Comparative Corporate Governance

COMPARATIVE CORPORATE GOVERNANCE
RESEARCH HANDBOOKS IN COMPARATIVE LAW

Series Editors: Francesco Parisi, Oppenheimer Wolff and Donnelly Professor of Law,
University of Minnesota, USA and Professor of Economics, University of Bologna, Italy and
Tom Ginsburg, Professor of Law, University of Chicago, USA
The volumes in this series offer high-level discussion and analysis on particular aspects of
legal systems and the law. Well-known scholars edit each Research Handbook and bring
together accessible yet sophisticated contributions from an international cast of top research-
ers. The first series of its kind to cover a wide range of comparative issues so comprehensively,
this is an indispensable resource for students and scholars alike.
Titles in this series include:
Comparative Contract Law
Edited by Pier Giuseppe Monateri
Comparative Property Law
Global Perspectives
Edited by Michele Graziadei and Lionel Smith
Comparative Administrative Law
Second Edition
Edited by Susan Rose-Ackerman, Peter L. Lindseth and Blake Emerson
Comparative Law and Anthropology
Edited by James A.R. Nafziger
Comparative Legal History
Edited by Olivier Moréteau, Aniceto Masferrer and Kjell A. Modéer
Comparative Policing from a Legal Perspective
Edited by Monica den Boer
Comparative Capital Punishment
Edited by Carol S. Steiker and Jordan M. Steiker
Comparative Privacy and Defamation
Edited by András Koltay and Paul Wragg
Comparative Dispute Resolution
Edited by Maria Federica Moscati, Michael Palmer and Marian Roberts
Comparative Tort Law
Global Perspectives
Edited by Mauro Bussani and Anthony J. Sebok
Comparative Corporate Governance
Edited by Afra Afsharipour and Martin Gelter
Comparative Corporate Governance
Edited by
Afra Afsharipour
Professor of Law and Senior Associate Dean for Academic Affairs,
University of California, Davis, School of Law, USA
Martin Gelter
Professor of Law, Fordham University School of Law, USA
RESEARCH HANDBOOKS IN COMPARATIVE LAW
Cheltenham, UK • Northampton, MA, USA

© The Editors and Contributors Severally 2021
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system
or transmitted in any form or by any means, electronic, mechanical or photocopying, recording,
or otherwise without the prior permission of the publisher.
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A catalogue record for this book

is available from the British Library
Library of Congress Control Number: 2021935861
This book is available electronically in the

Law subject collection
http://dx.doi.org/10.4337/9781788975339
ISBN 978 1 78897 532 2 (cased)

ISBN 978 1 78897 533 9 (eBook)
Contents
List of figuresviii
List of tablesix
List of contributorsx
Acknowledgementsxx
1 Introduction to comparative corporate governance 1

Afra Afsharipour and Martin Gelter
PART I PERENNIAL DEBATES IN COMPARATIVE CORPORATE

GOVERNANCE
2 Methods of comparative corporate governance 20

Christopher M. Bruner
3 Corporate law and economic development 38

Vikramaditya S. Khanna
4 The law and economics of comparative corporate law 56

María Isabel Sáez Lacave and María Gutiérrez Urtiaga
5 Corporate purpose and short-termism 73

Martin Petrin and Barnali Choudhury
6 Comparative and transnational developments in corporate social responsibility 92

Cynthia A. Williams
PART II THE BOARD: ITS DUTIES AND ITS FUNCTIONS
7 The structure of the board of directors: boards and governance

strategies in the US, the UK and Germany 116
Klaus J. Hopt and Patrick C. Leyens
8 Board composition: between independent directors, minority

representatives and employee representatives 144
Jean Jacques du Plessis
9 Diversity and the board of directors: a comparative perspective 179

Darren Rosenblum
10 Board duties: the duty of loyalty and self-dealing 200

Marco Corradi and Geneviève Helleringer
v
vi Comparative corporate governance
11 The duty of care and the business judgment rule: a case study in legal
transplants and local narratives 220
Carsten Gerner-Beuerle
12 Board duties: monitoring, risk management and compliance 242

Virginia Harper Ho
13 Who decides executive pay? A comparative perspective 263

Li-Wen Lin
14 Accounting and convergence in corporate governance: doctrinal or

economic path dependence? 282
Martin Gelter
PART III SHAREHOLDERS
15 Shareholder proposals shaking up shareholder say: a critical comparison

of the United States and Europe 302
Sofie Cools
16 Controlling shareholders and their duties 324

Gaia Balp and Marco Ventoruzzo
17 Minority shareholders’ rights, powers and duties: the market for

corporate influence 346
Umakanth Varottil
18 Institutional investors, activist funds and ownership structure 368

Assaf Hamdani and Sharon Hannes
19 Diversified enterprises with controlling shareholders: a theoretical

analysis of risk-sharing, control/voting leverage and tunneling 389
Sang Yop Kang
PART IV ENFORCEMENT
20 Public versus private enforcement in corporate governance 412

Pierre-Henri Conac
21 Direct and derivative shareholder suits: towards a functional and

practical taxonomy 431
Alan K. Koh and Samantha S. Tang
PART V MERGERS AND ACQUISITIONS
22 Corporate governance in negotiated takeovers: the changing

comparative landscape 455
Afra Afsharipour
Contents vii
23 Managing management buyouts: a US-UK comparative analysis 477

Andrew F. Tuch
Index500
Figures
8.1 The board and management differentiated 145
8.2 All-executive board 146
8.3 Majority executive board 147
8.4 Majority outside board 149
8.5 Two-tier board 150
8.6 The South African close corporation 151
9.1 Corporate diversity remedies 185
19.1 No legal personhood partition between two business lines 394
19.2 Legal personhood partition between two affiliated companies 395
19.3 Company operating various businesses (COVB) 398
19.4 Corporate group 400
19.5 Direct tunneling in a COVB 405
19.6 Tunneling based on internal transactions in a corporate group 406
viii
Tables
17A.1 Rights and duties of institutional investors 367
19.1 Cash-flow stabilization in COVBs and corporate groups 397
19.2 Comparison between COVB and Corporate Group 401
19.3 Patterns of tunneling in COVBs and corporate groups 407
23.1 Front-end duties of directors and officers in MBOs 490
23.2 Back-end duties of directors and officers in MBOs 494
ix
Contributors
Afra Afsharipour, Professor of Law and Senior Associate Dean for Academic Affairs,
University of California, Davis, School of Law, USA
Afra Afsharipour is Senior Associate Dean for Academic Affairs and Professor of Law at the
University of California, Davis School of Law. She researches in the areas of comparative
corporate law, corporate governance, mergers and acquisitions, and transactional law. Her
scholarship has appeared in several books and law reviews, including Columbia Law Review,
Vanderbilt Law Review, Minnesota Law Review, Georgia Law Review, and other
leading journals. She is the author of the Handbook On Corporate Governance In India:
Legal Standards And Board Practices (The Conference Board 2016). Prior to joining
the Davis faculty, Professor Afsharipour was a corporate attorney at Davis Polk & Wardwell
in both New York and California. She also served as a law clerk to the Honorable Rosemary
Barkett of the Eleventh Circuit Court of Appeals. She received her JD from Columbia Law
School, where she was a Harlan Fiske Stone Scholar, and served as an articles editor of the
Columbia Law Review and a submissions editor of the Columbia Journal of Gender and
Law. She received her BA (magna cum laude) from Cornell University.
Gaia Balp, Associate Professor of Business Law, Bocconi University Milan, Italy
Gaia Balp is an Associate Professor of Business Law at Bocconi University, Milan. Her
resarch mainly focuses on corporate law and securities regulation and includes articles pub-
lished in EU and US law reviews, as well as leading Italian law journals. She has also authored
a book on Proxy Advisors. Some representative projects include retail investor engagement
in the USA and the EU, high-frequency trading in equity markets, institutional investors’ col-
lective engagement, activist shareholders at de facto controlled companies, and early warning
tools in preventive restructuring frameworks. Gaia Balp is a member of the Faculty of the PhD
in Legal Studies at Bocconi University.
Christopher M. Bruner, Stembler Family Distinguished Professor in Business Law,

University of Georgia School of Law, USA
Christopher Bruner is the holder of the Stembler Family Distinguished Professorship in
Business Law at the University of Georgia School of Law. His scholarship focuses on cor-
porate law, corporate governance, comparative law, and sustainability, and his books include
Corporate Governance in the Common-Law World: The Political Foundations
of Shareholder Power (Cambridge University Press, 2013), Re-Imagining Offshore
Finance: Market-Dominant Small Jurisdictions in a Globalizing Financial World
(Oxford University Press, 2016) and The Cambridge Handbook of Corporate Law,
Corporate Governance and Sustainability (co-edited with B. Sjåfjell) (Cambridge
University Press, 2019). Bruner serves as co-editor (with M. Moore) of the Hart Publishing/
Bloomsbury Professional book series Contemporary Studies in Corporate Law. He has been
a visitor to the law faculties of the University of Cambridge, the University of Hong Kong,
the University of Leeds, the University of Sydney, the University of Toronto, the National
x
Contributors xi
University of Singapore, the Southwest University of Political Science and Law (Chongqing,
China), and the University of the Witwatersrand (Johannesburg, South Africa). Bruner
received his AB, MPhil and JD from the University of Michigan, the University of Oxford and
Harvard Law School, respectively.
Barnali Choudhury, Professor of Law, University College London, UK

Barnali Choudhury joined UCL in 2015, having previously taught at another London univer-
sity and before that in Canada, the U.S. and New Zealand. She is the author of Public Services
and International Trade Liberalization: Human Rights and Gender Implications
(Cambridge University Press, 2012), a co-editor of Understanding the Modern Company:
Corporate Governance and Theory (Cambridge University Press, 2017) and co-author
of the monograph, Corporate Duties to the Public (Cambridge University Press, 2019).
Barnali’s work has been published widely and she has been invited to give talks throughout
Asia, Europe, the Middle East, and North America. Her research has been cited by the United
Nations, the House of Commons and the House of Lords EU Select Committee, among others.
She has held visitorships at NYU Law School, the University of Cambridge and at the Max
Planck Institute for Comparative and Private Law and has been the recipient of numerous
research grants, including a Leverhulme Research Fellowship. She is currently the academic
director for UCL’s Global Governance Institute. Prior to joining academia, Barnali worked as
an international investment and corporate lawyer.
Pierre-Henri Conac, Professor of Law, University of Luxembourg, Luxembourg; Max

Planck Fellow, Max Planck Institute Luxembourg for International, European and Regulatory
Procedural Law; ECGI Research Member
Pierre-Henri Conac is Professor of Commercial and Company Law at the University of
Luxembourg where he founded the Master 2 in European and International Financial Law,
specialization in Banking and Financial Law (LLM). From 1999 to 2006, he was Associate
Professor of Law at the University of Paris 1 (Panthéon-Sorbonne). He graduated from the
University of Paris 1 (Panthéon-Sorbonne) in business law (1991), from HEC School of
Management (1990), and from the Institute of Political Studies of Paris (1994). He also earned
an LL.M. from Columbia Law School (1995). He is the author of “The regulation of securities
markets by the French Commission des opérations de bourse (COB) and the US Securities
and exchange commission (SEC)” which was awarded several prizes. His research areas deal
with securities law, company law, and comparative law in these fields, specially with the
United States. He has been member of many working groups in these areas, including the EU
Commission Informal Company Law Expert Group (ICLEG) and since 2017 is the chair of
the European Model Company Act (EMCA) Group. He is managing editor of the Revue des
Sociétés (Dalloz) and co-chief managing editor of the European Company and Financial
Law Review (De Gruyter).
Sofie Cools, Professor of Corporate Law, KU Leuven, Belgium

Sofie Cools is a full time professor of corporate law and co-director of the Jan Ronse Institute
for Company and Financial Law at the KU Leuven. She is also a member of the Belgian
Center for Company Law and the Sanctions Commission of the Belgian FSMA. From 2014
until 2019 she was a Senior Research Fellow at the Max Planck Institute for Comparative and
International Private Law in Hamburg. Sofie Cools’ current research focuses on shareholder
xii Comparative corporate governance
power in listed companies, contractual freedom in limited liability companies, and social
entrepreneurship. She authored numerous national and international publications, including
The Real Difference in Corporate Law Between the United States and Continental Europe:
Distribution of Powers, 30 Del. J. Corp. L. 697 (2005) and The Dividing Line Between
Shareholder Democracy and Board Autonomy: Inherent Conflicts of Interest as Normative
Criterion, 11 Eur. Comp. & Fin. L. Rev. 258 (2014), and is associate author of the third edition
of The Anatomy of Corporate Law (Oxford University Press, 2017). For her research she
received the Fernand Collin prize for law, the prix Pierre Coppens, the Ius Commune Prize and
the Irving Oberman Memorial Award at Harvard Law School.
Marco Corradi, Assistant Professor, Essec Business School, France and Singapore
Marco Corradi is an assistant professor at Essec Business School in Paris and in Singapore. He
graduated Summa cum Laude at Bologna Alma Mater Studiorum Law School, where he com-
pleted his studies with a thesis on the shareholders’ conflict of interest. He was subsequently
awarded a DPHIL (Oxford – Jesus College), an MPhil (Oxford – St Catherine’s College) –
both in Comparative and European Corporate Law – and an MJUR (LLM) in Law (Oxford – St
Catherine’s College). His present research interests are comparative corporate law, venture
capital law and EU competition law – with focus on the relationships between competition
law, corporate law and financial markets law. Since 2011, he has taken part in international
policy researches on competition law and free trade law, commissioned by non-European
competition authorities and governments. He has received research grants by British, Italian
and Swedish institutions. Marco is author of publications in Italian, English and French and
some of his research contributions have been translated into and published also in Chinese.
He is also qualified as ‘Avvocato’ at the Bologna Bar Association, as ‘Civil and Business
Mediator’ at ADR Chambers in London and he is a member of the Deutsche Institution für
Schiedsgerichtsbarkeit (Germany Arbitration Institute).
Jean Jacques du Plessis, Professor (Corporate Law), Deakin Law School, Deakin University,
Australia
Jean du Plessis is currently a Professor of Corporate Law in the Deakin Law School. Jean
studied in South Africa and obtained his Doctorate in Law (LLD) in 1991. He served
a three-year term as Head of the Deakin Law School from 2000 to 2002 and was the President
of the Corporate Law Teachers Association (CLTA) in 2007 and 2008. In December 2014,
Jean was appointed to the Deakin University Council for a three-year period until 31
December 2017. He is currently teaching the units Corporate Governance, Corporate Law and
Corporations Law at Deakin University.
Martin Gelter, Professor of Law, Fordham University School of Law, USA

An expert in comparative corporate law and governance, Professor Martin Gelter joined
Fordham Law School in 2009. Previously, he was a Considine Fellow in Law and Economics
at Harvard Law School, a Visiting Fellow at the University of Bologna, and an assistant
professor in the Department of Civil Law and Business Law at the WU Vienna University
of Economics (Vienna, Austria). He also has been a Visiting Professor at the University of
Paris-II (2013) and at National Taiwan University (2018). He has been a research member of
the European Corporate Governance Institute since 2006. In the past years, he has frequently
taught in training programs for judges in corporate law in the Republic of Georgia. Martin
Contributors xiii
holds degrees in law from the University of Vienna (Mag.iur., Dr.iur.), in business admin-
istration from WU Vienna University of Economics (Mag.rer.soc.oec., Dr.rer.soc.oec.), an
SJD from Harvard Law School, and an M.A. in Quantitative Methods for the Social Sciences
from Columbia University. His scholarship has appeared in numerous journals and books
both in Europe and in the United States, and he is a co-editor of the book Global Securities
Litigation and Enforcement (Cambridge University Press, 2019).
Carsten Gerner-Beuerle, Professor of Commercial Law, University College London, UK

Carsten is a professor of commercial law at University College London. Prior to this, he
worked at the London School of Economics, King’s College London and Humboldt University
Berlin. Carsten holds degrees in law and economics from Humboldt University Berlin (First
and Second Legal State Exam, PhD), the University of Minnesota (LLM) and the University
of London (MSc in Economics). He has also held visiting positions at various institutions in
Europe and the United States, including Trinity College Dublin, the Max Planck Institute for
Research on Collective Goods, Heidelberg University, and Duke University. Carsten is admit-
ted to the bar in Germany and the United Kingdom, regularly advises a German law firm on
matters of corporate law and corporate insolvency and has prepared studies for the European
Commission and the European Parliament on the reform of corporate governance, financial
regulation, and private international law. He is a research member of the European Corporate
Governance Institute (ECGI).
María Gutiérrez Urtiaga, Associate Professor, Department of Business and Finance,

Universidad Carlos III de Madrid, Spain
María Gutiérrez-Urtiaga is Associate Professor (tenured) at Universidad Carlos III, Department
of Business Administration. She received a PhD in Economics from Universidad Complutense
in 2000 and a Master in Economics and Finance from CEMFI in 1997. She teaches corporate
governance, corporate finance and financial management to both undergraduates and master
students. Her current research interests include corporate governance, corporate finance
and law and economics. She is a research associate of the European Corporate Governance
Institute (ECGI). Her research examines corporate governance institutions such as boards of
directors and fiduciary duties and corporate governance problems such as minority expro-
priation and bankruptcy costs. María has received several grants and awards for her research
work. Her work is regularly presented at prestigious conferences including the American Law
and Economics Association, the European Economic Association and the European Finance
Association. From 2012 until 2016 she was a member of the Consulting Committee of the
Comisión Nacional del Mercado de Valores (CNMV). Currently she is serving as president of
AEFIN (Asociación Española de Finanzas).
Assaf Hamdani, Professor, Faculty of Law and School of Management, Tel Aviv University,
Israel
Assaf Hamdani is a Professor of Law and the Director of the Fischer Corporate Governance
Center at Tel Aviv University. His research on law and economics, corporate law and secu-
rities regulation has been published in journals such as the Yale Law Journal, California
Law Review, Columbia Law Review, Stanford Law Review, and the Review of
Finance. He was a visiting professor at Berkeley Law School, Columbia Law School and
Harvard Law School.
xiv Comparative corporate governance
Sharon Hannes, Dean and Professor of Law, Faculty of Law, Tel Aviv University, Israel
Sharon Hannes is a Professor of Law and the Dean of the Faculty. He previously served as the
Academic Director of the Cegla Center for Interdisciplinary Research of the Law (the largest
legal research center in Israel) and was also the Editor in Chief of the journal Theoretical
Inquiries in Law. During the years 2004–14 he was the Academic Director of the Tel-Aviv
- Berkeley Executive LLM Program in Commercial Law, a joint program of Tel-Aviv
University and UC Berkeley. Professor Hannes received his SJD in Corporate and Financial
Law from Harvard Law School, where he was the recipient of the Byse Fellowship (2001). He
completed his LLM in Corporate Law at NYU School of Law, where he was a Hauser Global
Scholar. Professor Hannes was a Visiting Professor at Northwestern University School of
Law, Columbia Law School, and Georgetown Law.
Virginia Harper Ho, Research Professor and Associate Dean for International and
Comparative Law Programs, University of Kansas School of Law, USA
Virginia Harper Ho is the Associate Dean for International & Comparative Law and an Earl
B. Shurtz Research Professor of Law at the University of Kansas School of Law, where she
also serves as the Director of its Polsinelli Transactional Law Center. Her research focuses
on the intersections of corporate governance, sustainability and finance from a comparative
perspective. Her current work focuses on ESG disclosure reform, shareholder activism, com-
parative corporate governance and China’s green finance reforms. Her work appears in leading
law journals and edited volumes, and she is the author of a monograph on China’s labor law
reforms published by the University of California-Berkeley’s Institute for East Asian Studies.
Harper Ho has served as a Research Fellow of the International Institute of Green Finance
(IIGF) at the Central University of Finance and Economics (CUFE) in Beijing, China. Prior
to entering academia, Harper Ho practiced corporate and securities law and advised US and
foreign multinationals on cross-border transactions. She received her BA (summa cum laude)
and her MA from Indiana University – Bloomington. She received her JD with honors from
Harvard Law School.
Geneviève Helleringer, Professor of Law, Essec Business School, France; IECL Lecturer,
Oxford University, UK; ECGI Research Member
Geneviève Helleringer is a Law Professor at Essec Business School and IECL Lecturer at
Oxford University. She is also a Research Member of the European Corporate Governance
Institute (ECGI). Her research focuses on contract, corporate and financial law and alternative
dispute resolution, and draws on insights from economics, sociology and psychology. She has
written, edited, or contributed to numerous books and articles. She is an executive editor of the
Journal of Financial Regulation (Oxford University Press) and editorial board member
of the Studies in European Economic Law and Regulation book series (Springer). Geneviève
has been a visiting professor at UCLA and a visiting fellow at the Max Planck Institute in
Hamburg. Geneviève holds a JD from Columbia University (1999), an MSc in legal sociology
from Paris II Panthéon Assas University (2009), as well as an MSc and a doctorate in private
law from the Sorbonne University (2010) (receiving three national prizes for her doctoral
thesis, including the French Academy Grand Prize). She is admitted to the New York and
the Paris Bars. She studied philosophy, mathematics, and literature, as an undergraduate, and
economics and social sciences later at Essec Business School and Sciences-Po Paris, as well
Contributors xv
as experimental psychology at a graduate level at Oxford University. Before completing her

doctoral work, she worked for Shiseido in Japan and practised corporate law at Willkie Farr &
Gallagher and at Freshfields Bruckhaus Deringer in New York and Paris (2000–06).
Klaus J. Hopt, Emeritus Professor, Max Planck Institute for Comparative and International
Private Law, Hamburg, Germany
Professor Klaus J. Hopt is Emeritus Professor at the Max Planck Institute of Comparative
and International Private Law, Hamburg/Germany (since 1995). His university experience
(1974–95) records professorships in Tübingen, Florence/Italy, Bern/Switzerland, Munich
and visiting professorships in Belgium, France, Italy, Japan, the Netherlands, Switzerland
and the USA (University of Chicago, Harvard, NYU, Columbia). He was on the board of the
ECGI from 2005–11. His professional career includes: judge at the State Court of Appeals of
Stuttgart (1981–85), member of the German Takeover Commission (1995–2001), member
of the Deputation of the Deutscher Juristentag (2000–06), member of the High Level Group
of Company Law Experts, European Commission, Brussels (2001–02), vice president of
the German Research Foundation (2002–07), chairman of the Scientific Council of the
Max-Planck-Society (2003–06), member of the supervisory board of the Deutsche Börse
AG (2003–05), member of the International Advisory Board of the Alexander von Humboldt
Foundation (2011–14), expert for the German Parliament, the German Federal Constitutional
Court, the German Central Bank, the European Commission, the World Bank. He is member
of the German National Academy of Sciences Leopoldina (since 2008). He is author, editor,
and co-editor of numerous publications in the fields of corporate and commercial law and
corporate governance.
Sang Yop Kang, Professor of Law at Peking University, School of Transnational Law
(STL), China
Sang Yop Kang is Professor of Law at Peking University, School of Transnational Law (STL).
He teaches and researches in the areas of corporate governance, corporate law, securities regu-
lations, financial market regulations, law and economics, and East Asian economies. Professor
Kang holds an LLM degree and JSD degree at Columbia University School of Law. At STL,
Professor Kang received the Excellent Teaching Award from the Peking University twice. In
2017, he won Tsinghua China Law Review Award for Excellence in Research. Professor Kang
published numerous articles in academic journals. Also, he is a co-author of Law and Finance
of Related Party Transactions (Cambridge University Press) with world-leading scholars.
Professor Kang has been often invited as a speaker in conferences from many countries. He
is a lawyer and a CFA (Chartered Financial Analyst) charterholder. He is also a Research
Member of the ECGI (European Corporate Governance Institute).
Vikramaditya S. Khanna, Professor of Law, University of Michigan Law School, USA

Vikramaditya S. Khanna is the William W. Cook Professor of Law at the University of
Michigan Law School. He earned his SJD at Harvard Law School and was a Visiting Professor
of Law, Fall 2013 at Harvard Law School, a Senior Research Fellow at Columbia Law School
and Yale Law School, and a Visiting Scholar at Stanford Law School. His interest areas
include corporate and securities laws, law in India, corporate and white collar crime, legal
profession, corporate governance in emerging markets, and law and economics. He is the
founding and current editor of White Collar Crime eJournal and India Law eJournal at the
xvi Comparative corporate governance
Social Science Research Network. He served as Special Master in a dispute involving Indian
and American companies, is an Expert Consultant in a number of matters, and has testified at
the US Congress on topics related to Corporate and Executive Wrongdoing. He has published
papers in the Harvard Law Review, Journal of Finance, Journal of Econometrics,
Michigan Law Review, American Journal of Comparative Law, and Georgetown Law
Journal, among others. News outlets in the USA and elsewhere have quoted him and dis-
cussed his work and he has presented papers at many venues in the USA and internationally.
Alan K. Koh, Assistant Professor of Law, Nanyang Business School, Nanyang Technological
University, Singapore
Dr Alan K Koh (LLB (NUS); Dr jur (Frankfurt am Main); Advocate & Solicitor (Singapore))
is Assistant Professor of Law at the Division of Business Law, Nanyang Business School,
Nanyang Technological University (NTU) in Singapore, and also Academic Fellow of the
Centre for Asian Legal Studies, Faculty of Law, National University of Singapore (NUS).
He teaches Company Law & Corporate Governance at NTU and previously taught Contract
Law at NUS and Fiduciary Law at the University of Tokyo. He has been a visitor at the Max
Planck Institute for Comparative and International Private Law and the University of Tokyo,
Nagoya University, and Osaka City University. Alan’s research on comparative corporate
law and governance focuses on Singapore and Japan. Other interests include comparative law
and dispute resolution in Asia, especially where private international law issues arise. His
sole-authored monograph, Shareholder Protection in Close Corporations, is under con-
tract with Cambridge University Press, and his works have appeared in American Journal
of Comparative Law, University of Pennsylvania Journal of International Law,
Vanderbilt Journal of Transnational Law, Law Quarterly Review, Modern Law
Review, and Journal of Corporate Law Studies.
Patrick C. Leyens, Professor of Law, University of Bremen, Germany, and Erasmus

University Rotterdam, the Netherlands
Prof. Patrick C. Leyens holds the Chair of Civil Law, Corporate & Commercial Law at the
University of Bremen/Germany (since 2020), and is Prof. hon. at the Rotterdam Institute of
Law & Economics, Erasmus University Rotterdam, the Netherlands (since 2014). Patrick
studied law at the University of Cologne, earned a masters degree in international business
law at Queen Mary University of London (LLM) and completed the bar exam in Hamburg.
He received a doctoral and a post-doctoral degree for his comparative and law and economics
monographs on corporate law and securities regulation from the University of Hamburg (Dr.
iur., Habilitation). He has been Junior Professor of Private Law and Economic Analysis of
the Law at the University of Hamburg and Professor of Law and Business Research at Karl
Franzens University of Graz. Patrick has served as the Hamburg Director of the European
Doctorate in Law & Economics (EDLE), a joint doctoral program of the Universities Bologna,
Hamburg and Rotterdam. He also served as an adviser on banking law to the German Federal
Ministry of Finance and the German Federal Parliament. His research focuses on corporate
and commercial law, securities regulation, and especially on corporate governance.
Li-Wen Lin, Assistant Professor, Allard School of Law, Canada

Professor Li-Wen Lin is an Assistant Professor at the Allard School of Law. Her research and
teaching interests include comparative corporate governance, corporate social responsibility,
Contributors xvii
state capitalism, Chinese law, and law and economic sociology. She has written extensively
on the governance of China’s state-owned enterprises in respect of their ownership structure,
personnel management and executive compensation. Her research also focuses on various
legal innovations of corporate social responsibility (CSR), including codes of vendor conduct
in global supply chains, sustainability reporting, and mandatory CSR legislation around the
world. Her research work has been published in a wide range of law and interdisciplinary jour-
nals, including American Journal of Comparative Law, the China Quarterly, Stanford
Law Review, the World Trade Review, Columbia Business Law Review, Berkeley
Journal of International Law, University of Pennsylvania Asian Law Review, etc.
Professor Lin’s research has been profiled in The Economist and the Wall Street Journal. She
has been an invited guest speaker in news media such as Radio Free Asia. She is an invited
researcher at CRETA of National Taiwan University. Prior to entering academia, Professor
Lin was a consultant at a Forbes Global 2000 company. Professor Lin holds an LLB degree
from National Taiwan University, LLM and JSD degrees from the University of Illinois at
Urbana-Champaign, and a PhD degree in Sociology from Columbia University, where she was
appointed as a Paul F. Lazarsfeld Fellow.
Martin Petrin, Professor of Corporate Law and Governance at University College London
(UCL), UK and Dancap Private Equity Chair in Corporate Governance at Western University,
Canada
Martin Petrin is a Professor of Corporate Law and Governance. Martin has published widely
in his areas of expertise, including as the author and editor of several books, and is a regular
speaker at international conferences. Martin has practised law with a leading international
business law firm and has been admitted to the Bar in New York and Switzerland. He is also
a Distinguished Fellow and Visiting Professor at the Notre Dame London Law Program and
has served as a Visiting Professor at NYU London, the Richard H. McLaren Visiting Professor
in Business Law at Western University, and a Visiting Scholar at both the University of
Cambridge Faculty of Law and the Max Planck Institute for Comparative and Private Law.
Darren Rosenblum, Professor of Law, Pace Law School, USA

Professor Darren Rosenblum’s scholarship focuses on corporate governance, in particular
on diversity initiatives and remedies for sex inequality. He will join the Faculty of Law of
McGill University as Full Professor in August 2021. Darren Rosenblum is currently a faculty
member at the Elisabeth Haub School of Law at Pace University, where he teaches Contracts,
Corporations, and International Business Transactions, and serves as faculty director of the
Institute for International and Commercial Law. In 2018, he was a Wainwright Senior Fellow
at McGill’s Faculty of Law, during which he taught a course on Sexuality, Gender and the Law.
Professor Rosenblum clerked in the US District Court of Puerto Rico (1996–98), after which
he practised international arbitration at Clifford Chance and at Skadden Arps (1998–2004). He
has presented his pioneering work on corporate board quotas in English, French, Spanish, and
Portuguese. Notably, as a Fulbright Research Scholar in France, he performed a qualitative
study on the French quota for women on corporate boards, which he presented before the
French National Assembly in 2015. He has served as a visiting professor at Sciences Po Law
School in Paris, Brooklyn Law School, American University, and Seattle University.
xviii Comparative corporate governance
María Isabel Sáez Lacave, Professor of Law, Universidad Autónoma de Madrid, Spain
Maribel Sáez Lacave is Professor of Corporate and Business Law (Profesora Titular) at
Universidad Autónoma de Madrid. Her research interests include corporate law and law
and economics. She received a postdoctoral fellowship from the Alexander von Humboldt
Foundation to visit Marburg University and Bonn University (2004–05). She has been visiting
scholar at Harvard Law School (2017) and Columbia University (2012) and visiting profes-
sor of law at the Radzyner School of Law in the Interdisciplinary Center Herzliya (2013).
Her work is regularly presented at prestigious conferences including the American Law and
Economics Association and the European Law and Economics Association. She has published
in prestigious international law and finance journals such as Journal of Law, Finance and
Accounting, Corporate Governance: An International Review and the Journal of
Corporate Legal Studies.
Samantha S. Tang, Sheridan Fellow, Faculty of Law, National University of Singapore,

Singapore
Samantha is a Sheridan Fellow at the National University of Singapore Faculty of Law (NUS
Law). Prior to her appointment, she was a researcher at the Centre for Asian Legal Studies
at NUS Law, and an Associate Editor of the Asian Journal of Comparative Law. She is
also an Advocate & Solicitor of Singapore. Samantha’s research interests are the corporate
law of Commonwealth jurisdictions, with a special focus on shareholder stewardship, and
environmental, social and governance (ESG) investing. Her work has been published (or
are forthcoming) in the Law Quarterly Review, Lloyd’s Maritime and Commercial
Law Quarterly, Journal of Corporate Law Studies, Asian Journal of Comparative
Law, and Vanderbilt Journal of Transnational Law. Samantha’s article, Rethinking
the Theory in Books: Derivative Actions in Singapore and Hong Kong, won the Best Paper
Prize at the 2017 Corporate Law Teachers Association Conference, the flagship corporate law
conference in the Commonwealth.
Andrew F. Tuch, Professor of Law, Washington University School of Law, USA

Professor Tuch uses conceptual insights from economics and finance to examine issues in cor-
porate law and governance, securities regulation, and financial regulation. He has published
widely in the United States, the United Kingdom, and Australia. He holds LLM and SJD
degrees from Harvard Law School, where he was a Fulbright Scholar, a Fellow of the Program
on Corporate Governance, and an Olin Fellow in Law and Economics. At Harvard, he was
a two-time recipient of the Brudney Prize for the Best Paper in Corporate Governance. Before
joining Washington University, Professor Tuch was a member of the University of Sydney
Law School and, prior to that, practiced corporate law with Davis Polk & Wardwell in New
York and London. He has held visiting positions at Duke, IDC Herzliya, and the Max Plank
Institute of Comparative and International Private Law. He currently serves on the National
Adjudicatory Council of the Financial Industry Regulatory Authority (FINRA), the primary
regulator of broker-dealers in the United States.
Umakanth Varottil, Associate Professor, Faculty of Law, National University of Singapore,

Singapore
Umakanth specializes in corporate law and governance, mergers and acquisitions and corpo-
rate finance. While his work is generally comparative in nature, his specific focus is on India
Contributors xix
and Singapore. He has co-authored or co-edited five books, published articles in international
journals and founded the Indian Corporate Law Blog. He has also taught on a visiting basis at
law schools in Australia, India, Italy, New Zealand and the United States. He is the recipient of
several academic medals and honors. Prior to his foray into academia, Umakanth was a partner
at a pre-eminent law firm in India. During that time, he was also ranked as a leading corporate/
mergers & acquisitions lawyer in India by the Chambers Global Guide.
Marco Ventoruzzo, Professor of Business Law, Bocconi University Milan, Italy

Marco Ventoruzzo is Full Professor of Business Law at Bocconi University, where he is also
the Head of the Law Department and the former Coordinator of the PhD in Law. He has been
Full Professor of Law at Penn State Law School and co-founded and directed the Max Planck
Institute of Luxembourg on financial markets regulation. He taught at numerous law schools
in Europe, Asia, North and South America. His academic and professional activity focuses on
corporate law, securities regulation and financial markets, and has served as director or auditor
for several banking and financial corporations, listed and closely-held. He is an editor of
several peer-reviewed law journals, including European Company and Financial Law, The
Journal of Financial Regulation (Oxford), The Italian Law Journal, and the Italian
academic journals Rivista delle società and Banca Impresa Società. Marco Ventoruzzo
graduated, magna cum laude, in Economics and Business Administration at Bocconi
University and holds a JD, magna cum laude, from the University of Milan. He received an
LLM from the Yale Law School, a PhD in Corporate Law from the University of Brescia, and
studied at the Sorbonne in Paris.
Cynthia A. Williams, Professor of Law, Osgoode Hall Law School, Canada

Professor Cynthia Williams joined Osgoode Hall Law School on July 1, 2013 as the Osler
Chair in Business Law, a position she also held from 2007 to 2009. Before coming to Osgoode,
she was a member of the faculty at the University of Illinois College of Law and, prior to that,
she practised law at Cravath, Swaine & Moore in New York City. Professor Williams writes
in the areas of securities law, corporate law, corporate responsibility, comparative corporate
governance and regulatory theory, often in interdisciplinary collaborations with professors in
anthropology, economic sociology, and organizational psychology.
Acknowledgements
As editors, we owe a debt of gratitude to a number of friends and colleagues. We thank all
the authors for their excellent contributions to this Handbook. A supermajority of the authors
presented their chapters at Fordham Law School in September 2019. We thank the Fordham
Corporate Law Center (directed by Richard Squire) for funding and organizing the event, in
particular its administrative director Abigail Marcus, who shouldered most of the organiza-
tional burden. In addition to the authors, we thank Nicholas Howson, Florian Möslein, Katja
Langenbucher and Uriel Procaccia for numerous comments and contributions to the discus-
sion. We also thank Ishika Desai, Grace Lee, Danielle Mckenna, and Steven Cotto for their
assistance in preparing this Handbook.
xx
1. Introduction to comparative corporate
governance
Afra Afsharipour and Martin Gelter
1. COMPARATIVE CORPORATE GOVERNANCE—A SKETCH

