The future as history: The prospects for global convergence in corporate governance and its implications

Northwestern University Law Review

Volumn 93, Issue 3, 1999, Pages 641-707

  Coffee Jr , John C ^a  

^a NONE

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EID: 0042261097     PISSN: 00293571     EISSN: None     Source Type: Journal    
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References (317)

1. See ADOLF A. BERLE & GARDINER C. MEANS, JR., THE MODERN CORPORATION AND PRIVATE PROPERTY (1932). For the first reconsiderations of this thesis, see Bernard S. Black, Shareholder Passivity Reexamined, 89 MICH. L. REV. 520 (1990); Alfred F. Conard, Beyond Managerialism: Investor Capitalism?, 22 U. MICH. J.L. REFORM 117 (1988).
2. See ADOLF A. BERLE & GARDINER C. MEANS, JR., THE MODERN CORPORATION AND PRIVATE PROPERTY (1932). For the first reconsiderations of this thesis, see Bernard S. Black, Shareholder Passivity Reexamined, 89 MICH. L. REV. 520 (1990); Alfred F. Conard, Beyond Managerialism: Investor Capitalism?, 22 U. MICH. J.L. REFORM 117 (1988).
3. See ADOLF A. BERLE & GARDINER C. MEANS, JR., THE MODERN CORPORATION AND PRIVATE PROPERTY (1932). For the first reconsiderations of this thesis, see Bernard S. Black, Shareholder Passivity Reexamined, 89 MICH. L. REV. 520 (1990); Alfred F. Conard, Beyond Managerialism: Investor Capitalism?, 22 U. MICH. J.L. REFORM 117 (1988).
4. For the fullest discussion of this point and detailed evidence from the 27 principal corporate law jurisdictions, see Rafael La Porta et al., Corporate Ownership Around the World (June 1998) (visited March 3, 1999) 〈http://nberws.nber.org/papers/W6625〉 (unpublished manuscript, available on the Web). This study examines the ownership structure of the largest firms in 27 different countries, those with the 26 largest Gross National Products and Mexico. Compiling data on the 10 largest publicly traded nonfinancial companies in each country, the authors found that (i) slightly less than 40% qualified as widely held, (ii) 30% were family controlled, (iii) 18% were state controlled, and (iv) the balance fell into different categories not involving dispersed ownership. See id. It should be underscored that this study focused only on the very largest firms. Once the threshold is lowered, the extent of concentrated ownership becomes even clearer. Estimates differ, but the basic picture is the same across a variety of recent studies. Julian Franks and Colin Mayer found that 85% of large German firms had a shareholder with at least a 25% ownership interest. See Julian Franks & Colin Mayer, Ownership, Control and the Performance of German Corporations (April 1997) (unpublished manuscript prepared for a Sloan Conference at Columbia Law School, on file with the author). Another recent study estimates that 64% of large German firms have a majority owner, while in France the corresponding figure is 59%. See Paul Windolf, The Governance Structure of Large French Corporations: A Comparative Perspective, in CORPORATE GOVERNANCE TODAY 695, 714 (1998) [hereinafter CORPORATE GOVERNANCE TODAY]. An even more recent study estimates that 75% of all German listed companies have a majority owner, while 23% had a blockholder group holding in excess of ninety percent of the firm's equity capital. See Tim Jenkinson & Alexander Ljungqvist, Hostile Stakes and the Role of Banks in German Corporate Governance, NBER Discussion Paper No. 1695, at 6 (1997); see also discussion infra note 13.
5. For the fullest discussion of this point and detailed evidence from the 27 principal corporate law jurisdictions, see Rafael La Porta et al., Corporate Ownership Around the World (June 1998) (visited March 3, 1999) 〈http://nberws.nber.org/papers/W6625〉 (unpublished manuscript, available on the Web). This study examines the ownership structure of the largest firms in 27 different countries, those with the 26 largest Gross National Products and Mexico. Compiling data on the 10 largest publicly traded nonfinancial companies in each country, the authors found that (i) slightly less than 40% qualified as widely held, (ii) 30% were family controlled, (iii) 18% were state controlled, and (iv) the balance fell into different categories not involving dispersed ownership. See id. It should be underscored that this study focused only on the very largest firms. Once the threshold is lowered, the extent of concentrated ownership becomes even clearer. Estimates differ, but the basic picture is the same across a variety of recent studies. Julian Franks and Colin Mayer found that 85% of large German firms had a shareholder with at least a 25% ownership interest. See Julian Franks & Colin Mayer, Ownership, Control and the Performance of German Corporations (April 1997) (unpublished manuscript prepared for a Sloan Conference at Columbia Law School, on file with the author). Another recent study estimates that 64% of large German firms have a majority owner, while in France the corresponding figure is 59%. See Paul Windolf, The Governance Structure of Large French Corporations: A Comparative Perspective, in CORPORATE GOVERNANCE TODAY 695, 714 (1998) [hereinafter CORPORATE GOVERNANCE TODAY]. An even more recent study estimates that 75% of all German listed companies have a majority owner, while 23% had a blockholder group holding in excess of ninety percent of the firm's equity capital. See Tim Jenkinson & Alexander Ljungqvist, Hostile Stakes and the Role of Banks in German Corporate Governance, NBER Discussion Paper No. 1695, at 6 (1997); see also discussion infra note 13.
6. For the fullest discussion of this point and detailed evidence from the 27 principal corporate law jurisdictions, see Rafael La Porta et al., Corporate Ownership Around the World (June 1998) (visited March 3, 1999) 〈http://nberws.nber.org/papers/W6625〉 (unpublished manuscript, available on the Web). This study examines the ownership structure of the largest firms in 27 different countries, those with the 26 largest Gross National Products and Mexico. Compiling data on the 10 largest publicly traded nonfinancial companies in each country, the authors found that (i) slightly less than 40% qualified as widely held, (ii) 30% were family controlled, (iii) 18% were state controlled, and (iv) the balance fell into different categories not involving dispersed ownership. See id. It should be underscored that this study focused only on the very largest firms. Once the threshold is lowered, the extent of concentrated ownership becomes even clearer. Estimates differ, but the basic picture is the same across a variety of recent studies. Julian Franks and Colin Mayer found that 85% of large German firms had a shareholder with at least a 25% ownership interest. See Julian Franks & Colin Mayer, Ownership, Control and the Performance of German Corporations (April 1997) (unpublished manuscript prepared for a Sloan Conference at Columbia Law School, on file with the author). Another recent study estimates that 64% of large German firms have a majority owner, while in France the corresponding figure is 59%. See Paul Windolf, The Governance Structure of Large French Corporations: A Comparative Perspective, in CORPORATE GOVERNANCE TODAY 695, 714 (1998) [hereinafter CORPORATE GOVERNANCE TODAY]. An even more recent study estimates that 75% of all German listed companies have a majority owner, while 23% had a blockholder group holding in excess of ninety percent of the firm's equity capital. See Tim Jenkinson & Alexander Ljungqvist, Hostile Stakes and the Role of Banks in German Corporate Governance, NBER Discussion Paper No. 1695, at 6 (1997); see also discussion infra note 13.
7. For the fullest discussion of this point and detailed evidence from the 27 principal corporate law jurisdictions, see Rafael La Porta et al., Corporate Ownership Around the World (June 1998) (visited March 3, 1999) 〈http://nberws.nber.org/papers/W6625〉 (unpublished manuscript, available on the Web). This study examines the ownership structure of the largest firms in 27 different countries, those with the 26 largest Gross National Products and Mexico. Compiling data on the 10 largest publicly traded nonfinancial companies in each country, the authors found that (i) slightly less than 40% qualified as widely held, (ii) 30% were family controlled, (iii) 18% were state controlled, and (iv) the balance fell into different categories not involving dispersed ownership. See id. It should be underscored that this study focused only on the very largest firms. Once the threshold is lowered, the extent of concentrated ownership becomes even clearer. Estimates differ, but the basic picture is the same across a variety of recent studies. Julian Franks and Colin Mayer found that 85% of large German firms had a shareholder with at least a 25% ownership interest. See Julian Franks & Colin Mayer, Ownership, Control and the Performance of German Corporations (April 1997) (unpublished manuscript prepared for a Sloan Conference at Columbia Law School, on file with the author). Another recent study estimates that 64% of large German firms have a majority owner, while in France the corresponding figure is 59%. See Paul Windolf, The Governance Structure of Large French Corporations: A Comparative Perspective, in CORPORATE GOVERNANCE TODAY 695, 714 (1998) [hereinafter CORPORATE GOVERNANCE TODAY]. An even more recent study estimates that 75% of all German listed companies have a majority owner, while 23% had a blockholder group holding in excess of ninety percent of the firm's equity capital. See Tim Jenkinson & Alexander Ljungqvist, Hostile Stakes and the Role of Banks in German Corporate Governance, NBER Discussion Paper No. 1695, at 6 (1997); see also discussion infra note 13.
8. For recent commentary on the impact of ownership concentration on shareholder behavior, see, for example, Bernard S. Black & John C. Coffee, Jr., Hail Britannia?: Institutional Investor Behavior Under Limited Regulation, 92 MICH. L. REV. 1997 (1994); John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor As Corporate Monitor, 91 COLUM. L. REV. 1277 (1991); Ronald J. Gilson & Mark J. Roe, Understanding the Japanese Keiretsu: Overlaps Between Corporate Governance and Industrial Organization, 102 YALE L.J. 871 (1993); Mark J. Roe, Some Differences in Company Structure in Germany, Japan and the United States, 102 YALE L.J. 1927 (1993).
9. For recent commentary on the impact of ownership concentration on shareholder behavior, see, for example, Bernard S. Black & John C. Coffee, Jr., Hail Britannia?: Institutional Investor Behavior Under Limited Regulation, 92 MICH. L. REV. 1997 (1994); John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor As Corporate Monitor, 91 COLUM. L. REV. 1277 (1991); Ronald J. Gilson & Mark J. Roe, Understanding the Japanese Keiretsu: Overlaps Between Corporate Governance and Industrial Organization, 102 YALE L.J. 871 (1993); Mark J. Roe, Some Differences in Company Structure in Germany, Japan and the United States, 102 YALE L.J. 1927 (1993).
10. For recent commentary on the impact of ownership concentration on shareholder behavior, see, for example, Bernard S. Black & John C. Coffee, Jr., Hail Britannia?: Institutional Investor Behavior Under Limited Regulation, 92 MICH. L. REV. 1997 (1994); John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor As Corporate Monitor, 91 COLUM. L. REV. 1277 (1991); Ronald J. Gilson & Mark J. Roe, Understanding the Japanese Keiretsu: Overlaps Between Corporate Governance and Industrial Organization, 102 YALE L.J. 871 (1993); Mark J. Roe, Some Differences in Company Structure in Germany, Japan and the United States, 102 YALE L.J. 1927 (1993).
11. For recent commentary on the impact of ownership concentration on shareholder behavior, see, for example, Bernard S. Black & John C. Coffee, Jr., Hail Britannia?: Institutional Investor Behavior Under Limited Regulation, 92 MICH. L. REV. 1997 (1994); John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor As Corporate Monitor, 91 COLUM. L. REV. 1277 (1991); Ronald J. Gilson & Mark J. Roe, Understanding the Japanese Keiretsu: Overlaps Between Corporate Governance and Industrial Organization, 102 YALE L.J. 871 (1993); Mark J. Roe, Some Differences in Company Structure in Germany, Japan and the United States, 102 YALE L.J. 1927 (1993).
12. Many of these efforts explicitly stressed that they were "political" theories. See John Pound, The Rise of the Political Model of Corporate Governance and Corporate Control, 68 N.Y.U. L. REV. 103 (1993); Mark J. Roe, A Political Theory of American Corporate Finance, 91 COLUM. L. REV. 10 (1991). Without question, Professor Roe's work has been the dominant influence in this field and has spurred a new generation of scholars to search for "political" issues and divisions in the area of financial institutional structure.
13. Many of these efforts explicitly stressed that they were "political" theories. See John Pound, The Rise of the Political Model of Corporate Governance and Corporate Control, 68 N.Y.U. L. REV. 103 (1993); Mark J. Roe, A Political Theory of American Corporate Finance, 91 COLUM. L. REV. 10 (1991). Without question, Professor Roe's work has been the dominant influence in this field and has spurred a new generation of scholars to search for "political" issues and divisions in the area of financial institutional structure.
14. Michael Porter has long been the leading advocate of this point of view. See Michael E. Porter, Capital Disadvantage: America's Failing Capital Investment System, HARV. BUS. REV., Sept-Oct. 1992, at 65.
15. For the strongest recent statement of this view, see Jonathan R. Macey, Measuring the Effectiveness of Different Corporate Governance Systems: Toward a More Scientific Approach, 10 J. APPLIED CORP. FIN. 16 (1998) (arguing that prevalence of hostile takeovers in stock market centered systems ensures their long-run superiority over blockholder dominated systems); see also Ronald J. Gilson, Corporate Governance and Economic Efficiency: When Do Institutions Matter?, 74 WASH. U. L.Q. 327 (1996) (comparing stock market centered versus bank centered systems of corporate governance and emphasizing roles of industrial organization and path dependency). For an earlier view that bank centered systems might have efficiency advantages, at least in connection with particular production systems, see Gilson & Roe, supra note 3.
16. For the strongest recent statement of this view, see Jonathan R. Macey, Measuring the Effectiveness of Different Corporate Governance Systems: Toward a More Scientific Approach, 10 J. APPLIED CORP. FIN. 16 (1998) (arguing that prevalence of hostile takeovers in stock market centered systems ensures their long-run superiority over blockholder dominated systems); see also Ronald J. Gilson, Corporate Governance and Economic Efficiency: When Do Institutions Matter?, 74 WASH. U. L.Q. 327 (1996) (comparing stock market centered versus bank centered systems of corporate governance and emphasizing roles of industrial organization and path dependency). For an earlier view that bank centered systems might have efficiency advantages, at least in connection with particular production systems, see Gilson & Roe, supra note 3.
