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Dolores Utrilla
Dolores Utrilla
7th July 2020
Banking & Finance Human Rights Justice & Litigation

Op-Ed: “Banking restructuring and shareholders’ property rights – on standing and substance” by Dolores Utrilla

1. Introduction

Today, the European Court of Human Rights (ECtHR) rendered its Grand Chamber judgment in Albert and Others v. Hungary (application no. 5294/14), a case on the compatibility of banking organisational restructuring measures with the right to property (Article 1 of Protocol No. 1 to the European Convention on Human Rights, ECHR).

The case concerns Hungarian legislation imposing the mandatory integration of certain well-functioning banks, of which the applicants were shareholders, into a state controlled scheme. By virtue of that integration, several decisions concerning the banks’ management and functioning became subject to the approval of central bodies initially controlled by the State, which were granted also the power to impose certain concrete restrictions upon, inter alia, shareholders’ voting and dividends rights in exceptional circumstances. Today’s Grand Chamber ruling confirms the Chamber judgment of 29 January 2019, finding that the banks’ shareholders lack standing before the ECtHR and that therefore no violation of their property rights existed.

Albert and Others v. Hungary brings into the limelight a general issue of the utmost importance under both international law (including international investment law) and EU law: namely whether and how property rights of shareholders condition the enactment and enforcement of restrictive banking regulations. Furthermore, the case’s features make it particularly interesting for three reasons. Firstly, the key element under consideration was neither the economic value of shares nor their ownership (by contrast with banking nationalisation measures), but the restriction of the shareholder’s governance rights –  their rights to influence the banks’ conduct and policy. Secondly, the ECtHR was expressly called on to reconsider its case law that denies legal standing to shareholders in respect of restructuring measures directly addressed to their companies, and not to them. Thirdly, the dispute refers to restructuring measures adopted in the absence of malfunctioning of the banking system in general and the affected banks in particular, thereby offering the ECtHR an opportunity to set property-rights standards for this atypical kind of situation. 

A proper understanding of the meaning and potential implications of the case warrants, firstly, a brief explanation of its background and the procedure before the ECtHR (section 2 below). Then, the two main legal issues raised by the case will be tackled, namely the procedural locus standi issue (section 3 below) and the substantive compatibility of banking restructuring measures with the shareholders’ property rights (section 4 below).

2. Background and procedure

The applicants in Albert and Others v. Hungary were 237 Hungarian nationals who, at the time of application before the ECtHR (2014), held shares representing 98.28% of the total registered capital of Kinizsi Bank and 87.65% of the total registered capital of Mohácsi Bank.

Their complaints concerned the so-called Integration Act, a Hungarian piece of legislation which entered into force on 13 July 2013 and produced ipso iure the integration of several cooperative credit institutions, including  Kinizsi Bank and Mohácsi Bank. The purpose of this reform was to ‘professionalise, modernise and organise’ the cooperative credit institution sector, as well as to ensure the ‘prudent operation of cooperative credit institutions in the long term’. It must be noted that the Integration Act was adopted even though no systemic risks had been identified and most of the affected credit institutions – and in particular Kinizsi Bank and Mohácsi Bank – were highly profitable and safe. 

The mandatory integration was headed, inter alia, by the Integration Organisation of Cooperative Credit Institutions and by the Hungarian Savings Bank. These bodies were granted strong powers of supervision over the integrated entities, including for example the possibility to suspend the voting rights of shareholders in extreme cases, to define the requirements of solvency of the credit institutions on a case-by-case basis, and to suspend and substitute their executive officers. In particular, the integrated banks need the approval of the Savings to take resolutions concerning the adoption of the annual financial report of the company, the issuing of bonds,  decreases or increases of capital, any payment to the shareholders under any legal title, the conversion, merger or demerger of the company, the acquisition of own shares, and the appointment of executive officers. 

At the time of submission of their applications before the ECtHR, the shareholders had been concretely affected only by the Saving Act’s power to forbid the payment of dividends due to non-compliance with the relevant legislation and to the risk of not fulfilling the business plan. None of the remaining measures legally foreseen had been used in respect of Kinizsi Bank or Mohácsi Bank at that time. Moreover, several sets of proceedings had been lodged and were pending before Hungarian courts in which these banks or their shareholders sought a remedy against certain decisions of the Savings Bank or the Integration Organisation. 

The Hungarian Constitutional Court upheld the Integration Act in its decision No. 20/2014 of 30 June 2014, noting that it aimed at the transformation of a significant subsystem of the financial sector and that it was based on a complex regulatory concept. According to the Constitutional Court, the Integration Act contained provisions ‘directly, factually and actually affecting the person and the specific legal relationship of shareholders’. However, it concluded that in this sensitive sector the legislator ‘had reasonable grounds’ to adopt these rules, which were passed ‘in the interest of both the credit institutions and their clients and depositors’. 

In January 2014, the applicants brought the case before the ECtHR, claiming that the restriction of their rights to influence the operation of the integrated banks violated their rights under Article 1 of Protocol No. 1 to the ECHR. They also submitted that, as shareholders, they could only directly challenge the shareholders’ resolutions, but not the measures of the Savings Bank and the Integration Organisation. In this connection, they submitted that while their property had not been transferred to another entity, the Integration Act’s interference with their rights had been so severe as to amount to de facto expropriation.

