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. Regulatory competition under this assumption requires the successful provider of corporate law to offer both an attractive statute and specialized courts to interpret that statute in a predictable manner so managers and investors will want to incorporate in that jurisdiction. This article suggests that the European experience with jurisdictional competition, at least in the short term and perhaps for longer, could be different from that in the United States. We make both a positive and a normative statement that the process of regulatory competition in 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 in neoclassical economics of perfect information, perfect rationality and zero transaction costs. We also recognize the impact of path dependence and the importance of a learning process to designing regulatory and adjudication frameworks. Furthermore, we are aware that even optimal solutions to regulatory problems can become unstable and suboptimal over time. Although there are many ways in which, for these and other reasons, the European experience with corporate law 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 cases are litigated in Delaware. Delaware thus not only provides corporate charters but also its case law, and the user ordinarily must take a bundled product that includes substantive law (statutory and case law) together with adjudication. This bundling of statutory law and adjudication might, however, cause difficulties in Europe. 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. 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, and the fact that these differences discourage lawyers from recommending to their clients incorporation in other Member States, (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 could be “poor learners” about the complexities of applying national corporate law to managers and investors in other countries. Designing strategies to overcome these barriers to a Member State entering the market for adjudication in addition to the market for corporate statutes may be a realistic long-term objective. 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 adjudication. 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.

Disciplines

Law and Economics

Date of this Version

November 2004


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