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Two Types of Regulatory Competition: Competitive Federalism Versus Reflexive Harmonisation. A Law and Economics Perspective on Centros

  • Simon Deakin


There is a growing debate about the desirability of allowing greater scope for regulatory competition inside the European Union. The argument for doing so is that competition between the Member States in the production of legal rules will lead to greater economic efficiency than can be achieved through the harmonisation of standards. The Court’s ruling in Centros appears to mark a significant move in the direction of inter-state competition in company law. In deciding that a company founded by Danish citizens in the UK, thereby avoiding Danish minimum capital requirements, could not be denied the right to register an overseas branch in Denmark for the purposes of trading there, the Court has rekindled a long-running debate about the siège réel doctrine.



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2 Case C–212/97 Centros Ltd. v. Erhvervs-og Selkskabsstryrelsen [1999] ECR I–1459.

3 See Sørensen, K.Prospects for European company law after the Judgment of the European Court of Justice in Centros Ltd.2 (1999) CYEL 203 .

4 Van den Bergh, above n 1.

5 Cheffins, B. Company Law: Theory, Structure and Operation (OUP, 1997) at 426 .

6 Tiebout, C.The pure theory of local expenditures64 (1956) Journal of Political Economy 416 .

7 Comité Intergouvernemental Créé par la Conférence de Messine, Rapport des Chefs de Délégation aux Ministres des Affaires Etrangères (Brussels, 1956), summarised in English in (1956) Planning, No. 405.

8 International Labour Office, “Social aspects of European economic cooperation74 (1956) International Labour Review 99 .

9 Above n 7 at 233.

10 See Deakin, S.Labour law as market regulation: the economic foundations of European social policy”, in Davies, P. et al. (eds.) European Community Labour Law: Principles and Perspectives. Liber Amicorum Lord Wedderburn (OUP, 1996).

11 Case 120/78 Rewe-Zentral AG v. Bundesmonopolverwaltung für Brantwein [1979] ECR 649.

12 On the Sunday trading cases and economic analysis, see Deakin, above n 10. Following the Court’s much-debated decision in Joined Cases C-267/91 and C-268/91 Keck and Mithouard [1993] ECR I-6097, the case-law arguably became more closely aligned to the economic analysis.

13 See Van den Bergh, above n 10.

14 Ibid., at 342.

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16 For an accessible and insightful account of the prisoner’s dilemma, see Hargreaves, , Heap, S. and Varoufakis, Y. Game Theory: A Critical Introduction (Routledge, 1995), in particular ch. 5 .

17 A key text is Oates, W. and Schwab, R.Economic competition among jurisdictions: efficiency enhancing or distortion inducing?35 (1988) Journal of Public Economics 333 . For its use in a legal context see (inter alia) Revesz, R.Rehabilitating interstate competition: rethinking the ‘race to the bottom’ rationale for federal environmental regulation67 (1992) New York University Law Review 1210 ; van Wezel Stone, K.Labor and the global economy: four approaches to transnational labor regulation16 (1995) Michigan Journal of International Law 987 ; Van den Bergh, above n 1; Faure, above n 1.; Barnard C. “Social dumping revisited: some lessons from Delaware?” [2000] European Law Review 1.

18 Hargreaves Heap and Varoufakis, above n 16, ch. 3.

19 Ibid., ch. 7.

20 Revesz R. “Federalism and regulation: some generalisations”, in Esty and Geradin above n 1.

21 Van den Bergh, above n 1 at 353.

22 Hargreaves Heap and Varoufakis, above n 16 at 216.

23 Van den Bergh, above n 1 at 352.

24 Ibid.

25 Ibid., at 354.

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28 Paqué, K-HDoes Europe’s Common Market need a social dimension? Some academic thoughts on a popular theme”, in Addison, J.T. and Siebert, W.S. (eds.) Labour Markets in Europe: Issues of Harmonisation and Regulation (Dryden, 1997), at 109 .

29 For discussion from a law and economics perspective of the Sunday trading cases and the impact of the Court’s decision in Cases C–267/91 and C–268/91 Keck and Mithouard [1993] ECR I-6097, see Deakin, above n 10.

30 Van den Bergh, above n 1 at 346.

31 Van den Bergh, ibid.; Romano, R.Empowering investors: a market approach to securities regulation107 (1998) Yale Law Journal 2359, 2394.

