The Soviet Constitution Problem In Comparative Corporate Law: Testing The Proposition That European Corporate Law Is More Stockholder Focused Than U.S. Corporate Law

Leo E. Strine Jr.

Government of the State of Delaware – Supreme Court of Delaware; Harvard Law School; University of Pennsylvania Law School

November 9, 2015

89 S. Cal. L. Rev. (2016), Forthcoming

U of Penn, Inst for Law & Econ Research Paper No. 15-39

Abstract:

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 Soviet Constitution Problem In Comparative Corporate Law – Introduction

For years, sophisticated academic commentators have claimed that European corporation law is more favorable to stockholders than that of the United States. These statements are then parroted by members of the business press. But how true is this contention?

As this article explains, the argument that European corporate law is better for stockholders than U.S. corporate law is analogous to the claim that the Soviet Union protected human rights as well as, if not better than, the United States. If one looks only at the Soviet Constitution on paper, one might draw the conclusion that it was a model of liberalism because it provided separation between church and state, freedom of speech, freedom of the press, and freedom of assembly. But the reality was that the paper Soviet Constitution was not worth anything to Soviet citizens who attempted to exercise those rights, except perhaps to make the bitter fate of being imprisoned for speaking freely have an ironic quality.

The claim that European corporate law is more stockholder-focused than the United States relies upon a similar, if admittedly far less extreme, focus on paper law over how the law actually operates. Scholars fetishize the paper rights of European stockholders, including the non-frustration rule, which prohibits directors in many European nations from acting to block hostile takeovers without stockholder approval; the ability of stockholders to call a special meeting and replace the board; and rules that seek to provide for equal treatment of all target stockholders. These scholars argue that the European model of corporate law embraces more aspects of direct stockholder democracy, and thus, the European system is more favorable to stockholders than the republican model prevalent in the United States. In the latter model, the directors elected by the stockholders are able to pursue business strategies with more insulation during their terms of office than is supposedly possible in the European Union.

But these commentators slight the very different social and regulatory contexts in which these paper rights actually operate. They also ignore the fact that the end result of the American approach to corporate law in operation is a system where centralized management has an intense focus on generating returns for stockholders. The results of this focus are illustrated by empirical evidence indicating that American stockholders are able to use their supposedly weaker paper rights much more effectively than EU stockholders, that the incidence of M&A transactions is higher in the U.S. than in the EU, and that U.S. stockholders receive higher takeover premiums.

Put bluntly, rote statements that the EU is more stockholder-friendly than the U.S. reflect a failure to consider how corporation law operates in the real world. Policy discussions about the future direction of corporate law in both jurisdictions should address the practical reality of how the law actually shapes the behavior of corporate managers and produces outcomes for stockholders.

The Soviet Constitution Problem In Comparative Corporate Law

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