Wisconsin Workshop Presentation: March 27, 2009
Draft of February 1, 2009-not copyrighted, not to be quoted or cited
without written permission
What Is the Difference Between Corporation and Securities Regulation? A
Comparative US-EC Perspective
Richard M. Buxbaum, School of Law UC Berkeley
I
Introduction
The substantive law on which this presentation rests is company
law, but company law defined as reciprocally included in and including
some aspects of capital market law. The other part of the title, however,
might better be “a comparative constitutional law framework” within which
these two bodies of law, including their choice-of-law elements, are
embedded. The relevant elements of constitutional law bear both on the
federal/state or vertical and on the interstate or horizontal allocation of
authority to enact the described substantive law. Obviously, the justification
1
for this discussion arises from the current situation in which corporations can
carry their home-state law to their host states much in the way natural
persons once carried their personal laws of marriage, divorce and succession
along with their luggage to new domiciles. The analogy may be weak, but it
does suggest a further dimension for any comparative study, that of history.
A first puzzle deserving this comparative inquiry: The acid test of
the liberal economic order as expressed in company and capital-market law
has been the battle over hostile takeovers, and that is as true of the US as of
the EC. In the US, once the important state, Delaware, enacted a statute
creating a defensive framework against hostile takeovers, the US Supreme
Court rejected the argument that the Commerce Clause of the Constitution1
prohibited that state action. In the EC it never came to the test,2 because the
federal legislative system took over the inter-state political battle between
the liberal and the protectionist economic rivals and after much political
tugging and hauling fashioned a federal norm. Had the European Court of
Justice been pushed to rule on a Delaware-typeMember-State defensive law
before 2004, however, under what Treaty-constitutional norms would it have
1
That version of it, the negative or dormant Commerce Clause, is a barrier to single-state action even in the
absence of conflicting federal legislation.
2
More accurately, it has not come to the test; and my reading of the European literature is that the ECJ will
not upset the political compromise that led to the Directive. Of course, some commentators may be
inclined to argue that point.
2
acted? What explains the choice of this legislative route as against the
judicial route taken in the US? Is it only the accident of timing, the fact that
until reincorporation of publicly held corporations in such a state becomes
feasible no tropism towards any such state could develop?
A second puzzle: Why was Delaware able to enact the framework
statute for defense against a hostile offer in the first place? Presumably, that
was because its policy response to the finance-driven takeover phenomenon
was driven by its role as the state of incorporation of the majority of the
large publicly held corporations. That group – call it the Business
Roundtable for short – had the necessary political power to obtain that
legislation. The relatively few financial firms did not have the power to
prevent that enactment, even if some of them also were Delaware firms. 3
In the EC, the analogous question now probably is moot, given the 13th
Directive. But if the UK is the heir presumptive in Europe of the Delaware
mantle, and if we assume away the reincorporation timing problem, could it,
given the financial role and power of the City institutions,4 indeed have
enacted – could it, in a hypothetical post-Daily Mail future – enact a similar
3
One might interpose that New York, which is the home of finance capitalism if any state is, nonetheless
did enact a statute also tilting the playing field towards the target company management. There is a
response to that objection, but I will not pursue it here.
4
See the discussion of the provisions of the original [London] City Takeover Code in its restriction of the
target management’s defensive rights and the transfer of any “resistance” power to the shareholders in
Johnston, Cambridge L J 66:422, 442f (2007).
3
statute, one that could use the possibilities of the 13th Directive to the
maximum extent possible? And if it could not, might this be a sufficient
ground to conclude that there will be no European Delaware, quite apart
from the lively disputes about legal culture, language, political realities, and
other variables that have been aired in recent years?
Those puzzles led to the approach that follows. To restate the
principal thesis of this presentation: In the United States as in the European
Community it is the judicial branch that is in charge of these vertical and
horizontal allocations of legislative power, because it is in charge of the
constitutional norms that bear on this allocation. In the United States,
however, that judicial role is defeasible by legislation in a way more fully
discussed later. The comparative question is whether federal legislation is as
defeasible within the separation of powers system of the European
Community. If not – if the ECJ retains more override authority even against
federal legislation – then judicial self-restraint in exercising its constitutional
powers may be more important for the European Court of Justice than it is
for the US Supreme Court.
An implication of this thesis concerns the distinction between state
restrictions on the free movement of capital and state restrictions on the right
of establishment. The relative unimportance of this distinction in the US
4
constitutional architecture, when compared with that of the EC, matters. It
has a direct bearing on the role of judicial self-restraint in the imposition of
constitutional barriers to federal and not only to state efforts to permit or to
impose restrictions on these two freedoms. To put it briefly, just as antitrust
laws in the US view aim to protect competition and only through that
primary goal may incidentally protect competitors, so the constitutional
Commerce Clause aims to protect free markets and only incidentally to
protect the economic actors at work there. The Right-of-Establishment
Clause of the EC, however, may protect the market actor in a primary sense.
As Grundmann has put it:
“For all situations which are not exactly those decided in the Daily
Mail case nor those decided in the Überseering case, the core question
is whether the freedom applies directly (as in Überseering) or not (as
in Daily Mail).5
To an external observer this characterization as a primary right may create
some unintended consequences within the European Community that do not
occur in the United States.
