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Review Essay - Perspectives of Regulatory Competition in European Company Law

Published online by Cambridge University Press:  06 March 2019

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Copyright © 2005 by German Law Journal GbR 

References

1 Among the relevant literature, see Cary, William L., Federalism and Corporate Law: Reflections upon Delaware, 83 Yale L.J. 663 (1974); Ralph K. Winter, State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. Legal Stud. 251 (1977); Roberta Romano, The State Competition Debate in Corporate Law, 8 Cardozo L. Rev. 709 (1987); Lucian Ayre Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 Harv. L. Rev. 1435 (1992); Roberta Romano, Explaining American Exceptionalism in Corporate Law, in International Regulatory Competition and Coordination 127 (1996); William J. Carney, Federalism and Corporate Law: A Non-Delaware View of Results of Competition, in: International Regulatory Competition and Coordination 153 (1996); and William W. Bratton & Joseph McCahery, Regulatory Competition as Regulatory Capture: The Case of Corporate Law in the USA, in: International Regulatory Competition and Coordination 207 (1996).Google Scholar

2 For an overview see Lombardo, Stefano, Regulatory Competition in Company Law in the European Community 86-91 (2002).Google Scholar

3 Heine, Regulierungswettbewerb im Gesellschaftsrecht 120 (2003)Google Scholar

4 Romano, Roberta, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L. Econ. & Org. 225 (1985). This approach is also used by Lombardo, supra note 2, at 59-61.Google Scholar

5 Lombardo, supra note 2, at 83-101.Google Scholar

6 Heine, supra note 3, at 91-94, 141-45.Google Scholar

7 Kahan, Marcel & Kamar, Ehud, The Myth of State Competition in Corporate Law, 55 Stan. L. Rev. 679, 687-700 (2002).Google Scholar

8 Heine, supra note 3, at 145-49.Google Scholar

9 Romano, supra note 4.Google Scholar

10 Heine, supra note 3, at 149-52.Google Scholar

11 Roberta Romano, The Genius of American Corporate Law 43 (1993).Google Scholar

12 Heine, supra note 3, at 147.Google Scholar

13 Heine, supra note 3, at 234.Google Scholar

14 Heine, supra note 3, at 152.Google Scholar

15 Heine, supra note 3, at 164-67.Google Scholar

16 Heine, supra note 3, at 174-87.Google Scholar

17 Carney, William J., The Political Economy of Competition for Corporate Charters, 26 J. Legal Stud. 303 (1997).Google Scholar

18 Heine, supra note 3, at 191. Concerning the problem of workers codetermination systems, Lombardo comes to the same result. See Lombardo, , supra note 2, at 167-70.Google Scholar

19 Heine, supra note 3, at 192-94.Google Scholar

20 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, 2004 O.J. (L 142) 12. For an account of the history see Zumbansen, Peer, European Corporate Law and National Divergences: The Case of Takeover Regulation, in 3 Wash. U. Global Stud. L. Rev. 867 (2004).Google Scholar

21 See Edwards, Vanessa, The Directive on Takeover Bids – Not Worth the Paper It's Written On?, 1 Eur. Co. & Fin. L. Rev. 416 (2004); Silja Maul & Athanasios Kouloridas, The Takeover Bids Directive, in 5 German L.J. No. 4 (1 April 2004), 355-66.Google Scholar

22 With the same conclusion also see Gordon, Jeffrey N., Corporations, Markets and Courts, 91 Colum. L. Rev. 1931 (1991), 1971.Google Scholar

23 Heine, supra note 3, 168–74.Google Scholar

24 Heine, supra note 3, 194232. See also Heine, Klaus & Kerber, Wolfgang, European Corporate Laws, Regulatory Competition and Path Dependency, 13 Eur. J. L. & Econ. 47 (2001).Google Scholar