The ECtHR dismissed the application in its Chamber judgment of 29 January 2019, finding, by six votes to one, that there had been no violation of Article 1 of Protocol No. 1. The Strasbourg-based court considered, in essence, that the contested measures could possibly amount to interference with the rights of the banks, but not of the applicants, which as shareholders lacked standing before the ECtHR. The judgment included a dissenting opinion by Judge Pinto de Albuquerque, who argued, firstly, that the ECtHR should have recognised the applicants’ status as victims and, secondly, that the substance of the Hungarian measures was contrary to Article 1 of Protocol No. 1.

On 24 June 2019 the Grand Chamber Panel accepted the applicants’ request that the case be referred to the Grand Chamber under Article 43 ECHR. Today, 7 July 2020, the ECtHR’s Grand Chamber has confirmed the 2019 Chamber judgment and has declared the applications inadmissible. Today’s final ruling considers that the reform’s bearing on the situation of the individual shareholders was incidental and indirect, and that there was nothing to indicate that the applicants’ rights as individual shareholders had as such been aimed at or adversely affected by the measures, which essentially related to corporate matters.  

3. The procedural problem: shareholders as victims?

The ECtHR’s case law has long recognised that shares in a company have an economic value and, therefore, must be regarded as ‘possessions’ protected by Article 1 of Protocol No. 1. According to the Strasbourg-based court (see for example Olczak v Poland, 2002), shareholders’ rights include an indirect claim on the company’s assets (namely an economic right) as well as other unconditioned rights, especially voting rights and the right to influence the company’s conduct (governance rights). 

However, the relevant question is not only whether Article 1 of the Protocol covers the shareholders’ property rights, but also whether they have direct standing before the ECtHR as ‘victims’, in the sense of Article 34 ECHR, in respect of stringent restructuring measures which are formally addressed to their companies. This is a traditional problem in the area of international investment law (see for the International Centre for the Settlement of Investment Disputes in CMS v Argentina, 2003). It stems from the basic premise of company law according to which a company’s rights and interests are separated from rights and interests of its shareholders and that ‘corporate veil’ can be pierced only under a limited number of circumstances. 

In its leading case on the victim status of individual shareholders, Agrotexim and Others v. Greece (1995), the ECtHR held that shareholders cannot in principle be identified with their company and are not regarded as ‘victims’ unless the interference directly violates their rights. According to the Strasbourg-based court, only a person whose personal interests have been directly affected can have victim status. A similar approach has been taken by the Court of Justice of the EU, which has recognised that certain regulatory measures concerning banks directly affect the legal position of their shareholders, thereby rendering their claims admissible (see for instance Trasta Komercbanka AS v European Central Bank, T-247/16).

However, the locus standi test under Agrotexim v. Greece is particularly stringent because the ECtHR only grants shareholders victim status in the exceptional circumstance that ‘it is clearly established that it is impossible for the company to apply to the ECHR institutions through its organs’. According to the ECtHR, to accept the standing of shareholders would engender ‘considerable problems’ concerning the requirement of exhaustion of domestic remedies, because in most national legal systems, shareholders do not normally have the right to challenge actions prejudicial to ‘their’ company. 

This test, inspired by the International Court of Justice (ICJ) ruling in Barcelona Traction, Light and Power Company (Belgium v. Spain) (1970), entails a significant procedural barrier to shareholders and is often criticised because the ECtHR does not offer sufficiently clear guidelines for defining the standard that it will use to determine the victim status of future applicant shareholders (as argued here by Sarah Tishler). For example, the ECtHR has held that direct standing exists where the alleged interference consists of a cancellation of shares (Olczak v. Poland, 2002) or the takeover of a private bank by the State (Suzer and Eksen Holding v. Turkey, 2012).

When confronted with the case Albert and others v. Hungary, the ECtHR decided in its 2019 Chamber judgment to dismiss the applications on the procedural ground that the shareholders lacked the condition of victims of the alleged violations, thereby refraining from performing a substantive review on the Integration Act. According to the ECtHR’s Chamber, it should be for Kinizsi Bank and Mohácsi Bank to pursue an application before the Court, and not for the applicants, who did not hold 100% shares in those banks and were thus not their sole owners. The Chamber judgment found no exceptional circumstances to justify the lifting of the corporate veil in the case. The 2019 Chamber judgment also noted that the legislative provisions complained of mostly allow for measures to be taken against the cooperative credit institutions, while only very few provisions seem to allow for measures to be taken directly against particular shareholders. It also noted that the instances in which such concrete measures were taken in respect of Kinizsi Bank and Mohácsi Bank had been explicitly excluded by the applicants from the scope of their complaint.

