• Selected
• Entire List

Abstract:
The text of the proposed European Union takeover directive was last revised in June 1999, and there is still controversy about a crucial feature that it shares with London's City Code and Germany's voluntary Takeover Code: a strict "neutrality rule" that would require the board of a target corporation to desist from deploying most defensive measures without shareholder approval. The proposed directive thus follows the rule laid down in Principle 7 of the City Code which outlaws, on the part of the target's board, "any action, which could effectively result in any bona fide offer being frustrated or in the shareholders of the offeree company being denied the opportunity to decide on its merits."

This strict neutrality rule is mitigated in the proposed European takeover directive and in the German voluntary Takeover Code, both of which exempt a few defensive measures - such as looking for a white knight - from the strict ban on defensive measures deployed by the board of a target corporation without prior shareholder approval. The vast majority of defensive measures - such as raising new capital, making significant acquisitions or selling significant assets - are permitted, however, only if authorized by a general shareholders' meeting which takes place during the period of the takeover bid. This exception is in most cases practically impossible to use because the notice and preparation period for a general shareholders' meeting is too long (in Germany, more than two months).

The argument in favor of the strict neutrality rule begins with the principal-agent theory of corporate law widely held by institutional investors and legal scholars, particularly in the United States: directors are the agents of shareholders and are charged with acting in shareholders' best interests rather than their own in managing the corporation. The strict neutrality rule extrapolates from this agency duty a specific rule for hostile bids which requires directors' to desist from acting in circumstances where their own interests conflict with those of shareholders. Allowing directors to act, but subject to more intense scrutiny by courts, is not sufficient for proponents of strict neutrality. A strict ban on director action that could frustrate the bid without prior shareholder approval is believed to be required.

This argument for board neutrality, however, does not consider the fact that directors sometimes need to respond to shareholders' collective action problems when a tender offer is coercive. Nor does it consider the fact that defensive measures sometimes increase the price paid for a target company. Furthermore, the argument for board neutrality refuses to accommodate any responsibility of directors to non-shareholder stakeholders, an important feature of corporate law in many European countries.

In Europe, arguments for the strict neutrality rule are also empirically based on England's positive experience with the City Code. This empirical observation, however, does not support the theoretical argument for a strict neutrality rule standing alone, as the City Code not only restricts the board of the target company, but also restricts the conduct of the bidding corporation, fostering a balance of power between the two. Other countries that have adopted the strict neutrality rule, but not the City Code's restrictions on the bidder, such as Austria, and Germany in its voluntary Takeover Code, have done so relatively recently and so far have very limited actual experience with hostile tender offers.

Yet another problem is that the strict neutrality rule does not exist in a vacuum. In European countries that are politically hostile to hostile takeovers, board neutrality may be circumvented by government imposed defensive measures, and regulation can be enforced in a way that makes it nearly impossible to operate a target company once it is acquired. These burdens are likely to be far more disastrous for shareholders, and perhaps even for other stakeholders, than defensive measures implemented by a board of directors chosen by the shareholders. The strict neutrality rule, in this context, sends just the wrong message: that incumbent managers and other stakeholders should turn to politicians to fend off hostile bidders rather than to their own board of directors.

Furthermore, regardless of what the European takeover directive says, hostile bids will be difficult in some countries, particularly Germany, unless the legislature does something about a costly but effective bulwark against hostile takeovers: cross ownership of equity among corporate conglomerates. A rule that gives more discretion to target company boards could allay fears that German companies will be powerless to defend themselves and thus encourage the business community to recognize the inefficiencies of crossholdings as a means of defense. Divestment of these holding would in turn provide more capital for core businesses, inject liquidity into Germany's capital markets and bestow more power on individual shareholders.

If, however, the strict neutrality rule is not suitable for Europe, it is incumbent to suggest alternative ways to restrict the discretion of target company directors, who face an obvious conflict of interest in a hostile bid. Taking into account the number of trans-Atlantic takeover bids that are likely in the 2000's, and the fact that United States target corporations are bound by a "modified business judgement rule" that is more flexible than the strict neutrality rule, one solution could be the introduction in Europe of a modified business judgement rule that, although not identical, is comparable, to the American rule.