17. For the strongest recent statement of this view, see Jonathan R. Macey, Measuring the Effectiveness of Different Corporate Governance Systems: Toward a More Scientific Approach, 10 J. APPLIED CORP. FIN. 16 (1998) (arguing that prevalence of hostile takeovers in stock market centered systems ensures their long-run superiority over blockholder dominated systems); see also Ronald J. Gilson, Corporate Governance and Economic Efficiency: When Do Institutions Matter?, 74 WASH. U. L.Q. 327 (1996) (comparing stock market centered versus bank centered systems of corporate governance and emphasizing roles of industrial organization and path dependency). For an earlier view that bank centered systems might have efficiency advantages, at least in connection with particular production systems, see Gilson & Roe, supra note 3.
18. See Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997); see also Asli Demirguc-Kunt & Vosislav Maksimovic, Law, Finance and Firm Growth, 53 J. FIN. 2107, 2134 (1998) (finding that firms in countries with active stock market and well-developed legal system were able to obtain greater funds to finance growth).
19. See Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997); see also Asli Demirguc-Kunt & Vosislav Maksimovic, Law, Finance and Firm Growth, 53 J. FIN. 2107, 2134 (1998) (finding that firms in countries with active stock market and well-developed legal system were able to obtain greater funds to finance growth).
20. See La Porta et. al., supra note 7.
21. See id. at 1137.
22. See id.
23. This is the explanation given by La Porta et al., supra note 7; see also Andrei Schleifer & Robert W. Vishny, A Survey of Corporate Governance, 52 J. FIN. 737 (1997). In addition, it is, of course, possible that first mover advantages could account for the relative size of stock markets and publicly traded equity, but in this respect it is noteworthy that some European stock exchanges are older than either the London or New York exchanges (Amsterdam is generally recognized as the oldest stock exchange).
24. This is the explanation given by La Porta et al., supra note 7; see also Andrei Schleifer & Robert W. Vishny, A Survey of Corporate Governance, 52 J. FIN. 737 (1997). In addition, it is, of course, possible that first mover advantages could account for the relative size of stock markets and publicly traded equity, but in this respect it is noteworthy that some European stock exchanges are older than either the London or New York exchanges (Amsterdam is generally recognized as the oldest stock exchange).
25. While some investors may be willing to buy at greatly discounted prices, the preference of the entrepreneurs running the firm will be logically to organize blockholder structures that thereby maximize the prices they receive for their shares. In short, voting control is the only substitute for legal protections that enables the firm's founders to maximize the value of the shares they wish to sell.
26. A good sense of the high level of concentration of corporate ownership in European economies is provided by a recent detailed survey by the European Corporate Governance Network. See EUROPEAN CORPORATE GOVERNANCE NETWORK, THE SEPARATION OF OWNERSHIP AND CONTROL: A SURVEY OF SEVEN EUROPEAN COUNTRIES (submitted to the European Commission on October 27, 1997) [hereinafter ECGN SURVEY]. For example, in Austria, a survey of the 600 largest firms found that the "average fractional ownership of the largest shareholder . . . is over 80%." Klaus Gugler et al., The Separation of Ownership and Control: An Austrian Perspective, in ECGN SURVEY 1. For a world-wide survey that concludes that family controlled firms remain the dominant pattern worldwide (with state controlled firms being the second most observed pattern), see La Porta et al., supra note 2. Other recent studies are discussed supra note 2. The following table, taken from a recent Dutch study, reveals the fundamental differences in share ownership patterns between those Continental European countries characterized by concentrated ownership, here, Germany and the Netherlands, and the Anglo-American market centered systems: Share Ownership (%) Germany NL UK US -households 16.6 20.0 17.7 50.2 -non financial enterprises 38.8 9.6 3.1 14.1 -banks 14.2 0.7 0.6 0.0 -investment funds 7.6 1.5 9.7 5.7 -pension funds 1.9 7.9 34.2 20.1 -insurance companies 5.2 5.5 17.2 4.6 -government 3.4 0.0 1.3 0.0 -foreign shareholders 12.2 54.8 16.3 5.4 Ownership of largest shareholder greater than 25% 85 - 13 - greater than 50% 57 22 6 - See William Bratton & Joseph McCahery, Comparative Corporate Governance and the Theory of the Firm: The Case Against Global Cross Reference (working paper January 1999) (citing CPB NETHERLANDS, BUREAU FOR ECONOMIC POLICY ANALYSIS, CHALLENGING NEIGHBOURS, RETHINKING GERMAN AND DUTCH INSTITUTIONS 357 (1997) (table 10.3) (copy on file with the author)).
27. A good sense of the high level of concentration of corporate ownership in European economies is provided by a recent detailed survey by the European Corporate Governance Network. See EUROPEAN CORPORATE GOVERNANCE NETWORK, THE SEPARATION OF OWNERSHIP AND CONTROL: A SURVEY OF SEVEN EUROPEAN COUNTRIES (submitted to the European Commission on October 27, 1997) [hereinafter ECGN SURVEY]. For example, in Austria, a survey of the 600 largest firms found that the "average fractional ownership of the largest shareholder . . . is over 80%." Klaus Gugler et al., The Separation of Ownership and Control: An Austrian Perspective, in ECGN SURVEY 1. For a world-wide survey that concludes that family controlled firms remain the dominant pattern worldwide (with state controlled firms being the second most observed pattern), see La Porta et al., supra note 2. Other recent studies are discussed supra note 2. The following table, taken from a recent Dutch study, reveals the fundamental differences in share ownership patterns between those Continental European countries characterized by concentrated ownership, here, Germany and the Netherlands, and the Anglo-American market centered systems: Share Ownership (%) Germany NL UK US -households 16.6 20.0 17.7 50.2 -non financial enterprises 38.8 9.6 3.1 14.1 -banks 14.2 0.7 0.6 0.0 -investment funds 7.6 1.5 9.7 5.7 -pension funds 1.9 7.9 34.2 20.1 -insurance companies 5.2 5.5 17.2 4.6 -government 3.4 0.0 1.3 0.0 -foreign shareholders 12.2 54.8 16.3 5.4 Ownership of largest shareholder greater than 25% 85 - 13 - greater than 50% 57 22 6 - See William Bratton & Joseph McCahery, Comparative Corporate Governance and the Theory of the Firm: The Case Against Global Cross Reference (working paper January 1999) (citing CPB NETHERLANDS, BUREAU FOR ECONOMIC POLICY ANALYSIS, CHALLENGING NEIGHBOURS, RETHINKING GERMAN AND DUTCH INSTITUTIONS 357 (1997) (table 10.3) (copy on file with the author)).
28. A good sense of the high level of concentration of corporate ownership in European economies is provided by a recent detailed survey by the European Corporate Governance Network. See EUROPEAN CORPORATE GOVERNANCE NETWORK, THE SEPARATION OF OWNERSHIP AND CONTROL: A SURVEY OF SEVEN EUROPEAN COUNTRIES (submitted to the European Commission on October 27, 1997) [hereinafter ECGN SURVEY]. For example, in Austria, a survey of the 600 largest firms found that the "average fractional ownership of the largest shareholder . . . is over 80%." Klaus Gugler et al., The Separation of Ownership and Control: An Austrian Perspective, in ECGN SURVEY 1. For a world-wide survey that concludes that family controlled firms remain the dominant pattern worldwide (with state controlled firms being the second most observed pattern), see La Porta et al., supra note 2. Other recent studies are discussed supra note 2. The following table, taken from a recent Dutch study, reveals the fundamental differences in share ownership patterns between those Continental European countries characterized by concentrated ownership, here, Germany and the Netherlands, and the Anglo-American market centered systems: Share Ownership (%) Germany NL UK US -households 16.6 20.0 17.7 50.2 -non financial enterprises 38.8 9.6 3.1 14.1 -banks 14.2 0.7 0.6 0.0 -investment funds 7.6 1.5 9.7 5.7 -pension funds 1.9 7.9 34.2 20.1 -insurance companies 5.2 5.5 17.2 4.6 -government 3.4 0.0 1.3 0.0 -foreign shareholders 12.2 54.8 16.3 5.4 Ownership of largest shareholder greater than 25% 85 - 13 - greater than 50% 57 22 6 - See William Bratton & Joseph McCahery, Comparative Corporate Governance and the Theory of the Firm: The Case Against Global Cross Reference (working paper January 1999) (citing CPB NETHERLANDS, BUREAU FOR ECONOMIC POLICY ANALYSIS, CHALLENGING NEIGHBOURS, RETHINKING GERMAN AND DUTCH INSTITUTIONS 357 (1997) (table 10.3) (copy on file with the author)).
29. A good sense of the high level of concentration of corporate ownership in European economies is provided by a recent detailed survey by the European Corporate Governance Network. See EUROPEAN CORPORATE GOVERNANCE NETWORK, THE SEPARATION OF OWNERSHIP AND CONTROL: A SURVEY OF SEVEN EUROPEAN COUNTRIES (submitted to the European Commission on October 27, 1997) [hereinafter ECGN SURVEY]. For example, in Austria, a survey of the 600 largest firms found that the "average fractional ownership of the largest shareholder . . . is over 80%." Klaus Gugler et al., The Separation of Ownership and Control: An Austrian Perspective, in ECGN SURVEY 1. For a world-wide survey that concludes that family controlled firms remain the dominant pattern worldwide (with state controlled firms being the second most observed pattern), see La Porta et al., supra note 2. Other recent studies are discussed supra note 2. The following table, taken from a recent Dutch study, reveals the fundamental differences in share ownership patterns between those Continental European countries characterized by concentrated ownership, here, Germany and the Netherlands, and the Anglo-American market centered systems: Share Ownership (%) Germany NL UK US -households 16.6 20.0 17.7 50.2 -non financial enterprises 38.8 9.6 3.1 14.1 -banks 14.2 0.7 0.6 0.0 -investment funds 7.6 1.5 9.7 5.7 -pension funds 1.9 7.9 34.2 20.1 -insurance companies 5.2 5.5 17.2 4.6 -government 3.4 0.0 1.3 0.0 -foreign shareholders 12.2 54.8 16.3 5.4 Ownership of largest shareholder greater than 25% 85 - 13 - greater than 50% 57 22 6 - See William Bratton & Joseph McCahery, Comparative Corporate Governance and the Theory of the Firm: The Case Against Global Cross Reference (working paper January 1999) (citing CPB NETHERLANDS, BUREAU FOR ECONOMIC POLICY ANALYSIS, CHALLENGING NEIGHBOURS, RETHINKING GERMAN AND DUTCH INSTITUTIONS 357 (1997) (table 10.3) (copy on file with the author)).
30. A good sense of the high level of concentration of corporate ownership in European economies is provided by a recent detailed survey by the European Corporate Governance Network. See EUROPEAN CORPORATE GOVERNANCE NETWORK, THE SEPARATION OF OWNERSHIP AND CONTROL: A SURVEY OF SEVEN EUROPEAN COUNTRIES (submitted to the European Commission on October 27, 1997) [hereinafter ECGN SURVEY]. For example, in Austria, a survey of the 600 largest firms found that the "average fractional ownership of the largest shareholder . . . is over 80%." Klaus Gugler et al., The Separation of Ownership and Control: An Austrian Perspective, in ECGN SURVEY 1. For a world-wide survey that concludes that family controlled firms remain the dominant pattern worldwide (with state controlled firms being the second most observed pattern), see La Porta et al., supra note 2. Other recent studies are discussed supra note 2. The following table, taken from a recent Dutch study, reveals the fundamental differences in share ownership patterns between those Continental European countries characterized by concentrated ownership, here, Germany and the Netherlands, and the Anglo-American market centered systems: Share Ownership (%) Germany NL UK US -households 16.6 20.0 17.7 50.2 -non financial enterprises 38.8 9.6 3.1 14.1 -banks 14.2 0.7 0.6 0.0 -investment funds 7.6 1.5 9.7 5.7 -pension funds 1.9 7.9 34.2 20.1 -insurance companies 5.2 5.5 17.2 4.6 -government 3.4 0.0 1.3 0.0 -foreign shareholders 12.2 54.8 16.3 5.4 Ownership of largest shareholder greater than 25% 85 - 13 - greater than 50% 57 22 6 - See William Bratton & Joseph McCahery, Comparative Corporate Governance and the Theory of the Firm: The Case Against Global Cross Reference (working paper January 1999) (citing CPB NETHERLANDS, BUREAU FOR ECONOMIC POLICY ANALYSIS, CHALLENGING NEIGHBOURS, RETHINKING GERMAN AND DUTCH INSTITUTIONS 357 (1997) (table 10.3) (copy on file with the author)).
31. It is impossible to list all the scholars who have made or examined this claim in the 1990s. But for the earliest prediction of corporate convergence on an international scale that I have found in this decade, see Roberta S. Karmel, Is it Time for a Federal Corporation Law?, 57 BROOK. L. REV. 55, 90 (1991).
32. This theme that efficiency considerations shape corporate structures has a long history. See generally Harold Demsetz, The Structure of Ownership and the Theory of the Firm, 26 J.L. & ECON. 375 (1983); FRANK EASTERBROOK & DANIEL FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 212-18 (1991).
33. This theme that efficiency considerations shape corporate structures has a long history. See generally Harold Demsetz, The Structure of Ownership and the Theory of the Firm, 26 J.L. & ECON. 375 (1983); FRANK EASTERBROOK & DANIEL FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 212-18 (1991).
34. See Henry Hansmann & Reiner Kraakman, The End of History for Corporate Law (Nov. 19, 1997) (unpublished manuscript, prepared for a Sloan Conference at Columbia Law School).
