Regulatory dualism as a development strategy: Corporate reform in Brazil, the United States, and the European Union

Stanford Law Review

Volumn 63, Issue 3, 2011, Pages 475-537

  Gilson, Ronald J ^a   Hansmann, Henry ^b   Mariana, Pargendler ^c  

^a STANFORD LAW SCHOOL   (United States)

^b YALE UNIVERSITY   (United States)

^c FUNDAÇÃO GETÚLIO VARGAS   (Brazil)

Author keywords

[No Author keywords available]

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EID: 79953064160     PISSN: 00389765     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (215)

1. A large body of literature has sought to demonstrate the positive influence of financial development on overall economic growth. See, e.g., Valentina Bruno & Stijn Claessens, Corporate Governance and Regulation: Can There Be Too Much of a Good Thing?, 19 J. FIN. INTERMEDIATION 461, 479 (2010) (finding that companies with good corporate governance rely more heavily on external finance); Robert G. King & Ross Levine, Finance and Growth: Schumpeter Might Be Right, 108 Q.J. ECON. 717 (1993) (finding that indicators of financial development are strongly correlated with economic growth, and that predetermined components of financial development indicators significantly predict future growth rates); Ross Levine & Sara Zervos, Stock Markets, Banks, and Economic Growth, 88 AM. ECON. REV. 537 (1998) (finding a positive correlation between stock market liquidity and banking development and the contemporaneous and future rates of economic growth); Raghuram G. Rajan & Luigi Zingales, Financial Dependence and Growth, 88 AM. ECON. REV. 559 (1998) (finding that industrial sectors which are more dependent on external finance grow disproportionately faster in countries with well-developed financial markets); Asli Demirguc-Kunt & Ross Levine, Finance and Inequality: Theory and Evidence 2-3 (Nat'l Bureau of Econ. Research, Working Paper No. 15,275, 2009), available at http://www.nber.org/papers/ w15275.pdf (reviewing the literature on finance and inequality, and finding strong evidence that financial development helps improve economic opportunity and reduce inequality)
2. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny, in particular, have sought to make the case that, as an empirical matter, strong shareholder protection laws are an important prerequisite for vibrant capital markets and, perhaps, overall economic development. Representative examples of a prominent series of articles are La Porta et al., Investor Protection and Corporate Governance, 58 J. FIN. ECON. 3 (2000) [hereinafter La Porta et al., Investor Protection and Corporate Governance]; La Porta et al., Law and Finance, 106 J. POL. ECON. 1113 (1998); and La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997). Admittedly, the strength of these empirical results has been questioned. See, e.g., Holger Spamann, The "Antidirector Rights Index" Revisited, 23 REV. FIN. STUD. 467 (2010)
3. MANCUR OLSON, THE RISE AND DECLINE OF NATIONS (1982). Twenty-five years after the publication of The Rise and Decline of Nations, the balance of more than fifty works attempting to test Olson's theory of institutional sclerosis was found to be positive. See Jac C. Heckelman, Explaining the Rain: The Rise and Decline of Nations After 25 Years, 74 S. ECON. J. 18 (2007), for a review of this literature. The political economy of capital market development, in particular, is interpreted in Olson-like terms by Raghuram G. Rajan & Luigi Zingales, The Great Reversals: The Politics of Financial Development in the Twentieth Century, 69 J. FIN. ECON. 5 (2003)
4. See OLSON, supra note 3, at 77
5. In conceptual terms, a strategy of protecting elites so that they will not block reform is similar to Acemoglu and Robinson's development of constrained democracy as a means to persuade the elite not to resort to repression to maintain political, and therefore economic, power. See DARON ACEMOGLU & JAMES A. ROBINSON, ECONOMIC ORIGINS OF DICTATORSHIP AND DEMOCRACY 33-34 (2006)
6. Bebchuk and Neeman have modeled the impact of different interest groups on the degree of investor protection. They argue that the political influence of insiders of publicly traded firms leads to an inefficient level of investor protection, a result that is only partially attenuated by countervailing pressures by entrepreneurs who want to take new firms public. See Lucian A. Bebchuk & Zvika Neeman, Investor Protection and Interest Group Politics, 23 REV. FIN. STUD. 1089, 1089, 1091 (2010). Regulatory dualism can mitigate these political economy barriers to an efficient level of investor protection by isolating the legal regimes of incumbents from those of new firms seeking to raise equity capital
7. The decline may not be linear. The success of the "new" economy and economic growth generally may act as a catalyst for further reform, a possibility that the elite presumably will incorporate in their strategic calculus. As should already be apparent, the outcome of that calculus will depend heavily on local factors; while the structure of the analysis is general, the parameter values will depend on a country's particular circumstances. See infra Part IV.D
8. ALBERT O. HIRSCHMAN, EXIT, VOICE, AND LOYALTY: RESPONSES TO DECLINE IN FIRMS, ORGANIZATIONS, AND STATES 4-5 (1970)
9. But see Aldo Musacchio, Law Versus Contracts: Shareholder Protections and Ownership Concentration in Brazil, 1890-1950, 82 BUS. HIST. REV. 445, 448-49 (2008) (noting that Brazil experienced a period of fairly developed capital markets between 1890 and 1914)
10. See, e.g., MB ASSOCIADOS, DESAFIOS E OPORTUNIDADES PARA O MERCADO DE CAPITAIS BRASILEIRO [CHALLENGES AND OPPORTUNITIES FOR BRAZILIAN CAPITAL MARKETS] (2000), available at http://www.bmfbovespa.com.br/Pdf/mercado_capitais_desafios.pdf (noting the historical insignificance of Brazilian capital markets and the prominent role of governmental loans as a source of long-term financing)
11. See, e.g., SOLUÇÕES PARA O DESENVOLVIMENTO DO MERCADO DE CAPITAIS BRASILEIRO [SOLUTIONS FOR THE DEVELOPMENT OF BRAZILIAN CAPITAL MARKETS] 28 (Carlos Antonio Rocca ed., 2001) (citing the lack of financing alternatives to the private sector as one of the main obstacles to the international competitiveness of the Brazilian economy)
12. See, e.g., MÁRIO HENRIQUE SIMONSEN, BRASIL 2002, at 124 (1972) (arguing that Brazil's tradition of closely held family firms was not due to sociological traits, but to the failure of existing corporate laws to adequately protect minority shareholders); FUNDAÇÃO GETÚLIO VARGAS, A MISSÃO COOKE NO BRASIL [THE COOKE MISSION IN BRAZIL] 91 (1949) (proposing that Brazil adopt a system of shareholder protections similar to that available in the United States in order to overcome investors' aversion to equity markets)
13. For a detailed description of the tax incentive policies adopted in Brazil, see David M. Trubek, Law, Planning, and the Development of the Brazilian Capital Market, BULLETIN (N.Y.U. Graduate Sch. of Bus. Admin. Inst. of Fin.), nos. 72-73, 1971
14. See, e.g., David M. Trubek, Toward a Social Theory of Law: An Essay on the Study of Law and Development, 82 YALE L.J. 1, 45-46 (1972) (noting that although it was the case that "[the] rules governing creditor and shareholder rights were imperfect, that courts were neither accessible nor efficient, and that sanctions were ineffective," there was initial hope that "as the markets boomed they would generate pressure for improvement of the private rights system"). This position has since been found to have some historical precedent. In both the United Kingdom and Germany, shareholdings became more dispersed before effective minority shareholder protection was adopted. See generally Julian Franks et al., The Origins of the German Corporation-Finance, Ownership and Control, 10 REV. FIN. 537, 538- 39 (2006) (describing the evolution of corporate ownership structures in Germany); Julian Franks et al., Spending Less Time with Family: The Decline in Family Ownership in the United Kingdom, in A HISTORY OF CORPORATE GOVERNANCE AROUND THE WORLD 581 (Randall K. Morck ed., 2005) (describing the timing of dispersal of family shareholdings in the United Kingdom)