The modified business judgment rule in the United States is defined by extensive judicial interpretation, usually by courts in Delaware and other states that have a high degree of expertise in corporate law. This review process could be difficult to replicate in civil law countries, although some countries might develop a body of case law on takeover bids and other aspects of corporate law. There is, however, an alternative to relying solely on judicial review: Member States could in some instances allow ex-post shareholder voting (expedited with the help of the Internet) to veto defensive measures initiated by directors that do not maximize shareholder value.

Furthermore, if it is determined that some version of the American modified business judgment rule passes the test for transferability to Europe, Europeans will have to decide on which level - the European level or that of Member States - specific details of the new rule should be introduced. Here, the technique of a European directive is advantageous, because it allows the European Union to state a general principle in the directive and then leave it to the Member States to fine tune that principle in drafting legislation that conforms with the directive yet adopts to local practices of corporate governance. Within the confines of the directive, the individual Member States would thus be free to craft their own rules subject only to the discipline of jurisdictional competition. Now that the European Court of Justice has cast doubt on the "seat doctrine" requiring a corporation with its "center of gravity" in a Member State to comply with that State's corporate law, jurisdictional competition, long a hallmark of American corporate law, could possibly flourish in Europe as well.

Part II of this article discusses the business judgment rule as it is applied by the courts in Delaware, the most popular state of incorporation in the United States, to target corporation directors in hostile takeovers. Part II also briefly discusses the Williams Act, a federal law which provides some measure of protection to target company shareholders by regulating tender offer disclosure and bidding procedures. [Note: this doctrinal discussion of Delaware case law on takeover defenses and federal regulation of tender offers is intended for European readers and may be redundant to some United States readers.]

Part III provides a brief statistical comparison of takeover bids in the United States and in Europe, showing that takeover bids (particularly hostile bids) are still more common in the United States than in Europe and that premiums paid to shareholders are generally higher in the United States than in Europe. Part III also suggests explanations for these differences.

Part IV then discusses some advantages and disadvantages of adopting the American style modified business judgment rule in Europe in place of the strict neutrality rule. Advantages include (i) facilitating a more level trans-Atlantic playing field for hostile takeover activity than that which would evolve under the strict neutrality rule, (ii) protecting shareholders from coercive bids without the extensive, and in Continental Europe unworkable, regulation of tender offers that is currently mandated under London?s City Code; (iii) reducing political pressure on Member States to erect antitrust and other barriers to takeovers, while encouraging managers and other stakeholders to make an economic case to directors rather than a political case to regulators; and (iv) encouraging corporations in Germany and some other countries to rely less on cross-ownership of equity among corporate conglomerates as a defense against hostile takeovers. Disadvantages of the modified business judgment rule in a European setting include (i) difficulties with importing a rule based on common law into civil law countries, and (ii) the risk that the modified business judgment rule could be too pro management in its implementation by a European judiciary even less attune than its American counterpart to the concept of shareholder wealth maximization. These two difficulties, however, are surmountable, particularly if Member States rely less than the United States on ex-post judicial review and more on ex-post veto of defensive measures by shareholders. The Internet and related technological innovations make expedited shareholder voting a realistic alternative to the American tradition of rushing to the Delaware Court of Chancery for approval or repudiation of a takeover defense. Depending upon a range of factors, including the availability and quality of judicial resources in a particular Member State, and the feasibility of shareholder review of defensive measures through electronic voting, the relative importance of the judiciary and shareholders in reviewing directors' business judgments could differ depending on the Member State.

Part V proposes a generally worded business judgment rule for the European takeover directive as well as more specific language that could be adopted by one or more Member States.

