Luca Enriques (*)

Book Review:

The Comparative Anatomy of Corporate Law

REINIER KRAAKMAN ET AL., THE ANATOMY OF CORPORATE LAW. A COMPARATIVE AND FUNCTIONAL APPROACH (Oxford University Press 2004).

(*) Professor of Business Law, University of Bologna, and ECGI Research Associate. E-mail address:

luca.enriques@unibo.it. This review is based on an unpublished paper prepared for the conference “The Anatomy of Corporate Law”, held in London on June 30, 2003, and circulated under the title “The Comparative Anatomy of Related Party Transactions Law.” I wish to thank Alain Pietrancosta, Peter Mülbert, and Robert Thompson for helpful information about French, German, and US law respectively, and Brian Cheffins, Gérard Hertig, and other participants at the London conference for very helpful comments on an earlier draft. Usual disclaimers apply.

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I. Introduction: The Functional Anatomy of The Anatomy of Corporate Law

Seven leading corporate law scholars from top academic and research institutions in seven

countries and three continents worked together for nine years1 to produce the first global and

comprehensive comparative and functional analysis of corporate law.2 The authors managed to

meet “half a dozen”3 times together, and many more times in smaller groups,4 to discuss their

enterprise, and prepare “countless”5 drafts of each chapter. Three conferences and a number of

seminar presentations during the preparation of the book gave the authors feedback from other

academics,6 and meanwhile the chapters “circulated around the world countless times for revisions,

comments etc.”7 The recognized intellectual leader among the authors8 is Reinier Kraakman, a

Harvard Law School Professor, who had already made path-breaking contributions to corporate law

studies, often in partnership with one of the others, Henry Hansmann. Their team effort was

organized under the stewardship of one of the most enterprising and dynamic academics in the field,

Gérard Hertig.9 What all this leads to is a volume, The Anatomy of Corporate Law (hereinafter, “the

book”), that is certain to become a benchmark and a source of inspiration for comparative corporate

governance and corporate law research in the decades to come.

The book has nine chapters divided, ideally, into four parts. The parts can be described as

follows:

1 See Reinier Kraakman, Preface to REINIER KRAAKMAN ET AL, THE ANATOMY OF CORPORATE LAW i, i (2004)

(hereinafter: KRAAKMAN ET AL.). 2 Ibid. The authors of the book under review are Paul Davies (London School of Economics), Henry Hansmann

(now at Yale Law School), Gérard Hertig (ETH, Zurich), Klaus Hopt (Max-Planck-Institut for Foreign and Private International Law, Hamburg), Hideki Kanda (University of Tokyo), Reinier Kraakman (Harvard Law School), and Edward Rock (University of Pennsylvania).

3 E-mail from Gérard Hertig to the author (July 22, 2004) (on file with the author). 4 Ibid. 5 Ibid. 6 KRAAKMAN ET AL., supra note 1, at ix. 7 Hertig, supra note 3. 8 As shown by the fact that his name is first among the authors’ on the cover of the book and that the Preface is

his. 9 Ibid. (reluctantly conceding what other authors had agreed upon during the London conference, i.e. that he “did

play a coordination/entrepreneurial role,” while at the same time stressing that “it truly was [a team effort]”).

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(1) Business corporations are characterized by “an underlying commonality of

structures that transcends national boundaries:”10 they display everywhere five key

features (legal personality, limited liability, transferable shares, delegated

management with a board structure, and investor ownership) (Chapter 1).

(2) The problems that corporate law must universally address stem from the web of

agency relationships underlying the corporate form (shareholders-managers;

majority-minority shareholders; shareholders-other stakeholders, mainly creditors

and employees);11 in addressing them, “the law turns repeatedly to a basic set of

legal strategies”12 (Chapter 2).

(3) More analytically, corporate laws in major jurisdictions invariably resort to one or

more of ten legal strategies to address such agency problems, as shown by the

book’s illustration of laws relating to basic governance, creditor protection, related-

party transactions, significant corporate actions, control transactions, and issuers

and investor protection (Chapters 3 to 8).

(4) In conclusion, “[major] jurisdictions pick from among the same handful of legal

strategies … when addressing a specific agency issue or regulating a particular

transaction,”13 “corporate law ha[ving] converged significantly across [them]”14

(Chapter 9).

Each of the claims made in this work is new in at least some respects. Claim (1), however

familiar it may sound to traditional European legal scholars,15 is new in the law and economics

literature at least in that, following the insights of Hansmann and Kraakman,16 it clarifies the

economic function of legal personality.17 In the second part of this review essay I shall analyze the

10 KRAAKMAN ET AL., supra note 1, at 4. 11 Id. at 2. Cf. also Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L.

REV. 1911, 1914 (1996) (“effective corporate law is context-specific, even if the problems it must address are universal”).

12 KRAAKMAN ET AL., supra note 1, at 23. See infra, note ??? and accompanying text. 13 Id. at 217. 14 Id. at 218. Cf. Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 GEO. L.J.

439, 439 (2001) (“[t]he basic law of corporate governance – indeed, most of corporate law – has achieved a high degree of uniformity across developed market jurisdictions”).

15 See, e.g., GIAN FRANCO CAMPOBASSO, DIRITTO COMMERCIALE, 2, DIRITTO DELLE SOCIETÀ 150-54 (5th edition 2002) (describing the Italian “società per azioni,” (stock corporation) as characterized by legal personality, limited liability, “organizzazione corporativa”, i.e. a governance system by which management powers are delegated to a distinct corporate “organ” elected by the general meeting, and freely transferable shares. Investor ownership is not mentioned among the stock corporation’s features in Professor Campobasso’s textbook, because that feature is shared with other legal forms and is therefore treated when dealing with the common features of “società,” an Italian law concept covering both partnerships and stock corporations. See Id. at 26).

16 See Henry Hansmann & Reinier Kraakman, The Essential Role of Organizational Law, 110 YALE L.J. 387 (2000).

17 Compare FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 11 (1991) (“Legal identity … only mean[s] that the corporation … has a name in which it may transact and be sued”) with the treatment of legal personality in KRAAKMAN ET AL., supra note 1, at 6-8 (see also infra text accompanying fn ???).

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book’s characterization of business corporations as displaying the five features mentioned above, in

order to clarify the connections between these features and agency problems. I will show that the

five features are in part a cause of those problems (or of their peculiarity and intensity) and in part a

solution.

Claim (2) appears to be one of the most distinctive products of the joint effort of US and non-

US legal scholars, in that it includes issues concerning other stakeholders, and especially creditor

protection, instead of defining corporate law in the US tradition as dealing only with intra-corporate

relationships (shareholders and managers, or controlling and minority shareholders).18

Claims (3) and (4) are totally new, in that the conceptual framework for the comparative

analysis of corporate law in major jurisdictions itself is new, while claim (4) builds upon it. After

briefly describing claims (1) and (2) in parts II and III, this review concentrates on the most

innovative ones, first with a criticism of the framework for failing to consider enforcement issues

and the interaction between legal strategies and enforcement techniques. This failure reduces the

analytical strength of the comparative analysis in Chapters 3 to 8 (part IV). Parts V and VI focus on

the strongest and most controversial claim, the fourth one, first analyzing the authors’ explanations

for the persisting divergences among major jurisdictions (part V) and then questioning its very

substance. I see the discussion of the French law on related-party transactions as an instance of the

way the authors sometimes inadvertently find more international convergence than a deeper

analysis, taking the law off-the-books into greater account, would suggest (part VI). Part VII

concludes.

II. What Is a Corporation and Why It Matters to Find out The first chapter substantiates the claim that the anatomy of corporations is the same

everywhere. It describes five key features of business corporations present in all jurisdictions: legal

personality, limited liability, transferable shares, delegated management with a board structure, and

investor ownership. These are (default) terms for the corporate contract and for the relationships

between shareholders on the one hand and personal or corporate creditors on the other. They will be

briefly described below. In doing so we emphasize:

(a) their connection with the agency problems relating to business corporations. The book

does so explicity only here and there and may thus leave the reader wondering how close the link is

between the key features described in Chapter 1 and the agency problems treated in Chapters 2 to 8.

18 See, e.g., ROBERT C. CLARK, CORPORATE LAW 30 (1986) (“traditionally, the subjects of corporation law and

securities regulation are simply defined to deal only with relationships between shareholders and managers”).

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These five features are in fact in part at the root of those problems (or of their peculiarity and

intensity), but in part they represent a solution;

(b) their contractual nature, and especially the fact that most are just (default) deviations from

default terms under general contract law. This should help highlight how the book’s effort to

provide a not exclusively American and possibly global view did not require the authors to abandon

– even implicitly – the dominant paradigm of the corporation as a nexus of contract.19

a. Legal personality is an attribute of the corporation, by which the law treats it as a separate

entity which can act as “a contracting party distinct from the various individuals who own or

manage the firm”20 and can “own assets that are distinct from the property of other persons, such as

the firm’s investors.”21 From a functional point of view, what is crucial about legal personality is,

first, that creditors will have “a claim on the firm’s assets that is prior to the claims of the personal

creditors of the firm’s owners” (so called “affirmative asset partitioning”)22 and, second, that the

shareholders “cannot withdraw their share of firm assets at will, thus forcing partial or complete

liquidation of the firm” (“liquidation protection”).23

In its liquidation protection component, legal personality clearly exacerbates agency problems

between majority and minority shareholders and between managers and shareholders, because it

restricts the principals’ exit option, making them more exposed to opportunistic behavior by agents.