Comparative corporate governance has become a broad research field during the past decades.
With the increasing internationalization of law and legal scholarship, the subject has seen
a burgeoning volume of research from a practical, theoretical, and empirical perspective.
There is no single predominant definition of corporate governance. Notably, the Cadbury
Committee defined corporate governance as “the system by which companies are directed and
controlled.”1 Much more narrowly, Shleifer and Vishny have stated that “[c]orporate govern-
ance deals with the ways in which suppliers of finance to corporations assure themselves of
getting a return on their investment.”2 On the broad end of the definitional spectrum, Jonathan
Macey suggested that corporate governance includes “[a]nything and everything that influ-
ences the way that a corporation is actually run.”3
Practically speaking, both internationally and within individual countries, most corporate
governance research deals with the interaction between board members, officers, and share-
holders, primarily in large, publicly traded corporations. Considerable volumes of literature
thus are preoccupied with reducing conflicts of interest between shareholders and manage-
ment, and consequently minimizing agency cost, thus vindicating the narrow finance per-
spective. Given the predominance of controlling shareholders around the globe, the literature
increasingly focuses acutely on conflicts between controlling and minority shareholders. In
a comparative or international context, research also often takes a broader perspective in that
it includes all groups whose interests are affected by corporate activities and who have some
degree of influence on corporations, such as creditors and employees.
This book attempts to take a broad perspective, even if most of the chapters deal with boards
and shareholders and how they interact, both between and among each other (e.g. minority
versus controlling shareholders), covering both legal duties and their enforcement, as well
as the balance of powers generated by the institutional setup. Nevertheless, the interests of
other “stakeholders” are very much present throughout the chapters. The authors also explore
corporate purpose from various perspectives, namely short-termism, corporate social respon-
sibility (CSR) and environmental, social, and governance (ESG) issues. Labor representation
is discussed in the context of the board. Several of the chapters deal with corporate governance
in times of transition, namely mergers and acquisitions. In terms of subject, the authors address
1
Adrian Cadbury, Report of the Committee on the Financial Aspects of Corporate
Governance, ¶ 2.5 (1992).
2
Andrei Shleifer & Robert W. Vishny, A Survey of Corporate Governance, 52 J. Fin. 737, 737
(1997).
3
Jonathan R. Macey, Corporate Governance: Promises Kept, Promises Broken 2 (2008).
1
2 Comparative corporate governance
corporate law techniques such as the regulation of self-dealing, but also disclosure duties (e.g.
in the context of executive compensation and financial accounting).
In putting together the list of authors, the editors hoped to gain broad coverage of different
parts of the world, both across the book and within its subjects. We also attempted to illustrate
varying methodological approaches pursued by the authors.
2. A BRIEF INTELLECTUAL HISTORY OF THE FIELD
Comparative corporate law, including comparative corporate governance, has a rich intellec-
tual history.4 As renowned scholar Klaus Hopt has noted, “comparative company law is at
once very old and very modern.”5 The academic focus on comparative corporate law arose
in earnest with work that addressed the adoption of US-style securities regulation in Europe
and the influence of American company law, as well as research focused on increasing
intra-European comparisons due to the harmonization efforts of the European Community.6
The 1990s witnessed an increasing interest in comparative corporate law among scholars,
including many of the leading corporate law scholars in the United States. Much of the
scholarship initially focused on a few jurisdictions, primarily Germany and Japan, as well as
the UK.7 Furthermore, the study of comparative corporate law quickly morphed into a deeper
scholarly engagement with comparative corporate governance.8 Major institutes aimed at
research on corporate governance, often from interdisciplinary perspectives, were formed by
scholars and leading universities around the world.9 The scholarly focus on corporate govern-
ance was not surprising. As Curtis Milhaupt and Katharina Pistor have noted, corporations are
“the most important private actors in a market economy,” and “corporate governance is linked
to every facet of a country’s economic, political, and legal structures.”10
4
For an overview of the intellectual history of comparative law scholarship, see generally Mariana
Pargendler, The Rise and Decline of Legal Families, 60 Am. J. Comp. L. 1043 (2012).
5
Klaus J. Hopt, Comparative Company Law, in The Oxford Handbook of Comparative Law
1161, 1162 (Mathias Reimann & Reinhard Zimmermann eds., 2006).
6
Id. at 1170–71, 1174–76, 1179–81.
7
See, e.g., Bernard S. Black & John C. Coffee, Hail Britannia? Institutional Investor Behavior Under
Limited Regulation, 92 Mich. L. Rev. 1997 (1994); Ronald J. Gilson & Mark J. Roe, Understanding the
Japanese Keiretsu: Overlaps between Corporate Governance and Industrial Organization, 102 Yale
L.J. 871 (1993); Curtis J. Milhaupt, A Relational Theory of Japanese Corporate Governance: Contract,
Culture, and the Rule of Law, 37 Harv. Int’l L.J. 3 (1996); Mark J. Roe, Some Differences in Company
Structure in Germany, Japan and the United States, 102 Yale L.J. 1927 (1993).
8
See, e.g., Klaus J. Hopt, Hideki Kanda, Mark J. Roe, Eddy Wymeersch & Stefan Prigge
(eds.), Comparative Corporate Governance—The State of the Art and Emerging Research
(1998).
9
See Klaus J. Hopt, Comparative Corporate Governance: The State of the Art and International
Regulation, 59 Am. J. Comp. L. 1, 3-4 (2011).
10
Curtis J. Milhaupt & Katharina Pistor, Law and Capitalism: What Corporate Crises
Reveal About Legal Systems and Economic Development Around the World 4 (2008); see
also Ronald J. Gilson, From Corporate Law to Corporate Governance, in The Oxford Handbook of
Corporate Law and Governance 3, 25 (Jeffrey N. Gordon & Wolf-Georg Ringe eds. 2018) (stating
that the shift from corporate law to corporate governance reflects a legal view of the corporation that is
“increasingly complex and dynamic, hand in hand with the increased complexity and dynamics of the
capital market, input markets, and product markets that corporations inhabit.”).
Introduction to comparative corporate governance 3
The focus on corporate governance became even more pronounced with the publication of
an influential series of articles by leading economists—Professors Rafael La Porta, Florencio
Lopez-de-Silanes, Andrei Shleifer, Robert W. Vishny and several co-authors—famously
referred to as LLSV. As described in Section 3.1 below, the findings of the LLSV line of
papers—that is, that shareholder and creditor protection are correlated with capital markets
that are larger and deeper, with firms having better access to external financing on better terms,
and that countries’ economic growth is correlated with their legal origins—were controver-
sial.11 While LLSV’s initial work on these findings became more nuanced and contextualized
over time, their initial claim that common law systems and shareholder protection were critical
to market success helped accelerate a burgeoning focus on comparative corporate governance.
Importantly for the study of comparative corporate governance, the LLSV claims led to a great
deal of scholarship that concretely addressed not just laws on the books in a variety of jurisdic-
tions, but also how corporate governance laws function and are enforced.
By the early 2000s, a vast academic inquiry emerged, particularly at the intersection of law
and economics, regarding whether globalization and increasing financial integration were
leading to convergence of corporate governance systems, rules, and standards across coun-
tries.12 The comparative corporate governance inquiry first focused on developed economies,
most famously in the collaboration among leading scholars from several developed economies
in The Anatomy of Corporate Law.13 The authors of the Anatomy argued that “corporate
laws everywhere share core features” that are aimed at constraining three kinds of agency
conflicts: “conflicts between managers and shareholders, conflicts between controlling and
non-controlling shareholders, and conflicts between shareholders and the corporation’s other
11
For the initial first two ground-breaking articles, see Rafael La Porta, Florencio Lopez-de-Silanes,
Andrei Shleifer & Robert W. Vishny, Legal Determinants of External Finance, 52 J. Fin. 1131 (1997);
Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer & Robert W. Vishny, Law and Finance, 106
J. Pol. Econ. 1113, 1145–51 (1998). These articles were followed by a series of other influential papers.
See Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer & Robert Vishny, Investor Protection
and Corporate Governance, 58 J. Fin. Econ. 3 (2000); Rafael La Porta, Florencio Lopez-de-Silanes,
Andrei Shleifer & Robert Vishny, Investor Protection and Corporate Valuation, 57 J. Fin. 1147 (2001);
Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, What Works in Securities Laws?, 61 J.
Fin. 1 (2006); see also Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer,
The Law and Economics of Self-Dealing, 88 J. Fin. Econ. 430 (2008).
12
See, e.g., Andreas Fleckner & Klaus J. Hopt (Eds.), Comparative Corporate Governance:
A Functional and International Analysis (2013); Jeffrey N. Gordon & Mark J. Roe, Convergence
and Persistence in Corporate Governance (2004); Klaus J. Hopt, Eddy Wymeersch, Hideki
Kanda & Harald Baum (eds.), Corporate Governance in Context: Corporations, States,
and Markets in Europe, Japan, and the US (2005); William W. Bratton & Joseph A. McCahery,
Comparative Corporate Governance and the Theory of the Firm: The Case Against Global Cross
Reference, 38 Colum. J. Transnat’l L. 213 (1999); John C. Coffee Jr., The Future as History: The
Prospects for Global Convergence in Corporate Governance and its Implications, 93 Nw. U. L. Rev.
641, 642 (1999); Ronald J. Gilson, Globalizing Corporate Governance: Convergence of Form or
Function, 49 Am. J. Comp. L. 329, 336 (2001).
13
See Reinier R. Kraakman et al., The Anatomy of Corporate Law: A Comparative and
Functional Approach (2004); see also Luca Enriques, The Comparative Anatomy of Corporate
Law, 114 Am. J. Comp. L. 1011, 1011–12 (2004) (correctly predicting that the Anatomy was “certain to
become a benchmark and a source of inspiration for comparative corporate governance and corporate law
research in the decades to come.”).
contractual counterparties, including particularly creditors and employees.”14 The taxonomy

of conflicts and the typology of the range of alternative legal responses that are available
to address these conflicts in various settings, such as in control transactions, developed in
the Anatomy have significantly influenced the approach taken in comparative corporate law
scholarship for over a decade.
With the publication of the LLSV literature and the growing convergence debate facilitated
by major scholarly works such as the Anatomy, the comparative corporate governance inquiry
quickly expanded to other countries and regions as well.15 Academic inquiry has been particu-
larly focused on the rapidly developing economies of China,16 South Korea,17 India,18 Brazil,19
and to a lesser extent Singapore20 and South Africa. Even the Anatomy of Corporate Law
expanded its scope to address Brazil in its latest 2017 edition, bringing with it a greater focus
on state involvement and state ownership in corporate governance.21 And with the growth
in comparative corporate governance scholarship, there have been calls for the Anatomy to
expand even further to cover other major Asian jurisdictions outside of Japan.22
While scholarly literature on comparative corporate governance is flourishing, there are still
many important and emerging economies about which there is insufficient literature, at least in
English and by legal scholars.23 For example, scholars have not yet devoted much attention to
14
John Armour, Henry Hansmann, Reinier Kraakman & Mariana Pargendler, What is Corporate
Law, in Reinier Kraakman et al., The Anatomy of Corporate Law: A Comparative and
Functional Approach 2 (3d ed. 2017).
15
See, e.g., Dan W. Puchniak, The Derivative Action in Asia: A Complex Reality, 9 Berkeley
Bus. L.J. 1 (2012); Dan W. Puchniak & Kon Sik Kim, Varieties of Independent Directors in Asia:
A Taxonomy, in Independent Directors in Asia: A Historical, Contextual and Comparative
Approach (Dan W. Puchniak, Harald Baum & Luke Nottage eds., 2017).
16
See, e.g., Li-Wen Lin & Curtis J. Milhaupt, We Are the (National) Champions: Understanding the
Mechanisms of State Capitalism in China, 65 Stan. L. Rev. 697 (2013).
17
See, e.g., Hideki Kanda, Kon-Sik Kim and Curtis J. Milhaupt, Transforming Corporate
Governance in East Asia (2008).
18
See, e.g., Afra Afsharipour, Corporate Governance Convergence: Lessons from the Indian
Experience, 29 Nw. J. Int'l L. & Bus. 335 (2009); Umakanth Varottil, A Cautionary Tale of the
Transplant Effect on Indian Corporate Governance, 21 Nat. L. Sch. Ind. Rev. 1 (2009).
19
See, e.g., Mariana Pargendler, Politics in the Origins: The Making of Corporate Law in Nineteenth
Century Brazil, 60 Am. J. Comp. L. 805 (2012).
20
See, e.g., Wai Yee Wan, Legal Transplantation of UK-Style Takeover Regulation in Singapore,
in Comparative Takeover Regulation: Global and Asian Perspectives (Umakanth Varottil & Wan
Wai Yee eds., 2018); Dan W. Puchniak & Luh Luh Lan, Independent Directors in Singapore: Puzzling
Compliance Requiring Explanation, 65 Am. J. Comp. L. 265 (2017).
21
See Kraakman et al., supra note 13. For a comparative analysis of governance challenges in
state-owned enterprises, see Curtis J. Milhaupt & Mariana Pargendler, Governance Challenges of Listed
State-Owned Enterprises Around the World: National Experiences and a Framework for Reform, 50
Cornell Int’l L.J. 473 (2017).
22
See Alan K. Koh & Samantha S. Tang, The Future of The Anatomy of Corporate Law for Asia:
A Forward Looking Critique, 12 Asian J. Comp. L. 197 (2017).
23
For the latest cross-jurisdictional work on corporate governance, see, e.g., Jeffrey N. Gordon
& Wolf-Georg Ringe (eds.), The Oxford Handbook of Corporate Law and Governance (2018)
(addressing corporate governance issues in some of the BRIC (Brazil, Russia, India, China) countries,
but not many other emerging economies). As Mariana Pargendler explains, comparative analysis of
emerging markets lags the “immense literature covering developed countries.” The challenges with com-
parative analysis of emerging markets arise due to the heterogeneity in their histories, politics, economies
and legal systems, and the complexities with assessing convergence in corporate governance standards.
comparative analyses of corporate governance in much of the Middle East (outside of Israel),
or in many of the countries in the African continent. Similarly, corporate governance in much
of Latin America, outside of Brazil, and some of Asia’s most populous countries, such as
Indonesia, Pakistan, and Vietnam, remains underexplored by legal academics.24
3. KEY DEBATES
3.1 Legal Origins
While comparative lawyers had long debated the merits and demerits of different legal fami-
lies, the “legal origins” debate was jumpstarted by a team of economists in 1997.25 The authors
(LLSV) created relatively crude indices of shareholder (and creditor) protection in a large
number of countries based on a survey sent to leading law firms. Based on these indices, they
found that common law countries (or “English origin” jurisdictions) provided better investor
protection than civil law countries, especially “French origin” countries, with “German origin”
and “Scandinavian origin” jurisdictions in the middle.26 They found that strong investor
protection correlated with certain market indicators, especially the size of the capital market
relative to GDP and the degree of dispersion of ownership in the largest publicly traded com-
panies. To deal with endogeneity between measures of market volume and investor protection,
the authors used legal origins as instrumental variables, assuming that legal origins are exoge-
nous and influence market outcomes only through better investor protection.27
While LLSV were cautious in inferring causation, investor protection could influence own-
ership structure (and the size of capital markets) in two ways. First, if corporate law protects
shareholders against managers, shareholders are more likely to invest.28 Second, if corporate
law does not prevent the taking of private benefits of control by controlling shareholders,
remaining a controlling shareholder is a more attractive financial proposition.29 While these
are two different pathways, the literature is not always clear on the distinction.30
See Mariana Pargendler, Corporate Governance in Emerging Markets, in The Oxford Handbook of
Corporate Law and Governance 735, 737, 750 (2018).
24
For promising scholarship addressing some of these jurisdictions from comparative perspective,
see Carlos Berdejo, Oligarchs, Foreign Powers, and the Oppressed Minority: Regulating Corporate
Control in Latin America, 30 Duke J. Comp. & Int’l L. 1 (2019); Petra Mahy, The Evolution of
Company Law in Indonesia: An Exploration of Legal Innovation and Stagnation, 61 Am. J. Comp. L. 377
(2013); Francisco Reyes, Corporate Governance in Latin America: A Functional Análisis, 39 U. Miami
Inter-Am. L. Rev. 207 (2008).
25
La Porta et al., Legal Determinants, supra note 11; La Porta et al., Law and Finance, supra note
11, at 1145–51; Rafeal La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, Corporate Ownership
Around the World, 54 J. Fin. 471, 491–98 (1999). See supra note 11 and accompanying text.
26
La Porta et al., Law and Finance, supra note 11, at 1126–34.
27
See infra chs. 2 and 3.
28
E.g., Mark J. Roe, Corporate Law’s Limits, 31 J. Legal Stud. 233, 238 (2002).
29
La Porta et al., Investor Protection and Corporate Governance, supra note 11, at 13; Luigi
Zingales, Inside Ownership and the Decision to Go Public, 62 Rev. Econ. Stud. 425 (1995); Lucian
Arye Bebchuk, A Rent-Protection Theory of Corporate Ownership and Control (NBER Working Paper
No. 7203, 1999).
30
There is also the possibility of reverse causality, with financial development precipitating inves-
tor protection. See Simon Deakin, Prabirjit Sarkar & Mathias Siems, Is There a Relationship Between
Not surprisingly, this intrusion into the legal turf by economists resulted in considerable
criticism, and sometimes resentment among legal scholars. One point of contention was the
crude classification into four legal origins groups, which stands at odds with the depth and
nuances of decades of scholarship in comparative law.31 Clearly, the diffusion of models and
legal transplants around the world permeate the four categories. Even within categories, there
is often little unity within the “English origin” group (e.g. between the US on one hand, and
the UK and other commonwealth jurisdictions on the other hand).32 In addition, the literature
ignored the evidence suggesting an absence of meaningful contemporary differences between
legal families.33 Legal scholars have supplemented the big picture with granular historical case
studies, which often do not support the direction of causation implied by LLSV.34
Mistakes in the coding posed another, more specific issue. Holger Spamann completely
recoded the original index, which resulted in the disappearance of statistically significant
results.35 Concurrently, the “law and finance” group improved their methods, resulting in an
improved and more plausible index.36 Other papers in the “law and finance” school found other
surprising correlations between legal origins and various economics and social outcomes,
some in areas entirely unrelated to corporate law, ranging from government ownership of
banks to military conscription.37 This raised the question of whether legal origins, even if
exogenous because of their ancient roots, are in fact a proxy for political or cultural factors.38
Political theories of comparative corporate governance developed parallel to the legal
origins literature. A prominent example in the legal literature is Mark Roe’s work, which
suggested that “social democratic” policies undercut policies that keep managerial agency cost
Shareholder Protection and Stock Market Development?, 3 J.L. Fin. & Acct. 115 (2018) (using a panel
and Granger causality tests to determine the direction of causation).
31
See, e.g., Detlev Vagts, Comparative Company Law – The New Wave, in Festschrift für Jean
Nicolas Druey zum 65. Geburtstag 595, 598–99 (Rainer J. Schweizer, Herbert Burkart & Urs Gasser
eds., 2002); Mathias M. Siems, Legal Origins: Reconciling Law & Finance and Comparative Law, 52
McGill L.J. 55, 62–70 (2007) (criticizing the classification of countries).
32
E.g., John Armour & David A. Skeel, Jr., Who Writes the Rules for Hostile Takeovers, and Why?—
The Peculiar Divergence of U.S. and U.K. Takeover Regulation, 95 Geo. L.J. 1727 (2007) (discussing
the contrasting approaches toward takeover law); Christopher M. Bruner, Power and Purpose in the
“Anglo-American” Corporation, 50 Va. J. Int’l L. 579, 593–611 (2010) (comparing shareholder and
board centrism in the two jurisdictions).
33
E.g. Mark J. Roe, Legal Origins Politics, and Modern Stock Markets, 120 Harv. L. Rev. 460,
475–76 (2006) (discussing the erosion of differences between civil law and common law); Holger
Spamann, Contemporary Legal Transplants: Legal Families and the Diffusion of (Corporate) Law, 2009
BYU L. Rev. 1813, 1814–15 (2009) (“Some of the most sophisticated comparative lawyers assert that
there are few if any relevant differences between common and civil law today.”).
34
E.g., Brian R. Cheffins, Corporate Ownership and Control: British Business Transformed
(2008); John C. Coffee Jr., The Rise of Dispersed Ownership: The Roles of Law and the State in the
Separation of Ownership and Control, 111 Yale L.J. 1 (2001); Carsten Gerner-Beuerle, Law and
Finance in Emerging Economies: Germany and Britain 1800–1913, 80 Modern L. Rev. 263 (2017).
35
Holger Spamann, The “Antidirector Rights Index” Revisited, 23 Rev. Fin. Stud. 467 (2009).
36
Djankov et al., supra note 11.
37
Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, The Economic Consequences of
Legal Origins, 46 J. Econ. Lit. 285, 292 (2008).
38
Economists have continued to test LLSV’s theories with more sophisticated econometric methods.
See, e.g., Glauco De Vita, Chengchun Li & Yun Luo, Legal Origin and Financial Development:
A Propensity Score Matching Analysis, forthcoming Int’l J. Fin. Econ. (finding that German legal
origin predicts financial development).
in check. A key example was monitoring by the board, which is inhibited by German codeter-
mination in the view of its critics.39 Roe proposed that the rise of these types of policies was
caused by the economic devastation in Europe and Japan during the first half of the twentieth
century, which dealt a lasting blow to capital markets and thus put a greater emphasis on pro-
tecting what was left to individuals, namely their human capital in their role as employees.40
Other scholars have put forward additional complex political explanations.41 To cite
a prominent example, Gourevitch and Shinn have explained diverging corporate governance
outcomes as the outcomes of coalitions between three groups—insiders of the firm, capital,
and labor. Which system emerges depends on which coalition forms and dominates in a par-
ticular country and time period. For example, workers may align with blockholders to form a
“stakeholder model,” or they may align with outside investors to form a “transparency coali-
tion” if they have significant pension savings in the stock market.42 Differences in the political
system may play a role (for example, the distinction between majoritarian and proportional
representation systems), which result in different electoral coalitions.43
Two caveats should be made about these debates. First, ownership structures have under-
gone considerable change in recent years, with the remarkable rise of institutional ownership
in many jurisdictions eroding some of the classic differences.44 Second, political explanations
tend to focus on Western democracies and Japan, and tend not to look toward the developing
world. In contrast, legal origins studies include developing countries in their datasets. It is
plausible that the differences picked up in the literature are not necessarily differences in the
legal systems between European countries, but rather divergences in colonial or post-colonial
transplantation between English and other colonies.45 Laws typically are not transplanted
within their full social context, which is why they often do not operate effectively in the
recipient country.46 Consequently, legal origins may reflect different styles of major powers
in imposing their legal system or merging it with local traditions. Moreover, the influence of
legal families likely persists not because of historical events, but rather because of ongoing dif-
39
Mark J. Roe, Political Determinants of Corporate Governance 29–37 (2003); Roe, supra
note 28, at 253–69.
40
Roe, supra note 33.
41
John W. Cioffi, Public Law and Private Power 9 (2010) (suggesting that Social Democrats
allied themselves with outside investor interests in Germany in the early 2000s); Pepper D. Culpepper,
Quiet Politics And Business Power Corporate Control In Europe And Japan (2011) (empha-
sizing how corporate governance reforms are influenced by their salience among the electorate). For
a useful overview of recent political theories of corporate governance, see Manabu Matsunaka, Politics
of Japanese Corporate Governance Reform: Politicians Do Matter, 15 Berkeley Bus. L.J. 154, 156–61
(2018).
42
Peter Alexis Gourevitch & James J. Shinn, Political Power and Corporate Control 9
(2005).
43
Marco Pagano & Paolo F. Volpin, The Political Economy of Corporate Governance, 95 Am.
Econ. Rev. 1005 (2005).
44
See Adriana de La Cruz, Alejandra Medina & Yung Tang, Owners of the World’s Listed
Companies, OECD Capital Market Series (2019), www.oecd.org/corporate/Owners-of-the-Worlds
-Listed-Companies.htm; Gur Aminadav & Elias Papaioannou, Corporate Control Around the World, 75
J. Fin. 1191 (2020).
45
Daniel M. Klerman, Paul G. Mahoney, Holger Spamann & Mark I. Weinstein, Legal Origin or
Colonial History?, 3 J. Legal Analysis 379 (2011).
46
Daniel Berkowitz, Katharina Pistor & Jean-François Richard, The Transplant Effect, 51 Am. J.
Comp. L. 163, 189 (2003).
fusion from origin to recipient countries due to familiarity with the language, legal cooperation
and development aid, and academic exchanges.47
3.2 Convergence
A significant trend in corporate governance prevalent throughout this book is convergence.

Scholars became increasingly cognizant of converging trends between jurisdictions during the
late 1990s and early 2000s, which matched contemporary debates about economic globali-
zation.48 In a provocative article, Hansmann and Kraakman predicted an “End of History for
Corporate Law” based on an Anglo-American model of shareholder wealth maximization and
stronger rights of outside investors.49 While there were several factors pushing toward conver-
gence, arguably the most important one was the perceived efficiency of this model. Firms run
according to a more efficient model will eventually outcompete others in globalizing capital
and product markets. By extension, countries with better corporate law will be more success-
ful, forcing others to adapt.
While there seems to be consensus that there was some level of convergence, the theory
raises several questions. First, it is not particularly specific about which policies will prevail,
as there is no single Anglo-Saxon or common law model.50 Second, there are numerous factors
that can help explain the persistence of existing laws and corporate governance practices.
First, path dependence theory suggests that powerful interest groups will oppose convergence
because they obtain rents from the status quo.51 For example, if controlling shareholders and
labor manage to maintain a coalition domestically, the country would have to be relatively
open to competition from the outside and competitive pressures would have to be relatively
strong to overcome internal opposition to convergence.
Second, it is not obvious that a single model will be optimal for all countries. Different
countries might specialize in the production of different goods and services, for which differ-
ent corporate governance models will be suited. For example, developed countries have some-
times been classified into “arm’s length finance” jurisdictions, which rely on capital markets,
and “insider finance” jurisdictions, where firms refinance mainly through blockholders and
banks.52 The “varieties of capitalism” literature extends this framework by suggesting institu-
tional complementarities with other aspects of economic regulation.53 In this view, bank-based
financial systems provide a better match, for example, to labor systems relying on a greater
47
Spamann, supra note 33, at 1844–51.
48
Alan Dignam & Michael Galanis, The Globalization of Corporate Governance 110–43
(2009); Mathias M. Siems, Convergence in Shareholder Law 226–27 (2008).
49
Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L.J. 439,
443 (2001).
50
See supra note 32 and accompanying text.
51
E.g., Lucian Arye Bebchuk & Mark J. Roe, A Theory of Path Dependence in Corporate Ownership
and Governance, 52 Stan. L. Rev. 127, 142–53 (1999).
52
E.g., Erik Berglöf, A Note on the Typology of Financial Systems, in Comparative Corporate
Governance 151, 159–64 (Klaus J. Hopt & Eddy Wymeersch eds., 1997); Dignam & Galanis,
supra note 48, at 64; Christian Leuz, Different Approaches to Corporate Reporting Regulation: How
Jurisdictions Differ and Why, 40 Acct. & Bus. Res. 229, 236–37 (2010).
53
See generally Peter A. Hall & David Soskice, An Introduction to Varieties of Capitalism, in
Varieties of Capitalism 1, 8–9 (Peter A. Hall & David Soskice eds., 2001); Milhaupt & Pistor, supra
note 10.
role for long-term commitment of workers and the creation of specific human capital.54 Other
scholars have emphasized cultural explanations of persistent corporate governance differ-
ences, which may help entrench both economic patterns and legal path dependences.55 Thus,
countries could succeed internationally by adopting a production model or producing goods
and services that match its “variety of capitalism” or culture.
Although the question of convergence is ultimately an empirical one, it is by no means clear
that the end point will be an investor rights or shareholder primacy equilibrium. It is equally
plausible that we will see a modest level of convergence, and the persistence of variations
between countries pursing different economic strategies. The chapters in this book demonstrate
considerable borrowing of ideas. Arguably, convergence was strong until the 2008/09 finan-
cial crisis, and even afterwards to some extent. The verdict about the 2010s will likely be more
mixed. In some areas, we see increasing convergence along the lines predicted by Hansmann
and Kraakman, for example shareholder “say on pay” on executive compensation.56 In other
areas, we appear to see convergence, but in a different direction. Most strikingly, during the
past years there have been increasing concerns about sustainability and a greater push toward
a corporate purpose that deviates from shareholder wealth maximization. ESG issues have
very much come to the forefront of the debate in both developed and developing economies.57
4. THE BOOK’S PERSPECTIVE
4.1 Perennial Debates
This book begins with a section on perennial debates in comparative corporate governance.
The first two chapters address the methods used in comparative corporate law scholarship.
During the past three decades, the volume of comparative law scholarship has grown in
general, and the methods have shifted from the traditional functionalism represented by
venerable treatises58 toward greater methodological variation.59 Specifically in corporate
law, a contributing factor may have been the increased interest in comparative corporate law
in the United States, where mainstream legal scholarship has, over the decades, absorbed
various interdisciplinary methods.60 In corporate law, an economic perspective dominates,
and the field was further invigorated by a broader law and finance perspective, with finance
scholars following the footsteps of LLSV in incorporating legal issues into their models. Not
surprisingly, comparative scholarship also often takes an economic view and emphasizes the
54
E.g., Dignam & Galanis, supra note 48, at 75–76.
55
Amir N. Licht, The Mother of All Path Dependencies: Toward a Cross-Cultural Theory of
Corporate Governance Systems, 26 Del. J. Corp. L. 147 (2001).
56
See infra ch. 12.
57
See infra ch. 5.
58
E.g., Konrad Zweigert & Hein Kötz, An Introduction to Comparative Law (English
Translation 1998).
59
E.g., Mathias M. Siems, Comparative Law (2d ed. 2018).
60
E.g., Nuno Garoupa & Thomas S. Ulen, The Market for Legal Innovation: Law and Economics in
Europe and the United States, 59 Ala. L. Rev. 1555, 1568–78 (2008); Kristoffel Grechenig & Martin
Gelter, The Transatlantic Divergence in Legal Thought: American Law and Economics vs. German
Doctrinalism, 31 Hastings Int’l & Comp. L. Rev. 295, 328–30 (2008).
incentives set by law, as well as the interest groups whose economic interests have shaped the
law across jurisdictions.61
In his chapter, Christopher Bruner tackles the difficult question of methodology. He
contrasts functionalism with contextualism, which emphasizes jurisdictional differences.
Contextualists often assume a high degree of difference that cannot be eliminated because of
the difficulties involved in legal transplantation. However, contextualism often fails to provide
a theory for differences. Within law and economics, there is a major functionalist current,
but the shift from “corporate law” to “corporate governance” in the literature has brought
a broader set of cultural, political and economic issues into the debate. A major difficulty in
comparison is the fact that corporate law and governance do not have the same function in each
jurisdiction, but are part of a larger set of institutional complementarities. Choice of method
is thus typically a function of the intended audience, placing a premium on methodological
self-awareness and careful calibration of one’s claims.
Maribel Sáez and María Gutiérrez highlight the specific contributions of law and econom-
ics. They suggest that this field has been rebranded repeatedly, moving from “comparative
corporate law” through “comparative corporate governance” to “law and finance” and finally
to the “theory and empirics of comparative corporate law.” Corporate law scholarship started
with the doctrinal “Continental European” approach to law, which looks at the legal system
purely hermeneutically and from the inside. In the authors’ views, this limited approach has
consequences for the development of the law, e.g. by permitting clearly deficient rules to
persist because of their good fit with the existing system, and by ignoring the enforcement
problems of the law on the books. Comparative company law went beyond a mere description
of foreign law, often adopting English as its lingua franca. Comparative corporate governance
then infused economic thinking into the field, by focusing on solutions to agency problems.
“Law and finance” subsequently added a causal link between legal origins and good corporate
law on the one hand, and good economic outcomes on the other hand. Finally, more recent
literature either provides a more theoretically informed investigation of domestic laws or
investigates specific causal claims empirically.
Vikramaditya Khanna provides a detailed survey of the law and finance literature and its
implications for economic development, surveying the voluminous empirical literature. He
first tackles the question of causation—does strong investor protection facilitate economic
growth and developed capital markets, or do interest groups with a stake in the market lobby
for strong corporate law? In summary, he suggests that “there is good evidence for a growth to
law causation story and some evidence for a law to growth causation story.” The chapter also
considers the evidence that too much investor protection may inhibit investment and growth.
The chapter additionally surveys studies that explore what specific aspects of corporate law
matter, such as boards or Delaware incorporation within the United States. Internationally,
the entrenchment of the board is of lesser concern (given more concentrated ownership struc-
tures), but enforcement, disclosure and the rights of outside investors play a considerable role.
Finally, the chapter touches upon the corporate purpose debate and recognizes that corporate
law may contribute to developments in ways going beyond those conventionally understood if
we take the impact on stakeholders into account.
61
See, e.g., Anatomy of Corporate Law, supra notes 13 and 14 (taking an economic approach in
the guise of a functional approach).
In recent years, the debate about the proper role of the corporation in law and society has
often been described as being about “corporate purpose” or as the “shareholder-stakeholder”
debate, but its ancient roots go back over a century. Writing in 1917, German industrialist
and politician Walther Rathenau expressed deep concern about the role of short-term share-
holders who expected firms to produce returns at the expense of long-term development and
the public interest,62 which triggered a posthumous debate about his claims during the late
1920s.63 The Berle-Dodd debate of 1931 in the US prefigured many of the arguments of sub-
sequent decades, and serves as a template for recurring corporate purpose debates to this day.64
The “corporate purpose” debate has again gained traction in recent years, as the Business
Roundtable in the US in 2019 abandoned a shareholder primacy conception of the corporation
in favor of a stakeholder conception.65
Barnali Choudhury and Martin Petrin tackle the corporate purpose debate with an empha-
sis on the UK and the US. The chapter surveys discussions on both corporate purpose and
short-termism. While directors have the freedom to consider interests besides those of share-
holders, as a matter of practice most firms continue to focus on a narrow corporate purpose. In
the view of the authors, this narrow vision is conducive to short-termist corporate activities.
Thus, the chapter argues that US and UK firms should attempt to advance from a shareholder
ideology to a broader perspective. The authors suggest several reforms in corporate and secu-
rities law that would facilitate such a development.
Cynthia Williams’ chapter reviews developments relating to CSR and ESG (environmental,
social and governance) issues. It explores the increasing emphasis of institutional investors,
including index funds, on ESG data. The author argues that part of the reason that institu-
tional investors are emphasizing ESG is because of younger investors’ increasing interest in
topics such as climate change and economic inequality, and because the connection between
companies’ better management of ESG issues and better financial performance is becoming
well-established. Regarding CSR, the increasing importance can be seen in the activities of
multi-stakeholder collaborations establishing voluntary standards for CSR in many industries,
and in the actions of international organizations such as the United Nations establishing
standards for companies’ international human rights obligations or goals for Sustainable
Development. As to differences between countries in the importance given to CSR or the
voluntary versus mandatory nature of the field, Williams surveys a number of explanations,
including the possibility that countries with a less developed social welfare systems may
require a greater degree of voluntary CSR to maintain the legitimacy of the corporate govern-
ance system. However, countries with a strong stakeholder orientation in corporate law tend to
score better on sustainability indices, showing the potential importance of current discussions
of shifts in the United States from shareholder primacy to stakeholder governance. Ownership
structures and the predominant types of investors appear to have an impact on sustainability
62
Walther Rathenau, Vom Aktienwesen: Eine Geschäftliche Betrachtung (1917).
63
See Fritz Haussmann, Vom Aktienwesen Und vom Aktienrecht 20 (1928).
64
Adolf A. Berle, Corporate Powers as Powers in Trust, 44 Harv. L. Rev. 1049 (1931); E. Merrick
Dodd, Jr., For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145 (1932); A. A. Berle,
Jr., For Whom Corporate Managers Are Trustees: A Note, 45 Harv. L. Rev. 1365 (1931).
65
Business Roundtable, Statement on the Purpose of the Corporation (2019), available
at https://s3.amazonaws.com/brt.org/BRT-StatementonthePurposeofaCorporationOctober2020.pdf. But
see Lucian A. Bebchuk & Roberto Tallarita, The Illusory Promise of Stakeholder Governance, 106
Cornell L. Rev. 91, 124–39 (2020) (criticizing the statement).
outcomes as well. In addition, CSR-oriented disclosure requirements create incentives for

