Regulatory Competition in EU Corporate Law afterInspire Art: Unbundling Delaware’s Product for Europe

Abstract

The decisions of the European Court of Justice in Centros and then in Inspire Art open up the possibility of regulatory competition in European corporate law. Now that EU Member States have to recognize each other’s charters, some Member States could enact and enforce corporate law preferred by shareholders, managers or both, and thus lure corporations away from other Member States with less attractive corporate law. The European debate after Inspire Art will in some ways resemble the U.S. debate over the “Delaware effect” on corporate law over the past seventy years. Implicit in much of this debate, however, is the assumption, based on the U.S. experience, that regulatory competition in corporate law necessarily means that Member States will offer both their corporate law and their judicial system to managers and investors in other Member States who choose to incorporate abroad. In the United States, incorporation in Delaware means that corporate law cases are litigated in Delaware. This bundling of statutory law and adjudication might, however, cause difficulties in Europe. Using a theoretical framework of New Institutional Economics, we suggest that Member States are most likely to succeed in the regulatory competition following Centros and Inspire Art if they unbundle the corporate law product and allow buyers of corporate charters to choose the corporate law of the Member State of incorporation but have disputes under that law adjudicated elsewhere, preferably by arbitration panels. Although it is possible to allow disputes under one Member State’s corporate law to be decided by the local courts of another Member State (probably the “seat” of the corporation), 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. While national courts in the Member State of incorporation could do this by routinely enforcing arbitration awards, specific provision for arbitration in corporate statutes is preferable. Then, if a Member State where a corporation has its principal place of business or some other Member State were to try to make the arbitration clause unworkable under its own conflict of laws principles, the Member State of incorporation and private parties could claim, probably successfully, that frustration of the arbitration clause was not in compliance with the right of establishment as interpreted by the ECJ in Inspire Art.