In its affirmative asset partitioning component, legal personality deviates from the default rule

that no creditor has precedence over any other.24 Note that this is itself a default term, in a sense,

because nothing, in principle, prevents the corporation from guaranteeing its shareholders’ debt, and

hence from allowing personal creditors to seize the corporation’s assets in case of default of their

debtor.

b. Limited liability is a “default term in contracts between a [corporation] and its creditors

whereby creditors are limited to making claims against the assets that are the property of the firm

itself, and have no further claim against the personal assets of the firm’s shareholders (or

managers).”25

19 Cf. Brian R. Cheffins, The Trajectory of (Corporate Law) Scholarship, 63 CAMBRIDGE L.J., 456, 484 (2004)

(describing the contractarian paradigm as the dominant one in US scholarship). 20 KRAAKMAN ET AL., supra note 1, at 7. 21 Ibid. 22 Ibid. 23 Ibid. See also Margaret M. Blair, Locking in Capital: What Corporate Law Achieved for Business Organizers

in the Nineteenth Century, in 51 UCLA L. REV. 387 (2003) (emphasizing this function of legal personality and corporate law in general).

24 According to Hansmann & Kraakman, The Essential Role of Organizational Law, supra note ???, especially at 437, positive asset partitioning is the contribution of the State as a lawmaker to the success of the business corporation, because it would be prohibitively costly to contract with the shareholders’ personal creditors for corporate creditors’ priority over the corporation’s assets in the absence of such a device.

25 KRAAKMAN ET AL., supra note 1, at 8.

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This feature impacts upon all sorts of agency problems: most obviously, it exacerbates the

conflict of interest between shareholders and creditors,26 possibly leading the former to value-

destroying behavior at the expense of the latter.27 But it also affects conflicts between shareholders

and managers and between majority and minority shareholders: thanks to limited liability, outside

investors can diversify their portfolio and become risk-neutral with respect to any individual share

in their portfolio, while the managers’ and (usually) the dominant shareholders’ physical and human

capital is much more closely tied to their specific company, so that they may tend to be more risk-

averse than investors would prefer.28 If dominant shareholders and managers are able to manage the

company in line with their own (conservative) attitude towards risk, the conflict of interest between

shareholders and creditors will of course be mitigated—albeit possibly at the expense of outside

shareholders.

Limited liability, however, also helps mitigate intra-corporate conflicts: first, without it there

could be no secondary market for shares29 (unless, to be sure, the corporation issued bearer

shares),30 so that the exit option would be much less viable to (minority) shareholders. Second, “by

shifting downside business risk from shareholders to creditors, [it] enlists creditors as monitors of

the firm’s managers, a task which they may be in a better position to perform than are shareholders

in a firm in which share ownership is widely dispersed.”31

Limited liability is of course a deviation from the general (default) rule that the debtor’s

liability is unlimited, i.e. extends to all assets. Shareholders can of course individually opt out of

limited liability by giving a guarantee for the corporation’s debts.

c. Transferability of shares – the possibility of selling one’s contractual relationship qua

shareholder with the corporation, with no need for the corporation’s or other shareholders’ consent

– acts as a counterweight to liquidation protection, making the latter more tolerable to

shareholders.32 Indeed, transferability of shares is itself a legal strategy to resolve intra-corporate

agency problems.33 In fact, it makes the exit option available to shareholders, and if shares are

traded on a stock exchange it ensures liquidity and so facilitates the separation of ownership and

control.34 Of course, such separation exacerbates intra-corporate agency problems: dominant

26 Id. at 3. 27 See, e.g., Luca Enriques & Jonathan R. Macey, Creditors Versus Capital Formation: The Case Against the

European Legal Capital Rules, 86 CORNELL L. REV. 1165, 1169-70 (2001). 28 See, e.g., EASTERBROOK & FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW, supra note ???, at 99-

100. 29 See KRAAKMAN ET AL., supra note 1, at 10 fn 21 for references. 30 See infra text accompanying note ???. 31 Id. at 10. 32 See Luigi Spada, Dalla Nozione al Tipo della Società per Azioni, 1985, 1 RIVISTA DI DIRITTO CIVILE 95, 105

(suggesting that free transferability of shares was historically connected with the liquidation protection feature). 33 See KRAAKMAN ET AL., supra note 1, at 25. 34 See KRAAKMAN ET AL., supra note 1, at 3.

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shareholders or managers now face a multitude of scattered principals, each with insufficient

incentive to monitor the agents’ behavior due to the well-known collective action problem.35 But

the separation between ownership and control also has, so to speak, built-in defences against

conflicts of interest: secondary markets, especially in connection with the market for corporate

control, can discipline at least managers.36

Transferability of shares is also a deviation from a default rule in contracts: under general

contract law one is not allowed to transfer one’s position of party to a contract without the consent

of the other parties.37 Again, this is a default term, because corporations can elect to impose limits

on the transfer of shares, and often do when they are closely-held.

Finally, there is an intimate and at least historically bi-directional relationship between limited

liability and transferability of shares. The former allows for the creation of a secondary market, but

if bearer shares are used to facilitate circulation, shareholders’ liability is limited de facto,

regardless of the corporate law rules in place, because in an insolvency it will be simply impossible

to identify shareholders in order to make them liable for the corporate debts.38 Indeed, many joint

stock companies in the seventeenth and eighteenth centuries did not provide for limited liability, but

this became the norm after bearer shares became common.39

d. Delegated management with a board structure means that the management of the

corporation is centralized and delegated to specific individuals operating under the oversight of a

board of directors. This creates one of the two intra-corporate agency relationships. It also works to

mitigate conflicts of interest, first because directors can monitor managers on behalf of the

shareholders and second because they “can also provide a check on opportunistic behaviour by

controlling shareholders�either toward their fellow shareholders or toward other parties who deal

with the firm, such as creditors or employees�by providing a convenient target of personal liability

for decisions made by the firm.”40

Again, delegated management is a deviation from general contract default rules as

exemplified by partnership law, according to which partners have “equal rights in the management

35 See generally MANCUR OLSON, THE LOGIC OF COLLECTIVE ACTION 55 (photo. reprint 1994) (1965). 36 See, e.g., Henry N. Butler & Larry E. Ribstein, Opting out of Fiduciary Duties: A Response to the Anti-

Contractarians, 65 WASH. L. REV. 1, 21-28 (1990). 37 See, e.g., MICHEL GERMAIN, 1/II TRAITÉ DE DROIT COMMERCIAL G. RIPERT/R. ROBLOT 133 (18th ed. 2002)

(with specific regard to partnerships). 38 See Spada, Dalla Nozione al Tipo della Società per Azioni, supra note ???, at 105. 39 Ibid. 40 KRAAKMAN ET AL., supra note 1, at 12. See also Margaret M. Blair & Lynn A. Stout, A Team Production

Theory of Corporate Law, 85 VA. L. REV. 247, 290-292 (1999) (emphasizing that directors are guaranteed a certain degree of independence from shareholders). For a vivid illustration of how boards can act as shareholders’ champions even to prevent a dominant shareholder from selling control of the company to the alleged damage of minority shareholders see Hollinger Int’l v. Black, 844 A.2d 1022 (Del. Ch.) (truth to tell, the board of the plaintiff company had previously failed to check on the dominant shareholder’s blatant self-dealing. See, e.g., Stephanie Kirchgaessner, Black’s Greed Blasted by Hollinger, FIN. TIMES (London), Sept. 1, 2004, at 1).

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and conduct of the … business,”41 but is itself a default provision of sorts, in that shareholders may

forge pacts among themselves reserving a board seat to each, so that de facto the company will be

managed directly by shareholders.

e. Investor ownership indicates that shareholders (as opposed to workers, financial creditors,

suppliers and customers) have ultimate control of the firm, i.e. the right to choose its directors and

“the right to receive the firm’s net earnings.”42 Here is where the relationship between the core

features of the corporation and the legal strategies deployed to cope with agency problems is the

closest, since some of the legal strategies themselves define what investor ownership means in

terms of control over the firm.43 Vesting shareholders with the power to designate and remove

directors is of course one of the most obvious ways to mitigate agency problems between

shareholders and managers. At the same time these control rights, together with the fact that

shareholders are residual claimants with limited liability, amplify the conflicts of interest between

shareholders and creditors.

There is no doubt that this feature too is a default term in the corporate contract: parties are in

fact free, to some degree, to grant control rights to third parties, as when a company issues voting

bonds or when residual claims attach to securities other than common stock.

III. Agency Problems and Legal Strategies Chapter 2 sets out the analytical framework for the rest of the book. The authors identify three

relationships that give rise to agency problems (shareholders-managers, controlling shareholders-

outside shareholders, shareholders-creditors). Then, they engage in a fascinating, ingenious

exercise, identifying the “legal strategies” available to corporate law-makers around the world and

categorizing them into “regulatory strategies” and “governance strategies.”