35. See Mark J. Roe, Chaos and Evolution in Law and Economics, 109 HARV. L. REV. 641 (1996) (arguing that conditions existing at the time when an institution is formed will influence its functioning far into the future, without respect to efficiency considerations).
36. See Lucian A. Bebchuk & Mark J. Roe, A Theory of Path Dependence in Corporate Governance and Ownership (forthcoming in Stanford Law Review).
37. See Curtis J. Milhaupt, Property Rights in Firms, 84 VA. L. REV. 1145 (1998).
38. See Coffee, supra note 3, at 1281 (arguing that institutional investors' preference for liquidity explains in part their failure to hold concentrated blocks); see also Amar Bhide, The Hidden Costs of Stock Market Liquidity, 34 J. FIN. ECON. 31 (1993) (same); Thomas A. Smith, Institutions and Entrepreneurs in American Corporate Finance, 85 CAL. L. REV. 1 (1997) (same).
39. See Coffee, supra note 3, at 1281 (arguing that institutional investors' preference for liquidity explains in part their failure to hold concentrated blocks); see also Amar Bhide, The Hidden Costs of Stock Market Liquidity, 34 J. FIN. ECON. 31 (1993) (same); Thomas A. Smith, Institutions and Entrepreneurs in American Corporate Finance, 85 CAL. L. REV. 1 (1997) (same).
40. See Coffee, supra note 3, at 1281 (arguing that institutional investors' preference for liquidity explains in part their failure to hold concentrated blocks); see also Amar Bhide, The Hidden Costs of Stock Market Liquidity, 34 J. FIN. ECON. 31 (1993) (same); Thomas A. Smith, Institutions and Entrepreneurs in American Corporate Finance, 85 CAL. L. REV. 1 (1997) (same).
41. See La Porta et al., supra note 7, at 1132; see also La Porta et al., supra note 2.
42. See La Porta et al., supra note 7, at 1132; see also La Porta et al., supra note 2.
43. See La Porta et al., supra note 7, at 1132.
44. See MARK J. ROE, STRONG MANAGERS, WEAK OWNERS: THE POLITICAL ROOTS OF AMERICAN CORPORATE FINANCE (1994); see also Joseph A. Grundfest, Subordination of American Capitol, HARV. Bus. REV., Sept.-Oct. 1992, at 65.
45. See MARK J. ROE, STRONG MANAGERS, WEAK OWNERS: THE POLITICAL ROOTS OF AMERICAN CORPORATE FINANCE (1994); see also Joseph A. Grundfest, Subordination of American Capitol, HARV. Bus. REV., Sept.-Oct. 1992, at 65.
46. Note that an underlying assumption here is that ownership dispersion is the "natural" state for investors in recognition of their preferences for liquidity and diversification. This is consistent with the view taken in Coffee, supra note 3, at 1281.
47. See infra notes 39-56 and accompanying text. In turn, enhanced liquidity is believed to facilitate investment in longer-run, higher return projects, such as high technology start-ups, that may spur greater economic growth and productivity. See Ross Levine & Sara Zervos, Stock Markets, Banks, and Economic Growth, 88 AMER. ECON. REV. 537 (1998) (citing Valerie R. Bencivenga et al., Transaction Costs, Technological Choice, and Endogenous Growth, 67 J. ECO. THEORY 53 (1995) and Maurice Obstfeld, Risk-Taking, Global Diversification, and Growth, 84 AMER. ECON. REV. 1310 (1994)).
48. See infra notes 39-56 and accompanying text. In turn, enhanced liquidity is believed to facilitate investment in longer-run, higher return projects, such as high technology start-ups, that may spur greater economic growth and productivity. See Ross Levine & Sara Zervos, Stock Markets, Banks, and Economic Growth, 88 AMER. ECON. REV. 537 (1998) (citing Valerie R. Bencivenga et al., Transaction Costs, Technological Choice, and Endogenous Growth, 67 J. ECO. THEORY 53 (1995) and Maurice Obstfeld, Risk-Taking, Global Diversification, and Growth, 84 AMER. ECON. REV. 1310 (1994)).
49. See infra notes 39-56 and accompanying text. In turn, enhanced liquidity is believed to facilitate investment in longer-run, higher return projects, such as high technology start-ups, that may spur greater economic growth and productivity. See Ross Levine & Sara Zervos, Stock Markets, Banks, and Economic Growth, 88 AMER. ECON. REV. 537 (1998) (citing Valerie R. Bencivenga et al., Transaction Costs, Technological Choice, and Endogenous Growth, 67 J. ECO. THEORY 53 (1995) and Maurice Obstfeld, Risk-Taking, Global Diversification, and Growth, 84 AMER. ECON. REV. 1310 (1994)).
50. See infra notes 39-56 and accompanying text. In turn, enhanced liquidity is believed to facilitate investment in longer-run, higher return projects, such as high technology start-ups, that may spur greater economic growth and productivity. See Ross Levine & Sara Zervos, Stock Markets, Banks, and Economic Growth, 88 AMER. ECON. REV. 537 (1998) (citing Valerie R. Bencivenga et al., Transaction Costs, Technological Choice, and Endogenous Growth, 67 J. ECO. THEORY 53 (1995) and Maurice Obstfeld, Risk-Taking, Global Diversification, and Growth, 84 AMER. ECON. REV. 1310 (1994)).
51. See infra notes 51-56 and accompanying text.
52. A possibly intermediate position should be acknowledged here. Ronald Gilson has predicted that formal institutional variations in corporate law and practice will remain, but will be overshadowed by an increasing degree of functional convergence. See Ronald J. Gilson, Globalizing Corporate Governance: Convergence of Form or Function (December 5, 1998) (unpublished manuscript, prepared for a Sloan Conference at Columbia Law School). Indeed, it is virtually true by definition that if existing corporate governance systems possess sufficient plasticity so that their efficiency can be improved within their existing legal and regulatory parameters, then very different governance systems could exhibit approximately equivalent performance characteristics. But this position frames more of a question than an answer: is there sufficient plasticity within institutional forms to permit functional convergence?
53. See La Porta et al., supra note 2. This theme is further addressed supra notes 138-48 and accompanying text.
54. At the same time, however, weaker legal protections appear to imply higher control premiums to the controlling shareholder. Much evidence supports the proposition that, under "weaker" legal regimes, the controlling shareholders will be able to command a greater control premium for their shares. See Luigi Zingales, The Value of the Voting Right: A Study of the Milan Stock Exchange Experience, 7 REV. FIN. STUD. 125 (1994) (finding a high 82% premium for control blocks on the Milan Exchange, against an international average of 10 to 20%, and a United States average of 5.24%) [hereinafter Zingales, Voting Right]; Luigi Zingales, What Determines the Value of Corporate Votes, 110 Q.J. ECON. 1047 (1995) [hereinafter Zingales, Corporate Votes]. Such a disparity seems strong evidence of the relative value of control and the relative exposure of the minority. However, such evidence also implies that controlling shareholders outside the United States will resist a premium that could cause U.S. controlling shareholders to sell.
55. At the same time, however, weaker legal protections appear to imply higher control premiums to the controlling shareholder. Much evidence supports the proposition that, under "weaker" legal regimes, the controlling shareholders will be able to command a greater control premium for their shares. See Luigi Zingales, The Value of the Voting Right: A Study of the Milan Stock Exchange Experience, 7 REV. FIN. STUD. 125 (1994) (finding a high 82% premium for control blocks on the Milan Exchange, against an international average of 10 to 20%, and a United States average of 5.24%) [hereinafter Zingales, Voting Right]; Luigi Zingales, What Determines the Value of Corporate Votes, 110 Q.J. ECON. 1047 (1995) [hereinafter Zingales, Corporate Votes]. Such a disparity seems strong evidence of the relative value of control and the relative exposure of the minority. However, such evidence also implies that controlling shareholders outside the United States will resist a premium that could cause U.S. controlling shareholders to sell.
56. At the same time, however, weaker legal protections appear to imply higher control premiums to the controlling shareholder. Much evidence supports the proposition that, under "weaker" legal regimes, the controlling shareholders will be able to command a greater control premium for their shares. See Luigi Zingales, The Value of the Voting Right: A Study of the Milan Stock Exchange Experience, 7 REV. FIN. STUD. 125 (1994) (finding a high 82% premium for control blocks on the Milan Exchange, against an international average of 10 to 20%, and a United States average of 5.24%) [hereinafter Zingales, Voting Right]; Luigi Zingales, What Determines the Value of Corporate Votes, 110 Q.J. ECON. 1047 (1995) [hereinafter Zingales, Corporate Votes]. Such a disparity seems strong evidence of the relative value of control and the relative exposure of the minority. However, such evidence also implies that controlling shareholders outside the United States will resist a premium that could cause U.S. controlling shareholders to sell.
57. At the same time, however, weaker legal protections appear to imply higher control premiums to the controlling shareholder. Much evidence supports the proposition that, under "weaker" legal regimes, the controlling shareholders will be able to command a greater control premium for their shares. See Luigi Zingales, The Value of the Voting Right: A Study of the Milan Stock Exchange Experience, 7 REV. FIN. STUD. 125 (1994) (finding a high 82% premium for control blocks on the Milan Exchange, against an international average of 10 to 20%, and a United States average of 5.24%) [hereinafter Zingales, Voting Right]; Luigi Zingales, What Determines the Value of Corporate Votes, 110 Q.J. ECON. 1047 (1995) [hereinafter Zingales, Corporate Votes]. Such a disparity seems strong evidence of the relative value of control and the relative exposure of the minority. However, such evidence also implies that controlling shareholders outside the United States will resist a premium that could cause U.S. controlling shareholders to sell.
58. I borrow this rhetorical distinction between "formal" and "functional" convergence from Professor Gilson. See Gilson, supra note 27.
59. The term "regulatory arbitrage" is a more neutral term for what others call the "race to the bottom," that is, the migration of legal entities to the more lenient regulatory regime, with consequent pressure for regulatory relaxation on all regulators. For the view that migration from incorporation in one U.S. state to another state is relatively costless, see Bernard S. Black, Is Corporate Law Trivial?: A Political And Economic Analysis, 84 NW. U. L. REV. 542, 586-88 (1989).
60. The original debate was between William Cary and Ralph Winter. See William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 YALE L.J. 663 (1974) (arguing that competition for charters produces a race to the bottom); Ralph K. Winter, Jr., State Law, Shareholder Protection and the Theory of the Firm, 6 J. LEGAL STUD. 251, 254-62 (1977) (arguing that competition produces a race to the top). Judge Winter's views have been more fully articulated by Professor Roberta Romano. See Roberta Romano, Corporate Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L. ECON. & ORG. 225 (1985). In contrast, Professor Lucian Bebchuk has emphasized the likely divergences between the incentives of managers and shareholders with the resulting prospect that charter competition could produce at least marginally inefficient outcomes. See Lucian A. Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 HARV. L. REV. 1435 (1992). Besides the debate over efficiency, the other major approach in this literature has been to relate regulatory competition among the states to an interest group theory of the states' real interests. For a leading effort, see Jonathan R. Macey & Geoffrey P. Miller, Toward An Interest-Group Theory of Delaware Corporate Law, 65 TEX. L. REV. 469 (1987).
61. The original debate was between William Cary and Ralph Winter. See William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 YALE L.J. 663 (1974) (arguing that competition for charters produces a race to the bottom); Ralph K. Winter, Jr., State Law, Shareholder Protection and the Theory of the Firm, 6 J. LEGAL STUD. 251, 254-62 (1977) (arguing that competition produces a race to the top). Judge Winter's views have been more fully articulated by Professor Roberta Romano. See Roberta Romano, Corporate Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L. ECON. & ORG. 225 (1985). In contrast, Professor Lucian Bebchuk has emphasized the likely divergences between the incentives of managers and shareholders with the resulting prospect that charter competition could produce at least marginally inefficient outcomes. See Lucian A. Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 HARV. L. REV. 1435 (1992). Besides the debate over efficiency, the other major approach in this literature has been to relate regulatory competition among the states to an interest group theory of the states' real interests. For a leading effort, see Jonathan R. Macey & Geoffrey P. Miller, Toward An Interest-Group Theory of Delaware Corporate Law, 65 TEX. L. REV. 469 (1987).
62. The original debate was between William Cary and Ralph Winter. See William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 YALE L.J. 663 (1974) (arguing that competition for charters produces a race to the bottom); Ralph K. Winter, Jr., State Law, Shareholder Protection and the Theory of the Firm, 6 J. LEGAL STUD. 251, 254-62 (1977) (arguing that competition produces a race to the top). Judge Winter's views have been more fully articulated by Professor Roberta Romano. See Roberta Romano, Corporate Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L. ECON. & ORG. 225 (1985). In contrast, Professor Lucian Bebchuk has emphasized the likely divergences between the incentives of managers and shareholders with the resulting prospect that charter competition could produce at least marginally inefficient outcomes. See Lucian A. Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 HARV. L. REV. 1435 (1992). Besides the debate over efficiency, the other major approach in this literature has been to relate regulatory competition among the states to an interest group theory of the states' real interests. For a leading effort, see Jonathan R. Macey & Geoffrey P. Miller, Toward An Interest-Group Theory of Delaware Corporate Law, 65 TEX. L. REV. 469 (1987).
63. The original debate was between William Cary and Ralph Winter. See William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 YALE L.J. 663 (1974) (arguing that competition for charters produces a race to the bottom); Ralph K. Winter, Jr., State Law, Shareholder Protection and the Theory of the Firm, 6 J. LEGAL STUD. 251, 254-62 (1977) (arguing that competition produces a race to the top). Judge Winter's views have been more fully articulated by Professor Roberta Romano. See Roberta Romano, Corporate Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L. ECON. & ORG. 225 (1985). In contrast, Professor Lucian Bebchuk has emphasized the likely divergences between the incentives of managers and shareholders with the resulting prospect that charter competition could produce at least marginally inefficient outcomes. See Lucian A. Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 HARV. L. REV. 1435 (1992). Besides the debate over efficiency, the other major approach in this literature has been to relate regulatory competition among the states to an interest group theory of the states' real interests. For a leading effort, see Jonathan R. Macey & Geoffrey P. Miller, Toward An Interest-Group Theory of Delaware Corporate Law, 65 TEX. L. REV. 469 (1987).
