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Abstract: A central goal in devising a system of courts is to make judicial services easily accessible. As a consequence, justice is usually administered in a geographically decentralized fashion: trial courts are distributed across the territory in which the jurisdiction's law is applied. Corporate law, however, does not fit this pattern: courts are often located far away from the companies subject to their jurisdiction. In particular, Delaware law governs most publicly traded firms in the U.S., and is now extending its reach to encompass corporations headquartered around the globe. But Delaware courts are located only in Delaware. Consequently, there is a large and growing disparity between the geographic area where Delaware law is applied and the location of Delaware courts. This disparity is all the more striking because the quality of the Delaware judiciary is a prime reason why firms incorporate under Delaware law. This situation provokes a simple question: would it not be both desirable and feasible to have Delaware, and other jurisdictions whose law has extraterritorial reach, hold hearings and trials out of state? The creation of such extraterritorial courts might well yield significant benefits: litigation costs could be lowered, and regulatory competition between jurisdictions could be increased with regard to both substantive corporate law and judicial services. This paper explores the issues involved in such a regime of extraterritorial courts. We consider those issues as they arise within the U.S., within the EU, and globally. We largely limit our analysis to courts whose jurisdiction is confined to corporate law. We note, however, that much of what we say applies as well to other areas of commercial law. Moreover, whatever the merits of extraterritorial courts as a practical proposal, in exploring their promise we gain important perspective on the basic relationships among substantive law, adjudication, and territoriality, and on the differences between private arbitration and public adjudication.
extraterritorial, courts, Delaware, regulatory competition, arbitration, soverignity, jurisdiction
Abstract: U.S. corporations are free to choose the state law governing their internal affairs. In Europe, by contrast, the ability of corporations to choose the applicable corporate law regime used to face a formidable obstacle in the so-called real seat doctrine: Under this doctrine, which used to prevail in most European countries, the internal affairs of a corporation are governed not by the law of the state of incorporation but by the law of the state where the corporation's headquarters or "real seat" is located. As a result, corporations cannot choose the law of another member state, unless they are willing to move their headquarters as well. More recently, however, this situation has changed profoundly. Two decisions by the European Court of Justice, Centros and Uberseering, have made it clear that the real seat rule, as traditionally applied by many European countries, is incompatible with the Freedom of Establishment guaranteed by the Treaty establishing the European Community. As a result, the Community now faces the same question that the United States has long been grappling with: Should free choice be the principle underlying corporate law, or should the federal legislator intervene to eliminate free choice by imposing a federal corporate law regime; The present article seeks to answer that question with regard to the European Community. It argues that free choice cannot only be expected to yield greater benefits than complete or partial harmonization. Rather, free choice may well be more efficient in the European Community than it is in the United States.
Centros, regulatory competition, race to the bottom, race to the top, corporate law, European Community, Uberseering
Abstract: U.S. corporations are free to choose the state law governing their internal affairs, a concept one can refer to as free choice in corporate law. At least in principle, that concept also applies in the European Community. In both cases, the legal mechanism ensuring free choice is the state of incorporation doctrine, under which a corporation's internal affairs are governed by the law of the state of incorporation. However, presuming that free choice is efficient, an obvious question to ask is whether the state of incorporation doctrine is really the most beneficial way of granting free choice. Strikingly, though, existing legal scholarship all but ignores that question. The present article argues that while there are sound reasons for retaining the state of incorporation doctrine as one mechanism for granting free choice, it should not be the only such mechanism. The state of incorporation doctrine has significant drawbacks. For example, it does not allow corporations to choose the applicable corporate law without facing exposure to litigation in the state of incorporation. These drawbacks are significant both in the U.S. and in the European context. More importantly, though, there is reason to believe that the various disadvantages of the state of incorporation doctrine are largely responsible for the general unwillingness of U.S. and European firms to incorporate in a jurisdiction on the other side of the Atlantic. Therefore, federal law in both Europe and the United States should complement the state of incorporation doctrine by requiring states to offer at least one business corporation statute that allows corporations to choose the applicable state law in their articles of incorporation.