Regulatory strategies “dictate substantive terms that govern either the content of the agent-

principal relationship, or the formation or dissolution of that relationship.”44 They are divided into

“agent-constraining” and “affiliation terms” strategies.45 The former further divide into rules,

“which require or prohibit specific behaviors”46 (such as bans on loans to directors)47 and general

standards (such as the duty of loyalty)48 “which leave the precise determination of compliance to

41 Uniform Partnership Act (UPA § 18(e), RUPA § 401(f)). See e.g. LARRY E. RIBSTEIN & PETER V. LETSOU,

BUSINESS ASSOCIATIONS 108 (3rd ed. 1997). 42 KRAAKMAN ET AL., supra note 1, at 13. 43 See infra text accompanying note ???. 44 Id. at 23. 45 Ibid. 46 Ibid. 47 See Id. at 112. 48 See Id. at 114-16.

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adjudicators after the fact.”49 Affiliation-terms strategies are those that “dictate the terms on which

principals affiliate with agents rather than�as with rules and standards�the terms on which the

principal-agent relationship develops internally.”50 They further divide into entry strategies, which

dictate the “terms of entry by, for example, requiring agents to disclose information about the likely

quality of their performance before contracting with principals,”51 such as securities laws imposing

mandatory disclosure when a company goes public,52 and exit strategies, i.e. laws that “prescribe

exit opportunities for principals, such as awarding to a shareholder the right to sell her stock.”53

Governance strategies, instead, “build on the elements of hierarchy and dependency that

commonly characterize agency relationships; they attempt to protect principals indirectly, either by

enhancing their power or by molding the incentives of their agents.”54 They are divided into

appointment rights strategies, decision rights strategies, and agent incentives strategies.

Appointment rights strategies further divide into selection and removal strategies, and simply

allocate the power to select or remove corporate agents (directors, managers).55 Decision rights

strategies “grant principals the power to initiate or ratify management decisions,”56 and therefore

further divide into initiation and ratification strategies, such as shareholder authorization or

ratification of related party transactions or significant corporate actions.57 Finally, agent incentives

strategies “alter[] the incentives of agents rather than expanding the powers of principals.”58 These

are, first, the reward strategy, which “rewards agents for successfully advancing the interests of

their principals,”59 as when jurisdictions facilitate pay-for-performance regimes on the assumption

that they align the interests of managers with those of shareholders,60 and, second, the trusteeship

strategy, which relies on “the ‘low powered’ incentives of conscience, pride, and reputation” in

order to curb agents’ opportunistic behavior,61 as when the law requires approval of an internal or

external actor (disinterested directors, investment bankers, auditors, etc.) before the company can

enter into a related-party transaction.62

49 Id. at 23. 50 Id. at 24 (emphasis omitted). 51 Ibid. (emphasis omitted). 52 Id. at 25. Perhaps less intuitively, on-going disclosure by public companies is also categorized as an entry

strategy throughout the book (see especially Id. at 195-96). 53 Ibid. (emphasis omitted). 54 Id. at 23. 55 Id. at 26. 56 Ibid. (emphasis omitted). 57 See Id. at 122 & 134. 58 Id. at 26. 59 Id. at 26. 60 Id. at 27. 61 Ibid. 62 Ibid. It is perhaps somewhat misleading to emphasize the ‘low powered’ nature of such “trustees’” incentives,

because often they also respond to the powerful fear of civil or criminal liability for improperly favoring some corporate agents. Recent corporate scandals have provided a number of examples of gatekeepers’ failures that were followed by

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IV. Legal Strategies in Action: The Hazy Relationship Between Legal Strategies

and Enforcement Techniques

It would be hard to imagine a fuller or more crystalline picture of legal strategies for corporate

agency relationships. But an essential element of corporate law is missing�enforcement. The

authors make no attempt to analyze or categorize the many different enforcement techniques

available, i.e. the mechanisms by which legal systems react to violations of the law or, in other

words, by which legal strategies are made effective “off the books.”63 Also lacking, consequently, is

a treatment of the intricate interaction between substantive rules and enforcement, whether in static

terms, i.e. with respect to existing legal strategies and their practical relevance,64 or in a dynamic

perspective, i.e. with respect to the impact that certain enforcement techniques, or lack thereof, can

have on the evolution of corporate law.

To show how the conceptual framework in Chapter 2 might have been completed with a

comparable framework for enforcement, a taxonomy of the main enforcement techniques is

suggested here, with no pretence to emulate the book’s esprit de géométrie in drawing the legal

strategies picture, much less to exhaust the subject of corporate law enforcement.

some form of “hard law” reaction: most prominently, of course, Arthur Andersen simply ceased to exist following a criminal investigation into its wrongdoing as Enron’s external auditor (see, e.g., Alan C. Michaels, Fastow and Arthur Andersen: Some Reflections on Corporate Criminality, Victim Status, and Retribution, 1 OHIO ST. J. CRIM. L. 551, 558 (2004)). There is little doubt that, at least in this post-Enron world, gatekeepers do face a legal risk when performing their role and are well aware of it. It is also surprising, again especially in light of the recent wave of scandals and the ensuing prosecutions of gatekeepers, that in the chapter on issuers and investor protection, the book fails to highlight that the trusteeship strategy is one of the most common in securities regulation. Cf. Reinier H. Kraakman, Gatekeepers: The Anatomy of a Third-Party Enforcement Strategy, in 2 J.L. ECON. & ORG. 53, 64 (1986) (“Securities regulation has been richly endowed with chaperones by the cumulative efforts of Congress, the Securities and Exchange Commission …, and the federal judiciary”) and KRAAKMAN ET AL., supra note 1, at 27 (investment bankers can be given a trustee role by the law). Even in the case of directors, who are almost never held liable for violations of their duties when no self-dealing is involved (see Bernard Black & Brian Cheffins, Outside Directors Liability Across Countries, Stanford Law School John M. Olin Program in Law and Economics Working Paper No. 266 (Oct. 2003), at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=438321), the law does play a role in providing the right incentives to act in the interest of shareholders, especially in countries in which it is easy to start court proceedings against directors: “[a] further incentive for vigilance is simply the nuisance cost of being sued and especially of being deposed” (Bernard Black et al., Outside Director Liability 48-49, Stanford Law School John M. Olin Program in Law and Economics Working Paper No. 250 (Nov. 2003), at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=382422).

63 The authors are aware of this weakness (see especially KRAAKMAN ET AL., supra note 1, at 219). However, as Professor Kraakman says in the Preface (Kraakman, supra note 1, at vi), they “see this less as a weakness in the book … than as a challenge (to ourselves and others) to provide fuller analyses of the legal and market institutions affecting the operation of corporate law.”

64 Plausibly, the practical irrelevance of the corporate opportunity doctrine in France (see infra text accompanying notes ???) can be associated with the public nature of enforcement in that country. French prosecutors may be reluctant to prosecute cases of misappropriation of corporate opportunities, which are very hard to prove and completely untested for before a court in that country.

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First, enforcement techniques can be private or public, i.e. activated either by private parties

or by the State.65 Private enforcement techniques can further be divided into agent incentives

techniques, governance techniques, and error-reducing techniques.

Agent incentives techniques aim at reducing or eliminating the pecuniary consequences of

corporate agents’ wrongdoing and the ensuing benefits for them. They can be further divided into

monetary (liability, disgorgement of profits, punitive damages etc.) and restitutory (nullification)

remedies. These techniques are most commonly used with respect to violations of rules and

standards.

Governance techniques are those that directly affect the governance of corporations, either by

leading to judicial intervention in the company’s management or by strengthening the bargaining

power of the principals vis-à-vis corporate agents. They can be divided into voice remedies (as, in

France, the shareholders’ right to petition a court to obtain the designation of a mandataire

entrusted with the power to call the shareholder meeting66 or, in Italy, minority shareholders’ right

to obtain a court’s inspection of the company’s affairs and, if serious irregularities are found,

judicial removal of directors)67 and exit remedies (like the appraisal remedy in the U.S.).

Finally, error-reducing techniques are those that aim at reducing the risk of false negatives

and false positives, i.e. cases of enforcement techniques being used unsuccessfully when violations

have occurred or successfully when there has been no violation. False negatives-reducing

techniques (like the availability of derivative and/or class actions, pre-trial discovery rules favorable

to plaintiffs or damage awards to the plaintiffs in derivative suits) make it easier for plaintiffs to

bring suit and obtain a favorable judgement, while false positives-reducing techniques (such as bans

on contingency fees or statutes of limitations) do the opposite.

Public enforcement techniques can be further divided into politically-sensitive and politically-

neutral, depending on whether action is taken by a public body that is susceptible to political

motives and influences (as is the case of a Ministry or of public prosecutors in the US) or by one

that is somewhat insulated from political influence (such as an administrative agency or public

prosecutors independent of the executive). Depending on the sanctions to be applied, public

enforcement techniques can be further grouped into monetary (civil liability, fines) and non-

monetary. The latter include imprisonment, of course, and personal disqualification.

With this taxonomy in mind, it is easier to see why the book’s choice to leave enforcement

issues in the background makes its comparative analysis of corporate laws in major jurisdictions

less convincing than it would otherwise be, sometimes even discordant with the theoretical

65 See generally STEVEN SHAVELL, FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW 573-81 (2004). 66 Article L. 225-103(II)(2°), C. COM. 67 Article 2409, C.C.

