In the post-financial crisis regulatory reforms, emphasis has been placed on creating recovery and resolution frameworks for banks, which ensure that the costs of failure are born by private parties (primarily shareholders), instead of taxpayers and the wider economy. Supervisors have (or will have) extensive powers on banks, e.g. to remove and replace directors, to appoint “special managers”, to transfer shares and assets of banks to third parties, and even to cancel existing shares and issue new shares in order to “replace” existing shareholders. The purpose of this article, Bank Recovery and Resolution: What About Shareholder Rights?, is to examine the potential impact of bank recovery and  and of the United Kingdom (the special resolution regime for banks established by the Banking Act of 2009).
The article begins by studying the rationale for shareholder protection, especially in the banking sector. It subsequently studies the main shareholder rights, which include: property rights, governance rights (including pre-emption rights, appointment of directors and involvement in management), procedural rights, protection of minority shareholders, and protection of shareholders in banking groups (through the principles of separate legal personality and limited liability).
The article continues by examining whether interference with shareholder rights in the context of bank crisis management is justified as a matter of policy. The arguments appear compelling: there is a “public interest” need to protect financial stability, public finances (i.e. taxpayers’ money) and the wider economy; shareholders have voluntarily undertaken a business risk when investing in banks; shareholders relying on the implicit state guarantee on banks demonstrate moral hazard and perverse incentives to increase risk-taking; the exercise of shareholder rights is likely to delay or block an effective bank resolution; and “shielding” shareholders of group affiliates behind the principles of separate legal personality and limited liability may not reflect economic reality, especially in integrated and highly interconnected banking groups. Consequently, it appears that some degree of interference with shareholder rights, especially when a crisis occurs, is unavoidable.
Subsequently, the article examines the impact of the current draft Recovery and Resolution Directive on bank shareholder rights and interests. The article demonstrates that interference with shareholder rights increases as the bank’s condition deteriorates, throughout the three main stages of the framework: prevention, recovery and resolution. The special resolution regime under the Banking Act 2009 is examined in parallel to the draft Recovery and Resolution Directive. Beyond their differences, the two instruments broadly adopt the same principle with regard to shareholders in resolution: shareholders should be the first to absorb bank losses, which means that shareholder rights can be modified or abolished without shareholder approval, but potentially subject to appropriate compensations.
The article goes further by examining how the already existing legal framework which protects shareholder rights can be modified to accommodate changes introduced by recovery and resolution tools. With regard to property rights, both the draft Recovery and Resolution Directive and the Banking Act 2009, are (at least in theory) designed to comply with carve-outs under the European Convention of Human Rights.  Turning to governance and procedural rights, the draft Directive introduces exemptions from other EU directives (such as the Shareholders’ Rights Directive)  and will supersede any shareholder rights established in national law. However, recovery or resolution tools established in national legislations (such as the Banking Act 2009) cannot interfere with shareholder rights established at a higher level (i.e. by EU directives), taking into account relevant case law of the European Court of Justice.
In addition, the article argues that interference with shareholder rights can have significant and wide-reaching consequences. In this context, the article critically examines the currently (existing or proposed) safeguards for shareholders, under the draft Directive and the Banking Act 2009, especially in resolution. The article argues that in practice, the protection offered by such safeguards (e.g. the degree of ex ante “certainty”, and the value of compensation available for shareholders) is likely to vary on a case-by-case basis.
Finally, the article emphasizes, that, while imposing losses on shareholders is one of the measures intended to protect financial stability, it may have implications to the opposite effect. Potential practical implications from the perspective of bank shareholders include reduced interest in long-term investments in banks, or exacerbation of shareholder moral hazard as a bank approaches the triggers for resolution. Taking this into account, caution is called for in the design and application of provisions which impact shareholder rights in the recovery and resolution framework.
The full paper is available for download here.
 European Commission, ‘Proposal for a Directive of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investment firms’ COM(2012) 280/3
 And the Charter of Fundamental Rights of the European Union.
 Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies  OJ L184/ 17