firms to pursue and highlight socially responsible corporate activities.
4.2 The Board
Part II of the book turns to substantive topics in corporate governance, starting with the central
players in internal corporate governance in most jurisdictions: the board of directors. National
legislation provides important differences in the structure of the board, with the US one-tier
model and the German two-tier structure often seen as exemplars. Scholars argue, however,
that “board practices can blur the distinction between the two structures.”66 What is clear in
most jurisdictions is that for publicly traded corporations, the ultimate management power is
embedded in the board of directors, increasingly dominated by independent directors.67 Not
only do boards have ultimate managerial power, but the board of the modern public company
is vested with a monitoring or oversight role. The conception of public company boards as
a monitoring board with the primary function of monitoring the selection and supervision of
the corporation’s executives was most famously articulated in Professor Melvin Eisenberg’s
classic work.68 Since first articulated by Professor Eisenberg, the board’s monitoring role has
grown over time.69 The chapters in this section first examine the structure and composition of
the board of directors, before turning to issues that go to the heart of board responsibilities,
including the exercise of fiduciary duties and the board’s monitoring and oversight roles,
particularly in risk management, executive compensation, and disclosure.
Klaus Hopt and Patrick Leyens explore the structure of the board of directors with a focus on
the two most commonly used board models in corporate law: the one-tier board with a signifi-
cant number of non-executive directors, and the two-tier structure where non-executive direc-
tors are members of a supervisory board while executives directors compose the management
board. Hopt and Leyens argue that rather than settling on a particular board model, the law
should allow corporations flexibility in the choice of a board model. They stress that focusing
on the specific governance strategies available in a variety of situations, for example takeo-
vers or related party transactions, demonstrates that boards can address the types of agency
problems that arise in corporate governance in similar ways, regardless of the choice of board
model. Hopt and Leyens focus on three sample jurisdictions—the US, the UK, and Germany—
to show that different board models can accommodate the agency problems that commonly
arise in publicly listed corporations. They then complicate this argument by considering how
the board as an institution can be used to hold the corporation accountable to non-shareholders,
particularly employee stakeholders. As they show, it is only with employee-codetermination
as a governance strategy that one needs a two-tier board model.
Jean du Plessis’s chapter provides a broad survey of different types of board structures
used around the world, focusing on similarities and deviations in jurisdictions where a unitary
66
John Armour, Luca Enriques, Henry Hansmann & Reinier Kraakman, The Basic Governance
Structure; The Interests of Shareholders as a Class, in Anatomy, supra note 14, at 49, 51.
67
See id. at 50, 62–65.
68
Melvin A. Eisenberg, The Structure of the Corporation: A Legal Analysis (1976).
69
See Renee B. Adams, Benjamin E. Hermalin & Michael S. Weisbach, The Role of the Board
in Corporate Governance: A Conceptual Framework and Survey, 48 J. Econ. Lit. 58, 64–65 (2010);
Ronald J. Gilson & Jeffrey N. Gordon, Board 3.0: An Introduction, 74 Bus. Law. 351, 355–58 (2019).
board, a two-tier board, or an auditor board structure are required. The chapter discusses the
nuances of how even similar structures, such as the two-tier board, are implemented differently
in different jurisdictions. Taking a broad perspective, the chapter then explores the nuances of
board composition rules in various jurisdictions, including the UK, Germany, the Netherlands,
China, and Japan. Du Plessis closes by providing a historical perspective on board composi-
tion and board structure, focusing primarily on early initiatives, namely the 1971 Canadian
Dickerson Report, the EU Draft Fifth Directive on Company Law, the European Company,
and the 1977 UK Bullock Report. He argues that the board governance recommendations in
these initiatives continue to remain relevant today.
Darren Rosenblum’s chapter discusses gender diversity, a pressing issue in board govern-
ance and composition today. The chapter provides a comparative account of regulatory efforts
to implement sex diversity on boards. After exploring the history of corporate board quotas
for women, the chapter addresses the types of quotas and intervention models used in different
jurisdictions, from the hard statutory mandates of Norway to the soft quotas and disclosure
mandates in some common law jurisdictions, including the UK and Canada. The chapter ana-
lyzes the policy challenges raised by current diversity regimes, and what such challenges may
mean for future legislation and policy interventions as diversity continues to play a prominent
role in corporate governance debates.
Turning from board structure and composition to board duties and responsibilities, the next
set of chapters in this part address convergence in the specific duties and functions of the
board. Marco Corradi and Geneviève Helleringer examine the duty of loyalty—encompassing
both rules that govern self-dealing and corporate opportunity transactions—from a compar-
ative perspective. The chapter begins by comparing the approach to regulating self-dealing
and related party transactions under both common law (namely the US and UK) and civil law
regimes (focusing on continental Europe). It then turns to the legal development of corporate
opportunity rules, and contrasts the approach to corporate opportunities under US law with
the less-developed jurisprudence on corporate opportunities in civil law jurisdictions. They
note the tensions between the evolution of the law governing self-dealing transactions at the
European level, and the lack of harmonization on rules addressing corporate opportunities and
its continuing divergences across EU jurisdictions.
Carsten Gerner-Beuerle examines the diffusion and convergence of the duty of care, a fun-
damental fiduciary responsibility of the board, and its “judicial offshoot,” the business judge-
ment rule, whereby courts refrain from reviewing good faith business decisions. The chapter
begins by demonstrating how the duty of care and the business judgment rule are similarly
formulated across jurisdictions, examining both common law and European civil law coun-
tries. Through a comparison of the US and UK approaches, the chapter reveals that even if the
formulation of a legal rule may differ, as with the business judgement standard in the UK, the
operation of such a rule may be the same. In the tradition of the legal transplants literature, the
chapter then compares the application of the Delaware business judgment rule with its German
counterpart to show that even similarly formulated rules differ in actual operation because of
underlying local norms and narratives.
A central function of the modern public company board is its monitoring and oversight
role. Virginia Harper Ho’s chapter analyzes risk oversight and risk management as core ele-
ments of the board’s monitoring role. The chapter draws on examples from both international
guidance and different legal systems, including the US, the UK, continental Europe, and
China, as well as international standards, to explain the basic mechanisms of risk oversight,
risk management and compliance. The chapter argues that across jurisdictions, the fiduciary
duties of care and loyalty are used to hold boards accountable for carrying out their monitor-
ing role. Going beyond an analysis of fiduciary duties, the chapter proposes that the board’s
increasingly complex risk management and oversight responsibilities are now derived from
and impacted by multiple sources, including other regulatory regimes, market actors and
institutions, that have expanded risk regulation. The chapter thus concludes by identifying the
key sources of corporate risk oversight that inform and complement the role of the corporate
board in risk management.
Examining the convergence-divergence debate through the lens of executive compensation,
Li-Wen Lin’s chapter examines the legal regime on executive compensation in six jurisdic-
tions, including the United States, the United Kingdom, Germany, Japan, India, and China.
Executive compensation has long been viewed as within the central powers of the board, but
Lin’s chapter reveals the extent to which, for publicly traded companies in many jurisdictions,
the board of directors is no longer the only body with power over executive compensation
decisions. The chapter shows that not only have the legal rules restricting the board’s power
over executive pay begun to diverge in Western countries, but also that directors’ power over
executive pay varies widely when one assesses the legal regime in leading Asian jurisdictions
such as Japan, India, and China.
A crucial function of the board of directors is the oversight of financial disclosure, with
audit committees becoming ubiquitous as standing committees of public company boards.
Financial disclosure to investors necessarily depends on accounting standards. Thus, Martin
Gelter’s chapter grapples with the question of convergence and path dependence in accounting
laws and standards. Gelter argues that while accounting appears to have undergone interna-
tional convergence, at least in the goals of the dominant accounting standards, there remains
considerable persistence and divergence when one compares accounting standards in the US
and the EU member states. Gelter explains this persistence by turning to the theory of path
dependence. He exposes how the divergent interests of the accounting industry, a key interest
group in accounting, explains the lack of convergence in accounting standards.
4.3 Shareholders
As we note above, much of corporate governance concerns itself with balancing conflicts and
power between shareholders and managers, as well as among shareholders, namely controlling
and non-controlling shareholders. Shareholders are not a monolithic group, ranging from the
state, hedge funds, and institutional investors to family groups and individuals. Furthermore,
the past two decades have experienced significant changes in capital market structures around
the world, resulting in a reassessment of shareholder power and participation in corporate
governance, and debates about the degree to which the law can and should provide sharehold-
ers with a voice and facilitate greater shareholder protection.70 The chapters in Part III of the
book explore the makeup and power of contemporary shareholders, seeking to address both
the increasing significance of institutional investors and transformations in shareholder power,
70
For a series of chapters on shareholder categories, shifts in shareholder power and international
perspectives on shareholder power, see Jennifer G. Hill & Randall S. Thomas, Research Handbook
on Shareholder Power (2015).
rights and duties. Given the prevalence of concentrated shareholding around the globe, several
chapters address the rights, powers and duties of both controlling and minority shareholders.
Sofie Cools analyzes the transformation of shareholder power by comparing the use of
shareholder proposals by shareholders of US public companies with the relative lack of such
proposals in Europe. Focusing on Delaware, France, Germany, Belgium, and the Netherlands,
the chapter begins with a concise historical account of the evolution of shareholders’ substan-
tive powers and initiative powers. Using a functional approach, the chapter then dives into
assessing each set of shareholder powers in detail, and argues that private ordering through
shareholder power proposals in US companies is largely closing the gap in substantive share-
holder power that has existed between the United States and Europe. The chapter also casts
doubt on empirical comparisons of the frequency of shareholder proposals in the US and
Europe by showing how two important factors—differences in ownership structures and the
goals of shareholder proposals in the US—complicate such comparisons.
Turning to the dramatic increase in institutional investors around the globe, Assaf Hamdani
and Sharon Hannes analyze the governance implications of this rise against the background of
the growing influence of activist hedge funds. Using examples from a variety of jurisdictions,
they argue that for widely held companies, institutional investors can determine the outcome
of shareholder votes, including director elections. Nevertheless, they point out that even for
companies with dispersed ownership, country-specific regulations, political sentiments, and
social norms will impact the extent to which institutional investors will actually wield their
rising power. The chapter then turns to the limited ability of institutional investors to influence
governance in jurisdictions with predominantly controlled companies and considers the poten-
tial for institutional investors to become powerful in countries, such as Israel, experiencing
a shift from concentrated to dispersed ownership of publicly listed corporations.
Gaia Balp and Marco Ventoruzzo focus on the rules governing the duties of controlling
shareholders to minority shareholders in three jurisdictions: the US, Germany, and Italy. The
chapter argues that despite differences in the specific laws and enforcement mechanisms used
to address the duties of controlling shareholders, the principles and conceptual goals across
these jurisdictions are functionally quite similar. To support their argument, the chapter exam-
ines controllers’ duties in a variety of situations that present universal conflicts in controlled
companies—related party transactions, sale of a control stake and access to privileged infor-
mation. They demonstrate that, irrespective of the specific rules and enforcement tools used
in each of these situations, loyalty underpins the standards and rules for controllers’ conduct.
Nevertheless, the chapter recognizes that differences among these jurisdictions in the involve-
ment of the courts and in ex-ante versus ex-post legal regimes may impact the actual level of
minority investor protection.
Minority shareholders are not homogeneous, both within and across jurisdictions, in their
makeup, goals, and actions. Umakanth Varottil explores the implications of the increasing
heterogeneity of minority shareholders. The chapter argues that the expanding schism among
minority shareholders creates agency problems among types of minority shareholders, allow-
ing one type of minority shareholder to affect the interests of others. The chapter thus addresses
and expands on existing calls for legal rules that restrain minority shareholder behavior.71 To
further its claims, the chapter begins by recounting the evolution of the identity of minority
71
See. e.g., Iman Anabtawi & Lynn A. Stout, Fiduciary Duties for Activist Shareholders, 60 Stan.
L. Rev. 1255 (2008).
shareholders, focusing on the rise of institutional investors in the global stock markets. It
then turns to analyzing the goals and actions of two types of institutional investors—activist
hedge funds and passive funds—to show the potential conflicts among these shareholders. The
chapter ends by discussing from a comparative lens the legal tools, such as fiduciary duties and
stewardship responsibilities, available to address such conflicts.
Sang Yop Kang addresses controlling shareholder power in two types of scenarios: con-
trolling shareholders in corporate groups versus single corporations operating various business
lines. While these two types of business may functionally operate in a similar manner, Kang
explores the differences that arise in controllers’ behaviors in three contexts: risk-sharing
(cash-flow stabilization), control/voting leverage, and tunneling. The theoretical prism used by
Kang in analyzing these different contexts suggests that to increase their power and opportu-
nities, controllers may be more inclined to establish corporate groups rather than single corpo-
rations with different business lines (although controllers’ preference for the corporate-group
form is not always absolute).
4.4 Enforcement of Corporate Law
Directors’ and shareholders’ duties would be irrelevant in practice if they were not enforcea-
ble. Not surprisingly, there are big international differences in this regard.72 According to the
conventional wisdom in comparative corporate law, the US is the country where corporate law
(as well as securities laws) are most vigorously enforced.73 This is in part due to the existence
of an entrepreneurial plaintiff bar, which exists thanks to various institutional circumstances,
not the least the American rule in civil procedure (where each party pays their own cost) and
the possibility of contingency fees, which induces plaintiff attorneys to bring class actions as
well as derivative suits.74 There are other jurisdictions where litigation has become common,
for example Japan in the area of derivative litigation,75 as well as Canada, Australia, and Israel
72
See, e.g., Harald Baum & Dan W. Puchniak, The Derivative Action: An Economic, Historical and
Practice-Oriented Approach, in The Derivative Action in Asia 1 (Harald Baum & Dan W. Puchniak
eds., 2013); Mathias M. Siems, Private Enforcement of Directors’ Duties, in Collective Actions 93
(Stefan Wrbka, Steven van Uytsel & Mathias Siems eds., 2012); Brian R. Cheffins & Bernard S. Black,
Outside Director Liability Across Countries, 84 Tex. L. Rev. 1385 (2006); Martin Gelter, Why do
Shareholder Derivative Suits Remain Rare in Continental Europe, 37 Brook. J. Int’l L. 844 (2012);
Puchniak, supra note 15, at 1.
73
On regulators, see, e.g., Klaus J. Hopt, Comparative Corporate Governance: The State of the Art
and International Regulation, in Comparative Corporate Governance, supra note 12, at 3, 87–90.
On the role of litigation, see, e.g., Bruner, supra note 32, at 609–11 (contrasting the greater reliance
of US law on litigation with the ability of UK shareholders to remove directors); Alessio M. Pacces,
Controlling the Corporate Controller’s Misbehavior, 11 J. Corp. L. Stud. 177, 203–04 (2011) (discuss-
ing enforcement of self-dealing law by the Delaware courts).
74
See, e.g., John C. Coffee, Jr., The Globalization of Entrepreneurial Litigation: Law, Culture, and
Incentives, 165 U. Pa. L. Rev. 1895, 1917 (2017) (describing institutional factors favoring entrepreneur-
ial litigation in the US and how it spreads elsewhere).
75
Dan W. Puchniak & Masafumi Nakahigashi, Japan’s Love for Derivative Actions: Irrational
Behavior and Non-Economic Motives as Rational Explanations for Shareholder Litigation, 45 Vand. J.
Transnat’l L. 1 (2012); Mark D. West, Why Shareholders Sue: The Evidence from Japan, 30 J. Legal
Stud. 351 (2001).
in securities law.76 In all cases, cost rules have become favorable to lawsuits. The other aspect
of enforcement is the public side, i.e. enforcement by securities regulators, which relies largely
on financial endowment and qualified staff.77
The chapters in the book tackle enforcement from two perspectives. Pierre-Henri Conac’s
chapter looks specifically at the enforcement of corporate governance rules, including corpo-
rate governance codes. Taking a broad perspective, Conac looks at factors facilitating private
shareholder litigation, as well as enforcement by regulators, focusing mainly on European
jurisdictions, the United States, and Brazil. Among other factors, this chapter explores stock
exchanges (which have shed their public nature in recent decades and now compete for
listings) as enforcers considered intermediate between public and private mechanisms. The
chapter argues that private enforcement should be the main legal technique for enforcement,
but that public regulation should serve as a stopgap that remedies the deficiencies of the
private model.
Alan Koh and Samantha Tang restrict their analysis to private litigation in corporate law
and exclude securities law aspects. Their chapter provides a highly detailed taxonomy of the
various types of lawsuits and their functions in the Anglo-Commonwealth jurisdictions (UK,
Australia, Singapore, Hong Kong, New Zealand), the US, Germany, and Japan. The chapter
considers key factors furthering and limiting such suits, including cost structure, length of
the litigation, and possible outcomes. Besides derivative litigation, which involves remedies
from which the company itself benefits, the chapter looks very closely at direct suits, which
have received less attention in the literature. The taxonomy encompasses monetary and
non-monetary remedies, and looks at oppression and withdrawal, appraisal rights, injunctions,
as well as litigation challenging the validity of shareholder decisions.
4.5 M&A
The final two chapters of the book turn their attention to assessing corporate governance in
the specific context of mergers and acquisitions (M&A), including those involving the man-
agement of the corporation. M&A transactions—i.e. the transfer of control and ownership of
a business as an entirety—are among the most significant transactions undertaken by a firm.
Such transactions also provide opportunities and incentives for conflicts of interests between
and among the board, officers, and shareholders.78 Accordingly, the legal system in many
jurisdictions focuses on the balance of power in M&A transactions so as to both facilitate
M&A transactions and constrain, or manage, the types of conflicts that can arise.79 Thus,
corporate governance is at the center of the regulation of M&A.
The US and UK are the two most active markets for M&A transactions, particularly take-
overs involving publicly traded firms. And to a large extent their regulatory approaches to
addressing conflicts in M&A have had a significant impact on M&A regimes in other jurisdic-
76
E.g., Martin Gelter, Global Securities Litigation and Enforcement, in Global Securities
Litigation and Enforcement 3, 39 (Pierre-Henri Conac & Martin Gelter eds., 2019).
77
See Howell E. Jackson & Mark J. Roe, Public and Private Enforcement of Securities Laws:
Resource-Based Evidence, 93 J. Fin. Econ. 207 (2009).
78
See John C. Coates Jr., Mergers, Acquisitions, and Restructurings: Types, Regulation, and
Patterns of Practice, in Oxford Handbook, supra note 10, at 570, 576–82.
79
See Paul Davies, Klaus Hopt & Wolf-Georg Ringe, Control Transactions, in Anatomy, supra
note 14, at 205, 207–11.
tions.80 Thus, both of the chapters in this section of the book focus on a comparative analysis
of the US and UK.
Afra Afsharipour considers how corporate governance concerns are reflected in the approach
to regulating friendly takeover transactions in the US and UK. The chapter argues that, with
respect to friendly takeovers, the two jurisdictions address corporate governance concerns and
the balance of power between the board of directors and shareholders in increasingly divergent
ways. The chapter discusses how the UK restrains director power in friendly M&A deals,
including recent rules that constrain the power of directors to negotiate deal protection mecha-
nisms. The chapter compares the UK model with that adopted in the US, which provides wide
latitude to directors to negotiate and design M&A deals and, due to recent changes to Delaware
jurisprudence, provides little opportunity for shareholders to check management conflicts
through litigation. The chapter concludes by assessing the extent to which trajectory of US and
UK experiences with addressing corporate governance in friendly takeovers demonstrates the
important pull of path dependence in the design of corporate governance rules.
Turning to director and officer fiduciary duties in management buyouts (MBOs), Andrew
Tuch comparatively assesses US and UK laws governing such transactions. MBOs raise the
quintessential type of conflicts in M&A transactions because they involve the board or officers
of the target firm acting as owners of the buyer. As the chapter illustrates, the UK’s no-conflict
rule is often viewed as more severe than the US fairness rule in regulating MBOs. The chapter
argues, however, that the fiduciary rules in each jurisdiction operate similarly, tasking neutral
or disinterested directors with policing self-dealing and facilitating commercially sensitive
responses to conflicts of interest. The comparison also reveals significant divergence between
the two systems—in modes of enforcement and in disclosure requirements for deal-related
practices. Nevertheless, the chapter asserts that both the US and UK may not effectively
prevent fiduciary misconduct early in the MBO deal process.
5. CONCLUSION
As the chapters in this book demonstrate, comparative corporate governance scholarship

continues to flourish. The scholarly debate continues to grapple not only with the governance
changes occurring in the traditionally-studied jurisdictions of the US, UK, Europe, and Japan,
but over the past decade this scholarship has come to address more extensively other econom-
ically significant countries, such as Brazil, China, and India. The literature shows that, while
there is much to learn from the larger theoretical models we reference above, the comparative
picture remains more complex than the one painted by the original “law and finance” discus-
sion. This is particularly true given growing concerns around the globe with issues of sus-
tainability and corporate purpose. The continuing evolution of corporate governance debates
means that for scholars, a comparative approach to corporate governance will long prove to be
insightful in understanding and analyzing corporate law generally.
80
See Umakanth Varottil & Wai Yee Wan, Comparative Takeover Regulation: The Background to
Connecting Asia and the West, in Comparative Takeover Regulation, supra note 20, at 3, 5 (2018).
PART I
PERENNIAL DEBATES IN
COMPARATIVE CORPORATE
GOVERNANCE
2. Methods of comparative corporate governance
Christopher M. Bruner1
1. INTRODUCTION
Methodology has not received sufficient attention in the field of comparative law. All too often,
legal scholars proceed on the assumption – or, perhaps, article of faith – that placing laws and
regulatory structures from multiple jurisdictions in a box and then shaking up the contents will
somehow generate useful knowledge.2 This shortcoming is perhaps even more significant in
the specific field of comparative corporate governance, where the general comparative legal
literature that does exist on the subject tends to be ignored.3 While there is assuredly no single,
optimal comparative method, it remains critically important for scholars to evaluate whether
the approach undertaken is fit for purpose – that is, whether the comparative method adopted
is in fact capable of illuminating the subject of inquiry.4
This chapter highlights some significant methodological choices and challenges encoun-
tered in comparative corporate governance. Section 2 describes differing comparative postures
that one might adopt, emphasizing similarity or difference, respectively – an important thresh-
old consideration, insofar as one often finds what one sets out to find, without recognizing the
degree to which such predispositions might cloud the analysis and preclude a fuller account.
Section 3 examines how the “law and economics” movement in particular has affected com-
parative analysis of corporate governance, critiquing its (implicit) methodology and assessing
its impacts. Section 4 then discusses various choices in research design, emphasizing how
the alternatives are impacted by the foregoing dynamics. Section 5 briefly concludes, calling
for methodological self-awareness and candid acknowledgment of the limits of what various
comparative approaches to corporate governance can deliver.
2. COMPARATIVE POSTURE AND THE PRODUCTION OF

KNOWLEDGE
Methodology involves evaluating critically the use of a given method to pursue a particular
type of research, the aim being to ensure production of “relevant information concerning the
1
For helpful comments, thanks to Afra Afsharipour, Martin Gelter, Geneviève Helleringer, Klaus
Hopt, and participants in the Handbook authors’ conference at Fordham University School of Law.
2
See Alan Watson, Legal Transplants: An Approach to Comparative Law 1–2 (2d ed. 1993)
(observing that comparative legal scholarship often proceeds as if “the nature of the method or technique
is obvious”).
3
See Mathias M. Siems, The Methods of Comparative Corporate Law, in Routledge Handbook
of Corporate Law 11, 11 (Roman Tomasic ed., 2017).
4
See id. at 12; see also Lynn M. LoPucki, A Rule-Based Method for Comparing Corporate Laws,
94 Notre Dame L. Rev. 263, 264–65 (2018).
20
Methods of comparative corporate governance 21
question that the research aims to answer.”5 So how does comparative law, in particular, con-
tribute to the production of useful knowledge?
There are widely differing views on how comparative legal analysis ought to be approached,
and what even counts as comparative law in the first place. Alan Watson, in his classic 1974
treatment of “legal transplants,” took the position that “comparative law” should be regarded
as involving something more than mere study of a foreign legal system, or “an elementary
[descriptive] account of various legal systems,” or the simple “matter of drawing comparisons”
at the level of discrete rules or branches of law; for Watson, only “the study of the relationship
of one legal system and its rules with another” involves sufficient intellectual rigor to permit
comparative law to be regarded as a distinct discipline. This is a high bar indeed, requiring
deep engagement with the history of the systems in question and “the particular factors which
shape legal growth and change” within them.6 By the time this work was reprinted in 1993,
Watson remained of the opinion that relationships among systems constitute “the main com-
ponent” of comparative law, yet had come to “accept that knowledge of a number of systems,
related or unrelated, may enable us to draw a few general conclusions” – notably that, regard-
less of the prevalence of borrowing, the idiosyncratic “legal culture of the lawmaking elite” in
a given country can have a major impact on legal development as well.7
This debate regarding the proper content of comparative law, as a field, essentially turns on
“whether comparative law is itself a method,” or rather “a research topic itself.”8 The reality,
however, is that both are commonly thought today to fall within the field of comparative law.
If the comparison is deployed as a means of explaining something external to the rules them-
selves – say, phenomena influencing the development of law over time – then comparative law
might be said to operate as a method, whereas if “comparison itself constitutes the purpose
of an investigation” – say, because one wants to understand how some intrinsic feature of
a given form of law differs from one jurisdiction to another – then comparative law arguably
represents a research subject in itself. In either case, however, the nature of the inquiry will
be driven by the form of the question posed, and because of this diversity of goals, there can
be “no generally applicable method.”9 An extraordinary range of forces motivate comparative
legal study, particularly in the field of corporate governance, where growing interest has been
driven by globalization of corporate and financial activity; cross-border regulatory harmoniza-
tion; reform efforts in response to global crises; and academic interest in understanding such
phenomena.10 Such varied motivations will naturally prompt comparative study “at various
levels of abstraction and practice.”11
5
Jaap Hage, Comparative Law as Method and the Method of Comparative Law 1–2 (Maastricht
European Private Law Institute Working Paper No. 2014/11, 2014), https://ssrn.com/abstract=2441090.
6
See Watson, supra note 2, at 4–7.
7
Id. at 117–18.
8
Hage, supra note 5, at 6–7.
9
Id. at 10–12; see also Mathias Siems, Comparative Law 6–11 (2d ed. 2018).
10
See David Cabrelli & Mathias Siems, A Case-Based Approach to Comparative Company Law,
in Comparative Company Law: A Case-Based Approach 1, 1–3 (Mathias Siems & David Cabrelli
eds., 2013); Andreas Cahn & David C. Donald, Comparative Company Law: Text and Cases on
the Laws Governing Corporations in Germany, the UK and the USA 3–6 (2010); Annelise Riles,
Wigmore’s Treasure Box: Comparative Law in the Era of Information, 40 Harv. Int’l L.J. 221, 221–25
(1999); see also infra Section 4.
11
Cahn & Donald, supra note 10, at 6.
In evaluating methodological alternatives, a critical threshold consideration involves how

the framing of the question itself might predispose one toward finding similarity or difference.
This is, in essence, the distinction between functionalism and contextualism – the former
emphasizing commonality at the level of practical problems and solutions, predisposing one
to find convergence toward some optimal legal strategy, while the latter emphasizes idiosyn-
crasy, predisposing one to find persistent diversity in the formulation of social goals and legal
strategies to achieve them.
2.1 Functionalism: Emphasizing Similarity
Functionalism, as presented by Konrad Zweigert and Hein Kötz, takes as its starting point the
notion that “the only things which are comparable are those which fulfil the same function,”
and then proceeds on the assumption that “the legal system of every society faces essentially
the same problems, and solves these problems by quite different means though very often
with similar results.”12 This purported tendency prompts Zweigert and Kötz to adopt “a ‘prae-
sumptio similitudinis’, a presumption that the practical results are similar,”13 and this strong
assumption, in turn, supports the fundamental methodological claim of functionalism. “The
question to which any comparative study is devoted must be posed in purely functional terms;
the problem must be stated without any reference to the concepts of one’s own legal system.”14
They elaborate that “the solutions we find in the different jurisdictions must be cut loose from
their conceptual context and stripped of their national doctrinal overtones so that they may
be seen purely in the light of their function.”15 From here, it is a short step to evaluation of
the relative quality of various jurisdictions’ solutions, prompting Zweigert and Kötz to call
for “a truly international comparative law which could form the basis for a universal legal
science.”16
By its terms, functionalism claims “a methodological monopoly,”17 and as we will see, it
represents the dominant method in comparative corporate governance today.18 While various
concepts of functionality are employed across disciplines,19 the most significant for compar-
ative law is what Ralf Michaels calls “equivalence functionalism” – the notion, reflected in
Zweigert and Kötz’s work, that “similar functional needs can be fulfilled by different institu-
tions, the idea of the functional equivalent.”20
Notwithstanding its predominance, functionalism has been widely criticized. As a threshold
matter, Michaels observes that those developing this approach “were more pragmatically than
methodologically interested,” and that Zweigert and Kötz themselves were in fact “driven
12
Konrad Zweigert & Hein Kötz, An Introduction to Comparative Law 34 (Tony Weir
trans., 3d ed. 1998).
13
Id. at 40.
14
Id. at 34.
15
Id. at 44.
16
Id. at 46–47; see also Siems, supra note 9, at 27; Riles, supra note 10, at 231–40.
17
Ralf Michaels, The Functional Method of Comparative Law, in The Oxford Handbook of
Comparative Law 339, 343 (Mathias Reimann & Reinhard Zimmermann eds., 2006).
18
See infra Section 3; see also Christopher M. Bruner, Corporate Governance in the
Common-Law World: The Political Foundations of Shareholder Power 14–17 (2013).
19
See Michaels, supra note 17, at 343–63.
20
Id. at 356–57, 363.
primarily by an interest in universalist humanism and in legal unification; the functional

method was simply the best tool to reach these goals.”21 Apart from any such instrumental
motivations, however, functionalism as a comparative method encounters problems on its
own terms. Functionalists must “assume that ‘law’ can somehow be separated from ‘society’
because otherwise law could not fulfil a function for society,”22 yet in many instances it
appears impossible to disentangle law from its cultural context. Indeed, the identification of
true common problems across jurisdictions – the foundation of functionalist analysis – can
prove both conceptually and practically difficult. This often requires functionalists either to
retreat to a high level of abstraction in order to articulate the purportedly shared problem with
a sufficient degree of commonality,23 or alternatively to focus the analysis on a very small
number of narrowly circumscribed comparisons,24 which in turn may tend to limit the scope of
comparative study to relatively similar jurisdictions.25
Even in such cases, however, cultural context inevitably re-enters the picture, as Zweigert
and Kötz acknowledge. In some cases, the solution to the purported problem arises outside
law, being “provided by custom or social practice,” or perhaps by “unwritten rules of commer-
cial practice.”26 If “different countries meet the same need in different ways,” they note, “we
must ask why. This is a particularly demanding task, since the reasons may lie anywhere in
the whole realm of social life.”27 A vivid example would be the United Kingdom’s historical
reliance on self-regulation in fields like takeover law, contrasting starkly with U.S. reliance on
formal securities regulations and corporate law fiduciary doctrines. This divergence has been
attributed to the close geographic proximity and cultural homogeneity of relevant private and
public actors in “the City,” London’s financial district, relative to their U.S. counterparts.28
The fact that social needs and regulatory structures effectively respond to and are dynami-
cally conditioned by one another means that functionalist reasoning “is of course circular – it
goes from problems to functions and from functions to problems,” with some prior awareness
of each being required to recognize the other.29 Accordingly, Andreas Cahn and David Donald
21
Id. at 362; see also Donald C. Clarke, “Nothing But Wind”? The Past and Future of Comparative
Corporate Governance, 59 Am. J. Comp. L. 75, 80 (2011) (arguing that comparative corporate govern-
ance has been principally motivated by a pragmatic search “for solutions to problems in one jurisdiction
by looking at the practice of other jurisdictions”).
22
See Michaels, supra note 17, at 365.
23
See Bruner, supra note 18, at 16, 115; Michaels, supra note 17, at 366–68; Watson, supra note 2,
at 4–5; Günter Frankenberg, Comparing Constitutions: Ideas, Ideals, and Ideology – Toward a Layered
Narrative, 4 Int’l J. Const. L. 439, 444–45 (2006).
24
See, e.g., LoPucki, supra note 4, at 268 (proposing a strict form of functionalist analysis in which
“the researchers’ goal is to compare a single aspect of a jurisdiction’s corporate law with the correspond-
ing aspect of another jurisdiction’s corporate law”).
25
See Siems, supra note 9, at 42–44 (observing functionalism’s relative “disregard of non-Western
countries” based on “the assertion that these countries are too different to be comparable”); see also id.
at 127–28 (observing that the “law-as-culture” approach “has been less focused on Western countries …
and this more extensive scope of application may indeed be one of its appeals”).
26
See Zweigert & Kötz, supra note 12, at 35, 38.
27
Id. at 44; see also Bruner, supra note 18, at 16–17.
28
See Bruner, supra note 18, at 150–51, 244–45; see also John Armour & David A. Skeel, Jr.,
Who Writes the Rules for Hostile Takeovers, and Why? – The Peculiar Divergence of U.S. and U.K.
Takeover Regulation, 95 Geo. L.J. 1727, 1757–63, 1771–72 (2007); Caroline Bradley, Transatlantic
Misunderstandings: Corporate Law and Societies, 53 U. Miami L. Rev. 269, 299–300, 309 (1999).
29
See Michaels, supra note 17, at 369.
warn that “this circular method of assuming a whole to determine the functions of the parts
and then employing a deepened understanding of the parts’ complementary functions to
reformulate the idea of the whole” requires particular “caution.”30 This naturally prompts
methodological anxiety, as the turn to context becomes “a kind of quicksand” for functional-
ists. “Any amount of contextual detail that [they] might provide seems insufficient,” Annelise
Riles explains, “and yet every amount of detail threatens the possibility of comparing across
different systems.”31
The assumption of functional equivalence, thought to provide the justification for com-
parison in the first instance, creates substantial problems in its own right in terms of drawing
conclusions and insights from the analysis. Precisely because functional equivalents “are
by definition of equal value with respect to that function,” evaluating the relative merits of
various solutions requires appeal to norms external to that function, rendering the exercise
“almost impossibly complex,” and correlatively controversial due to the open-ended range of
potential metrics.32 For example, I have argued elsewhere that U.S. corporate law has histori-
cally resisted strong-form shareholder governance powers of the sort taken for granted by U.K.
company lawyers, in part because the broader U.S. regulatory regime has relied heavily on cor-
porate employers, rather than the state, to deliver critical social welfare protections – broader
contextual realities that raise the economic, social, and political stakes of the employment
relationship, prompting greater regard for non-shareholder constituencies.33 Which approach
to corporate governance should be regarded as optimal or superior? One could not coherently
evaluate this without reference to prevailing views on distributive justice and other normative
metrics that are themselves culturally and historically contingent.34 Yet, functionalist analyses,
by their own terms, generally direct attention away from such contextual factors by assuming
functional equivalence of legal structures, implicitly avoiding engagement with historical,
cultural, social, and political dynamics that may drive divergences and complicate normative
evaluation of resulting law.35
2.2 Contextualism: Emphasizing Difference
In stark contrast, contextualism emphasizes precisely what functionalism tends to exclude

from the analysis. Dynamics of history, culture, society, and politics take centerstage, and the
30
Cahn & Donald, supra note 10, at 7; see also Clarke, supra note 21, at 85–86 (observing that
“there is no objective way of knowing what function or need a particular practice serves,” and that the
“very act of deciding what is a problem involves a value judgment”).
31
Riles, supra note 10, at 236–40; see also Siems, supra note 9, at 22–23.
32
See Michaels, supra note 17, at 374–80; see also Jeffrey N. Gordon, Convergence and Persistence
in Corporate Law and Governance, in The Oxford Handbook of Corporate Law and Governance
28, 51–53 (Jeffrey N. Gordon & Wolf-Georg Ringe eds., 2018); Klaus J. Hopt, Comparative Company
Law, in The Oxford Handbook of Comparative Law, supra note 17, at 1161, 1174–78; Pierre
Legrand, Antivonbar, 1 J. Comp. L. 13, 27–29 (2006).
33
See generally Bruner, supra note 18.
34
Id. at 289.
35
See John Armour et al., Beyond the Anatomy, in Reinier Kraakman et al., The Anatomy of
Corporate Law: A Comparative and Functional Approach 267, 267–70 (3d ed. 2017); Michaels,
supra note 17, at 374–75; cf. Watson, supra note 2, at 95–101, 107–08, 111–13, 116 (observing that
while much law is borrowed from other systems, once transplanted it operates differently due to local
circumstances).
comparative posture that these preoccupations inspire is diametrically opposed to that inspired
by functionalism. For contextualists, a high degree of national idiosyncrasy – including sub-
stantial diversity of goals and regulatory responses – is assumed, predisposing these scholars
toward the identification of enduring national differences.36 It is not an overstatement to say
that contextualism represents anti-functionalism, picking up precisely where functionalist
analyses leave off37 and rejecting outright the sorts of assumptions and conclusions described
above.
Unlike functionalists, contextualists assume a high degree of difference, and then make it
their project to locate and understand that difference. Accordingly, contextualists articulate
the aims and takeaways of comparative legal research in very different terms. Pierre Legrand,
for example, asserts that “the world is irreducibly plural in character,”38 and advances an
alternative methodology emphasizing “concern for life-in-the-law,” by which he refers to “an
engagement with the world at ground level – on the street, so to speak – where the singular
and irreducible is what is real in contrast to what can be subsumed under concepts and catego-
ries.”39 He aims for a “contrarian comparativism” that will “sustain otherness,” with compara-
tive analysis itself effectively amounting to “an archaeology or genealogy” or “an ethnography
of (legal) difference.”40 There being “no way to establish a claim to the effect that one legal
form permits a better grasp of the world than all others,” the comparatist’s project becomes
achieving “a cosmopolitan gaze” – that is, an understanding and regard for difference, reflect-
ing respect for “social existence” and distinct identities.41 The whole point of comparative
law, on this approach, becomes understanding difference, assumed to be persistent, with no
pretense of evaluation.42
The contextualist approach would appear to present a compelling alternative to function-
alism, in that it focuses intently on the very subjects that fall within the functionalist’s blind
spots. Yet, equal and opposite problems arise for the contextualist approach. Simplistic
appeals to “culture” to explain divergences in legal structures may lapse into the same circu-
larity described above if unaccompanied by an account of the causal mechanisms involved.43
More generally, however, contextualism runs the risk of overstating contingency and, taken
to its logical extreme, undercuts any coherent basis for pursuing particular comparisons at
all.44 This tendency leaves contextualist scholarship “susceptible to the well-known limits of
36
See Bruner, supra note 18, at 17–18. For an example in the field of comparative corporate
governance, see generally Christopher M. Bruner, What Is the Domain of Corporate Law? (University
of Georgia School of Law Legal Studies Research Paper No. 2019-04, 2018), https://ssrn.com/abstract=
3308611 (concluding that contextual features preclude identification of a single stable domain for corpo-
rate law in all places and times).
37
See, e.g., Michaels, supra note 17, at 340–41 (observing that the main methodological alternatives
to functionalism are “comparative legal history, the study of legal transplants, and the comparative study
of legal cultures”); Siems, supra note 3, at 12–26 (describing various alternative methodologies, includ-
ing historical, contextual, and normative analysis).
38
Legrand, supra note 32, at 19.
39
Id. at 25; see also Frankenberg, supra note 23, at 442–43.
40
Legrand, supra note 32, at 30, 34.
41
Id. at 34–36; see also Frankenberg, supra note 23, at 445–46.
42
Legrand, supra note 32, at 34–35; see also Bruner, supra note 18, at 21.
43
See Siems, supra note 9, at 132.
44
See Bruner, supra note 18, at 18; Riles, supra note 10, at 245; cf. Siems, supra note 9, at 32–35
(“The main advantage of the functional method is that it provides the necessary link between the different
rules that legal systems tend to employ.”).
critical, post-modern perspectives, including charges of dead-end relativism.”45 As Russell

