Europe’s Ius Commune on Director Revocability

The following post comes to us from Sofie Cools, a S.J.D. candidate at Harvard Law School.

Among the most important rights of shareholders is the right to elect and dismiss directors. While the election of directors usually garners a lot of attention among scholars and policymakers, the same cannot be said of the right to dismiss directors, even though it is at least of equal concern. In my paper, Europe’s Ius Commune on Director Revocability, which was recently made available on SSRN, I explore the neglected topic of the latitude of shareholder meetings to remove directors of public companies over time and across several jurisdictions in Europe and the United States. The specific question relates to whether the law mandatorily prescribes that shareholders have the right to remove directors at will, and whether common principles can be distilled at a regional or international level.

The analysis demonstrates that a mandatory rule of at-will revocability of company directors is widespread across the civil law tradition in Europe – including the French, German and probably even the Scandinavian family. The rule is usually applied more vigorously in single-tier boards than in dual-tier boards. It is especially strict in a few French-origin jurisdictions with a one-tier board, such as France and Belgium. Germany, Austria, and in some cases the Netherlands have, in the course of the twentieth century, introduced two-tier board structures. Although the rule of at-will removal has been significantly impaired for these dual-tier boards, this paper shows that, even there, it still plays a vital role. Indeed, shareholders’ say in the removal of supervisory board members has mostly been unaffected. That is why, even when managing directors can be removed only by the supervisory board, the shareholders’ influence mostly continues to be felt, by cascading through their control over the supervisory board to the level of the management board.

This commonality across European civil law jurisdictions does not result from European Union regulation. Instead, the origins of at-will revocability of directors date back to the time of the first development of corporate law, long before the idea of a European Union even developed. The paper reveals that at-will revocability of corporate directors was first explicitly stated as a general and mandatory rule in Napoleon’s codification of French commercial law in 1807. Together with the Napoleonic code, the rule spread out over continental Europe thanks to Napoleon’s conquests and the role of his commercial code as a model for later codifications of commercial law elsewhere. Thus, I argue, at will revocability can be rated among the common principles of European civil law.

The history of the two chief common law jurisdictions, the United Kingdom and the United States, contrasts sharply with that of civil law. In the United Kingdom, the principle first appeared as a default rule in the second half of the nineteenth century, and became compulsory only halfway through the twentieth century. At-will removal has long been absent in the United States. Many American states have now introduced the rule, but still allow a company to deviate in its articles of incorporation. An important finding of this paper is therefore that a mandatory rule of at-will revocability is not part of traditional common law. Surprisingly, this discrepancy between common law and civil law has so far largely been overlooked in legal and economic scholarship. Likewise, the power to remove directors at will has not been put forward as an important element in the ongoing debate on enhancing the position of stockholders in American corporations.

Since at-will removability of directors is crucial in determining the power relations within a corporation, the difference here between common and civil law presumably interacts with other divergences between both legal cultures. For instance, the findings of this paper offer support for a hypothesis I made earlier with regard to a possible association – and even partially causal relationship – between removability of corporate directors and stock ownership structures. The possible existence of an association is to a considerable extent buoyed by the finding that at-will removability is mandatory in civil law jurisdictions, where stock ownership is predominantly concentrated, but generally absent or at least not compulsory in the main common law jurisdictions, where stock ownership is significantly more dispersed. The fact that the mandatory rule of at-will removability traces back earlier than the development of these stock ownership patterns, moreover, suggests that at least a partial causation may run from the regulation of director removal to the prevailing stock ownership patterns.

At the very least, it is clear that a longstanding difference between civil law and common law with regard to the authority of a shareholder meeting to remove those in charge of governing the company is so fundamental that it is a premise that must be taken into account in comparative corporate law, especially where power relations within corporations are considered.

The paper is available here.

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