Private Equity Minority Investments - Universität St.Gallen

Part One: Introduction and Theoretical Foundationscontrol over (at least ordinary 200 ) decisions taken at the general meeting, theassembly of the shareholders of a stock corporation or the meeting ofmembers in a GmbH, with a binding effect for all other shareholders (ormembers). The minority investor, on the other hand, is unable to veto theseordinary decisions even if holding a sizeable investment. 201 Moreover, sincethe board of directors is elected by the general meeting following themajority principle and since Swiss corporate law does not ensure minorityshareholder representation on boards of directors, the minority investor defacto does not have the power to appoint any directors, even if de jureentitled to participate in the respective elections. As the directors areoftentimes influenced by the wishes of the shareholders who electedthem, 202 they can be expected to promote the controlling shareholder’sinterests within their legitimate discretionary powers. Even if a minorityinvestor has representatives on the board of directors, the investor has littlepower to block decisions supported by the majority of the board memberswho represent the controlling shareholder’s interests. It follows that thecontrolling shareholder most likely controls the general meeting ofshareholders, along with the board of directors, and – through there – theexecutive management. Conversely, the minority investor is virtuallyexcluded from corporate decision making enabling the controllingshareholder to make business decisions favorable to his/her own interestsand ignore the PEMI’s interests and concerns. 203Limited fungibility of shares and resulting lack of exit options. Even withthe lack of voice, the oppression problem would be far less acute if minorityinvestors could easily exit their investment by selling the shares at a fairprice (so-called taking the Wall Street walk 204 ), thereby escaping any abusesof power. 205 The market mechanism restrains controlling shareholders (andthe company organs nominated by them) from taking actions that harm the200Decisions other than those listed in CO 704 I.201However, depending on the size of the minority stake and the type of decision, minorityshareholders may have a blocking minority with respect to certain important decisions (CO704).202See O’NEAL/THOMPSON, § 3.43.203See UTSET, p. 1339, 1341; cf. also MEANS, p. 1208.204See MEANS, p. 1208, FN 3; BOHRER, § 8, N 330; KUNZ, Minderheitenschutz, §4, N 64;HIRSCHMAN, p. 46.205See MOLL, Minority oppression, p. 891; UTSET, p. 1339; ROCK/WACHTER, p. 916 et seq.(“difficulty of exit … lies at the heart of the evolution of minority shareholders’ remedies for‘oppression’”). However, cf. MEANS, p. 1217, FN 39 (“[i]t should be noted, however, that theability to exit from a public corporation through sale of stock does not offer perfect protectionfor shareholders, who may be forced to take losses in order to sell.”); STOUT, p. 795(“Although a single shareholder may be able to sell a small number of shares easily, whenexploited shareholders try to sell en masse, the result is a predictable loss of value.”).42