Miller sums it up, “[i]f the contextualists are right and context thwarts the borrowing that
functionalism sought to promote, comparative law runs the risk of being reduced to little more
than socio-legal tourism.”46
Potential means of drawing upon multiple methodologies with differing strengths are dis-
cussed below.47 However, this debate regarding the relative merits of functionalism and how to
structure a viable alternative remains “the focal point of almost all discussions about the field
of comparative law as a whole,”48 and it provides a particularly illuminating window onto the
current prevailing methodological approaches to comparative corporate governance, to which
we now turn.
3. THE LAW AND ECONOMICS APPROACH AND

METHODOLOGICAL RESPONSES
While there has been considerable borrowing of legal structures from other systems across
numerous areas of law, this trend has arguably been even stronger in the area of private law,
where Roman civil law and English common law have loomed particularly large as models.49
As to corporate law and governance, in particular, there is a widespread perception that the
substantial nexus with economic theory tends to “enable comparability of legal systems, thus
providing a common denominator (‘tertium comparationis’) in the terminology of compar-
ative law.”50 More specifically, this nexus leads many to conclude that corporate law and
governance are “relatively culturally neutral in nature,” facilitating greater transplantation of
corporate governance structures from one jurisdiction to another.51 Accordingly, it is unsur-
prising that there is a strong association between economic orientation and methodological
45
Russell A. Miller, Comparative Law and Germany’s Militant Democracy, in US National
Security, Intelligence and Democracy: From the Church Committee to the War on Terror
229, 243 (Russell A. Miller ed., 2008).
46
Id. In response, Miller proposes a “discursive” alternative, in which “sociological information”
revealed through comparative law “might enlighten, as a social critique, the understanding of one’s own
social milieu,” which might in turn “inform the growing of our own norm as a bottom-up process.” Id.
47
See infra Section 4.
48
Michaels, supra note 17, at 340; see also Riles, supra note 10, at 280 (identifying “the function-
alist/contextualist paradigm that characterizes the majority of comparative legal scholarship”). Annelise
Riles identifies a third methodological posture that she labels discourse analysis. These scholars “share
an affinity for critical theory and cultural studies,” and their “primary interest is in the politics and epis-
temology of comparative research itself,” taking aim at “the politics of comparison” and other scholars’
“pretenses of empiricism.” Id. at 246–48. Ultimately, however, this form of comparative scholarship may
be fairly described as a methodological extension of contextualism in which “the problem of context is
defined as a critique” of the comparative exercise itself. Id. at 248–50; see also Siems, supra note 9, at
134–44 (describing “critical comparative law” approaches).
49
See Watson, supra note 2, at 22, 95; see also Zweigert & Kötz, supra note 12, at 40 (noting
that their presumption of similarity is stronger in “those parts of private law which are relatively
‘unpolitical’”).
50
Siems, supra note 3, at 12.
51
See Cabrelli & Siems, supra note 10, at 10 (describing debates in the literature on this point).
functionalism in the literature on comparative corporate governance.52 As Donald Clarke

explains, the “simplest hypothesis of the [comparative corporate governance] literature is that
economics, and only economics, matters,” leading such scholars to conclude that “[c]ountries
faced with similar economic pressures will, over time, adopt similar corporate governance
institutions.”53
While comparative corporate governance already exhibited functionalist tendencies due to
its origins among corporate practitioners working across borders,54 the “law and economics”
(L&E) movement that arose in the mid-1970s has more firmly established this as the predomi-
nant method.55 Fundamentally, the L&E approach lends itself to functionalist analysis in com-
parative corporate governance because it posits a single, universal problem and then compares
various systems through that lens; building on the work of financial economists, the common
problem is often said to be agency costs in widely held public companies that arise due to
misalignment of incentives between shareholders and managers, who are conceptualized in
principal-agent terms.56 This prompts evaluation of various jurisdictions’ corporate govern-
ance systems by reference to the degree to which they effectively manage such agency costs,57
and has led many to predict substantial convergence upon strong-form minority shareholder
protections in response to regulatory competition.58
Such dynamics are apparent not only in expressly comparative L&E scholarship, but also in
the more general L&E literature on corporate governance, to the degree that such analyses are
presented in a quasi-scientific manner.59 Frank Easterbrook and Daniel Fischel’s 1991 book
provides a quintessential example, purporting to set out “the economic structure of corporate
law” in implicitly universal terms.60 The corporate form is presented as “a financing device
52
This is not to suggest, however, that the theory of legal transplants necessarily represents a form of
functional analysis. Indeed, Watson himself emphasizes that “[v]ariations in the political, moral, social
and economic values which exist between any two societies make it hard to believe that many legal
problems are the same for both except on a technical level.” Watson, supra note 2, at 4–5. Ultimately,
he concluded that “even in theory there is no simple correlation between a society and its laws” due to
the considerable variation in motivations for legal borrowing and the associated local impacts, id. at 108,
suggesting that there may be no singular theory of legal transplants at all. Accordingly, more tailored
studies of particular instances of legal transplantation might lend themselves to a more functionalist
approach or a more contextualist approach, as the case may be.
53
Clarke, supra note 21, at 92.
54
See Hopt, supra note 32, at 1162, 1169, 1183.
55
See John W. Cioffi, Public Law and Private Power: Corporate Governance in the Age of
Finance Capitalism 48 (2010); Clarke, supra note 21, at 82–83.
56
See Bruner, supra note 18, at 53–57; Clarke, supra note 21, at 85–86; Hopt, supra note 32, at
1164–66. Note, however, that this literature has applied agency cost analysis to companies with concen-
trated share ownership as well, focusing on conflicts between controlling and minority shareholders. See,
e.g., John Armour et al., Agency Problems and Legal Strategies, in Kraakman et al., supra note 35, at
29, 29–31.
57
See Bruner, supra note 18, at 112–13; Cioffi, supra note 55, at 48–49.
58
See Bruner, supra note 18, at 113–14; Clarke, supra note 21, at 82–85.
59
See, e.g., Bruner, supra note 18, at 6 (citing “the scientific pretensions of the ‘law and economics’
movement”); see also Frankenberg, supra note 23, at 444 (describing the “cognitivist fallacy” of “a legal
‘physics’ animated by systems and concepts, notions of unity and hierarchy, scientific laws of inter-
pretation and other disciplinary norms”); Legrand, supra note 32, at 22 (criticizing “the law-as-science
tradition”).
60
See Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate
Law 3–4 (1991).
[that] is not otherwise distinctive,” and the core problem for corporate law is accordingly said
to be reducing agency costs in order to attract equity capital, an approach that they locate
squarely in the financial economics “tradition.”61 The broader historical, cultural, social, and
political context, meanwhile, is essentially assumed off the table by presenting corporate
governance as a purely internal arrangement without substantial effects on third parties, who
are in any event thought to be amenable to protection through their own contracts and external
regulation.62 Having presented corporate governance as a straightforward expression of an
underlying economic science, it is unsurprising that normative and positive claims about the
field would tend to blur in their account.63
These tendencies are readily apparent in expressly comparative work building on this
approach. For example, in their 2004 essay titled “The End of History for Corporate Law,”
Henry Hansmann and Reinier Kraakman broadly adhere to the functionalist characterization
of the corporate form and corporate law described above64 and largely ignore contextual fea-
tures that one might expect to prompt idiosyncrasy,65 concluding that strong-form convergence
upon “a shareholder-centered ideology of corporate law” has become inevitable.66 Similarly,
The Anatomy of Corporate Law – of which Hansmann and Kraakman are contributing authors,
along with several other scholars – adopts an expressly “functional” comparative approach,
focused on agency cost reduction, that emphasizes “the underlying uniformity of the corporate
form” around the world.67 While The Anatomy is more candid in acknowledging the static
nature and limited reach of a method that sets aside historical, cultural, social, and political
dynamics68 – and cites the emergence of a “complementary tradition in comparative scholar-
ship” that “emphasizes political differences as a source of variation in laws”69 – the project
nevertheless remains rooted in the notion that “the exigencies of commercial activity and
61
See id. at 10–11, 355.
62
See, e.g., id. at 6–7, 22–25, 35–39.
63
See id. at 15 (“The normative thesis of the book is that corporate law should contain the terms
people would have negotiated, were the costs of negotiating at arm’s length for every contingency suf-
ficiently low. The positive thesis is that corporate law almost always conforms to this model.”). On the
debate regarding whether economics is in fact a science, see Raj Chetty, Yes, Economics Is a Science,
N.Y. Times, Oct. 20, 2013, www.nytimes.com/2013/10/21/opinion/yes-economics-is-a-science.html
(citing economists’ “scientific approach to economic questions, which is characterized by formulat-
ing and testing precise hypotheses”); Tim Hyde, What Have Economists Learned About Culture?
Understanding the Interplay Between Culture and Institutions, Am. Econ. Ass’n (Dec. 21, 2015), www
.aeaweb.org/research/what-have-economists-learned-about-culture (observing that “economists have
long been reluctant to study cultural forces if they can’t be part of a testable hypothesis that can be proven
or disproven with data”); Robert Shiller, Is Economics a Science?, Guardian (Nov. 6, 2013), www
.theguardian.com/business/economics-blog/2013/nov/06/is-economics-a-science-robert-shiller (observ-
ing that economics “is necessarily focused on policy,” and that “once we focus on economic policy,
much that is not science comes into play”).
64
See Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L.J.
439, 439–42, 449–51 (2001).
65
See id. at 443, 463–65.
66
See generally id. The argument also rests to some degree on empirical reference to “strong evi-
dence of a growing consensus on these issues among the academic, business, and governmental elites in
leading jurisdictions,” though without citation. See id. at 439–41.
67
John Armour et al., What Is Corporate Law?, in Kraakman et al., supra note 35, at 1, 1–5; see
also Armour et al., supra note 56, at 29–31.
68
See Armour et al., supra note 67, at 4–5; Armour et al., supra note 35, at 267–72.
69
Armour et al., supra note 35, at 268.
organization present practical problems that are roughly similar in market economies through-
out the world,” and that various countries arrive at “roughly similar … solutions to them.”70 In
this respect, The Anatomy clearly reflects the association between economic orientation and
methodological functionalism described above.
The shift over recent decades from “corporate law” to “corporate governance” as the
predominant frame of reference for thinking about the nature and forms of power in major
corporate enterprises can at least partially be understood in terms of such methodological
dynamics, including perceived shortcomings associated with L&E-inspired functionalism.
Marc Moore and Martin Petrin define corporate governance as “an enquiry into the causes
and consequences of the allocation of decision-making power within large, socially significant
business organizations,” such that the concept reaches beyond corporate law as such.71 This
broadening of the frame of reference in corporate discourse has been associated with a desire
for greater “contextual specificity,” including the interaction of corporate law “with non-legal
corporate processes and institutions,”72 as well as “culture, politics, or geography … [that]
can start the system down a specific path” and “complementarities” across elements of the
system that might foster stability over time.73 For Ronald Gilson, this shift reflects growing
recognition that “the ‘right’ governance model is contextual” and “must be dynamic” in order
to “accommodate changes” in relevant markets.74
In this spirit, corporate governance framing has facilitated comparison of strikingly differ-
ent systems that do not address various issues through the same areas of law, do not involve
the same core constituencies, and/or look to the corporate form to address different types of
social and economic problems. For example, in his comparative study of the United States
and Germany, John Cioffi describes corporate governance as “a juridical nexus of securities,
company, and labor relations law that structurally allocates power among managers, share-
holders, and employees within the corporation” – a formulation that allows employees, favored
through co-determination of the supervisory board within Germany’s two-tier board structure,
to be styled as corporate “insiders,” in stark contrast with the U.S. approach.75 Similarly, as
I have explored in prior work, corporate governance framing facilitates recognition of the fact
that even systems that closely resemble one another by global standards – for example, the
common-law systems of the United Kingdom, the United States, Australia, and Canada – do
not necessarily look to the corporation to perform the same range of social and economic
functions.76 As these examples suggest, the shift toward corporate governance framing has
gone hand-in-hand with political economy-based approaches – often focusing on “comple-
70
71
Marc Moore & Martin Petrin, Corporate Governance: Law, Regulation and Theory 4
(2017) (emphasis removed).
72
See Ronald J. Gilson, From Corporate Law to Corporate Governance, in The Oxford Handbook
of Corporate Law and Governance, supra note 32, at 3, 5–8.
73
Id. at 9.
74
Id. at 22, 25.
75
See Cioffi, supra note 55, at 38–39.
76
See generally Bruner, supra note 18 (arguing that the United States places greater reliance on
corporations to supply critical social welfare protections than these other jurisdictions do, rendering
strong-form shareholder-centrism more politically controversial in the United States). On the difficulties
of specifying the domain of corporate law, and the significance of the shift to corporate governance
framing, see Bruner, supra note 36.
mentarities” across fields of law and regulation, as well as associated institutional forms77
– and in some cases has represented an expressly progressive response to L&E-inspired
functionalism.78 These developments likewise resonate with the advent of behavioral eco-
nomics, which – in rejecting contractarianism’s strong assumptions of rationality and market
efficiency – “allows space for a ‘comparative institutional analysis’ of whether regulation of
various kinds outperforms unregulated markets,”79 and how varying approaches to corporate
governance might respond to decision-making biases and limitations in particular contexts.80
As a result of the foregoing, the methodological shift toward corporate governance framing
has also dovetailed with a shift from hard rules toward more fluid norms of the sort that lie
at the heart of sociological perspectives on institutions81 – exemplified by the proliferation of
corporate governance codes, starting with the 1992 Cadbury Report, that rely on the “comply
or explain” enforcement strategy.82 To be sure, this “code movement” has been associated with
drivers of uniformity of the sort that L&E literature predicts, reflecting the fact that regulators
are indeed keenly aware of what other jurisdictions are doing, prompting regulatory compe-
tition.83 This largely reflects the fact that securities regulation and exchange listing rules have
grown in significance as forces shaping corporate governance – an important driver of appar-
ent convergence in increasingly globalized capital markets.84 However, these surface points
of convergence – aimed principally at communicating the vigor of a jurisdiction’s minority
77
See Cioffi, supra note 55, at 47–54; Gilson, supra note 72, at 9, 12–14. As these scholars
observe, the concept of institutional complementarity is most commonly associated with the “Varieties
of Capitalism” literature. See generally Peter A. Hall & David Soskice, An Introduction to Varieties
of Capitalism, in Varieties of Capitalism: The Institutional Foundations of Comparative
Advantage 1 (Peter A. Hall & David Soskice eds., 2001); see also Amir N. Licht, Culture and Law in
Corporate Governance, in The Oxford Handbook of Corporate Law and Governance, supra note
32, at 129, 139–40 (“At the most general level of analysis of the structure of economic systems – some-
times referred to as ‘varieties of capitalism’ – culture has been linked to large-scale variation in such
structures.”).
78
See, e.g., Bruner, supra note 18, at 22–27, 140–42 (examining the interaction of corporate gov-
ernance and social welfare protections). For additional examples of comparative corporate governance
studies similarly focusing on how various fields of law and regulation interact, see generally Luca
Enriques & Martin Gelter, How the Old World Encountered the New One: Regulatory Competition and
Cooperation in European Corporate and Bankruptcy Law, 81 Tul. L. Rev. 577 (2007) (examining the
interaction of corporate governance and insolvency law); Martin Gelter, The Dark Side of Shareholder
Influence: Managerial Autonomy and Stakeholder Orientation in Comparative Corporate Governance,
50 Harv. Int’l L.J. 129 (2009) (examining the interaction of corporate governance and employment
law).
79
Kent Greenfield, The End of Contractarianism? Behavioral Economics and the Law of
Corporations, in The Oxford Handbook of Behavioral Economics and the Law 518, 523–24 (Eyal
Zamir & Doron Teichman eds., 2014).
80
Id. at 532–33 (reporting that co-determination is thought to have helped German companies
weather the financial crisis, while acknowledging that “behavioral research is quite thin in this area,
with insights coming from extrapolating from behavioral research regarding political differences among
members of groups, the creation of in-group identity, and the salience of the tendency for reciprocity”).
81
See Peter A. Hall, Historical Institutionalism in Rationalist and Sociological Perspective, in
Explaining Institutional Change: Ambiguity, Agency, and Power 204, 216–17 (James Mahoney
& Kathleen Thelen eds., 2010).
82
See Moore & Petrin, supra note 71, at 58–67.
83
See Hopt, supra note 32, at 1168–69, 1182–83.
84
See Moore & Petrin, supra note 71, at 3–5; Hopt, supra note 32, at 1178–82. For additional
background on the interaction of these fields in the U.S. context, see generally Christopher M. Bruner,
shareholder protections – distract from persistent divergences in underlying structures, as well

as how apparently similar rules, standards, and concepts are interpreted, applied, and enforced.
This is what Jeffrey Gordon has in mind when he refers to “divergence within convergence”
– that is, “formal similarities that mask important functional differences.”85 Wide variation
around the world in the meaning of director independence, how nominally independent
directors are elected, and the governance powers given to them provide a vivid example,
and Gordon attributes persistent overarching divergences in effective shareholder protection,
among other things, to differing institutional and market contexts, as well as powerful cultural
and national associations that complicate harmonization efforts.86 More generally, Amir Licht
associates cultural differences with divergence across jurisdictions in foundational corporate
governance structures, including formulation of the corporate objective, corporate relations
with stakeholders, executive compensation, and the operation, composition, and structure of
the board of directors.87
The foregoing dynamics produce a complex interplay of forces, reflecting the tension
between functional emphasis of similarity and contextual emphasis of difference. This sug-
gests that nuanced comparative corporate governance analyses must be prepared to embrace
both perspectives to some degree, and to grapple with both sets of dynamics.
4. COMPARATIVE RESEARCH DESIGN
As discussed above, the most important threshold methodological consideration for compar-
ative corporate governance is one of intellectual posture toward the material, or perspective
upon it. As a working hypothesis, does one fundamentally lean toward assuming commonality
across jurisdictions in terms of the practical problems they aim to solve and how they go about
doing so, or does one lean toward assuming divergence across jurisdictions in these respects?
As we have seen, this generally leaves one predisposed either to look for similarity or to look
for difference, which may heavily impact how one frames research questions and how one
assembles and interprets available evidence. More specifically, in the field of corporate gov-
ernance, this effectively boils down to how one positions the work relative to the predominant,
L&E-inspired approach – either focusing on agency costs or some other purportedly universal
problem in a functionalist spirit, or deviating from the assumed universality of such dynamics,
perhaps by focusing on some broader range of historical, cultural, social, or political factors in
a more contextualist spirit.
Center-Left Politics and Corporate Governance: What Is the “Progressive” Agenda?, 2018 BYU L.
Rev. 267 (2018).
85
Gordon, supra note 32, at 32–33; see also Hopt, supra note 32, at 1182–83, 1188–90; Katharina
Pistor et al., The Evolution of Corporate Law: A Cross-Country Comparison, 23 U. Pa. J. Int’l Econ.
L. 791, 865–67 (2002).
86
See Gordon, supra note 32, at 32–37, 41–44, 51–53. For in-depth analysis of such dynamics in
a major developing economy, see generally Afra Afsharipour, Corporate Governance Convergence:
Lessons from the Indian Experience, 29 Nw. J. Int’l L. & Bus. 335 (2009) (finding that, notwithstanding
adoption of corporate governance structures modeled on the U.S. and U.K. systems, “India’s political,
economic, and social framework … created a corporate governance environment that only formally
mirrors Anglo-American governance principles”).
87
See Licht, supra note 77, at 143–57.
As the foregoing discussion of the shift toward corporate governance has already suggested,
however, this matter of posture or perspective is not so much a binary as a spectrum – and
where one falls on that spectrum may itself have much to do with the nature of the question
and the specific audience one hopes to reach. As Jaap Hage observes, “[e]ven if one assumes
that the content of the law is determined by the sources that underlie a legal system, it still
makes a difference for the method that is to be used whether the research question is descrip-
tive, explanatory, or evaluative” – the former aim presumably prompting one to focus on
black-letter sources, while the latter aims presumably require engaging with materials that
illuminate broader historical, cultural, social, and political contexts.88 Accordingly, such con-
siderations may prompt differing approaches to a given subject “at various levels of abstrac-
tion and practice,” each with “its own focus and its own tasks.”89 For example, the audience
might be practitioners interested in narrower and more technical questions, in which case
a strongly functional approach framed by reference to a factual scenario that could plausibly
arise in multiple jurisdictions – most obviously, some form of cross-border transaction – might
prove highly valuable.90 From this perspective, “comparative law that focuses on providing
detailed and accurate information about disparate legal systems rather than either reflecting
on the policy goals of legislation or seeking the overall coherence of a given system’s solution
to a specific problem” might be the order of the day.91 Alternatively, the audience might be
policymakers trying to decide how to approach a new issue or contemplating reform of exist-
ing regulatory structures, in which case identifying the optimal comparative method becomes
more complicated. Here, one could imagine embracing a similarly functional approach to the
extent that a factual scenario has arisen that squarely resembles a situation faced elsewhere,
or if cross-border harmonization efforts are contemplated.92 By the same token, however, one
could imagine policymakers benefiting from a more decidedly contextual approach – say, in
response to local promotion of a foreign regulatory structure that might or might not prove
workable in the local market and legal context, or in evaluating potential adoption of a pur-
ported best practice of international capital markets. In such instances, policymakers may need
to balance their desire to attract mobile capital against the need to understand the potential
domestic costs and impacts of adopting a potentially ill-fitting regulatory structure.93 For
scholars, meanwhile, the issue of appropriate posture or perspective depends entirely on what
it is one hopes to illuminate – which could include any or all of the foregoing.94
At the same time, research design raises other important considerations, perhaps the most
significant being reliance on quantitative versus qualitative analysis. Along with the L&E
movement has come increasing comfort with quantitative analyses positing a single problem
at a high level of abstraction – say, minority shareholder protection – and then coding discrete
sets of legal features according to the degree to which they serve the purported function and
88
See, e.g., Hage, supra note 5, at 6.
89
See Cahn & Donald, supra note 10, at 4–6; see also Siems, supra note 9, at 2–6.
90
For an example of such a methodological approach to comparative corporate law, see generally
LoPucki, supra note 4.
91
92
See id. at 4–5.
93
See supra notes 71–87 and accompanying text.
94
See Cahn & Donald, supra note 10, at 6–7.
looking for illuminating correlations.95 This form of comparative analysis has proven contro-
versial, with the LLSV literature96 representing perhaps the quintessential example. Based
on their quantitative work, LLSV argued that the degree to which stock ownership disperses
depends upon the degree of protection that the jurisdiction provides for minority shareholders,
which in turn depends on the legal system’s orientation. Common-law systems, they con-
cluded, provide better protections than civil-law systems do.97
This work and the associated literature have faced withering criticism. Critics have
responded that LLSV focus excessively on the “law on the books,” ignoring enforcement
issues; that the coded features of corporate law are not uniformly shareholder-protective, or
provide no protection at all; and that “the correlations this literature finds are spurious and
the product of data mining.”98 At the same time, it has been observed that the causal argu-
ment is contradicted by historical accounts of the dispersal of stock ownership in the United
Kingdom and the United States (where legal protections lagged market protections), and that
such studies can offer no explanation of varying levels of shareholder protection and stock
ownership dispersal across the category of common-law countries.99 While such critiques
have prompted refinements in subsequent quantitative studies of shareholder protection, they
remain subject to substantial “shortcomings” including the subjective nature of coding, uncer-
tainty regarding how variables should be aggregated, and how to account for differences in the
“functional role” of a given variable from one jurisdiction to another as well as “changes to the
political and social climate” in a given jurisdiction over time.100
Such controversy has fueled broader critiques of single-score rankings and indices that “use
the same factors to compute the governance scores of firms regardless of differences in firm
characteristics … or countries,”101 and has more generally prompted skepticism regarding
what empirical comparative studies can deliver. As Holger Spamann explains:
Randomized experiments are unavailable, “natural experiments” are rare at best, and even standard
observational studies face considerable challenges: Units (countries) are highly heterogeneous,
95
See Clarke, supra note 21, at 88–89; Allen Ferrell, The Benefits and Costs of Indices in Empirical
Corporate Governance Research, in The Oxford Handbook of Corporate Law and Governance,
supra note 32, at 214, 214–18.
96
This abbreviation refers to the surnames of the four economists most closely associated with this
literature – Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. See
Bruner, supra note 18, at 116.
97
See generally Rafael La Porta et al., Legal Determinants of External Finance, 52 J. Fin. 1131
(1997); Rafael La Porta et al., Law and Finance, 106 J. Pol. Econ. 1113 (1998); Rafael La Porta,
Florencio Lopez-de-Silanes & Andrei Shleifer, Corporate Ownership Around the World, 54 J. Fin. 471
(1999); Rafael La Porta et al., Investor Protection and Corporate Governance, 58 J. Fin. Econ. 3 (2000).
98
Clarke, supra note 21, at 88–90; see also Pistor et al., supra note 85, at 792–93, 805; Siems, supra
note 3, at 14, 18; Mathias Siems & David Cabrelli, Form, Style and Substance in Comparative Company
Law, in Comparative Company Law: A Case-Based Approach, supra note 10, at 363, 366–67, 376;
Holger Spamann, Empirical Comparative Law, 11 Ann. Rev. L. & Soc. Sci. 131, 135–48 (2015).
99
See Bruner, supra note 18, at 116–18; see also Siems, supra note 3, at 18 (observing that “classi-
fications are bound to raise the objection that, on the one hand, they overemphasise differences between
categories and, on the other hand, they underemphasise differences within these categories”).
100
101
Vikramaditya Khanna, Corporate Governance Ratings: One Score, Two Scores, or More?, 158 U.
Pa. L. Rev. PENNumbra 39, 40 (2009); see also Ferrell, supra note 95, at 218–26 (discussing challenges
associated with indices, including measurement errors and endogeneity concerns).
samples are small (there is only one sample of at most 200 countries), and data are sparse (i.e., una-
vailable for many countries or variables). Moreover, replication on independent samples is generally
impossible. As a consequence, comparative data require particularly careful analysis and interpreta-
tion, and even then can rarely if ever isolate any particular causal effect.102
The foregoing critiques suggest that those pursuing quantitative studies in comparative
corporate governance can expect to face substantial challenges, including the difficulty of
identifying meaningful proxies (e.g. factors that accurately and comprehensively assess the
strength of minority shareholder protections), the difficulty of assessing how meaningful the
identified factors might be in practice (e.g. the degree to which those shareholder protections
are enforced), and the significance of contextual features that can affect the operation of such
regulatory structures.
Qualitative case studies, meanwhile, pursue a very different approach with distinctive
strengths and weaknesses. Such a method may prove attractive where the nature of the
research question itself sharply limits the universe of potential jurisdictions – say, those with
substantially dispersed stock ownership – and/or relates specifically to contextual features
of the sort that require depth and nuance, rendering them more difficult to address in a com-
pelling way through a quantitative approach.103 At the same time, however, this method can
prove difficult to scale – as we arguably find with various “political” theories of corporate
governance that provide compelling binary comparisons of certain exemplars of the categories
that interest their proponents (say, the United States versus Germany), yet render it difficult to
situate various other jurisdictions coherently within the small number of equilibria that many
such theories generate.104 Additionally, qualitative case studies that focus on a small number
of jurisdictions may be correlatively more likely to fall prey to the problem of selection upon
the dependent variable. This problem may arise, for example, in connection with “ideal type”
analysis, and involves trying to demonstrate the cause of some phenomenon solely by looking
at cases where that phenomenon actually occurred;105 investigating additional cases where the
phenomenon in question did not occur, to determine whether the purported causes were absent,
might permit stronger causal claims to be advanced, and this issue requires particular attention
in comparative research design. For example, as I have explored elsewhere, explaining the
successes of “market-dominant small jurisdictions” (including Delaware) in cross-border cor-
porate and financial services requires examining not solely jurisdictions that are “small” and
“market-dominant,” but also jurisdictions that lack these characteristics.106
102
Spamann, supra note 98, at 132.
103
See Bruner, supra note 18, at 23–24.
104
See, e.g., id. at 119–38 (examining this problem across a range of political theories of comparative
corporate governance).
105
See Christopher M. Bruner, Re-Imagining Offshore Finance: Market-Dominant Small
Jurisdictions in a Globalizing Financial World 41–50 (2016). Ideal types aim “to express vividly
certain consequential features of a social phenomenon that are pertinent to a given scholar’s research
interest.” Id. at 41–43. For in-depth discussion of the problem of selection upon the dependent variable
and its consequences, see Barbara Geddes, How the Cases You Choose Affect the Answers You Get:
Selection Bias in Comparative Politics, 2 Pol. Analysis 131 (1990).
106
See Bruner, supra note 105, at 49–50. Jurisdictions examined through this lens (Bermuda, Dubai,
Singapore, Hong Kong, Switzerland, and Delaware) are contrasted with certain “failed small jurisdic-
tions” (Nauru and the Netherlands Antilles) as well as “successful large jurisdictions” (New York and
London) to strengthen causal claims. See generally id.
The challenges and trade-offs discussed above suggest that, where possible, there might be
benefits to combining such methodologies.107 In some circumstances, quantitative and quali-
tative methods might be usefully combined as checks upon one another and/or to accentuate
different aspects of a subject.108 As Mathias Siems explains,
“mixed methods” have recently become more popular, in particular in comparative studies. Applying
both quantitative and qualitative methods may enable the researcher to reduce the disadvantages of
both methods. What is more, both methods can facilitate each other: for example, qualitative research
can generate a hypothesis that can be tested with quantitative data, and any quantitative data also have
to be interpreted through use of qualitative information.109
More fundamentally, creative research design might bridge functionalist and contextualist
perspectives. For example, the significance of cultural context might be explored through
a functional lens, to the degree that cultural features can be characterized in functional terms
(if only at high levels of abstraction).110 Alternatively, a scholar aiming to understand how
similarities and/or differences between corporate governance systems arise might begin with
a functionalist working hypothesis to prompt comparison, but expressly test it as the analysis
proceeds in order to identify where context looms particularly large as a driver of difference.111
This effectively amounts to treating Zweigert and Kötz’s “praesumptio similitudinis” as a
“heuristic” rather than an “ontological” device.112 In so doing, we may find that “there are
problems we should be worrying about other than shareholder-management agency costs,”
107
See Siems, supra note 3, at 26–27.
108
For noteworthy examples, see generally Mark J. Roe, Political Determinants of Corporate
Governance: Political Context, Corporate Impact (2003) (observing various correlations through
quantitative studies and then turning to illustrative case studies); Siems & Cabrelli, supra note 98 (pre-
senting case studies and then coding information from them “in terms of legal rules, the underlying legal
sources and the actual results” in order to “quantify similarities and differences, going beyond anecdotal
examples”); Spamann, supra note 98, at 143 (observing that comparative data “may not affirmatively pin
down any particular cause, but they can considerably reduce the set of plausible ones”).
109
110
Amir Licht cites the “common postulate in cross-cultural psychology … that all societies confront
similar basic issues or problems when they come to regulate human activity,” and that “cultural responses
to the basic problems that societies face are reflected … in prevailing value emphases of individuals.”
Accordingly, “dimensional models for cross-cultural analysis” posit high-level “value dimensions”
taking the forms of abstract binaries – for example, “embeddedness/autonomy, hierarchy/egalitarianism,
and mastery/harmony.” Licht, supra note 77, at 133 (describing the framework developed by Shalom
Schwartz). Expressed in such terms, various approaches to corporate governance may tend to correlate
with particular cultural features. For example, “a cultural emphasis on egalitarianism likely will buttress
social norms on gender equality that would facilitate a higher female presence on boards,” and “may
encourage employee representation in boards as a constituency that is also vulnerable to firm perfor-
mance, in addition to shareholders.” Id. at 153–54.
111
For an example, see Bruner, supra note 18, at 22–27 (aiming to “steer a middle course between
strict functionalism and strict contextualism, endeavoring to balance the need for commonality sufficient
to permit meaningful comparison with the need for nuance sufficient to reflect the significant impact of
distinct histories, cultures, and legal contexts”). See also Cabrelli & Siems, supra note 10, at 2–3; cf.
Riles, supra note 10, at 276–80 (“Rather than attempting to relate global and local spheres of legality, to
somehow tie them up in one grand comparative scheme, we might take on the somewhat less grandiose
task of describing and understanding actual artifacts of transnational legality ….”).
112
See Siems, supra note 9, at 36.
that “what we think is fundamental may not be so fundamental, and that we may be taking for
granted issues that outsiders find of intense interest.”113
Methodologically, one might think about such an approach as operating to model the
“irrelevance” of context, with the seemingly paradoxical aim of illuminating its significance.
In much the same way that economists Franco Modigliani and Merton Miller famously illumi-
nated the significance of a firm’s capital structure,114 and as others have more recently sought
to do with governance structure,115 the functionalist working hypothesis described above might
analogously function to specify the circumstances under which context would be irrelevant –
not because one necessarily believes that context is irrelevant, but because such analysis might
help isolate contextual variables that matter in the real world.116 As Colin Mayer sums it up,
“without understanding the frictionless world of Modigliani and Miller, it is impossible to
appreciate the significance of the frictions. What the Modigliani and Miller theorem clarifies
is the importance of the frictions for the actual forms of finance that companies choose to
adopt.”117 Perhaps one might similarly characterize the frictionless world of functionalism
as a means of better comprehending the significance of the historical, cultural, social, and
political frictions that prompt varying approaches to corporate governance around the world.
5. CONCLUSIONS
In evaluating how best to navigate the challenges described in this chapter and determine the
best method through which to approach particular research questions in the field of compar-
ative corporate governance, it is critical to recall that there is no single, optimal comparative
method.118 Lest comparative scholars feel themselves to be uniquely afflicted with methodo-
logical complexities, however, many of these challenges are not in fact unique to “compar-
ative” law as such. This is because all law is in fact comparative to the extent that a given
society regards consistency as a critical element of justice – a value that animates the concept
of judicial precedent.119 Accordingly, as Jefferson White observes, because “justice requires
that like cases be treated alike” and “no two cases are identical,” reasoning by analogy must
stand at the very heart of legal judgment.120 A process of resolving similarity and difference
113
Clarke, supra note 21, at 108–09.
114
See generally Franco Modigliani & Merton H. Miller, The Cost of Capital, Corporation Finance
and the Theory of Investment, 48 Am. Econ. Rev. 261 (1958).
115
See Zohar Goshen & Doron Levit, Irrelevance of Governance Structure 3 (ECGI Finance Working
Paper No. 606/2019, 2019), https://ssrn.com/abstract=3340912.
116
Modigliani and Miller found that capital structure is irrelevant to firm value when taxes, transac-
tion costs, and various market imperfections are assumed off the table – suggesting that such variables
help explain why capital structure matters in the real world. See Modigliani & Miller, supra note 114, at
265–81, 292–96. For additional contemporary discussion, see Stephen J. Lubben, Corporate Finance
105–35 (2d ed. 2017). See also Goshen & Levit, supra note 115, at 3 (using a similar approach to illumi-
nate when strong shareholder powers might affect firm value).
117
Colin Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore
Trust in It 170 (2013).
118
See LoPucki, supra note 4, at 264; Siems, supra note 3, at 12.
119
See Jefferson White, Analogical Reasoning, in A Companion to Philosophy of Law and Legal
Theory 583, 583 (Dennis Patterson ed., 1996).
120
Id. at 584.
must undergird all legal reasoning to some degree,121 and yet we lack a compelling account
of how we know relevant similarity when we see it; as White concludes, “at present we do
not understand how these processes work – whether in law or in other kinds of knowledge
acquisition,” and “[u]ntil more progress is made in scientific and philosophical understanding
of these cognitive functions and their interaction it is likely that some purely conditional or
stage-setting conception … will control accounts of analogical reasoning in law.”122
As scholars of comparative law, and comparative corporate governance in particular, we
are not remotely alone in facing substantial methodological challenges. I have argued here
that there are significant issues regarding comparative posture and research design that require
attention, and that strategies are available to manage the associated tensions and work through
the trade-offs. Ultimately, however, there are no silver-bullet solutions. The aim must be to
produce work that is methodologically self-aware, “remaining conscious of the contingency
of the exercise and acknowledging its inevitable limitations” in a spirit of “methodological
humility.”123 This effectively requires grappling transparently with the limits of one’s method,
defending its use by reference to a coherent account of its strengths and weaknesses, and –
perhaps most significantly of all – calibrating one’s claims accordingly.124
This is, in essence, what Legrand has in mind in suggesting that, even if one cannot fully
succeed in identifying and pursuing a perfectly illuminating comparative methodology, one
should nevertheless endeavor to “fail better” than one might otherwise have done.125 It is as
much a matter of self-reflection as anything else,126 and the product – contingent and uncertain
as it may be – represents an important benefit to consumers of the work, contributing to the
production of knowledge through comparative corporate governance by further illuminating
the field’s complexities.
121
See Bruner, supra note 18, at 18–20.
122
White, supra note 119, at 584–89.
123
See Bruner, supra note 18, at 111.
124
Id. at 22–27.
125
See Legrand, supra note 32, at 25 (emphasis removed).
126
Cf. id. (critiquing a comparative scholar for “making things so easy for himself” and “not even
attempting to go beyond himself” (emphasis in original)).
3. Corporate law and economic development
Vikramaditya S. Khanna1
1. INTRODUCTION
The debate on the relationship between corporate law and economic development could fill
volumes. Many scholars have examined this relationship using a variety of methodologies and
across many countries. This chapter aims to address some of the larger issues triggered by this
vast literature and to raise a few questions that merit greater examination as the discussion
continues forward.
As a starting point, the claim that corporate law can influence economic development
comes in a variety of forms. For example, corporate law might serve to reduce the coordina-
tion costs of many constituents interacting together to run a business.2 Examples include the
entity shielding and asset partitioning roles of corporate (and organizational) law.3 Another
is that corporate law, along with a few other areas of law, serves to protect shareholders who
invest their capital in firms over which they do not have complete control (i.e., corporate law
as investor protection).4 One might imagine other purposes as well, but because much of the
literature focuses on corporate law as a form of investor protection, this chapter also primarily
examines that role and then later considers other purposes and their connections with eco-
nomic development.
The notion that corporate law as investor protection can enhance economic development
is based on the idea that greater investor protection through the law is likely to induce more
people to invest, which in turn increases the amount of capital available for businesses in
a country.5 More investible capital partially alleviates one of the key constraints on business
1
My thanks to Afra Afsharipour, Chris Bruner, Martin Gelter, Carsten Gerner-Beuerle, Assaf
Hamdani, Genevieve Helleringer, Klaus Hopt, Nicholas Howson, Li-Wen Lin, Sang Yop Kang, Florian
Möslein, Martin Petrin, Uriel Procaccia, Darren Rosenblum, Umakanth Varrotil, and participants at the
Research Handbook on Comparative Corporate Governance Workshop held at Fordham University
School of Law for comments and suggestions and to McKenzie Southworth and Ajitesh Kir for excellent
research assistance.
2
See, e.g., John Armour, Henry Hansmann, Reinier Kraakman & Mariana Pargendler, What is
Corporate Law?, in The Anatomy of Corporate Law: A Comparative and Functional Approach 2
(Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus
Hopt, Hideki Kanda, Mariana Pargendler, Wolf-Georg Ringe & Edward Rock eds., 3d ed., 2017).
3
See, e.g., Henry Hansmann & Reinier H. Kraakman, The Essential Role of Organizational Law,
110 Yale L.J. 387, 390 (2000).
4
See, e.g., Armour et al., supra note 2, at 13.
5
See Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer & Robert W. Vishny, Law and
Finance, 106 J. Pol. Econ. 1113 (1998) [hereinafter Law and Finance]; Rafael La Porta, Florencio
Lopez-de-Silanes, Andrei Shleifer & Robert W. Vishny, Legal Determinants of External Finance, 52 J.
Fin. 1131 (1997) [hereinafter External Finance]; Armour et al., supra note 2.
38
Corporate law and economic development 39
growth – financing – and that should enhance economic development.6 Within this simple
notion, however, are a number of embedded assumptions and questions that merit exploration.
One question is whether the direction of causation runs from improvements in corporate
law to increases in growth, vice versa, or in some other way. Much of the literature on the
relationship between law and economic development suggests that the relationship is not so
unidirectional.7 Another question is, assuming enhancements in corporate law cause changes
in investment, are those changes always increases in investment or might they be decreases
too? For example, firms might seek less equity capital if they thought the costs of investor
protections were too onerous or, perhaps, investment via the formal sector might increase
with enhancements in corporate law, but informal sector investment might decrease by more.8
Whatever the overall effects on investment, might the effects differ depending on the type of
firm (e.g., controlled or diffusely held) or something else (e.g., industry)?9 Even if improve-
ments in investor protection enhance overall investment, what parts of corporate law seem to
do that?10 Assuming we can identify what parts appear to matter in one jurisdiction, are they
likely to be the same in other jurisdictions?11 Further, is it the law per se that matters, or is it the
likelihood of its enforcement or how it is interpreted by a (sophisticated) judiciary?12 Perhaps
it is simply whether the law allows parties to contract around it (i.e., “enabling” or default law)
or perhaps mandatory rules work better in some contexts.13 Further, might pressure to attract
investors lead jurisdictions to compete and then perhaps converge in their corporate laws and,
if so, toward what?14 All these, and many other, questions have been raised in the literature and
continue to be a source of great discussion.
This chapter explores a number of these questions and highlights some key findings along
with areas that merit further investigation. Section 2 briefly details the core investor protection
argument and examines both the causation question and whether more investment always
accompanies enhanced investor protections. Section 3 examines what about corporate law,
its enforcement, and interpretation might matter to investment or firm value (and does that
differ across countries). Section 4 begins to explore what the relationship is between eco-
6
See Armour et al., supra note 2; La Porta et al., Law and Finance, supra note 5; La Porta et al.,
External Finance, supra note 5; Raghuram G. Rajan & Luigi Zingales, Financial Dependence and
Growth, 88 American Economic Review 559–86 (1998).
7
See infra Section 2.1.
8
See infra Section 2.2.2.
9
10
See id.
11
12
See id.
13
See, e.g., Troy A. Paredes, Corporate Governance and Economic Development, 28 Reg. 34–39
(2005) (advising developing countries generally to turn to a mandatory model of corporate law). But see
Armour et al., supra note 2, at 20 (noting that “for many corporations, there may often be little practical
difference between mandatory and default rules. Firms end up, as a practical matter, adopting default
rules as well as the mandatory rules.”).
14
See, e.g., Lucian Arye Bebchuk & Mark J. Roe, A Theory of Path Dependence in Corporate
Ownership and Governance, 52 Stan. L. Rev. 127 (1999); Henry Hansmann & Reinier Kraakman, The
End of History for Corporate Law, 89 Geo. L.J. 439 (2000); Amir N. Licht, The Mother of All Path
Dependencies: Toward a Cross-Cultural Theory of Corporate Governance Systems, 26 Del. J. Corp. L.
147 (2001).
nomic development and a corporate law focused on more than investor protection. Section 5
concludes.
2. RELATIONSHIPS BETWEEN CORPORATE LAW AND