64. The original debate was between William Cary and Ralph Winter. See William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 YALE L.J. 663 (1974) (arguing that competition for charters produces a race to the bottom); Ralph K. Winter, Jr., State Law, Shareholder Protection and the Theory of the Firm, 6 J. LEGAL STUD. 251, 254-62 (1977) (arguing that competition produces a race to the top). Judge Winter's views have been more fully articulated by Professor Roberta Romano. See Roberta Romano, Corporate Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L. ECON. & ORG. 225 (1985). In contrast, Professor Lucian Bebchuk has emphasized the likely divergences between the incentives of managers and shareholders with the resulting prospect that charter competition could produce at least marginally inefficient outcomes. See Lucian A. Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 HARV. L. REV. 1435 (1992). Besides the debate over efficiency, the other major approach in this literature has been to relate regulatory competition among the states to an interest group theory of the states' real interests. For a leading effort, see Jonathan R. Macey & Geoffrey P. Miller, Toward An Interest-Group Theory of Delaware Corporate Law, 65 TEX. L. REV. 469 (1987).
65. Although Australia and Canada are also federal systems, competition for corporate charters among their provinces does not appear to be vigorous. See Ronald J. Daniels, Should Provinces Compete? The Case for a Competitive Corporate Law Market, 36 MCGILL L.J. 130, 150 (1991). Within the European Community, only a constrained form of competition is possible, as minimum standards, set forth in directives issued by the Council of the EU bind all members states. See sources cited infra notes 82-89 and accompanying text.
66. German courts have struck down a variety of efforts perceived by them as attempts to contract around codetermination. See Mark J. Roe, Codetermination and German Securities Markets, 1998 COLUM. BUS. L. REV. 167.
67. See infra notes 107-128 and accompanying text.
68. Others have asserted that this function of reducing agency costs is the historic and most important goal of the federal securities laws. See Paul G. Mahoney, Mandatory Disclosure as a Solution to Agency Problems, 62 U. CHI. L. REV. 1047, 1047-51 (1995).
69. The latest evidence suggests that American corporate law is relatively uniform, whether despite or because of interjurisdictional charter competition. See William J. Carney, The Production of Corporate Law, 71 S. CAL. L. REV. 715, 728 (1998); infra notes 223-32 and accompanying text.
70. On this theme, see generally Mark J. Roe, Backlash, 98 COLUM. L. REV. 217 (1998).
71. For a recent consensus statement of this view and an attempt to provide empirical support for the proposition that such a board increases corporate efficiency and market value, see Ira M. Millstein & Paul W. MacAvoy, The Active Board of Directors and Performance of the Large Publicly Traded Corporation, 98 COLUM. L. REV. 1283 (1998). But see Sanjai Bhagat & Bernard S. Black, Board Composition and Firm Performance, in CORPORATE GOVERNANCE TODAY, supra note 2, at 291, 292 ("no convincing evidence" exists that firms with majority-independent boards perform better than firms without such boards).
72. For a recent consensus statement of this view and an attempt to provide empirical support for the proposition that such a board increases corporate efficiency and market value, see Ira M. Millstein & Paul W. MacAvoy, The Active Board of Directors and Performance of the Large Publicly Traded Corporation, 98 COLUM. L. REV. 1283 (1998). But see Sanjai Bhagat & Bernard S. Black, Board Composition and Firm Performance, in CORPORATE GOVERNANCE TODAY, supra note 2, at 291, 292 ("no convincing evidence" exists that firms with majority-independent boards perform better than firms without such boards).
73. See MANCUR OLSON, THE LOGIC OF COLLECTIVE ACTION: PUBLIC GOODS AND THE THEORY OF GROUPS (1965). Olson later extended his theory to show how interest groups could (and would) maintain inefficient rules in place even at the cost of national decline. See MANCUR OLSON, THE RISE AND DECLINE OF NATIONS: ECONOMIC GROWTH, STAGFLATION AND SOCIAL RIGIDITIES (1982).
74. See MANCUR OLSON, THE LOGIC OF COLLECTIVE ACTION: PUBLIC GOODS AND THE THEORY OF GROUPS (1965). Olson later extended his theory to show how interest groups could (and would) maintain inefficient rules in place even at the cost of national decline. See MANCUR OLSON, THE RISE AND DECLINE OF NATIONS: ECONOMIC GROWTH, STAGFLATION AND SOCIAL RIGIDITIES (1982).
75. See Survey - German Banking and Financing 98: A Unique Perspective; FIN. TIMES, June 24, 1998, at 7.
76. See Jeffrey N. Gordon, Deutsche Telekom, German Corporate Governance, and the Transition Costs of Capitalism, 1998 COLUM. BUS. L. REV. 185, 200.
77. See id.
78. See Gilson, supra note 27.
79. See Zingales, Voting Right, supra note 29; Zingales, Corporate Votes, supra note 29.
80. See Zingales, Voting Right, supra note 29; Zingales, Corporate Votes, supra note 29.
81. See La Porta et al., supra note 7, at 1132; Schleifer & Vishny, supra note 11.
82. See La Porta et al., supra note 7, at 1132; Schleifer & Vishny, supra note 11.
83. See ECGN SURVEY, supra note 13.
84. See ROE, supra note 23.
85. Some have argued that the system of lifetime employment in Japan created a desirable incentive to invest in human capital, but the most recent review doubts that the practice had such an impact and finds that the actual motivation was to reduce worker influence in the factory and to minimize the prospect of socialist electoral victories in post-war Japan. See Ronald Gilson & Mark J. Roe, Lifetime Employment: Labor Peace and the Evolution of Japanese Corporate Governance (forthcoming in the Columbia Law Review).
86. Gordon, supra note 42, at 196.
87. For example, even a large institutional investor holding 1 to 2% of a firm's stock must recognize that 98% of the benefit of any gains that flow from its monitoring efforts will be enjoyed by other shareholders. For an 80% blockholder, however, this is a less serious problem.
88. See Bratton & McCahery, supra note 13; see also Milhaupt, supra note 19, at 1179-84.
89. See Bratton & McCahery, supra note 13; see also Milhaupt, supra note 19, at 1179-84.
90. The extreme example is probably Italian corporate governance which relies on small family held firms and has minimized the role of outside investors. See Jonathan R. Macey, Italian Corporate Governance: One American's Perspective, in CORPORATE GOVERNANCE TODAY, supra note 2, at 677, 692 (noting also that Italian economy "is dominated by small efficient family firms"). French corporate governance also seems to be characterized by "an interpenetration of kinship structures (family owners) and managerial bureaucracy." See Windolf, supra note 2, at 695.
91. The extreme example is probably Italian corporate governance which relies on small family held firms and has minimized the role of outside investors. See Jonathan R. Macey, Italian Corporate Governance: One American's Perspective, in CORPORATE GOVERNANCE TODAY, supra note 2, at 677, 692 (noting also that Italian economy "is dominated by small efficient family firms"). French corporate governance also seems to be characterized by "an interpenetration of kinship structures (family owners) and managerial bureaucracy." See Windolf, supra note 2, at 695.
92. Revealingly, Germany uses the last major financial marketplace to prohibit insider trading, and it did so two years late in complying with an EU directive requiring such a prohibition. See Roberta S. Karmel, Transnational Takeover Talk - Regulations Relating to Tender Offers and Insider Trading in the United States, the United Kingdom, Germany, and Australia, 66 U. CIN. L. REV. 1133, 1149-52 (1998).
93. See Bratton & McCahery, supra note 13, at 8.
94. See id. at 9; see also Arnold W.A. Boot & Jonathan R. Macey, Objectivity, Control and Adaptability in Corporate Governance, in CORPORATE GOVERNANCE TODAY, supra note 2, at 213, 214-15 (1998). This latter problem is a corollary of the greater frequency of hostile control consists in market centered systems.
95. See Gordon, supra note 42, at 187; Marco Pagano et al., Why Do Companies Go Public? An Empirical Analysis, 53 J. FIN. 27 (1998).
96. See Gordon, supra note 42, at 187; Marco Pagano et al., Why Do Companies Go Public? An Empirical Analysis, 53 J. FIN. 27 (1998).
97. See Peter Gumbel, Cracking the German Market: The Hard Sell, Getting Germans to Invest in Stock, WALL ST. J., Aug. 4, 1995, at A4. See Gordon, supra note 42, at 196 (citing study by Theodor Baums, a German law professor); see also The 1996 Guide to Germany, EUROMONEY, June 1996, at A4 tbl. 1 (for 1995, 23.9% for Germany, 130.7% for Great Britain).
98. See Peter Gumbel, Cracking the German Market: The Hard Sell, Getting Germans to Invest in Stock, WALL ST. J., Aug. 4, 1995, at A4. See Gordon, supra note 42, at 196 (citing study by Theodor Baums, a German law professor); see also The 1996 Guide to Germany, EUROMONEY, June 1996, at A4 tbl. 1 (for 1995, 23.9% for Germany, 130.7% for Great Britain).
99. See Peter Gumbel, Cracking the German Market: The Hard Sell, Getting Germans to Invest in Stock, WALL ST. J., Aug. 4, 1995, at A4. See Gordon, supra note 42, at 196 (citing study by Theodor Baums, a German law professor); see also The 1996 Guide to Germany, EUROMONEY, June 1996, at A4 tbl. 1 (for 1995, 23.9% for Germany, 130.7% for Great Britain).
100. See Roberta S. Karmel, Italian Stock Market Reform, N.Y. L.J., Aug. 20, 1998, at 3.
101. See id.
102. As of 1989, only seven Italian corporations had offered more than 50% of their shares to the public, and in five of these, voting control remained locked in a small family group. See Macey, supra note 53, at 687-88.
103. Gordon, supra note 42, at 186-87.
104. Id. at 186.
105. See Thane Peterson et al., The Euro's Warm-Up Act: IPOs, BUS. WEEK, June 22, 1998 at 24 (noting that new share offerings exceeded $91 billion in 1997 on European exchanges, a record level, and may exceed this in 1998).
106. See id. (noting that 53% of the $31 billion in new offerings in 1998 have been corporate offerings unrelated to privatizations).
107. See id. (discussing success of the Neuer Market).
108. See Thane Peterson, A High-Tech Europe Is Finally In Sight, BUS. WEEK, Aug. 31, 1998, at 120 (noting also that this market was up 150% in 1998).
109. See id. Several of these listings appear to have done IPOs in the United States and then listed on the Neuer Market. See Graham Bowley, A Success Worth Replicating, FIN. TIMES, Sept. 3, 1998, at 21 (discussing Quiagen, Germany's first biotech startup).
110. See Karmel, supra note 60, at 3.
111. See Manning G. Warren III, The European Union's Investment Services Directive, 15 U. PA. J. INT'L BUS. L. 181 (1994). The "Investment Services Directive" is more technically referred to as Council Directive 93/22 on
112. See id.
113. See Alan Friedman, Prodi Rolls Out Reforms, INT'L HERALD TRIB., Feb. 19, 1998, at 1.
114. James Blitz, Italian Takeover Reforms Take Shape, FIN. TIMES, Feb. 12, 1998, at 2.
115. See id.
116. See Karmel, supra note 60, at 3. There had been at least 17 such IPOs as of mid-August 1998. See id.; see also Deborah Ball, New Entrepreneurs Fuel IPO Bonanza in Italy, WALL ST. J., July 22, 1998, at B7A (estimating that another five hundred private Italian firms could qualify for stock exchange listing).
117. See Karmel, supra note 60, at 3. There had been at least 17 such IPOs as of mid-August 1998. See id.; see also Deborah Ball, New Entrepreneurs Fuel IPO Bonanza in Italy, WALL ST. J., July 22, 1998, at B7A (estimating that another five hundred private Italian firms could qualify for stock exchange listing).
118. See Suzanne McGee, Europe's IPO Game May Get Tougher, WALL ST. J., Aug. 25, 1998, at C1 (noting that "it became almost routine for new stock issues to be sold well above the price range at which they were marketed. Issues have been outscribed tenfold routinely, and many rally in after-market trading").
119. See id.
120. See McGee, supra note 77, at C1 (noting approaching major privatizations in Switzerland, Poland, Greece, and France).
121. See Friedman, supra note 73 (noting that corporate governance and financial transparency reform seem to be issues that are particularly attractive to center-left coalitions in Italy and possibly Holland and Sweden).
122. See Kent Hargis, Do Foreign Investors Stimulate or Inhibit Stock Market Development in Latin America, 38 Q. REV. ECON. & FIN. 303 (1998) (reviewing literature); Levine & Zervos, supra note 25; Raghuram G. Rajan & Luigi Zingales, Financial Dependence and Growth, 88 AM. ECON. REV. 559 (1998). These studies do not demonstrate the superiority of securities markets over a banking system as an engine of growth, but they do suggest that securities markets stimulate investment in longer term and higher risk projects (such as high technology investments) that have a higher return over the long run.
123. See Kent Hargis, Do Foreign Investors Stimulate or Inhibit Stock Market Development in Latin America, 38 Q. REV. ECON. & FIN. 303 (1998) (reviewing literature); Levine & Zervos, supra note 25; Raghuram G. Rajan & Luigi Zingales, Financial Dependence and Growth, 88 AM. ECON. REV. 559 (1998). These studies do not demonstrate the superiority of securities markets over a banking system as an engine of growth, but they do suggest that securities markets stimulate investment in longer term and higher risk projects (such as high technology investments) that have a higher return over the long run.
