Corporate Law System Research Articles

The Development of German Corporate Law Until 1990: An Historical Reappraisal

The development of modern corporate law can be located in four “origin” legal systems: France, England, Germany and the United States (specifically in leading State Jurisdictions such as New York, New Jersey and Delaware). These systems are often segregated between an Anglo-American “outsider” system of corporate law and governance and the Continental “insider” system. This has its political economy parallel in the “Varieties of Capitalism” literature, which separates the major capitalist economies into “Liberal Market Economies”, such as the UK and the USA, and “Co-ordinated Market Economies”, such as Germany. These distinctions concentrate, in particular, on whether the system of corporate finance is based on open stock markets and widely dispersed “outsider” shareholding, as in the Anglo-American model, or on finance carried out by “insider” universal investment banks with places on the supervisory organs of corporations as is often claimed to be the case for the German system.

Board Diversity or Gender Diversity? Perspectives from Europe, Australia and South Africa

Board diversity has been a hot topic for several years. However, it is only in recent years that pertinent questions have been asked about what is actually meant by board diversity and what would constitute a board with an ideal diversity. In the past the debate on board diversity has always been dominated by the lack, or very low numbers, of females on boards. This has been a fact in most countries with sophisticated corporate law and corporate governance systems in place. The issue of female representation on boards still dominates the board diversity debate, but other forms of diversity, including age, cultural, nationality and race have also become part of the debate. The quest is to find answers to questions like whether a diversified board would be better, and whether diversified boards will ensure a better return for investors; in other words, whether there is a ‘business case’ to be made out to have diversity on a board. Many studies have been done, but the answer is still evasive. This is not totally unexpected as the criteria used for these studies differ and the circumstances and complexities of business are such that a final conclusion will probably never be reached. In this article we focus on the board diversity debate in Europe, Australia and South Africa – three completely different parts of the world. In addition we devote Part V to put the topic of board diversity in a broader context, but paying particular attention to gender diversity.

Liberalization Models in the Electricity Sector: The Impact of the Market for Corporate Control in Britain and Spain (1996–2010)

Liberalization and re-regulation have brought along major changes in the regulated environment of utility industries, and particularly in the electricity sector. Nonetheless, the impact of these developments exhibits substantial differences. This article analyses the diverging impact of the market for corporate control (i.e. takeovers) on the evolution of the electricity sector in Britain and Spain. Takeovers have been prominent in the restructuring of the electricity sector in Britain. Every single privatised company has been acquired by foreign rivals in a short span of time. The Spanish electricity sector, in contrast, has been unequally exposed to takeovers: changes in ownership at Iberdrola and Union Fenosa were characterised by a friendly transition while Endesa has been acquired by Enel despite the preferences of Spanish policy-makers for the building of national champions. The argument presented in this article stresses the continuing importance of three key national institutions of corporate governance –ownership structures of listed companies; the system of corporate law and its associated voting rights procedures; and the degree of independence of regulatory authorities.

Putting Creditors in Their Rightful Place: Corporate Governance and Business Ethics in the Light of Limited Liability

Contemporary academic and policy discussions of corporate governance tend to accord primacy to the interests of shareholders. While the primacy (descriptive or prescriptive) of shareholders is argued for in various ways, others seek to promote a wider stakeholder model of the firm and its governance. In both cases, the interests of creditors tend to be neglected. In this paper, the fundamental position of creditors in a system of corporate law that offers limited liability is reasserted and explained, and the implications explored. It is demonstrated that there are, in effect, two modes of governance possible for a limited liability corporation: the “normal” mode, when shareholders’ interests are primary, and the “distressed” mode, when creditors’ interests are paramount. As a result of this analysis, writers on corporate governance who are influenced by certain managerial myths or economic theories of the firm are encouraged to view the position of shareholders in a more informed light. Writers on business ethics, who often find themselves contending, perhaps implicitly, with inappropriate understandings of the nature of business corporations and their governance, are similarly alerted to the weakness of certain positions perceived as antithetical to their agenda. Finally, business ethicists who advocate a stakeholder perspective are encouraged to recognize the position of creditors and to pay more attention to them as a stakeholder group.