25 Bebchuk, Lucian A. & Roe, Mark J., A Theory of Path Dependence in Corporate Ownership and Governance, 52 Stan. L. Rev. 127 (1999). For a German perspective see Schmidt, Reinhard H. & Spindler, Gerald, Path Dependence and Complementarily in Corporate Governance, in Convergence and persistence in corporate governance 114 (2004). For a general approach to path dependency see Arthur, W. Brian, Competing Technologies, Increasing Returns, and Lock-In by Historical Events, 99 Econ. J. 116 (1989).Google Scholar

26 Heine, supra note 3, at 195 ff.Google Scholar

27 For this approach see especially Henry Hansman & Reiner Kraakman, The End of History for Corporate Law, 89 Geo. L.J. 439 (2001), reprinted e.g. in: Convergence and Divergence in Corporate Governance 33 (Gordon, Jeffrey N. & Roe, Mark J., eds., 2004).Google Scholar

28 For an overview of the adoption of Chapter 11 Bankruptcy Code in Germany, see Terhart, Peter, Chapter 11 bankruptcy code: eine Alternative für Deutschland? (1996).Google Scholar

29 Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards, which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, Official Journal L 26, 31/01/1977 p. 1 ff.Google Scholar

30 For the current state of the reform see European Commission, Modernization of Company Law and Enhancement of Corporate Governance in the European Union – A Plan to Move Forward, available at: http://europa.eu.int/comm/internal_market/en/company/company/modern/index.htm.Google Scholar

31 Heine, supra note 3, at 229.Google Scholar

32 Heine, supra note 3, at 231.Google Scholar

33 The application of a corporate law with low protection of creditors in a legal system with a strong protection of creditors in corporate law might, therefore, cause an insufficiently low level of creditor protection. As a consequence, the costs of capital for this corporation might, therefore, increase and diminish the increase in efficiency by the application of this corporate law. This effect is also known in conflicts of law as the problem of characterization. See Weintraub, Russell J., Commentary on the Conflicts of Law 49-55 (4th ed. 2001); Christian von Bar & Peter Mankowski, Internationales Privatrecht – Band I 712 (2nd ed. 2003).Google Scholar

34 Heine reaches this conclusion for the problem of path dependency and legislative competition in corporate law, but acknowledges that further research might be necessary in order to apply this as a general conclusion for the theory of path dependency. See Heine, , supra note 3, at 229, 238.Google Scholar

35 See especially Schmidt, Karsten, Editorial: Verlust der Mitte durch “Inspire Art”? – Verwerfungen im Unternehmensrecht durch Schreckreaktionen der Literatur, 168 Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht [ZHR] 493 (2004). For contract law see Fleischer, Holger, Gesetz und Vertrag als alternative Problemlösungsmodelle im Gesellschaftsrecht, 168 Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht [ZHR] 673 (2004).Google Scholar

36 For commentary on the Überseering and Inspire Art decisions by the ECJ, see Bälz, Kilian & Baldwin, Teresa, The End of the Real Seat Theory (Sitztheorie): the European Court of Justice Decision in Ueberseering of 5 November 2002 and its Impact on German and European Company Law, in 3 German L.J. No. 12 (1 December 2002), available at http://www.germanlawjournal.com/article.php?id=214; Christian Kersting & Clemens Philipp Schindler, The ECJ's Inspire Art Decision of 30 September 2003 and its Effects on Practice, in 4 German L.J. No. 12 (1 December 2003), 1277-1291, available at: http://www.germanlawjournal.com/article.php?id=344. For a comprehensive analysis of the real seat theory see Schulz, Martin, European Challenges for German Corporate Law: An Analysis of the recent Jurisprudence of the European Court of Justice on the Freedom of Establishment and its Impact on German Company Law and Conflicts of Laws, in: Annual of German & European Law, Vol. II (Miller, Russell & Zumbansen, Peer, eds., 2005) [forthcoming].Google Scholar

37 For an overview of the state of the art of the harmonization of European Company Law see Lombardo, , supra note 2, at 25-55.Google Scholar

38 For further details see Lombardo, , supra note 2, at 41-44.Google Scholar

39 Lombardo, supra note 2, at 201-02.Google Scholar

40 See the classical account by Alchian, Armen A. & Demsetz, Harold, Production, Information Costs, and Economic Organization, 62 Am. Econ. Rev. 777 (1972).Google Scholar