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framework, as we show below.68 The lack of such a taxonomy may also explain the book’s

tendency to underestimate the importance of enforcement issues and their impact on corporate

governance, as also shown below.69 This tendency, incidentally, is somewhat surprising, as two of

the authors have produced an in-depth, earlier analysis of the relationship between substantive rules,

enforcement and corporate governance, expressing the view that “a proper focus on enforcement

would make us reconsider the familiar debate on convergence or divergence of substantive legal

rules in world corporate governance systems.”70

The book does consider enforcement issues when describing the various legal strategies in

major jurisdictions, but treating them as part and parcel of the legal strategies devised in Chapter 2,

not as distinctive features of corporate law. Four examples can highlight how the outcome is

discordant with the analytical framework.

First, in Chapter 4 (on creditor protection), liability is categorized as a standard.71 Actually,

liability is an enforcement technique (a monetary remedy), as is demonstrated by the fact that it can

attach to violations of rules as well as of standards. Second, the authors often discuss trusteeship

strategies under the standard strategy label: this is the case in Chapters 4 and 5, where they discuss

director and auditor liability.72 Third, enforcement techniques come stealthily into the foreground in

Chapter 5, where the authors discuss restitutory and monetary remedies for inadequate board

approval of related-party transactions73 under the trusteeship strategy label.74 Finally, they conquer

the centre of the stage in the same chapter, where the authors break the standards strategy into

separate analyses of a number of civil remedies.75

As we have seen, the authors appear to underestimate the relevance of enforcement issues to

corporate governance and their impact upon corporate law itself. First, they recognize that in some

countries (notably the US, and more recently and to a lesser degree, Japan) enforcement is the work

of civil courts, to which shareholders resort by derivative and class action suits, while elsewhere it

is criminal prosecutors (France) or the government (UK) that play the primary role.76 In other

68 See text accompanying fn ???-???. 69 See text accompanying fn ???-???. 70 Gérard Hertig & Hideki Kanda, Rules, Enforcement, and Corporate Governance (August 31, 1998)

(unpublished manuscript, on file with the author). 71 KRAAKMAN ET AL., supra note 1, at 88-95. 72 Ibid. And see Id. at 127. See also supra note ??? (Gatekeepers). 73 Id. at 108. 74 Id. at 105. 75 Id. at 114-18. 76 Id. at 130. Harald Halbhuber has recently cast doubt on the relevance of the Department of Trade and Industry

investigation powers to the enforcement of English company law. See Harald Halbhuber, National Doctrinal Structures and European Company Law, 38 COMMON MKT. L. REV. 1385, 1404 (2001):

“the DTI focuses on combating illegal and fraudulent business practices, such as various types of investment fraud and other activities, like selling 40 000 non-existent tickets to the soccer world

13

words, the book notes that major jurisdictions divide across the line of private versus public

enforcement, but makes no serious effort to understand why. To the contrary, it claims that the two

forms of enforcement are functionally equivalent.77 This claim is unconvincing. Intuitively, while

egregious self-dealing may be punished everywhere, whether enforcement is the job of private or

public actors, “regular” self-dealing and also opportunistic insider behaviour in medium-size and

small companies is much likelier to be detected in countries like the US, where private enforcement

techniques are coupled with false negatives-reducing ones.

The authors also dismiss the idea that enforcement-related issues are central to explaining

why the duty of loyalty doctrine is more developed in the US than elsewhere. In their view, while it

is true that US law encourages shareholder lawsuits by its low hurdles to derivative and class

actions, by contingent fees, and by “generous attorney’s fees … to support a specialized plaintiff’s

bar[,] … these factors alone may not fully explain the richness of U.S. case law.”78 They refer,

instead, to ownership structure, arguing that in the UK, institutional investors can protect

themselves by forming voting coalitions, while in continental Europe concentrated ownership

protects shareholders from managerial expropriation.79 Further, the authors note that an increase in

shareholder litigation can be observed “as European ownership structures become more

dispersed.”80

If what matters is ownership structure, however, it is unclear why we do not find much greater

development of dominant shareholders’ fiduciary duties in continental European countries, where

ownership is concentrated. Further, a deeper look into enforcement-related aspects provides a better

explanation for the greater development of the duty of loyalty in the US.81 In fact, in jurisdictions

other than the US (and, to a lower degree, Japan), there exist some enforcement-related features that

prevent shareholders and investors from suing directors and other insiders. Such features generally

make it too costly ex ante for individuals to initiate a number of lawsuits, such as those related to

mass torts, antitrust, product liability, securities fraud, and directors’ or dominant shareholders’

violations of fiduciary duties. Since these features are not corporate law-specific, they can hardly be

explained in terms of ownership structures.

cup. In its own words, the DTI sees as its task ‘to root out rogue companies who prey on the consumer’”).

77 See KRAAKMAN ET AL., supra note 1, at 115-16. 78 Id. at 116. 79 Id. at 117. 80 Ibid. 81 For a discussion of the link between easier access to justice for shareholders and the development of fiduciary

standards see Luca Enriques, Do Corporate Law Judges Matter? Some Evidence from Milan, 3 EUR. BUS. ORG. L. REV. 765, 773-74 (2002) (easier access to justice allows judges: (a) to tackle the real issue, i.e. fairness to (minority) shareholders; (b) to gain experience in this area and therefore “develop a ‘nose’ for corporate misconduct;” (c) to feel legitimized to take an active role in corporate law issues and to second-guess insiders’ behaviour and business decisions).

14

As the book observes, shareholder derivative suits are also available in Europe (especially in

France) and Japan, where recent experience shows “that substantial litigation activity is possible

without U.S.-style incentives for the plaintiff’s bar[:] … a modest procedural reform sparked an

explosion in Japanese derivative litigation in 1993.”82 Similarly, contingent fees (and fee awards),

important as they are,83 cannot fully account for the striking international differences in how often

shareholders go to court. In fact, contingent fees are prohibited in Japan as well.

But the book fails to consider (at least) two enforcement-related legal features that may have

some explanatory power.84 Japan shares one feature with the US, which France – the only country

where procedural hurdles are, at least prima facie, not higher than in Japan – lacks, namely, the

standard “American rule” that each side bears its own legal fees.85 France (like other European

jurisdictions, including the UK) has the “loser pays” rule, with case-by-case exceptions, meaning

that a plaintiff shareholder risks not only paying her own attorney’s fees and other expenses, but

also those incurred by the defendant.86 Plausibly, this has a greater chilling effect on shareholder

litigation than the ban on contingent fees, because while the latter prohibition can always be

circumvented,87 there is no way around the “loser pays” rule: the court itself orders the loser to pay

the winner’s legal costs. Any litigation strategy under this rule is therefore more costly ex ante.

The second procedural aspect that is obliterated in the book’s discussion of enforcement

issues and their relevance to the development of the duty of loyalty doctrine is pre-trial discovery:88

unless it is easy for the plaintiff shareholder to get information from the corporation, the chances of

winning are extremely low, as the Japanese experience again suggests. Mark West reports that in

82 See KRAAKMAN ET AL., supra note 1, at 117. Reference is made to the lowering, in 1993, of “the filing fee for

shareholder suits … from a percentage of damages claimed to 8200 yen (about U.S. $ 75).” See, e.g., Katharina Pistor et al., The Evolution of Corporate Law: A Cross-Country Comparison, 23 U. PA. J. INT’L ECON. L. 791, 861 (2002).

83 See Gérard Hertig, Convergence of Substantive Law and Convergence of Enforcement: A Comparison, in CONVERGENCE IN CORPORATE LAW: THE EMERGING QUESTIONS 328, 340 (Jeffrey N. Gordon & Mark J. Roe eds. 2004) (expressing the view that “the main reason for the divergence [in fiduciary duties enforcement] to remain significant is the institutionalized availability of contingent fees for US attorneys”).

84 In addition to those described immediately below in the text, further legal features influencing access to justice by minority shareholders and investors, and thus the development of the duty of loyalty, are the availability of class actions (they are not available in most major jurisdictions) and pleading rules (in civil law jurisdictions, “fact pleading” is required, i.e. the plaintiff must state all material facts at the very outset of the proceedings, while in common law jurisdictions “notice pleading” only requires that the nature of the claim is specified, making it much easier for plaintiffs to start lawsuits with less information than in jurisdictions requiring fact pleading. See Paolo Giudici, Private Antitrust Law Enforcement in Italy, 1 COMPETITION L. REV. 61, 82-83 (2004)).

85 For Japan, see Mark D. West, Why Shareholders Sue: The Evidence From Japan, 30 J. LEGAL STUD. 351, 355 (2001). To be precise, Japan has a one-sided American rule, because “[i]f a plaintiff wins, … the Commercial Code … provides that the company shall pay a ‘reasonable amount of attorneys’ fees upon plaintiff’s motion. Absent extraordinary circumstances, defendants pay their own attorneys’ fees” (Ibid.).

86 See Black & Cheffins, Outside Directors Liability Across Countries, supra note ???, at 27, 60 & 79 (the “loser pays rule” discourages shareholder litigation in the UK, Germany, and France).

87 See Gerard Hertig & Joseph A. McCahery, Company and Takeovers Law Reforms in Europe: Misguided Harmonizazion Efforts or Regulatory Competition?, 4 EUR. BUS. ORG. L. REV. 179, 193 (2003) (stating that contingent fees “are already a common but often concealed practice throughout Europe”).