124. See Kent Hargis, Do Foreign Investors Stimulate or Inhibit Stock Market Development in Latin America, 38 Q. REV. ECON. & FIN. 303 (1998) (reviewing literature); Levine & Zervos, supra note 25; Raghuram G. Rajan & Luigi Zingales, Financial Dependence and Growth, 88 AM. ECON. REV. 559 (1998). These studies do not demonstrate the superiority of securities markets over a banking system as an engine of growth, but they do suggest that securities markets stimulate investment in longer term and higher risk projects (such as high technology investments) that have a higher return over the long run.
125. For overviews of this process, see generally Uri Geiger, Harmonization of Securities Disclosure Rules in the Global Market - A Proposal, 66 FORDHAM L. REV. 1785 (1998); David Reid & Andrew Ballheimer, The Legal Framework of the Securities Industry in the European Community Under the 1992 Program, 29 COLUM. J. TRANSNAT'L L. 103 (1991); Andreas J. Roquette, New Developments Relating to the Internationalization of the Capital Markets: A Comparison of Legislative Reforms in the United States, the European Community, and Germany, 14 U. PA. J. INT'L BUS. L. 565 (1994); Manning G. Warren III, Global Harmonization of Securities Laws: The Achievements of the European Communities, 31 HARV. INT'L L.J. 185 (1990) (describing the development of the disclosure system in the European Union).
126. For overviews of this process, see generally Uri Geiger, Harmonization of Securities Disclosure Rules in the Global Market - A Proposal, 66 FORDHAM L. REV. 1785 (1998); David Reid & Andrew Ballheimer, The Legal Framework of the Securities Industry in the European Community Under the 1992 Program, 29 COLUM. J. TRANSNAT'L L. 103 (1991); Andreas J. Roquette, New Developments Relating to the Internationalization of the Capital Markets: A Comparison of Legislative Reforms in the United States, the European Community, and Germany, 14 U. PA. J. INT'L BUS. L. 565 (1994); Manning G. Warren III, Global Harmonization of Securities Laws: The Achievements of the European Communities, 31 HARV. INT'L L.J. 185 (1990) (describing the development of the disclosure system in the European Union).
127. For overviews of this process, see generally Uri Geiger, Harmonization of Securities Disclosure Rules in the Global Market - A Proposal, 66 FORDHAM L. REV. 1785 (1998); David Reid & Andrew Ballheimer, The Legal Framework of the Securities Industry in the European Community Under the 1992 Program, 29 COLUM. J. TRANSNAT'L L. 103 (1991); Andreas J. Roquette, New Developments Relating to the Internationalization of the Capital Markets: A Comparison of Legislative Reforms in the United States, the European Community, and Germany, 14 U. PA. J. INT'L BUS. L. 565 (1994); Manning G. Warren III, Global Harmonization of Securities Laws: The Achievements of the European Communities, 31 HARV. INT'L L.J. 185 (1990) (describing the development of the disclosure system in the European Union).
128. For overviews of this process, see generally Uri Geiger, Harmonization of Securities Disclosure Rules in the Global Market - A Proposal, 66 FORDHAM L. REV. 1785 (1998); David Reid & Andrew Ballheimer, The Legal Framework of the Securities Industry in the European Community Under the 1992 Program, 29 COLUM. J. TRANSNAT'L L. 103 (1991); Andreas J. Roquette, New Developments Relating to the Internationalization of the Capital Markets: A Comparison of Legislative Reforms in the United States, the European Community, and Germany, 14 U. PA. J. INT'L BUS. L. 565 (1994); Manning G. Warren III, Global Harmonization of Securities Laws: The Achievements of the European Communities, 31 HARV. INT'L L.J. 185 (1990) (describing the development of the disclosure system in the European Union).
129. See Geiger, supra note 82, at 1788-89.
130. See Geiger, supra note 82, at 1789-90; Reid & Ballheimer, supra note 82, at 124.
131. See Geiger, supra note 82, at 1789-90; Reid & Ballheimer, supra note 82, at 124.
132. For reviews of these efforts, see generally Terence L. Blackburn, The Societas European: The Evolving European Corporation Statute, 61 FORDHAM L. REV. 695 (1993); Amir N. Licht, International Diversity in Securities Regulation: Roadblocks on the Way to Convergence, 20 CARDOZO L. REV. 227, 239-40 (1998).
133. For reviews of these efforts, see generally Terence L. Blackburn, The Societas European: The Evolving European Corporation Statute, 61 FORDHAM L. REV. 695 (1993); Amir N. Licht, International Diversity in Securities Regulation: Roadblocks on the Way to Convergence, 20 CARDOZO L. REV. 227, 239-40 (1998).
134. See Proposal for a Fifth Directive, Foundation Article 54(3)(g) of the EEC Treaty Concerning the Structure of Public Limited Companies and the Powers and Obligations of Their Origins, 1983 O.J. (C240) 2. This draft proposed two optional structures for providing employee representation, but both encountered intense British opposition.
135. See Corporate Governance Update, 5 CORP. GOVERNANCE INT'L REV. 256 (1997).
136. See Jane Martinson, Takeover Directive in Deadlock, FIN. TIMES, Oct. 9, 1998, at 2.
137. See More Talks on Defining Takeovers Bids Directive, EUR. REP., Jan. 9, 1999, available in LEXIS, Nexis Library, curnws file.
138. The Acquired Rights Directive of 1977 has been implemented by legislation in many EU member states. In Britain, the Transfer of Undertakings (Protection of Employment) Act codifies its obligations. Essentially, on a transfer, the employee staff must be transferred on the same or better terms. For a brief summary, see What the TUPA means for you, GUARDIAN, Dec. 5, 1998, at 18.
139. See Council Directive 88/627 of December 12, 1988 on the Information to be Published when a Major Holding in a Listed Company is Acquired or Disposed of, 1988 O.J. (L. 348) 62.
140. See ECGN SURVEY, supra note 13, at 56-57.
141. See id. at 87-90.
142. See Marco Brecht & Ekkehart Bohmer, Transparency of Ownership and Control in Germany, in ECGN SURVEY, supra note 13, at 23 (noting "clash of cultures" over issue of transparency).
143. See id. at 57.
144. See id.
145. Id. at 90-92.
146. See Marco Becht, Ownership and Control in Belgium, in ECGN SURVEY, supra note 13, at 13-18.
147. See Marcello Binachi et al., Ownership Pyramidal Groups and Separation Between Ownership and Control in Italy, in ECGN SURVEY, supra note 13, at 13-14.
148. See Fund Managers Call for Relaxation of Restrictions, FIN. TIMES, Sept. 11, 1988, at 2.
149. Id.
150. See id.
151. See David Mercado, Evolving Accounting Standards in the International Markets, in INTERNATIONAL SECURITIES MARKETS 1996, at 345, 346 (1996) (PLI No. B4-7166); see also Glenn Reiter, International Securities Offerings.- Recent Developments And Current Issues, in 29TH ANNUAL INSTITUTE ON SECURITIES REGULATION (1997) (PLI B4-7206).
152. See David Mercado, Evolving Accounting Standards in the International Markets, in INTERNATIONAL SECURITIES MARKETS 1996, at 345, 346 (1996) (PLI No. B4-7166); see also Glenn Reiter, International Securities Offerings.- Recent Developments And Current Issues, in 29TH ANNUAL INSTITUTE ON SECURITIES REGULATION (1997) (PLI B4-7206).
153. See Mercado, supra note 103, at 419 (Exhibit C) (setting forth the SEC statement, which was not issued as a formal release).
154. My colleague Louis Lowenstein has argued that the SEC will be under intense pressure to relax standards for domestic issuers if it lowers standards for foreign issuers. See Louis Lowenstein, Financial Transparency and Corporate Governance: You Manage What You Measure, 96 COLUM. L. REV. 1335, 1338 (1996). The counterargument is that institutional investors may force both foreign and domestic issuers to disclose more information than the SEC requires.
155. Some predict that the SEC will cross this bridge by no later than 2002. See Paul Pachter, International Accounting Standards: The World's Standards By 2002, 68 CPA J. 14, 15 (1998).
156. See Amir N. Licht, Regulatory Arbitrage for Real: International Securities Regulation in A World Interacting Securities Markets, 38 VA. J. INT'L. L. 563, 566 (1998).
157. See Greg Ip & Gregory L. White, Big Board Is Hoping Daimler Chrysler Drives In More Foreign Primary Shares, WALL ST. J., Oct. 21, 1998, at C1; see also Gerard Achstatter, Foreign Companies Flock to the U.S. But Their Stocks Carry Extra Risks, INVESTOR'S BUS. DAILY, June 2, 1998 at A-7 (noting 50% rise in foreign listings from 1995 to 1998).
158. See Greg Ip & Gregory L. White, Big Board Is Hoping Daimler Chrysler Drives In More Foreign Primary Shares, WALL ST. J., Oct. 21, 1998, at C1; see also Gerard Achstatter, Foreign Companies Flock to the U.S. But Their Stocks Carry Extra Risks, INVESTOR'S BUS. DAILY, June 2, 1998 at A-7 (noting 50% rise in foreign listings from 1995 to 1998).
159. See Licht, supra note 107, at 566.
160. See Geiger, supra note 82, at 1786 (citing data from Office of International Corporate Finance of the SEC); see also Pachter, supra note 106.
161. See Geiger, supra note 82, at 1786 (citing data from Office of International Corporate Finance of the SEC); see also Pachter, supra note 106.
162. While foreign issuers list, they seldom make primary offerings in the United States. This may be attributable to a fear of the litigation remedies that they would face in the United States under the Securities Act of 1933 or to the additional accounting requirements of the SEC when a foreign issuer seeks to register securities for sale (in which event the SEC requires not simply reconciliation to U.S. Generally Accepted Accounting Principles ("GAAP") but full compliance therewith).
163. See Licht, supra note 107, at 634-35; see also, Gordon Alexander et al., Asset Pricing and Dual Listing on Foreign Capital Markets: A Note, 42 J. FIN. 151 (1987); Gregory Kedlec & John McConnell, The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings, 49 J. FIN. 611 (1994).
164. See Licht, supra note 107, at 634-35; see also, Gordon Alexander et al., Asset Pricing and Dual Listing on Foreign Capital Markets: A Note, 42 J. FIN. 151 (1987); Gregory Kedlec & John McConnell, The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings, 49 J. FIN. 611 (1994).
165. See Licht, supra note 107, at 634-35; see also, Gordon Alexander et al., Asset Pricing and Dual Listing on Foreign Capital Markets: A Note, 42 J. FIN. 151 (1987); Gregory Kedlec & John McConnell, The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings, 49 J. FIN. 611 (1994).
166. When Daimler listed on the New York Stock Exchange in 1993, it was required to restate its 1992 annual earnings to comply with U.S. GAAP standards. It had reported a gain of DM 615 million to its shareholders, but was required to restate this as a loss of DM 1,839 - or a swing of nearly DM 2,554. See Pachter, supra note 106, at 14. Obviously, this turnaround can both embarrass management and cause uncertainty for investors and thus represents a deterrent to a U.S. listing. Nonetheless, foreign firms continue to list at an increasing rate.
167. Professor Edward Rock has studied the IPO process in Israel, which typically involves a "high-tech" start up company in Israel listing on NASDAQ as an integral part of the offering process. He concludes that an "unappreciated function of the U.S. mandatory disclosure regime is the extent to which it permits issuers to make a credible commitment to a level and permanence of disclosure." See Edward Rock, Mandatory Disclosure As Credible Commitment: Going Public, Opting In, Opting Out and Globalization, at 2 (Oct. 14, 1998) (unpublished manuscript). In essence, this is the same bonding thesis. See also Asher Blass et al., Corporate Governance In An Emerging Market: The Case of Israel, 10 J. APPLIED CORP. FIN. 79, 86-89 (1998) (finding that high quality Israeli IPOs listed on NASDAQ, while lower quality offerings listed on Tel Aviv Stock Exchange and that portfolio investors tended to invest in the former offerings, but not the Tel Aviv offerings). Such self-segregation again seems to support the bonding thesis.
168. Professor Edward Rock has studied the IPO process in Israel, which typically involves a "high- tech" start up company in Israel listing on NASDAQ as an integral part of the offering process. He concludes that an "unappreciated function of the U.S. mandatory disclosure regime is the extent to which it permits issuers to make a credible commitment to a level and permanence of disclosure." See Edward Rock, Mandatory Disclosure As Credible Commitment: Going Public, Opting In, Opting Out and Globalization, at 2 (Oct. 14, 1998) (unpublished manuscript). In essence, this is the same bonding thesis. See also Asher Blass et al., Corporate Governance In An Emerging Market: The Case of Israel, 10 J. APPLIED CORP. FIN. 79, 86-89 (1998) (finding that high quality Israeli IPOs listed on NASDAQ, while lower quality offerings listed on Tel Aviv Stock Exchange and that portfolio investors tended to invest in the former offerings, but not the Tel Aviv offerings). Such self-segregation again seems to support the bonding thesis.
169. See Licht, supra note 107, at 634. One study even finds that foreign firms that had listed only their depositary receipts in the bulletin board market in the U.S. experience significant positive returns when they upgrade from this OTC market to the NASDAQ market and, as a consequence, become "reporting" companies subject to the SEC's mandatory disclosure system. See Darius Miller, Why Do Foreign Firms List in the United States: An Empirical Analysis of the Depositary Receipt Market (1996) (unpublished manuscript, on file with the author) (cited in Licht, supra note 107, at 634). The importance of this finding is that these issuers had already overcome market segmentation by establishing an ADR facility, but had not yet become subject to U.S. mandatory disclosure rules. See SEC Rule 12g3- 2(b), 17 C.F.R. § 240.12g3-2 (1998) (providing exemption for such foreign issuers upon filing of home country financial statements). Thus, the upgrade isolates the impact of the differential between SEC reporting requirements and home country requirements.