ECONOMIC DEVELOPMENT
There are a number of ways in which corporate law might interact with economic develop-
ment, but because its role as a form of investor protection has been central in the literature,
I describe it with some care. Discussion of how other purposes of corporate law interact with
economic development is deferred until Section 4. Generally speaking, economic development
is facilitated when there is more capital available for business.15 Limited capital can restrain
the growth of firms (especially small to mid-size firms) and thereby constrain the growth
of the economy.16 Investors are often reluctant to invest for a variety of reasons (e.g., risks,
including expropriation, are too high relative to returns) and one way to address this reluctance
is to use the law to reduce, though not eliminate, concerns about investing one’s money with
little control over how it is used.17 Such investor protection likely aids in the process of capital
raising thereby making more capital available for businesses and hence facilitating economic
growth.18 Phrased in this manner, the claim is similar to those for how institutions matter to
growth – better institutions (e.g., legal rules) aid in protecting property and enforcing contracts
which enhance the prospects for economic growth.19
This account, however, has a number of assumptions (often implicit) embedded within it.
First, it suggests that the direction of causation runs from “better corporate law” (what this
means is discussed a bit later) to economic growth. I explore this account in Section 2.1.
Second, assuming some version of “corporate law causing growth” is correct, then it suggests
that “better corporate law” leads to more investment. This is explored in Section 2.2.
2.1 The “Causation” Question
How causation operates is not easy to address either conceptually or empirically. Indeed, the
standard account – that “better” corporate law causes economic growth – is not the only way
in which the relationship between law and growth might operate.
15
See, e.g., Rajan & Zingales, supra note 6.
16
Larger firms can raise equity capital more easily than newer and smaller firms because, in part,
they can rely on their reputations to assuage investor concerns and have other methods of raising capital
beyond equity or risk capital. Cf., e.g., Vikramaditya S. Khanna & Umakanth Varottil, Developing the
Market for Corporate Bonds in India, in NSE Annual Research Report, National Stock Exchange
of India (2012), https://ssrn.com/abstract=2021602; La Porta et al., External Finance, supra note 5, at
1149; Paredes, supra note 13, at 34, 39.
17
See Armour et al., supra note 2; La Porta et al., Law and Finance, supra note 5; La Porta et al.,
External Finance, supra note 5.
18
See Armour et al., supra note 2.
19
See, e.g., Douglass North, Institutions, Institutional Change and Economic Performance
(1990); Douglass North, Economic Performance through Time, 84 Am. Econ. Rev. 359–68 (1994);
Douglass North, Institutions, 5 J. Econ. Persp. 97–112 (1991).
For example, increases in economic growth might lead to improvements in corporate law
(a reversal of the standard causation account). Typically, for legal changes to arise, there needs
to be some influential group(s) lobbying for them. Economic growth might provide resources
and political power to certain groups who might then lobby for better corporate law.20 If
causation runs in this direction, then simply proposing corporate law reforms may not generate
much growth or at least not in the way anticipated. Of course, even within this account, there is
debate about whether these groups really identify “better” corporate law for their jurisdiction
(or just mimic global best practices) or whether there are sub-groups within these groups that
engage in rent-seeking to benefit themselves at the expense of others.21
Even this does not exhaust the relationships between corporate law and economic develop-
ment. For example, some scholars have noted that often the relationship between growth and
corporate law might be iterative or “rolling”.22 That is, sometimes law reform might trigger
some growth which may lead to more legal change which in turn has some impact on growth
again. Alternatively, it may be that economic growth empowers some groups to lobby for legal
change leading to more growth (at least in some areas) and that leads to more legal change.
This narrative does not undermine the connection between “better” law and growth, but rather
suggests that the direction of causation is more ambiguous and interdependent.
Thus, there are at least three accounts of causation: law to growth, growth to law, and rolling
or iterative interactions. Which of these is more likely and what evidence do we have?
A starting point is to explore the historical development of stock markets in larger econ-
omies. For example, Coffee argues that the growth of stock markets reflects the growth to
law causation story.23 When looking at nineteenth century stock market development in the
US, UK, France and Germany it appears that they all had weak investor protection laws and
enforcement, but the US and the UK developed diffusely held stock markets more quickly.24
Coffee argues this was because private players used their reputations and relationships to
assuage investors’ concerns in the US and the UK.25 He notes that the US was particularly
motivated because it was more in need of foreign capital in the nineteenth century than other
countries and pushed harder to convince investors to invest.26 Key players included investment
bankers (like J.P. Morgan) who used their reputation and connections with investors in Europe
to encourage investment in the US and to assure investors that these investments reflected
20
See, e.g., Ronald Inglehart & Christian Welzel, Modernization, Cultural Change,
and Democracy: The Human Development Sequence (2005); Seymour Martin Lipset, Some Social
Requisites of Democracy: Economic Development and Political Legitimacy, 53 Am. Pol. Sci. Rev.
69–105 (1959).
21
See, e.g., Afra Afsharipour, The Promise and Challenges of India’s Corporate Governance
Reforms, 1 Indian J.L. Econ. 33 (2010); Umakanth Varottil, Evolution and Effectiveness of Independent
Directors in Indian Corporate Governance, 6 Hastings Bus. L.J. 281 (2010). For papers discussing rent
seeking, see Iman Anabtawi, Some Skepticism About Increasing Shareholder Power, 53 UCLA L. Rev.
561 (2006). See also John C. Coffee, Jr., Privatization and Corporate Governance: The Lessons from
Securities Market Failure, 25 J. Corp. L. 1 (1999).
22
See Curtis J. Milhaupt & Katharina Pistor, What Corporate Crises Reveal About Legal
Systems and Economic Development Around the World (2008).
23
See John C. Coffee, Jr., The Rise of Dispersed Ownership: The Roles of Law and the State in the
Separation of Ownership and Control, 111 Yale L.J. 1 (2001).
24
See id. at 24–25.
25
See id. at 26–29, 41.
26
See id. at 24–26.
good prospects. 27 Further, the self-regulatory efforts of the NYSE played an important role in
convincing investors to take a chance.28
However, such private efforts did not take off in France and Germany because not only were
they not as motivated to access foreign capital at that time, but also the governments in both
countries did not make private ordering all that easy.29 The US had less effective government
regulation and intervention early on, leaving space for private efforts which adapted quickly
to developing market conditions. 30 In France and Germany, the government intervened more
and chilled private ordering and self-regulatory efforts.31
Coffee’s analysis suggests that private ordering is important to more rapid stock market
development when investor protection is weak. Further, actual law reform may follow from
that as dispersed investors and those benefitting from it become more empowered to influence
legal reforms. This sounds much like the growth to law account.
Moving outside the more developed Western markets, a pair of papers by Franklin Allen
and his co-authors suggest that the growth to law account and private ordering may be critical.
In exploring the financial development and economic growth of China, Allen, et al. find that
its State-owned sector and listed firm sector have fairly weak corporate governance and are not
thought to be engines of growth.32 Rather, its private unlisted sector is where growth seems to
be greatest, yet it is not fully subject to the better governance rules of the listed firms sector.33
The authors find that the private sector relies on strong reputational forces and relationships to
address investors’ concerns.34 Their account parallels that of Coffee’s in the earlier stages of
US stock market development.
In their analysis of India, Allen, et al. explore the sources of external financing of Indian
firms.35 They find the investor protections in India are, in practice, weak (in spite of India
being a common law country with generally good institutions on paper) and unsurprisingly the
primary sources of financing for many firms are less formal ones that depend on reputation,
trust and relationships.36 This suggests that the non-law methods of investor protection (e.g.,
reputation, relationships) are more important to the external financing of the firm in large
economies like India and China at this stage.37
Along with being consistent with Coffee’s analysis, these papers indicate that corporate law
reforms may not be of first order importance in economies where other institutional structures
are not well positioned to take these reforms and where non-law driven protection is still
prevalent. Indeed, an important area for scholarship is exploring the non-law forces that may
facilitate financial development and their interactions with corporate law reform. This will be
27
See id. at 29–30.
28
See id. at 26.
29
See id. at 8–9, 52.
30
See id. at 9.
31
See id.
32
See Franklin Allen, Jun Qian & Meijun Qian, Law, Finance and Economic Growth in China, 77 J.
Fin. Econ. 57, 59, 85–86 (2005).
33
See id. at 59.
34
See id. at 59–60.
35
See Franklin Allen, Rajesh Chakraborti, Sankar De, Jun Qian & Meijun Qian, Financing Firms in
India, 21 J. Fin. Intermediation 409–55 (2012).
36
See id. at 2. Bank financing and external equity financing trail these less formal channels. See id.
at 3.
37
See id. at 2–3.
crucial not only to enhancing growth, but also to understanding what adjustments, if any, the
legal system may need to make in light of existing institutional structures.
These accounts can be contrasted with a series of papers exploring the law to growth
causation account. Perhaps the most well-known of these are the pair of papers by La Porta,
Lopez-de-Silanes, Shleifer and Vishny (known as LLSV).38 They argue that one of the key
determinants of financial market development is whether the country is a common law or
civil law country. They code for a number of countries’ corporate laws and then regress this
against measures of financial market development and find that common law countries tend
to have larger and more diffusely held stock markets.39 They further argue that they can show
causation by using an instrumental variables analysis relying on legal origin as the instrument
and that the causal channel for common law’s superiority for financial development is the
greater contracting freedom and lesser governmental intervention it typically provides relative
to civil law.40
Although these papers have been extremely influential, there have been a series of papers
– both from Law and from Finance – challenging the methods used to code the corporate
governance rules of the countries in their studies, the validity of using legal origins as an
instrument (both conceptually and in practice), and whether the historical development of
stock markets undermines the core causal claims.41 In spite of this, there is little doubt that the
LLSV line of research has generated a great deal of scholarly inquiry and has had significant
policy impact.
Along with the LLSV line of inquiry, a number of papers have explored whether specific
corporate law reforms have caused increases in firm value (as proxied by Tobin’s Q).42
Although increases in firm value are not the same as increases in investment, one imagines
that more highly valued firms (or better performing firms) would attract more investment than
lower valued or poorly performing firms. This literature is vast and I will not attempt a com-
plete summary of it here. Rather, I focus on the basic structure of many papers – they look
for a legal change that can plausibly act as a source of exogenous variation and then examine
whether some variable of interest (e.g., Tobin’s Q) changed in some way that can be attributed
to the corporate law reforms.
If the research design is sound (e.g., there is a true exogenous shock creating tolerably clear
control and treatment groups) and one finds an effect, then there is good evidence of a causal
38
See La Porta et al., Law and Finance, supra note 5; La Porta et al., External Finance, supra note
5.
39
5.
40
5.
41
See, e.g., Daniel Klerman, Paul G. Mahoney, Holger Spamann & Mark I. Weinstein, Legal Origin
or Colonial History?, 3 J. Legal Analysis 379 (2011); Raghuram G. Rajan & Luigi Zingales, The Great
Reversals: The Politics of Financial Development in the Twentieth Century, 69 J. Fin. Econ. 5, 5–50
(2003); Holger Spamann, The “Antidirector Rights Index" Revisited, 23 Rev. Fin. Stud. 467 (2010).
42
I discuss some of these in Section 3. For a useful summary until 2012, see Stijn Claessens & Burcin
Yurtoglu, Focus 10: Corporate Governance and Development – An Update, Int’l Fin. Corp. (2012),
www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+cg/resources/focus
_case+studies/focus+10+corporate+governance+and+development+-+an+update.
connection from corporate law to firm value.43 Further, even if the shock is not exogenous,
sometimes a fuller battery of tests and reliance on Fixed Effects and Random Effects models
can provide a persuasive case for causation.44
There are some papers that satisfy many of these conditions and provide a good case for
some corporate law and governance elements causing increases in firm value and, extrap-
olating from that, having a potentially beneficial effect on investment.45 However, whether
the specific legal changes in one country would have the same or similar effects in another is
a more open question (one I explore more in Section 3).
Thus far, then, it seems there is good evidence for a growth to law causation story and
some evidence for a law to growth causation story. This suggests further study is warranted –
perhaps in-depth case studies – before deriving any strong conclusions.
For example, in a book exploring six case studies of corporate law and development
Professors Milhaupt and Pistor find that the relationship may be more nuanced than either
primary account suggests.46 Rather, the relationship seems more iterative, interdependent and
context dependent. Thus, in some cases they discuss it appears that changes in law might have
facilitated growth which then empowered various groups to lobby for greater legal change.47
Alternatively, some accounts suggest that growth might have come first and then led to legal
change which impacted growth and so forth.48 Indeed, research on the development of the
home mortgage market in India suggests that such a “rolling” or iterative account of devel-
opment is visible there too.49 Such accounts suggest the causal story is not likely to be the
same everywhere and that initial conditions (howsoever arrived at) will be of importance in
understanding the path to development and the causal chain.
2.2 Does Investment Increase After Corporate Law Reforms?
Even if we assume that better corporate law causes changes in investment, then does that
always lead to increased investment or are decreases possible too and how much might invest-
ment overall change? Further, what does the evidence suggest?
2.2.1 Too much investor protection?

At the conceptual level it is plausible that there can be too much investor protection which
may then be associated with less investment.50 Investment requires both that firms are willing
to seek additional investors and investors are willing to invest. Enhancing investor protection
43
For a recent account of how things thought to be exogenous in earlier studies turn out not to be, see
Jonathan M. Karpoff & Michael D. Wittry, Institutional and Legal Context in Natural Experiments: The
Case of State Antitakeover Laws, 73 J. Fin. 657–714 (2018).
44
See, e.g., Black et al., infra note 94. A pure experiment is difficult to find in this area and external
validity would not be that easy to satisfy.
45
46
See Milhaupt & Pistor, supra note 22.
47
See id. at 197–219.
48
See id.
49
See Vikramaditya S. Khanna, Law, Institutions and Economic Development: New Insights from
the Development of the Home Mortgage Market in India - Can Two Wrongs Make a Right? (Sept. 7,
2019), https://ssrn.com/abstract=3032632.
50
See, e.g., Valentina G. Bruno & Stijn Claessens, Corporate Governance and Regulation: Can
There Be Too Much of a Good Thing?, 19 J. Fin. Intermediation 461–82 (2010).
might induce some investors to invest, but it also creates obligations on the firms to those
investors. These obligations can be quite burdensome and, if too burdensome, could lead some
firms to delay seeking capital or find alternate forms of financing (e.g., informal finance) or
simply operate at a smaller scale (thereby constraining growth).51
Further, there is some support in the creditor protection literature for the argument that too
much protection might reduce credit. For example, Vig finds that a reform strengthening cred-
itor rights in India led to a decline in secured debt, total debt and asset growth amongst other
things – the opposite of what one would expect.52 In essence, it appears that borrowers became
more reluctant to borrow when the costs of borrowing increased.
Similarly, firms (and their founders) might be reluctant to raise external equity capital if its
costs increase too much. For example, one study suggests that allowing parties to waive certain
fiduciary duties (i.e., trimming back obligations to investors) appears to be not inconsistent
with increasing firm value.53 This suggests that there may be offsetting effects of enhanced
corporate law – which in turn suggests empirical testing would be useful to assess the claim
that better corporate law leads to more investment.54
However, the handful of empirical studies thus far have not reached a consensus. One paper
focuses on where foreign investors choose to acquire firms and finds corporate governance
matters to this kind of cross border transaction.55 Another study by Kim and Lu finds that
foreign investors cherry pick better governed firms in emerging markets and that the premia
vary in ways that indicate corporate governance is relevant for investment.56 The authors argue
that foreign acquirer’s cherry pick stocks in part because some countries have weaker corpo-
rate laws.57 From this, the authors create a way to measure the gap in corporate laws between
acquirer and target countries and hypothesize that the larger the gap the greater the degree of
cherry picking.58 They then test this against a comprehensive database of country corporate
governance reforms and find that as the gap increases the degree of cherry picking gets more
severe.59 This, they argue, means that corporate law reforms matter to cross border investment.
51
Bruno and Claessens argue that there is a “threshold level of country development above which
stringent regulation hurts the performance of well governed companies or has a neutral effect for poorly
governed companies.” Id. at 461.
52
See Vikrant Vig, Access to Collateral and Corporate Debt Structure: Evidence from a Natural
Experiment, 68 J. Fin. 881–928 (2013).
53
See, e.g., Gabriel V. Rauterberg & Eric L. Talley, Contracting Out of the Fiduciary Duty of
Loyalty: An Empirical Analysis of Corporate Opportunity Waivers, 117 Colum. L. Rev. 1075 (2017).
54
It is noteworthy that some studies are concerned with the data underlying investment meas-
ures (it might reflect “round-tripping”). See, e.g., Michelle Hanlon, Edward L. Maydew & Jacob R.
Thornock. Taking the Long Way Home: U.S. Tax Evasion and Offshore Investments in U.S. Equity and
Debt Markets, 70 J. Fin. 257–87 (2015); Dilek Aykut, Apurva Sanghi & Gina Kosmidou, What to Do
When Foreign Direct Investment is Not Direct or Foreign: FDI Round Tripping (World Bank Policy
Research Working Paper No. 8046, 2017), https://ssrn.com/abstract=2960424. Instead, one could look at
whether firms or countries with better corporate governance are valued more highly by the stock market.
A number of studies do things like this and some are discussed in Section 3.
55
See, e.g., Arturo Bris & Christos Cabolis, The Value of Investor Protection: Firm Evidence from
Cross-Border Mergers, 21 Rev. Fin. Stud. 605–48 (2008).
56
See, e.g., E. Han Kim & Yao Lu, Corporate Governance Reforms Around the World and
Cross-Border Acquisitions, 22 J. Corp. Fin. 236 (2013).
57
See id. at 248.
58
See id. at 237.
59
See id.
However, a large multi-year study by Armour, Deakin, Sarkar, Siems and Singh found that
countries adopting “better” corporate governance (i.e., more in line with Anglo-American
Corporate Law) did not appear to then develop larger stock markets.60 They suggest this could
be because the corporate law in some countries might already be quite protective of investors
and adding more might increase compliance costs more than any likely gains to investor
protection.61 Alternatively, it might be that features of Anglo-American corporate law did not
quite fit the institutional and business environment in the country undertaking the reforms
(e.g., if the country had mainly controlled firms and a judiciary not much experienced in cor-
porate matters then Anglo-American corporate law might be an awkward fit).62
This research suggests that although investor protection is likely to impact investment,
whether it increases it or decreases it is likely to depend on where the country is initially.
Further research on these effects seems valuable and important.
2.2.2 Effects on informal capital providers