These are admittedly rather abstract notions and need to be unpacked.
Grundmann, European Company Law (Antwerpen 2006) at 502. I take “direct” and “primary” as
equivalents.
5
5
II
The Current Contest Over the Applicable Law
A.
The Terrain
As is now clear beyond argument, initial corporate mobility is assured
within the EC by judicial interpretations of the right of establishment
guaranteed by Treaty articles 49 and 54; capital mobility in similar fashion
through judicial interpretation of article 63.6 In the case of enterprises of
modest capital needs, the jurisprudence developed under the first heading
has led many of them to choose incorporation in the country with the most
modest capitalization requirements – for now, the UK. The judicial
guarantee of mobility permits these enterprises to situate their activities
within any EC member state, including the home state of the entrepreneurs
who formed the entity. Before the Centros line of decisions, it was the
prerogative of the Member State, exercised legislatively in some, judicially
in most cases, to promulgate the rules of private international law
concerning the law applicable to the affairs of a foreign business entity.7
Since the Centros line was established, the state-of-incorporation alternative
has been constitutionally mandated as the only legitimate version of this
6
For present purposes I ignore the different guarantees available to rights of establishment and of capital
mobility when the matter involves nationals of non-Member States (article 64), as well as bilateral treaties
of the FCN sort.
At this point of the presentation, “affairs” not “internal affairs” is the appropriate term, since the actual
definition of “affairs” is contestable and indeed is a central part of the following discussion.
7
6
former doctrine of private international law for the states of the EC.8 That
constitutional command has not yet been issued by the US Supreme Court;
and were it to be issued, it would have to be issued under the Commerce
Clause.
That difference in the constitutional texts will be one element of this
presentation. In context, however, that also will require a brief look at the
already mentioned question of the actual scope of the company law that falls
under this private international law doctrine (be it constitutionally mandated
or not).
So far the story is one of initial formation of entities in the states of
the EC, and more specifically of initial formation of companies that have not
yet tapped capital markets. In my opinion this is an important point. The last
barrier holding back the already existing and especially the publicly held
company from having the option of reincorporating outside their home state
is the Daily Mail barrier.9 Depending on the resolution of this matter10 – not
8
See in lieu of innumerable others Behrens, IPRax 1999, 323.
9
Decision of Sep. 27, 1988, C-81/87. As Basedow, Tulane L. Rev. 82:2119 (2008), points out (at 2134),
the palpable annoyance of the ECJ at the failure of the Council to utilize legislative or treaty mechanisms to
provide some appropriate degree of freedom of movement to incorporated entities not only led to the
arrogation of that power by the Court but may have generated enough inertial momentum to overturn Daily
Mail as well.
10
For its description, see e.g. Schon in FS Lutter(2000), 683 (and at 702 for the formal explanation of the
distinction between rejection of departure and rejection of arrival of the corporation). Of course, one form
of reincorporation – the cross-border fusion of two corporations – already overrides national legal barriers
since Sevic Systems, C411/03, and now has been legislatively confirmed and concretized in Directive
2005/36 of Oct. 26, 2005.
7
to mention the uncertain state of affairs in the future11 -- it may become
necessary to reconsider whether one Member State might become the
Delaware of the EC, and if so, a Delaware more secure in its legal position
than the original?
B.
The Constitutional and the Private-Law Frames of Reference
It seems the right time, therefore, to look at the constitutional control
of this migration question in comparative perspective. That such an inquiry
implicates both private international law and substantive company law12
seems clear. And as already said, that also suggests a look at the history as
well as at the current and possible future status of these two sets of norms.
Two inter-jurisdictional issues, as mentioned, are the subject of this
presentation. The first concerns the vertical division of powers; that is, the
legislative relationship between Washington or Brussels on the one hand and
11
The awaited judgment of the ECJ in Cartesio, Case No. C-210/06 may resolve at least a part of this issue.
An argument for ending the distinction is presented by Mucciarelli, 98:2008 EBOR 267.
12
Of course, a substantial literature already exists on this question of state competition for corporate
charters, one well-summarized and critically evaluated by von Hein. For a useful debate,, compare
Dammann, “Freedom of Choice in European Corporate Law,” 29 Yale J. Int’l L. 477 (2004) at 520ff with
Enriques, “EC Company Law Directives and Regulations: How Trivial Are They?,” 27 U. Pa. J. Int’l L. 1
(2006) and Tröger, “Choice of Jurisdiction in European Corporate Law – Perspectives of European
Corporate Governance,” 6 Eur. Bus. Org. L. Rev. 3 (2005).
8
the states or Member States on the other.13 The second concerns the
traditional horizontal or interstate conflict as umpired by federal
constitutional norms. This second issue unavoidably implicates the
substantive content of company law. That substantive content, in turn,
deserves examination under two points of view, both involving the question
of a defensible state-level substantive company-law regime in light of
corporate mobility through the escape hatch offered by direct
reincorporation or reincorporation through merger. By “defensible” I mean
a substantive content of company law that is constitutionally acceptable and
politically worth contending for.