regulatory competition, centros, uberseering, uberseering, ueberseering, charter competition, race to the top, race to the bottom, Delaware effect, charter market, double taxation, extraterritoriality
Abstract: The world's nations vary widely in the quality of their judicial systems. In some jurisdictions, the courts resolve disputes quickly, fairly, and economically. In others, they are slow, inefficient, biased, incompetent, or corrupt. These differences are important not just for litigants, but for nations as a whole: effective courts are important for economic development. A natural implication is that countries with underperforming judiciaries should reform their courts. Yet reform is both difficult and slow. Another way to deal with a dysfunctional court system is for litigants from afflicted nations to have their cases adjudicated in the courts of other nations that have better-functioning judicial systems. We explore here the promise of such cross-jurisdictional litigation, and the reforms needed to make it succeed. The issue is timely. The increasing pace of global commerce is creating pressures for legal reforms that will dramatically improve the legal environment for litigating across borders. Moreover, advances in transportation and telecommunications are making it increasingly practical for parties to litigate in remote courts. Just as residents of New York City now commonly obtain assistance with utility bills and computer software telephonically from service personnel in Bangalore, it should become possible for merchants in Bangalore to have their disputes decided in New York courts via the internet.
Judicial services, arbitration, courts, competition, choice of forum, international litigation, choice of law, corporations, regulatory competition, development
Abstract: The world's nations vary widely in the quality of their judicial systems. In some jurisdictions, the courts resolve commercial disputes quickly, fairly, and economically. In others, they are slow, inefficient, incompetent, biased, or corrupt. These differences are important not just for litigants, but for nations as a whole: effective courts are important for economic development. A natural implication is that countries with underperforming judiciaries should reform their courts. Yet reform is both difficult and slow. Another way to deal with a dysfunctional court system is for litigants from afflicted nations to have their commercial disputes adjudicated in the courts of other nations that have better-functioning judicial systems. We explore here the promise of such extraterritorial litigation and conclude that it is strong, particularly in light of a communications revolution that permits litigation in a remote court without requiring travel by parties, witnesses, or lawyers..
Private arbitration is another alternative to weak local courts, and its role will surely continue to expand. But public courts have important advantages over private arbitration in resolving commercial disputes. Consequently, broader international access to well-functioning public courts holds unique promise.
The volume of extraterritorial litigation is presently small. A set of basic legal and practical reforms could, however, change that situation dramatically. To motivate those reforms, it is essential that jurisdictions with strong courts have an incentive to attract foreign litigants. The best way to achieve this is through higher court fees for foreign litigants who lack substantial ties to the forum state. This may require important adjustments in legal culture. But only by abandoning formal equality in court fees is it likely that real global equality in access to judicial services can be accomplished.
adjudication, arbitration, courts, competition, choice of forum, international litigation, choice of law, contracts, rule of law, regulatory competition, development
Abstract: We empirically study the incorporation choices or, more accurately: formation choice, of limited liability companies. Most of the firms in our large sample of more than 64,000 limited liability companies are formed in the state where their principal place of business is located (the PPB state). As their size increases, however, firms become more likely to be formed outside that state, with Delaware emerging as the primary destination for those that are not formed in the PPB state. In particular, of those firms that have 1,000 or more employees, roughly half are formed outside their home state, and of the latter, more than 80% are formed in Delaware. We show that substantive law matters to the formation choices of closely held limited liability companies. More specifically, limited liability companies appear to be migrating away from those states that offer lower levels of protection for minority investors: We find statistically significant evidence that firms are less likely to be formed in their PPB state if the latter offers relatively lenient rules on managerial liability or if it allows companies to be dissolved via a less than unanimous resolution of the members.
incorporation, market for corporate law, limited liability company, LLC, regulatory competition, Centros, formation, race to the bottom, race to the top, Cary, fiduciary duties, oppression, dissolution, veil-piercing, veil, courts
Abstract: This article addresses the role of comparative law in the context of constitutional and statutory interpretation. More specifically, it deals with the normative question of whether courts can justify the ascription of a particular meaning to a constitutional or statutory provision by comparative reasoning, that is, by reasoning involving a reference to foreign law. For analytical purposes, it is important to note that comparative law can be used in basically two ways to justify a particular interpretation of a constitutional or statutory provision. First, it can be made part of traditional forms of legal reasoning. In the United States, as in other countries, there exists a standard set of criteria that are frequently referred to when it comes to justifying the interpretation of a statutory or constitutional provision. These criteria particularly include the plain meaning of the words of the statute, the legislative intent, the purpose of the statute, and - pragmatically - the desirability of the consequences that are likely to result from a particular interpretation. Comparative law can be made part of those arguments. For example, one can try to predict the likely consequences of a particular construction by evaluating the experiences made in other countries that have adopted similar solutions. The use of comparative law as part of such traditional arguments does not pose particular challenges. Second, however, one can also imagine a form of legal reasoning where foreign statutes or decisions by foreign courts are per se advanced as arguments in favor of or against a particular interpretation. The court's argument then takes the following form: One reason for choosing interpretation A is that courts in the country X have interpreted a similar statute in X to mean A. One can refer to such arguments as authority-based comparisons. Relying on Habermas' version of the discourse theory, this article argues that authority-based comparisons are, in fact, a legitimate form of legal reasoning.
