Enforcement of Shareholder Duties: The Preferred Way to Sustainability?

Over the past few years, EU Member States have implemented national and EU legislation to create a series of new shareholder duties, with the objective of building a more responsible, engaging investor community. However, the appropriate legal, social and economic mechanisms for enforcing these duties are also crucial, and have received less legislative attention so far. In this paper, we will examine which duties can be enforced effectively, in particular duties which aim to ensure more sustainable businesses. One characteristic example is the duty to engage with companies, as laid out in the EU Shareholder Rights Directive.

Regarding legal enforcement, we will analyse both soft law and hard law options. Soft law codes have been the preferred regulatory framework for emphasising shareholders’ duties (e.g., the UK Stewardship Code), and these have been the preferred corporate governance instrument in general. However, studies show that soft law measures are difficult to enforce and that their effect on good governance may be limited. Even hard law would be difficult to enforce against foreign shareholders, both due to jurisdictional limitations and to the widespread use of intermediaries and conduit companies. Last but not least, general market implications may slow enforcement mechanisms in this area. Any attempt to impose shareholder duties could have consequences for the amount of foreign investments made. Thus, imposing more duties on shareholders may require that we choose a different approach to the regulation of these duties.