Inefficient American corporate governance under the financial crisis and China's reflections

PurposeChina has hitherto followed the US model of corporate governance, but recent crises suggest that that might not be the model to follow. This paper aims to consider that proposition.Design/methodology/approachThis is a comparative study of US and Chinese systems of corporate governance.FindingsCorporate governance is an alien concept for China. The establishment of the China company law system came later than western nations' corporate law system. Since 1992, China has made substantial progress in several areas of corporate governance. It is well known that for nearly a hundred years the American‐style corporate governance mechanism has been the model of the countries in the world. And China also follows the example of American corporate governance. Against the background of the global financial crisis, it is time to reflect upon the model of corporate governance in China.Originality/valueThe paper invites reflection on existing paths towards good corporate governance in China.

An Overview of China's Corporate Law Regime

This paper, a chapter of a forthcoming book, provides an overview of the corporate law regime in China, focusing on the newly revised PRC Company Law. It briefly examines the history of China's corporate law development, the structure of the company law, sources of law in the corporate law, corporate governance, corporate finance, and corporate social responsibility in China. It also discusses, for a law and development perspective, the purposes, principles and general trend of direction of China's corporate law system.

Societas Europaea: between Harmonization and Regulatory Competition

During the past years in Europe, the possibility of a market for corporate incorporations, namely the freedom of European companies to choose their country for incorporation, has been blocked, in part, by the difficult economic conditions and in part by the operation of national level rules on the conflicts of laws which limit the degree to which a company can choose its applicable law. National level laws also widely differ in their attitude towards the movement of companies from one jurisdiction to another and this factor does not help a resumption of the companies and of the investments in the private equity sector. This situation has been changed by some judgments of the European Court of Justice that underscored, in the cases of Überseering, Centros, Inspire Art and Sevic, the EU Treaty’s principles of Free Establishment and Movement of Firms. In these cases legal entities and human beings were considered in the same way. This confirmed the ECJ’s approach that originates from Articles 43 and 48 of the EC Treaty which together with some efforts of the EU Legislator have tried to facilitate a mechanism of corporate entry and exit that possibly will encourage a direct competition of the different corporate law systems provided by the European Member States. Along this line, the proposed Directive on Cross-border Transfer of the Registered Offices of Limited Liability Companies and the Directive on Cross-border Mergers (2005/56/EC) try to provide a common solution to the issue of re-incorporation. In the European market for corporate control, where one size does not fit all, decentralized solutions can permit Member States to continue patterns of diversity, while regulatory arbitrage allows individual firms for which the national model is inappropriate to opt out. Moreover, in an area such as company law, where the configuration of the optimal rules is hotly debated, regulatory competition, if driven by the market from the bottom together with a harmonization of the law implemented by the top through Directives, can lead to a conversion of the European corporate law and build up, at the same time, a ‘market-for-rules’ that is essential for economic growth. In this paper, I will discuss the role of the legal instrument available for companies since 8 October 2004, namely the Statute for a European Company (SE), underlying some of its applications and implications in the process of harmonization of the law. In particular, I will try to explain why this regulation, even if it is obsolete in some parts and incomplete in some others, being a motivation for regulatory competition, can represent a step forward towards the development of appropriate legal rules. In the next sections, I will describe the experience of the European legislator trying to create a common model of European Company (part 2) and to what extent nowadays EU law permits companies to migrate from a member country to another one (part 3). Then, analysing the European market for corporate control, I will show how an efficient regulatory competition, in which arbitrage will be motivated by a desire to increase total value rather than the private interests of one group, can be feasible and attractive (parts 4 and 5). Eventually I will summarize adding some conclusions (part 6).