Comparative, constitutional, interpretation, construction, Habermas, Breyer, Scalia, Printz, comparativism, reasoning, dicourse, consensus, truth, Alexy
Abstract: Exploiting a large new database, this paper explores the incorporation choices of closely held U.S. corporations. The majority of corporations in our sample incorporate in the state in which their primary place of business (PPB) is located. However, among the corporations with more than 1000 employees, only about half incorporate in their PPB state, and of those that do not, more than half are incorporated in Delaware. We find statistically significant and robust evidence that corporations from states with low quality judiciaries are more likely to incorporate outside of their PPB state. Furthermore, corporations are more likely to migrate away from states where the risk of veil piercing is perceived to be high or that offer a particularly generous level of minority shareholder protection. The study complements empirical studies of incorporation choices of public companies, and offers new empirical evidence related to several theoretical debates concerning the market for corporate law.
Abstract: U.S. corporate law focuses on the maximization of shareholder wealth. By contrast, German corporate law continues to attach considerable importance to the interests of other stakeholders. Most importantly, German corporate law is designed to serve the interests of employees as well as those of shareholders. Under German codetermination law, employees are represented on the so-called supervisory board, thereby participating in the management of the corporation. In their present form, the rules on codetermination apply only to corporations incorporated in Germany. This did not present much of a problem as long as Germany adhered strictly to the so-called real seat doctrine. Under that doctrine, the location of the corporate headquarters determined the applicable corporate law. As a result, firms headquartered in Germany were forced to obey by the German rules on codetermination. However, in a series of groundbreaking decisions, the Court of Justice of the European Communities has made it clear that the real seat doctrine violates the Freedom of Establishment guaranteed by the Treaty Establishing the European Community. According to the Court, once a corporation has been validly formed in any given Member State, it generally has the right to be governed by the corporate law of that Member State. Thus, the rules on codetermination can now be evaded with impunity by so-called pseudo-foreign corporations that are headquartered in Germany, but incorporated in another Member State. This leads to an obvious question: Could Germany extend the scope of application of its codetermination law to cover pseudo-foreign corporations without violating European Community law? This note argues that the answer is yes. This note was first published in the Fordham Journal of Corporate and Financial Law, which kindly allowed me to post a copy on SSRN.
Centros, Inspire Art, Uberseering, Ueberseering, codetermination, german, corporate, fundamental freedoms, freedom of estabishment, imperative requirements, mandatory requirements
Abstract: Both in the United States and in Europe, corporations are free to choose the applicable corporate law by incorporating in the jurisdiction of their choice. However, smaller firms face a number of obstacles in exercising that choice. One such obstacle concerns the law on adjudicative jurisdiction: In the United States as well as in the European Community, corporations are exposed to third-party suits in their state of incorporation even if they have no other ties to that state. In this Article, I argue that while the relevant rule may not matter much in the United States, it probably imposes a considerable burden on corporations in Europe. Moreover, I show that there is no convincing justification for the relevant Community law rule. It does not promise to increase the combined gains reaped by contracting parties, nor can it be expected to achieve either a substantive increase in positive externalities or a significant reduction in negative externalities. Finally, it cannot even be justified persuasively on fairness grounds.
