A RULE-BASED METHOD FOR COMPARING CORPORATE LAWS.

AuthorLoPucki, Lynn M.

INTRODUCTION 264 I. STEP 1: SCENARIO SPECIFICATION 269 A. Method 270 B. Illustration 271 II. STEP 2: ENTITY TYPE SELECTION 273 III. STEP 3: SCENARIO RESOLUTION 275 A. Method 275 B. Illustration 276 1. The Substantive Law Resolutions 277 a. The Delaware Report 277 b. The United Kingdom Report 278 2. The Enforcement Procedures Resolutions 280 a. The Delaware Report 281 b. The United Kingdom Report 282 IV. STEPS 4 AND 5: COMPARISON 284 A. Method 284 1. Extract, State, and Juxtapose the Governing Rules 284 2. State the Respects in Which the Rules are the Same or Different 286 B. Illustration 288 1. The Substantive Law Comparison 288 2. The Enforcement Comparison 288 V. STEP 6: EVALUATION OF DIFFERENCES 290 A. Method 290 B. Illustration 293 VI. REPORTING COMPARISONS 294 CONCLUSIONS 295 INTRODUCTION

Scholars, lawyers, judges, and policymakers frequently need to compare corporate laws, (1) both internationally and domestically. In part, this need results from the internal affairs doctrine, a conflict-of-laws rule that is unique to corporate law. The doctrine requires that courts apply the corporate law of the state or country of incorporation to the corporation's internal affairs. Because corporations can easily and inexpensively incorporate anywhere--regardless of the locations of their headquarters or operations--the internal affairs doctrine enables them to pick their governing laws from an almost worldwide menu. (2) The result is that even many corporations operating solely in the United States are governed by foreign corporate laws. (3) Lawyers must make comparisons to assist their clients in choosing legal regimes, judges must make comparisons to apply foreign entity laws in their cases, policymakers must make comparisons to decide what corporate and entity laws to offer, and corporate legal scholars must make comparisons to make sense of the differences.

Comparative law scholars are reconciled to the fact that no single comparative method is best. (4) Methods may serve different purposes or be effective only in particular situations. (5) There are, however, some widely accepted standards or principles by which methods are judged. (6) Although comparisons may be rule based, (7) they are expected to take context, (8) including legal traditions, (9) into account. They must be capable of discovering and including institutions that perform the same functions, (10) even when those institutions are contained in disparate doctrines (11) and described by different terminology. (12) They must recognize that when concepts do exist in different jurisdictions, they may be understood differently. (13) Comparisons must take into account the means by which and the extent to which the legal systems actually enforce their rules. (14)

This exacting list of requirements has thus far prevented the field of comparative law from meeting corporate law's need for a simple and intuitive comparative method. This Article addresses the need by specifying a rule-based method for comparing corporation (15) laws that, when executed well, can meet all of those expectations. Following Rudolf Schlesinger, (16) the method does so by using country experts. (17) What is new is the manner in which researchers using the proposed method frame and execute the comparisons. The researchers break comparisons down into subcomparisons, each consisting of a single rule for each jurisdiction, state the rules in parallel, and then state the ways in which the rules are the same or different. Conclusions of "similarity" are treated as incomplete comparisons. The method's principal advantage is that it increases the closeness, that is, the specificity, of the resulting comparisons. Close comparisons by the proposed method frequently reach different results than comparisons that simply rely on the researchers to exercise good judgment.

The proposed method incorporates and builds on Rudolf Schlesinger's "case-oriented factual method" (18) as adapted to company law by Mathias Siems and David Cabrelli. (19) Under their methods or mine, the researchers begin by posing a hypothetical factual scenario (the "Scenario"). The researchers modify the Scenario reiteratively, and solve it under the laws of each of the jurisdictions under investigation. The purpose of the Scenario is to identify the corresponding laws and practices of the two jurisdictions. Those laws and practices are the ones--regardless of their nature--that would be applied in the jurisdiction to resolve the Scenario. The proposed method differs from Siems and Cabrelli by comparing only two jurisdictions and including in the Scenario all facts necessary for an attorney to render an opinion in each of the two jurisdictions. (20) It rejects the method of posing questions to country experts untethered by a specific factual scenario. (21)