According to the 2019 Chamber judgment, the Integration Act could indeed affect the applicants’ interests, but this was not enough to grant them standing as victims, because this legislative provision was not directly aimed at the applicants as shareholders. In this regard, the ECtHR specifically based its reasoning on two points. Firstly, the applicants’ failure to show that their shares in Kinizsi Bank and Mohácsi Bank had lost their economic value due to those banks’ automatic membership in the Integration Organisation. Secondly, the fact that concrete restrictive measures in respect of shareholders’ rights are enabled by the Integration Act only in exceptional cases and that the applicants failed to demonstrate that they were in fact likely to run the risk of being individually affected by the aforementioned measures (Jensen and Rasmussen v. Denmark, 2006).

A fundamentally different view was contained in the dissenting opinion of Judge Pinto de Albuquerque, who argued that the majority’s interpretation was too formalistic and disregarded the actual consequences of the Integration Act for the shareholders’ property rights. The dissenting opinion noted inter alia that the high percentage of participation of the applicants in the banks (nearly 100%) should have been taken into consideration. It also highlighted that the sheer loss of control in and of itself constitutes interference with the shareholders’ right to the enjoyment of their property, even if there is no immediate, visible financial detriment for the shareholders. It also stressed that the fact that certain restrictive measures only apply in exceptional circumstances is irrelevant in this respect: even if these measures do not occur frequently, the fact that the law provides for the possibility of such extreme measures in the future should itself suffice for a violation to be found (Ayangil and Others v. Turkey, 2011).

Today’s Grand Chamber judgment confirms the Chamber’s take on the case, further explaining that the Integration Act did not directly regulate any of the specific legal rights that the applicants as shareholders had held under the applicable domestic law, or directly interfered with the exercise of those rights. Nor had the legislation apparently had an adverse impact on the business of the two banks. The Grand Chamber expressly rejects the applicants’ request to pierce the corporate veil because they owned almost 100% of the shares. In this regard, the ECtHR stresses that the banks were not family-run or owned or otherwise closely-held entities, but public companies with limited liability, numerous shareholders and a fully delegated management. It concludes from this that the banks and their shareholders were not so closely identified with each other that it would be artificial to distinguish between them. Lastly, the Grand Chamber notes that the applicants, who held considerable voting majorities in the general meetings of the two banks, could have directed the banks, which remained operational with their regular management in place, to bring legal proceedings on their behalf. Interestingly, the Grand Chamber devotes significant attention to explain, systematise and justify its previous case law on the shareholder’s standing (paragraphs 120-145).

4. The substantive problem: banking restructuring as a breach of property rights?

From a substantive standpoint, Albert and others v. Hungary is a particularly interesting case because it offered the ECtHR the opportunity to determine how Article 1 of Protocol No. 1 applies to restructuring measures adopted outside the typical scenario of banking crisis and/or resolution. Thereby it could have provided useful standards also beyond ECHR law and in particular at the EU law level, where property claims in respect of banking restructuring measures have been addressed so far almost exclusively as regards post-crisis EU banking governance, whilst the assessment of other banking reorganisational arrangements from the perspective of the shareholders’ economic rights remains a much less explored territory. It is worth mentioning in this regard the pending case Adusbef and Others (C-686/18) on the compatibility of Italian legislation for cooperative banks with the requirements of EU prudential rules, the internal market, State aid rules, and Articles 16 and 17 of the Charter, as explained here by Laura Wissink.

Although both the 2019 Chamber judgment and today’s Grand Chamber ruling dismissed the applications on procedural grounds, refraining from assessing them on the merits, its consideration in the context of the previous case law of the ECtHR makes apparent that the ruling conceived the Integration Act as a mere regulatory measure of the use of property, rather than as an expropriation. This stems from the fact that, as already mentioned, where the ECtHR considers that there was a deprivation of property, it usually accepts the standing of shareholders (Olczak v. Poland, Suzer and Eksen Holding v. Turkey). This is important not only in procedural terms, but also at a substantive level, because, as I explained elsewhere, the ECtHR’s case law traditionally confers national authorities a wider margin of appreciation, and conducts a much more flexible judicial review, when it comes to regulatory measures than when it deals with deprivations of property.

This is the only substantive finding arising from Albert and others v. Hungary regarding Article 1 of Protocol No. 1. The rest remains unanswered. It would have been particularly interesting  to see how the wide margin of appreciation afforded to States in the area of regulatory measures coexists with (i) the alleged public interest goals of a restructuring measure not based on malfunctioning or risks in the banking sector (justification), and (ii) the severity of the restrictions of the shareholders’ rights (proportionality). 

In this regard, today’s Grand Chamber judgment contains an interesting obiter dicta: according to the ECtHR, the reform had a considerable impact at company level. It noted in particular that relevant provisions of the new legislation were clearly coercive and involuntary, and that they directly affected the governing structures of the two banks, which had lost a significant degree of their management power to the Integration Organisation and the Savings Bank. What this may have involved if the action had been brought by the companies themselves and not by their shareholders remains an open question.


Dolores Utrilla is Associate Professor at the University of Castilla-La Mancha and Assistant Editor at EU Law Live. She is author of ‘Las garantías del Derecho de propiedad privada en Europa’ (Thomson Reuters, 2012) and of ‘The multilevel protection of the right of property in Europe’ (China-EU Law Journal, Springer, 2014).



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