15

Japan, where pre-trial discovery does not exist,89 in eight of the nine cases (in a sample of 140

derivative suits) in which shareholders recovered damages, the shareholders piggybacked on public

enforcement actions.90

To conclude, while the Preface and the final chapter concede that the book does not address

issues of law enforcement, administration and compliance “with the same consistency or emphasis

that it bring[s] to [the] comparative discussion of substantive law,”91 the fact is that the comparative

discussion itself is weakened by the authors’ downplaying enforcement issues.

V. What Accounts for the Persisting Divergence among Company Laws in

Major Jurisdictions?

The thesis of the book is not only that corporate law performs the same function everywhere,

as is intuitive, but also that it is much more uniform around the globe than one might think or than

comparative legal scholars usually suggest. Chapters 3 to 8 examine major jurisdictions and show

an appreciable international convergence of form or at least function in core corporate law

provisions.

The book also accounts for a number of exceptions to the convergence thesis and presents

intriguing discussions of their causes. Once it is accepted that the problems addressed are universal

and solutions can also fit into a universal conceptual framework, the challenge for comparative

corporate law scholars is to understand why divergences among major jurisdictions persist. The

authors adduce a full dozen different explanations, which can be grouped into four categories:

cultural, economic, political and legal.92

88 US and, to be sure, UK rules on pre-trial discovery are much more favourable to plaintiffs than in continental

Europe. See Giudici, Private Antitrust Law Enforcement in Italy, supra note ???, at 81-82. 89 West, Why Shareholders Sue: The Evidence From Japan, supra note ??? at 377. 90 Id. at 378. Recently, the issue of discovery was raised as a fundamental reason why shareholder derivative

litigation remains rare in France during a hearing at the Assemblée Nationale of Mme Colette Neuville, chairman of ADAM (Association de défense des actionnaires minoritaires). See Philippe Houillon, Avis Présenté au Nom de la Commission des Lois de l’Assemblée nationale sur le Projet de Loi de Sécurité Financière, n° 772, Apr. 8, 2003, 2ème partie.

91 Kraakman, Preface, supra note ???, at vi. See also KRAAKMAN ET AL., supra note 1, at 219. 92 To be sure, the book also put forth a number of pseudo-explanations. See KRAAKMAN ET AL., supra note 1, at

97 (“creditor protections diverge because jurisdictions do not attach the same importance to creditor protection,” or in other words because jurisdictions are either debtor-friendly or creditor-friendly (ibid.). The authors make a number of hypotheses on why a jurisdiction should be of one kind or another, but they appear not to believe that these hypotheses have any explanatory power: Id. at 78 and especially fn 37), 108 (where, in discussing why certain jurisdictions prefer a nullification remedy to a damages remedy, the authors tell us that one reason is that “nullification may injure not only the interested manager who failed to obtain approval, but also third parties who have contracted with the interested manager in the aftermath of the conflicted transaction. In contrast, a damages remedy can be targeted directly against the culpable party”), 118 (explaining why the duty of loyalty is more developed and case law richer in the US, the authors observe that “Japanese and, especially, European corporate laws are more creditor-oriented than U.S. corporate laws. As a result, managers in European and Japanese companies are more likely to be sued or investigated for fiduciary

16

Surprisingly, cultural explanations are attributed a minimal role in accounting for persistent

divergences.93 In fact, only once do the authors use a cultural explanation (differences in business

ethics) to explain judges’ diverging attitudes towards related party transactions in the US and in

Europe.94

Economic explanations are naturally much more common. First, the greater emphasis on

creditor protection in certain jurisdictions is related to the greater number of medium-size and large

closely held companies, which in turn is explained by greater market fragmentation.95 The second

economic explanation, cited twice, is “differences in the capital markets,” i.e. whether the financial

system is bank-oriented or market-oriented.96 A third economic explanation, put forward only once,

stresses a difference in business practices, i.e. the fact that “mergers are more common on the

Continent than in the UK (where business planners favor tender offers).”97 The fourth economic

explanation, and the most frequent, is again unsurprisingly ownership structure, cited 11 times.98

The political explanation, which, with 7 mentions, is the second most frequent, ascribes

corporate law features to pressure from interest groups.99

Here and there, finally, law-related explanations are also produced to account for differences

in corporate law. Twice one finds the distinction between common and civil law jurisdictions.100

And twice we are referred to American judges’ activism to explain US corporate law exceptions.101

duty violations in the vicinity of insolvency. Managers of U.S. corporations, on the other hand, are sued for fiduciary duty violations throughout the life of the firm, which obviously allows for richer case law” (footnotes omitted)). In one case, the book resorts to the elusive idea that jurisdictions appear to have a different degree of trust in the board of directors in order to account for the different role the law assigns to it with regard to related-party transactions (Id. at 129-30).

93 On the relevance of culture and social norms to the convergence and law and finance debates see especially Amir N. Licht, The Mother of All Path Dependencies Toward a Cross-Cultural Theory of Corporate Governance Systems, 26 DEL. J. CORP. L. 147 (2001); John C. Coffee, Jr., Do Norms Matter? A Cross-Country Evaluation, 149 U. PA. L. REV. 2151 (2001). The authors defend their reluctance to resort to cultural explanations on the grounds that “existing research on the relationship between corporate law and … culture provides no clear-cut or generally accepted explanations.” KRAAKMAN ET AL., supra note 1, at 222 (footnotes omitted). The same is said to be true (Ibid.) about “macro-politics,” i.e. about the idea that what matters for corporate ownership structures is how pro-labor or anti-labor a given country is. See MARK J. ROE, POLITICAL DETERMINANTS OF CORPORATE GOVERNANCE (2003).

94 KRAAKMAN ET AL., supra note 1, at 118. 95 Id. at 99. 96 Id. at 87. This explanation for continental European jurisdictions’ preference for capital maintenance rules to

protect creditors is somewhat ambiguous, however. As the authors put it, “capital maintenance requirements are more effective when financing is conservative and bank-centered, and law or market institutions restrict wholesale leveraging or share repurchases” (ibid.; emphasis added). In the ensuing discussion, however, the authors appear to forget about market institutions and to give weight only to the constraints stemming from legal institutions (Id. at 88), so that this explanation turns out to be somewhat circular.

97 Id. at 136. Of course, one can easily argue that the preference for tender offers in the UK as opposed to mergers, in turn, must itself reflect some other economic or financial or cultural or even legal features.

98 Id. at 45, 51, 53 (twice), 96, 108, 117, 123, 129, 136 & 154. 99 Id. at 49 & 53 (managers), 53 (institutional investors), 68 (institutional investors), 121 (controlling

shareholders), 190-91 (institutional investors, managers, trade unions), 213-14 (security analysts and lawyers). 100 Id. at 87 (“Judges in civil law jurisdictions such as France and Germany are traditionally uncomfortable with

open-end standards, and much prefer to enforce relatively bright-line rules”) and 97 (“French and German legislators who might have employed UK/U.S. style standards are reluctant … to vest so much discretion in civil courts).

101 Id. at 108 & 116.

17

In three cases, the book tells us that other legal features of one or more countries explain differences

in corporate law.102 In two cases, both regarding the UK, a sort of “legal tradition” explanation is

given.103 In only one instance do the authors contrast jurisdictions in terms of whether lawmaking is

centralized or decentralized.104 In one case, finally, for a divergence between UK law and that of the

rest of Europe, beside ownership structures and different business practices, importance is attached

to different views on legal strategies.105

The most frequently recurring explanations for persistent divergences, then, are ownership

structures106 and interest groups. One can argue that these explanations are not ultimate ones, i.e.

ownership structures and interest-group dynamics are in turn the product of other economic and

political forces. As a matter of fact, one of the most widely debated issues in the comparative

corporate governance literature is indeed what determines ownership structures. The book takes no

position in the lively current debate, perhaps because this is also a subject “on which reasonable

minds can differ.”107 The authors tell us only that they do not buy La Porta et al.’s law and finance

story.108 Given the plethora of contributions and of fancy theories and refinements by lawyers,

economists, and finance scholars since La Porta et al.’s seminal work, the book’s lack of a positive

theory (or at least the endorsement of some existing theory) is a surprising lacuna.109

Ownership structures and interest-group dynamics are closely linked: in general, the authors

resort to the economic explanation when they deem a country’s legal rules to be efficient and the

political when outcomes are inconsistent with the choices an efficiency minded corporate law-

maker would supposedly make.110 But they offer no general or case-by-case conjecture on (if not

102 Id. at 45 & 49 (codetermination, which is at crossroads with an interest group explanation), 97 (differences in

insolvency proceedings), and 117 (procedural hurdles to shareholder litigation). 103 Id. at 108 (referring to the fact that “shareholder ratification has a long tradition … in the UK”) & 173

(reporting that “English law has always viewed the powers of the board as flowing from a delegation from the shareholders”).

104 Id. at 53 & 191. 105 Id. at 136 (“it … also reflects a more basic difference in views on the relative value of judicially-enforced

standards on the one hand, and ex ante rules and decision rights on the other”). 106 Recently two of the book’s authors have “attempt[ed] to account for all important legal and institutional

differences in corporate governance as correlates of different ownership structures.” See Gerard Hertig & Reinier Kraakman, Comparing Corporate and Regulatory Structures in the U.S. and EU 2, unpublished manuscript (October 2004) (on file with the author) (emphasis omitted).