Deterring firms and founders from raising equity capital is one way in which investment might
decline with more corporate law, but there are other ways too. Recall that financing often
arises from both formal and informal sources and in emerging economies informal sources are
usually the primary source of external financing (as the Allen, et al., papers noted earlier find).
It is conceivable that enhanced investor protections could have effects on informal financing
that in turn might weaken overall investment or the benefits from it. For example, a recent
study by Banerjee, Chandrasekhar, Duflo and Jackson finds that as microfinance grew in some
Indian villages the informal debt markets appeared to weaken.63
A parallel is plausible in equity markets – increases in formal sector investment following
on from corporate law reforms might reduce informal investment. This might happen because
the providers of capital for informal investment probably need a broad number of projects
to be sustainable and profitable (and to diversify risks, for example). However, if the rise of
formal investment attracts away target investee firms from informal investors then the informal
investors would not have as broad a base from which to build their portfolios and could lead to
some degree of atrophy of their market. For example, if informal investors typically serviced
the small to medium size firms in an economy,64 then an improvement in corporate law might
make some of the medium size firms more attractive to formal investment. These firms may
60
See John Armour, Simon F. Deakin, Prabirjit Sarkar, Mathias Siems & Ajit Singh, Shareholder
Protection and Stock Market Development: An Empirical Test of the Legal Origins Hypothesis, 6 J.
Empirical Legal Stud. 343 (2009).
61
See id. at 374.
62
See id. at 374–75. This literature does not directly address whether changes in corporate law
influence the likelihood of raising capital within a corporate group (rather than raising capital from the
external (i.e., arms-length) financing market).
63
See Abhijit V. Banerjee, Arun G. Chandrasekhar, Esther Duflo & Matthew O. Jackson, Changes
in Social Network Structure in Response to Exposure to Formal Credit Markets (Sept. 7, 2018), https://
ssrn.com/abstract=3245656. For a similar finding, see Christine Binzel, Erica Field & Rohini Pande,
Does the Arrival of a Formal Financial Institution Alter Informal Sharing Arrangements? Experimental
Evidence from Village India, Harvard Kennedy School Evidence for Policy Design (2013), https://
epod.cid.harvard.edu/publications/does-arrival-formal-financial-institutions-alter-informal-sharing
-arrangements.
64
Bigger firms can probably raise formal financing simply by relying on their reputations. See supra
discussion in note 16.
then obtain some of their financing from the formal sector. If this happened, then informal
investors would face a pool of firms missing some more successful medium sized firms. This
effect (which has parallels to the lemons effect) makes being an informal investor less profit-
able. At some threshold, the departure of investee firms to the formal sector makes being an
informal investor less attractive and may lead to a diminution in informal investment.65 This
can harm the firms in the small and medium sized sectors that would not be financed by formal
investment because now they may have fewer informal sources to approach too.
Whether and when this deleterious effect arises (and whether it dominates the increase in
formal investment) does not appear to have been studied in great depth.66 However, this seems
like an important topic for inquiry because a decline in investment in the smaller and medium
firm sectors may be more likely to harm economic development (as these firms are, arguably,
where much of the growth and employment arises).67 Moreover, the informal financing sector
may have certain advantages over the formal sector because in environments where institu-
tional structures are weak the informal sector may have the adaptability, and provide services
(e.g., business advice or connections), that the formal sector may not and that may be attractive
to smaller and medium sized firms seeking to raise capital.68 A useful start might be exploring
what the primary sources of informal external financing are in a particular country and what
their margins are. Further, one might delve into what happens to smaller and medium sized
firms when formal investment increases – does the gap between the new players and estab-
lished players increase or decrease. Moreover, one might want to examine what happens to
informal sources of financing when the formal sector grows – do they disappear, do they join
the formal sector or do they retool and enter another sector of the economy, or something else?
3. WHAT ABOUT CORPORATE LAW MATTERS?
Assuming that changes in corporate law are likely to be associated with (or perhaps cause)
changes in firm value or investment that still leaves open the question of which aspects of cor-
porate law matter most. To get a better understanding of this, I divide the discussion into two
sections – one examining empirical findings in the US and the second examining empirical
findings elsewhere. One reason for this is that the primary agency problem in the US and the
UK (manager-shareholder) is different than that in other parts of the world (controller-minority)
65
Some informal financiers may migrate to the formal sector so that the total amount of investment
might increase, but the point is that conceptually both positive and negative effects may occur and the
overall effect might be ambiguous in the abstract.
66
For an overview of informal financing, see Franklin Allen, Meijun Qian & Jing Xie, Understanding
Informal Financing, 39 J. Fin. Intermediation 19–33 (2019).
67
See Edward L. Glaeser, William R. Kerr & Giacomo A.M. Ponzetto, Clusters of Entrepreneurship,
67 J. Urb. Econ. 150, 150 (2010) (finding that employment growth is strongly predicted by smaller
average establishment size in the US). But see Kelly D. Edmiston, The Role of Small and Large
Businesses in Economic Development (2007), https://ssrn.com/abstract=993821 (arguing that attribut-
ing the bulk of net job creation to small businesses arises largely from comparatively large job losses at
large firms rather than especially robust job creation by small firms).
68
Cf. Vig, supra note 52, at 924; Banerjee et al., supra note 63.
because of differing ownership structures (diffusely held versus controlled).69 This might lead
to different parts of corporate law and governance mattering in each of these contexts.
3.1 Empirical Studies in the US
Two of the earliest US studies provided results that were somewhat surprising. First, Daines
found that Delaware incorporated firms were valued more highly by the market (as measured
by Tobin’s Q) than similar firms incorporated elsewhere and that this result was robust to
various controls and endogeneity.70 The study suggested that something in Delaware corporate
law was adding value to firms incorporated there (e.g., treatment of takeovers, independent
boards, sophisticated judiciary, network effects).71 Although this Delaware effect was later
found to be more transitory and did not generally apply to larger Delaware firms it gen-
erated a great deal of interest in using financial economics techniques to assess corporate
governance.72
Second, a study by Bhagat and Black examined whether board independence (measured
as the fraction of independent directors minus the fraction of insider directors on the board)
correlated with measures of longer-term performance of US firms.73 They found little evidence
that it did. Although there could be explanations for this result (e.g., most US boards are
majority independent making it challenging to find useful variation for empirical testing), it
was important in pushing for greater empirical inquiry into what about corporate law matters.74
These papers were followed, or accompanied, by a number of papers examining specific
aspects of corporate governance. For expositional brevity, I summarize some of their findings
below. The general impression was that many specific aspects of corporate governance might
be associated or correlated in some way with measures of firm value. Some of the key findings
of this research are listed below (this is not a comprehensive list):
●● That restrictions on takeover activity had negative stock price reactions;75
69
See Gur Aminadav & Elias Papaioannou, Corporate Control Around the World, 75 J. Fin. 1191
(2021); Armour et al., supra note 1; OECD, Owners of the World’s Listed Companies (2019), www.oecd
.org/corporate/Owners-of-the-Worlds-Listed-Companies.htm.
70
See Robert M. Daines, Does Delaware Law Improve Firm Value?, 62 J. Fin. Econ. 525, 525–58
(2001).
71
See id.; see also Marcel Kahan & Michael Klausner, Standardization and Innovation in Corporate
Contracting (or the Economics of Boilerplate), 83 Va. L. Rev. 4 (1997); Ehud Kamar, A Regulatory
Competition Theory of Indeterminacy in Corporate Law, 98 Colum. L. Rev. 1209 (1998); Michael
Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 Va. L. Rev. 757 (1995).
72
See Guhan Subramanian, The Disappearing Delaware Effect, 20 J.L. Econ. Org. 32–59 (2004).
73
See Sanjai Bhagat & Bernard S. Black, The Non-Correlation between Board Independence and
Long-Term Firm Performance, 27 J. Corp. L., 231–73 (2002).
74
For a helpful summary of the state of the debate in the US, see Michael D. Klausner, Empirical
Studies of Corporate Law and Governance: Some Steps Forward and Some Steps Not, in The Oxford
Handbook on Corp. Law and Governance (Jeffrey N. Gordan & Wolf-Georg Ringe eds., 2018).
75
See Jonathan M. Karpoff & Paul H. Malatesta, State Takeover Legislation and Share Values:
The Wealth Effects of Pennsylvania’s Act 36, 1 J. Corp. Fin. 367–82, (1995) (studying the effects of
Pennsylvania’s anti-takeover law); Mark L. Mitchell & Jeffrey M. Netter, Triggering the 1987 Stock
Market Crash: Antitakeover Provisions in the Proposed House Ways and Means Tax Bill?, 24 J. Fin.
Econ. 37–68 (1989) (examining the effects of tax law changes).
●● That extensions of mandatory disclosure laws to NASDAQ firms in 1964 predict positive
returns to subject firms76 and reduced share price volatility;77
●● That larger boards tended to be less effective monitors;78
●● That the structure of the audit committee might matter to firm value;79
●● That institutional ownership might proxy for outsider monitoring of the firm;80
●● That whether the CEO and Board Chairperson were the same might matter;81
●● That the structure and operation of stock options and executive compensation might
matter;82
●● That the presence of independent boards might affect CEO turnover and hence governance.83
Although these studies provided a number of fascinating findings, they have triggered substan-
tial commentary and analysis on methodology, and on how one conceptualizes and measures
governance. For example, Spamann finds that much of the empirical corporate governance
literature relying on changes in Delaware law may produce biased results and suggests some
ways to address these concerns.84
Other studies have noted that because governance is a multi-faceted concept and that many
of the individual features of governance are interdependent on each other and on institutional
conditions, one may want to look for an overall measure of governance.85 This can then be
used to explore the effects of governance on firm value and investment.
76
See Michael Greenstone, Paul Oyer & Annette Vissing-Jorgensen, Mandated Disclosure, Stock
Returns, and the 1964 Securities Acts Amendments, 121 Q.J. Econ. 399 (2006).
77
See Allen Ferrell, Mandated Disclosure and Stock Returns: Evidence from the Over-the-Counter
Market, 36 J. Legal Stud. 213 (2007).
78
See Michael C. Jensen, The Modern Industrial Revolution, Exit, and the Failure of Internal
Control Systems, 48 J. Fin. 831–80 (1993); Martin Lipton & Jay W. Lorsch, A Modest Proposal for
Improved Corporate Governance, 48 Bus. Law. 59–77 (1992); David L. Yermack, Higher Market
Valuation of Companies With a Small Board of Directors, 40 J. Fin. Econ. 185–212 (1996).
79
See Daniel N. Deli & Stuart Gillan, On the Demand for Independent and Active Audit Committees,
6 J. Corp. Fin. 427–45 (2000).
80
See K.J. Martijn Cremers & Vinay B. Nair, Governance Mechanisms and Equity Prices, 60 J. Fin.
2859, 2859–94 (2005); Alex Edmans, Blockholder Trading, Market Efficiency, and Managerial Myopia,
64 J. Fin. 2481, 2481–514 (2009); Jay Hartzell & Laura T. Starks, Institutional Investors and Executive
Compensation, 58 J. Fin. 2351, 2351–74 (2003); E. Han Kim & Yao Lu, CEO Ownership, External
Governance, and Risk-Taking, 102 J. Fin. Econ. 272–92 (2011).
81
See, e.g., Sanjai Bhagat & Brian Bolton, Corporate Governance and Firm Performance, 14 J.
Corp. Fin. 257–73 (2008); Aiyesha Dey, Ellen Engel & Xiaohui Liu, CEO and Board Chair Roles, to
Split or Not to Split?, 17 J. Corp. Fin. 1595 (2011); David F. Larcker & Brian Tayan, Chairman and
CEO: The Controversy Over Board Leadership Structure, Stanford Closer Look Series (June 24,
2016), www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-closer-look-58-independent-chair.pdf.
82
See Klausner, supra note 74; Jap Efendi, Anup Srivastava & Edward Swanson, Why Do Corporate
Managers Misstate Financial Statements? The Role of in-the-money Options and Other Incentives, 85 J.
Fin. Econ. 667–708 (2007); Lin Peng & Ailsa Röell, Executive Pay and Shareholder Litigation, 12 Rev.
Fin. 141–84 (2008).
83
See Michael S. Weisbach, Outside Directors and CEO Turnover, 20 J. Fin. Econ. 431–60 (1988).
84
See Holger Spamann, On Inference When Using State Corporate Laws for Identification
(European Corp. Governance Institute – Finance Working Paper No. 1024, 2019), https://ssrn.com/
abstract=3499101.
85
See infra text accompanying notes 86–88 (discussing indices).
Perhaps the best known overall measures (or indices) are the “G” index (from Gompers,
Ishii and Metrick) and the “E” index (from Bebchuk, Cohen and Ferrell).86 Both studies find
that their indices correlate with measures of firm value. The “G” index (for governance) is
created using 24 governance features listed in the Investor Responsibility Research Center
(IRRC) and combines them in an equal weighted manner. The authors find that better govern-
ance is associated with higher firm value such that if an investor held the firms in the top decile
of governance and shorted the firms in the bottom decile they would have received about an
8 percent return per year for 10 years (1990–99). The “E” Index starts from the “G” index
and finds that 18 of the 24 features are not empirically relevant to the firm value results. The
authors then use the remaining six features and create the “E” index (for entrenchment) and
find that better governance under the “E” index correlates with higher firm value. Like the “G”
index, they compute that a long-short strategy using the “E” index would have returned about
7.5 percent per year for a decade.
Many papers have used the “G” and “E” indices in their studies, but of late, some papers
question whether the results based on these indices are theoretically and empirically justifia-
ble. An excellent discussion of these issues is found in Klausner.87 He argues that for US firms
the key thing an index should ascertain is how entrenched the board and management are.
This stems from many US firms being diffusely held and thus the key issue being how easily
can shareholders replace the board. For countries with primarily controlled firms (i.e., most
countries), the “G” and “E” indices have little to say about their primary governance problem
(the majority-minority conflict).
Klausner notes that the features used to compute these indices (and many other corporate
governance indices) do not have much theoretical connection to entrenchment concerns and
thus the indices do not really measure entrenchment in most US firms. Indeed, some of the
features that might be correlated with entrenchment might also be beneficial for firms in
various contexts. Because of this the value of these indices as measures of overall governance
is limited.
Indeed, the problem Klausner discusses is related to the problem of construct validity.
Black, de Carvalho, Khanna, Kim and Yurtoglu discuss construct validity in the context of
corporate governance indices.88 The core problem is that an index is a construct designed to
measure underlying corporate governance and practice (which is not directly observed), but
the construct can only do so imperfectly. This implies that there is no direct way to measure
the gap between the index and the underlying concept and makes relying on such indices prob-
lematic unless adjustments are made on how one might address some of the concerns raised
by construct validity. The paper then highlights how using very context specific indices may
facilitate greater construct validity – something few studies using these indices do.
86
See Lucian Bebchuk, Alma Cohen & Allen Ferrell, What Matters in Corporate Governance?,
22 Rev. Fin. Stud. 2 (2009); Paul Gompers, Joy Ishii & Andrew Metrick, Corporate Governance and
Equity Prices, 118 Q.J. Econ. 107 (2003).
87
See Klausner, supra note 74.
88
See Bernard S. Black, Antonio Gledson de Carvalho, Vikramaditya S. Khanna, Woochan Kim &
B. Burcin Yurtoglu, Corporate Governance Indices and Construct Validity, 25 Corp. Governance: An
Int’l Rev. 397–410 (2017).
3.2 Empirical Studies Outside the US
Empirical inquiry in the US has been accompanied by an explosion of empirical inquiry

outside the US. There are a number of country specific studies examining the potential effects
of country level and firm level governance on measures of firm value and performance and
a number of cross country (i.e., multi-country) studies as well.89 The general results are that
governance does seem to matter, but what matters appears to be different outside the US than
in the US. In particular, entrenchment is a lesser concern (as most firms are controlled), but
disclosure and shareholder (minority) rights seem particularly important (as these may be
key ways in which to monitor the controlling shareholder). Indeed, this is consistent with
survey and interview evidence from Private Equity funds, Hedge Funds and other Institutional
Investors focused on markets outside the US and UK who say that they are most interested in
disclosure and shareholder rights.90 This is further buttressed by studies indicating that owner-
ship structure is a first order concern in many markets.91
89
On the following individual country studies, see, e.g.:
India: N. Balasubramaniam, Bernard S. Black & Vikramaditya S. Khanna, The Relation Between
Firm-Level Corporate Governance and Market Value: A Study of India, 11 Emerging Markets Rev.
319–40 (2010), Bernard S. Black & Vikramaditya S. Khanna, Can Corporate Governance Reforms
Increase Firms’ Market Values?: Event Study Evidence from India, 4 J. Empirical Legal Stud. 749–96
(2007), Dhammika Dharmapala & Vikramaditya S. Khanna, Corporate Governance, Enforcement, and
Firm Value: Evidence from India, 29 J.L. Econ Org. 1056–84 (2013).
Brazil: Ricardo P.C. Leal & Andre L. Carvalhal-da-Silva, Corporate Governance and Value in Brazil
(and in Chile), in Investor Protection and Corporate Governance — Firm Level Evidence
Across Latin America (Florencio Lopez-de-Silanes and Alberto Chong eds., 2007), www. iadb.org/res/
pub_desc.cfm?pub_id=R-514; Bernard S. Black, Antonio Gledson de Carvalho & Erica Christina Rocha
Gorga, What Matters and for Which Firms for Corporate Governance in Emerging Markets? Evidence
from Brazil (and Other BRIK Countries), 18 J. Corp. Fin. 934 (2012).
Hong Kong: Steven Yan-Leung Cheung, J. Thomas Connelly, Piman Limpaphayom & Lynda Zhou,
Do Investors Really Value Corporate Governance? Evidence from the Hong Kong Market, 18 J. Int’l
Fin. Mgmt. Acct. 86–122 (2007).
Korea: Bernard S. Black, Hasung Jang & Woochan Kim, Does Corporate Governance Affect Firms'
Market Values? Evidence from Korea, 22 J.L. Econ. Org. 366–413 (2006).
Russia: Bernard S. Black, The Corporate Governance Behavior and Market Value of Russian Firms,
2 Emerging Markets Review 89–108 (2001); Bernard S. Black, Inessa Love & Andrei Rachinsky,
Corporate Governance Indices and Firms’ Market Values: Time-series Evidence from Russia, 7
Emerging Markets Rev. 361–79 (2006).
Cross country studies: Craig Doidge, G. Andrew Karolyi & Rene M. Stulz, Why Do Countries Matter
So Much for Corporate Governance, 86 J. Fin. Econ. 1–39 (2007); Artyom Durnev & E. Han Kim, To
Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation, 60 J. Fin. Econ. 1461–93
(2005); Leora F. Klapper & Inessa Love, Corporate Governance, Investor Protection and Performance
in Emerging Markets, 10 J. Corp. Fin. 703–28 (2004); Reena Aggarwal, Isil Erel, Rene M. Stulz &
Rohan Williamson, Do U.S. Firms Have the Best Corporate Governance? A Cross-Country Examination
of the Relation Between Corporate Governance and Shareholder Wealth (Fisher College of Business
Working Paper No. 2006-03-006, 2006), http://ssrn.com/abstract=954169.
90
See Vikramaditya S. Khanna & Roman Zyla, Survey Says … Corporate Governance Matters
to Investors in Emerging Market Companies, Int’l Fin. Corp. Publication, World Bank Group
(2012), www1.ifc.org/wps/wcm/connect/dbfd8b004afe7d69bcb6bdb94e6f4d75/IFC_EMI _Survey_
web.pdf?MOD=AJPERES.
91
See Tarun Khanna & Yishay Yafeh, Business Groups in Emerging Markets: Paragons or
Parasites?, 45 J. Eco. Lit. 331–72 (2007); Alessandro Zattoni, Torben Pedersen & Vikas Kumar,
Moreover, for some emerging markets a part of the value associated with corporate gov-
ernance reforms may be in their enforcement (rather than the specific governance reforms)92
which may in turn be valuable because of the “signal” it sends to foreign investors that the
government will try to assuage investors’ concerns. 93
Further, although cross-country studies tend to find a positive association between
governance and firm value, we should assess them carefully because construct validity is
a particularly large concern in such multi-country studies where a governance feature in one
country might have quite different implications in another. Black, de Carvalho, Khanna, Kim
and Yurtoglu address these sorts of concerns by designing country specific indices (based
on in-depth multi-year surveys) that take local practices and laws into account and then run
detailed Fixed Effects and Random Effects regressions on them.94 The results indicate that the
key areas of governance across the five countries studied (Brazil, India, Korea, Russia and
Turkey) are disclosure and shareholder rights with a few countries having firm value impacted
by board structure in a noticeable way (e.g., Brazil).
These results underscore those from US studies – corporate governance may matter to firm
value, but it likely depends on context such that any governance effects in one place may not
simply “port” over to another. This suggests once again that context will matter greatly and
that effects may vary across countries, across types of firms and across other parameters of
interest (e.g., industry).
4. HOW DOES THE CORPORATE PURPOSE DEBATE IMPACT

THE RELATIONSHIP BETWEEN CORPORATE LAW AND
ECONOMIC DEVELOPMENT?
In recent years, we have seen the reinvigoration of a seminal debate – what is the purpose of
the corporation: to enhance shareholder wealth or to enhance social welfare or yet something
else?95 Moreover, the purpose of the corporation is thought to then determine the goal of cor-
The Peformance of Group-Affiliated Firms During Institutional Transition: A Longitudinal Study of

Indian Firms, 17 Corp. Governance: An Int’l Rev. 510–23 (2009). For the value of control, see
generally M.J. Barclay & C.G. Holderness, Private Benefits of Control in Public Corporations, 25 J.
Fin. Econ. 371 (1989). See also Alexander Dyck & Luigi Zingales, Private Benefits of Control: An
International Comparison, 59 J. Fin. 537 (2004); Zohar Goshen & Assaf Hamdani, Corporate Control
and Idiosyncratic Vision, 125 Yale L.J. 563 (2016); Lucian Arye Bebchuk, A Rent-Protection Theory of
Corporate Ownership and Control (NBER Working Paper. No. 7203, 1999).
92
See Dharmapala & Khanna, supra note 89.
93
See, e.g., Marcelo de C. Griebeler & Elisa M. Wagner, A Signaling Model of Foreign Direct
Investment Attraction, 18 Economica 344–58 (2017); Antonio Estache, Eric Bond & Steve Chiu, Trade
Reform Design as a Signal to Foreign Investors: Lessons for Economies in Transition (World Bank
Policy Research Working Paper No. 1490, 1995), https://elibrary.worldbank.org/doi/abs/10.1596/1813
-9450-1490.
94
See Bernard S. Black, Antonio Gledson De Carvalho, Vikramaditya S. Khanna, Woochan Kim &
B. Burcin Yurtoglu, Methods for Multicountry Studies of Corporate Governance (and Evidence from the
BRIKT Countries), 183 J. Econometrics 230–40 (2014).
95
See, e.g., Vikramaditya S. Khanna, Global Asset Managers and the Rise of Long Term Sustainable
Value, Quarterly Briefing, National Stock Exchange of India, (Oct. 2018), https://archives
.nseindia.com/research/content/QB_October_2018.pdf; Martin Lipton, The Purpose of the Corporation,
Harv. L. Sch. F. on Corp. Governance and Fin. Reg. (Apr. 2018), https://corpgov.law.harvard.edu/
porate law (e.g., if the purpose of the corporation is to enhance social welfare then should the
purpose of corporate law be to benefit society not just shareholders). This sets up the debate
between shareholder primacy and stakeholder theories, which traditionally align around the
Anglo-American models of corporate law (e.g., mainly about investor protection) and the rest
of the world’s models (e.g., about more than investor protection). The debate this time has
been triggered by concerns about income inequality, the rise of socially responsible investment
and corporate social responsibility, and recent statements of large asset managers that they
want their investee firms to focus on long term sustainable value.96
In this chapter, I will not engage with the debate over which corporate purpose is most
appropriate or whether the shareholder primacy norm, as a practical matter, constrains manag-
ers from spending on socially responsible activities, or whether long term sustainable value is
very different than shareholder wealth maximization in the longer run. Rather, I focus on what
implications arise for the relationship between corporate law and economic development if the
corporate purpose debate is resolved in favor of stakeholder theories (assuming this leads to
some differences in behavior from shareholder primacy).
If corporate law is not solely motivated by investor protection, then the argument about
how corporate law relates to raising financing appears to change. Now corporate law may
have other effects (e.g., protecting labor, environmental protection) and that might have some
impact on its ability to facilitate capital formation. At the simplest level, this could weaken the
relationship between corporate law and economic development. Although this seems persua-
sive, it is worthwhile to examine this claim more carefully.
First, most countries outside the US and the UK follow, at least on paper, some version
of a stakeholder theory, but these countries are not uniformly performing poorly on raising
investment.97 They may not have as deep markets as the US at present, but they are not unable
to raise external equity finance and some papers suggest that in some countries their versions
of stakeholder theory may potentially enhance firm value.98
2018/04/11/the-purpose-of-the-corporation/; Lucian A. Bebchuk & Roberto Tallarita, The Illusory

Promise of Stakeholder Governance, Cornell L. Rev. (forthcoming Dec. 2020), https://ssrn.com/
abstract=3544978; Letter from Larry Fink, Founder, Chairman and CEO of BlackRock, Inc., to CEOs
(Jan. 17, 2018), www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter; see also Oliver
Hart & Luigi Zingales, Companies Should Maximize Shareholder Welfare Not Market Value, 2 J. L.
Fin. & Acct. 247–74 (2017); Robert G. Eccles & Svetlana Klimenko, The Investor Revolution, Harv.
Bus. Rev. (May–June 2019), https://hbr.org/2019/05/the-investor-revolution; Leo E. Strine, Jr., Toward
Fair and Sustainable Capitalism: A Comprehensive Proposal to Help American Workers, Restore
Fair Gainsharing between Employees and Shareholders, and Increase American Competitiveness
by Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth and
Encouraging Investments in America’s Future (Univ. of Pa., Inst. for Law & Econ. Research Paper No.
19-39, 2019), https://ssrn.com/abstract=3461924.
96
See supra note 95; Attracta Mooney, How Asset Managers Turned into Business Agitators, Fin.
Times (Dec. 23, 2019), www.ft.com/content/f568ec48-1840-11ea-8d73-6303645ac406.
97
See Armour et al., supra note 60 (questioning whether increased legal protection of shareholders
leads to more rapid financial development); Rajan & Zingales, supra note 41, at 44 (noting that the
passage of pro-labor legislation does not fully explain the shrinkage of public equity markets in Europe
in the 1920s and 1930s).
98
See Edith Ginglinger, William Megginson & Timothee Waxin, Employee Ownership, Board
Representation, and Corporate Financial Policies, 17 J. Corp. Fin. 868 (2011) (finding that, in France,
employee board representation increases firm value); Franklin Allen, Elena Carletti & Rob Marquez,
Stakeholder Capitalism, Corporate Governance and Firm Value (European Corporate Governance
Second, stakeholder theories may provide more political insulation for financial market, and
other market-oriented, reforms.99 For example, in India, one reason for enacting a requirement
for firms above a certain profit threshold to spend 2 percent of profits on corporate social
responsibility is to support further financial market reforms and general liberalization and
modernization efforts.100 It is conceivable that in some contexts this approach and the political
insulation it provides may benefit development too.101 This is not to discount the other benefits
that might arise from stakeholder theories, but to note that there are countervailing considera-
tions that might suggest stakeholder theories have advantages for future reforms.
Third, corporate law may contribute to economic development in more ways than its inves-
tor protection aspects. For example, if some parts of corporate law contribute to, say, innova-
tion then even if those parts do not enhance investor protection much they may still benefit
economic growth.102 This seems like an area meriting further research as well.
In addition to these considerations, one may also wonder whether the other roles of corpo-
rate law (or organizational law) may contribute to economic development. For example, it is
conceivable that the entity shielding and asset partitioning roles of corporate law may impact
economic development in important ways outside of investor protection (e.g., impact on
access to credit, bankruptcy, innovation).
These all suggest caution in quickly ascribing effects on economic development from
the corporate purpose debate. This it seems is a topic worthy of further inquiry in separate
research.
5. CONCLUSION
The debate over the relationship between corporate law and economic development spans
a great deal of scholarly work across numerous countries. In spite of this, many fundamental
questions still remain rather open for discussion and debate: what is the causal relationship (if
any) between corporate law and economic development, does “better” corporate law always
Institute – Finance Working Paper No. 190, 2007), https://papers.ssrn.com/sol3/papers.cfm?abstract_id

=968141 (predicting that, at least in industries that are primarily limited by marginal cost uncertainties,
stakeholder orientation, as long as it is not excessive, should lead to higher overall firm value); Simon
Jager, Benjamin Schoefer & Jorg Heining, Labor in the Boardroom (National Bureau of Economic
Research (NBER) Working Paper No. 26519, 2019), www.nber.org/papers/w26519.pdf (finding that in
Germany “the evidence is consistent with richer models of industrial relations whereby shared govern-
ance raises capital.”).
99
See Lucian A. Bebchuk, The Myth That Insulating Boards Serves Long-Term Value, 113 Colum.
L. Rev. 1637, 1640–41 (2013); Leo E. Strine, Jr., Can We Do Better by Ordinary Investors; A Pragmatic
Reaction to the Duelling Ideological Mythologists of Corporate Law, 114 Colum. L. Rev. 449 (2014).
100
See Dhammika Dharmapala & Vikramaditya S. Khanna, The Impact of Mandating Corporate
Social Responsibility: Evidence from India’s Companies Act 2013, 56 Int’l Rev. L. Econ. 92 (2018).
101
The potential political insulation provided by stakeholder approaches may also be present in some
informal financing systems. These systems are typically built on social norms and may often require
some degree of give and take.
102
See, e.g., Robert Cooter, The Falcon's Gyre: Legal Foundations of Economic Innovation
and Growth (2014), https://scholarship.law.berkeley.edu/books/1. There is a literature examining
the connections between stakeholder theory and human capital investment as well. See, e.g., Peter M.
Madsen & John B. Bingham, A Stakeholder–Human Capital Perspective on the Link between Social
Performance and Executive Compensation, 24 Bus. Ethics Q. 1 (2014).
lead to enhanced investment, what about corporate law might matter to enhancing firm value
and investment, and a host of other questions. This chapter provides an overview of the
existing literature and raises a few questions that might lead to future research topics. For
example, what is the effect of enhancing corporate law on informal sources of investment and
what might be the net effect on investment. In addition, the chapter begins to probe whether
the recent corporate purpose debate may affect the relationship between corporate law and
economic development. This discussion suggests that the debate over the relationship between
corporate law and economic development will continue to generate important scholarship.
4. The law and economics of comparative
corporate law
María Isabel Sáez Lacave and María Gutiérrez Urtiaga1
1. INTRODUCTION
The study of company law is usually categorized into one of two extreme and opposing views:
the doctrinal approach and the law and economics (L&E) approach.2 But a third approach,
based on a comparative perspective, combines the best elements of both extreme views to offer
a richer view of the cathedral from various perspectives.
In this chapter we will explain the different methodological approaches characterizing the
doctrinal, the L&E, and the comparative views. We will emphasize how comparative company
law has developed as a bridge between the two extremes and how it has enriched the L&E
view of company law. As we will see, nowadays, the best L&E analysis of corporate law
benefits from a comparative perspective to inform policy recommendations. We will refer to
this view as the L&E of comparative company law.
It seems that the only common feature of the methodologies used by doctrinal analysis and
L&E analysis is that they are non-comparative. Doctrinal analysis studies one jurisdiction in
isolation and searches for a detailed understanding and explanation of the law in the books.
L&E studies, at a general level, alternative arrangements for corporate matters in order to
determine the best solution to ensure an efficient allocation, using tools borrowed from eco-
nomics. Comparative views of corporate law, however, combine the in-depth study of legal
rules and institutions in various settings with economic insights to analyze specific rules across
jurisdictions. The methodologies used by comparative studies (comparative corporate law,
comparative corporate governance and law and finance) have changed to be able to address
different questions and, as we will see, these changes have sometimes led to a re-branding of
the comparative endeavor under different labels. All the successive brands refer to compar-
ative studies of corporate law, but each of them embraces knowledge and tools used by the
two extreme views – doctrinal and pure L&E – to a different degree. In this sense, there is an
unresolved tension throughout the comparative analysis between, on the one hand, offering
a detailed and very specific explanations of different legal rules and doctrines and, on the other
hand, providing an abstract and generalized knowledge of the functioning of corporate law.
1
The authors wish to thank for their helpful comments Marco Corradi, Fernando Gómez-Pomar,
Assaf Hamdani, Amir N. Licht, the seminar audiences at the Fordham Law School’s Workshop on
Elgar's Research Handbook on Comparative Corporate Governance and specially the editors, Martin
Gelter and Afra Afsharipour.
2
Nuno Garoupa & Thomas S. Ulen, The Market for Legal Innovation: Law and Economics in
Europe and the United States, in Comparative Law and Economics (Theodore Eisenberg & Giovanni
B. Ramello eds., 2016); Kristoffel R. Grechenig & Martin Gelter, The Transatlantic Divergence in Legal
Thought: American Law and Economics vs. German Doctrinalism, 31 Hastings Int’l & Comp. L. Rev.
295 (2008).
56
The law and economics of comparative corporate law 57
This tension is one of the reasons, we believe, why the comparative study of company law
has experienced frequent rebranding episodes, from comparative corporate law, to compara-
tive corporate governance, to law and finance. Rebranding has been useful to attract people
from different backgrounds to the study of corporate law and to bring about methodological
changes, both from legal scholarship and from economic scholarship, while avoiding resist-
ance from the status quo at any given moment. However, this rebranding has also resulted in
the creation of parallel academic niches each defending its own methodology and advancing
criticism on others, rather than in all scholars interested in corporate law embracing new meth-
odologies over time. This makes it particularly important to state clearly what one interprets as
comparative company law, because different researchers in the field may be talking about very
different methodological perspectives to study the same issue in company law.
The rest of the chapter proceeds as follows. In the next section we compare and contrast
traditional doctrinal – often called dogmatic in some Continental European tradition – studies
of company law with the comparative perspective and explain how comparative knowledge
overcomes important limitations inherent in dogmatic analysis. In Section 3 we discuss how
the comparative perspective was broadened by the comparative corporate governance studies
that focused on the relative efficiency of corporate law across jurisdictions to combat mana-
gerial agency costs. Section 4 explains how this analysis was enriched by the discussion on
causality introduced by the law and finance literature. Finally, Section 5 argues that there is
a mutual reinforcement between comparative knowledge and the L&E approach to the study
of company law. Conclusions are presented in Section 6. Throughout the chapter, we use the
topic of minority expropriation to exemplify the differences in key issues and methodologies
across these different comparative approaches.
2. FROM DOCTRINAL COMPANY LAW TO COMPARATIVE

COMPANY LAW: ESTABLISHING FUNCTIONALITY
Traditionally, the study of corporate law has been conducted in each jurisdiction at the
domestic level with the objective of producing doctrines and “technical” notions and concepts
to guide thinking through legal materials and problems and, in particular, to fill the blanks
of incomplete or obsolete laws and regulations, and to adapt the Law to the emergence of
new situations. This requires a very detailed knowledge of the corporate law materials (laws,
regulations, case law) of a given jurisdiction, and is considered the most important asset for
lawyers, courts, and firms doing business in that country.
This approach uses dogmatic analysis as its methodological toolbox. The core of this
methodology is to study company law as a “system,” highlighting all its complexities and
inter-relationships and its ultimate internal coherence.3 This methodology focuses on the
coherent design of law in the books and therefore uses hermeneutics and exegesis to analyze
the meaning of legal texts. The way dogmatic analysis views corporate law is as a collection
of the different rules that regulate the life of the company from its inception until its death,
and the law is the system that governs completely the functioning of this “living” entity.
Because company law is understood as a closed system, and therefore, a self-referential and
3
Karl Larenz & Claus-Wilhem Canaris, Methodenlehre Der Rechtswissenschaft (1st ed.
1995).
self-explained system, the typical research question in this literature is the categorization of
a specific part of this system and the creation of concepts that explain those categories. As
a result, the legal community might end up convinced that a meaningful categorization and
a persuasive conceptualization solve all legal problems in real life.
An important weakness of this methodology is that dogmatic analysis dispenses with issues
of enforcement and with the consequences of law in action. Notice, moreover, that the law is
analyzed as an auto-referenced system, with its own mechanism of interpretation and updating
of its meaning. Although real world considerations may enter into historical and teleological
interpretations, efficiency considerations coming from social, political or economic forces are
all but ignored. In addition, there is no study of the socio-economic consequences of the rules
being discussed. In other words, the legitimacy of a doctrine or the interpretation of how the
provisions of a law interplay with other pieces of the system relies in the rhetorical power of
the arguments and their capacity to offer a conceptual fit. Whether the proposed solution gen-
erates efficient allocations is not a major concern, mainly because this methodology does not
count with the tools and instruments to assess allocations and results, other than common sense
guessing. Moreover, logical thinking has important limits. While logical thinking produces
correct reasoning, it only discusses the validity of the arguments, offering the correct relation-
ship between premises and conclusions. But, logical thinking does not attempt to establish the
truth of the premises or determine the relevance of the conclusions.4
To illustrate these methodological issues, we consider here, and in all the subsequent sec-
tions of the chapter, the problem of minority expropriation as an important and illustrative
example. Conflicts of interests between controlling shareholders and minority shareholders are
probably the most important corporate governance problem that controlled companies face.5
Nevertheless, this problem has not attracted the attention of legal academics in many European
jurisdictions (where controlled firms are prevalent or at least widely present). Moreover, the
introduction of Majority of the Minority (MOM) approval rules and other schemes trying to
reallocate control rights regarding related party transactions6 have encountered heavy resist-
ance among doctrinal academics. Why? There are two reasons why a dogmatic analysis of
company law does not favor this reallocation of control rights.
First, seen through the lens of dogmatic analysis, “shareholder status” is based on the own-
ership of shares vested with voting rights and this categorization of the concept of shareholder
does not permit or justify any mechanism that undermines their – by hypothesis legitimate
– voting power. So, as a general rule, the individual right to vote of the shareholder should
be upheld. Therefore, blockholders can vote their shares even if they are a conflicted party in
4
Noson S. Yanofsky, The Outer Limits of Reason: What Science, Mathematics, and Logic
Cannot Tell Us (1st ed. 2016).
5
Empirical studies show that expropriation in European jurisdictions is higher than in the US.
Alexander Dyck & Luigi Zingales, Private Benefits of Control: An International Comparison, 59 J. Fin.
537, 551 (2004); Tatiana Nenova, The Value of Corporate Voting Rights and Control: A Cross-Country
Analysis, 68 J. Fin. Econ. 325 (2003). For examples of how European jurisdictions allow tunneling see
Simon Johnson, Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, Tunneling, 90 Am.
Econ. Rev. 22 (2000). For a taxonomy of tunneling practices, see Vladimir Atanasov, Bernard S. Black
& Conrad S. Ciccotello, Law and Tunneling, 37 J. Corp. L. 1 (2011).
6
At the EU level the introduction of a MOM rule (majority of the minority shareholders’ approval)
has been watered down to disinterested approval at board level, Art. 9c Directive (EU) 2017/828 of the
European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC.
a business transaction with the company.7 In addition, if blockholders are not allowed to vote
their shares, the voting power of the minority increases, along with the risk of hold up. As
the minority increases its voting power through these reallocations, the outcome of the voting
mechanism differs more markedly from the original aggregated interest according to the pure
shareholder status rule.8
Second, because dogmatic analysis sees law as a closed system and does not consider
enforcement issues, there is a presumption that each legal system is already equipped with
adequate tools to prevent minority expropriation (such as standards against disloyal behavior
of managers and controlling shareholders). Germany is a paradigmatic case. The standard
view among German scholars is that the fiduciary duties of shareholders are developed well
enough to protect minority shareholders from expropriation.9 This is probably true as to law
in the books, in view of the enormous bibliography written on the matter. However, as law
in action shows, the effectiveness of ex post litigation tools to limit controlling shareholder’s
opportunism seems far from effective.10
This example highlights a clear contradiction in the dogmatic approach between, on the one
hand, the presumed sophistication and complexity of the legal doctrines applied, and on the
other hand, the lack of tools to contrast and refute different views. Without these refuting tools,
dogmatic analysis rests on little more than “ad hoc” categorizations, rhetoric abilities and
personal intuitions to defend them.11 Nevertheless, it is important to notice that at the domestic
level there is only one observation to study (that particular jurisdiction) and this inhibits ques-
tioning and testing the causes, consequences and efficiency of the legal solutions in a given
system. These types of questions can only arise when more than one domestic system is
analyzed. Adding further to this problem, comparability is limited due to language barriers. As
doctrinal analysis is conducted at the domestic level and based on law in the books, it is largely
dominated by the language of the country, which extends to citations of literature.
The move from traditional company law to comparative company law arises naturally
in a global economy. Even from a practical and domestic point of view, foreign company
laws become important since many large firms have branches and subsidiaries operating in
other jurisdictions. The increasing number of cross-border cases turned out to be challenging
for companies that are facing global competition. In this context, there are many different
reasons for the interest in looking simultaneously at company law in different jurisdictions.
First, nowadays, practitioners, regulators and courts will have to analyze many international
7
Corporate Law in many jurisdictions consider some restricted cases of conflict of interest that
prevent shareholders from voting, but they are of a different nature than business transactions. See
Germany § 136 AktG; Spain, art. 190 LSC.
8
Precisely because of this, more emphasis is usually placed on the dangers of minority hold up
than on the threat of minority expropriation. María Gutiérrez-Urtiaga & Maribel Sáez-Lacave, Strong
Shareholders, Weak Outside Investors, 18 J. Corp. L. Stud. 277 (2018).
9
Wolf-Georg Ringe, Changing Law and Ownership patterns in Germany: Corporate Governance
and the Erosion of Deutschland AG, 63(2) Am. J. Comp. L. 493, 504 (2015) (“For the most part, these
loyalty duties apply to majority shareholders, thus making the principle an important tool of minority
protection, and responding to the prevalence of blockholders in the German corporate landscape.”).
10
María Gutiérrez-Urtiaga & Maribel Sáez-Lacave, A Contractual Approach to Disciplining
Self-dealing by Controlling Shareholders, 2 J.L. Fin. Acct. 173 (2017).
11
Jan M. Smits, What is Legal Doctrine? On the Aims and Methods of Legal-Dogmatic Research, in
Rethinking Legal Scholarship: A Transatlantic Dialogue (Rob van Gestel, Hans-W. Micklitz &
Edward L. Rubin eds., 2017).
cases that will require the knowledge of different national laws and regulations. Second, the
need to develop common principles and rules at the European level must start by considering
simultaneously the different national laws that are being harmonized.12 European company law
and the case law of the European Court of Justice became a fruitful ground for legal analysis.13
The practical need to learn at least the rudiments of corporate law codes different from one’s
own necessarily implies some degree of comparison. This comparison is interesting not only
for practitioners (lawyers, advisors) and even law-makers, but also for academics. This may be
considered the initial push for the relevance of comparative law. This also becomes clear when
we notice that the early comparative literature was targeted to scholars from one country inter-
ested in learning the rules and solutions of other countries. Finally, this ultimately explains
why comparative papers were initially written in the home country language of the research-
ers. Many of these works were mere descriptions of company law in foreign jurisdictions.14
Interestingly, from an academic perspective, once we have reached the point where we are
looking at different national solutions to the same problem, the question of why these national
solutions are similar or different arises in a natural way. This broader perspective was more
suited to an international audience on comparative matters,15 and this was also reflected in the
generalization of the use of English language as “lingua franca.”
The similarities are to be found in the functional method that studies – albeit in an informal
way – the economic problems that all these national corporate laws are trying to solve.16 And
this already leads to an instrumental view of company law which is characteristic of the L&E
approach. Nevertheless, traditional comparative company law uses functional analysis of the
economic goals of company law as an abstract justification or starting point, which is not nec-
essarily incorporated further in the comparison between countries. From that point onwards,
the essence of the comparative law exercise is to produce a detailed description of commonali-
ties and differences across different jurisdictions. These are put in the context of legal families
or traditions.17 Moreover, comparative analysis emphasizes the importance of law in action
over law in the books and how the law is applied and enforced.18 But all this is performed with
an explicit rejection of any evaluation in an attempt to preserve the neutrality of the analyst.
This rejection is founded on three reasons. First, the complexity of the domestic law codes
precludes comparability. Because the various domestic codes differ in so many respects, one
can always find a specific issue with they address better than other codes. Moreover, because
the analysis starts from a functional view, to the extent that all the different domestic laws
perform the same function, they must be equivalent or of equal value. Second, any attempt at
determining which law is “better” will be tainted by home bias. The knowledge of domestic
12
(Mathias Reimann & Reinhard Zimmermann eds., 2006).
13
Stefan Grundmann, European Company Law (1st ed. 2011); Michel Menjucq, Droit
International Et Européen Des Sociétés (1st ed. 2001).
14
Hanno Merkt & Stephan R. Göthel, US-Amerikanisches Gesellschaftsrecht (1st ed. 2006).
15
See, as an example, Andreas Cahn & David Donald, Comparative Company Law: Text and
Cases on the Laws Governing Corporations in Germany, The UK and The USA (1st ed. 2018).
16
Ralf Michaels, The Functional Method of Comparative Law, in The Oxford Handbook OF
Comparative Law (Mathias Reimann & Reinhard Zimmermann eds., 2006).
17
Konrad Zweigert & Hein Kötz, Introduction to Comparative Law (1st ed. 1998).
18
Ralf Michaels, Comparative Law by Numbers? Legal Origins Thesis, Doing Business Reports,
and the Silence of Traditional Comparative Law, 57 Am. J. Comp. L. 765 (2009).
law is almost always superior to the knowledge of any foreign law and this creates a bias in
academics to find that the law of their country is superior to others. And third, the observed
differences across countries are attributed to different histories, politics and socio-economic
characteristics. These differences make legal transplants likely to fail, and therefore they also
make relative evaluation futile. 19
To illustrate this point, let us examine the comparative perspective going back to our
example concerning controlling shareholders and minority protection, discussed above at the
country level. The way this problem is treated in the comparative literature is illustrated by
Conac et al.20 Their paper describes how three major continental European countries (France,
Germany and Italy) regulate controlling shareholders’ self-dealing, looking at all the possible
rules, doctrines and remedies available in each country. From a comparative perspective,
the research idea here is to acknowledge the problems of asset diversion by insiders – the
functional approach – and show that the doctrines and remedies are far from uniform across
jurisdictions.21 By adopting a comparative point of view, the study portrays a complete picture
of the variety of legal tools available to tackle self-dealing in each country, which may be
familiar to legal academics and practitioners in each jurisdiction, but probably alien to scholars
from other legal system. The study assumes that, as far as these (major) jurisdictions have
articulated some kind of legal response to the problem, all doctrines and remedies deserve
attention.22
Comparative company law has a long tradition and remains a fruitful and active area of
research.23 This literature has proved to be very good at identifying and updating the core
problems or matters of interest in the company context. Because of this, its main advantage
is that it provides an overview of the hot topics regarding company matters across countries,
and reliable information about the law, doctrines and remedies in some relevant jurisdictions.
Nevertheless, comparative company law has always been very cautious regarding the eval-
uation of the solutions across jurisdictions,24 and this reluctance to identify superior legal
solutions to specific functional problems has limited its influence on policy design.
19
Id. at 787.
20
Pierre-Henri Conac, Luca Enriques & Martin Gelter, Constraining Dominant Shareholders’
Self-Dealing: The Legal Framework in France, Germany, and Italy, 4 Eur. Company & Fin. L. Rev. 491
(2007).
21
Id. at 494 (“It is in fact tempting to compare corporate laws by taking one benchmark jurisdiction,
typically the US, and to assess the quality of other countries’ corporate law systems depending on how
much they replicate some prominent features of US law, such as for example Delaware Courts’ emphasis
on approval of self-dealing transactions by a majority of the minority shareholders. This approach may
provide a distorted picture of the effectiveness of other corporate laws, because it might fail to account
for legal strategies and enforcement tools that, while unknown to the US corporate governance regime,
allow countries to tackle self-dealing differently, but no less effectively, than the US, or, in other words,
to achieve functional as opposed to formal convergence.”).
22
Id. at 527 (“It is far from easy to tell what jurisdiction among the three has the most effective rules,
and it is even harder to evaluate how well they fare compared to US or UK law.”).
23
As an example of a recent significant contribution to this literature, see Carsten Gerner-Beuerle
& Michael Schillig, Comparative Company Law (1st ed. 2019).
24
The prevalent view seems to be that efficiency comparisons cannot be made when the law is shaped
by tradition or cultural factors. Ugo Mattei, Efficiency in Legal Transplants: An Essay in Comparative
law and Economics, 14 Int’l Rev. L. & Econ. 3, 11 (1994) (“Comparative law and economics has
always made clear that divergences in different legal systems do not necessarily imply inefficiencies.
From its very beginning it was admitted that different legal traditions may develop alternative solutions
3. FROM COMPARATIVE COMPANY LAW TO