41 The basic agency problems that arise in the corporate context are agency problems between shareholders and managers, agency problems between majority and minority shareholders, and agency problems between shareholders and third parties. See Jensen, Michael C. & Meckling, William H., Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976).Google Scholar

42 Lombardo, supra note 2, at 109.Google Scholar

43 Lombardo, supra note 2, at 201.Google Scholar

44 Lombardo, supra note 2, at 202.Google Scholar

45 Lombardo, supra note 2, at 203.Google Scholar

46 EC Case C-212/97 [1999] ECR I-1459. From the abundance of case notes, see e.g. Ebke, 48 Am. J. Comp. L. 623 (2000); Wymeersch, in: Corporations, Capital Markets and Business in the Law: Liber Amicorum Richard M. Buxbaum 629 (2000); and Halbhuber, 38 Comm. Market L. Rev. 1385 (2001).Google Scholar

47 EC Case C-208/00 [2002] ECR I-9919. On the Überseering decision, see e.g. Wulf-Henning Roth, 52 Int'l & Comp. L.Q. 177 (2003); Ebke, 58 Juristenzeitung 927 (2002); Eidenmüller, 23 ZIP 2233 (2002); Kilian Baelz & Teresa Baldwin, 3 German L.J. No. 12 (1 December 2002), available at http://www.germanlawjournal.com/article.php?id=214.Google Scholar

48 EC Case C-167/01 [2003] ECR I-10155. See e.g. Erich Schanze & Andreas Jüttner, Die Aktiengesellschaft 661 (2003); Silja Maul, 58 BetriebsBerater 2297 (2003); Christian Kersting & Clemens Philipp Schneider, 4 German L.J. 1277 (1 December 2003), available at http://www.germanlawjournal.com/article.php?id=344.Google Scholar

49 For a general overview see Mock, Sebastian, Harmonization, Regulation and Legislative Competition in European Company Law, 3 German L.J. No. 12 (1 December 2003), available at http://www.germanlawjournal.com/article.php?id=216.Google Scholar

50 Hirte, Heribert, Abkehr von der Sitztheorie, in: Handbuch zum Grenzüberschreitenden Gesellschaftsrecht (Hirte, Heribert & Bücker, Thomas, eds., 2005).Google Scholar

51 EC Case C-9/02 [2004] – Lasteyrie du Saillant, (German translation reprinted in 57 Neue Juristische Wochenschrift [NJW] 2439 (2004)).Google Scholar

52 Lombardo, supra note 2, at 202.Google Scholar

53 See Zumbansen, Peer, supra note 20.Google Scholar

54 Many regulations are based on model laws that are drafted by commissions and only later enacted by the states individually. Therefore differences can occur when single states do not enact later drafts of the model laws.Google Scholar

56 U.S. Const. art. I § 8 cl. 4.Google Scholar

57 Nevertheless, differences remain and especially in the case law of the different courts of appeal. However, forum shopping occurs basically only in corporate reorganizations under Chapter 11. See Cole, Marcus, “Delaware is not a state”: Are We Witnessing Jurisdictional Competition in Bankruptcy, 55 Vand. L. Rev. 1845 (2002); Robert K. Rasmussen & Randall S. Thomas, Whiter the Race? A Comment on the Effects of the Delawarization of Corporate Reorganizations, 54 Vand. L. Rev. 283 (2001). For the limits of the general protection of bankruptcy law, see Lombardo, , supra note 2, at 96-99.Google Scholar

58 However, a general obligation to comply with US-GAAP does not exist in the United States. Only businesses under coverage of the federal securities laws are required to comply with US-GAAP in their financial statements (Sec. 5 Securities Act 1933; Sec. 12, 13, 15(d) Exchange Act). Nevertheless, accountants tend to adopt SEC accounting practices even for firms not legally subject to them.Google Scholar