regulatory competition, market for corporate charters, delaware, centros, inspire art, jurisdiction, adjudication
Abstract: A majority of scholars seem to believe that at least on balance, state competition for corporate charters benefits rather than harms investors. Once one embraces free choice as beneficial, however, it is logical to ask whether the federal legal framework can be modified in a way that enhances charter competition and hence increases the relevant benefits. Curiously, that issue has attracted comparatively little attention. In particular, the existing literature all but ignores the question of whether the federal rules governing the allocation of adjudicative jurisdiction are efficient against the background of charter competition. That is all the more surprising, because it has long been known that the need to litigate in the state of incorporation may well discourage smaller corporations from choosing the state corporate law they find most efficient. The obvious question, therefore, is whether federal law should intervene in order to reduce that exposure. This article argues that the answer has to be a positive one. Indeed, the federal legislator would be well advised to take two steps with the aim of reducing the need for corporations to litigate in the state of incorporation: First, federal law should ensure that corporations are not exposed to suits brought by third party plaintiffs in the state of incorporation, if the corporation's statutory domicile and perhaps the residence of the plaintiff are the only factors connecting the case with that state. Second, federal law ought to prevent the real seat state from closing its courts to litigation concerning the internal affairs of pseudo-foreign corporations.
charter competition, regulatory competition, choice of forum, forum selection clause, jurisdiction, race to the top, race to the bottom, pseudo-foreign corporation, state competition, exposure to litigation, litigation, close corporations, full faith and credit clause
Abstract: One of the most central questions of corporate law is how to deal with controlling shareholders. On the one hand, the presence of a controlling shareholder can benefit the corporation, particularly by subjecting managers to better monitoring. On the other hand, there is always the risk that the controller will abuse his influence and enrich himself at the expense of the other shareholders. Traditionally, corporate law has tried to solve this dilemma by focusing on individual transactions suspected of being unfair. However, such a transaction-centered approach has significant drawbacks. Most importantly, it strikes the wrong balance between the interests of the controller and those of the other shareholders. From an efficiency perspective, the amount of benefits that the controller should be able to extract from the corporation depends both on how valuable his presence is to the corporation and on the extent to which the controller bears costs of control that he cannot share with the other shareholders. However, the transaction-centered approach fails to take these factors into account because it only focuses on the fairness of individual transactions. As a result, the level of benefit extraction is bound to be too high in some corporations while being too low in others. The present article, therefore, presents an alternative to the transaction-centered approach: Minority shareholders should be given the right to expel the controller, and at the same time, corporations should be allowed to opt out of the transaction-centered protections that existing law imposes. The proposed regime would ensure that controllers cannot extract benefits in excess of what their presence yields. Moreover, it would allow controllers to receive sufficient compensation for those costs of control that they cannot presently share with the other shareholders.
controlling shareholder, private benefits, ostracism, expulsion, fiduciary duties, self-dealing
Abstract: The quality of national judicial systems varies widely from country to country. In some jurisdictions, the courts resolve commercial disputes quickly, fairly, and economically, while in others, they are slow, inefficient, incompetent, biased, or corrupt. These differences affect not only litigants, but nations as a whole: effective courts are important for economic development. A natural implication is that countries with underperforming judiciaries should reform their courts. Unfortunately, judicial reform is both difficult and slow. Another way to deal with a dysfunctional court system is for litigants from afflicted nations to have their domestic commercial disputes adjudicated in better-functioning foreign courts. In this Article, we explore the potential advantages and limitations of such extraterritorial litigation and conclude that its promise is strong, particularly in light of a revolution in communications technology that permits litigation in a remote court without travel by parties, witnesses, or lawyers. Private arbitration is another alternative to ineffective local courts, and its role in resolving commercial disputes will surely continue to expand. Public courts, however, have important advantages over private arbitration in resolving commercial disputes. Consequently, broader international access to well-functioning public courts holds unique promise. Presently, the volume of extraterritorial litigation is small. A set of basic legal and practical reforms could, however, change that situation dramatically. To motivate those reforms, it is essential that jurisdictions with strong courts have an incentive to attract foreign litigants. The best way to achieve this is through higher court fees for foreign litigants who lack substantial ties to the forum state. This may require important adjustments in legal culture.