107 Id. at 5. 108 See Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997) (ascribing the

different degree of financial development to the legal origin of countries); Id., Law and Finance, 106 J. POL. ECON. 1113 (1998) (same). After declaring (Id. at p. 46), that they take no position as to the question of causality between law and ownership, the authors explicitly dismiss the law and finance theory as unproven (Id. at 61) and further, as we have seen, explain differences in law as a result of ownership structures, which is of course inconsistent with La Porta et al.

109 See David A. Skeel, Jr., Corporate Anatomy Lessons, 113 YALE L.J. 1548-50 (2004) (book review) (describing the book “as a prequel [rather] than a sequel to the current [law and finance] debates”).

110 In a few cases, it is even unclear whether the authors are suggesting an economic or a political explanation. For instance, in accounting for divergences in the law of significant corporate actions and for the “greater power of the general shareholders meeting to make significant corporate decisions in EU jurisdictions” compared to the US, the authors tell us that this “reflects the stronger legal position of European shareholders and coincides … with the well-

18

explanation for) why, in the presence of any given (dominant) ownership structure, the outcome is

sometimes the inefficient one that allows powerful interest groups to extract rents and sometimes

the efficient one. For example, why are disclosure obligations tough on managerial self-dealing in

US public corporations, while disclosure of controlling shareholders self-dealing is poor in

continental Europe?

One wonders whether there are not other factors that could possibly account for the

divergences that the book fails to consider or considers insufficiently. First, it is surprising that

lawyers are mentioned only once as an interest group whose pressure might explain divergence.111

In fact, studies on corporate law production in various jurisdictions show that lawyers play a key

role in the shaping of corporate law on both sides of the Atlantic.112 Of course, lawyers often act as

lobbyists for other interest groups or, even more often, perceive their own role as neutral and

“technical,” but, consciously or not,113 they also pursue their own agenda, being in control of much

of the legislative process. Therefore, differences in the structure of the legal profession, and

known differences in ownership structure between U.S. and European companies. Large companies tend to be widely held [i]n the U.S., and the legal power of boards is strong” (KRAAKMAN ET AL., supra note 1, at 154). Not only are we left in doubt on whether the US outcome is to be ascribed to a Darwinian reaction to collective action problems or interest group pressure�or both; what is even less clear is why dominant shareholders in European companies should ever need protection of the sort provided by decision and initiation rights strategies: being in control, they certainly do not need formal legal powers to decide on or initiate fundamental corporate transactions. One may counter that in such jurisdictions there has simply been no departure from a starting point in which shareholders had formal approval powers, for the very simple reason that dominant shareholders had no reason to relinquish those powers. But, first, continental European corporate laws were deeply influenced by the Dutch law on colonial companies, which, contrary to the English experience of such companies, granted almost no powers to common shareholders (see Ariberto Mignoli, Idee e problemi nell’evoluzione della “company” inglese, 1960 RIVISTA DELLE SOCIETÀ 633, 640 & 643). Second, the requirement of a shareholder meeting decision on significant transactions only makes it easier for minority shareholders to challenge them in court, at least in countries, such as Germany and Italy, where shareholder litigation often takes the form of an action of nullity against shareholder meeting resolutions (for Germany see, e.g., Karsten Schmidt, § 245, in GROßKOMMENTAR ZUM AKTG 116-18 (Klaus J. Hopt & Wiedemann eds., 4th ed. 1996); for Italy, see, e.g., Enriques, Do Corporate Law Judges Matter? Some Evidence from Milan, supra note ???, at 792). A more convincing explanation may well be that formal shareholder approval powers, unimportant as they are to dominant shareholders with regard to their own companies, prove to be relevant in the context of hostile takeovers: where ownership is concentrated, these are rare, but intuitively the hostile acquirer will more frequently be a company with a dominant shareholder (if only because these companies are much more common). The acquiring company will prefer a corporate law regime granting formal approval powers to shareholder, because managers will have much less leeway to adopt defensive tactics to counter takeover attempts.

111 See supra fn ???. 112 See, e.g., Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55 STAN. L. REV.

679, 705 (2002) (“The driving force behind many corporate statutes is corporate lawyers”); William J. Carney, The Production of Corporate Law, 71 SOUTH. CAL. L. REV. 715, especially at 737 (1998) (same). With respect to Italy see Luca Enriques, Uno sguardo cinico sulla riforma del diritto societario: più rendite; meno rigidità?, Working Paper Indret 11 (July 2004), at http://www.indret.com/rcs_articulos/cas/231.pdf (reporting that 33 out of the 35 components of the Commission in charge of drafting the Italian corporate law reform of 2003 were lawyers); Id., How Trivial Is Derived EC Corporate Law? 33-34, unpublished manuscript (September 2004) (highlighting the primary role of lawyers and law professors in the production of EC corporate law directives and regulations) (on file with the author); With respect to Germany see Christian Kirchner et al., Regulatory Competition in EU Corporate Law after Inspire Art: Unbundling Delaware’s Product for Europe 11 (2004) (unpublished manuscript, on file with the author) (“Law professors, through the participation on government appointed commissions, play a significant role in law reform in … Germany”).

19

especially in ease of access to it, may help explain divergent solutions. More explicitly, false

negative-reducing enforcement techniques are plausibly the product of lawyers’ interest in ensuring

a high level of shareholder litigation, while false positive-reducing techniques, and especially the

ban on contingency fees, reflect an uncompetitive market for lawyers, consistent with the well

known fact that the US lawyer market is certainly more open, dynamic and competitive than the

European and the Japanese.114

Similarly, the authors make no mention of accountants as an interest group for company law

in Europe, whereas, as the book itself shows, accounting and disclosure obligations for closely held

companies, together with capital maintenance rules that draw upon accounting representations of a

company’s health to limit distributions to shareholders, are widespread and, not coincidentally,

imposed by the European Community.115

Finally, it is surprising to note that only once do the authors ascribe diverging corporate law

strategies to whether lawmaking is centralized or decentralized. Many of the differences between

US and European corporate laws, and especially the much more flexible and enabling structure of

American corporate law, can arguably be explained by the fact that, for various reasons that are not

worth exploring here,116 only in the US have jurisdictions vibrantly competed to attract

incorporations, at least in the past.117

113 See generally Don A. Moore et al., Conflict of Interest and the Unconscious Intrusion of Bias, Harvard NOM

Working Paper No. 02-40, at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=324261 (2002) (providing experimental evidence of bias even in judgments by conflicted actors who were asked to make objective judgments).

114 Cf. Gillian K. Hadfield, The Price of Law: How the Market for Lawyers Distorts the Justice System, 98 MICH. L. REV. 953, 984 (2000) (“Compared to England …, the United States has fewer entry restrictions to the practice of law and a much larger number of lawyers per capita”); David Hood, Exclusivity and the Japanese Bar: Ethics or Self-Interest?, 6 PAC. RIM L. & POL'Y J. 199, 199-200 (1997) (reporting that the Bar exam in Japan is “notoriously difficult,” and that Japan has a ratio of one practicing attorney to 10,000 persons, while the US have a ratio of one attorney to every 403 persons); OLIVER E. WILLIAMSON, THE ECONOMIC INSTITUTIONS OF CAPITALISM 123 (1985) (reporting that “the number of lawyers in Japan is deliberately kept small [in order] to preserve [Japan’s] nonlitigous tradition).

115 Cf. Enriques & Macey, Creditors Versus Capital Formation: The Case Against the European Legal Capital Rules, supra note ???, at 1202-03 (identifying accountants as an interest group extracting rents from legal capital rules and therefore resistant to their repeal); William J. Carney, The Political Economy of Competition for Corporate Charters, 26 J. LEGAL STUD. 303, 317 (1997) (explaining supra-national rules like those of the EC in this area as aiming to protect the rents extracted by certain interest groups in individual Member States against the risk that domestic companies may reincorporate in jurisdictions providing for no such rules).

116 Various unique features of the American corporate law landscape in the nineteenth century spurred regulatory competition. Among them three are worth mentioning: first, as Frederick Tung has noted, during most of the nineteenth century in most states “corporate charters were granted through special acts by state legislatures. Disputes over internal corporate affairs were seen to implicate the sovereignty of the incorporating state, and the courts of other states were therefore willing to defer to the incorporating state’s courts and laws” (Frederick Tung, Lost in Translation: From U.S. Corporate Charter Competition to Issuer Choice in International Securities Regulation 17, Loyola Law School (Los Angeles) Public Law and Legal Theory Research Paper No. 2004-8 (Mar. 2004), at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=515088). In other words, the emergence of the internal affairs doctrine, which later made regulatory competition possible, was an historical accident. Second, due to the size of most states and the absence of geographical and cultural barriers among them, relocation from one state to the other was sufficiently inexpensive as to make it risky for states other than the largest to adopt the real seat doctrine or other similar defensive regulations (like pseudo-corporation statutes). Cf. William J. Carney; The Political Economy of Competition for Corporate Charters, 26 J. LEGAL STUD. 303, (1997) (highlighting that the possibility of firms physically migrating from a state that has bad corporate law makes all attempts to fend off regulatory competition by other states ineffective).

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VI. On and Off the Books: The Tricky Job of Comparing Legal Systems As

Illustrated by the French Law on Self-Dealing

The problem for any conscentious comparative analysis is that corporate law “off the books”

is often – not to say usually – substantially different from corporate law on the books: the latter may

be irrelevant or misleading, because corporate actors simply disregard the rules and there is no

meaningful enforcement or else because interpretation by legal scholars and courts is plainly

inconsistent with actual wording.