Constraining Dominant Shareholders' Self-Dealing: The Legal Framework in France, Germany, and Italy

All jurisdictions supply corporations with legal tools to prevent or punish asset diversion by those, whether managers or dominant shareholders, who are in control. As previous research has shown, these rules, doctrines and remedies are far from uniform across jurisdictions, possibly leading to significant differences in the degree of investor protection they provide. Comparative research in this field is wrought with difficulty. It is tempting to compare corporate laws by taking one benchmark jurisdiction, typically the US, and to assess the quality of other corporate law systems depending on how much they replicate some prominent features. We take a different perspective and describe how three major continental European countries (France, Germany, and Italy) regulate dominant shareholders' self-dealing by looking at all the possible rules, doctrines and remedies available there. While the doctrines and remedies reviewed in this article are familiar enough to corporate lawyers and legal scholars from the respective countries, this is less true for many participants in the international discussion, which remains dominated by Anglophone legal scholars and economists. We suggest that some of these doctrines and remedies, namely the German prohibition against concealed distributions, the role of minority shareholders in the prosecution of abus de biens sociaux in France, and nullification suits in all three countries have not received the attention they deserve.

The Case for Limited Shareholder Voting Rights

Recent years have seen a number of efforts to extend the shareholder franchise. These efforts implicate two fundamental issues for corporation law. First, why do shareholders - and only shareholders - have voting rights? Second, why are the voting rights of shareholders so limited? This essay proposes answers for those questions. As for efforts to expand the limited shareholder voting rights currently provided by corporation law, the essay argues that the director primacy-based system of U.S. corporate governance has served investors and society well. This record of success occurred not in spite of the separation of ownership and control, but because of that separation. Before changing making further changes to the system of corporate law that has worked well for generations, it would be appropriate to give those changes already made time to work their way through the system. To the extent additional change or reform is thought desirable at this point, surely it should be in the nature of minor modifications to the newly adopted rules designed to enhance their performance, or rather than radical and unprecedented shifts in the system of corporate governance that has existed for decades.

Share Price as a Poor Criterion for Good Corporate Law

Author(s): Stout, Lynn A. | Abstract: Academics, reformers, and business leaders all yearn for a single, objective, easy-to-read measure of corporate performance that can be used to judge the quality of public corporation law and practice. This collective desire is so powerful that it has led many commentators to grab onto the first marginally plausible candidate: share price.Contemporary economic and corporate theory (as well as recent business history) nevertheless warn us against unthinking acceptance of share price as a measure of corporate performance. This Essay offers a brief reminder of some of the many reasons why stock prices often fail to reflect true corporate performance, including the problem of private information; obstacles to effective arbitrage; investors' cognitive defects and biases; options theory and the problem of multiple residual claimants; and the problem of corporate spillover effects that erode diversified shareholders' returns. These considerations argue against assuming there is a tight connection between stock prices and underlying corporate wealth generation. A corporation or a corporate law system designed around the philosophy that anything that raises share price is good is likely to produce a firm that cooks its books; that avoids long-term projects that won't appeal to unsophisticated investors; that chases after investment fads and fancies; that tries to opportunistically exploit creditors, employees, and customers; and that pursues business strategies that harm its diversified shareholders' other investment interests.The Essay concludes that, if we allow our desire for a universal performance measure to blind us to the fallibility of share price, we court costly error. The Essay examines three recent examples of just such erroneous triumphs of hope over experience: the rise and fall of the Revlon doctrine; the 1990s infatuation with options-based executive compensation; and academics' current preoccupation with event studies, regressions on Tobin's Q, and other forms of empirical scholarship that attempt to judge the quality of corporate law and practice according to changes in share price.