59 See Restatement (Second) of Conflicts of Law (Philadelphia: American Law Institute, 1971), § 302.Google Scholar

60 For an overview see Lombardo, , supra note 2, at 53.Google Scholar

61 Nevertheless, the lack of a harmonized or unified regime of securities regulation does not have to be regarded as a prerequisite for a European market of corporate charters (see section C(III), above).Google Scholar

62 Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards, 2002 O.J. (L 243), 1 available at: http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=en&numdoc=32002R1606&model=guicheti.Google Scholar

63 As a consequence, the applicability of International Financial Reporting Standards will be different in every Member State. Due to the fact that the applicable law of accounting is determined by the law of incorporation, this fact might also become an important circumstance for firms in the choice of a Member State for incorporation. For the applicable laws of accounting see Westhoff, André, Rechnungslegung, in: Handbuch zum Grenzüberschreitenden Gesellschaftsrecht (Hirte, Heribert & Bücker, Thomas, eds., 2005).Google Scholar

64 Gesetz zur Einführung internationaler Rechnungslegungsstandards und zur Sicherung der Qualität der Abschlussprüfung (Bilanzreformgesetz), vom 4. Dezember 2004, Bundesgesetzblatt I S. 3166.Google Scholar

65 Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings; 2000 O.J. (L 160), 1.Google Scholar

66 See Hirte, Heribert & Mock, Sebastian, Wohin mit der Insolvenzantragspflicht?, Zeitschrift für Wirtschaftsrecht [ZIP] 27 (2005) [forthcoming].Google Scholar

67 For a U.S. perspective see Skeel, David A., Rethinking the Line Between Corporate Law and Corporate Bankruptcy, 72 Tex. L. Rev. 471 (1994), arguing that the separation of bankruptcy and company law in the United States has led to problems that undermined both areas of the law. Skeel therefore suggests that the law of corporate bankruptcy has to be returned to the states.Google Scholar

68 See Amtsgericht (AG) (First Instance Court) Hamburg, Neue Zeitschrift für Insolvenzrecht [NZI] 5 (2003), 442. For a detailed discussion of the qualification of the Sec. 214 Insolvency Act 1986, see Mock, Sebastian & Schildt, Charlotte, Insolvenz, in: Handbuch zum Grenzüberschreitenden Gesellschaftsrecht (Hirte, Heribert & Bücker, Thomas, eds., 2005); Hans C. Hirt, The Wrongful Trading Remedy in UK Law: Classification, Application and Practical Significance, 1 Eur. Co. & Fin. L. Rev. 71 (2004).Google Scholar

69 For an overview on this debate see Mock, & Schildt, , supra note 68.Google Scholar

70 Mock, & Schildt, , supra note 68.Google Scholar

71 See note 62.Google Scholar

72 The case law on the regulation on insolvency proceedings shows that the courts of the Member States interpret the requirements of art. 3 in a very broad way. For an overview see Paulus, Christoph G., Zuständigkeitsfragen nach der Europäischen Insolvenzverordnung, Zeitschrift für Wirtschaftsrecht [ZIP] 24 (2002), 729.Google Scholar

73 Heine also concludes that the lack of uniformity in securities regulation and bankruptcy law will limit the efficiency of a legislative competition in the European market for corporate charters. See Heine, , supra note 6, 231 ff.Google Scholar

74 Inspire Art, supra note 48; Hirte, supra note 50.Google Scholar

75 Cal. Corp. Code § 2115(a).Google Scholar

76 Most significantly, the Sarbanes-Oxley Act introduced several duties for board members. As well, Sec. 10A(i) Exchange Act (15 U.S.C. § 78j-1) imposes duties for the audit committee; Sec. 13(k) Exchange Act (15 U.S.C. § 78m) prohibits loans to directors and officers.Google Scholar

