Regulatory Competition in EU Corporate Law After Inspire Art: Unbundling Delaware's Product for Europe

Abstract

The decisions of the European Court of Justice in Centros and most recently in Inspire Art will change the business landscape by opening up Europe to legislatory competition in corporate law. This potentially could enable some Member States to enact and enforce corporate law that is preferable for shareholders and managers and thus lure corporate charters away from other Member States with less attractive corporate law. The European debate after Inspire Art will in some part be modeled after the U.S. debate over the effect on American corporate law for well over the past seventy years. Implicit in much of this debate, however, is the assumption, based on the American experience, that legislatory competition in corporate law necessarily means that Member States, after Centros and Inspire Art, will offer both their corporate law and their judicial process for resolving corporate law disputes to managers and investors in other Member States that choose to incorporate abroad. Legislatory competition under this assumption requires the successful offeror of corporate law to offer both an attractive corporate statute and specialized courts that can be relied upon to interpret the law in a predictable manner, thereby inducing managers and investors to incorporate in that jurisdiction. This article suggests that the European experience with jurisdictional competition, at least in the short term and perhaps permanently, could be quite different from that in the United States. We make both a positive and a normative statement that the process of legislatory competition in the field of corporate law in Europe will not and should not follow the American example in all aspects. Using a theoretical framework of New Institutional Economics, we relax the assumptions of perfect information, perfect rationality and zero transaction costs. We also recognize the impact of path dependence and the importance of a learning process in designing regulatory and adjudication frameworks, and we are also aware of the fact that even optimal solutions to regulatory problems may become unstable and suboptimal over time. Although there are many ways in which, because of these factors, the European experience with legislatory competition could be different from that in the United States, we focus in this article on one difference in particular. In the United States, incorporation in Delaware means that corporate law litigation in most cases takes place in Delaware, so that Delaware not only sells corporate charters but also its case law. The buyer has to buy (and is well advised to buy) a bundled product including substantive law (statutory and case law) together with procedural law. This type of bundling of statutory law and adjudication, however, might cause difficulties in Europe. The thesis of this article is that Member States are most likely to survive in the legislatory competition following Centros and Inspire Art if they debundle the corporate law product. Buyers of corporate charters thus should be allowed to choose corporate law of the Member State of incorporation (home country) but have disputes under that law be adjudicated elsewhere, preferably by arbitration panels. A number of factors make it difficult for Member States to offer adjudication to managers and investors in other Member States. These include (i) language barriers (particularly for Member States whose courts do not do business in English), (ii) differences between common law and civil law approaches to adjudication, (iii) procedural differences between courts of Member States that are greater than those between Delaware and other US states, which in turn discourage lawyers from recommending that clients incorporate in Member States outside their own, (iv) the cost to a Member State of building specialized judicial expertise in corporate law, (v) incomplete information about real or perceived judicial bias, (vi) uncertainty concerning conflict of laws within the EU, (vii) uncertainty about mutual recognition of judgments within the EU, and (viii) the fact that an effective adjudication system will require a learning process and that national judges are poor learners about the implications of applying national corporate law to international managers and investors. Developing strategies to overcome these barriers to entering the market for a bundled product of corporate statutes plus adjudication may be a realistic long-term strategy for one or more Member States. This article suggests, however, that Member States should also explore strategies to offer their corporate statutes without adjudication by national courts and instead facilitate alternative methods of adjudicating corporate law disputes. Although allowing resolution of disputes under one Member State's corporate law by the local courts of another Member State (probably the of the corporation) is a possibility, for a variety of reasons we find this to be an unattractive alternative. A more attractive alternative is adjudication by panels of professional arbitrators who specialize in the corporate law of a particular Member State, but who could be citizens of different Member States, and who would apply uniform procedural rules determined by an arbitration association rather than by national courts. This alternative requires that Member States allow corporate charters to provide for arbitration of disputes over corporate internal affairs. A home country, offering its corporate law for corporations having a seat elsewhere (the host country) even could change its national corporate law explicitly to allow for arbitration. If the host country would then try to make that clause unworkable under its own conflict of laws principles this might not be in compliance with the right of establishment as interpreted by the ECJ in Centros and Inspire Art.