Share Price as a Poor Criterion for Good Corporate Law

Academics, reformers, and business leaders all yearn for a single, objective, easy-to-read measure of corporate performance that can be used to judge the quality of public corporation law and practice. This collective desire is so powerful that it has led many commentators to grab onto the first marginally plausible candidate: share price. Contemporary economic and corporate theory (as well as recent business history) nevertheless warn us against unthinking acceptance of share price as a measure of corporate performance. This Essay offers a brief reminder of some of the many reasons why stock prices often fail to reflect true corporate performance, including the problem of private information; obstacles to effective arbitrage; investors' cognitive defects and biases; options theory and the problem of multiple residual claimants; and the problem of corporate spillover effects that erode diversified shareholders' returns. These considerations argue against assuming there is a tight connection between stock prices and underlying corporate wealth generation. A corporation or a corporate law system designed around the philosophy that anything that raises share price is good is likely to produce a firm that cooks its books; that avoids long-term projects that won't appeal to unsophisticated investors; that chases after investment fads and fancies; that tries to opportunistically exploit creditors, employees, and customers; and that pursues business strategies that harm its diversified shareholders' other investment interests. The Essay concludes that, if we allow our desire for a universal performance measure to blind us to the fallibility of share price, we court costly error. The Essay examines three recent examples of just such erroneous triumphs of hope over experience: the rise and fall of the Revlon doctrine; the 1990s infatuation with options-based executive compensation; and academics' current preoccupation with event studies, regressions on Tobin's Q, and other forms of empirical scholarship that attempt to judge the quality of corporate law and practice according to changes in share price.

The New Federalism of the American Corporate Governance System: Preliminary Reflections of Two Residents of One Small State

The year 2002 was a tumultuous one for the American system of corporate governance. High-profile scandals at large firms propelled reform initiatives from both Congress (in the form of the Sarbanes-Oxley Act) and the major stock exchanges (in the form of new listing standards and rules). These reforms - what we call the 2002 Reforms - include provisions that regulate the internal affairs of public corporations. As a result, the Reforms represent a challenge to the existing division of responsibilities among the federal government, the stock exchanges, and the states, in which the states have been given the primary role in articulating and enforcing substantive principles of corporation law governing the internal affairs of corporations and the responsibility of directors to stockholders. In fact, the 2002 Reforms can be viewed as creating a shadow corporation law that has a prescriptive quality at odds with the corporate law system in place in states like Delaware.In this essay, we examine some of the more interesting ways in which the 2002 Reforms will affect state corporation law and the traditional policy domain of states. Although many aspects of the Reforms hold promise as guarantors of greater corporate integrity, other elements are less obviously useful. We discuss some of our initial impressions of the Reforms, both pro and con, and highlight some of the more interesting policy implications of the Reforms for state corporate law.We conclude by counseling state policymakers to be active participants in the process of breathing life into the Reforms and in addressing the crisis in corporate confidence that arose in 2002. If states assume these responsibilities with vigor, we have confidence that the existing division of responsibilities among the federal government, the stock exchanges, and the states will persist. Because that division has, on balance, served investors and the public well, it should not be lightly abandoned.