Abstract:
This article compares (i) Germany's highly protectionist 2001 corporate takeover law, (ii) the proposed EU Thirteenth Directive (which endorses the very different market oriented "strict neutrality rule" of the London City Code) and (iii) Delaware's "modified business judgment rule" which lies somewhere between these two approaches. The article also discusses some of the political and economic explanations for Germany's approach to hostile takeovers. The last section of the article discusses a fourth approach favored by the authors: allowing managers to initiate defenses against hostile tender offers but then allowing shareholders to veto management initiated defensive tactics through voting on the Internet.

Abstract:
The decisions of the European Court of Justice in Centros and most recently in Inspire Art will change the business landscape by opening up Europe to legislatory competition in corporate law. This potentially could enable some Member States to enact and enforce corporate law that is preferable for shareholders and managers and thus lure corporate charters away from other Member States with less attractive corporate law.

The European debate after Inspire Art will in some part be modeled after the U.S. debate over the "Delaware effect" on American corporate law for well over the past seventy years. Implicit in much of this debate, however, is the assumption, based on the American experience, that legislatory competition in corporate law necessarily means that Member States, after Centros and Inspire Art, will offer both their corporate law and their judicial process for resolving corporate law disputes to managers and investors in other Member States that choose to incorporate abroad. Legislatory competition under this assumption requires the successful offeror of corporate law to offer both an attractive corporate statute and specialized courts that can be relied upon to interpret the law in a predictable manner, thereby inducing managers and investors to incorporate in that jurisdiction.

This article suggests that the European experience with jurisdictional competition, at least in the short term and perhaps permanently, could be quite different from that in the United States. We make both a positive and a normative statement that the process of legislatory competition in the field of corporate law in Europe will not and should not follow the American example in all aspects.

Using a theoretical framework of New Institutional Economics, we relax the assumptions of perfect information, perfect rationality and zero transaction costs. We also recognize the impact of path dependence and the importance of a learning process in designing regulatory and adjudication frameworks, and we are also aware of the fact that even optimal solutions to regulatory problems may become unstable and suboptimal over time. Although there are many ways in which, because of these factors, the European experience with legislatory competition could be different from that in the United States, we focus in this article on one difference in particular. In the United States, incorporation in Delaware means that corporate law litigation in most cases takes place in Delaware, so that Delaware not only sells corporate charters but also its case law. The buyer has to buy (and is well advised to buy) a bundled product including substantive law (statutory and case law) together with procedural law. This type of bundling of statutory law and adjudication, however, might cause difficulties in Europe. The thesis of this article is that Member States are most likely to survive in the legislatory competition following Centros and Inspire Art if they debundle the corporate law product. Buyers of corporate charters thus should be allowed to choose corporate law of the Member State of incorporation (home country) but have disputes under that law be adjudicated elsewhere, preferably by arbitration panels.

A number of factors make it difficult for Member States to offer adjudication to managers and investors in other Member States. These include (i) language barriers (particularly for Member States whose courts do not do business in English), (ii) differences between common law and civil law approaches to adjudication, (iii) procedural differences between courts of Member States that are greater than those between Delaware and other US states, which in turn discourage lawyers from recommending that clients incorporate in Member States outside their own, (iv) the cost to a Member State of building specialized judicial expertise in corporate law, (v) incomplete information about real or perceived judicial bias, (vi) uncertainty concerning conflict of laws within the EU, (vii) uncertainty about mutual recognition of judgments within the EU, and (viii) the fact that an effective adjudication system will require a learning process and that national judges are "poor learners" about the implications of applying national corporate law to international managers and investors.

Developing strategies to overcome these barriers to entering the market for a bundled product of corporate statutes plus adjudication may be a realistic long-term strategy for one or more Member States. This article suggests, however, that Member States should also explore strategies to offer their corporate statutes without adjudication by national courts and instead facilitate alternative methods of adjudicating corporate law disputes. Although allowing resolution of disputes under one Member State's corporate law by the local courts of another Member State (probably the "seat" of the corporation) is a possibility, for a variety of reasons we find this to be an unattractive alternative. A more attractive alternative is adjudication by panels of professional arbitrators who specialize in the corporate law of a particular Member State, but who could be citizens of different Member States, and who would apply uniform procedural rules determined by an arbitration association rather than by national courts. This alternative requires that Member States allow corporate charters to provide for arbitration of disputes over corporate internal affairs. A home country, offering its corporate law for corporations having a seat elsewhere (the host country) even could change its national corporate law explicitly to allow for arbitration. If the host country would then try to make that clause unworkable under its own conflict of laws principles this might not be in compliance with the right of establishment as interpreted by the ECJ in Centros and Inspire Art.

