Relationship between Goals of Company Law and Harmonization of Company Law in the EU
17 Pages Posted: 18 Nov 2013
Date Written: January 26, 2013
In the European Union there is still a discussion continuing about the desirable extent of harmonization of company law. According to the subsidiarity principle, the union should enact company law only in cases where member states cannot solve an issue effectively themselves. The primacy of national legislation is fueled mainly by benefits of diversity consisting in (i) legal rules better adapted to the preferences of firms and citizens, and (ii) innovation through the dynamic forces of competition between legal orders. However, benefits of diversity may be outweighed by benefits of centralization, such as averting of the danger of a ‘race to the bottom.’ An interesting observation is that the concept of race to the bottom implies that states stop pursuing goals of company law and start to pursue other goals. These other goals are the economic benefits of (re)incorporation of companies in the respective state such as taxes paid by therein incorporated companies, or services that these companies buy from other local companies. This is to be understood so that a primary goal of a state is promotion of efficiency (wealth) of its nationals. If benefits of attracting foreign companies by poor company laws are higher than benefits of high quality company law (which is possible due to existence of interstate externalities) then the state decides for the former.
Keywords: company law, securities law, harmonization
JEL Classification: K22
Suggested Citation: Suggested Citation