Enron, Sarbanes-Oxley and Accounting: Rules Versus Principles Versus Rents

In our self-regulatory system of corporate law, the job of insisting on trustworthy numbers devolves in the first instance on the gatekeepers. It follows that the auditors take the brunt of the blame and that the Sarbanes-Oxley Act (the Act), the legislation intended to address the scandals and restore confidence in the securities markets, responds by regulating the profession. More accurately, Sarbanes-Oxley triggers the start of a political process intended over time to produce a new regulatory regime. The statute follows the standard regulatory strategy of delegating most of the task of devising the new regime's terms to an administrative agency, a new Public Oversight Board (POB). The regulatory outcome remains open accordingly. High financial stakes imply an ongoing political contest over the POB's political and institutional gestalt and the terms of any new regulation. The resulting uncertainty, although regrettable, probably could not have been avoided. Unfortunately, Sarbanes-Oxley does not stop with an open-ended delegation of authority respecting the audit function to a new agency. The Act goes on to address the substance of Generally Accepted Accounting (GAAP). It does this first in section 108(d), which requires the SEC to study the system to ascertain the extent to which it is principles-based, as opposed to rules-based, and to tell us how long it will take for us to achieve a system; and second, in section 108(a), which requires the Financial Accounting Standards Board (FASB) and any other approved standards-setting body to adopt procedures ensuring prompt consideration of new rules reflecting international convergence on high quality standards. Given an ongoing political contest respecting the shape of the POB and its regulatory program, critical questions need to be asked about these substantive initiatives. More particularly, this Article asks whether substantive intervention into the articulation of GAAP could trigger just the sort of regulatory error that the agency delegation model, followed in respect of the POB, was intended to avoid. Principles-based accounting and international however desirable in the abstract, have to be considered in light of the institutional contexts in which they would operate and effect consequences. Principles and convergence, by themselves do little to constrain rent-seeking behavior on the part of managers and auditors. Absent antecedent institutional reform that ensures auditor independence and lessens the negative impact of rent-seeking and influence activity on audit quality, perverse effects could follow in the event that sections 108(d) and 108(a) influence GAAP's future shape. Unfortunately, Sarbanes-Oxley does not ensure the requisite institutional reform; it merely holds out the possibility of reform. Part I describes Sarbanes-Oxley's delegation to the POB, surveying the issues the Act leaves open and the ongoing political contest respecting their resolution. Part II situates the principles-based that the Act commends in the context of the Enron disaster. This discussion begins with a story currently in circulation - that Enron exemplifies the abuses of rules-based under GAAP and demonstrates the need to move to principles-based accounting. The discussion then falsifies the story, showing that Enron violated both rules and standards under GAAP. Full responsibility for the disaster goes to the enforcement of GAAP's rules and standards by Enron's auditor rather than to the rules and standards themselves. The discussion then broadens, explaining why the relative merits of rules and principles are being debated in respect of GAAP at this time, and how the principles-based argument rests on a false premise, holding out risks for audit quality.

The New Federalism of the American Corporate Governance System: Preliminary Reflections of Two Residents of One Small State

The year 2002 was a tumultuous one for the American system of corporate governance. High-profile scandals at large firms propelled reform initiatives from both Congress (in the form of the Sarbanes-Oxley Act) and the major stock exchanges (in the form of new listing standards and rules). These reforms - what we call the 2002 Reforms - include provisions that regulate the internal affairs of public corporations. As a result, the Reforms represent a challenge to the existing division of responsibilities among the federal government, the stock exchanges, and the states, in which the states have been given the primary role in articulating and enforcing substantive principles of corporation law governing the internal affairs of corporations and the responsibility of directors to stockholders. In fact, the 2002 Reforms can be viewed as creating a shadow corporation law that has a prescriptive quality at odds with the corporate law system in place in states like Delaware.In this essay, we examine some of the more interesting ways in which the 2002 Reforms will affect state corporation law and the traditional policy domain of states. Although many aspects of the Reforms hold promise as guarantors of greater corporate integrity, other elements are less obviously useful. We discuss some of our initial impressions of the Reforms, both pro and con, and highlight some of the more interesting policy implications of the Reforms for state corporate law.We conclude by counseling state policymakers to be active participants in the process of breathing life into the Reforms and in addressing the crisis in corporate confidence that arose in 2002. If states assume these responsibilities with vigor, we have confidence that the existing division of responsibilities among the federal government, the stock exchanges, and the states will persist. Because that division has, on balance, served investors and the public well, it should not be lightly abandoned.

Global Markets and Local Institutions: Corporate Law System and Financial Reform Debates in Taiwan