Abstract: This book addresses a number of fundamental issues in German and European antidiscrimination law. The first part of the book concentrates on the constitutional framework for German antidiscrimination law. It argues that the fundamental rights (Grundrechte) guaranteed by the German Basic Law (Grundgesetz) do not only prohibit the government from discriminating on the basis of gender, race, religion, etc., but also impose on the government a duty to protect individuals against systematic discrimination suffered at the hands of private parties. This said, the fundamental rights leave the government with a broad amount of discretion regarding the question of how to protect individuals against discrimination. It follows that there is no enforceable duty to enact specific prohibitions against discrimination. The second part analyzes the question of whether German law contains a general unwritten prohibition against discrimination among private parties. The third part focuses on the law of the European Community, namely on the Council Directive 2000/43/EC of 29 June 2000 implementing the principle of equal treatment between persons irrespective of racial or ethnic origin. This part of the book argues that the traditional understanding of this directive is in many ways misguided. The fourth part analyzes the meaning and significance of the proposed Antidiscrimination Act (Antidiskriminierungsgesetz) which was formally introduced in the German Bundestag in December 2004.
Discrimination, German, contracts, fundamental rights, basic law, Grundrechte, Grundgesetz, anti-discrimination, ADG, Antidiskriminierungsgesetz
Abstract: The debate on regulatory competition has long been at the heart of corporate law scholarship. One of the most contentious issues today is the relationship between regulatory competition and legal determinacy: Critics of charter competition claim that such competition may lead Delaware to rely excessively upon vague standards that make it difficult to predict legal outcomes. Supporters of state competition reject that view. What both sides have in common, though, is a dearth of hard evidence to support their respective accounts. This is unsurprising. To show that regulatory competition makes - or does not make - corporate law less determinate, one has to demonstrate how corporate law would look in the absence of regulatory competition - hardly an easy task. To overcome this problem and shed some empirical light on the matter, the present article relies on a comparative approach: It contrasts Delaware law with two other major Western corporate law systems, namely those of Germany and the United Kingdom. Despite recent steps toward a European charter market, neither country’s law on public corporations has been shaped by regulatory competition. However, as I show, both legal systems tend to rely even more strongly on indeterminate standards than Delaware does. This finding is difficult to explain for those who attribute Delaware’s reliance on standards to regulatory competition
Delaware, regulatory competition, determinacy, indeterminacy
Abstract: One of the most central questions of corporate law is how to deal with controlling shareholders. On the one hand, the presence of a controlling shareholder can benefit the corporation, particularly by subjecting managers to better monitoring. On the other hand, there is always the risk that the controller will abuse his influence and enrich himself at the expense of the other shareholders.
Traditionally, corporate law has tried to solve this dilemma by focusing on individual transactions suspected of being unfair. However, such a transaction-centered approach has significant drawbacks. Most importantly, it strikes the wrong balance between the interests of the controller and those of the other shareholders. From an efficiency perspective, the amount of benefits that the controller should be able to extract from the corporation depends both on how valuable his presence is to the corporation and on the extent to which the controller bears costs of control that he cannot share with the other shareholders. However, the transaction-centered approach fails to take these factors into account because it only focuses on the fairness of individual transactions. As a result, the level of benefit extraction is bound to be too high in some corporations while being too low in others.
The present article, therefore, presents an alternative to the transaction-centered approach: Minority shareholders should be given the right to expel the controller, and at the same time, corporations should be allowed to opt out of the transaction-centered protections that existing law imposes. The proposed regime would ensure that controllers cannot extract benefits in excess of what their presence yields. Moreover, it would allow controllers to receive sufficient compensation for those costs of control that they cannot presently share with the other shareholders.
Abstract: There is widespread agreement that Title VII is failing women at the top. Title VII has been fairly successful at protecting women at the lower echelons of private enterprise from discrimination, the argument runs, but has largely failed in its efforts to protect women aspiring to managerial positions. Not surprisingly, this assessment has prompted calls for fundamental reforms.
At least from a comparative perspective, however, the perception of U.S. sex discrimination law as "anti-elitist" seems misguided. As this article shows, continental European legal systems tend to fare far worse on this score: In much of Europe, antidiscrimination law remains a child of the labor movement and of those parties that represent the interests of the working class. Accordingly, the relevant legal systems are much better at protecting the "common" female worker against discrimination than at providing such protection to high-achieving female workers or unemployed women.
From a transatlantic perspective, then, it seems unjustified to criticize U.S. antidiscrimination law for being excessively focused on the protection of lower-level employees. On the contrary, its comparative effectiveness at protecting female workers at all levels of private employment constitutes one of the central virtues of U.S. sex discrimination law.
discrimination, sex, gender, employment discrimination, gender discrimination, sex discrimination, Title VII, equal treatment, class
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