32 Ibid.

33 On the Securities and Exchange Act and pre-emption, see Romano, above n 31; on the National Labor Relations Act and pre-emption, see van Wezel Stone, K.The legacy of industrial pluralism: the tension between individual employment rights and the New Deal system of collective bargaining59 (1992) University of Chicago Law Review 575 .

34 Teubner, G. Law as an Autopoietic System (Blackwell, 1993) at 52 .

35 Teubner, ibid; Rogowski, R. and Wilthagen, T. (eds.) Reflexive Labour Law (Kluwer, 1994); Deakin, S. and Hughes, A.Economic efficiency and the proceduralisation of company law3 (1999) Company, Financial and Insolvency Law Review 169 .

36 Deakin, S. and Wilkinson, F.Rights vs. efficiency? The economic case for transnational labour standards23 (1994) Industrial Law Journal 289 .

37 Black, J. Rules and Regulators (OUP, 1998).

38 See Deakin and Wilkinson above n 36.

39 Esty, D.Revitalising environmental federalism95 (1996) Michigan Law Review 570 ; Engel, K.State environmental standard-setting: is there a race and is it to the bottom?47 (1997) Hastings Law Journal 271 .

40 75 US 168. See Butler, H.Nineteeth century jurisdictional competition in the granting of corporate privileges14 (1985) Journal of Legal Studies 129 .

41 Charny, D.Competition among jurisdictions in corporate law rules: an American perspective on the ‘race to the bottom’ in the European Community”, in Wheeler, S. (ed.) A Reader on the Law of the Business Enterprise (OUP, 1994), 368 .

42 Cary, W.Federalism and corporate law: reflections on Delaware83 (1974) Yale Law Journal 663 .

43 Amanda Acquisition Corp. v. Universal Foods Corp. 877 F.2d 496 (1989), per Easterbrook J., cited in Charny, above n 41.

44 Charny, ibid at 371.

45 See in particular, Romano, R.Law as a product: some pieces of the incorporation puzzle1 (1985) Journal of Law, Economics and Organisation 225 , “The state competition debate in corporate law” 8 (1987) Cardozo Law Review 709, The Genius of American Corporate Law (AEI Press, 1993); Macey, J. and Miller, G.Toward an interest-group theory of Delaware corporate law65 (1987) Texas Law Review 469 ; Roe, M.Takeover politics”, in Blair, M. (ed.) The Deal Decade (Brookings Institution, 1993).

46 Roe ibid.

47 Bebchuck, L. and Ferrell, A.Federalism and corporate law: the race to protect managers against takeovers99 (1999) Columbia Law Review 1168 .

48 Charny, above n 41 at 372–373. More recently, the adoption by Delaware of a limited liability company or LLC (a form of incorporation designed for the small, closed firm) with provision for the founders to opt out of a large range of fiduciary duty rules, has given rise to a suggestion that the state may again be involved in a “race to the bottom”. See Cohen, D.Theories of the corporation and the limited liability company: how should courts and legislatures articulate rules for piercing the veil, fiduciary responsibility and securities regulation for the limited liability company51 (1998) Oklahoma Law Review 428 , for discussion of Delaware’s LLC statute.

49 Alva, C.Delaware and the market for corporate charters: history and agency15 (1990) Delaware Journal of Corporate Law 885 ; Black, B.Is corporate law trivial? A political and economic analysis84 (1990) Northwestern University Law Review 542 .

50 Katz, M. and Shapiro, C.Network externalities: competition and compatibility75 American Economic Review (1985) 424 .

51 Villiers, C. European Company Law: Towards Democracy? (Aldershot: Dartmouth, 1998), at 19 .

52 Cary, above n 42.

53 Schmitthoff, C.The future of the European company law scene”, in Schmitthoff, C. (ed.) The Harmonisation of European Company Law (UKNCCL, 1973), 3 at 9.

54 Villiers, above n 51 at 29. See also Edwards, V. European Company Law (Clarendon Press, 1999) for a general account of the evolution of the EU company law harmonisation programme.

55 Mueller, D. and Sirower, M.The causes of mergers: tests based on the gains to axquiring fir’s shareholders and the size of premia” ESRC Centre for Business Research Working Paper no. 109, 1998 (University of Cambridge).

56 Article 5(1)(c). See Official Journal of the European Communities, C 378, 13.12.97.

57 Deakin, and Slinger, , “Hostile takeovers, corporate law and the theory of the firm”, 24 (1997) Journal of Law and Society 124 .

58 Slinger, G. and Deakin, S.Company law as an instrument of inclusion: reregulating stakeholder relations” ESRC Centre for Business Research Working Paper no. 145, 1999, University of Cambridge .

