The Globalization of Corporate Law: the End of History or a Never-ending Story?

• Publication year: 2021

THE GLOBALIZATION OF CORPORATE LAW: THE END OF HISTORY OR A NEVER-ENDING STORY?

Franklin A. Gevurtz(fn*)

Abstract: Considerable scholarship during the last few decades addresses the question of whether corporate laws are becoming global by converging on commonly accepted approaches. Some scholars have asserted that such convergence is occurring around the most efficient laws and institutions, thereby marking the "End of History" for corporate law. This Article responds to such assertions by developing three claims not previously given due attention in the convergence literature. First, it demonstrates that the history of corporations and corporate law has been one of seemingly constant movement toward global convergence, yet the resulting convergence is always incomplete or transitory. Next, it points out that because forces besides efficiency also produce convergence, convergence often occurs around corporate laws and institutions that have no particular efficiency or other normative advantage, or that necessarily represent stable equilibrium points. Finally, the Article asks what are the important corporate laws and institutions by which to measure the extent of convergence at any one time. It develops the answer that a stable convergence is least likely for the most important corporate law issues, which are characterized by tensions between competing policies and no easy solutions for the problems presented.

INTRODUCTION. ...............................................................................476

I. THE HISTORY OF CONVERGENCE IN CORPORATE LAW. .............................................................................................480

A. The Early Roots of Convergence.........................................480

B. Continuous Borrowing and Transplants...............................485

1. The General Patterns.................................................485

2. Converging on Limited Liability..............................487

3. Regulations to Protect Non-shareholder Interests.....487

4. Cycles of Regulation and Deregulation in Protecting Shareholders............................................491

II. WHY CONVERGENCE IN CORPORATE LAW OCCURS......494

A. The Efficiency Hypothesis................................................... 494

1. Economic Darwinism and Corporate Laws..............494

2. Forces for Divergence............................................... 495

B. Inefficient Convergence ....................................................... 496

1. Fads and Fashions.....................................................496

2. The Endogenous Variables Problem......................... 500

3. Rent-Seeking.............................................................505

III. WHAT IS IMPORTANT IN MEASURING CONVERGENCE. ........................................................................507

A. The Assumptions of Academics...........................................507

B. The Tough Policy Issues......................................................511

1. Mandatory Versus Permissive Corporate Law.........512

2. Authority Versus Accountability for Corporate Managers ................................................................... 515

CONCLUSION . ................................................................................... 520

INTRODUCTION

While corporations, at least the largest ones, commonly operate on a global scale, the laws governing their internal affairs (in other words, the rights and duties of their owners and managers) are national or sub-national. (fn1) In the last few decades, considerable scholarship has focused on whether these national and sub-national corporate laws are becoming, like many of the corporations they govern, global-in this case by converging upon commonly accepted approaches.(fn2) Earlier comparative corporate law scholarship was to a great extent a technical affair, occupied with describing differences in specific rules-e.g., whether a nation's corporate law provided for a one- or two-tier board of directors(fn3)-and lacked any overarching purpose or direction motivating its inquiry.(fn4) This changed when scholars began to look at a broader context, which culminated in the convergence predictions.

The broader inquiry culminating in predictions of convergence has both descriptive and normative aspects. The descriptive aspect commonly begins with an observation about the pattern of shareholdings in the United States and England as contrasted with the pattern found in most of the rest of the world.(fn5) Specifically, the largest corporations in the United States and England commonly have widely dispersed shareholdings in which no shareholder or cohesive group of shareholders holds enough stock to control the corporation; in contrast, in many other parts of the world, a relatively few shareholders will hold large enough blocks of voting shares to possess effective control over even the largest companies.(fn6) This, as well as other differences between corporations of different nations, fuels the following normative inquiry: do such differences produce superior performance for corporations from one nation versus another (which presumably translates into superior overall economic performance)?(fn7) Bringing the matter back to law, the descriptive and normative questions then become whether various corporate or other legal rules and institutions facilitate dispersed or concentrated shareholdings (or other differences encountered in corporations from different nations), and thereby lead to improved individual corporate and overall economic performance.(fn8)

The answers reached to these inquires tend to depend on the decade. In the 1980s and the beginning of the 1990s, the Japanese and German economies and companies were outperforming the economy and companies in the United States. Accordingly, scholarship noted the advantage of more concentrated shareholdings in disciplining or otherwise providing better incentives for corporate managers.(fn9) Scholars also noted the apparent advantage that systems for greater employee involvement in corporate decisions, as were found in Japan and Germany, possessed in producing better, and better implemented, corporate business practices.(fn10) The question became what laws and institutions were needed in the United States to make our corporations function more like Japanese and German corporations. (fn11) In the later 1990s, superior economic and corporate performance shifted to the United States. Accordingly, scholarship presumed the virtues of dispersed ownership in raising capital, promoting high technology startups, and facilitating management discipline through the threat of hostile takeovers(fn12)-and also recognized the dark side of more concentrated ownership as illustrated in the Asian Financial Crisis.(fn13) The question correspondingly became what laws and institutions other nations should develop to promote dispersed shareholdings as in the United States.(fn14)

These discussions in turn led to an additional question with both descriptive and normative aspects: if, indeed, a set of corporate practices and legal rules exist that produce better corporate and overall economic performance in every nation, will the corporate laws and practices in various nations not ultimately converge upon these laws and practices to create a global corporate law?(fn15) The normative implications of an affirmative answer are that individual national efforts to resist this convergence are both misguided and futile. Among the scholars reaching the conclusion that convergence toward superior corporate law and institutions is occurring, Professors Hansmann and Kraakman may have been the most provocative in their assertion at the beginning of the new century that we had reached "The End of History for Corporate Law."(fn16) Hansmann and Kraakman claimed that corporate law had converged a century earlier on the essential features of corporations, and now, after a century of experimentation, had solved the remaining critical issues by converging on a so-called standard shareholder-oriented model-thereby rejecting manager-, labor-, or state-oriented models.

The ensuing decade, bookended by major corporate scandals and corresponding stock- and financial-market collapse, has not treated kindly the thesis that we have reached the end of history for corporate law by solving its remaining critical issues. Indeed, Hansmann and Kraakman's unfortunate choice of title bears increasing resemblance to the ill-timed statement of the hapless official who, late in the nineteenth century, called for closing the patent office on the ground that everything worthwhile to invent already had been invented.

The purpose of this Article is not to pick further, for the sake of doing so, at the bones of Hansmann and Kraakman's or similar theses. Rather, this Article seeks to use the failure of such theses as a launching point for a broader consideration of the subject of convergence in corporate law. Essentially, this Article makes three interrelated claims regarding convergence in corporate law.

Part I of this Article examines the history of convergence in corporate law. It develops the argument that the history of corporations and corporate law has been one of seemingly constant movement toward convergence. Yet contrary to the linear...