The Soviet Constitution Problem in Comparative Corporate Law

This post comes to us from Leo E. Strine, Jr., Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent essay, The Soviet Constitution Problem in Comparative Corporate Law: Testing the Proposition that European Corporate Law is More Stockholder Focused than U.S. Corporate Law, issued as Discussion Paper of the Program on Corporate Governance and forthcoming in the Southern California Law Review. Related research from the Program on Corporate Governance includes Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance, by Chief Justice Strine; and The Case for Increasing Shareholder Power, by Lucian Bebchuk.

Leo E. Strine, Jr., Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance, recently issued an essay that is forthcoming in the Southern California Law Review. The essay, titled The Soviet Constitution Problem in Comparative Corporate Law: Testing the Proposition that European Corporate Law is More Stockholder Focused than U.S. Corporate Law, is available here. The abstract of Chief Justice Strine’s essay summarizes it as follows:

This article addresses the proposition advanced by academic and press commentators that European corporation law promotes stockholder welfare better than its U.S. counterpart. Those who express that view often point to the stronger rights afforded to stockholders under the laws of the European member states, including the non frustration rule, the ability of stockholders to take direct action by calling a special meeting and replacing directors, and rules that aim to provide equal treatment for all target stockholders. But, claiming that stockholders are economically better off as a result of the literal law on the books is akin to judging the Soviet Union’s protection of human freedom by reading its Constitution. That is, if one looks only at the Soviet Constitution on paper, one might conclude that it was a model of liberalism because it provided for separation between church and state, freedom of speech, freedom of the press, and freedom of assembly. But in reality, the Soviet citizens were unable to exercise any of those rights. In an admittedly far less extreme way, the claim that European corporate law better advances stockholder welfare than the U.S. approach relies upon a similar misplaced emphasis on paper rights.

This article proposes that scholars who tout Europe as a stockholder paradise slight the social and regulatory context in which laws operate, and elide the fact that American corporate law creates a system where directors have an intense focus on generating stockholder profits. Available empirical evidence suggests that U.S. stockholders use their rights to influence corporate policies more effectively than their European counterparts, that there is more M&A activity in the United States than in Europe, and that U.S. stockholders receive higher takeover premiums. By highlighting the practical ways in which American corporate laws operate compared to those in Europe and observing how that operation affects stockholder value, this article is intended to contribute to the increasingly global debate about corporate governance. Because policy advocates have argued that EU corporate law should inform U.S. policymaking and vice versa, it is critical that there be a clear eyed understanding of how each system works in actual practice, not just in theory, lest we make policy mistakes.

The full article is available here.

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One Comment

  1. Marco Ventoruzzo
    Posted Monday, December 14, 2015 at 11:17 am | Permalink

    Leo Strine is right in pointing out how shareholders’ rights theoretically existing on paper might not be easilly enforceable through litigation or other means in several European countries (just consider the average duration of a lawsuit in some jurisdictions!). One issue mentioned in the article that I think deserves even more attention is that it might be true that shareholders have some additional powers vis-a-vis directors in Europe, but that these powers and rights are often beneficial only for controlling shareholders, in a context of concentrated ownerhsip in which the real agency problem is the one between large and small shareholders. In this perspective, rules such as the mandatory bid and board neutrality have often limited practical relevance for minority investors, and we should be careful about optional rules and contractual freedom in bylaws, as in some systems this might mean having the fox guarding the hen-house.

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