15. Since 1932, Brazilian firms were permitted to issue nonvoting stock so long as these securities provided either a dividend or a liquidation preference vis-à-vis common stock. In many firms, nonvoting preferred shares only had a liquidation preference. See Lei No. 6.404, de 15 de Dezembro de 1976, DIÁRIO OFICIAL DA UNIÃO [D.O.U.] de 17.12.1976, art 17.It was not until the legal reforms of 1997 and 2001 that Brazilian corporations were required to grant more substantial preferences (such as favorable dividend treatment or tagalong rights) to preferred nonvoting shares. See Lei No. 10.303, de 31 de Outubro de 2001, D.O.U. de 1.11.2001, art. 2; Lei No. 9.457, de 5 de Maio de 1997, D.O.U. de 6.5.1997, art 1.For a survey of the ownership structure of publicly traded Brazilian corporations in the 1970s, see Comissão de Valores Mobiliários, Valor de Mercado do Capital das Companhias Abertas Brasileiras [Market Capitalization of Brazilian Publicly Traded Companies], 4 REVISTA BRASILEIRA DO MERCADO DE CAPITAIS 283, 292 (1978) (finding that listed companies in Brazil typically had a controlling shareholder holding a majority of the company's voting stock)
16. See infra notes 30, 209, and accompanying text; see also Luciano Coutinho & Flavio Marcilio Rabelo, Brazil: Keeping It in the Family, in CORPORATE GOVERNANCE IN DEVELOPMENT 35, 49 (Charles P. Oman ed., 2003) (describing the role of the Brazilian Association of Public Companies as a "traditional representative of the business élite" in successfully opposing corporate governance reforms in 2001)
17. Lei No. 6.404, de 15 de Dezembro de 1976, D.O.U. de 17.12.1976 as amended. Lei No. 6.404 remains Brazil's principal corporate law statute
18. For a critique of the 1976 Corporations Law, seeMODESTO CARVALHOSA, A NOVA LEI DAS SOCIEDADES ANÔNIMAS [THE NEW CORPORATIONS LAW] 11-17 (1977)
19. See Lei No. 9.457, de 5 de Maio de 1997, D.O.U. de 6.5.1997. For an examination of the role of the government as a shareholder in shaping corporate law reforms in Brazil and elsewhere, see Mariana Pargendler, State Ownership and Corporate Governance 13-22 (Jan. 2011) (unpublished manuscript) (on file with authors)
20. See Maria Helena Santana, The Novo Mercado, in NOVO MERCADO AND ITS FOLLOWERS 1, 9-10 (2008)
21. Alexander Dyck & Luigi Zingales, Private Benefits of Control: An International Comparison, 59 J. FIN. 537, 554-56 (2004). Dyck and Zingales compared the price paid for a controlling block to the market share price following the change of control in a sample of 393 transactions, and found that private benefits of control ranged from -4% in Japan to 65% in Brazil. Id. According to a different study, which used dual-class price differentials to estimate private benefits of control, an average Brazilian controlling shareholder could expect to extract up to one-third of the value of the company by holding as little of one-sixth of total cash flow rights. Tatiana Nenova, The Value of Corporate Voting Rights and Control: A Cross-Country Analysis, 68 J. FIN. ECON. 325, 327 (2003)
22. Santana, supra note 20, at 7. The São Paulo Stock Exchange was established in the late nineteenth century and was rivaled in importance by the Rio de Janeiro Stock Exchange for most of the twentieth century. In the late 1980s, however, the Rio de Janeiro Stock Exchange collapsed and was eventually shut down following a major stock price manipulation scheme. This led to the consolidation of all stock trading on the São Paulo Stock Exchange. In 2008, the S;o Paulo Stock Exchange merged with the São Paulo Commodities and Futures Exchange (Bolsa de Mercadorias e Futuros-BM&F) to form BM&F Bovespa, a publicly traded firm listed on the Novo Mercado
23. Following an international trend of demutualization of stock exchanges, in 2007 the São Paulo Stock Exchange was transformed into an investor-owned firm and went public on the Novo Mercado. See id. at 5
24. MB ASSOCIADOS, supra note 10
25. See Cally Jordan & Mike Lubrano, How Effective Are Capital Markets in Exerting Governance on Corporations?, in FINANCIAL SECTOR GOVERNANCE 327, 342 (Robert E. Litan et al. eds., 2002) (describing the creation of the Novo Mercado as a "quasi private effort to make up for the perceived shortcomings of legislative reform")
26. While the Brazilian Congress finally amended the Corporations Law in late 2001, the Olson problem was again apparent: the reform was quite limited. The new statute, Lei No. 10.303, de 31 de Outubro de 2001, D.O.U. de 1.11.2001, continued to permit the issuance of nonvoting preferred shares, but the ratio to total capital was reduced from 66.7% to 50% for new firms. Id. at art. 15, § 2. The 2001 law also reintroduced a mandatory bid rule, but only partially: it applied only to common shares and entitled common shareholders to receive only 80% of the price paid for the controlling block. Id. at art. 254-A. Other protective provisions in the statute-such as the right of minority shareholders to call a special meeting to deliberate on transactions tainted by the controlling shareholders' conflicts of interest- were vetoed by Brazil's President. See Mensagem No. 1.213, de 31 de Outubro de 2001, D.O.U. de 31.10.2001 (describing the reasons for the presidential veto)
27. See infra Part II.A
28. See CALIXTO SALOMÃO FILHO, O NOVO DIREITO SOCIETÁRIO [THE NEW CORPORATE LAW] 58 (3d ed. 2006)
29. See Santana, supra note 20, at 12
30. ASSOCIAÇÃO BRASILEIRA DAS COMPANHIAS ABERTAS, RELATÓRIO DA DIRETORIA [ANNUAL MANAGEMENT REPORT] 6 (2005), available at http://www.abrasca.org.br/aabrasca/ Relatorio-Anual-Abrasca-2005.pdf
31. Indeed, following the creation of the Novo Mercado the Brazilian Association of Public Companies began to argue that legal reforms banning nonvoting preferred shares were unnecessary precisely because "voluntary market mechanisms" had emerged to address this issue. ASSOCIAÇÃO BRASILEIRA DAS COMPANHIAS ABERTAS, RELATÓRIO DA DIRETORIA [ANNUAL MANAGEMENT REPORT] 24 (2006), available at http://www.abrasca.org.br/aabrasca/Relatorio_Anual_Abrasca_2006.pdf
32. Santana, supra note 20, at 12
33. As described in Part I.D, the Novo Mercado took a while to take off after it was adopted. Two years after its creation, commentators were skeptical of governance reforms through stock exchange standards, and attributed the "weak" response to the Novo Mercado experiment to its inability to compete with the stronger "reputational brand" of the NYSE. John C. Coffee, Jr., Racing Towards the Top?: The Impact of Cross-Listings and Stock Market Competition on International Corporate Governance, 102 COLUM. L. REV. 1757, 1807-08 (2002)
34. See, e.g., Bernard S. Black, The Legal and Institutional Preconditions for Strong Securities Markets, 48 UCLA L. REV. 781, 782 (2001)
35. See MB ASSOCIADOS, O MERCADO DE CAPITAIS BRASILEIRO FRENTE AOS DESAFIOS IMPOSTOS PELAS NEGOCIAÇÕES INTERNACIONAIS EM SERVIÇOS FINANCEIROS [BRAZILIAN CAPITAL MARKETS AND THE CHALLENGES IMPOSED BY INTERNATIONAL NEGOTIATIONS IN FINANCIAL SERVICES] 27 (2004), available at http://www.bmfbovespa.com.br/Pdf/Estudo2.pdf (noting that the Novo Mercado initially aimed at attracting medium-sized firms with ongoing investment projects)
36. See Rajan & Zingales, supra note 3, at 7 ("[W]hen a country's borders are open to both trade and capital flows,. the opposition to financial development will be most muted and development will flourish.")