Abstract:
The purpose of this paper is to apply both neoclassical economics and a more recently developed method of economic analysis - new institutional economics - to Germany's system of shop closing hours regulation, and to put this peculiar type of regulation into the general theory of regulation that emerges from each of these two methodological approaches. Our intention is not only to compare the costs and benefits of the regulation itself, but also, through analyzing this particular type of regulation using both methodological approaches, to show differences between them. The paper is organized as follows: First, we look into the history of closing hours regulation from a public choice perspective. Then we apply standard neoclassical economics with a welfare economics orientation. The last part of the paper brings into play an institutional economics analysis. Our argument will focus on the difference between a simple welfare analysis where all consumers are taken as one group that might profit from cost reductions traced back to confining shopping hours to periods where labor costs are (relatively) low. In a competitive environment shopkeepers who are able to reduce costs by concentrating on fewer shopping hours should be forced to reduce prices respectively and thus would not profit from those cost reductions. Consumers who have to accept the disadvantage of confined shopping hours would be compensated by price reductions. The economic question then would be whether or not public regulation is superior to private agreements which could lead to comparable results. Our discussion looks into the preferences of different subsets of consumers. Some consumers might accept higher prices if they can shop at personally convenient hours; others might prefer lower prices and be willing to do their shopping only in limited periods of time. There is evidence of this even today, as we see many circumventions of closing hours regulation in Germany. Consumers reveal their preferences for late shopping hours by their willingness to pay higher prices when shopping in gas stations, late evening shops and Kiosks. If different groups of consumers have different preferences as far as shopping hours are concerned, the utilitarian approach of neoclassical economics would probably apply the Kaldor-Hicks test and find that closing hours regulation is economically justifiable if the winners of closing hours regulation can compensate the losers and still retain some welfare gains. This approach is difficult in practice, however, insofar as it presupposes comparability of individual utility across groups with very different preferences. Any attempt to convert these different measures of utility into a common currency would probably render the Kaldor-Hicks analysis unworkable. In practice, analysis of regulation under the Kaldor-Hicks approach thus presupposes perfect information and rationality of the person(s) evaluating the alternative regulatory regimes, and furthermore that lawmakers will respond to the evaluators' informed recommendation by implementing regulation based on the collective welfare rather than ulterior motives (special interests, ideological predispositions, etc.) The institutional economics approach goes in another direction: instead of applying the Kaldor Hicks-test to identify a solution that theoretically maximizes collective utility, identify first the learning process most likely to lead a society to a welfare maximizing solution. How can a society most effectively overcome imperfect information, irrationality and imperfections in the political process to actually solve a particular problem? Furthermore, new institutional economics characterizes the end objective somewhat differently: rather than identify the solution that maximizes collective welfare (an evaluation that, as explained above, is in practice often difficult), identify the solution that affected persons (consumers, shop owners and shop workers) would most likely consent to if they were not aware of their own special interests ahead of time (an analysis similar to the Rawlsian hypothetical consent behind a "veil of ignorance."). This determination of course has difficulties of its own, but the focus of new institutional economics first on the learning process and then on actual results allows at least some characteristics of the ideal regulatory regime to be identified even if others are left to be solved by experience rather than economic theory. This article concludes that for consumers, shop owners and workers alike, in a world of incomplete information, bounded rationality, and an imperfect political process, the arguments for an evolutionary process informed by market competition are superior to the arguments for public regulation. Although cartel regulations should perhaps be relaxed to allow private agreements on opening hours between merchants in individual neighborhoods, government should not compel merchants to enter into such agreements or penalize merchants who set opening hours on their own. Furthermore, if public entities must regulate shop closing hours, it is preferable that the regulation be determined on the local level rather than by a central government. Although market competition will most likely lead to superior results, jurisdictional competition is superior to regulation dictated by a central government.