77 Lombardo, supra note 2, at 201-05.Google Scholar

78 Heine, supra note 3, at 239; Lombardo, supra note 2, at 203.Google Scholar

79 Lombardo, supra note 2, at 203.Google Scholar

80 Heine, supra note 3, at 256-58.Google Scholar

81 Heine, supra note 3, at 246.Google Scholar

82 See section C(IV), above.Google Scholar

83 For a mandatory introduction to the liability for wrongful trading in the Member States, see Habersack, Mathias & Verse, Dirk A., Wrongful Trading – Grundlage einer europäischen Insolvenzverschleppungshaftung?, 168 Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht [ZHR] 174, 214 (2004). Nevertheless, Habersack and Verse propose that only the general duty to enact a wrongful trading should be implemented by the European legislator. The details of such regulation should instead be left to the Member States. Nevertheless, a legislative competition – if to a smaller extent – would occur.Google Scholar

84 For an overview see Lombardo, , supra note 2, at 53.Google Scholar

85 For an overview see Adolff, Johannes, Turn of the Tide?: The “Golden Share” Judgements of the European Court of Justice and the Liberalization of the European Capital Markets, 3 German L.J. No. 8 (1 August 2002), available at http://www.germanlawjournal.com/article.php?id=170;. For the situation in Germany see Wellige, Kristian, Weg mit dem VW-Gesetz!, Europäische Zeitschrift für Wirtschaftsrecht [EuZW] 14 (2003), 427.Google Scholar

86 Romano, Roberta, The Advantage of Competitive Federalism for Securities Regulation 15 (2002).Google Scholar

87 Id., 26-29.Google Scholar

88 Id., 48-50. See also Heine, , supra note 3, at 152-67.Google Scholar

89 For this development see Grossman, Ellen J., U.S. vs. International Stock Option Disclosure Reform: The International Community Leads Where the U.S. Community failed, 29 BROOK. J. INT'L L. 281 (2003); Sebastian Mock, Accounting for Stock-based Compensation, 16 Euro. Bus. L. Rev. 359 (2005).Google Scholar

90 Easterbrook, Frank H. & Fischel, Daniel R., The Economic Structure of Corporate Law 303 (1991).Google Scholar

91 Romano, supra note 86, at 140.Google Scholar

92 Romano, supra note 86, at 46.Google Scholar

93 Heine, supra note 3, at 271.Google Scholar

94 Heine, supra note 3, at 271.Google Scholar

95 Under the site-of-sale rule, securities transactions are governed by the law of the state in which either the offer or the acceptance to buy the security took place. In contrast, under the issuer securities domicile rule the securities transaction is governed by the law of the state in which the issuer has its domicile.Google Scholar

96 Carsten Peter Claussen, Bank- und Börsenrecht 358-61 (3rd ed. 2003).Google Scholar

97 See e.g. Art. 1 Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, 2003 O.J.(L 345) 64. For Germany see Assmann, Heinz-Dieter, in: Einleitung, Grosskommentar zum Aktiengesetz (Hopt, Klaus J. & Wiedemann, Herbert, eds., 1992), n. 690 ff.Google Scholar

98 See supra note 48.Google Scholar

99 Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE), 2001 O.J. (L 294) 1. See hereto Christoph Teichmann, The European Company – A Challenge to Academics, Legislatures and Practitioners, in 4 German L.J. No. 4 (1 April 2003), 309-331.Google Scholar

100 Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), 2003 O.J. (L 207) 1. See the contribution by Braun, Susanne, The European Private Company: A Supranational Company Form for Small and Medium-Sized Enterprises?, in 5 German L.J. No. 11 (1 November 2004), available at http://www.germanlawjournal.com Google Scholar

101 Heine, supra note 3, at 275.Google Scholar

102 Art. 9 Council Regulation on the Statute for a European company (SE), Art. 8 Council Regulation (EC) on the Statute for a European Cooperative Society (SCE).Google Scholar

103 Hirte, Heribert, Die Europäische Aktiengesellschaft, Neue Zeitschrift für Gesellschaftsrecht [NZG] 5 (2002), 1, 2; Marie-Agnes et al., The Societas Europaea in Relation to the Public Corporation of Five Member States (France, Italy, Netherlands, Spain, Austria), 3 Euro. Bus. Org. L. Rev. 733 (2002); and Sebastian Mock, Die Europäische Genossenschaft (SCE), 2 Zeitschrift für Gemeinschaftsprivatrecht [GPR] 213 (2004).Google Scholar

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