37. For a discussion of the role of network effects in the implementation of regulatory dualism through private organizations, see Part IV.B.2
38. We use the term "one share, one vote" loosely to describe the absence of nonvoting shares. Voting caps and pyramidal structures were not prohibited under initial Novo Mercado regulations. See BM&F BOVESPA, REGULAMENTO DE LISTAGEM DO NOVO MERCADO [NOVO MERCADO LISTING RULES] § 3.1 (2008), available at http://www.bmfbovespa.com.br/Pdf/RegulamentoNMercado.pdf
39. See, e.g., André Carvalhal-da-Silva & Ricardo Leal, Corporate Governance, Market Valuation and Dividend Policy in Brazil, 1 FRONTIERS FIN. & ECON. 1, 6 (2004) (finding that, as of 2000, the largest shareholder in a sample of 225 Brazilian firms held, on average, 72% of the company's voting capital and 51% of its total capital); Ricardo P.C. Leal & André L. Carvalhal-da-Silva, Corporate Governance and Value in Brazil (and in Chile) 5, 20-22 (Mar. 29, 2005) (unpublished manuscript), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=726261 (noting a rise in the concentration of voting rights in Brazilian firms from 1998 to 2002)
40. Andre Carvalhal da Silva & Avanidhar Subrahmanyam, Dual-Class Premium, Corporate Governance, and the Mandatory Bid Rule: Evidence from the Brazilian Stock Market, 13 J. CORP. FIN. 1, 4 (2007)
41. Tatiana Nenova, Control Values and Changes in Corporate Law in Brazil 2 (Sept. 25, 2001) (unpublished manuscript), available at http://papers.ssrn.com/sol3/papers.cfm? abstract_id=294064
42. For a discussion of the economic properties of a mandatory bid rule, see Clas Bergström et al., The Optimality of the Mandatory Bid Rule, 13 J.L. ECON. & ORG. 433, 447- 48 (1997) (noting the mandatory bid rule makes control transactions more expensive by imposing greater interest expenses and risk); Frank H. Easterbrook & Daniel R. Fischel, Corporate Control Transactions, 91 YALE L.J. 698, 716, 737 (1982) (arguing that unequal sharing of gains in corporate control transactions maximizes shareholder wealth); and Marcel Kahan, Sales of Corporate Control, 9 J.L. ECON. & ORG. 368, 378 (1993) (arguing that equal sharing rules may be less efficient than private control transfers for sales of high fractions of corporate shares)
43. The tradeoff between encouraging efficient transactions and protecting minority investors from expropriation upon control sales in countries lacking adequate regulation of going-private transactions remains open to investigation. For a description of different modalities of extraction of private benefits of control in operating decisions, control sales, and freezeouts, see Ronald J. Gilson & Jeffrey N. Gordon, Controlling Controlling Shareholders, 152 U. PA. L. REV. 785, 787 (2003)
44. BM&F BOVESPA, supra note 38, § 11.2
45. See id. § 12.5.1(iii)
46. See id. §§ 12.2-4
47. The CVM was established by the Capital Markets Law, Lei No. 6.385, de 7 de Dezembro de 1976, D.O.U. de 9.12.1976, the same year of the enactment of the then-new Corporations Law. It was not until the last decade, however, that the CVM began taking a truly activist stance toward investor protection. See infra notes 206-08 and accompanying text
48. According to a 2010 cross-country comparison by the World Bank, Brazil ranks 98th out of 183 economies with respect to the ease of enforcing commercial contracts. THE WORLD BANK, DOING BUSINESS 2011: BRAZIL 64 (2010), available at http://doingbusiness.org/̃/media/fpdkm/doing%20business/documents/p rofiles/country/db11/bra.pdf
49. For instance, arbitral panels have an infamous tendency to "split the baby" and find a mutually acceptable, even if unprincipled, solution to the dispute in question, while public courts can perform better in holding parties to their incentives for performance ex ante. For a discussion of the advantages of public courts over arbitration, see Jens Dammann & Henry Hansmann, Globalizing Commercial Litigation, 94 CORNELL L. REV. 1, 31-39 (2008)
50. Public courts must ultimately enforce arbitration awards in the absence of voluntary compliance by the losing party, which reintroduces concerns about judicial effectiveness. But the procedure for the enforcement of arbitration awards is much simpler than the initial determination of a violation, and is subject to a limited scope of review
51. The involvement of the São Paulo Stock Exchange in the Novo Mercado arbitration process is not trivial. The board of directors of the São Paulo Stock Exchange is responsible for appointing thirty arbitrators with renowned capital market expertise to compose the Panel, and the applicable regulations provide that the parties should preferably, although not necessarily, appoint arbitrators who are members of the Panel. Thus, the reputations of prominent individuals are placed behind the arbitration procedure. In addition, before the award is made final, the Arbitral Tribunal needs to submit a draft to the chairman or vice chairman of the Panel, who, without interfering with the arbitrators' judgment, may propose changes to the formal aspects of the award and draw attention to other substantive aspects of the dispute. See BOVESPA, CÂMARA DE ARBITRAGEM DO MERCADO: REGULAMENTO [MARKET ARBITRATION PANEL: REGULATION] §§ 7.8, 9.2.1 (2002), available at http://www.camaradomercado.com.br/InstDownload/regulamentonv07012002.pdf
52. See id. § 9.13
53. See id.
54. Id note note. § 7.12.7
55. See Paulo Cezar Aragão, A CVM em Juízo: Limites e Possibilidades [The CVM Before the Courts: Limits and Possibilities], 34 REVISTA DE DIREITO BANCÁRIO E DO MERCADO DE CAPITAIS 38, 40 (2006) (noting that in the more than thirty years of authority of the 1940 Corporations Law, there was only one judicial lawsuit on the duties and liabilities of managers of Brazilian corporations)
56. See infra notes 206-08 and accompanying text
57. BM&F BOVESPA, GOVERNANÇA CORPORATIVA E O DESENVOLVIMENTO DO MERCADO DE CAPITAIS BRASILEIRO [CORPORATE GOVERNANCE AND THE DEVELOPMENT OF BRAZILIAN CAPITAL MARKETS] 7 (2009), http://www.valoronline.com.br/sites/default/files/ bmfbovespa_0.pdf
58. BM&F BOVESPA, GOVERNANÇA CORPORATIVA E O DESENVOLVIMENTO DO MERCADO DE CAPITAIS BRASILEIRO [CORPORATE GOVERNANCE AND THE DEVELOPMENT OF BRAZILIAN CAPITAL MARKETS] 7 (2009), http://www.valoronline.com.br/sites/default/files/ bmfbovespa_0.pdf
59. See Estatísticas das Aberturas de Capital na BM&FBOVESPA [Statistics on IPOs on BM&FBOVESPA], BM&F BOVESPA, http://www.bmfbovespa.com.br/cias-listadas/ consultas/ ipos-recentes/ipos-recentes.aspx?Idioma=pt-br (last visited Feb. 20, 2011)
60. ANBID, CÓDIGO DE AUTO-REGULAÇÃO DA ANBID PARA AS OFERTAS PÚBLICAS DE DISTRIBUIÇÃO E AQUISIÇÃO DE VALORES MOBILIÁRIOS [ANBID SELF-REGULATORY CODE FOR PUBLIC OFFERINGS FOR THE DISTRIBUTION OR ACQUISITION OF SECURITIES] art. 6 (2006), available at http://www.anbid.com.br/auto_regulacao_downloads/mercado_capitais/novo_codigo_mc.pdf
61. Many of the recent IPOs that took place outside of the Novo Mercado did so due to regulatory restrictions on foreign control that prevented firms from issuing only voting shares without governmental approval. These firms generally opted for a Level 2 listing. See Érica Gorga, Changing the Paradigm of Stock Ownership from Concentrated Towards Dispersed Ownership? Evidence from Brazil and Consequences for Emerging Countries, 29 NW. J. INT'L L. & BUS. 439, 455 (2009)
62. These reorganizations are examples of the "efficient restructurings" discussed in Henry Hansmann & Reinier Kraakman, Essay, The End of History for Corporate Law, 89 GEO. L.J. 439, 461 (2001). Hansmann and Kraakman note that efficient restructurings require that the controlling shareholders be able to extract the capitalized value of private benefits of control when opting for a superior corporate governance regime. Efficient restructurings, they argue, can be an antidote to the path-dependent nature of corporate ownership and governance identified in Lucian Arye Bebchuk & Mark J. Roe, A Theory of Path Dependence in Corporate Ownership and Governance, 52 STAN. L. REV. 127 (1999)
63. Parecer de Orientação CVM [CVM Advisory Opinion] No. 34 (2006), available at http://www.cvm.gov.br/asp/cvmwww/atos/exiato.asp?File=/pare/pare034.htm. In a highly publicized transaction involving a major Brazilian telecom, minority shareholders rejected a proposal to migrate from the traditional segment to the Novo Mercado at conversion ratios by which common shares held by controlling shareholders would be worth three times more than preferred shares. See Simone Azevedo, O preço da escalada [The Price of the Upswing], 37 REVISTA CAPITAL ABERTO 10 (2006) (describing the structure of the proposed share exchange); Oi! Brazil's Shareholding Elite Receives a Black Eye from the Regulator, ECONOMIST, Aug. 26, 2006, at 63
64. These figures are based on the authors' calculations from media reports on migrations and conversion prices through 2008. In addition, at least a handful of the firms that migrated to the Novo Mercado from the traditional segment had as a shareholder the investment arm of Brazil's National Development Bank (BNDES), an early and vocal supporter of the Novo Mercado-implying that the new segment may have been embraced in these cases owing to factors other than the invisible hand of the market. Still, the potential role of BNDES alone is insufficient to explain the success of the Novo Mercado, both because migrations from the basic segment represent only a small fraction of Novo Mercado listings and because most of the Bank's largest borrowers are not listed on the segment. See Alexandre Di Miceli da Silveira, The Role of the BNDES (Brazilian Development Bank) on the Corporate Governance of Large Companies in Brazil 5-6 (2010) (unpublished manuscript), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1639097 (showing that only five of the Bank's top thirty borrowers in 2009 were listed on the Novo Mercado, and arguing against the view that the BNDES promotes higher corporate governance standards in investee companies)