170. See Licht, supra note 107, at 634. One study even finds that foreign firms that had listed only their depositary receipts in the bulletin board market in the U.S. experience significant positive returns when they upgrade from this OTC market to the NASDAQ market and, as a consequence, become "reporting" companies subject to the SEC's mandatory disclosure system. See Darius Miller, Why Do Foreign Firms List in the United States: An Empirical Analysis of the Depositary Receipt Market (1996) (unpublished manuscript, on file with the author) (cited in Licht, supra note 107, at 634). The importance of this finding is that these issuers had already overcome market segmentation by establishing an ADR facility, but had not yet become subject to U.S. mandatory disclosure rules. See SEC Rule 12g3- 2(b), 17 C.F.R. § 240.12g3-2 (1998) (providing exemption for such foreign issuers upon filing of home country financial statements). Thus, the upgrade isolates the impact of the differential between SEC reporting requirements and home country requirements.
171. See Licht, supra note 107, at 634. One study even finds that foreign firms that had listed only their depositary receipts in the bulletin board market in the U.S. experience significant positive returns when they upgrade from this OTC market to the NASDAQ market and, as a consequence, become "reporting" companies subject to the SEC's mandatory disclosure system. See Darius Miller, Why Do Foreign Firms List in the United States: An Empirical Analysis of the Depositary Receipt Market (1996) (unpublished manuscript, on file with the author) (cited in Licht, supra note 107, at 634). The importance of this finding is that these issuers had already overcome market segmentation by establishing an ADR facility, but had not yet become subject to U.S. mandatory disclosure rules. See SEC Rule 12g3-2(b), 17 C.F.R. § 240.12g3-2 (1998) (providing exemption for such foreign issuers upon filing of home country financial statements). Thus, the upgrade isolates the impact of the differential between SEC reporting requirements and home country requirements.
172. See Ira M. Greenstein and Lloyd Harmetz, U.S.-Israel Transactions Présent Unique Issue, N.Y. L.J.,Apr. 27, 1998, at S2.
173. See Richard Rappaport, Beating Their Swords Into IPO Shares, FORBES ASAP, June 1, 1998, at 93.
174. See U.S. NASDAQ Wants Share of Israeli Privatization, REUTER EUR. BUS. REP., Apr. 16, 1997, available in LEXIS, News Library, Curnws file (quoting Frank Zarb, chief executive officer of the NASD).
175. See Rappaport, supra note 117, at 93. Some 12 Israeli IPOs were effected in 1996 in the United States, more than those of any other foreign country.
176. See Pachter, supra note 106. In 1997, foreign registrants raised $28 billion in U.S. capital markets - 16 times the 1990 level. See id.
177. For example, in 1997, TV Azteca effected a $650 million IPO (as part of a privatization) through Bear Stearns. See Robinson, Year End Review: Latin America Markets, INVESTMENT DEALERS' DIG., Jan. 12, 1998, at 43.
178. See Licht, supra note 107, at 635-36 (making this point that prior commentary had focused only on competition among different legal regimes and overlooked the possibility of complementary and mutually reinforcing interaction).
179. Controlling premiums in Israel appear to be the second highest in the Western world (second to only those in Italy), thereby suggesting that minority protections are limited. See Ronald Lease et al., The Market Value of Control in Publicly-Traded Corporations, 11 J. FIN. ECON. 439 (1982); Macey, supra note 53, at 684.
180. Controlling premiums in Israel appear to be the second highest in the Western world (second to only those in Italy), thereby suggesting that minority protections are limited. See Ronald Lease et al., The Market Value of Control in Publicly-Traded Corporations, 11 J. FIN. ECON. 439 (1982); Macey, supra note 53, at 684.
181. See Pagano et al., supra note 57, at 61.
182. See id. at 36. In the U.S., venture capital backed firms go public after an average period of five years. See id.
183. See Kristian Rydqvist & Kenneth Hogholm, Going Public in the 1980's: Evidence from Sweden, 1 EUR. FIN. MGMT. 287, 309 (1995).
184. See Pagano et al., supra note 57, at 36.
185. For just this explanation, see Pagano et al., supra note 57, at 29.
186. In August 1998, SAP, the fourth largest German company in terms of market capitalization, listed on the New York Stock Exchange. See Corporate Germany Reaping the Rewards of Risk Taking, FIN. TIMES, Aug., 11, 1998, at 20. Hoechst, the German chemical and pharmaceutical giant, has also recently listed. See Survey-German Banking and Finance 1998: A Unique Perspective, FIN. TIMES, June 24, 1998, at 7. Finally, Siemens AG, the largest German industrial corporation next to Daimler, has indicated its intent to shift to U.S. GAAP by 2000 and list on the New York Stock Exchange by 2001. See Nicholas Bray, International Accounting Rules Catch On, WALL ST. J., Oct. 21, 1998, at B19D.
187. In August 1998, SAP, the fourth largest German company in terms of market capitalization, listed on the New York Stock Exchange. See Corporate Germany Reaping the Rewards of Risk Taking, FIN. TIMES, Aug., 11, 1998, at 20. Hoechst, the German chemical and pharmaceutical giant, has also recently listed. See Survey-German Banking and Finance 1998: A Unique Perspective, FIN. TIMES, June 24, 1998, at 7. Finally, Siemens AG, the largest German industrial corporation next to Daimler, has indicated its intent to shift to U.S. GAAP by 2000 and list on the New York Stock Exchange by 2001. See Nicholas Bray, International Accounting Rules Catch On, WALL ST. J., Oct. 21, 1998, at B19D.
188. In August 1998, SAP, the fourth largest German company in terms of market capitalization, listed on the New York Stock Exchange. See Corporate Germany Reaping the Rewards of Risk Taking, FIN. TIMES, Aug., 11, 1998, at 20. Hoechst, the German chemical and pharmaceutical giant, has also recently listed. See Survey-German Banking and Finance 1998: A Unique Perspective, FIN. TIMES, June 24, 1998, at 7. Finally, Siemens AG, the largest German industrial corporation next to Daimler, has indicated its intent to shift to U.S. GAAP by 2000 and list on the New York Stock Exchange by 2001. See Nicholas Bray, International Accounting Rules Catch On, WALL ST. J., Oct. 21, 1998, at B19D.
189. See Macey, supra note 53, at 692 (small Italian firms "unlikely to survive European unification").
190. See Theodor Baums, Corporate Contracting around Defective Regulations: The Daimler-Chrysler Case (Arbeitspapier No. 68, Universitat Osnabruck, 1998) (noting that some commercial registers in Germany will not register transnational mergers and others will). Or, as one of Chrysler's senior corporate attorneys observed (seemingly ruefully): "There's no such thing in German law as a merger between a German company and a non-German company." Bar Talk: The Gamma Project: The Marriage of Chrysler and Daimler, AM. LAW., June, 1998, at 13 (quoting Meredith Brown of Debevoise & Plimpton).
191. See Theodor Baums, Corporate Contracting around Defective Regulations: The Daimler- Chrysler Case (Arbeitspapier No. 68, Universitat Osnabruck, 1998) (noting that some commercial registers in Germany will not register transnational mergers and others will). Or, as one of Chrysler's senior corporate attorneys observed (seemingly ruefully): "There's no such thing in German law as a merger between a German company and a non-German company." Bar Talk: The Gamma Project: The Marriage of Chrysler and Daimler, AM. LAW., June, 1998, at 13 (quoting Meredith Brown of Debevoise & Plimpton).
192. See Baums, supra note 131, at 6-8. Indeed, mergers appear to be rarely used as an acquisition method in Germany. See DIETER BEINERT, CORPORATE ACQUISITIONS & MERGERS IN GERMANY 48 (1991). Instead, acquisitions are chiefly accomplished through share or asset purchases. See id. at 45.
193. See Baums, supra note 131, at 6-8. Indeed, mergers appear to be rarely used as an acquisition method in Germany. See DIETER BEINERT, CORPORATE ACQUISITIONS & MERGERS IN GERMANY 48 (1991). Instead, acquisitions are chiefly accomplished through share or asset purchases. See id. at 45.
194. Under the Co-Determination Act (Mitbestimmungengesetz) of 1976, the supervisory board of a German corporation (including both AGs and GmbHs) that employs more than two thousand employees must consist of an equal number of shareholders' representatives and labor representatives. See BEINERT, supra note 132, at 87-88. Other co-determination statutes apply to certain smaller companies having more than five hundred employees. See id. Where a controlling foreign parent holds the stock of the German company, the same basic rules apply and codetermination is required if the subsidiary employs over two thousand workers. See THE GERMAN CO-DETERMINATION ACT 23 (Hannes Schneider & David Kingman eds., 1976).
195. For the finding that Italian corporations needed a substantial business history (on average 33 years) before they could effect a successful IPO, see Pagano et al., supra note 57.
196. Ford's acquisition of Volvo's automobile assets is another case in point. Volvo's shareholders were adamant that they preferred Ford to Fiat or Renault, the two other most likely merger candidates. See Edmund Andrews, 'Ford-Volvo': A Deal For All Sweden, N.Y. TIMES, Jan. 30, 1999, at C5. Renault shares were particularly resisted by Swedish shareholders, because it was viewed as a statecontrolled company, which was unlikely to maximize the share value of Volvo or provide Swedish stockholders with a liquid investment vehicle. See id. at C5.
197. See Gilson, supra note 27.
198. See Steven N. Kaplan, Top Executive Rewards and Firm Performance: A Comparison of Japan and the U.S., 102 J. POL. ECON. 510 (1994); Steven N. Kaplan, Top Executive Turnover and Firm Performance in Germany, 10 J.L. ECON. & ORG. 142 (1994); Steven N. Kaplan & Bernadette A. Minton, Appointments of Outsiders to Japanese Boards: Determinants and Implications for Managers, 36 J. FIN. ECON. 224 (1994).
199. See Steven N. Kaplan, Top Executive Rewards and Firm Performance: A Comparison of Japan and the U.S., 102 J. POL. ECON. 510 (1994); Steven N. Kaplan, Top Executive Turnover and Firm Performance in Germany, 10 J.L. ECON. & ORG. 142 (1994); Steven N. Kaplan & Bernadette A. Minton, Appointments of Outsiders to Japanese Boards: Determinants and Implications for Managers, 36 J. FIN. ECON. 224 (1994).
200. See Steven N. Kaplan, Top Executive Rewards and Firm Performance: A Comparison of Japan and the U.S., 102 J. POL. ECON. 510 (1994); Steven N. Kaplan, Top Executive Turnover and Firm Performance in Germany, 10 J.L. ECON. & ORG. 142 (1994); Steven N. Kaplan & Bernadette A. Minton, Appointments of Outsiders to Japanese Boards: Determinants and Implications for Managers, 36 J. FIN. ECON. 224 (1994).
201. Of the recent cross-border mergers, only Deutsche Bank's bid for Bankers Trust has been for cash, and revealingly Deutsche Bank is not listed on the New York Stock Exchange. Also, its acquisition of Bankers Trust is for approximately $9 billion and thus within its financial limits. Larger takeovers in the range of the Amoco-B.P., Exxon-Mobil or Daimler-Chrysler transactions would be extremely difficult to finance for cash.
202. This is because it can issue listed shares that will be the functional equivalent of cash.
203. It is estimated that former Chrysler shareholders will receive 44% of the stock in the merged entity. See John Tagliabue, Germans Reject Challenge to Daimler Stock Options, N.Y. TIMES, Aug. 13, 1998, at D4. In addition, American institutional investors may have already held significant stakes in Daimler, thus raising at least the possibility that American shareholders may own a majority of the merged entity.
204. It is also possible that this feature was a major attraction of the merger to Daimler management because it freed them from the supervision of their controlling shareholder.
205. See supra notes 44-46 and accompanying text.
206. While Deutsche Bank's supervision of Daimler hardly amounted to an "iron hand" rule, the Daimler-Chrysler merger did dilute its stake to 15%, which seems below the level sufficient to confer control.
207. See supra notes 112-15 and accompanying text.
208. See Tagliabue, supra note 140.
209. See id.
210. Daimler's own CEO was estimated to have been paid between $1.1 and $1.5 million during this same year. See id.
211. See David Johnston, American-Style Pay Moves Abroad; Importance of Stock Options Expands in a Global Economy, N.Y. TIMES, Sept. 3, 1998, at C1. It can be debated whether the new German system for stock options through the conversion of debentures that are sold only to management represents an example of "functional convergence" or "formal convergence," but either way German courts have upheld the practice.
212. Essentially, foreign issuers that have more than 300 shareholders of record in the United States are in theory required to register under § 12(g) of the Securities Exchange Act of 1934. However, an exemptive rule affords them an easy escape from the U.S. periodic disclosure system so long as they agree to provide the SEC with the same documents and information that they file in their home countries or give their shareholders. See Rule 12g3-2(b), 17 C.F.R. § 240.12g3-2 (1998). This exemption is ended, however, once the foreign issuer lists on NASDAQ. See Rule 12g3-2(d), 17 C.F.R. § 240.12g3-2 (1998). Listing on an exchange requires the foreign issuer to register under §12(b) of the Securities Exchange Act of 1934, and Rule 12g3-2 thereby becomes inapplicable. See also infra notes 178-79 and accompanying text.
213. A historical consensus exists that the Securities Act of 1933 was largely modeled after a British statute. Professor Mahoney has argued that the original intent of both the British Parliament and the American Congress was to force promoters to disclose self-dealing relationships with the firm. See Mahoney, supra note 36, at 1048-1100. Professor Mahoney argues that the federal mandatory disclosure system was "an incremental change from a longstanding set of judicial doctrines that were designed to combat a specific agency problem - the promoter problem." Id. at 1111. Related agency problems arise whenever there is a controlling shareholder, as there typically is in legal regimes characterized by concentrated ownership.
