Shareholder Conflicts in Close Corporations: Between Theory and Practice. Evidence from Italian Private Limited Liability Companies

Abstract

Shareholder conflicts are said to be the Achilles heel of close corporations. They materialize in different ways and shapes, mostly in the form of majority oppression, minority abuse or shareholder deadlocks. Different cognitive biases and heuristics, as shown by the behavioral law and economics movement currently so much in vogue, contribute to their emergence (such as overoptimism, strategic behavior, availability and representativeness heuristics, information asymmetry). In the international corporate law practice, depending on the concrete (principal-principal) governance goal to be achieved, entrepreneurs employ various contractual safeguards to effectively prevent and resolve the above shareholder conflicts. The most common are restrictions on the transfer of shares (e.g., right of first refusal, consent clauses), special prerogatives to minority shareholders (e.g., veto rights over management decisions, super-majorities for fundamental corporate actions) and expulsion clauses, while more experienced players also recur to drag-along or tag-along provisions, as well as to shoot-out procedures. The present article builds upon this framework in order to conduct probably the first wholly law-in-action research on a representative dataset of Italian private limited liability companies (srl) incorporated in South Tyrol and Milan. The South Tyrol represents the paradigm model of the Italian SME market, while Milan occupies an “outlier” position as the major international financial and economic marketplace. The first empirical findings suggest that with reference to “conventional” safeguards (right of first refusal, consent clauses, etc.) a significant degree of contractual sophistication can be observed, while more innovative clauses such as tag along or drag along provisions are generally missing. The explanation may lie in the fact that legal advisers path-dependently imitate standardized corporate charter terms widely acknowledged and tested among the legal community rather than investing considerable efforts in the drafting of optimal customized arrangements.