65. See Boletim Empresas [Companies' Bulletin], BM&F BOVESPA, http://www.bmfbovespa.com.br/empresas/boletim_empresas_janeiro10.asp (last visited Jan. 31, 2011)
66. See Gorga, supra note 61, at 447 (noting that on the Novo Mercado, firms' largest shareholders on average own 36% of the shares, but for Level 1 and Level 2, firms' largest shareholders average 65% and 63%, respectively)
67. See id. at 446
68. See id. at 474
69. Although many of the existing shareholder agreements are among related parties alone, raising concerns that they effectively create a potentially opportunistic controlling coalition, others arguably exhibit independence. Unlike a single controlling shareholder or an affiliated controlling group, unrelated blockholders face coordination problems in expropriating minority shareholders and dividing the respective proceeds, as they are unable towrite legal contracts to that effect. See Julian Franks & Colin Mayer, Ownership and Control of German Corporations, 14 REV. FIN. STUD. 943 (2001) (finding that blockholders in German firms effectively discipline management and extract low private benefits of control)
70. As of 2008, Level 1 firms (where many of the old, traditional Brazilian firms are listed) still had on average slightly more widely distributed shareholdings as a percentage of total capital than Novo Mercado companies-though this is not the case if one counts only voting shares. See Gorga, supra note 61, at 523-24
71. BM&F BOVESPA, supra note 38, § 2.1 (defining "diffuse control" as the control exerted by a shareholder who holds less than 50% of the company's capital stock); see also Gorga, supra note 61, at 480 n.133 (adopting a 50% ownership threshold to identify the presence of a controlling shareholder)
72. For example, the law and finance literature adopts a substantially lower threshold to ascertain the existence of a controlling shareholder. See, e.g., Rafael La Porta et al., Corporate Ownership Around the World, 54 J. FIN. 471, 491-98 (1999) (using 20% and 10% thresholds to determine control)
73. The vast majority of firms going public in recent years adopted in their bylaws some form of enhanced mandatory bid rule, which is subject to triggers generally ranging from 10% to 35% of the company's shares. See Lucia Rebouças & Nelson Rocco, Conceitos Básicos de Governança Se Tornam Consensos de Mercado [Basic Corporate Governance Concepts Become Consensus in the Market], GAZETA MERCANTIL, May 19, 2008, available at 2008 WLNR 9428814. These mandatory bid rule requirements typically impose a minimum premium requirement-which, in the case of some companies, reaches the exorbitant amount of 50% above the firm's fifty-two-week high price, thus effectively serving as a takeover shield. See S. Wade Angus & Mariana Pargendler, Opportunities and Challenges for Foreign Private Equity Investors in Brazil, in INTERNATIONAL BUSINESS TRANSACTIONS WITH BRAZIL 63, 73 (Beatriz Franco et al. eds., 2008). Moreover, many such clauses were drafted as dead hand devices-that is, neither shareholders nor the boards can alter their content without first offering to buy out the remaining shareholders under the existing criteria. See Gorga, supra note 61, at 483. Despite their popularity, the CVM has recently asserted that these "immutable" provisions in firm bylaws are invalid under Brazilian law. See Parecer de Orientação CVM [CVM Advisory Opinion] No. 36 (2009), available at http://www.cvm.gov.br/asp/cvmwww/atos/Atos/pare/pare036.doc
74. Improvements in domestic macroeconomic conditions, including the decline in interest rates of Brazilian public bonds and booming international financial markets, were also key to the renaissance in Brazil's capital markets starting in 2004. Previously, the combination of high inflation, staggering interest rates, and unstable economic policy had created an unsuitable environment that deterred Brazil's capital market development. See, e.g., Angus & Pargendler, supra note 73, at 73
75. ERNST & YOUNG, GROWTH DURING ECONOMIC UNCERTAINTY: GLOBAL IPO TRENDS REPORT 2008, at 2 (2008). In 2007 Brazil raised $27.3 billion in IPOs, compared to $34.2 billion in the United States and $66 billion in China. Id
76. Fabricio Vieira, Valor das empresas na Bolsa alcança o PIB [Value of Firms in the Exchanges Equals GDP], FOLHA DE SÃO PAULO, June 16, 2008, http://www1.folha.uol.com.br/folha/dinheiro/ult91u412753.shtml. In 1996, Brazil's stock market capitalization equaled 27% of GDP, and in 2000, 37% of GDP. Id
77. There is also empirical support for the link between better corporate governance and better corporate performance in Brazil. Based on a large-sample 2004 survey of publicly traded Brazilian firms, Bernard Black, Antonio Gledson de Carvalho, and Érica Gorga find a positive statistically significant relation between quality of governance and corporate performance as measured by Tobin's q. Bernard Black et al., Does One Size Fit All in Corporate Governance? Evidence from Brazil (and Other BRIK Countries) 5 (Univ. of Tex. Law Sch. Law & Econ. Research Paper, Paper No. 152, 2009), available at http://ssrn.com/ abstract=1434116
78. See Boletim Empresas, supra note 65
79. Recent empirical work suggests that, due in part to better corporate governance standards, the stock prices of companies listed on the São Paulo Exchange premium listing segments (Level 1, Level 2, and the Novo Mercado) were less sensitive to changes in the market and had lower volatility than the stock prices of companies listed on the traditional segment. See Pablo Rogers & José Roberto Securato, Corporate Governance and Volatility in the Capital Markets: Brazil Case Study, 7 J. CORP. OWNERSHIP & CONTROL 40 (2009). These findings, however, precede the 2008 financial crisis, a time when the share prices of firms listed on the Novo Mercado fell more than those of companies listed on the traditional segment. The stock prices of Novo Mercado firms have since largely recovered
80. Lynn Cowan & Rogerio Jelmayer, Year's Biggest IPOs Make Debuts, WALL ST. J., Oct. 8, 2009, at C3. Banco Santander S.A. opted for a Level 2 listing, as did other banks going public in recent years
81. Danilo Gregório & Simone Azevedo, Inspiration for the East: Encouraged by the Novo Mercado's Success, the Philippines and India Create Special Listing Tiers in Their Own Stock Exchanges, REVISTA CAPITAL ABERTO, Aug. 2009, at 38
82. See OLSON, supra note 3, at 3, 77-79 (citing Britain after World War II as the most notable case of relative decline owing to the harmful influence of powerful interest groups)
83. See, e.g., TULLIO ASCARELLI, PANORAMA DO DIREITO COMERCIAL [PANORAMA OF COMMERCIAL LAW] 13 (1947) (noting that duality in private law, in which a new legal regime emerges parallel to the traditional system only to later achieve universal application, is pervasive in legal evolution)
84. See, e.g., id. at 46-49 (noting that the economic demands relating to the dynamism of the emerging commerce required a departure from the civil law principles, which continued to govern agrarian relations); A. CLAIRE CUTLER, PRIVATE POWER AND GLOBAL AUTHORITY 109 (2003) ("[T]he medieval law merchant supported a predominantly private commercial order, generating merchant laws and institutions that operated outside the local political economy of the period."); FRANCESCO GALGANO, LEX MERCATORIA 11 (2001) (describing the history of the lex mercatoria as a body of law directly created and applied by the merchant class, without the mediation of general politics). But see Stephen E. Sachs, From St. Ives to Cyberspace: The Modern Distortion of the Medieval 'Law Merchant,' 21 AM. U. INT'L L. REV. 685 (2006) (arguing that, contrary to the conventional view, medieval merchants were largely subject to local laws and customs, which varied substantially)
85. See Eric Nowak, Investor Protection and Capital Market Regulation in Germany, in THE GERMAN FINANCIAL SYSTEM 425, 426 (Jan Pieter Krahnen & Reinhard H. Schmidt eds., 2004) (noting that prior to World War I, Germany's stock markets boasted nearly twelve hundred listed companies compared to the approximately six hundred firms listed on the New York Stock Exchange)
86. MB ASSOCIADOS, supra note 10, at 42 (citing Simon Johnson, Which Rules Matter? Evidence from Germany's Neuer Markt (2000) (unpublished manuscript))
87. John Schmid, Menu Is Meager at 'New' Exchanges, INT'L HERALD TRIB. (Paris), Mar. 12, 2003, at 11
88. Hans-Peter Burghof & Adrian Hunger, Access to Stock Markets for Small and Medium Sized Growth Firms: The Temporary Success and Ultimate Failure of Germany's Neuer Markt 2 (Oct. 2003) (unpublished manuscript), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=497404
89. See id. at 3
90. See id
91. The London Stock Exchange inaugurated the trend with the launch of the Alternative Investment Market (AIM) in 1995, and was followed by the Belgium-based pan- European EASDAQ and Paris Bourse's Nouveau Marché in 1996. See Gail Edmondson & Heidi Dawley, Europe as High-Tech Heaven?, BUSINESSWEEK, May 12, 1997, at 20. According to the Neuer Markt Rules and Regulations, "Issuers are, in particular, innovative enterprises which develop new sales markets, utilize new methods of, for example, procurement, production or distribution, or offer new products and/or services, and whose activities can be expected to generate high turnover and profits in the future." DEUTSCHE BÖRSE GRP., RULES AND REGULATIONS NEUER MARKT, at pt. 1, § 1 (1999), available at http://www.cnmv.es/delfos/tendencias/neuer.pdf
92. See Sigurt Vitols, Frankfurt's Neuer Markt and the IPO Explosion: Is Germany on the Road to Silicon Valley?, 30 ECON. & SOC'Y 553, 554 (2001)
93. See, e.g., Erik Theissen, Organized Equity Markets, in THE GERMAN FINANCIAL SYSTEM, supra note 85, at 139, 144
94. See La Porta et al., Investor Protection and Corporate Governance, supra note 2, at 22 ("[C]aptains of German industry have accepted [the Neuer Markt] because their firms were not directly affected.")