First, what elements of substantive company law may still be
imposed, in the federal proto-constitutional sense, by a host state that is not
the state of incorporation? Second, what elements of substantive company
law applicable to its own corporations may a host state be able to maintain,
in Real-political terms, in the face of a potential flight through
reincorporation elsewhere? Those two questions in turn also lead to
comparative reflection on the very definition of company law, and that,
John Armour, “Who Should Make Corporate Law? EC Legislation versus Regulatory Competition,” in
After Enron (John Armour & Joseph McCahery, eds., Oxford 2006), 497. On the law and politics of statelevel rules of private international law acceptable within the post-Centros frame of reference, see the work
of the Second Commission of the German Council for Private International, Vorschläge und Berichte zur
Reform des europäischen und deutschen iinternationalen Privatrechts (Tübingen 2007), esp. Zimmer at
372ff.
13
9
again, in two contexts. The first context involves the much-discussed
stakeholder issue, but a stakeholder issue writ large, embracing Walter
Rathenau as well as Milton Friedman, bankruptcy as well as
codetermination, financial-center banks as well as local communities. The
second context – perhaps only an important component of the first – arises
from the globalization of financial markets; namely, the modern issue of
separating company law however defined from capital-market law.14 This
issue circles back to the problem of federal-state competition, the vertical
division of powers.
II
Competition with the Center
A.
The Starting Point – the United States
It is tempting if not always productive to lay the half-century history
of adapting company law to a Europe-wide common market next to the more
than two centuries of that same adaptation in the United States. Productive
or not, however, let me put down a few basic comparisons. Company
capitalization as well as the corporate production and distribution of goods
“In addressing the regulatory challenge as to which norms are most appropriate to the governance of the
corporation in a globally competitive setting, boundaries between company and capital markets law
become as relative as those between corporate governance, corporate social and environmental
responsibility, and industrial relations.” Peer Zumbansen & Daniel Saam, “The ECJ, Volkswagen and
European Corporate Law: Reshaping the European Varieties of Capitalism,” 8 German Law Journal 1027
(2007) at 1031.
14
10
began in both polities principally at the single-state level – in the United
States for physical, in Europe for political and legal reasons. Given these
historically grounded different starting position, both the pace and the scope
of central engagement in law-making took different paths. In the United
States the move first to a nationwide level of production and distribution and
then to a nationwide level of financing of these nationwide activities came
well before the development of a strong central government. The Civil War
of the 1860s laid the groundwork for these physical developments, the
Gründerjahre of the last quarter of the 19th Century the groundwork for
these financial developments. Before then, essentially through the first half
of the century, single-state laws (first special charter-laws; after the
Jacksonian Revolution general incorporation laws) sufficed to facilitate
corporate formation. And the common-law development of rudimentary
doctrines of fiduciary duties sufficed to provide a basic, indeed a robust,
degree of shareholder and creditor protection against misjudgment and
misbehavior of these entities’ controllers. In short, as US corporations
moved to a national scale of activity, the evolution of state law was able to
keep pace with the evolution of the market.
Of course, the resultant absence of federal-level legislation depended
on one further historical fact. At least until the mid-19th Century, while the
11
state of incorporation was also the corporate seat, and especially while and
to the degree that its shareholders and creditors also were based in that same
state, it was there that litigation either seeking a recovery from the entity or a
money or status judgment on its behalf was brought. There was no issue as
to whose law would apply, since all relevant elements also were located in
the forum state. As a result, if an action was brought elsewhere, especially
when no assets in that other forum were available against which to enforce
the judgment, these other courts in essence returned such cases to the home
state, whose courts could render effective relief unavailable elsewhere.15
Then, after national economic activity made monetary but not status relief
available outside the home state, it was only a short step to continue the
primacy of the law of the state of incorporation in the case of disputes
involving shareholders’ and even some species of creditors’ rights.
At first, so long as the administrative nerve center of the entity
remained in the state of incorporation, this was a natural consequence of the
absence of a second logical candidate whose law “should” be used. And
when, during the last quarter of the century, place of incorporation and seat
could diverge, thanks to New Jersey’s offer of a modern and facilitative
company law to large enterprises choosing to place their headquarters across
15
Buxbaum in FS Kegel
12
the Hudson River in New York, the situation did not change. By then the
place of incorporation had been sufficiently entrenched in the common-law
doctrines of the corporate conflict of laws (not, nota bene, in the statutory
law), that even the courts of the seat, while accepting the placement of
litigation there, applied the now settled notion that the law of the state of
incorporation governed the internal affairs of the corporation.
