The Soviet Constitution Problem in Comparative Corporate Law: Testing the Proposition that European Corporate Law is More Stockholder Focused than U.S. Corporate Law
Article by Chief Justice Leo E. Strine, Jr.
From Volume 89, Number 6 (September, 2016)
This Article addresses the proposition advanced by academic and press commentators that European corporation law promotes stockholder welfare better than its U.S. counterpart. Those who express that view often point to the stronger rights afforded to stockholders under the laws of the European member states, including the non-frustration rule, the ability of stockholders to take direct action by calling a special meeting and replacing directors, and rules that aim to provide equal treatment for all target stockholders. But claiming that stockholders are economically better off as a result of the literal law on the books is akin to judging the Soviet Union’s protection of human freedom by reading its constitution. That is, if one looks only at the Soviet Constitution on paper, one might conclude that it was a model of liberalism because it provided for separation between church and state, freedom of speech, freedom of the press, and freedom of assembly. But in reality, the Soviet citizens were unable to exercise any of those rights. In an admittedly far less extreme way, the claim that European corporate law better advances stockholder welfare than the U.S. approach relies upon a similar misplaced emphasis on paper rights. This Article proposes that scholars who tout Europe as a stockholder paradise slight the social and regulatory context in which laws operate, and elide the fact that American corporate law creates a system where directors have an intense focus on generating stockholder profits. Available empirical evidence suggests that U.S. stockholders use their rights to influence corporate policies more effectively than their European counterparts, that there is more merger and acquisition (“M&A”) activity in the United States than in Europe, and that U.S. stockholders receive higher takeover premiums. By highlighting the practical ways in which American corporate laws operate compared with those in Europe and observing how that operation affects stockholder value, this Article is intended to contribute to the increasingly global debate about corporate governance. Because policy advocates have argued that E.U. corporate law should inform U.S. policymaking and vice versa, it is critical that there be a clear-eyed understanding of how each system works in actual practice, not just in theory, lest we make policy mistakes.
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