214. See id. at 1049, 1111.
215. Id. at 1111.
216. The statutory command to make a disclosure filing in § 13(d) is fleshed out by Rule 13d-1(a). Rule 13d-1 (b)(1) then permits institutional investors under certain conditions to file a shorter, less burdensome document, known as a Schedule 13G, within 45 days after the conclusion of the calendar year. Sections 13(d) and 13(g) of the Exchange Act do not apply to equity securities of issuers that must file periodic reports only by reason of § 15(d) of the Exchange Act because the issuer made a public offering in the United States. This exemption, however, will not benefit issuers traded in any public market (other than a very small bulletin board market), as § 12(g) will require registration if there are as few as three hundred shareholders resident in the United States.
217. See supra notes 92-93 and accompanying text for the 10% threshold under the Transparency Directive.
218. See SEC Rule 13d-3, 17 C.F.R. § 240.13d-3 (1998).
219. See SEC Rule 13d-5(b)(i), 17 C.F.R. § 240.13d-5 (1998); see also Wellman v. Dickinson, 682 F.2d 355, 362-63 (2d Cir. 1982), cert. denied, 460 U.S. 1069 (1983). No formal or written agreement is necessary to give rise to a § 13(d) group. See SEC v. Savoy Industries Inc., 587 F.2d 1149, 1162-63 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979); GAF Corp. v. Milstein, 453 F.2d 709, 715-16 (2d Cir. 1971), cert. denied, 406 U.S. 910 (1972).
220. See Rule 13d-2, 17 C.F.R. § 240.13d-2 (1998). For a discussion of this "promptness" requirement, see SEC Litigation Release No. 12835 (April 11, 1991), SEC v. Edelman, 49 SEC Docket No.12, at 952, 953 (April 23, 1991).
221. See Securities Exchange Act of 1934 § 13(d)(1), 15 U.S.C. § 78m(d)(1) (1994); see also Schedule 13D, Items 2-6,17 C.F.R. § 240.13d-101 (1998).
222. For a good overview of the application of the Exchange Act to foreign persons and entities, see Edward F. Greene et al., U.S. REGULATION OF THE INTERNATIONAL SECURITIES AND DERIVATIVES MARKETS § 7.02 (4th ed. 1998).
223. See American Depository Receipts Securities Act Release No. 6894, 56 Fed. Reg. 24,420 (1991) (the "ADR Concept Release"); see also Greene et al., supra note 159, § 7.02, at 7-4.
224. See SEC Filing of Schedules 13D and 13G, 17 C.F.R. § 240.13d-1(b)(2) (1998). Although technically the Schedule 13G is only available to U.S. institutional investors (and only under certain conditions), a series of no-action letters have permitted foreign institutional investors to use this simplified form. See Greene et al., supra note 159, § 7.02, at 7-5 n.8.
225. In a 1990 Concept Release, the SEC proposed exempting foreign bidders from the procedural and disclosure provisions of the Williams Act where (1) the target was a foreign corporation, and (2) 10% or less of the target's outstanding shares were held of record by U.S. shareholders (other than U.S. citizens who were 10% or greater shareholders). See Concept Release on Multinational Tender and Exchange Offers, Securities Act Release No. 33-6866, 55 Fed. Reg. 23, 75 (1990). The SEC also indicated that the civil liability provisions in § 14(e) of the Exchange Act would continue to apply. The SEC has recently moved to implement this proposal. See Cross-Border Tender Offers Business Combinations and Rights Offerings, Securities Act Release No. 7611, 63 Fed. Reg. 69,136 (1998). Even if it were adopted, the proposed 10% threshold would leave most large multinational firms listed on the NYSE fully subject to U.S. tender offer law, because U.S. ownership would exceed 10%.
226. See SEC Equal Treatment of Security Holders, 17 C.F.R. § 240.14d-10 (1998).
227. The SEC has long used an eight-factor test to determine whether closely-linked purchases amount to a tender offer. See SEC v. Carter Hawley Hale Stores, Inc., 760 F.2d 945, 949-52 (9th Cir. 1985); Wellman v. Dickinson, 475 F. Supp. 783, 823-26 (S.D.N.Y. 1979). Under this test, efforts by a controlling shareholder to buy shares from insiders at a common price could give rise to a tender offer with a concomitant obligation under Rule 14d-10 to open the offer to all shareholders.
228. For a review of SEC policy toward concurrent foreign and domestic tender offers, see Greene et al., supra note 159, § 7.03(3); see also SEC Release No. 34-27671 (Feb. 2, 1990).
229. See Greene et al., supra note 159, § 7.03[4].
230. Some informed commentators have opined that the SEC would today likely take the view that the bidder cannot avoid compliance with the Williams Act by excluding U.S. residents from the offer, at least in the case of an issuer whose equity securities were registered under § 12 of the Exchange Act. See id. § 7.03[4][b],at 7-25.
231. For an overview of these requirements, see id. § 2.03[2][b].
232. See NYSE LISTED COMPANY MANUAL §§ 303.00, 310.00(A).
233. The NYSE, AMEX and NASDAQ have a common voting rights policy that precludes actions that disenfranchise shareholders of stock traded in their markets or dilutes their voting strength. This policy specifically prohibits any disparate reduction of voting rights through any corporate action or issuance of stock, including plans that cap voting rights for any shareholder or that require a holding period before voting rights become fully exercisable. See Order Granting Approval to Rule Changes Relating to Exchanges' and Associations' Rules Regarding Shareholder Voting Rights, SEC Release No. 34-35121, 59 Fed. Reg. 66,570 (1994).
234. See Greene et al., supra note 159, § 2.03[2][b], at 2-21 to 2-23.
235. See id. § 2.03[2][b], at 2-23 to 2-24 (discussing nonwaivable provisions of NYSE corporate governance policies).
236. See id. § 2.03 [2][c], [d].
237. Rule 13e-3 requires a detailed evaluation of the fairness of the proposed transaction, including a detailed assessment of the material factors upon which the issuer's claim that the transaction is fair is based. See Schedule 13E-3, Item 8(b), 17 C.F.R. § 240.13e-100 (1998). Failing this mandatory disclosure, the transaction can be enjoined or damages sought. There is thus no need to prove a material omission if the specific justifications and evaluation strikes the court as inadequate. See Howing Co. v. Nationwide Corp., 826 F.2d 1470, 1478-79 (6th Cir. 1987).
238. Among other things, the issuer is required to focus on fairness by describing the purpose of the transaction, the alternatives considered, and the effect of the transaction, including the benefits and detriments to the issuer and affected securities holders. See Schedule 13E-3, Item 7, 17 C.F.R. § 240.13e-100 (1998). If an outside report or valuation is utilized, there must be a summary of the report and information about how the outside party was selected and how the compensation of such party was to be determined. See Schedule 13E-3, Item 9, 17 C.F.R § 240.13e-100 (1998). Most importantly, Item 8 of Schedule 13E-3 requires the issuer (or the affiliate filing the Schedule 13E-3) to state that it "reasonably believes that the Rule 13e-3 transaction is fair or unfair to the unaffiliated security holders" and then requires the issuer or affiliate to "discuss in reasonable detail the material factors upon which the belief. . . is based." Schedule 13e-3, Item 8,17 C.F.R. § 240.13e-100 (1998).
239. See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1997).
240. See, eg., Howing, 826 F.2d at 1474 (upholding private cause of action under Rule 13e-3), aff'd, 927 F.2d 263 (6th Cir. 1991).
241. See SEC Rule 12g3-2(d)(3), 17 C.F.R. § 240.12g3-2(d)(3) (1998).
242. See SEC Rule 12g3-2(d)(2), 17 C.F.R. § 240.12g3-2(d)(2) (1998).
243. See Securities Exchange Act of 1934, § 13(b)(2)(A), 15 U.S.C. § 78m(b)(2)(A) (1994).
244. See Securities Exchange Act of 1934, § 13(b)(2)B), 15 U.S.C. §78m(b)(2)(B) (1994).
245. See SEC Rule 13b2-1, 17 C.F.R. § 240.13b2-1 (1998).
246. In 1998, Congress approved an international convention sponsored by the Organization for Economic Cooperation and Development (OECD) that committed each OECD nation to criminalize such bribery. See Congress Passes Bill to Curb International Business Bribery, N.Y. TIMES, Oct. 22, 1998, at A5.
247. See Leasco Data Processing Equip. v. Maxwell, 468 F.2d 1326, 1335-37 (2d Cir. 1972).
248. See Consolidated Gold Fields PLC v. Minorco, S.A., 871 F.2d 252, 263-63 (2d Cir. 1989), cert. denied 492 U.S. 939 (1989); Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 988-90 (2d Cir. 1975), cert. denied, 423 U.S. 1018 (1975).
249. See Itoba Ltd. v. Lep Group Plc, 54 F.3d 118 (2d Cir. 1996), cert. denied, 516 U.S. 1044 (1996).
250. See generally Stephen J. Choi & Andrew T. Guzman, The Dangerous Extraterritoriality of American Securities Law, 17 Nw. J. INT'L L. & BUS. 207 (1996).
251. See Donald C. Langevoort, Schoenbaum Revisited: Limiting the Scope of Antifraud Protection in an Internationalized Securities Marketplace, 55 LAW & CONTEMP. PROBS. 241, 255-60 (1992).
252. See United States v. O'Hagan, 117 S.Ct. 2199, 2206-07 (1997).
253. As noted earlier, foreign listings on the New York Stock Exchange have recently tripled, over one thousand foreign issuers now trade in U.S. markets, and the trend seems to be increasing. See supra notes 107-10 and accompanying text.
254. "Bonding" is, of course, a term of art in the standard "agency cost" literature. Essentially, the principal can either "monitor" the agent to reduce inappropriate conduct by the agent, or the agent can "bond" its own conduct, for example, by posting a surety bond or otherwise subjecting itself to penalties. See Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305, 308 (1976).
255. While market segmentation; that is, the existence of barriers to cross-border capital flows, supplies an alternative explanation for multiple and global stock listings, financial economists have recently preferred the bonding explanation. See Oren Furst, A Theoretical Analysis of The Investor Protection Regulations Argument for Global Listing of Stocks (Sept. 10, 1998) (working paper, International Center for Finance at Yale University, on file with the author); see also Blass et al., supra note 114, at 86-87 (noting that high quality Israeli IPOs have preferred to list in the United States on NASDAQ, whereas lower quality IPOs have listed on the Tel Aviv Stock Exchange).
256. While market segmentation; that is, the existence of barriers to cross-border capital flows, supplies an alternative explanation for multiple and global stock listings, financial economists have recently preferred the bonding explanation. See Oren Furst, A Theoretical Analysis of The Investor Protection Regulations Argument for Global Listing of Stocks (Sept. 10, 1998) (working paper, International Center for Finance at Yale University, on file with the author); see also Blass et al., supra note 114, at 86-87 (noting that high quality Israeli IPOs have preferred to list in the United States on NASDAQ, whereas lower quality IPOs have listed on the Tel Aviv Stock Exchange).
257. See supra notes 124-27 and accompanying text.
258. The election to comply with "higher" U.S. standards would, however, have to be irrevocable; otherwise, having sold shares to U.S. investors, foreign issuers might reconsider their election and return to a "lower" disclosure standard.
259. See Stephen J. Choi & Andrew T. Guzman, Portable Reciprocity: Rethinking the International Reach of Securities Regulation, 71 S. CAL. L. REV. 903, 941-45 (1998); Merritt Fox, Securities Disclosure in a Globalizing Market: Who Should Regulate Whom?, 95 MICH. L. REV. 2498 (1997).
260. See Stephen J. Choi & Andrew T. Guzman, Portable Reciprocity: Rethinking the International Reach of Securities Regulation, 71 S. CAL. L. REV. 903, 941-45 (1998); Merritt Fox, Securities Disclosure in a Globalizing Market: Who Should Regulate Whom?, 95 MICH. L. REV. 2498 (1997).
261. See Fox, supra note 195, at 2618.
262. This is Professor Fox's position - he doubts the case for investor protection, but believes mandatory disclosure does improve efficient pricing and allocative efficiency. See id.
263. For a recent discussion of "network externalities" as applied to corporate law, see generally Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 VA. L. REV. 757 (1995).
264. It is well recognized that a security's "spread" (i.e., the distance between its bid and asked price) tends to narrow as trading volume increases. Greater liquidity allows the market-maker to reduce the price it charges for functioning as a financial intermediary.
265. For a good review of these arguments, see Uri Geiger, The Case for the Harmonization of Securities Disclosure Rules in the Global Market, 1997 COLUM. BUS. L. REV. 241; see also Lawrence J. White, Competition versus Harmonization-An Overview of International Regulation of Financial Services, in INTERNATIONAL FINANCIAL MARKETS: HARMONIZATION VERSUS COMPETITION 5, 39 (Claude Barfield ed., 1996).
266. For a good review of these arguments, see Uri Geiger, The Case for the Harmonization of Securities Disclosure Rules in the Global Market, 1997 COLUM. BUS. L. REV. 241; see also Lawrence J. White, Competition versus Harmonization-An Overview of International Regulation of Financial Services, in INTERNATIONAL FINANCIAL MARKETS: HARMONIZATION VERSUS COMPETITION 5, 39 (Claude Barfield ed., 1996).
267. The counterargument will predictably be made that an efficient market can discount the legal risks associated with foreign stocks. Although this is highly debatable, it misses the key point about the social waste involved. The available empirical evidence suggests that accounting differences do significantly affect the decisions of participants in the capital markets. See FREDERICK D. S. CHOI AND RICHARD M. LEVICH, THE CAPITAL MARKET EFFECTS OF INTERNATIONAL ACCOUNTING DIVERSITY 90-98 (1990) (emphasizing costs and social waste involved in attempts to compare issues using different accounting systems). In short, even if the approximate adjustments can be made to share price, the effort is costly and wasteful.