Italian corporate law provides a good illustration of this: Article 2373(1) of the Italian Civil

Code, as it was in force until December 31, 2003, used to provide that “[a] shareholder who has an

interest in conflict with that of the company, either for his own account or for the account of third

persons, may not exercise his voting right in the relevant shareholder resolution.” However, under

the largely predominant scholarly and judicial construction of this provision, despite this seemingly

clear wording, shareholders actually could cast their vote in conflicted resolutions.118

While the authors are perfectly aware of these discrepancies between statutory law,

interpretation, and enforcement,119 here and there one gets the impression that by overemphasizing

law on paper or unimportant features of law off the books,120 they draw a picture of greater

convergence than is indeed observable.

The regime on related-party transactions in France is a case in point. As the book stresses

throughout Chapter 5, France has perhaps the strictest regulations on self-dealing transactions of all

major countries. Since La Porta et al. have made French corporate law somewhat notorious in their

empirical analysis showing that “along a broad range of dimensions, French-civil-law countries

afford the worst protections to shareholders,”121 such a finding appears to be startling. However, if

one does not content oneself with what French corporate law on the books says and examines what

happens in practice as well, the picture becomes much more consistent with La Porta et al.’s.

Finally, corporate law as a product was the entrepreneurial creation of James B. Dill, who convinced New Jersey politicians to enter the market for charters, and, together with them, was able to make a profit by creating a corporation acting as agent for companies wishing to incorporate in New Jersey (see, e.g., Christopher Grandy, New Jersey Corporate Chartermongering, 1875-1929, 49 J. ECON. HIST. 677, 680-81 (1989).

117 See especially Kahan & Kamar, The Myth of State Competition in Corporate Law, supra note ???, passim (denying that any regulatory competition is still in place in the US). See, however, Robert Daines, The Incorporation Choices of IPO Firms, 77 N.Y.U.. L. REV. 1559 (2002) (arguing that Delaware is still separately competing for charters with each of the other US States).

118 See CAMPOBASSO, supra note ???, at 349. 119 See especially KRAAKMAN ET AL., supra note 1, at 219-220. 120 See, e.g., supra note ??? (Halbhuber) and corresponding text. 121 La Porta et al., Law and Finance, supra note ???, at 1129 (and see also Id. at .1130, where French corporate

law itself does not score well in terms of shareholder protection).

21

Under French law, all transactions in which a director, a shareholder with more than a 10

percent stake, or a controlling company has an interest must be approved by the board and ratified

by the shareholder meeting, following a special report by the auditors (commissaires aux

comptes).122 The interested party must abstain from voting both within the board and at the

shareholders meeting.123 Liability follows if the transaction harms the corporation124 and

transactions not authorized by the board are voidable.125

Even as written, however, the law has its little tricks. First, these rules do not apply to

“current transactions entered into at normal conditions.” These transactions only have to be

disclosed by the interested party to the chairman of the board, who must then provide a list of such

transactions to the board and to the auditors.126 And even this disclosure obligation does not apply

to transactions of this kind that are not material to each of the parties involved, in light of their

content and financial implications.127 As we make clear below, the exemption for current

transactions leaves some room for manoeuvring.128

Further, approval by the shareholders meeting relieves directors of liability for damages and

so insulates the transaction from judicial review save in the case of fraud.129 Finally, a transaction

not authorized by the board cannot be voided if the shareholders meeting ratifies it, no matter

whether it is harmful or not, as long as a special report by the external auditors clarifies why the due

procedure was not followed.130

Considering law off the books, the picture is much gloomier. First of all, the widely followed

construction of these rules by the national association of accountants is that transactions by which

“the controlling company takes charge of certain organisational tasks (general organisation, internal

audit, accounting, IT and legal services, personnel training, R&D, real estate leasing)” and receives

compensation for such tasks by controlled companies, are presumed to be “current transactions.”131

The same is true for “financial transactions within the group” and for all intra-group transactions at

cost price.132 Therefore, a very broad set of transactions is exempted from most of the rules

described above.

122 Articles L225-38 and L225-40, C. COM. 123 Article L225-40, C. COM. 124 Article L225-41, C. COM. 125 Article L225-42, C. COM. 126 Article L225-39, C. COM. 127 Ibid. 128 See infra, text accompanying fn ???. 129 Article L225-41, C. COM. See YVAN BALENSI, LES CONVENTIONS ENTRE LES SOCIÉTÉS COMMERCIALES ET

LEURS DIRIGEANTS 170 (1975) (shareholders’ approval does not relieve directors of liability in the presence of fraud) 130 Article L225-42, C. COM. 131 See DOMINIQUE SCHMIDT, LES CONFLITS D’INTÉRÊTS DANS LA SOCIÉTÉ ANONYME 120 (2nd ed. 2004)

(translation by the author). 132 Id. at 120-21 (translation by the author).

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Second, in practice shareholder meetings have traditionally been given little specific

information about related-party transactions and have routinely ratified them,133 with the effect of

insulating the interested parties from liability, unless fraud can be demonstrated. That is, this regime

has the practical effect of making it harder for the plaintiff-stockholder to win duty-of-loyalty cases

than duty-of-care cases; in the former, one must prove not only that the transaction was harmful to

the company but also that there was fraud by the directors, whatever this means.134

Third, shareholder meetings usually ratify transactions not authorized by the board on the

basis of auditors’ reports which respectfully pass over the circumstances leading to lack of

authorization.135

For intra-group transactions, finally, the case law developed by criminal judges hearing abus

des biens sociaux cases appears to be quite deferential to controlling companies’ policies. In the

authors words, the Rozenblum doctrine136 “holds that a French corporate parent may legitimately

divert value from one of its subsidiaries if three conditions are met: the structure of the group is

stable, the parent is implementing a coherent group policy, and there is an equitable intra-group

distributions of costs and revenues overall.”137

Similarly, the authors affirm that the corporate opportunity doctrine has gained acceptance in

France.138 They substantiate this claim first by citing two articles in the French Commercial Code

generically dealing with directors’ liability and punishing the abuse of corporate powers (abus des

pouvoirs sociaux) and second by citing a French company law textbook’s assertion that “a loss of

profit, the loss of an enrichment opportunity also [may] constitute a harm to the corporation’s

interest [possibly relevant as an abus des pouvoirs sociaux].”139 It is fair to say that the taking of a

corporate opportunity may in fact be punished as an abus des pouvoirs sociaux and make directors

liable for damages to the corporation. However, quite apart from the fact that there appears to be no

case law at all in this area,140 the claim that this doctrine has any life off the (text)books simply fails

what has now become perhaps our crudest, yet by no means least telling, empirical test one may

conduct these days�the Google test.

133 See HANS-MICHAEL GIESEN, ORGANHANDELN UND INTERESSENKONFLIKT. VERGLEICHENDE UNTERSUCHUNG

ZUM DEUTSCHEN UND FRANZÖSISCHEN AKTIENRECHT 142 (1984); Eddy Wymeersch, Do We Need a Law on Groups of Companies, in CAPITAL MARKETS AND COMPANY LAW 573, 584-85 (Klaus J. Hopt & Eddy Wymeersch eds. 2003).

134 For references on the meaning of fraud in the context of Article L225-41, Commercial Code (France), see LUCA ENRIQUES, IL CONFLITTO D’INTERESSI DEGLI AMMINISTRATORI DI SOCIETÀ PER AZIONI 49 (2000).

135 SCHMIDT, LES CONFLITS D’INTERETS DANS LA SOCIETE ANONYME, supra ???, at 430 fn 149. 136 Cass. crim., Feb. 4, 1985, Revue des Sociétés 1985, 648, note Bouloc. 137 KRAAKMAN ET AL., supra note 1, at 125. 138 KRAAKMAN ET AL., supra note 1, at 116. 139 M. COZIAN ET AL., DROIT DES SOCIETES 313 (16th ed. 2003) (“un manque à gagner, la perte d’une occasion

d’enrichissement réalisent encore un outrage à l’intérêt de la société”). 140 See e-mail from Alain Pietrancosta, Professor at the University of Tours, to the author (12 June 2003).

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I have searched Google for web pages in French and located in France displaying the words

“corporate opportunity.”141 There are only two such web pages. One contains the proceedings of a

conference,142 where the two words are in a speech by Lord Alexander of Weedon, the former

chairman of a British bank, according to whom “[e]xchange rate stability and a base for widening

and deepening capital markets is most important and I think it’s a pointer to what we want to try

and achieve in the world of Corporate Governance and Corporate opportunity.”143 The second is an

introduction (in English) to the law of corporations “d’inspiration anglo-saxonne” prepared by a tax

consultancy firm specializing in offshore centers such as Panama and the Cayman Islands.144 By

contrast, a search in Google for “corporate opportunity” in web pages in German situated in

Germany yielded eight pages that mention the corporate opportunity doctrine.145 Even sharper is the

contrast with the US, and also with Canada and the UK. Searches in Google for web pages in

English located in the US, Canada, or the UK with the words “corporate opportunity,” “directors”

and “liability” (these additions should cut out most advertisements of business opportunities),

yielded 996,146 199,147 and 15148 pages respectively.

