Company Law Harmonization Reconsidered: What Role for the EC?

Abstract

Is there a case for (further) harmonization EC company law? Should the EC play a central role in company lawmaking? If, as is often the case among lawyers, one looks at company law harmonization as an ideal, perfect objective that by hypothesis can only make things better, the answer to these questions is a definitely yes. However, if one treats company law harmonization as a real-world phenomenon, looking at its record thus far and scrutinizing its various rationales with the help basic intuitions from economics and public choice theory, then the picture changes and the initial questions should be answered in the negative other than with regard to initiatives merely aiming to facilitate the free movement companies across the EU. This paper provides such a picture. First, it shows that the possible justifications for harmonization in the company law area do not stand close scrutiny. It argues that, with no European Delaware in sight, it is premature to impose rules aimed at preventing a race to the bottom among EU jurisdictions. While recognizing that harmonization can be justified in theory to correct market failures if Member States alone are unable or unwilling to correct them and if the proposed harmonized rules would make society better off than in their absence (also taking the costs arising from the harmonized rules into account), it argues that there is no reason to believe that EC institutions are any better positioned than national lawmakers in performing the task tackling market failures. Further, the paper analyzes the rationales related to the market integration objective and argues that in the real world negative harmonization (i.e. harmonization removing barriers to the four freedoms) is most often bundled with positive harmonization, so that what can be gained in terms greater freedom establishment is usually lost in terms lower flexibility rules. It criticizes level playing field as a possible rationale for company law harmonization, and argues that, far from lowering transaction costs, real-world harmonization has thus far raised them and hardly can be expected to do otherwise in the future. Finally, the rationales relating to scale economies in law production and to the correction national governments' failures are dismissed as either implausible with regard to company law or unconvincing due to the fact that the EC is also prone to producing excessively rigid company law rules and to change them over-frequently. The paper then highlights harmonization's drawbacks. Company law harmonization substitutes a single lawmaker for twenty-five different ones, or in other words a monopolist for twenty-five competitors, implying a higher risk excessive regulation and innovation and a lower degree experimentation in the company law field. A uniform law also rules out the possibility that divergent expectations and preferences at the national level are taken into account. Further, real-world harmonization turns out to increase the degree complexity and uncertainty national company laws. In addition, EC company law rules are hard to change and therefore little adaptable to new economic or technological developments. Finally, the harmonization process itself is costly in terms lobbying expenditures and the rent extraction opportunities it grants EC officials and politicians. The paper concludes that, ideally, the EC should only engage in free-choice and contractual freedom enhancing harmonization, while recognizing that EC lawmakers cannot be expected to espouse such a programme and expressing the no more realistic hope that they will have the courage, in Gerard Hertig's words, of doing nothing instead pursuing their ambitious harmonization agenda.