95. See DEUTSCHE BÖRSE GRP., supra note 91, pt. 2, § 3.4
96. Id note note. § 3.10
97. Id note note. § 4.1.9
98. Id note note. § 2.2
99. Id note note. § 2.2
100. Id note note. § 3.8
101. Id note note. §§ 3.1(2), 3.2
102. Id note note. § 2.1(2). The listing committee rejected about 20% of the applicants based on a "subjective" approach. See Stewart Fleming, The Neuer Markt's Wild Ride, INSTITUTIONAL INVESTOR, Apr. 1999, at 42
103. DEUTSCHE BÖRSE GRP., supra note 91, pt. 5, § 2
104. See, e.g., Sharon Reier, On the Continent, a Hodgepodge of Local Standards and Laws; Full Disclosure: Where (Outside the U.S.) to Find Company Data, INT'L HERALD TRIB. (Paris), Nov. 6, 1999, at 15 (citing early remarks by market participants that the Neuer Markt would "die in beauty" as the rigorous standards would discourage listings)
105. Mark Landler, German Technology Stock Market to Be Dissolved, N.Y. TIMES, Sept. 27, 2002, at W1
106. See Vanessa Fuhrmans, Playing by the Rules: How Neuer Markt Gets Respect, WALL ST. J., Aug. 21, 2000, at C1. The percentage of German adults holding shares soared from approximately 9% in 1997 to 20% in 2000. Landler, supra note 105
107. Neuer Markt's Global Ambitions, MARKETWATCH (June 23, 1999), http://www.marketwatch.com/story/neuer-markts-global-ambitions
108. See Renault Enguerand, La guerre des nouveaux marchés d'actions fait rage en Europe; Le Neuer Markt allemand est en position de force [The War of New Equity Markets Rages Europe; The German Neuer Markt Is in a Strong Position], LE MONDE, Feb. 10, 1999
109. Fuhrmans, supra note 106
110. Schmid, supra note 87
111. See Fuhrmans, supra note 106. Little more than one year after its launch, the SMAX featured 125 listings. Id
112. See Burghof & Hunger, supra note 88, at 8
113. Brian M. Carney, Teutonic Tailspin: A German Market's Rise and Fall, WALL ST. J., Oct. 1, 2002, at A20
114. Danny Fortson, View from the City: AIM Carefully, DAILY DEAL, Apr. 18, 2005, available at 2005 WLNR 5939689
115. Carney, supra note 113
116. Id note note note
117. Edmund L. Andrews, Think Nasdaq. Now Double the Pain., N.Y. TIMES, Jan. 28, 2001, § 3, at 1
118. David Fairlamb, Down and Out in Frankfurt: The Neuer Markt's Woes Include a Tech-Stock Slump, Management Wrangles, and Fierce Rivalry from London, BUSINESSWEEK, Oct. 23, 2000, at 58
119. Andrews, supra note 117
120. See id
121. Fuhrmans, supra note 106
122. See DEUTSCHE BÖRSE GRP., supra note 91, pt. 2, § 2.1(4); Jack Ewing, The Neuer Markt Needs a Watchdog with Teeth, BUSINESSWEEK, Jan. 8, 2001, at 25
123. See Fuhrmans, supra note 106
124. See Josef Tobien & Olaf Schick, New Listing Regulations: Neuer Markt, in THE IFLR GUIDE TO GERMANY 27 (2001); Memorandum, Dewey Ballantine LLP, End of Neuer Markt 3-4 (Oct. 15, 2002) (on file with authors)
125. See Rachel Stevenson, Scandals and Bankruptcies Destroy Germany's Neuer Markt, INDEPENDENT (London), Sept. 27, 2002, at 23 (quoting an investor's statement that while the Neuer Markt was initially a "high-profile index," it eventually became "the last place you would want to list a business because of the negative associations"); see also Coffee, supra note 33, at 1805 (attributing the debacle of the Neuer Markt to "the strength of the network externalities that link firms traded on the same high profile market")
126. See Neal E. Boudette & Alfred Kueppers, Neuer Markt Faces Mounting Pressure from Members to Tighten Listing Rules, WALL ST. J., July 11, 2001, at C12
127. Landler, supra note 105
128. Case C-212/97, Centros Ltd. v. Erhervs-og Selskabsstyrelsen, 1999 E.C.R. I-1459. For a description of the Centros decision in terms of the Olson problem, see Ronald J. Gilson, Globalizing Corporate Governance: Convergence of Form or Function, 49 AM. J. COMP. L. 329, 350-56 (2001)
129. The German codetermination system is composed of a complex set of statutes; however, for our purposes it consists of the requirement that the supervisory boards of corporations with more than five hundred employees have one-third employee representatives and those of corporations with more than two thousand employees have one-half employee representatives. See Betriebsverfassungsgesetz [BetrVG] [Industrial Constitution Act], Oct. 11, 1952, BUNDESGESETZBLATT, Teil I [BGBL. I] at 681; Mitbestimmungsgesetz [MitbestG] [Codetermination Act], Apr. 5, 1976, BGBL. I at 1153; see also Katharina Pistor, Codetermination: A Sociopolitical Model with Governance Externalities, in EMPLOYEES AND CORPORATE GOVERNANCE 163, 165-68 (Margaret M. Blair & Mark J. Roe eds., 1999) (summarizing the German codetermination system)
130. See Pistor, supra note 129, at 165-68 (tracing the political history of worker involvement in corporate governance)
131. See id. at 165
132. See Case C-167/01, Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art Ltd., 2003 E.C.R. I-10155; Case C-208/00, Überseering BV v. Nordic Constr. Co. Baumanagement GmbH (NCC), 2002 E.C.R. I-9919; Centros, 1999 E.C.R. I-1459. Some question remains as to whether Centros actually prevents Germany from protecting codetermination. While Centros prevents Germany from blocking German businesses from incorporating elsewhere, some argue that Germany nonetheless could impose codetermination by legislation on such "pseudo-foreign" companies regardless of their state of incorporation. See, e.g., Jens C. Dammann, Note, The Future of Codetermination After Centros: Will German Corporate Law Move Closer to the U.S. Model?, 8 FORDHAM J. CORP. & FIN. L. 607, 613-14 (2003). Germany has not passed such legislation. Even assuming that such legislation would not conflict with the treaty, the effect of Centros is to shift the political burden of going forward with legislation. Before Centros, the business community required legislation to restrict codetermination, which the labor unions could block. After Centros, the labor unions require legislation to overcome Centros, which the business community can block
133. The typical method for an established company to switch its state of incorporation is to merge the existing company into a subsidiary newly formed in the destination state. While the EU Cross-Border Merger Directive on cross-border mergers of companies with share capital, Parliament and Council Directive 2005/56, 2005 O.J. (L 310) 1 (EC), generally facilitates cross-border mergers, it is not of much help if the goal is to avoid employee governance participation. If the existing state of incorporation requires worker participation and the destination state does not, as contemplated here, the directive imposes a set of standard employee governance rules. See Mathias M. Siems, The European Directive on Cross- Border Mergers: An International Model, in CORPORATE MERGERS: MODERN APPROACHES 156, 167-68 (P.L. Jayanthi Reddy ed., 2009)
134. A second method by which to shift a corporation's state of incorporation is to simply transfer the state of incorporation, accomplished by dissolving the existing corporation and reincorporating it in the target jurisdiction. This process is said to be unworkable. "Given the high costs involved, the time involved and the related administrative burden, with sometimes more than 35 procedural steps to overcome, this hardly ever occurs and European companies are, in practice, deprived of the possibility of moving their place of registration within the EU." Commission Staff Working Paper, Impact Assessment on the Directive on the Cross-Border Transfer of Registered Office, at 5, SEC (2007) 1707 (Dec. 12, 2007). While the European Commission has determined not to proceed with a transfer of registered office directive, the proposals all assumed that employee participation would be protected in much the same fashion as in the cross-border merger directive. See id.; see also European Parliament Resolution of 10 March 2009 with a Recommendation to the Commission on the Cross-Border Transfer of the Registered Office of a Company, 2010 O.J. (C 87) 5, 7 (recommending a transfer of registered office directive)