COMPARATIVE CORPORATE GOVERNANCE: SOLVING
THE AGENCY PROBLEM IN THE FIRM
Corporate governance can be broadly defined as the study of company law through the lens of
the agency conflicts that arise in corporations. Berle and Means provided the initial intuition.25
But the formalization of the analysis arises in the economic literature.26 And the language,
grammar and reasoning in this analysis was later taken up by legal scholars dissatisfied with
the solutions provided by American company law to the agency conflict between managers
and shareholders. Comparative corporate governance (CG) emerges when these legal academ-
ics, together with regulators and companies, started searching for inspiration for solutions to
agency problems by looking at other jurisdictions.
Initially, comparative CG was narrowly concerned with the study of the conflict of interest
between dispersed investors and management. However, it has now grown to encompass the
general study of corporate law as the set of rules governing the control of the company and the
relationships and conflicts among all different stakeholders in the corporation. In this sense,
one can argue that comparative CG is in fact a rebranding of the traditional study of company
law using modern economic theory and departing from the dogmatic or doctrinal perspective
on control and decisions in corporations.
Moreover, it is also interesting to notice that comparative CG is the logical evolution of
comparative corporate law. This may seem surprising at first. From one point of view, com-
parative CG is clearly opposed to comparative company law, because it explicitly arises from
a search for the best solutions to address agency problems. This is precisely the reason why the
new comparative literature was rebranded as comparative corporate governance and why many
scholars consider the two as separate literatures. But, from another point of view, it is clearly
a natural coming of age for the comparative company law literature: it breaks its perceived
ceiling and gains relevance in policy decisions with far-reaching economic consequences.27
The best example of comparative CG is the seminal work of Mark Roe.28 Roe draws from
both literatures, the comparative corporate law and the CG literature. From the comparative
law literature, he takes the idea that American company law is the result of different forces
outside the law and, particularly, of political forces. From the CG literature, he borrows the
idea that the agency conflict is key to understanding the functionality of corporate law. Roe
for the same legal problem that are neutral from the stand point of efficiency.”). On the reluctance of
comparative scholars to evaluate, see also Michaels, supra note 16, at 785 (“Comparative lawyers have
become cautious in evaluating one law as better than another. Some object to any evaluative comparison
on the basis of incommensurability. Yet, even those who see value in it are hesitant, and for a reason: if
both laws are functionally equivalent they are by definition of equal value with regard to that specific
function.”).
25
Adolphe Berle & Gardiner Means, The Modern Corporation and Private Property (1st
ed. 1932).
26
Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency
Costs, and Ownership Structure, 3 J. Fin. Econ. 305 (1976).
27
See Theodor Baums & Kenneth E. Scott, Taking Shareholder Protection Seriously? Corporate
Governance in the U.S. and Germany, 17(4) J. Applied Corporate Fin. 44 (2005), for an example of
the new methodology.
28
Mark J. Roe, Strong Managers, Weak Owners: The Political Roots of American
Corporate Finance (1st ed. 1994).
is in fact focusing on the narrow issue of the conflict of interest between dispersed investors
and management, and he is searching for best solutions to these conflicts. Notice that his
methodology starts to differ from the standard methodology of comparative company law.
His approach is empirical, even if informally so. He compares the US to Germany and Japan
in terms of both economic outcomes and corporate law. Interestingly, this was done at a time
when economic growth was stronger in Germany and Japan. This naturally led to the idea that
this was the result of better law. With the benefit of hindsight, it is of course easy to see that the
problem with this analysis was that correlation was interpreted as causation.29 Nevertheless,
it was tremendously influential. Comparative scholars started to identify the singularities of
their home country governance systems and began to treat institutional differences as having
competitive consequences and therefore, an influence on corporate performance. This resulted
in many fruitful lines of research.
Probably the most important line of debate in this literature has been the convergence
versus path dependence of corporate law. Some authors have argued that corporate govern-
ance systems across the globe will inevitably converge to the Anglo-American model, due
to globalization and market pressures that force the regulator to adopt shareholder-oriented
corporate governance practices.30 Other authors consider that there is path dependence in
corporate governance and that globalization pressures are not strong enough to overcome laws
and regulations that serve the interests of powerful domestic actors.31 Additionally, if there
is convergence, it may be formal or merely functional.32 Functional convergence can happen
without changes to company laws in a market with free movement of capital where firms
can move across jurisdictions.33 On the other hand, formal convergence requires regulatory
intervention.34 But, when market forces allow companies to shop around, there is a market for
29
Roberta Romano, A Cautionary Note on Drawing Lessons from Comparative Corporate Law, 102
Yale L.J. 2021, 2022 (1993) (“The central lesson to be drawn from Roe's research in comparative corpo-
rate governance is that there is no compelling evidence to support a preference for German or Japanese
organizational forms and hence for their adaptation to U.S. firms.”).
30
John C. Coffee, The future as History: The Prospects for Global Convergence in Corporate
Governance and Its Implications, 93 Nw. U. L. REV. 641 (1999); Henry Hansmann & Reinier
Kraakman, The End of History for Corporate Law, 89 Geo. L.J. 439 (2001).
31
Lucian A. Bebchuk & Mark J. Roe, A Theory of Path Dependence in Corporate Governance
and Ownership, 52 Stan. L. Rev. 127 (1999) (arguing that path dependence is largely driven by the
self-interest of those who benefit from existing structures).
32
Ronald Gilson, Globalizing Corporate Governance: Convergence of Form or Function, 49 Am. J.
Comp. L. 329 (2001).
33
A good example of these mechanisms is the debate about cross-listing. Cross-listing allows firms
in any given jurisdiction to opt out of the local corporate law and into the corporate law of an alternative
jurisdiction. When firms decide to list on US exchanges to access US financial resources, they are com-
pelled to follow the US Securities and Exchange Commission’s (SEC) rules. By doing this, the foreign
company selects voluntarily US corporate governance rules in preference to those of its own jurisdiction.
John C. Coffee, Racing Towards the Top? The Impact of Cross-Listings and Stock Market Competition
on International Corporate Governance, 102 Colum. L. Rev. 1757 (2002). But, other authors have
challenged this bonding hypothesis on cross-listing. Amir N. Licht argues that more stringent regimes
deter issuers, and there is evidence that insiders behave opportunistically with regard to the cross-listing
decision. Amir N. Licht, Cross-Listing and Corporate Governance: Bonding or Avoiding?, 4 Chi. J.
Int’l L. 141 (2003).
34
Katharina Pistor, Martin Raiser & Stanislaw Gelfer, Law and Finance in Transition Economies,
8 Econ. of Transition, 325 (2000) (providing empirical evidence for transition economies that have
experienced de jure convergence through regulatory intervention). Nevertheless, they show that these
legal rules, corporate law becomes a product to be designed in a competitive market by the
regulators and this leads to another very ample line of research which has to do with regulatory
competition.35
Interestingly, the topic of minority expropriation that we are using as our general example
has not been an important line of research in the comparative corporate governance literature.36
This is because in comparative CG, the features of controlled firms are analyzed through the
lenses of standard agency costs.37 The analysis under this perspective shows that concen-
trated ownership structures provide a natural solution to the Berle and Means corporations.
According to this view, controlling shareholders are seen as a very effective monitoring device
to reduce managerial agency problems. This is not to say that this literature is not aware of the
risk of expropriation of public investors by the insiders in controlled firms. But, as long as the
benefits of having a controlling shareholder are greater than the costs in terms of private bene-
fits extraction, public investors are better-off with controlling shareholders than without them.
In this literature, private benefits are “rewards” to controlling shareholders for the costs they
bear associated with holding an illiquid large stake in the company and exercising a monitoring
function that generate gains for all shareholders. According to this argument, in the absence
of private benefits, no block-holder would have the incentives to play a monitoring role38 for
advances in de jure convergence have failed to increase the availability of external finance in these
countries because de facto convergence of the effectiveness of legal institutions has not been achieved.
35
In the US, where company law is state law, the leading position of Delaware as incorporation
state has fuel the debate over “raise to the bottom” or “raise to the top.” In Europe, the argument is about
whether companies should be subject to the laws of the jurisdiction of incorporation, regardless of the
physical location of their business, operations and activities (the incorporation theory), or whether they
should be subject to the rules of the jurisdiction of the main place of business of the corporation (the seat
theory). This debate has been progressively made clear through the case Law of the European Court of
Justice that has established the scope of the right of establishment. See, e.g., Francesco Munari & Paolo
Terrile, The Centros Case and the Rise of an EC Market for Corporate Law, in Capital Markets in the
Age of Euro: Cross-Border Transactions, Listed Companies and Regulation (Guido Ferrarini,
Klaus J. Hopt & Eddy Wymeersch eds., 2002); Eddy Wymeersch, Centros: A Landmark Decision
in European Company Law, in Corporations, Capital Markets and Business in the Law, Liber
Amicorum Richard M. Buxbaum (Theodor Baums, Klaus J. Hopt & Norbert Horn eds., 2000); J.
Rickford, Current Developments in European Law on the Restructuring of Companies: An Introduction,
15 Eur. Bus. L. Rev. 1225 (2004); Wolf-Georg Ringe, No Freedom of Emigration for Companies?, 16
Eur. Bus. L. Rev. 621 (2005); Wulf-Henning Roth, From Centros to Ueberseering: Free Movement
of Companies, Private International Law, and Community Law, 52 Int’l & Comp. L. Q. 177 (2003);
Wolfgang Schön, The Mobility of Companies in Europe and the Organizational Freedom of Company
Founders, 3 Eur. Company & Fin. L. Rev. 122 (2006); Mathias Siems, SEVIC: Beyond Cross-Border
Mergers, 8 Eur. Bus. Org. L. Rev. 307 (2007); Erik Werlauff, Using a Foreign Company for Domestic
Activities, 10 Eur. Bus. L. Rev. 306 (1999).
36
In its beginnings, this literature was very focused on developed economies, and scholars in these
major jurisdictions were not very much confronted with the idea of minority expropriation. Interestingly,
scholars in other jurisdictions have paid more attention to these issues. See Afra Afsharipour, Corporate
Governance Convergence: Lessons from the Indian Experience, 29 Nw. J. Int’l L. & Bus. 335 (2009);
Umakanth Varottil, A Cautionary Tale of the Transplant Effect on Indian Corporate Governance, 21
Nat’l L. Sch. India Rev. 1 (2009).
37
Ronald J. Gilson & Jeffrey N. Gordon, Controlling Controlling Shareholders, 152 U. Pa. L. Rev.
785 (2003).
38
Andrei Shleifer & Robert M. Vishny, Large Shareholders and Corporate Control, 94 J. Pol.
Econ. 461, 463 (1986). For the authors that emphasized the dark side of private benefits and the negative
effects on capital market development, see Lucian A. Bebchuk & Luigi Zingales, Ownership Structures
the benefit of all shareholders. This perspective reinforces the general view that concentrated
ownership structure is a clear strength of the German and Japanese models.39 The interplay of
large corporations, corporate groups and financial institutions results in a successful form of
industrial organization.40 Controlling shareholders are not perceived as a problem, but as part
of the solution. Moreover, the alignment of interest of the controlling shareholders with other
long-term non-diversified stakeholders, such as workers or banks is viewed as an advantage
and not considered as detrimental of the interests of market investors.41 Therefore, this liter-
ature paid little attention to corporate governance mechanisms that try to reduce controlling
shareholder opportunism42 and to foster capital market development.43
As a general conclusion, we can say that the underlying idea inherent in comparative CG
analysis is that law matters, and it shapes economic outcomes, with better solutions to the
agency problem causing better economic outcomes. Nevertheless, comparative CG fails to
prove this central idea because the methodology is based on identifying correlations among
a small number of observations. Proving that law matters requires establishing causality. The
search for this causal link between law and economic outcomes is the beginning of the law
and finance literature. A literature that unlike comparative CG would be initially dominated by
economists that came in with a new and provocative methodological toolbox.
and the Decision to Go Public, in Concentrated Corporate Ownership (Randall K. Morck ed.,
2000); Lucian A. Bebchuk, Efficient and Inefficient Sales of Corporate Control, 109 Q. J. ECON. 957
(1994); Lucian A. Bebchuk, A Rent Protection Theory of Corporate Ownership and Control (NBER
Working Paper No. 7023, 1999), www.nber.org/papers/w7203.
39
Ronald J. Gilson & Mark J. Roe, Understanding the Japanese Keiretsu: Overlaps Between
Corporate Governance and Industrial Organization, 102 Yale L.J. 271 (1993). For the German case,
see Tobias H. Tröger, Germany's Reluctance to Regulate Related Party Transactions, in The Law and
Finance of Related Party Transactions (Luca Enriques & Tobias H. Tröger eds., 2019).
40
See Masahiko Aoki, Toward an Economic Model of the Japanese Firm, 27 J. Econ. Lit. 1 (1990);
Masahiko Aoki, The Japanese Firm as a System of Attributes: A Survey and Research Agenda, in The
Japanese Firm: The Sources of Competitive Strength (Masahiko Aoki & Ronald Dore eds., 1994).
But see Yoshiro Miwa & Mark J. Ramseyer, The Myth of the Main Bank: Japan and Comparative
Corporate Governance, 27 L. & Soc. Inquiry 401 (2002) (challenging this view); Yoshiro Miwa &
Mark J. Ramseyer, The Fable of the Keiretsu, 11 J. Econ. & Mgmt. Strategy 169 (2002). For a response
to the critics, see Curtis J. Milhaupt, On the (Fleeting) Existence of the Main Bank System and Other
Japanese Economic Institutions, 27 L. & Soc. Inquiry 425 (2002).
41
The presence of these stakeholders on the board of directors is also viewed as positive. See, e.g.,
Martin Gelter, The Dark Side of Shareholder Influence: The Connection between Managerial Autonomy
and Stakeholder Orientation in Comparative Corporate Governance, 50 Harv. Int’l L.J. 129, 129
(2009) (arguing that “given their costs, laws aiming at the protection of stakeholders – such as codetermi-
nation and restrictive employment laws – may be normatively more desirable in the presence of stronger
shareholder influence, particularly under concentrated ownership.”). On the particular case of mandatory
two-tier boards including worker representatives, see Reinhard H. Schmidt & Gerald Spindler, Path
Dependence and Complementarity in Corporate Governance, in Convergence and Persistence in
Corporate Governance (Jeffrey N. Gordon & Mark J. Roe eds., 2004).
42
Theodor Baums & Kenneth E. Scott, Taking Shareholder Protection Seriously? Corporate
Governance in the United States and Germany, 53 Am. J. Comp. L. 31 (2005) (highlighting that a com-
parative perspective shows that Germany already had strong minority rights). This view has been chal-
lenged by other authors. See Gutiérrez-Urtiaga & Sáez-Lacave, supra note 8.
43
Ronald J. Gilson, Globalizing Corporate Governance: Convergence of Form or Function, in
Convergence and Persistence in Corporate Governance 1, 128 (Jeffrey N. Gordon & Mark J. Roe
eds., 2004) (arguing that “[t]he bank centered capital markets of Germany and Japan allowed executives
to manage in the long run.”).
4. FROM COMPARATIVE CORPORATE GOVERNANCE TO

LAW AND FINANCE: THE SEARCH FOR CAUSALITY
The law and finance literature studies the causal link between company law and economic out-
comes, which was taken for granted in the previous literature dominated by legal scholars. As
more economists became interested in the comparative corporate governance that was being
conducted by legal scholars, and started doing empirical analysis in the field, proving causality
became a precondition for any attempt to compare the efficiency of alternative regulatory
regimes and solutions.
The main problem to prove causality is endogeneity. This problem was in fact already
present in the comparative company law tradition and cited as one of the reasons for not engag-
ing in the evaluation of the laws of different countries, since the observed differences across
countries can be attributed to different socio-economic characteristics. The novel, striking
and ingenious idea that started the law and finance literature was to find the solution to this
apparently intractable problem precisely in the work of the comparative company law scholars
and their taxonomy of different legal traditions. This idea, and the key papers in the law and
finance literature, was developed by Rafael La Porta, Florencio Lopez-de-Silanes, Andrei
Shleifer and Robert Vishny (usually referred to as LLSV).44
In their earliest papers, LLSV show that different legal measures of investor protection –
and the indexes that they build aggregating these measures – vary in a systematic way depend-
ing on the legal origin of the jurisdiction. Moreover, they show that these legal variables are
correlated to economic outcomes both at country level (capital market development) and firm
level (ownership concentration and firm value). To prove that there is a causal relationship
running from the law to these economic outcomes, LLSV use legal traditions and families
as an exogenous predetermined variable for law. This solves potential endogeneity concerns
because legal origins – unlike other characteristics of the law – are fixed, they do not change
with changing cultural or socioeconomic factors and they do not respond to changes in eco-
nomic outcomes. Therefore, if one finds a significant relationship between a legal tradition and
a battery of economic outcomes, this relationship can be interpreted as a causal impact of the
law on the economy.
The initial results from LLSV papers supported the superiority of the economic outcomes
produced by common law over civil law in terms of capital market development and firm
value. Two explanations were given for these results. One explanation asserts that common
law can adapt faster to capital markets and investors changing requirements because it is
developed through case law rather than through legislation that takes longer to respond to
market innovation.45 Alternatively, common law may also be more business friendly because
44
Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, Corporate Ownership Around
the World, 54 J. Fin. 71 (1999); Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer & Robert
Vishny, Law and Finance, 106 J. Pol. Econ. 1113 (1998); Rafael La Porta, Florencio Lopez-de-Silanes,
Andrei Shleifer & Robert Vishny, Legal Determinants of External Finance, 52 J. Fin. 1131 (1997);
Andrei Shleifer & Robert Vishny, A Survey of Corporate Governance, 52 J. Fin. 737 (1997). The
general implications of their work are clearly summarized by the authors. See Rafael La Porta, Florencio
Lopez-de-Silanes & Andrei Shleifer, The Economic Consequences of Legal Origins, 46 J. Econ. Lit.
285 (2008) [hereinafter La Porta et al., Economic Consequences].
45
Thorsten Beck, Asli Demirguc-Kunt & Ross Levine, Law and Finance: Why does Legal Origin
Matter?, 31 J. Comp. Econ. 653 (2003).
judges are said to be more independent from the government in common law systems than in
civil law systems and less likely to be captured by interest groups.46
Whatever the ultimate explanation, LLSV made a strong statement that law matters, which
was hugely influential. The influence extended not only to researchers but also – and unlike
the previous comparative literature – to real world policy through the recommendations of the
World Bank. For an institution focused on promoting reform in developing countries the idea
that law matters, that it can be changed and that it can be measured through indexes is clearly
very attractive. The indexes summarize and quantify the legal complexities of different coun-
tries in a simple measure with a proven causal relationship to economic outcomes and, there-
fore, can inform policy recommendations. This got started the Doing Business project that
collects annual legal data on many different areas of business laws and regulations that affect
the functioning of companies in each country. It covers issues such as the ease of registering
property, getting credit, the protection of minority investors and so on. This has been a very
influential project, with the World Bank making recommendations to countries in response to
their advancement within the index. But it has also received extensive and powerful criticism.
The most obvious one is that LLSV were able to prove the impact of legal origins, but this
is the one thing that is not easy to change in the corporate law of the country. In response to
criticisms the World Bank has improved methodology, but the index will surely continue to be
challenged also for other reasons.47
For legal scholars, the idea that law matters was already obvious.48 But LLSV confronted
them with the limits of traditional methodologies. Interestingly, many scholars in comparative
corporate governance responded by identifying the limits of LLSV methodology.49 In par-
ticular, their indexes seem ad hoc because they only look at some specific legal tools (such as
cumulative voting) and not others (such as the availability of nullification suits). Moreover,
the indexes were criticized for placing too much emphasis on law in the books50 and for using
wrong measures.51 But, the most serious criticism is likely that legal origins are not really
exogenous or fixed, which undermines any causal effect.52 LLSV have responded to all of
these criticisms and still argue their initial thesis is correct. Nevertheless, they concede that
legal origins can be better understood as “a style of social control of economic life,”53 which
goes back to the problem of the correlation between the law and other political and social
forces.
46
Raghuram G. Rajan & Luigi Zingales, The Great Reversals: the Politics of Financial Development
in the Twentieth Century, 69 J. Fin. Econ. 5 (2003).
47
Holger Spamann, Empirical Comparative Law, 11 Ann. Rev. L. & Soc. Sci. 131 (2015).
48
As R. Michaels suggests, this view was uncontroversial to legal scholars who believed that what
matters about the law is its functionality. Michaels, supra note 18, 768.
49
Mathias Siems, Legal Origins: Reconciling Law & Finance and Comparative Law, 52 McGill
L.J. 55 (2007).
50
John C. Coffee, Law and the Market: The Impact of Enforcement, 156 U. Pa. L. Rev. 229 (2007).
51
Holger Spamann, The Anti-Director Rights Index Revisited, 23 Rev. Fin. Stud. 467 (2010).
52
See John Armour, Simon Deakin, Priya Lele & Mathias Siems, How Do Legal Rules Evolve?
Evidence from a Cross-Country Comparison of Shareholder, Creditor and Worker Protection, 57 Am.
J. Comp. L. 591 (2009); Holger Spamann, On the Insignificance and/or Endogeneity of La Porta et al.’s
“Anti-Director Rights Index” Under Consistent Coding (2006), www.law.harvard.edu/programs/olin
_center/fellows_papers/pdf/Spamann_7.pdf.
53
La Porta et al., Economic Consequences, supra note 44, at 286.
But, in spite of all the criticism, the idea of translating law into numbers and indexes has
been a great success among legal scholars that have responded to the simple categorization
into common and civil law by creating alternative indexes capturing better the legal nuances
of the different domestic laws and regulations.54 Clearly, the search for these new indexes
reflects the tension between detailed knowledge of domestic laws and the need for general and
abstract classifications of law. Legal scholars working on this field tend to put more emphasis
on the former, while economists usually are biased towards the latter. Moreover, the develop-
ment of indexes has also been a confirmation of the dangers of home bias that were expressed
by scholars of traditional comparative company law as a major reason to avoid evaluation.
European scholars have usually amended the initial indexes in directions that make civil law
systems score higher on the alternative rankings. Finally, developing good indexes has proven
very difficult and it is an ongoing effort, because it requires a meta-analysis of law that goes
beyond law in the books to encompass many different factors in each jurisdiction that affect
the reach and enforcement. 55
We now turn again to the specific topic of minority protection. This has been a major dis-
cussion in the law and finance literature. In fact, LLSV’s work highlighted that concentrated
ownership structures are much more common around the world than dispersed ones, and there-
fore elevated the problem of minority expropriation at least at the same level of importance
as that of the traditional shareholders-manager conflict. The previous comparative literature
saw large shareholders as a potential solution to reduce managerial agency costs, and private
benefits as a necessary compensation for the supervision effort. But the central idea introduced
by LLSV is that existing ownership structures are an equilibrium response to the legal envi-
ronment. And, in particular, concentrated ownership structures are much more common in
civil law countries because their laws do not provide sufficient protection to market investors.
This insufficient protection has two consequences. First, it hinders the development of large
and liquid capital markets and forces companies to raise money from large shareholders and
debt markets. Second, insufficient protection implies that controlling shareholders will fix
their stakes at the minimum that allows them to maintain control and this will result in low
54
In this regard, it is worth to notice that the reaction of European legal scholars to this literature
was very confrontational because it touched on widely – and deeply – held beliefs about the quality of
European company law. LLSV papers ranked shareholder protection in many European jurisdictions
lower than expected. The common perception was that minority protection and shareholders’ rights
across Europe were a cornerstone of the legal system, and furthermore, that European economies were
highly competitive despite having smaller capital markets. A potential reason for this discrepancy
has to do with the ad hoc nature of the indexes developed by LLSV that arbitrarily took into account
some specific rules but not others. See; Conac et al., supra note 20; Udo C. Braendle, Shareholder
Protection in the USA and Germany—On the Fallacy of LLSV (May 24, 2005), http://ssrn.com/abstract=
728403; Robert Schmidbauer, On the Fallacy of LLSV Revisited—Further Evidence About Shareholder
Protection in Austria and the United Kingdom (Feb. 2006), https://papers.ssrn.com/sol3/papers.cfm
?abstract_id
=913968. LLSV tried to address this criticism by developing a more systematic anti
self-dealing index. See Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, The Law and
Economics of Self-Dealing, 88 J. Fin. Econ. 430 (2008).
55
Amir N. Licht, Chanan Goldschmidt & Shalom H. Schwartz, Culture, Law, and Corporate
Governance, 25 Int’l Rev. L. & Econ. 229 (2005); Holger Spamann, Legal Origin, Civil Procedure, and
the Quality of Contract Enforcement, 166 J. Institutional Theoretical Econ. 149 (2010).
firm value and high minority expropriation.56 Therefore, in LLSV low minority protection by
a legal system is the cause of both ownership concentration and significant expropriation.
But, in line with the general criticisms that we have discussed, the LLSV measure of minor-
ity protection has also been criticized for various reasons. In particular, it has been argued that
some measures considered as desirable for minority protection are not very effective,57 that
appropriate measures can be introduced via contractual arrangements,58 and that controlling
shareholders do also appear in countries with well-functioning legal protections of minority
interest and produce efficient outcomes.59
All these different criticisms point out the ultimate failure of the law and finance literature
to explain the causal link between legal variables and complex economic outcomes (like GDP
growth or stock market development). The indexes are like a black box that only allows us
to observe a legal input and an economic output, but not the workings in-between. Causality
arguments will only be successful in changing policies if one can clearly explain the mecha-
nism through which a specific regulation affects complex economic aggregates.
Because of this, the new literature has set itself a more modest goal that allows for a causal
interpretation of results and for more detailed policy recommendations: the analysis of the
impact of very specific norms on immediate outcomes.
5. FROM LAW AND FINANCE TO THE LAW AND