It is also a historical fact with consequences for the present that when
federal legislation did appear on the scene in the United States, it was first
enacted to control the large corporations’ market and social impacts, not
their methods of drawing household savings into the productive sector. The
statutes creating the Interstate Commerce Commission and the Federal Trade
Commission were enacted decades before the law establishing the Securities
and Exchange Commission. They reflected the fact that it was the
corporation in its relations with its physical-factor providers and its product
markets, not the corporation in its relations with its equity (and debt) capital
providers which engendered trans-state problems needing federal-level
solutions. The occasional suggestions for federal involvement in
(traditional) company law reform, let alone for a federal company law, never
13
gained political traction when they were raised during that same era of trustand monopoly-busting.16
After the stock market crash of 1929 the protection of shareholders, at
least in their capacity as investors in national capital markets, led to federal
intervention. Another historical contingency dictated that this intervention
be on the basis of disclosure rather than substantive regulation. The reason
for that approach, which soon became a virtue and then a limitation, can be
found in yet another chapter of late 19th-Century history. The investor fraud
that did occur then, and much did, still largely was local fraud on local
investors; the result was the enactment of individual state securities
regulation, the so-called Blue Sky Laws. That legislation, and the regulatory
schemes it created, was to some degree substantive and even paternalistic, at
least in the major states. The political scene at the advent of the Roosevelt
Administration did not permit the elimination of those state laws; indeed,
their survival was guaranteed against the preemptive effect of the US
Constitution’s Supremacy Clause by an explicit savings clause in the
Securities Act of 1933.17 It was capital-market transparency, not substantive
16
That said, it is worth noting that the iconic federal law of that era, the Sherman Anti-Trust Law, did focus
on one “internal affair” of the corporation; namely, the form in which its cartelization and monopolization
behavior potential was structured. But even at the time of its adoption it was clear that the trust form was
not the essential issue.
17
There are important implications here for the particular approach the US Supreme Court took in the
1980s to the state reactions to the hostile-takeover phenomenon; this is further discussed later.
14
controls on the issuance of equity and debt instruments, that was needed –
and that was seen as supplemental to existing state-level statutory and
common-law controls on the practices and decisions of corporate managers.
B.
The Starting Point – the European Economic Community in 1958
Even to an outsider, it is obvious that the creation of the European
Economic Community had to result in a different engagement of the central
legislative authorities. State-based financial and commercial walls had to be
broken down and not merely worn down, and that for two reasons. The
obvious reason, given the potential for trans-state commerce, was to create a
true common market once the customs and tariff barriers thereto had been
reduced and were on the way to elimination. The less obvious reason had to
do with the arrival of foreign – sc. American -- enterprises more accustomed
to working outside their home base than were their European counterparts of
the time. Given the liberal economic policies that are the cornerstone of the
Common Market, the emerging interest in cross-border production and
distribution by European enterprises had to be facilitated as radically and as
rapidly as possible if a US takeover of the private sector was to be avoided.
The only alternative to the latter would have been a two-track economic
15
policy – a Fortress Europe approach – and it is to the enduring credit of the
EEC “founding fathers” that this temptation was avoided even at the
political cost of a significant first wave of foreign investment in the
European private sector.18
For present purposes, however, the point is one of time and timing.
The industrial and commercial bases for an EC-wide field of operations
already existed; it was the legal framework that had to be built. The luxury
of evolution was not an option. Central legislation was possible under the
evolving proto-constitutional regime, and when necessary was promulgated.
That is the story of the first wave of directives, and it need not be revisited
here. Only the comparative point is relevant; namely, that specific
improvements, even within a narrowly defined company-law regime let
alone within the actual broadly defined one,19 if deemed urgently needed and
politically feasible,20 could be and were adopted by Brussels in either
directive or regulation form. The US auto-limitation to a disclosure or
transparency philosophy for federal legislation was not relevant, at least as
18
In this context, too, it is still worth noting that the pressure was to reduce public and private barriers to
commerce; concern with reducing barriers to the movement of capital came later.
19
“Broadly defined,” of course, from the US view of the traditional scope of that field of law.
20
This feasibility condition should not be underestimated. The first round of company-law harmonization
directives on the whole concerned relatively noncontroversial issues and helped to modernize outdated
national laws in a facilitative manner. See, e.g., Pirŝl, 14 Col. J. Eur. L. 277 (2008), 329f. Compare the
fate of the 13th Directive!
16
to most of the substantive provisions of this first wave of federally generated
uniform or harmonized Member State law.21
One other comparative point in this introductory overview concerns
the Societas Europaea. Its original failure is not only the consequence of the
socio-political dispute over codetermination. It also is the consequence of a
lack of demand for the form. Of course this is to a degree a circular
argument: Had it not been possible to drop these incremental improvements
into national legislation, like a cuckoo’s egg into a wren’s nest, the all-ornothing approach of an EC-wide company law would necessarily have been
on the agenda.22 That aside, however, the more important comparison is
another. The century-long evolution of US state-based corporation law
resulted in a slow harmonization from the bottom up, to a level at which its
relative individual differences did not need further top-down harmonization.
In later years, of course, the Delaware phenomenon constrained other states’
experimentation with variations in substantive detail. But even earlier, when
relatively few major corporations had chosen Delaware, the degree of
substantive differentiation was not large given the general acceptance of a
21
This is not to say that German or even EU capital-market regulation puts a lower value on transparency
and disclosure as the cornerstones of its approach. See, e.g., Fleischer & Schmolke, ZIP 29:1501 (2008) at
1502: “Kapitalmarktrecht ist auch und gerade Informationsrecht. Es gründet auf einer umfassenden
Offenlegungsphilosophie….”; more broadly Merkt, xx ZGR 532 (2007).
22
The analogous fate of EC-wide intellectual property-law regimes is instructive on this point, from both a
demand and a supply perspective.
17
narrowly defined and facilitatively oriented concept of corporation law.
Contrast that with the significant level of individual Member-State
differences in both contexts, differences that did call for a substantial
helping of top-down harmonization in the EC.
