The Uneasy Case for Top-Down Corporate Law Harmonization in the European Union

Abstract:     
Is there a case for (further) harmonization of EC corporate law? If one treats corporate law harmonization as a real-world phenomenon, looking at its record thus far and scrutinizing its various rationales, the question should be answered in the negative. First, the paper shows that the possible justifications for harmonization in the corporate law area do not stand close scrutiny. It argues that, with no European Delaware in sight, it is premature to impose rules aimed at preventing a race to the bottom among EU jurisdictions. Even if harmonization can be justified in theory to correct market failures that Member States alone are unable or unwilling to correct and provided that the proposed harmonized rules would make society better off than in their absence (also taking the costs arising from the harmonized rules into account), this paper argues that there is no reason to believe that EC institutions are any better positioned than national lawmakers in performing the task of tackling market failures. Further, the paper analyzes the rationales related to the market integration objective and argues that in the real world negative harmonization (i.e. harmonization removing barriers to the four freedoms) is most often bundled with positive harmonization, so that what can be gained in terms of greater freedom of establishment is usually lost in terms of lower flexibility. It criticizes level playing field as a possible rationale for corporate law harmonization, and argues that, far from lowering transaction costs, real-world harmonization has thus far raised them and can hardly be expected to do otherwise in the future. Finally, the rationales relating to scale economies in law production and to the correction of national governments' failures are dismissed as either implausible with regard to corporate law or unconvincing.

The paper then highlights harmonization's drawbacks. Corporate law harmonization substitutes a single lawmaker for twenty-five different ones, or in other words a monopolist for twenty-five competitors, implying a higher risk of excessive regulation and innovation and a lower degree of experimentation. A uniform law also rules out the possibility that divergent expectations and preferences at the national level are taken into account. Further, real-world harmonization increases complexity and uncertainty of national corporate laws. In addition, EC corporate law rules are hard to change and therefore little adaptable to new economic or technological developments. Finally, the harmonization process itself is costly in terms of lobbying expenditures and the rent extraction opportunities it grants EC officials and politicians.

After testing the proposed general framework by providing an analysis of certain recent initiatives by the EC in the field of corporate law (namely, those on shareholder rights, differential voting structures, pyramids and cross-border mergers), the paper concludes that, ideally, the EC should only engage in limiting barriers to companies' freedom of movement within the EU.

Number of Pages in PDF File: 75

Keywords: Corporate Law, European Union, EC Company Law, Harmonization, Corporate Governance, Company Law Action Plan, Regulatory Competition, Cross-Border Mergers, Shareholder Rights, Cross-Border Voting, Dual-Class Shares, Pyramids

JEL Classification: G18, G38, K22

Accepted Paper Series