This crude test cannot be dismissed by suggesting that it simply provides further evidence of

French linguistic chauvinism. Unlike German, which has its own word for corporate opportunity

(Geschäftschance),149 French has no accepted equivalent.150

When, further, one considers that shareholder suits are extremely rare in France151 and that

criminal prosecutions for abus des biens sociaux can only punish major abuses,152 it is definitely

141 The search was made on 27 July 2004. 142 Lord Alexander of Weedon, Conclusion, in LE DROIT DES SOCIETES AU SERVICE DES ENTREPRISES DANS

L’EUROPE DU XXIE SIECLE 51, 53 (Colloque du 6 décembre 1999), at http://www.creda.ccip.fr/colloque/13spe/13afspe.pdf.

143 Id., at 53. 144 http://www.kenyon-management.com/33.htm. 145 See http://www.mpipriv-hh.mpg.de/deutsch/Forschung/GrosskomAktienGKommentVorstand.htm;

http://www.mpipriv-hh.mpg.de/deutsch/Mitarbeiter/HoptKlausVollstSchriftv.html; http://abcatalog.net/htdocs/front/detail.php?isbn=3540643176&part=4&word=#C; http://www.jura.uni-duesseldorf.de/dozenten/noack/texte/normen/stellungnahme%20-%20komplett.pdf; http://radbruch.jura.uni-mainz.de/~muelbert/Files/muelhaupt-Dateien/unterlagen/exloes4.rtf; http://www.uni-potsdam.de/u/ls_oechsler/lehre/sem/corpor/dalibor.pdf; http://www.mpp-rdg.mpg.de/pdf_dat/engel_cv.pdf; http://www.mpp-rdg.mpg.de/engellit.html.

146 See http://www.google.it/search?lr=lang_en&cr=countryUS&q=%22corporate+opportunity%22+directors+liability&hl=it&ie=UTF-8&ie=UTF-8&oe=UTF-8.

147 See http://www.google.it/search?lr=lang_en&cr=countryCA&q=%22corporate+opportunity%22+directors+liability&hl=it&ie=UTF-8&ie=UTF-8&oe=UTF-8.

148 See http://www.google.it/search?lr=lang_en&cr=countryUK&q=%22corporate+opportunity%22+directors+liability&hl=it&ie=UTF-8&ie=UTF-8&oe=UTF-8.

149 As Holger Fleischer reports, in Germany “there is a rich body of case law and extensive academic writing” on corporate opportunities” (footnotes omitted). Holger Fleischer, The Responsibility of the Management and Its Enforcement, in REFORMING COMPANY AND TAKEOVER LAW IN EUROPE 373, 388 (Guido Ferrarini et al. eds. 2004).

150 See Pietrancosta, supra note ???.

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hard to make a case for the functional equivalence between French related-party transactions law

and US or English law, arguably the most stringent in this area.153

VII. Conclusions

The Anatomy of Corporate Law encapsulates corporations and corporate law within an

ingenious, universal conceptual framework that clarifies the basic functions of the corporate form

and its regulation. For the first time it provides a functional comparative analysis of corporate law

in the main countries. Its conclusion is that there is a high degree of convergence among major

jurisdictions.

As we have seen, however, the tricky – or worse, hard to ascertain154 – discrepancies between

on-the-books and off the books corporate law, coupled with the authors’ choice to play down

enforcement issues, justify the main criticism in this review, i.e. that the book overstates

convergence.

In my view,155 major jurisdictions have been converging and may further converge, at least

functionally, in their treatment of conflicts of interests between shareholders and managers,156 while

little convergence with regard to conflicts of interest between majority and minority shareholders

has been achieved or is likely to be achieved in the short to medium term.

151 See supra note ??? and corresponding text. 152 See supra note ??? and corresponding text. 153 Cf. Luca Enriques, The Law on Company Directors’ Self-Dealing: A Comparative Analysis, in 2 INT’L &

COMP. CORP. L.J. 297, 308-09, 312-13, 326-27 & 329-30 (2000) (describing US and UK law on corporate directors’ self-dealing and concluding that “self-dealing regulation is more sophisticated and has more bite in the UK and the US than [in France, Germany and Italy]”).

154 As any prospective lawyer learns very soon in training, the exact content of a given statutory provision or doctrine is a matter on which reasonable minds can differ. To a certain extent, law off the books, like beauty, is in the eye of the beholder. (One personal anecdote is in point here: in 1996, I had the chance to talk with one of the co-authors of the La Porta et al.’s Law and Finance article (supra note ???) (then only a working paper) and to draw his attention to the fact that there were quite a few mistakes in their corporate law indexes. He took notice of them and thanked me. When the article came out, I found out that none of those mistakes had been corrected. When I met him again at a conference a few years later, he had apparently forgotten about our previous meeting. I told him how much I liked their Law and Finance work, despite the many mistakes on what the law is in this or that of their 49 countries. He replied that so many lawyers had provided them with so many contrasting comments on what the law really was in this or that country, that they had quickly decided to disregard all of them.) It is a small step from here to conclude that convergence too is in the eye of the beholder. Cf. KRAAKMAN ET AL., supra note 1, at 219 (“To some extent similarities across jurisdictions depend on one’s perspective”).

155 See supra, end of fn ???-1. 156 It may well be that jurisdictions deploy different legal strategies to cope with managers’ conflicts of interest,

depending on a variety of factors (see generally Zohar Goshen, The Efficiency of Controlling Corporate Self-Dealing: Theory Meets Reality, 91 CALIF. L. REV. 393, 413-25 (2003)): convergence is functional, however, in the sense that rules against managerial self-dealing are becoming more stringent and can be expected to align ever more closely with the most stringent.

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Both these trends can be observed in current policy developments at the EC level. The Market

Abuse Directive157 has reinforced the ban on insider trading and introduced new disclosure

obligations on trading by managers and persons connected to them,158 apparently inspired by US

law.159 Departing from the US model,160 however, European policymakers have not included

significant shareholders among the recipients of such disclosure obligations. Unlike Section 16(a)

of the Securities Exchange Act, EC rules do not require that trading by significant shareholders be

disclosed, despite the fact that in continental Europe it is much more common for listed companies

to have a dominant shareholder,161 that is, a shareholder with access to inside information.

Further, the European Commission has recently suggested that “Member States should be

required to provide for a framework rule for groups that allows those concerned with the

management of a company belonging to a group to adopt and implement a co-ordinated group

policy, provided that the interests of that company’s creditors are effectively protected and that

there is a fair balance of burdens and advantages over time for that company’s shareholders.”162 In

other words, the Commission plans to impose the Rozenblum doctrine163 upon all Member States by

means of a directive. As a consequence, some of the most common types of self-dealing

transactions by dominant shareholders will fall under the loose Rozenblum standard, which is much

more dominant shareholder-friendly than the entire fairness test applied by Delaware courts to

review self-dealing transactions by controlling shareholders.164

This view on convergence in the law on manager-shareholders conflicts of interest and of

persisting divergence in the law on conflicts of interest between dominant shareholders and

minority shareholders also finds support in further research by Professors Hertig and Kraakman,

who argue that dominant shareholders are more effective than managers as an interest group in

protecting their own rents:

157 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing

and market manipulation (market abuse), 2003 O.J. (L 109) 27. 158 Article 6, para. 4, Directive 2003/6/EC, supra note ???, provides that “[p]ersons discharging managerial

responsibilities within an issuer of financial instruments and, where applicable, persons closely associated with them, shall, at least, notify to the competent authority the existence of transactions conducted on their own account relating to shares of the said issuer, or to derivatives or other financial instruments linked to them. Member States shall ensure that public access to information concerning such transactions, on at least an individual basis, is readily available as soon as possible.”

159 See Section 16(a), Securities Exchange Act of 1934 (15 U.S.C. 78p). 160 Ibid. 161 See, e.g., THE CONTROL OF CORPORATE EUROPE (Fabrizio Barca & Marco Becht eds. 2001). 162 COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT: MODERNISING

COMPANY LAW AND ENHANCING GOVERNANCE IN THE EUROPEAN UNION – A PLAN TO MOVE FORWARD 19 (May 21, 2003).

163 See supra, note ??? and accompanying text. 164 See, e.g., Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983). Delaware law of controlling shareholders’

self-dealing transactions is even stricter than the law on directors’ self-dealing: see, e.g., Mary A. Jacobson, Note: Interested Director Transactions and the (Equivocal) Effects of Shareholder Ratification, 21 DEL. J. CORP. L. 980, 994 (1996).

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Managers are less effective lobbyists than controlling shareholders because they are more tightly constrained in the promises they can make to politicians … . Controlling shareholders can devote more time to lobbying (if they do not manage the firm) and generally have more financial resources … . Conversely, controlling shareholders are more interesting to politicians … because their discretion [is] less constrained by corporate governance rules. In addition, managerial promises are less credible than those of controlling shareholders, as managers are more likely to lose their job than controlling shareholders to sell their stake.165

As such insights on the impact of ownership structures on corporate law politics by two of the

book’s authors suggest, the book’s conceptual framework and comparative analysis certainly can

and will be refined, but it is out of question that future scholarship in comparative corporate law

will build heavily on it.

165 Hertig & Kraakman, Comparing Corporate and Regulatory Structures in the U.S. and EU, supra note ???, at

14-15.