Putting capital-market regulation aside for separate discussion, only
rarely has the US Congress superimposed traditional company-law elements
onto the state-law mix. The Clayton Act of 1914 contains an antitrust-based
barrier to the election of directors from competitor firms (the interlockingdirector prohibition); and the Plant Closure Notification Act of 1986 might
be read as constraining otherwise available management discretion in the
field of mergers in an “internal” procedural and not only a substantive
sense.23 Of course all of the manifold species of public law – from antitrust
law to employment discrimination – constrain the decision-making freedom
of management. Still, the mentioned two are the only ones that might even
loosely be characterized as internal constraints; that is, constraints internal to
rather than external to company-law regimes as US legal history and custom
defines them. It is only with the enactment of the Foreign Corrupt Practices
Act in 1978 and the Sarbanes-Oxley Act in 2001 that the occasional
23
Worker Adjustment and Retraining Notification (WARN) Act, 29 U.S.C.A. §§2101ff. This minor statute
requires advance notice to the workforce of a target company when plant closures are likely (including as
the result of a takeover). Compare art. 6(1) of the 13 th (Takeover) Directive, with its employee-notification
system that depends on the nature of employee representation in the target company under the state law
applicable to this relationship (which of course may be the law of the administrative seat).
18
incursions of SEC regulatory efforts into the interior spaces of company law
gained a still- contested statutory foothold; and even then, in each statute
essentially in the context of a disclosure philosophy.24 That it could be
otherwise is the subject of the constitutional discussion later; but that it has
been thus is clear.
C.
“Vertical” and “Horizontal” Competition and Their Relationship to
Private International Law: Yesterday, Today and Tomorrow
1.
Introduction
It is, of course, a doctrine of the conflict of laws – of private
international law – that makes much of the substantive company law of the
host state impotent to temper the activities of the mobile corporation.
Whether gradually evolved as the internal affairs doctrine of AngloAmerican law or directly imposed as a corollary of the “right of
establishment” doctrine in consequence of the ECJ’s Treaty interpretation,
the result is the same. The indirect consequences of these two evolutionary
paths, however, differ sufficiently to justify some comparative reflections on
the relationship of state and federal law in this field.
24
Of course, to some extent this is a matter of definition; one could argue about the characterization of
some of the Sarbanes-Oxley Act requirements – see von Hein, at 324. But the justification of these
requirements does rest largely on the transparency of the corporation’s governance structures and
processes.
19
In the European Union of today, it is, at least in the view of an
external observer, possible and perhaps likely that EU-level legislation
might in time serve as a partial correction of the partial impotence of hoststate law in this post-Centros situation. If Daily Mail falls by the wayside,
and reincorporation joins initial incorporation as a form of corporate
mobility, these questions will gain further political urgency and move higher
up the priority ranking for the Brussels actors. In any event, that would be
protection supplementing whatever host-state protection the ECJ itself,
without central legislative guidance, may in the future accept as to those
elements of company law that go beyond the core owner-manager/ principalagent elements.
These questions of central and of host-state rules, whether driven by
the worker-protection (including codetermination), creditor-protection, or
civil-procedure elements of many European company-law codes, are major
subjects of academic commentary and political controversy today. In the
United States of today, however, even if the current financial crisis is taken
into account, a correction from Washington of similar magnitude is not on
the agenda. Given the fact that except for the takeover-defense area state
codes do not go beyond the mentioned core owner-manager context, it also
20
is not as necessary.25 If a well-functioning centralized capital-market
regulatory regime indirectly but substantially reduces owner-manager
conflicts, then the main reform issues for those aspects of corporation law
that lie outside the investor-regulation sector still will be contested at the
horizontal, state-of-incorporation versus host-state level – between Delaware
and, say, California.
I do not wish to minimize the salience of Mark Roe’s historically
derived argument that threats of federal legislation are a constraint on both
legislative and judicial adventures on the part of those states – really, of the
one state, Delaware – whose corporation law matters. My point relativizes
but does not contradict that possibility. Were the US definition of
corporation law as broad as, for example, the German one, occasions for the
exercise of central power to shape US corporation law would be more
frequent. But given our narrow definition, those occasions are fewer. I
shall, later in this presentation, look at these occasions in more detail. For
now, it is the general point arising from our historically contingent definition
of the subject matter that needs emphasis. Let me first, therefore, look at the
possibilities of interstate legislative competition within the relatively soft
25
I recognize, but put aside as more symbolic than real, the issue of federal limits on executive
compensation at least for that sector of the economy receiving federal financial support.
21
constraint of the oversight regime in the US, the Commerce Clause of the
Constitution.
2.
The Constitutional Framing of the Division of Powers in the US
Since Delaware corporation law is de facto the generally applicable
legal regime, and since all states of the American Union sail under the
economic-liberalism flag, – meaning essentially facilitative rather than
regulatory rules for corporate structure and behavior – what interstate
competition there is occurs at the margins. The degree of competing
economic ideologies even now still afloat within the European Union is
unknown in the United States, with one exception. That exception, however,
– the “margin of appreciation” that target-company directors have to rebuff
unwanted merger and takeover efforts – is a central point of departure for the
balance of this discussion. I therefore take that subject as one of the two
substantive company-law issues within which to frame the following
discussion. But in order to extend the discussion of this conflict of
competence, I will take a far less significant problem as the other bookend;
namely, the minimum-capitalization issue. But first the overall
constitutional framework.