The proposed method assumes that the researchers' goal is to compare a single aspect of a jurisdiction's corporate law with the corresponding aspect of the corporate law of another jurisdiction. The method consists of six steps. The first step is to create the hypothetical fact Scenario. The second step is to choose comparable entity types for comparison--one from each jurisdiction. The third step is to conduct the research necessary to resolve the Scenario in each jurisdiction. The fourth step is to extract from that research the rules that directly determined the resolution, express those rules in parallel to the extent practical, and juxtapose them. The fifth step is to express the most important respects in which the laws are the same or different. The sixth step is to apply the researchers' evaluative criteria to reach useful conclusions.

The method proposed in this Article is designed for the comparison of corporate laws in developed countries. That is a relatively easy context in which to make rule-based comparisons, because corporate law is largely statutory and similar in both form and substance across countries. For example, leading corporate law scholars Henry Hansmann and Reinier Kraakman state:

The basic law of corporate governance--indeed, most of corporate law--has achieved a high degree of uniformity across developed market jurisdictions, and continuing convergence toward a single, standard model is likely. The core legal features of the corporate form were already well established in advanced jurisdictions one hundred years ago, at the turn of the twentieth century. (22) In addition, countries copy popular features of other countries' corporate laws as a means of attracting business activity. (23) David Skeel states that "[f]ew countries develop their own corporate law from scratch. Major enactments are usually borrowed from the laws of another country, and it turns out that nearly every corporate law in the world can be traced, directly or indirectly, to one or more of... five jurisdictions." (24) As a result, corporate law is rule based and increasingly contained in statutes that are organized by entity type.

As previously noted, the proposed method assumes that the researchers' goal is to compare a single aspect of a jurisdiction's corporate law with the corresponding aspect of another jurisdiction's corporate law. (25) Comparisons of multiple aspects or among multiple jurisdictions would require that the method be applied separately to each aspect and pair of jurisdictions. Before applying the method, the researchers should specify the purpose of the comparison (26) and conduct a search of the relevant literature to determine whether the same or similar comparisons have already been made. (27)

Part I explains the processes for specifying a Scenario. It introduces the Scenario that will serve as the illustration in the remainder of this Article--a comparison of the liability of directors for the exercise of poor judgment in a Delaware corporation with the corresponding liability in a United Kingdom public limited company. (28) Part II explains and illustrates the necessity of selecting specific entity types for comparison. Part HI describes and illustrates the method for resolving the Scenario in both jurisdictions. Part IV explains and illustrates the novel process for close comparison--the extraction, juxtaposition, and comparison of decisional rules from the country reports. Part V presents and illustrates the method for evaluation of the differences exposed through close comparison. Part VI distinguishes the reporting of comparisons from the making of comparisons. The Article concludes that the proposed method serves a broad range of needs and, as a result, has the potential to increase the use of comparison as a way of gaining insight into legal systems. Throughout this Article, illustrative text is indented and in a sans serif font in order to distinguish it from supportive materials and my commentary.

  1. STEP 1: SCENARIO SPECIFICATION

    The first step is to specify a Scenario. The Scenario is a statement of facts that could occur in either jurisdiction, expressed concretely. Its purpose is to achieve comparability.

    Laws are comparable only if they address the same situation. (29) The Scenario is a method for assuring that the compared laws do. To understand the Scenario's function, imagine that cases identical to the Scenario arose in both jurisdictions and a party in each obtained an attorney's opinion as to how the case would be resolved in the jurisdiction. Each attorney would discover and report the laws, customs, practices, and other factors that would resolve the Scenario in the attorney's jurisdiction. The rules identified in each jurisdiction would be comparable to the rules identified in the other jurisdiction because both sets of rules would have addressed the same facts. Rules comparable in one application are probably comparable in some others, thus creating the basis for rule-based comparison.

    Use of the Scenario is designed to overcome the problem that jurisdictions may use different bodies of law or procedures to resolve...

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