268. For a fuller discussion of the likelihood that specialists and market makers would react to the possibility of informed trading by insiders, by widening their spreads, see Lawrence R. Glosten, Insider Trading. Liquidity, and the Role of the Monopolist Specialist, 62 J. BUS. 211 (1989). It is, of course, arguable that only foreign issuers will be subject to such wider spreads, as both dealers and investors discount only these stocks. But this exclusive focus on stock price ignores the impact of tolerating insider trading in some cases on the behavior of potential future inside traders. Once it becomes possible to trade some U.S. listed stocks based on nonpublic, "inside" information, the temptation grows to use such information in the case of domestic issuers as well. In effect, the prohibition loses its moral force, and an increased rate of violations becomes predictable.
269. See Edmund W. Kitch, The Theory and Practice of Securities Disclosure, 61 BROOK. L. REV. 763 (1995) (stressing that disclosure to the market also implies disclosure of proprietary plans to competitors).
270. See supra notes 51-56 and accompanying text.
271. For a fuller discussion of the role of trust in firms, markets, and organizations, see Rafael La Porta et al., Trust in Large Organizations, 87 AM. ECON. REV. 333 (1997).
272. Thus, even a foreign, blockholder-dominated firm whose minority shares trade at a greatly discounted price erodes trust when it enters into a deal or transaction that subsidizes its blockholders at the expense of public shareholders.
273. This point that disclosure to the market also means disclosure to one's competitors and can result in competitive injuries has been stressed by Professor Edmund Kitch. See Kitch, supra note 203.
274. For a review of the very different Czech and Polish experiences with voucher privatization, see John C. Coffee, Jr., Inventing a Corporate Monitor for Transitional Economics: The Uncertain Lessons from the Czech and Polish Experiences, in COMPARATIVE CORPORATE GOVERNANCE: THE STATE OF THE ART AND EMERGING RESEARCH 68-138 (Klaus Hopt et al. eds., 1998).
275. See id. at 111-38. In 1995, the Prague Stock Exchange had 1,716 listings; by early 1999, this number had fallen by more than 80% to 301 listings, and it was estimated that fewer than a dozen of these enjoyed any liquidity. See Peter S. Green, Prague Exchange's Failed Reform Efforts Leaves Some Predicting Its Demise, INT'L HERALD TRIB., Mar. 17, 1999, at 16. Correspondingly, over the same period, the value of an investment in an index of the leading 50 stocks on the Prague Stock Exchange would have fallen by over 60%. See id. (noting decline of PX-50 index from 1,000 to 371). In contrast, the Polish experience appears to have been different and dispersed ownership has been more stable, in part
276. Of course, state law regulates the simplest forms of fiduciary abuse: unfair self-dealing, excess compensation, usurpation of corporate opportunities. But these forms of misconduct rarely have a material impact on share price, In contrast, federal law more directly regulates corporate control transactions that could more severely injure minority shareholders.
277. No other commentator to my knowledge has made this argument, but there is recognition that state corporate law has become virtually uniform across the states. See Carney, supra note 37, at 717. Where variations among states may have greater significance is in reducing transaction costs; this is both outside the fiduciary duty context and largely unaffected by the federal securities laws. Although novel, my thesis has a historical foundation. Professor Mahoney has argued that the original purpose of both the U.S. and U.K. securities laws was to reduce the capacity of promoters and insiders to overreach public shareholders. See Mahoney, supra note 36. In that light, this Article's claim is simply that the SEC has substantially succeeded. For earlier assessments of the requirements of federal securities law that implicitly find them as important as state fiduciary duties in preventing misconduct by controlling persons, see Melvin A. Eisenberg, The Structure of Corporation Law, 89 COLUM. L. REV. 1461, 1483- 85 (1989); Joel Seligman, The New Corporate Law, 59 BROOK. L. REV. 1 (1993).
278. No other commentator to my knowledge has made this argument, but there is recognition that state corporate law has become virtually uniform across the states. See Carney, supra note 37, at 717. Where variations among states may have greater significance is in reducing transaction costs; this is both outside the fiduciary duty context and largely unaffected by the federal securities laws. Although novel, my thesis has a historical foundation. Professor Mahoney has argued that the original purpose of both the U.S. and U.K. securities laws was to reduce the capacity of promoters and insiders to overreach public shareholders. See Mahoney, supra note 36. In that light, this Article's claim is simply that the SEC has substantially succeeded. For earlier assessments of the requirements of federal securities law that implicitly find them as important as state fiduciary duties in preventing misconduct by controlling persons, see Melvin A. Eisenberg, The Structure of Corporation Law, 89 COLUM. L. REV. 1461, 1483- 85 (1989); Joel Seligman, The New Corporate Law, 59 BROOK. L. REV. 1 (1993).
279. No other commentator to my knowledge has made this argument, but there is recognition that state corporate law has become virtually uniform across the states. See Carney, supra note 37, at 717. Where variations among states may have greater significance is in reducing transaction costs; this is both outside the fiduciary duty context and largely unaffected by the federal securities laws. Although novel, my thesis has a historical foundation. Professor Mahoney has argued that the original purpose of both the U.S. and U.K. securities laws was to reduce the capacity of promoters and insiders to overreach public shareholders. See Mahoney, supra note 36. In that light, this Article's claim is simply that the SEC has substantially succeeded. For earlier assessments of the requirements of federal securities law that implicitly find them as important as state fiduciary duties in preventing misconduct by controlling persons, see Melvin A. Eisenberg, The Structure of Corporation Law, 89 COLUM. L. REV. 1461, 1483-85 (1989); Joel Seligman, The New Corporate Law, 59 BROOK. L. REV. 1 (1993).
280. No other commentator to my knowledge has made this argument, but there is recognition that state corporate law has become virtually uniform across the states. See Carney, supra note 37, at 717. Where variations among states may have greater significance is in reducing transaction costs; this is both outside the fiduciary duty context and largely unaffected by the federal securities laws. Although novel, my thesis has a historical foundation. Professor Mahoney has argued that the original purpose of both the U.S. and U.K. securities laws was to reduce the capacity of promoters and insiders to overreach public shareholders. See Mahoney, supra note 36. In that light, this Article's claim is simply that the SEC has substantially succeeded. For earlier assessments of the requirements of federal securities law that implicitly find them as important as state fiduciary duties in preventing misconduct by controlling persons, see Melvin A. Eisenberg, The Structure of Corporation Law, 89 COLUM. L. REV. 1461, 1483- 85 (1989); Joel Seligman, The New Corporate Law, 59 BROOK. L. REV. 1 (1993).
281. See Daniels, supra note 33, at 182-84 (because Canadian securities administrators could in effect countermand provincial law, charter competition among the provinces has not developed).
282. For example, it may be very costly to enforce Section 13(d)'s notion of a voting group against European individuals and firms that form voting alliances without disclosure. See supra notes 155-61 and accompanying text. Still, more visible transactions (such as "going private" transactions or voting rights recapitalizations) could be more easily monitored.
283. For the principal contending positions, see supra note 32.
284. See Choi & Guzman, supra note 195, at 930-34; Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 YALE L.J. 2359 (1998).
285. See Choi & Guzman, supra note 195, at 930-34; Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 YALE L.J. 2359 (1998).
286. Adding further complexity is the fact that there is a third potential source of regulation: the rules of the securities exchange(s) on which the issuer's stock trades. For the moment, this complexity can be deferred.
287. See generally Roberta Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J. L. ECON. & ORG. 225 (1985).
288. For Delaware, corporate franchise tax revenue has consistently averaged 16.7% of Delaware's total tax revenues. See Romano, supra note 215, at 2389. The potential tax revenues to the United States (or the SEC) from attracting foreign issuers to list in U.S. markets are trivial by comparison.
289. See supra notes 82-86 and accompanying text. Of course, under the EC model, each jurisdiction must have disclosure standards meeting some minimum level. Hence, the system is not simply a reciprocal one.
290. For a review of this debate, see Geiger, supra note 82; Lowenstein, supra note 105.
291. For a review of this debate, see Geiger, supra note 82; Lowenstein, supra note 105.
292. See Carney, supra note 37, at 717.
293. See Ehud Kamar, A Regulatory Competition Theory of Indeterminacy in Corporate Law, 98 COLUM. L. REV. 1908 (1998).
294. See id. at 1923-27; see also Klausner, supra note 198, at 842-47.
295. For a general discussion of herding, see David S. Scharfstein & Jeremy C. Stein, Herd Behavior and Investment, 80 AM. ECON. REV. 465 (1990).
296. See Kamar, supra note 222, at 1923-27.
297. See Barry D. Baysinger & Henry N. Butler, The Role of Corporate Law in the Theory of the Firm, 28 J.L. & ECON. 179 (1985); see also Daniels, supra note 33, at 138-40.
298. See Barry D. Baysinger & Henry N. Butler, The Role of Corporate Law in the Theory of the Firm, 28 J.L. & ECON. 179 (1985); see also Daniels, supra note 33, at 138-40.
299. See Macey & Miller, supra note 32, at 491-98 (1987); see also Kamar, supra note 222, at 1924.
300. See Macey & Miller, supra note 32, at 491-98 (1987); see also Kamar, supra note 222, at 1924.
301. This has been the claim of those who wish to substitute state securities regulation for federal regulation. See Romano, supra note 215, at 2361.
302. For recent discussions of the London Stock Exchange's strong competitive position and its recent linkage to the Deutsche Borse, see Meg Carter, Competition is Hotting Up in the Staid World of the Stock Market, TIMES (London), July 24, 1998, at 38; Lea Paterson, Don't Write Off the City Just Yet; News Analysis: London Can Fend Off Attacks on its Financial Leadership, INDEPENDENT (London), June 24, 1998, at 18.
303. For recent discussions of the London Stock Exchange's strong competitive position and its recent linkage to the Deutsche Borse, see Meg Carter, Competition is Hotting Up in the Staid World of the Stock Market, TIMES (London), July 24, 1998, at 38; Lea Paterson, Don't Write Off the City Just Yet; News Analysis: London Can Fend Off Attacks on its Financial Leadership, INDEPENDENT (London), June 24, 1998, at 18.
304. See supra note 108 and accompanying text.
305. See supra notes 149-83 and accompanying text.
306. Two advantages have been recurrently stressed in this Article: (1) securities markets facilitate investment in longer-run, higher risk projects that advance technological growth and productivity, see sources cited supra notes 25, 81; and (2) in a world of consolidating mergers, firms with high stock prices for their public shares are likely to be the survivors.
307. It seems generally recognized that U.S. disclosure standards are more rigorous than those of any other country with the possible exception of Canada. Even the United Kingdom's standards require less line of business data and do not require discussion of management-identified trends that may affect the firm's future liquidity, capital needs or operating results. See David H. Landau, Note, SEC Proposals to Facilitate Multinational Securities Offerings: Disclosure Requirements in the United States and United Kingdom, 19 N.Y.U. J. INT'L. L. & POL. 457, 459-68 (1987).
308. These points have been made in great detail by a number of authors. See Geiger, supra note 200; Joel P. Trachtman, International Regulation Competition, Externalization and Jurisdiction, 34 HARV. INT'L L.J. 47, 66-67 (1993); White, supra note 200, at 39.
309. These points have been made in great detail by a number of authors. See Geiger, supra note 200; Joel P. Trachtman, International Regulation Competition, Externalization and Jurisdiction, 34 HARV. INT'L L.J. 47, 66-67 (1993); White, supra note 200, at 39.
310. These points have been made in great detail by a number of authors. See Geiger, supra note 200; Joel P. Trachtman, International Regulation Competition, Externalization and Jurisdiction, 34 HARV. INT'L L.J. 47, 66-67 (1993); White, supra note 200, at 39.
311. Some respond that reduction in agency costs is an illusory efficiency gain, because dispersed ownership is the source of most agency costs. See Bratton & McCahery, supra note 13, at 12-13. This response focuses only on the agency costs of controlling management and ignores the agency costs of preventing non-pro-rata distributions to controlling blockholders. While this issue may well remain theoretically indeterminate, the extraordinary size of control premiums in some European markets, see Zingales, supra note 29, suggests that public shareholders lose more from this form of opportunism than from fiduciary misconduct by management.
312. See Levine & Zervos, supra note 25; Rejan & Zingales, supra note 81. Others have argued that legal underdevelopment prevents a national economy from being able to credibly commit to controlling opportunism and hence retards economic growth. See Demirguc-Kunt & Maksimovic, supra note 7. In this light, migration to foreign securities markets or international securities harmonization can be viewed as a "second-best" but politically feasible solution by which firm growth and national economic prosperity can still be pursued.
313. See Levine & Zervos, supra note 25; Rejan & Zingales, supra note 81. Others have argued that legal underdevelopment prevents a national economy from being able to credibly commit to controlling opportunism and hence retards economic growth. See Demirguc-Kunt & Maksimovic, supra note 7. In this light, migration to foreign securities markets or international securities harmonization can be viewed as a "second-best" but politically feasible solution by which firm growth and national economic prosperity can still be pursued.
314. See Levine & Zervos, supra note 25; Rejan & Zingales, supra note 81. Others have argued that legal underdevelopment prevents a national economy from being able to credibly commit to controlling opportunism and hence retards economic growth. See Demirguc-Kunt & Maksimovic, supra note 7. In this light, migration to foreign securities markets or international securities harmonization can be viewed as a "second-best" but politically feasible solution by which firm growth and national economic prosperity can still be pursued.
315. For this view (as applied to the Asian financial crisis), see Raghuram G. Rajan & Luigi Zingales, Which Capitalism? Lessons from the East Asian Crisis, 11 J. APPLIED CORP. FIN. 40 (1998).
316. SEC Rule 3al2-3(b) exempts foreign private issuers from Sections 14(a), 14(b), 14(c), 14(f) and 16 of the 1934 Act. See 17 C.F.R. § 240.3a12-3(b) (1998).
317. See id.