22
As then-Professor Felix Frankfurter pointed out already in the 1930s,
the broadly interpreted Commerce Clause of the US Constitution, especially
its so-called Dormant Commerce Clause subset, meant that the only weapon
the individual state had with which to regulate elements of interstate
commerce was the laissez-faire weapon.26 The more important point for
comparative purposes, however, is another. Congress always has had the
power to use the Commerce Clause as its constitutional warrant to regulate
economic activities and structures on any basis, whether liberal or dirigiste.27
Only politics, not the constitution, constrains these actions. As a result,
given sufficient political impulse, federal regulatory corrections inhibiting
the free movement of capital could be adopted either directly or through
delegation of that inhibitory authority to the states. Neither form of these
incursions would be limited to classic public-law subjects like environmental
or antitrust law; both could include traditionally defined company-law
subject matter.28 The US Supreme Court of course has approved the use of
26
Felix Frankfurter, The Commerce Clause Under Marshall, Taney and Waite (Chapel Hill 1937), esp. at
100. See generally to this point Richard Buxbaum & Klaus Hopt, Legal Harmonization and the Business
Enterprise (Berlin 1988) at 46ff.
27
It has been eloquently argued that the treaty-based quasi-constitutional framework of the European
Economic Community and its later incarnations is a liberal-economic framework that may not so easily be
manipulated for dirigiste purposes.27 The test of that proposition lies for now with the ECJ, a major reason
for comparing the constitutional power the two high courts have defined for or arrogated to themselves.
28
This is more and more recognized in the European understanding of US company law; see again von
Hein 324f.
23
the authority granted the Congress under the affirmative Commerce Clause
to enact legislation that restricts interstate commerce. Indeed, practically
speaking, the principal purpose and exercise of the affirmative Commerce
Clause is to regulate, not to liberate, interstate commerce.
But the Court has done something more sensitive. It has approved
Congressional use of the affirmative grant of authority under the Commerce
Clause to delegate to the states the right to enact restrictive legislation that it
would have stricken down under the dormant Commerce Clause.
3.
A Comparative Perspective on the EU Situation
That important constitutional point leads to the first of my two
substantive examples, the norms at issue in Centros. I will assume that an
EU regulation setting uniform minimum capitalization requirements,
however qualified,29 would not be struck down under the Centros line of
argument. For this kind of non-discriminatory central legislation, the
primary-right nature of the Establishment Clause presumably would not
matter.30 But that rights characterization might matter were this a directive
29
Or, more sensibly, a directive authorizing a range of state legislation within a narrow minimummaximum range of capital requirements, and distinguishing between large/small or privately/publicly
owned entity types.
Again, of course, if the EU Treaty is as “instinct with” the economic context of human rights and due
process as the ECJ recently intimated in the Kadi judgment, some might wish to argue this point.
30
24
straightforwardly authorizing Member States to apply their substantive
minimum-capitalization requirements to an entity incorporated elsewhere
(with whatever threshold conditions bearing on pseudo-foreign status
attributes the directive might set). Suppose the Council did not collectively
share the implicit view of the ECJ that the concept of establishment31 was so
central an entitlement that Denmark could not ask the incorporators-owners,
so long as they were Danish subjects, to use Danish law if they intended to
limit their establishment to Denmark and seek no equity capital beyond their
own bank account.32 Put more generally, suppose the political decision was
that no significant interstate interest is implicated by incorporating a Momand-Pop store.
In 1972 Eric Stein opined that the Council was limited to enact
directives that brought national company law provisions only so close to one
another as was needed to permit the Common Market to function.33
Whether that subsidiarity principle avant la lettre could be converted into
judicial acceptance of Council legislation permitting the mentioned state-
31
And perhaps, by analogy, of capital movements.
And the very form of incorporation – as UK Company Limited by Shares or as GmbH – under current
law bars the incorporators from seeking equity capital from others, at least through the organized capital
markets.
32
Eric Stein, Harmonization of European Company Laws – National Reform and Transnational
Coordination (1971) at 77. This point, though not my question, also is noted by Piršl, supra n. x at 331 n.
363.
33
25
level variation in capitalization requirements may be a more debatable
question today, after interim Treaty revisions and the arrival of Centros and
its progeny, especially Inspire Art.34
From a comparative perspective, however, this is an important point.
It is moot in fact since no US state law bothers to make minimum
capitalization a condition precedent to corporate status, but hypothetically
speaking I have no doubt about the constitutional legitimacy of any such
Congressional authorization, enacted under the Commerce Clause.
Now the other example: The comparative history of legislation
responding to the phenomenon of the hostile takeover, and of judicial
treatment thereof, is both real not hypothetical, and separately instructive
because in the US it does not involve any federal legislation of the target
company.35 It is useful to compare the outcome of the implementation of the
13th Directive with its US counterpart, even if and indeed because the
Directive’s applies both to the bidder and to the target.
The political compromise that gained the Directive’s passage permits
each Member State to enact legislation that in turn permits corporations
incorporated there to delegate to its managerial organ(s) authority to
34
Case C-167-01, [2003] ECR I-10155].