59 This legislation dates back to 1975 and is currently contained in the Trade Union and Labour Relations (Consolidation) Act 1992. It is supported by a number of EC directives (in particular Directive G8/59 on Collective Redundancies, Official Journal L 225, 12.8.1998, pp. 16–21.

60 The Transfers of Undertakings (Protection of Employment) Regulations 1981, implementing EC Directive 77/187, Official Journal L 061, S.3.1977, pp. 26–28, as amended by Directive G8/50, Official Journal L 201, 17.7.1998, pp. 88–92 (the “Acquired Rights Directive”).

61 See Deakin, S. and Morris, G. Labour Law (Butterworths, 2nd ed., 1998) at 786788 .

62 There is a provision for there to be annual consultation over merger plans between company representatives and representatives of employees in the Annex to the European Works Councils Directive (Directive 94/45, Official Journal L 254, 30.9.1994, pp. 64–72). However, it is arguable that this provision, on its own, it unlikely to lead to significant employee participation in decision making on mergers: see Wheeler, S.Works councils: towards stakeholding?24 (1997) Journal of Law and Society 44 .

63 The amended proposal is published in the Official Journal C 378, 13.12.1997. The background to the proposal is explained in Commission document COM (97) 565 final. See also House of Lords Select Committee on the European Communities, Takeover Bids, 13th Report, HL Paper 100, Session 1995–96. In June 1999 the Member States agreed a common position on the latest form of the draft Directive, and it seems highly likely that it will be formally adopted in the near future.

64 Romano, above n 31

65 Bebchuck and Ferrell, above n 47.

66 Roe, above n 45.

67 See Villiers, above n 51.

68 Company Law: Theory, Structure and Operation (Clarendon Press, 1997).

69 Freedman, J and Godwin, M.Incorporating the micro business: perceptions and misperceptions”, in Hughes, A. and Storey, D. (eds.) Finance and the Small Firm (Routledge, 1994 ).

70 Bebchuck and Ferrell, above n 65.

71 Deakin, S. and Slinger, G.Hostile takeovers, corporate law and the theory of the firm24 (1997) Journal of Law and Society 124 .

72 Deakin and Hughes above n 35.

73 Case C–212/97 [1999] ECR I–459.

74 Bebchuck, L.The desirable limits on state competition in corporate law105 (1992) Harvard Law Review 1435 .

75 Posner, R.The rights of creditors of affiliated corporations”, 43 (1976) University of Chicago Law Review 499 ; Cheffins above n 5, ch. 11.

76 Cheffins, ibid, ch. 12.

77 Rogers, J. and Streeck, J.Workplace representation overseas”, in Freeman, R. (ed.) Working under Different Rules (NBER/Russell Sage Foundation, 1994), 97156 .

78 Freeman, R. and Lazear, E.An economic analysis of works councils”, in Rogers, J. and Streeck, W. (eds.) Works Councils: Consultation, Representation, Cooperation (University of Chicago Press, 1994).

79 Mandatory rules may fulfill a number of useful purposes. These may include supplying standard terms which have a positive “network externality” or the public good effect of reducing transaction costs. See Charny, op. cit., at pp. 380–383 (referring to these as “focal point” rules). In addition, rules which offset asymmetrical information (or inequalities of bargaining power) may be relevant in the context of creditor and employee rights. See Charny, above n 41 at 389–390; Deakin and Wilkinson above n 36.

80 Vitols, S. Casper, S. Soskice, D. and Woolcock, S. Corporate Governance in Large British and German Companies (Anglo-German Foundation for the Study of Industrial Society, 1997), 35 .

81 Ibid., at 36.

82 Romano, above n 31 at 2394.

83 Coffee, J.The mandatory/enabling distinction in corporate law: an essay on the judicial role89 (1989) Columbia Law Review 1618 ; Eisenberg, M.The structure of corporation law89 (1989) Columbia Law Review 1461 .

84 Alva, above n 49.

85 Cohen, above n 48.

* Reader in Economic Law at the University of Cambridge. The present paper draws on ideas first developed in a related paper (“Regulatory competition versus harmonisation in European company law” in Esty D. and Geradin D. Regulatory Competition and Economic Integration: Comparative Perspectives (OUP, forthcoming)). I am grateful for comments received in conferences held at the Yale Law School (October 1999) and the Centre for Corporate and Commercial Law, in collaboration with the Centre for European Legal Studies, University of Cambridge (November 1999).


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