Private Enforcement of Corporate Law: An Empirical Comparison of the UK and US

36 Pages Posted: 16 Apr 2008 Last revised: 19 Oct 2010

John Armour

University of Oxford - Faculty of Law; University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Bernard S. Black

Northwestern University - Pritzker School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)

Brian R. Cheffins

University of Cambridge - Faculty of Law; European Corporate Governance Institute (ECGI)

Richard Nolan

University of York - York Law School

Date Written: February 13, 2009

Abstract

IIt is often assumed that strong securities markets require good legal protection of minority shareholders. This implies both "good" law -- principally corporate and securities law -- and enforcement, yet there has been little empirical analysis of enforcement. We study private enforcement of corporate law in two common law jurisdictions with highly developed stock markets, the United Kingdom and the United States, examining how often directors of publicly traded companies are sued, and the nature and outcomes of those suits.

We find, based a comprehensive search for filings over 2004-2006, that lawsuits against directors of public companies alleging breach of duty are nearly nonexistent in the UK. The US is more litigious, but we still find, based on a nationwide search of decisions between 2000-2007, that only a small percentage of public companies face a lawsuit against directors alleging a breach of duty that is sufficiently contentious to result in a reported judicial opinion, and a substantial fraction of these cases are dismissed.

We examine possible substitutes in the UK for formal private enforcement of corporate law and find some evidence of substitutes, especially for takeover litigation. Nonetheless, our results suggest that formal private enforcement of corporate law is less central to strong securities markets than might be anticipated.

Keywords: Private enforcement, corporate law, derivative actions, public enforcement, comparative corporate law

JEL Classification: G38, K22, K41

Suggested Citation

Armour, John and Black, Bernard S. and Cheffins, Brian R. and Nolan, Richard, Private Enforcement of Corporate Law: An Empirical Comparison of the UK and US (February 13, 2009). as published in Journal of Empirical Legal Studies Vol. 6, pp. 687-722, 2009; U of Texas Law, Law and Econ Research Paper No. 89; McCombs Research Paper Series, Paper No. FIN-02-07; Oxford Legal Studies Research Paper No. 1105355; 3rd Annual Conference on Empirical Legal Studies Papers; ECGI - Law Working Paper No. 120; ECGI - Finance Working Paper No. 234. Available at SSRN: https://ssrn.com/abstract=1105355

John Armour

University of Oxford - Faculty of Law ( email )

Oriel College
Oxford, OX1 4EW
United Kingdom
+44 1865 286544 (Phone)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Bernard S. Black (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Northwestern University - Kellogg School of Management

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5049 (Phone)

European Corporate Governance Institute (ECGI)

Brussels
Belgium

Brian R. Cheffins

University of Cambridge - Faculty of Law ( email )

10 West Road
Cambridge, CB3 9DZ
United Kingdom
+44 1223 330084 (Phone)
+44 1223 330055 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Richard C. Nolan

University of York - York Law School ( email )

University of York
Heslington, York YO10
United Kingdom

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