35
With a few exceptions at the margins. The management of the target company must take a position on
the desirability of the tender offer, and if choosing to repurchase issued shares as a defensive maneuver
may not discriminate by excluding the bidder from participating in that opportunity.
26
emplace a variety of devices constraining the ability of a hostile bidder to
succeed in a takeover. I make that assertion fully conscious of the fact that
for management’s actions the Directive does enshrine a principle of
neutrality as a default principle, purportedly limiting the target’s Board of
Director-level margin of appreciation in this regard. But at the shareholder
level, it authorizes the state of incorporation to allow shareholder action to
promulgate or permit management to promulgate defensive barriers that may
frustrate takeover bids. 36
In the present state of affairs, a state-approved charter provision
permitting more aggressive defensive maneuvering than the legislated
principle of defensive neutrality could bear 37 presumably would initially be
tested by the ECJ, on the basis of its reading of the scope of the 13th
Directive itself. To that extent it would not be a constitutional decision. But
the compatibility of art. 9 with the Treaty, even if not a real question within
the EU is at least in the abstract a constitutional issue and deserves a
comparative look.
4.
36
The Dormant Commerce Clause at Work
So far as I understand, the full reach of art. 9 of the Directive in this regard has not yet been tested.
37
A strong recent example is that of the Italian Consob delegation of authority to Italian companies to make
maximum use of the defensive weaponry arguably permitted under that Directive.
27
That comparison is additionally useful because it puts the horizontal
competition between the state of incorporation and some other legitimately
concerned state into a new light. In the US, the conclusion one might draw
from the predecessor to CTS, Edgar v. Mite,38 that the internal affairs
doctrine has constitutional underpinnings, is not solid. The effort of the host
state there to impose its anti-takeover legislation on a corporation
incorporated elsewhere failed under the Dormant Commerce Clause, but
more particularized extraterritorial claims, whether based on the pseudoforeign status of the affected corporation39 or on particularized issues tinged
with creditor-protection40 or civil-procedure implications,41 have not been
successfully challenged to date.42
But comparative reflection on this state of affairs discloses a paradox
as interesting for EU as it is for US law. In this same field of anti-takeover
norms, a field it has chosen to characterize as traditional corporation law
38
457 U.S. 624 (1982).
39
That, of course, is the famous §2215 of the California Corporations Code; see now to this whole complex
von Hein, supra n. xx, at 454ff.
40
Exemplified by the New York statutory imposition of direct liability for unsatisfied wage claims against
a corporation on its principal shareholders, in §1320 of the Business Corporation Law.
41
See, e.g., §800 of the California statute applying its version of the contemporary-ownership standing
requirement for derivative actions to suits on behalf of any corporation, domestic or foreign.
42
The line of US Supreme Court cases culminating in Order of United Commercial Travelers of America v.
Wolfe, 331 U.S. 586 (1947), arguably mandating the law of the state of incorporation (see especially
Comment [von Falkenhausen], Cornell L. Q. 37:441, 446f (1952)), involve premium-payment and similar
issues under mutual insurance contracts and have not been generalized to this extent.
28
because leading state codes have so characterized it, the Supreme Court has
rationalized its acceptance of similarly restrictive legislation by (and so far
only by) the state of incorporation43 even in the absence of Congressional
authorization thereof. Some details will make this clear.
The device emplaced in the CTS case was the flip-in – the issuance
(by the Board of Directors, not the shareholders) of rights to non-tendering
shareholders to purchase common shares at a price low enough to dilute the
proportional ownership of the shares purchased through the tender-offer by
the hostile bidder; dilute it to a degree sufficient to preclude the hostile bid.
Putting aside various corrections at the margins, the emplacement of these
plans generally has been judicially approved, at the state level, within the
context of directorial authority constrained only by a subject-specific
concept of the so-called “intermediate level of review.”
Even as these contingent dilution devices were countered by bidders
and found wanting in the takeover marketplace, state legislatures came to the
aid of locally incorporated companies by authorizing or even enacting, as
default provisions, stronger anti-takeover weapons. After hesitating to enter
this arena, even Delaware enacted a strong statute deserving brief
paraphrasing, especially because of its “sticky-default” form: Once a person
43
CTS v. Dynamics Corp. of America, 481 U.S. 69 (1987).
29
acquired 15% of the target’s stock and had not in that first bid acquired 85%
of the stock, it faced a barrier that in terms of tender-offer financing could
well be a deal breaker. It could not for three years thereafter carry out a
follow-up merger unless the target directors prior to that threshold date had
approved that (prospective) merger, or unless after the threshold acquisition
the board approved it and two-thirds of the voting stock not owned by the
acquirer authorized it.
While the Delaware statute has not been before the US Supreme
Court, intermediate federal courts have approved it and I have no doubt it
would pass muster under the teachings of the CTS decision.