135. A slightly more nuanced formulation of this point recognizes that the Centros dual regulatory regime provides companies a choice only with respect to worker participation imposed by the corporate governance system. Worker participation imposed by other regulatory regimes, like workers councils imposed by labor law, cannot be avoided by foreign incorporation
136. To some extent, the text overstates the exit barriers confronting established German corporations. The maintenance of employee participation in governance required by the Cross-Border Merger Directive is diluted if the surviving firm then engages in another merger with a company chartered in the same member state. In that event, the Directive requires that employee participation be maintained only for an additional three years. Parliament and Council Directive 2005/56, art. 16, § 7, 2005 O.J. (L 310) 8 (EC). Since the language of the Directive refers only to "subsequent domestic mergers," an argument is available that changes in the legal form of the surviving company other than by merger will "launder" the employee participation requirement without the three-year lag. Id. (emphasis added). Finally, simple reincorporation may be available after the European Court of Justice's decision in Cartesio, which constrains a member state from restricting reincorporation by treating it as a liquidation under local law. Case C-210/06, Cartesio Oktató és Szolgáltató bt, 2008 E.C.R. I-9641. Here the doctrinal analysis remains quite uncertain. See, e.g., Andrzej W. Wiśniewski & Adam Opalski, Companies' Freedom of Establishment After the ECJ Cartesio Judgment, 10 EUR. BUS. ORG. L. REV. 595, 611 (2009). Notwithstanding the variety of techniques by which an established German company may, with patience and subtlety, escape an employee participation regime, the transactional and legal barriers stand in sharp contrast to the unfettered discretion of an early stage company simply to choose a more favorable jurisdiction in which to incorporate. The differential still operates as a dual regulatory regime
137. Council Regulation 2157/2001, 2001 O.J. (L 294) 1 (EC); Council Directive 2001/86, 2001 O.J. (L 294) 22 (EC)
138. See Jochem Reichert, Experience with the SE in Germany, 4 UTRECHT L. REV. 22, 28 (2008)
139. See id. at 28. Reichert reports that one German company converting to a European Company form disclosed to its shareholders that one motive for making the shift was to freeze its codetermination obligation at the one-third level. Id.; see also Horst Eidenmüller et al., Incorporating Under European Law: The Societas Europaea as a Vehicle for Legal Arbitrage, 10 EUR. BUS. ORG. L. REV. 1 (2009) (finding strong evidence that firms have adopted the SE form in order to avoid or mitigate the effects of mandatory codetermination laws). Efforts to test this hypothesis empirically using event study techniques have not found distinctive abnormal returns when the company shifting to a European Company previously had been subject to German codetermination. See, e.g., Horst Eidenmüller et al., The Societas Europaea: Good News for European Firms 20 (European Corporate Governance Inst., Working Paper No. 127/2009, 2009), available at http://www.ssrn.com/abstract=1409555; Felix Lamp, Value Creation and Value Destruction in the Societas Europaea: Evidence from the New Legal Form 22-23 (Dec. 18, 2010) (unpublished manuscript), available at http://www.ssrn.com/abstract=1728162. Because of the small sample size in both studies, the results are not persuasive
140. As yet, the empirical evidence is consistent with half of the analysis: by and large, existing large firms have remained incorporated in Germany. With respect to newly formed corporations, however, the largest number of German-located businesses incorporating outside Germany are small local businesses, of the sort actually involved in Centros, rather than, like the example in the text, venture capital-backed technology start-ups. See Marco Becht, Colin Mayer & Hannes F. Wagner, Where Do Firms Incorporate? Deregulation and the Cost of Entry, 14 J. CORP. FIN. 241, 247-48 (2008) (providing empirical evidence concerning Germany-based firms incorporating in the United Kingdom)
141. See Lucian Arye Bebchuk & Alma Cohen, Firms' Decisions Where to Incorporate, 46 J.L. & ECON. 383, 386 (2003); Robert Daines, The Incorporation Choices of IPO Firms, 77 N.Y.U. L. REV. 1559, 1572 (2002) (describing a bimodal competition system in which nearly 95% of firms that incorporate outside of their home state choose Delaware)
142. See Mark J. Roe, Delaware's Politics, 118 HARV. L. REV. 2491, 2500 (2005); Roberta Romano, The States as a Laboratory: Legal Innovation and State Competition for Corporate Charters, 23 YALE J. ON REG. 209, 212-13 (2006)
143. See Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55 STAN. L. REV. 679, 688-89 (2002)
144. See Bebchuk & Cohen, supra note 141, at 386; Daines, supra note 141, at 1574
145. See Ian Ayres, Judging Close Corporations in the Age of Statutes, 70 WASH. U. L.Q. 365, 374-75 (1992) (describing costs); Jens Dammann & Matthias Schündeln, The Incorporation Choices of Privately Held Corporations, J.L. ECON. & ORG. (forthcoming 2011) (finding that 93% of a broad sample of closely held corporations are incorporated in their home state)
146. See, e.g., Kahan & Kamar, supra note 143, at 735 (noting that politics drives the laws of states other than Delaware, which are more likely to favor management than if they were motivated by competition)
147. See Roe, supra note 142, at 2525-26
148. In fact, it is common to see managers and their employees or labor unions working together for protective antitakeover action from a state legislature. See Daines, supra note 141, at 1579-80 & n.70 (noting that "[i]n state after state, managers have successfully lobbied for statutes that restrict takeovers and protect managers (and possibly employees) at the expense of shareholders," and citing a case in Massachusetts in which a company was able to secure favorable protective legislation because it "was a large employer and rallied its employees to spirited protest meetings"); Mark J. Roe, Takeover Politics, in THE DEAL DECADE: WHAT TAKEOVERS AND LEVERAGED BUYOUTS MEAN FOR CORPORATE GOVERNANCE 321, 339-40 (Margaret M. Blair ed., 1993) (describing a successful lobbying effort by Pennsylvania corporations and labor unions to get an antitakeover statute enacted)
149. See Bebchuk & Cohen, supra note 141, at 395 tbl.5 (showing, for all fifty states, the percentage of firms located in each state that are incorporated in that state, and revealing a negative correlation between local incorporation and state size); Daines, supra note 141, at 1606 tbl.A2 (revealing a similar negative correlation in thirty states and the District of Columbia between size and percentage of firms incorporated locally)
150. Daines, supra note 141, at 1581, 1585
151. See Kahan & Kamar, supra note 143, at 740 ("[B]ecause, unlike noncompeting states, Delaware also had an interest in not antagonizing shareholders of companies that it might attract from other states. it passed a milder [antitakeover] statute."). There are also abundant examples of state-level corporate law reforms that have been hindered by local interest groups. For example, New York labor unions have been able to block the elimination of section 630 of the Business Corporation Law, which holds the ten largest shareholders of a corporation personally liable for unpaid employee wages. Id. at 732. Similarly, public interest lawyers and labor unions prevented the creation of a chancery court in Pennsylvania. Id. at 733