Abstract:
Most of the EU budget is spent on redistribution. Large sums of money are transferred from the member state governments to Brussels and back to these governments. Some member states end up as net receivers and some as net payers. Most economists agree that the resources of the budget should be reallocated from redistribution towards the provision of more Union-wide public goods. While such appeals have been made for years, little change has been observed. We want to explain why. We propose to distinguish two periods. In the early years of the Community, some larger member states or coalitions of member states were able to credibly threaten to terminate membership if their claims on budgetary resources were not fulfilled. Their activity has created a redistributive status quo to which, in the second period, the budgetary rules of the Treaty were applied. It is shown that the combination of the Council's qualified majority rule on the expenditure side and the unanimity rule on the revenue side and on the programs are largely responsible for creating a deadlock in the status quo with large redistribution and few Union-wide public goods. In order to break the deadlock, a complementary budget procedure is proposed on the basis of voting by veto.

Abstract:
The concluding remarks not only dwell on the merits of an economic approach to public international law but also view public international law as a challenge for economic analysis. The potential lessons of a reciprocal learning process for public international law could be the following ones: (1) stress the functional approach to public international law; (2) expand the subject matter; (3) take into consideration costs and benefits of alternative solutions, even in the realm of private law; (4) re-conceptualise the legitimisation paradigm. The branch of New Institutional Economics provides the necessary methodological tools to treat the specific problems of that field of law. The lessons for economics, on the other hand, could be the following ones: (1) stress institutional economics (including constitutional economics); (2) start a dialogue with social science rational choice approaches.

Abstract:
The decisions of the European Court of Justice in Centros and then in Inspire Art open up the possibility of regulatory competition in European corporate law. Now that EU Member States have to recognize each other's charters, some Member States could enact and enforce corporate law preferred by shareholders, managers or both, and thus lure corporations away from other Member States with less attractive corporate law. The European debate after Inspire Art will in some ways resemble the U.S. debate over the "Delaware effect" on corporate law over the past seventy years. Implicit in much of this debate, however, is the assumption, based on the U.S. experience, that regulatory competition in corporate law necessarily means that Member States will offer both their corporate law and their judicial system to managers and investors in other Member States who choose to incorporate abroad. In the United States, incorporation in Delaware means that corporate law cases are litigated in Delaware. This bundling of statutory law and adjudication might, however, cause difficulties in Europe. Using a theoretical framework of New Institutional Economics, we suggest that Member States are most likely to succeed in the regulatory competition following Centros and Inspire Art if they unbundle the corporate law product and allow buyers of corporate charters to choose the corporate law of the Member State of incorporation but have disputes under that law adjudicated elsewhere, preferably by arbitration panels. Although it is possible to allow disputes under one Member State's corporate law to be decided by the local courts of another Member State (probably the "seat" of the corporation), for a variety of reasons we find this to be an unattractive alternative. A more attractive alternative is adjudication by panels of professional arbitrators who specialize in the corporate law of a particular Member State, but who could be citizens of different Member States,and who would apply uniform procedural rules determined by an arbitration association rather than by national courts. This alternative requires that Member States allow corporate charters to provide for arbitration of disputes over corporate internal affairs. While national courts in the Member State of incorporation could do this by routinely enforcing arbitration awards, specific provision for arbitration in corporate statutes is preferable. Then, if a Member State where a corporation has its principal place of business or some other Member State were to try to make the arbitration clause unworkable under its own conflict of laws principles, the Member State of incorporation and private parties could claim, probably successfully, that frustration of the arbitration clause was not in compliance with the right of establishment as interpreted by the ECJ in Inspire Art.