Taiwan offers an interesting case for the discourse on global markets and local institutions. She began to develop her economy in the early 1960s, after a reasonably successful land reform program by the Nationalist (Kuomintang, or KMT) government in the 1950s. The KMT-controlled Republic of China (ROC) government had retreated to Taiwan in 1949 after losing the civil war to China. Despite her impressive economic achievements in the fifty years since the KMT government went to Taiwan, however, the dichotomy still exists: Taiwan eyes on the global markets, but her corporate law system and financial market remain local and parochial! Indeed, this dichotomy is a long-term weakness for Taiwan, which had a peaceful transition of government when the candidate from the Democratic Progressive Party (DPP), former Mayor Chen Shui-bian, won the March 2000 presidential election after the KMT splintered. Despite Taiwan's WTO accession to the WTO in 2001, her government had other new challenges. For example, President Chen Shui-bian had to face global recessions and lack of confidence in Taiwan, which registered negative growth for the first time since the first oil crisis in the early 1970s. Also, after a decade of opening up Taiwan's financial market, which coincides with her democratization, Taiwan finds her financial market in a dire situation. The problems in the financial market are illustrated by increasing nonperforming loans (NPLs), reluctance to lend because of shrinking market value of collateral, and lack of innovation. In the industrial sector, inadequate confidence in the new government led to reduced domestic investment and exodus of funds for active and portfolio investment abroad. Even towards the end of the KMT administration, financial reform became an obvious policy bandwagon. However, reforms are usually easier said then done. The KMT administration was able to propose a financial reform program, but did not garner the political will to force it into enactment. The Economic Development Advisory Council (EDAC) meeting, called in early July and closed in late August 2001 by President Chen Hsui-bian to solidify political consensus for economic reform, apparently met with success. Even though his predecessors had failed to achieve government re-engineering in the last decade, President Chen has called for shrinking the government and streamline the administrative process. The administration was instructed to develop a detailed implementation plan within two weeks after closure of the EDAC meeting, and to seek expeditious enactment or amendment of laws when necessary, despite a national election towards the year end which ended the term of the national parliament in early January 2002. One important goal of the EDAC and the recommendations, of course, was to maintain the confidence of the business community in Taiwan. Meanwhile, directed by the Ministry of Finance and the Central Bank of China and aided by some of the big five accounting firms, an elite team of close to 300 financial examiners drawn from ten government-affiliated banks began their work in August 2001. They were first stationed at 36 local credit institutions, which as a group generally had the worst NPL problems. These 36 local credit institutions represented close to 10% of the banking institutions. The MOF also made a public announcement that the government would guarantee to pay the debts of these local credit institutions. They then began to do special audits and examined questionable lend practices. In September 2001, despite protests by the management of some of these local credit institutions, their assets were involuntarily transferred to the ten government-affiliated banks. Their operations became part of the ten banks' branches, and they discontinued their banking business. There are speculations that this joint MOF-CBC enforcement action was motivated by political reasons to clip the wings of the local factions traditionally supporting the KMT. That may be so. But for possibly the wrong reasons the right thing was done. Indeed, this crackdown marks the first time in post-War Taiwan's history that the government is trying to clean up the financial system. As shown above, Taiwan had followed a path that focused on the manufacturing sector to transform herself from an agrarian society into a newly industrializing economy. She began with light manufacturing activities and went into shipping, steel, automobile, petrochemical and electronics in the 1970s and 1980s in an effort to upgrade her industrial prowess. She has followed a gradual, partial approach to globalization. Domestic competition was suppressed and small and medium, as was the financial sector.

A Rent-Protection Theory of Corporate Ownership and Control

This paper develops a rent-protection theory of corporate ownership structure - and in particular, of the choice between concentrated and dispersed ownership of corporate shares and votes. The paper analyzes the decision of a company's initial owner whether to maintain a lock on control when the company goes public. This decision is shown to be very much influenced by the size that private benefits of control are expected to have. Most importantly, when private benefits of control are large - and when control is thus valuable enough - leaving control up for grabs would attract attempts by rivals to grab control and thereby capture these private benefits; in such circumstances, to preclude a control grab, the initial owner might elect to maintain a lock on control. Furthermore, when private benefits of control are large, maintaining a lock on control would enable the company's initial shareholders to capture a larger fraction of the surplus from value-producing transfers of control. Both results suggest that, in countries in which private benefits of control are large, publicly traded companies will tend to have a controlling shareholder. It is also shown that separation of cash flow rights and voting rights will tend to be used in conjunction with a controlling shareholder structure but not with a dispersed ownership structure. Finally, the paper analyzes why companies might make control partially contestable, as many US companies currently do by adopting antitakeover arrangements. The results of the paper are consistent with the available evidence, can explain the observed patterns of corporate ownership, and yield testable predictions for future empirical work. The analysis also implies that a corporate law system that effectively limits private benefits of control can produce more efficient choices of ownership structure.