152. See, e.g., John C. Coates IV, Explaining Variation in Takeover Defenses: Blame the Lawyers, 89 CALIF. L. REV. 1301, 1340, 1366 (2001) (hypothesizing that companies incorporated in Delaware should have more takeover defenses because of the IPO process, and showing that firms incorporated in Delaware empirically have more takeover defenses than the average firm)
153. See Mark J. Roe, Delaware's Competition, 117 HARV. L. REV. 588, 624-32 (2003) [hereinafter Roe, Delaware's Competition]; Roe, supra note 142, at 2510-11
154. See, e.g., Bernard Black & Reinier Kraakman, Delaware's Takeover Law: The Uncertain Search for Hidden Value, 96 NW. U. L. REV. 521, 565-66 (2002); Ronald J. Gilson, Unocal Fifteen Years Later (and What We Can Do About It), 26 DEL. J. CORP. L. 491, 502-06 (2001)
155. See Kahan & Kamar, supra note 143, at 705-06 & n.86 (noting the interest of corporate lawyers in establishing statutes that require litigation and sophisticated legal advice, and discussing lawyers' efforts to stop a proposed Nevada law reducing officers' and directors' liability to shareholders); Ehud Kamar, A Regulatory Competition Theory of Indeterminacy in Corporate Law, 98 COLUM. L. REV. 1908 (1998) (arguing that Delaware is successful at attracting corporate charters because its corporate law is vague enough to give its judges a high degree of power); Jonathan R. Macey & Geoffrey P. Miller, Toward an Interest- Group Theory of Delaware Corporate Law, 65 TEX. L. REV. 469, 472 (1987) (arguing that the Delaware bar plays an outsized role in determining the content of Delaware corporate law)
156. See Roberta Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L. ECON. & ORG. 225, 234 (1985)
157. Illinois Business Take-Over Act, Pub. Act No. 80-1421, 1978 Ill. Laws 1581 (repealed 1983)
158. Edgar v. Mite Corp., 457 U.S. 624, 639, 646 (1982) (striking the Illinois statute as preempted by the federal Williams Act and beyond state authority under the dormant Commerce Clause)
159. See WILLIAM T. ALLEN, REINIER KRAAKMAN & GUHAN SUBRAMANIAN, COMMENTARIES AND CASES ON THE LAW OF BUSINESS ORGANIZATION 604-12 (2d ed. 2007)
160. See, e.g., Henry N. Butler, Corporation-Specific Anti-Takeover Statutes and the Market for Corporate Charters, 1988 WIS. L. REV. 365, 382-83 (criticizing corporationspecific antitakeover statutes as egregious instances of managers' use of the political process for entrenchment purposes); Kahan & Kamar, supra note 143; Roberta Romano, The Future of Hostile Takeovers: Legislation and Public Opinion, 57 U. CIN. L. REV. 457, 461 (1988) (describing the evolution of state antitakeover statutes); Roberta Romano, The Political Economy of Takeover Statutes, 73 VA. L. REV. 111, 122-25 (1987) (noting that the adoption of Connecticut's takeover statute was driven by one major company incorporated in the state); Robert Daines, Do Classified Boards Affect Firm Value? Takeover Defenses After the Poison Pill 10-13 (2001) (unpublished manuscript) (on file with authors) (describing how Massachusetts imposed a classified board on all Massachusetts corporations in response to a request by one firm's management for protection from a single acquirer)
161. See, e.g., Roe, Delaware's Competition, supra note 153 (arguing that the main legal competitor of Delaware is the federal government, not other states)
162. See ROBERTA ROMANO, THE GENIUS OF AMERICAN CORPORATE LAW 75-84 (1993); Roe, supra note 142, at 2513-15 (using a formal model to illustrate how federal intervention could make the takeover market less efficient)
163. See HERBERT HOVENKAMP, ENTERPRISE AND AMERICAN LAW 1836-1937, at 241-67 (1991)
164. New Jersey, which in the late nineteenth century and early twentieth century played the role in corporate chartering now played by Delaware, was attractive to out-ofstate companies in part because it, unlike other states, did not restrict corporate combinations that were anticompetitive. New Jersey corporate law was also attractive because it eliminated arbitrary restrictions imposed by other states and focused on protection of shareholders and creditors. See Edward Q. Keasbey, New Jersey and the Great Corporations, 13 HARV. L. REV. 198, 205-12 (1899)
165. See supra Part II.B
166. The history of these restrictions is recounted briefly in Geoffrey P. Miller, Interstate Banking in the Court, 1985 SUP. CT. REV. 179, 181-83. See also Eugene Nelson White, The Political Economy of Banking Regulation, 1864-1933, 42 J. ECON. HIST. 33 (1982) (providing a political economy account of intrastate branching restrictions)
167. Prasad Krishnamurthy, Branching Restrictions, Financial Market Integration, and Firm Growth: Evidence from U.S. Banking Deregulation (Aug. 17, 2009) (unpublished manuscript) (on file with authors), provides empirical evidence of the effects of U.S. branch banking restrictions on business growth and surveys the previous literature on the subject
168. See JONATHAN R. MACEY & GEOFFREY P. MILLER, BANKING LAW AND REGULATION 9-11 (2d ed. 1997); Miller, supra note 166, at 181 (discussing federal legislation passed in 1933 "permit[ting] national banks to branch within a state on the same terms and conditions as state banks")
169. On the lack of real choice of regulation offered by this "dual" system, see Henry N. Butler & Jonathan R. Macey, The Myth of Competition in the Dual Banking System, 73 CORNELL L. REV. 677, 678 (1988). Butler and Macey emphasize that maintenance of this inefficient regulatory regime benefited yet another entrenched interest group, namely the regulators. See id. at 679
170. See Krishnamurthy, supra note 167, at 3
171. See, e.g., MARK J. ROE, STRONG MANAGERS, WEAK OWNERS 54-59 (1994)
172. See MACEY & MILLER, supra note 168, at 29-32
173. The two approaches can be combined, as they were by the Novo Mercado in a recent set of proposed amendments to its listing rules. See infra text accompanying notes 200- 01
174. See Steven Shavell, On Optimal Legal Change, Past Behavior, and Grandfathering, 37 J. LEGAL STUD. 37 (2008) (arguing that grandfathering is efficient when switching costs are high)
175. Despite their grandfathering protection for old public firms, the new statutory rules were rather timid and were later dwarfed by the Novo Mercado requirements banning nonvoting shares altogether. See supra Part I.A-B
176. See, e.g., NYSE, LISTED COMPANY MANUAL § 313.00 (1994)
177. See Renee L. Crean, Recent Development in New York Law, 72 ST. JOHN'S L. REV. 695, 700 (1998)
178. See TARUN KHANNA, BILLIONS OF ENTREPRENEURS 165-66 (2007)
179. See, e.g., MODESTO CARVALHOSA, 1 COMENTÁRIOS À LEI DE SOCIEDADES ANÔNIMAS [COMMENTARIES TO THE CORPORATIONS LAW] 170 (4th ed. 2002) (arguing that the 2001 reform's different treatment of old and new Brazilian firms with respect to preferred shares is inequitable and unconstitutional)
180. On menus in general, particularly in the context of corporate law, see Ian Ayres, Menus Matter, 73 U. CHI. L. REV. 3 (2006); and Yair Listokin, What Do Corporate Default Rules and Menus Do? An Empirical Examination (Yale Law Sch. John M. Olin Ctr. for Studies in Law, Econ., & Pub. Policy Research Paper, Paper No. 335, 2007), available at http://ssrn.com/abstract=924578
181. See Ronald J. Gilson & Curtis J. Milhaupt, Choice as Regulatory Reform: The Case of Japanese Corporate Governance, 53 AM. J. COMP. L. 343, 346 (2005)
182. Robert N. Eberhart, Corporate Governance Systems and Firm Value: Empirical Evidence from Japan's Natural Experiment 4 (July 2010) (unpublished manuscript), available at http://sprie.stanford.edu/publications/22480. Companies that adopted the iinkai secchi structure initially improved their performance compared to industry competitors that retained the traditional governance structure. Id. This advantage diminished after two years, illustrat
183. DEL. CODE ANN. tit. 8, § 102(b)(7) (2010)
184. 488 A.2d 858 (Del. 1985)
185. As is widely understood, Delaware corporations had no difficulty making the choice-virtually every company adopted the contemplated charter amendment