The two principal reasons for that conclusion lead us to a critical
comparative constitutional issue: The statute applies only to corporations
incorporated in the enacting state; and rules concerning shareholder voting
are an inherent and traditional element of state corporation law. These two
considerations trump any argument concerning mobility of capital. Some
quotations make the point:
“The primary purpose of the Act is to protect the shareholders of
Indiana corporations….Dynamics’ argument that the Act is
unconstitutional ultimately rests on its contention that the Act will
limit the number of successful tender offers….[T]his result would not
substantially affect our Commerce Clause analysis….The very
commodity that is traded in the ‘market for corporate control’ –
the corporation – is one that owes its existence and attributes to
state law. Indiana need not define these commodities as other
30
States do; it need only provide that residents and nonresidents
have equal access to them….Accordingly, even if the Act should
decrease the number of successful tender offers for Indiana
corporations, this would not offend the Commerce Clause.”
In short, the Court has subordinated federal Commerce Clause
principles to the private-law side of the conflict of laws. This is a different
and more significant outcome than merely approving a federal statute that
would permit the states to enact such authorizing legislation.
5.
The Political Aspects of Establishment and of Capital Mobility
While the 13th Directive is based on the authority granted in Treaty
art. 44(2), which is in formal terms part of Chapter 2’s right of
establishment, its Preamble, interestingly, also references the problem of
capital mobility.44 In functional terms, I would characterize the Directive as
focused on the mobility of capital. Therefore, again from a US perspective,
I would assume that its provisions, in particular its art. 9, would be found
compatible with the Treaty.45 If so, the situation is essentially similar – as to
this point – with that emanating from CTS. But this only sharpens the
44
Preamble, par. 20.
45
This approach indirectly implies a disjunction between the rights and duties of the bidder and those of the
target, since art. 9 necessarily focuses on the law of the state of incorporation. Thus the functional
equivalence of the US approach is evident.
31
contrast with the minimum-capitalization issue, with its judicial supervision
based on the right of establishment
As a result, the legal space available to the Council of Ministers to
respond to political demands for more control of these fugitive entities might
be limited to variations on the creation of an EU-wide minimum-capital
requirement. A first consequence, though in my view a minor one, is that
this constrained freedom of central legislation probably would generate
political contests over directives promulgating a more thoroughgoing set of
minimum standards.
To speculate with one example: A minimum capitalization
requirement applicable to the small and closely held company (as defined)
would be a response demonstrating both the narrow range of legislative
techniques and the expectable range of political opposition. In this
hypothetical example, total opposition to any non-trivial limit might be
limited to one Member State, say the UK. Even if the legislative regime
chosen could override a single-state opponent, however, a number of
Member States might well disagree over the compromise level above the
minimal one. From my external perspective, that would be a second-best
solution; second-best from a constitutional perspective, though perhaps best
from a policy perspective.
32
It is clear, of course, that modern and in my opinion sound views
concerning the trivial role minimum capitalization requirements play in the
arena of creditor protection also would play a role in the rejection of, say,
German political demands for this form of threshold requirement. But it
might well be argued that it is a constitution the ECJ is expounding, not the
contemporary economic version of Herbert Spencer’s Social Darwinism. In
that case, at the federal level, efficiency considerations of the kind that under
Centros would condemn single-state efforts of this sort might well not play a
dispositive role. At this central level efficiency might not be a right, only a
necessity and not the only necessity. Preferable from a policy perspective,
therefore, would be constitutional acceptance of federal legislation
permitting state legislation to impose some host-state requirements, whether
based on the nature of the foreign corporation46 or on the specific local
norm, at least if justified on some ground more compelling than Irish
households’ preference for Irish potatoes.
Whether such elements would stay within the margin of appreciation
afforded by the ECJ’s constitutional control is for others to discuss. But if
the hostile bid-frustration power granted by the 13th Directive is acceptable,
then an important aspect of interstate commerce already has been sacrificed
46
That is, on the pseudo-foreign corporation policy, exemplified by the California legislation.
33
to local preference. In the US, at least, the political preference of the
Supreme Court for the Business Roundtable over the adventurers of Michael
Milken’s Wall Street was widely shared, making the somewhat shabby cover
of the CTS decision under the internal affairs doctrine acceptable. Today’s
hostile takeover scene, however, is more an industrially than financially
driven phenomenon, and a similar rationalization for the European-level
compromise would be less convincing.
IV
Conclusion
And that leads to my comparative conclusion: In the US, a major state
restriction on interstate commerce has been accepted under the internalaffairs norm of the conflict of laws, but the converse is not true. The
Dormant Commerce Clause has not been used to prohibit minor restrictions
by a host state, at least so long as these are no more onerous than those there
imposed on its own subects.47 Further, federal permission of host-state
restrictive legislation presumably would be acceptable. If in the EU the
identical major restriction is similarly acceptable, but minor host-state
restrictions, even if federally authorized, were to be prohibited under the
47
Delaware’s contrary soi-disant decisions are irrelevant.
34
establishment wing of the mobility of commerce norm, a good deal of
pressure would be placed on a federal legislative agenda.
I will allow myself one unfair characterization: If the EU
jurisprudence can accept art. 9 of the 13th Directive but not Germany’s
minimum-capitalization argument, then from a functional understanding of
the mobility of capital and of its users that jurisprudence is straining at a
gnat while swallowing a camel. But however characterized, the balance of
the comparative conclusions I draw from this review returns to the title. If
the current jurisprudence puts as much of the future of modern company law
on the federal agenda as here predicted, a European Delaware would not
only be unlikely but an irrelevancy.
35