186. See infra Part IV
187. Henry Hansmann, Corporation and Contract, 8 AM. L. & ECON. REV. 1, 2 (2006)
188. See id. at 4-5; see also Robert Daines & Michael Klausner, Do IPO Charters Maximize Firm Value? Antitakeover Protection in IPOs, 17 J.L. ECON. & ORG. 83, 85 (2001)
189. See supra notes 19-21 and accompanying text
190. See Gilson & Milhaupt, supra note 181, at 354
191. In Stone v. Ritter, 911 A.2d 362 (Del. 2006), the Delaware Supreme Court held that the duty of oversight established under In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), a classic duty of care case, could give rise to a violation of the duty of loyalty if the directors failed to discharge their fiduciary obligations in good faith. See Stephen M. Bainbridge et al., The Convergence of Good Faith and Oversight, 55 UCLA L. REV. 559, 597 (2008) (describing the Delaware Supreme Court's decision in Stone as "another case in which section 102(b)(7) seems to be driving the analysis"); Claire A. Hill & Brett H. McDonnell, Stone v. Ritter and the Expanding Duty of Loyalty, 76 FORDHAM L. REV. 1769, 1770 (2007) (defending the use of the duty of good faith to enlarge the scope of director liability for breach of the duty of loyalty)
192. For some perspective on the tortured evolution of the duty of care under Delaware law, see William T. Allen et al., Realigning the Standard of Review of Director Due Care with Delaware Public Policy: A Critique of Van Gorkom and Its Progeny as a Standard of Review Problem, 96 NW. U. L. REV. 449, 458-65 (2002)
193. In a limited fashion, Delaware has provided a menu that allows reducing fiduciary duty to the obligation of good faith and fair dealing, but this is limited to alternative forms of corporations, rather than traditional corporations. Some of these forms, however, like master limited partnerships, are suitable for public ownership. See JESSE H. CHOPER, JOHN C. COFFEE, JR. & RONALD J. GILSON, CASES AND MATERIALS ON CORPORATIONS 800-11 (7th ed. 2008) (describing development of the obligation of good faith and fair dealing as an alternative to fiduciary duty). Evidence showing that Delaware corporations going public typically have plain vanilla charters other than with respect to antitakeover provisions, even though the statute allows for substantial variation, suggests that Delaware understands that there is little market for higher standards. See Michael Klausner, The Contractarian Theory of Corporate Law: A Generation Later, 31 J. CORP. L. 779, 788-91 (2006) (summarizing evidence)
194. Under a 2007 reform to the North Dakota Publicly Traded Corporations Act promoted by corporate governance advocates, firms incorporated under North Dakota law after July 1, 2007, can insert a provision in their articles of incorporation that subjects them to a bundle of strong shareholder rights, including majority voting for directors, advisory shareholder votes on executive compensation, the ability to propose board nominees on the company's proxy statement, and reimbursement of proxy expenses incurred by insurgent shareholders. North Dakota Publicly Traded Corporations Act, N.D. CENT. CODE §§ 10-35, 54-09-08 (2010). Since firms already incorporated in North Dakota before 2007 are presumably free to reincorporate and thereby take advantage of the new shareholder-oriented provisions, the established and the reformist regimes are available to both old and new firms, making this a straightforward example of regulatory dualism
195. BM&F BOVESPA, supra note 38, § 14.2
196. Among other things, the stricter amendments, effective as of January 2006, require at least 20% of the directors of Novo Mercado firms be independent. Santana, supra note 20, at 32
197. See supra Part II.A
198. Leandro Modé, 'Reforma' do Novo Mercado fica pela metade [Novo Mercado 'Reform' Only Half Successful], O ESTADO DE S. PAULO, Sept. 10, 2010
199. See Vinícius Pinheiro, BM&FBovespa descarta criar novo nível de governança [BM&FBovespa Discards the Creation of New Governance Level], AGÊNCIA ESTADO, Sept. 9, 2010, http://economia.estadao.com.br/noticias/bmfbovespa-descarta-criar-novo-n ivel-de -governanca,not_34761.htm
200. See supra note 73 and accompanying text
201. See supra Part III.A
202. George Orwell highlighted the problem in the closing scene in Animal Farm; it became difficult to tell the pigs from the farmers. GEORGE ORWELL, ANIMAL FARM 86-93 (Alfred Knopf 1993) (1945).
203. See, e.g., John C. Coffee, Jr., The Rise of Dispersed Ownership: The Roles of Law And the State in the Separation of Ownership and Control, 111 YALE L.J. 1, 22-23, 80 (2001) (noting the reverse causality between capital markets developments and investor protection laws, as "[s]trong markets do create a demand for stronger legal rules")
204. See Bebchuk & Roe, supra note 62, at 129 ("[T]here are significant sources of path dependence in a country's patterns of corporate ownership structure.")
205. Lei No. 11.638, de 28 de Dezembro de 2007, D.O.U. de 28.12.2007. Prior to the reform, Bovespa's premium listing segments required the adoption of either IAS or U.S. GAAP while old firms listed in the traditional segments generally followed the laxer Brazilian GAAP
206. Parecer de Orientação CVM [CVM Advisory Opinion] No. 35 (2008), available at http://www.bmfbovespa.com.br/juridico/download/ParecerOrientacaoCVM_35.p df
207. See Yuki Yokoi, Happy Preferred Shareholders: Under CVM Pressure, Aracruz PN and ON Get Equal Treatment in VCP Merger, REVISTA CAPITAL ABERTO, Sept. 2009, http://www.capitalaberto.com.br/english/ler_artigo.php?pag=2&sec=77 &i=2584. Yokoi describes the process leading to the merger of Aracruz into Votorantim Papel e Celulose in September of 2009. The new company, Fibria, the world's largest pulp and paper company, is expected to migrate to the Novo Mercado. Id
208. See Instrução CVM [CVM Rule] No. 480, de 7 Dezembro de 2009
209. For a description of the process leading to the adoption of these regulations and of the decisions challenging their legality and constitutionality, see Diego Werneck Arguelhes & Mariana Pargendler, Collateral Costs of Violence: How Insecurity Is Shaping Legal Institutions in Brazil (2010) (unpublished manuscript) (on file with authors)
210. See supra text accompanying note 5
211. See Roe, Delaware's Competition, supra note 153, at 616-20
212. See Natalya Shnitser, A Free Pass for Foreign Firms? An Assessment of SEC and Private Enforcement Against Foreign Issuers, 119 YALE L.J. 1638 (2009). This is particularly true when the foreign-listed company has few assets in the United States and is therefore practically immune from private enforcement of the securities law
213. See Dammann & Hansmann, supra note 49 (proposing to give parties to commercial contracts in countries with weak courts the option of committing to have their disputes adjudicated in the public courts of another country with a better-developed judiciary)
214. The European Union, for example, following the American pattern, now offers a choice between having one's trademark rights governed by an established national legal regime or by the reformist European Union regime. See Julie Bak, OHIM: The European Community Trademark's PTO, 19 J. CONTEMP. LEGAL ISSUES 416, 418 n.10 (2010)
215. States in the United States that limit marriage to heterosexual couples but recognize gay marriages entered into in other states offer an example. See David D. Meyer, Fragmentation and Consolidation in the Law of Marriage and Same-Sex Relationships, 58 AM. J. COMP. L. 115, 130 n.70 (2010). Another example-involving a menu offered by a single jurisdiction- is the recent creation within three states of a rigorously committed form of "covenant marriage" as an alternative to conventional marriage. See Katherine Shaw Spaht, Covenant Marriage Seven Years Later: Its As Yet Unfulfilled Promise, 65 LA. L. REV. 605, 605- 06 (2005).