ECONOMICS OF COMPARATIVE COMPANY LAW:
IMPLICATIONS FOR POLICY
L&E can be understood as the study of the relationship between law and social welfare either
from a positive or from a normative perspective.60 This literature identifies the optimal legal
rules for specific problems – ranging from taxation, to contract enforcement and even to
family law – making use of economic theory models and/or state of the art empirical research.
This approach is particularly well suited to the study of company law. Nevertheless, the
L&E literature on corporate law has mainly focused on US law and the problems faced by
US companies. It has not been comparative to a large extent, probably because Europe has
lagged behind the US in this discipline.61 But, recently L&E analysis of company law has been
enriched by the introduction of serious comparative input. Interestingly, this has happened in
two different but complementary ways using two different methodologies. As we will see,
the first methodology draws from the comparative CG studies, while the second is the natural
continuation of the law and finance literature.
56
Lucien A. Bebchuk & Mark Roe, A Theory of Path Dependence in Corporate Ownership and
Governance, 52 Stan. L. Rev. 127 (1999).
57
See Jeffrey N. Gordon, Institutions as Relational Investors: A New Look at Cumulative Voting, 94
Colum. L. Rev. 124, 142–60 (1994).
58
See Bernard S. Black, Is Corporate Law Trivial?: A Political and Economic Analysis, 84 Nw. U.
L. Rev. 542 (1990).
59
Ronald J. Gilson, Controlling Shareholders and Corporate Governance: Complicating the
Comparative Taxonomy, 119 Harv. L. Rev. 1641 (2006).
60
Richard A. Posner, Utilitarianism, Economics, and Legal Theory, 8 J. Legal Stud. 103 (1979).
61
Martin Gelter & Kristoffel R. Grechenig, History of Law and Economics, in Encyclopedia of
Law and Economics (Jürgen Backhaus ed., 2014).
The book “The Anatomy of Corporate Law” is the first major work to introduce the com-
parative perspective into the L&E analysis of corporate law.62 The methodological approach of
the book is intuitive, non-formal/non-mathematical and, following the comparative tradition,
it focuses on functionality.
The book identifies the underlying economic problems of the corporation in the abstract and
examines how different legal frameworks offer alternative solutions to these problems. The
starting point is that company law across jurisdictions addresses the same three basic agency
problems: (1) the opportunism of managers vis-a-vis shareholders; (2) the opportunism of con-
trolling shareholders vis-a-vis minority shareholders; and (3) the opportunism of shareholders
as a class vis-a-vis other corporate constituencies or stakeholders, such as corporate creditors
and employees. Then, the authors consider a set of legal strategies to address these agency
problems (ex-ante, ex-post, self-regulation, etc.). The third step – and the book’s central claim
– is that company forms are fundamentally similar across countries. The book illustrates how
a number of core jurisdictions pick among the same range of legal strategies to address the
three basic agency issues. This book has been very important in changing the views of academ-
ics outside the US regarding company law matters and L&E analysis, especially in Europe. It
has been key to make L&E analysis, that was traditionally tied in the eyes of many European
scholars to US law, more interesting and accessible to non-US scholars. Nevertheless, it
also exemplifies the tension between the search for optimality of the L&E tradition and the
attention to detail and rejection of evaluation of the comparative tradition. In the new editions
of the book, the examination of different domestic laws has increasingly gained weight, and
has broadened the scope of coverage to new jurisdictions, putting more weight in a standard
comparative (and informative) analysis and less in the analysis of relative efficiency.
The second wave of recent studies that incorporate comparative knowledge to the L&E
analysis of corporate law uses a very different approach. This new approach is formal/math-
ematical and mainly empirical, using sophisticated econometric methods. The idea here is
to determine the design of the best regime using both micro-economic models and empirical
validation of the theoretical results using data and detailed knowledge of the laws across dif-
ferent jurisdictions. In this literature comparative knowledge is key to achieve rigorous causal
inference, which usually requires quasi-natural legal experiments.63
Consider three recent papers that exemplify this comparative L&E. Becht, Polo and Rossi64
studied whether the UK rule that forces an ex-ante shareholders’ vote on M&A operations
is effective in preventing empire building and prevents managers from completing value
destroying operations. To establish causality, the outcomes of UK mergers are compared to the
outcomes of similar US mergers that did not require shareholders’ approval using a regression
discontinuity analysis that supports a causal interpretation.
Armour, Black, Cheffins and Nolan studied the impact on stock market development of
the differences in ex-post enforcement of fiduciary duties in the US and the UK, finding that,
62
Reinier Kraakman, Paul Davies, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki
Kanda & Edward Rock, The Anatomy of Corporate Law: A Comparative and Functional
approach (1st ed. 2004).
63
The basic idea is to identify a quasi-random non-anticipated change in laws or exogenous and
ad hoc threshold for the application of some particular regulation. Notice that the LLSV papers do not
satisfy these stringent requirements for causal inference.
64
Marco Becht, Andrea Polo & Stefano Rossi, Does Mandatory Shareholder Voting Prevent Bad
Acquisitions?, 29 Rev. Fin. Stud. 3035 (2016).
contrary to common perceptions, these differences in private enforcement do not seem to have
a significant impact.65
Christensen, Hail and Leuz,66 in turn, studied the impact of the transposition of the Market
Abuse Regulation (the MAR directive) across all EU states. The staggered transposition of
the directive across EU states allowed the researchers to treat this change in law as a natural
legal experiment and use a difference-in-differences (DID) methodology. Surprisingly, the
higher protection offered by the new law did not improve the liquidity of the markets that had
the lower initial protection levels. In fact, the initial differences in liquidity were reinforced
after the harmonization of market abuse laws. This proves that investors only value the level
of protection offered by the law on books if it goes hand in hand with a higher quality of
enforcement.
This new research is deeply grounded in the L&E tradition but it also makes use of two
characteristics typical of the law and finance literature. First, the policy orientation, meaning
an intention to offer guidance for better regulation of companies. Second, the use of detailed
comparative knowledge. Nevertheless, comparative knowledge is no longer used as an end in
itself. Rather, it is used as a tool to establish causality. This focus on comparative knowledge
is in fact the clear distinction between this new comparative law and economics study of
company law and mainstream L&E studies, which are more theoretically abstract or more nar-
rowly focused on US law. The difference with the previous approaches is in the focus on very
specific rules and regulations rather than on broad characteristics of legal families, indexes
or general differences across regimes or maximalist approaches. This focus on specific rules
is necessary because policy recommendations must be workable and based on solid causal
empirical evidence. State of the art methodologies allow the researchers to establish these
causal relationships only in the context of specific norms and intermediate outcomes. This is
not to say that broader views are not necessary or inspirational. But, because of the method-
ological problems with cross country panel data, we know that most implications from broad
analysis cannot be empirically proved and therefore are not good guides for policy makers.
Finally, this new line of research can also be exemplified with recent papers on the topic of
minority expropriation. The starting point is the empirical evidence that concentrated owner-
ship produces expropriation irrespectively of legal origin67 and the proposition that CG solu-
tions necessary to address this problem are different from measures designed for companies
with dispersed ownership.68 Form this starting point different authors go on to determine the
impact of very specific rules on the extent of expropriation establishing the causal link using
comparative data across jurisdictions.
Consider two examples of the type of rules that are discussed. Bebchuck and Hamdani69
analyze the particularities of the nomination of independent directors in controlled firms. The
65
John Armour, Bernard S. Black, Brian R. Cheffins & Richard C. Nolan, Private Enforcement of
Corporate Law: An Empirical Comparison of the UK and US, 6 J. Emp. Legal Stud. 687 (2009).
66
Hans B. Christensen, Luzi Hail & Christian Leuz, Capital-Market Effects of Securities Regulation:
Prior Conditions, Implementation, and Enforcement, 29 Rev. Fin. Stud. 2885 (2016).
67
Alexander Dyck & Luigi Zingales, Private Benefits of Control: An International Comparison, 59
J. Fin. 537 (2004).
68
Lucian A. Bebchuk & Assaf Hamdani, The Elusive Quest for Global Governance Standards, 157
U. Pa. L. Rev. 1263 (2009).
69
Lucian A. Bebchuk & Assaf Hamdani, Independent Directors and Controlling Shareholders, 165
U. Pa. L. Rev. 1271 (2017).
traditional solution of having the shareholders nominate independents clearly is better suited
to non-controlled companies. But for controlled companies, the conflict of interest arises
between controlling shareholders and market investors. In this context, if the controlling
shareholder has the power to nominate the independents, little monitoring can be expected
from the independents in the board. Bebchuck and Hamdani study the different monitoring
outcomes that can be expected across different jurisdictions depending on the power of the
controller to nominate, re-elect and remove directors. As a second example, consider the
analysis of pre-emptive rights as a measure to limit minority expropriation presented by
Fried and Spamann.70 This issue, of little relevance for US law, has been and continues to be
a cornerstone in minority protection across European jurisdictions. Fried and Spamann offer
a L&E analysis of pre-emptive rules that identifies their limitations rules when there is asym-
metric information and also emphasizes how its effectiveness can change across jurisdictions
depending on the finer details such as the requirement of simple majority or the introduction
of a MOM rule to approve transactions.
6. CONCLUSIONS
In this chapter, we develop an overview of the comparative corporate law literature arguing
that comparative analysis is a natural bridge between the seemingly irreconcilable approaches
of the dogmatic analysis and the L&E analysis of company law.
We have seen how comparative corporate law was initially developed to overcome the
limitations of the scope and the methodology of traditional and dogmatic domestic analyses
of corporate law. Over time, it gained more and more weight relative to that tradition as it
embraced new questions and new methodologies. Nowadays comparative knowledge has
become a key tool for the most sophisticated L&E analysis and particularly to guide policy
decisions. And this is true whether we consider the more intuitive, less formal type of L&E
analysis or whether we consider the formal/mathematical/empirical version of L&E studies.
This is the L&E of comparative company law.
70
Jesse M. Fried & Holger Spamann, Cheap-Stock Tunneling Around Preemptive Rights (ECGI –
Law Working Paper No. 408, 2018), https://ssrn.com/abstract=3185860.
5. Corporate purpose and short-termism
Martin Petrin and Barnali Choudhury
1. INTRODUCTION
The question of the purpose of the corporation is among the most enduring debates in
Anglo-American corporate law. In earlier times, the corporate purpose was clear, but as
the corporate entity proliferated and matured – and its power and societal effects became
far-reaching – the corporate purpose morphed into a complex issue.
The corporate purpose is also closely linked to the notion of short-termism. As the corporate
purpose necessarily defines the ultimate ends of corporations and their activities, it may also
influence and define the time frame within which such activities are expected to translate into
intended results. For this reason the corporate purpose and the time horizon for corporate aims
and activities are closely interconnected.
This chapter examines the corporate purpose and its links to short-termism. In keeping
with the book’s comparative outlook, we will discuss these issues with reference to broader
“Anglo-American law” albeit with a specific focus on the United Kingdom and United States.
Essentially, we argue that a narrow corporate purpose tends to foster short-termist corporate
activities. Following on from this, we suggest that the time has come to break away from the
dominant shareholder ideology of US and UK firms and adopt a broader corporate purpose.
The chapter begins by taking a brief look at the evolution of the corporate purpose before
engaging in a comparative examination of the relevant frameworks. It then moves to examine
the issue of short-termism and its linkage with the corporate purpose debate. Finally, the
chapter looks at the way forward, suggesting a rebalanced corporate purpose and measures
addressing short-termism that can complement a reformulated purpose.
2. SOME (BRIEF) NOTES ON THE EVOLUTION OF THE

CORPORATE PURPOSE
Corporations were originally created as public or quasi-public institutions. Medieval corpo-
rate bodies, guilds, and European trading companies served mainly public functions.1 When
the large British trading companies vanished around the middle of the eighteenth century, it
was family enterprises, partnerships and unincorporated joint stock companies that emerged
as important drivers of the Industrial Revolution.2 By the end of the nineteenth century, the
importance of companies overtook that of other organizational forms and they became the
1
See Masahiko Aoki, Corporations in Evolving Diversity: Cognition, Governance and
Institutions 3–7 (2010); Jonathan Barron Baskin & Paul J. Miranti, A History of Corporate
Finance 59–63 (1997); Ted Nace, Gangs of America: The Rise of Corporate Power and the
Disabling of Democracy 19–23 (2003).
2
Nace, supra note 1, at 57.
73
dominant vehicle by which to conduct larger scale business.3 The charters of incorporated
companies continued to imply public responsibilities or associations with the public good, in
the form of infrastructure projects. British business companies remained closely connected to
the state, with the distinction between private and public companies crystalizing only later.4
The American corporation initially developed along similar lines. The purpose of early
US corporations was to exercise social functions and advance the public good,5 including as
a tool for the provision of new infrastructure.6 Even more so than in Britain, however, the
government heavily curtailed the size and power of corporations in the US. These restrictions
were achieved through charters and supported by the prevailing view of corporations as
quasi-public institutions.7 As the US Supreme Court put it in one case, although the value
of corporations “in commerce and industry was fully recognized, incorporation for business
was commonly denied … because of fear.” 8 Specifically, this fear concerned the possibility
that corporate entities “might bring evils” to society, including “encroachment upon the
liberties and opportunities of the individual,” “subjection of labor to capital,” “monopoly,”
and “absorption of capital.”9 The United States’ answer to these fears was to decentralize and
delegate the chartering function almost exclusively to the various state legislatures.10 States
initially only granted small numbers of charters and tended to limit them to corporations that
focused on public services such as developing roads, bridges, canals, wharves, etc.11
In the nineteenth century, the limitations on conducting business through the corporate
form began to change in both Britain and the US. The chartering system started to decline and
ultimately disappeared, with general incorporation or automatic chartering taking its place.12
As a consequence, the emphasis on public functions of corporations faded and, in any event,
was no longer enforceable.13 Supported by an emerging investor friendly legal framework, the
corporate form was increasingly used to conduct business for private gain.14 In continuance of
this trajectory, twentieth-century corporate governance in the UK and the US has been largely
orientated towards shareholders, with wider societal concerns falling mostly by the wayside.15
The shift from closely held or family owned businesses towards larger corporations with
institutional investors as controlling shareholders in the second half of the twentieth century
3
See Lorraine Talbot, Progressive Corporate Law for the 21st Century 32–35 (2013).
4
Baskin and Miranti, supra note 1, at 132–34.
5
See, e.g., Citizens United v. FEC, 130 S. Ct. 876, 949–50 (2010).
6
7
See Talbot, supra note 3, at 71–75.
8
Louis K. Liggett Co. v. Lee, 288 U.S. 517, 548 (1933).
9
Id.
10
11
See, e.g., Ian Spier, Corporations, the Original Understanding, and the Problem of Power, 10
Geo. J.L. & Pub. Pol’y 115, 126 (2012); Currie’s Adm’r v. Mutual Assurance Soc’y, 14 Va. 315, 347–48
(1809).
12
See Ron Harris, The Private Origins of the Private Company: Britain 1862–1907, 33 Oxford J.
Legal Stud. 339 (2013).
13
Lyman Johnson, Law and Legal Theory in the History of Corporate Responsibility: Corporate
Personhood, 35 Seattle U. L. Rev. 1135, 1146 (2012).
14
Id. at 1144.
15
Corporate purpose and short-termism 75
further contributed to the transformed focal point for corporations.16 The enhanced focus on
shareholders and their financial interests eventually became known as the concept of “share-
holder value.”17
To be sure, the twentieth-century shift away from a public to a private (investor-oriented)
function also faced various obstacles and opposition. Both the UK and the US experienced
phases during which the general tendency toward shareholder-centrism was to a certain
extent interrupted or weakened, although not reversed, by countervailing political and popular
movements.18 Additionally, academics and other commentators began questioning whether
corporations can and should advance the interests of groups beyond their own shareholders.19
Ultimately, what carried the day was the view of corporations as private creatures whose
only ‘public’ role consists of offering enhanced economic efficiency.20 Shareholder value
thus prevailed as the overarching corporate purpose and underpinning principle of corporate
governance. Whether, or how long, this status quo will prevail is not certain. Indeed, as history
has shown, the corporate purpose is not set in stone.
Perhaps we have already witnessed “peak shareholder value” as more recent developments
hint at the potential for future changes. In hindsight, it seems clear that an important event
in this regard was the 2008–09 global financial crisis, although it took some time for it to
start influencing the corporate purpose debate. The crisis revealed fundamental systemic
issues that may flow from an excessive focus on shareholder wealth, as well as problems of
short-termism. The financial crisis negatively affected societies around the globe, directly –
such as through the loss of employment and pensions – or indirectly, including through the
impact of taxpayer funded governmental “bail outs” of financial institutions. After decades
of private gains, the public was forced to absorb the downside of corporate activities. While
stock markets and business eventually recovered, the structural changes and effects caused
by the financial crisis proved to be profound and continue to negatively affect at least certain
employees and industries. Together with the impact from globalized trading, those who lost
their employment, homes, or experienced a substantial decline in their economic welfare,
became increasingly discontent.
Indeed, a growing segment of the public today perceives the corporate world as unfair.21
This wave of discontent is so strong that it is even said to have contributed to Brexit and the
election of Donald Trump.22 We will describe further below how the events since the turn of
16
Brian R. Cheffins, Corporate Ownership and Control: British Business Transformed
338–44 (2008).
17
Id.
18
Talbot, supra note 3, at 41–70, 87–90; Nace, supra note 1, at 137–38.
19
See Talbot, supra note 3, at 102–13; Peer C. Zumbansen, The Evolution of the Corporation:
Organization, Finance, Knowledge and Corporate Social Responsibility 17, CLPE Research Paper No.
6/2009, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1346971.
20
Pioneering in this regard was Ronald Coase, The Nature of the Firm, 4 Economica 386 (1937).
21
See, e.g., United Nations, The Global Social Crisis: Report on the World Social
Situation (2011); Inci Ötker-Robe and Anca Maria Podpiera, The Social Impact of Financial Crises:
Evidence from the Global Financial Crisis, World Bank Policy Research Paper 6703 (2013).
22
See, e.g., Pankaj Ghemawat, Globalization in the Age of Trump, 95 Harv. Bus. Rev. 112 (2017);
Jacqueline O’Reilly et al., Brexit: Understanding the Socio-Economic Origins and Consequences, 14
Socio-Economic Review 807–54 (2016); Philip Augar, A call for corporate boards to overturn the status
quo, Financial Times (Jan. 3, 2018), www.ft.com/content/9e573ff6-efb4-11e7-bb7d-c3edfe974e9f;
Richard Partington, Brexit will hit north of England the hardest, says thinktank, The Guardian (Nov. 9,
the millennium have revitalized academic thinking and sparked initiatives by a number of
policy-makers and business representatives that focus on alternatives to the shareholder value
model.
3. THE CORPORATE PURPOSE – A COMPARATIVE LOOK
The argument about the purpose of corporations has never been conclusively settled and contin-
ues today. Nevertheless, as mentioned above, the now entrenched position in Anglo-American
law is the notion that corporations serve one main purpose: to maximize, or at least enhance
in the long term, the monetary value of the enterprise for the benefit of its shareholders. This
shareholder wealth maximization approach can be contrasted with alternative models, most
notably stakeholder theory. An understanding of both approaches is helpful for a deeper under-
standing and contextualization of the corporate purpose as currently implemented by law. The
following sections will therefore first outline the main theoretical approaches, followed by an
examination of the law “on the books” in the UK and the US.23
3.1 Theoretical Approaches
Two broad approaches have emerged by which to theorize and broadly classify the corpo-
rate purpose. The first one is shareholder wealth maximization, which sees the furtherance
of shareholders’ financial interests, namely as expressed through the value of their shares
in a firm, as the sole corporate purpose. The second one is what we will call the “pluralist
approach.” As used herein, the pluralist approach is an umbrella term for a number of different
theoretical approaches that include, as the main unifying characteristic, an extension of the
scope of the corporate purpose beyond advancing shareholder interests alone.
The idea of shareholder wealth maximization derives in part from the nexus of contracts
theory. In US academic circles, and among the influential Delaware judiciary, it is this model
that has become the dominant approach by which to conceptualize corporations. The nexus
of contracts theory describes the corporation as a bundle of formal and informal “contrac-
tual” relationships between various constituencies, which act together to produce goods and
services and thereby form a “firm.”24 The nexus of contracts theory emphasizes the private
nature of corporations and, consequently, also the private nature of regulations – corporate
law – that govern these entities. It also regards corporate law as a set of non-mandatory rules
that facilitate “contracting” between different parties by providing a set of cost-saving default
provisions, which the parties are still able to change as needed.
The importance of the nexus of contract theory’s dominance for the present chapter lies
mainly in its stance on the corporation’s purpose and responsibilities. First, the nexus of con-
tracts theory is traditionally associated with shareholder wealth maximization. The dominance
2017), www.theguardian.com/business/2017/nov/09/brexit-will-hit-northern-england-economy-hardest
-ippr-north-thinktan.
23
For a fuller account of the corporate purpose debate, see also Barnali Choudhury & Martin
Petrin, Corporate Duties to the Public chapter 37–60 (2019) from which this section will draw.
24
For a concise outline of the theory, see Frank H. Easterbrook & Daniel R. Fischel, The
Economic Structure of Corporate Law 12 (1991).
of the nexus theory thus also translates into the dominance of its conception of the corporate
purpose. Second, and relatedly, proponents of the theory argue that corporations are incapable
of bearing societal or moral duties. Contractarians assert that this inability to bear such duties
is a result of the corporation’s nature as a “contractual nexus,” making it a purely fictional
legal device without actual human consciousness that would enable it to bear such duties.25
As a result, and coupled with many of its proponents’ view that shareholders are the firm’s
only residual claimants, the nexus theory normally entails that the corporate purpose is solely
geared towards shareholders’ financial interests.26 Conversely, considerations of extraneous
interests of non-shareholder parties are either disregarded or subordinated as matters that
should be regulated through non-corporate laws.
Shareholder wealth maximization also influences views on managerial duties. Directors and
officers, under the contractarian school of thought, are regarded as contractual agents of share-
holders that have a fiduciary obligation to maximize the latter’s wealth.27 Some commentators
therefore argue that shareholders, as residual risk bearers, would have demanded primacy in
corporate decision-making and that profit maximization as the corporation’s goal is the “bar-
gained for right” under which shareholders have implicitly contracted with the corporation.28
Many contractarians also view profit maximization as integral to reducing agency costs. Profit
maximization as a singular goal, it is argued, limits managers’ discretion to promote their
self-interests and provides clear aims for them to pursue, eliminating the distraction of having
to manage conflicting interests.29
Pluralist theories differ sharply from the shareholder wealth maximization principle in that
they widen the corporate purpose. Here, the strict focus on shareholder interests is relaxed
or even abandoned. Pluralist theories include stakeholder oriented models, corporate social
responsibility (CSR) thinking and similar theories providing that companies have responsibili-
ties to a variety of constituents, not only shareholders. These constituents – such as employees,
communities, governments, and other parties – are regarded as additional stakeholders whose
resources and various financial or non-financial “investments” in the corporation deserve
protection and consideration to the same extent as shareholder interests.
In short, despite the lack of a single, unified underlying theory, pluralist models generally
arrive at three conclusions. First, that there is a need for corporations to consider the interests
of a broader group of non-shareholder stakeholders; second, that wealth maximization should
not be an overriding concern guiding corporate decision-making;30 and third, that corporate
decision-making should balance the interests of all stakeholders, including but not limited to
25
Daniel R. Fischel, The Corporate Governance Movement, 35 Vand. L. Rev. 1259, 1273 (1982).
26
For instance, while the ‘team production’ model is contractarian in nature, it still implies that
boards should take into account interests other than only those of shareholders. See Margaret M. Blair &
Lynn A. Stout, A Team Production Theory of Corporate Law, 85 Va. L. Rev. 247 (1999).
27
Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97
Nw. U. L. Rev. 547, 548 (2003).
28
Easterbrook and Fischel, supra note 24, at 36–39, 92–93; Bainbridge, supra note 27, at 577–87.
29
Easterbrook and Fischel, supra note 24; Michael C. Jensen, Value Maximization, Stakeholder
Theory, and the Corporate Objective Function, 14(3) J. Applied Corp. Fin. 8 (2001); Mark J. Roe, The
Shareholder Wealth Maximization Norm and Industrial Organization, 149 U. Pa. L. Rev. 2063, 2065
(2001).
30
John Kaler, Differentiating Stakeholder Theories, 46 J. Bus. Ethics 71 (2003).
shareholders.31 With respect to the latter point, crucially, this entails that even in the case of
a conflict between shareholder and non-shareholder interests, the former should not automati-
cally prevail. In contrast to shareholder wealth maximization, pluralist theories would suggest
that the board needs to balance the competing interests, and if appropriate decide to favor
non-shareholder interests over (shorter or longer term) shareholder interests. Still, pluralist
theories do not necessarily provide a clear answer or guidelines on how to resolve shareholder
and stakeholder conflicts of interest.
Building upon pluralist ideas, recent years have seen various efforts to provide fresh
impulses and advance the corporate purpose debate. In the wake of corporate scandals around
the turn of the millennium and, later, influenced by the global financial crisis and renewed
environmental concerns, various academics have linked the shareholder wealth focus to
short-termism (on which more below) and negative effects on the economy and society.
For example, some scholars have developed corporate models that rebalance the powers of
corporate stakeholders in favor of labor or environmental sustainability.32 Under these models,
the corporate purpose is redefined to emphasize the interests of a particular stakeholder, such
as labor or the environment, while shareholders are disempowered. Other scholars have sug-
gested that the corporate purpose be redesigned purposefully to restrain ideas of shareholder
wealth maximization. For instance, corporations can be viewed as institutions in their own
right, with interests independent of any stakeholders including shareholders, enabling them
to be run with a view to building sustainable, long-term value enhancement.33 They can be
analogized to a “shared resource” or “commons,” whose sustainability is dependent on the
participation of multiple constituencies in its governance.34 Yet another recent proposal con-
sists of shifting to a model based on trust and commitment or establishing a specific corporate
purpose. In this model “trust firms” are established in which only long-term “committed”
shareholders can vote and/or the corporation is required to specify its corporate purpose, which
must extend beyond profit.35
3.2 The UK’s ‘Enlightened Shareholder Value’
Although alternative views to shareholder wealth maximization are gaining traction, this does
not mean that they have already made their way into the law ‘on the books.’ While the UK
has not experienced the same level of ideology-driven corporate law debates as in the US, the
corporate purpose remains the subject of ongoing discussion. More recently, these have been
influenced by the introduction of a new statutory provision.
Prior to 2006, the longstanding position in the UK – as expressed in case law, a previous
version of the UK Corporate Governance Code, and corporate governance reports – was clear
31
Blair & Stout, supra note 26, at 281.
32
See, e.g., Talbot, supra note 3; Beate Sjåfjell, Regulating for Corporate Sustainability: Why the
Public-Private Divide Misses the Point, in Understanding the Company: Corporate Governance
and Theory 145 (Barnali Choudhury & Martin Petrin, eds., 2017).
33
Andrew R. Keay, Board Accountability and the Entity Maximization and Sustainability Approach,
in Choudhury & Petrin, supra note 32, at 271.
34
Simon Deakin, The Corporation as Commons: Rethinking Property Rights, Governance and
Sustainability in the Business Enterprise, 37 Queen’s L.J. 339, 350–53 (2012).
35
Colin Mayer, Firm Commitment: Why The Corporation Is Failing Us And How To Restore
Trust In It (2013); Colin Mayer, Prosperity: Better Business Makes the Greater Good (2019).
adherence to the principle that corporations should be run for the sole benefit of shareholders.36
As part of the company law codification and reforms introduced in the Companies Act 2006,
however, corporate legislation adopted the so-called enlightened shareholder value principle.37
Although there is no statutory provision that directly addresses the corporate purpose, and thus
explicitly implements this approach, there is now a prominent provision on the directors’ duty
to “promote the success of the company” to this effect.
Section 172 of the Companies Act provides that “[a] director of a company must act in the
way he considers, in good faith, would be most likely to promote the success of the company
for the benefit of its members as a whole.”38 This section is, by itself, an express codification
of pre-existing common law on directors’ duties.39 However, the section also specifies, in
what may have been implied in previous case law as well,40 that in promoting the company’s
success, directors must have regard to a number of factors. These include, among others, the
likely consequences of any decision in the long term; the interests of the company’s employ-
ees; the need to foster the company’s business relationships with suppliers, customers and
others; the impact of the company’s operations on the community and the environment; the
desirability of the company maintaining a reputation for high standards of conduct; and the
need to act fairly as between members of the company.41
Section 172 makes it clear that there is a duty to “consider” non-shareholder interests even
though directors are obliged to work towards the benefit of the members as a whole; that is,
the shareholders as an entirety.42 As long as they, in good faith, contemplate other interests,
they may still decide that disregarding them is most advantageous for shareholders.43 Although
the wording of section 172 appears to suggest that there may be room for interpretation, the
ultimate aim of the provision remains shareholder value generation.44 This understanding
of the “benefit of members as a whole” is in line with case law and preparatory legislative
work, the latter of which did not intend to deviate from the shareholder wealth maximization
principle, as some have suggested.45 Rather, the aim of section 172 was to encourage boards
to take into account a broad range of factors and engage in longer-term thinking in corporate
decision-making, but not to abandon shareholder wealth maximization.46 As the term suggests,
“enlightened shareholder value” is still a shareholder value principle, albeit one that incor-
36
See Talbot, supra note 3, at chapters 1–2.
37
See Andrew Keay & Hao Zhang, An Analysis of Enlightened Shareholder Value in Light of Ex
Post Opportunism and Incomplete Law, 8(4) European Company and Financial Law Review 445
(2011). Similar legislation has recently also been adopted in Canada and India. On the former, see section
122(1.1) of the Canada Business Corporations Act. On the latter, see Afra Afsharipour, Redefining
Corporate Purpose: An International Perspective, 40 Seattle U. L. Rev. (2017).
38
Companies Act 2006, sec. 172(1) (UK).
39
See, e.g., Lord Denning in Scottish Co-operative Wholesale Society Ltd v. Meyer [1959] AC 324.
40
See, e.g., Re West Coast Capital (Lios) Ltd, [2008] CSOH 72; Cobden Investments Ltd v. RWM
Langport Ltd, [2008] EWHC 2810 (Ch); Arbuthnott v. Bonnyman [2015] EWCA Civ 536.
41
Companies Act 2006, sec. 172(1)(a–f) (UK).
42
Companies Act 2006, sec. 112 (UK).
43
See People & Planet v HM Treasury [2009] EWHC 3020 (Admin) (QBD).
44
Lorraine Talbot, Trying to Change the World with Company Law? Some Problems, 36 Legal
Stud. 513, 515, 529 (2016).
45
Cynthia A. Williams & John M. Conley, An Emerging Third Way? The Erosion of the Anglo
American Shareholder Value Construct, 38 Cornell Int’l L.J. 493, 500 (2005).
46
porates stakeholder interests only insofar as they are compatible with overriding shareholder
interests.
While the enlightened shareholder value principle continues to dominate corporate law
thinking in the UK, the recently enacted Corporate Governance code may signify movement
towards a less shareholder-centric view. In 2018, the Corporate Governance code was updated
to recommend, as its first principle, that the board promote the company’s success by gener-
ating value for shareholders and contributing to wider society.47 The wording of this principle
suggests that contributions to society are equated to generating shareholder value rather than
suggesting the priority of shareholder value over other interests as section 172 does. It may
also be telling that the 2018 Code introduces the importance of corporate contributions to
society when previous incantations of the Code were silent on the matter.48 Nevertheless, for
the most part, the corporate purpose under UK law does not entail stakeholder responsibilities
other than the soft obligation for directors to “consider” their interests, leaving shareholder
wealth maximization as the legislatively prescribed principle. Consequently, we can see that
UK law has gone farther in entrenching the shareholder wealth maximization principle than
US law, discussed next, that does not contain an analogous provision to section 172 and offers
more flexibility to deviate from it.
3.3 US Ambivalence about the Corporate Purpose
Unlike the UK, which has sought to bring clarity (at least theoretically) to the notion of the
corporate purpose, in the US, neither legislatures nor the judiciary have followed suit. US
statutes do not state the purpose of the corporation, which also means that they do not suggest
that corporations have a duty to profit-maximize or advance stakeholder interests.49 There are
also some corporate law sources that expressly adopt an intermediate position. For example,
the American Law Institute’s Principles of Corporate Governance enable corporations to take
into account ethical considerations for the responsible conduct of business, even if they are
contrary to profit driven interests.50 Similarly, corporations that elect to become benefit cor-
porations are stipulated as having the corporate purpose of creating public benefit, which can
involve employee interests, community interests, and environmental interests, among others.51
However, the fact that benefit corporations are clearly mandated to pursue a public purpose
does not automatically clarify the purpose of the majority of “regular” (non-benefit) corpora-
tions that operate alongside benefit corporations, where the law remains ambivalent and has
led to diverging views on the corporate purpose.
While general corporate statutes do not directly define the corporate purpose, narrower
state constituency statutes, which are primarily devices to block hostile corporate takeovers,
47
UK Corporate Governance Code (2018), Principle 1.A.
48
See, e.g., UK Corporate Governance Code (2016).
49
Einer R. Elhauge, Sacrificing Corporate Profits in the Public Interest, 80 N.Y.U. L. Rev. 733,
738 (2005). On the ambiguity in legal principles governing the corporate purpose, see for example
Christopher M. Bruner, The Enduring Ambivalence of Corporate Law, 59 Ala. L. Rev. 1385 (2008).
50
American Law Institute, Principles of Corporate Governance: Analysis and
Recommendations (1992) §§ 2.01(a)–(b) (1992) (note that at the time of writing of this chapter, the
drafting of a new edition of the Principles was underway).
51
For an overview of all Benefit Corporation legislation in the US, see State by State Status of
Legislation (2019).
may permit corporate managers to take into account a myriad of interests.52 Constituency
statutes enable corporate managers to consider the effects of corporate actions upon a wide
variety of stakeholders including employees, suppliers, customers, creditors and communities.
In practice, these statutes are largely ineffective today, although they may serve as evidence
of legislative interest in deviating from a pure shareholder value driven purpose in at least
some areas of managerial decision-making. Overall, the creation of benefit corporations and
constituency statutes do not resolve the ambiguity surrounding the corporate purpose. Rather,
they may exacerbate it by permitting, but not mandating, acts that diverge from shareholder
wealth maximization. Indeed, the existence of benefit corporations may suggest that regular
corporations should, in contrast, be shareholder-oriented.
Case law on the corporate purpose in the US also reveals a lack of clarity. In 1919, the
Michigan Supreme Court’s opinion in Dodge v. Ford Motor Co.53 famously held that a corpo-
ration is not a charitable institution but, rather, has a mandate to generate profits for sharehold-
ers.54 However, subsequent Delaware case law has only sparsely commented on the corporate
purpose and, at times, advocated in favor of deviations from profit maximization in certain
circumstances, particularly in cases of potential hostile takeovers.55 A notable development is
a 2010 case involving e-commerce giant eBay. In deciding the case, the Delaware Chancery
Court noted that directors are obliged “to promote the value of the corporation for the benefit
of its stockholders,”56 a statement which later opinions repeatedly referred to as well.57
Arguably, however, eBay’s specific facts, the presence of a controlling stockholder, as well
as its language (including the reference that the “[t]he corporate form … is not an appropriate
vehicle for purely philanthropic ends”)58 still leave room for directors to temper shareholder
wealth maximization.
To be sure, even if an unambiguous corporate purpose could be derived from the law, it is
a separate question as to whether corporations’ deviations from an established purpose can
be enforced. Differences between standards of conduct and standards of review mean that
even if directors’ actions are contrary to their duties – specifically, contrary to the permissible
corporate purpose – the prevalent exculpatory provisions in US corporate charters and the
business judgment rule may protect boards from liability (and judicial review of their deci-
52
See Kathleen Hale, Corporate Law and Stakeholders: Moving Beyond Stakeholder Statutes, 45
Ariz. L. Rev. 823, 833 n.78 (2009).
53
Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919).
54
Some commentators have argued that Dodge is ambiguous, given that it was arguably a case
about actions of a controlling stockholder. On this, see for example Lynn A. Stout, Why We Should Stop
Teaching Dodge v. Ford, 3 Va. L. Bus. Rev. 163 (2008).
55
Paramount Comm., Inc. v. Time, Inc., 571 A.2d 1140, 1150 (Del. 1989); Revlon v. MacAndrews,
506 A.2d 173, 182 (Del. 1986); Unocal v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985).
56
eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010).
57
E.g., In re Plx Technology Inc. Stockholders Litig., 2018 Del. Ch. LEXIS 448, at *28 (Del Ch. Feb.
16, 2018). Former Delaware Supreme Court Chief Justice Strine has strongly defended the proposition
that Delaware law demands shareholder wealth maximization. Leo E. Strine, Jr., The Dangers Of Denial:
The Need For A Clear-Eyed Understanding of the Power and Accountability Structure Established by the
Delaware General Corporation Law, 50 Wake Forest L. Rev. 761, 763 (2015). Interestingly, however,
he elsewhere also acknowledged that the theoretical predicate for strong-form shareholder-centrism is no
longer in place. Leo E. Strine, Jr., Conservative Collision Course?: The Tension between Conservative
Corporate Law Theory and Citizens United, 100 Cornell L. Rev. 335 (2015).
58
eBay Domestic Holdings, 16 A.3d at 34.
sions in the first place).59 Thus, what the law allows and what corporations can do (without
judicial intervention) differs, allowing for corporate decisions that contravene shareholder
wealth maximization. This does not mean that business leaders typically use this leeway to
pursue a broader corporate purpose – most of them arguably do not – but it shows that there are
legal protections in place for those that may choose to steer their corporations towards a more
pluralist view of corporations.
Indeed, a notable development in the above vein is the influential Business Roundtable’s
2019 statement on the purpose of the corporation, which as signed by 181 CEOs of major cor-
porations such as Amazon, Ford, American Express, Johnson & Johnson, Apple, and General
Motors, among others.60 Since 1978, the Business Roundtable has advocated that the purpose
of the corporation is principally to serve the interests of their shareholders. However, for the
first time, in its latest statement, it does not take this position, advocating instead in favor of
a much broader corporate purpose. As the statement notes, the corporation should serve the
interest of all of its stakeholders, specifically by delivering value to customers, investing in its
employees, dealing fairly and ethically with its suppliers, supporting the communities in which
they work, and generating long-term value for shareholders.61
The statement noticeably lacks an enforcement mechanism and it may be simply a means
of holding off necessary tax and regulatory reform, as the former US Treasury Secretary has
observed.62 Or, it may be an effort at virtue signaling with corporations focused on “doing
good” and not on correcting the practices they are involved in that “do harm.”63 In any case,
it seems to buy into a growing trend in which more than half of Americans believe that the
corporation’s purpose should include “making the world better”64 and where candidates for
political office are campaigning in favor of a pluralist corporate purpose.65
4. SHORT-TERMISM AND CORPORATE PURPOSE
The previous sections have shown that although there is again growing support for alterna-
tive pluralist approaches, the prevalent corporate purpose, in theory and practice, remains
shareholder wealth maximization. Both approaches to the corporate purpose are linked to the
second broader issue to be explored in this chapter: short-termism. While shareholder wealth
59
See, e.g., Del. Code Ann. Tit. 8, § 102(b)(7); Brehm v. Eisner, 746 A.2d 244, 264 n.66 (Del.
2000).
60
Business Roundtable, Statement on the Purpose of a Corporation (Aug. 2019), https://
opportunity.businessroundtable.org/ourcommitment. It is worth noting, however, that the press release
that accompanied the statement framed the statement in far more “stakeholderist” terms than the wording
of the statement itself would suggest it contained.
61
Id.
62
Richard Henderson & Patrick Temple-West, Group of US corporate leaders ditches
shareholder-first mantra, Financial Times (Aug. 19, 2019), www.ft.com/content/e21a9fac-c1f5-11e9
-a8e9-296ca66511c9.
63
Alan Murray, America’s CEOs Seek a New Purpose for the Corporation, Fortune (Aug. 19,
2019), https://fortune.com/longform/business-roundtable-ceos-corporations-purpose.
64
Id.
65
Matthew Yglesias, Elizabeth Warren has a plan to save capitalism, Vox (Aug. 15, 2018), www
.vox.com/2018/8/15/17683022/elizabeth-warren-accountable-capitalism-corporations.
maximization has been accused of contributing to short-termism, some pluralist approaches

haven been justified by reference to their potential for containing short-termism.66
In the following, we will first outline the problem of short-termism, focusing in particular
on its broader links to the corporate purpose.67 We will then look at arguments questioning
whether short-termism is actually problematic. Next, we will examine specific manifestations
of short-termism, which explains how short-term thinking is “transmitted” into the corporate
sphere.
4.1 Defining Short-Termism
Short-termism is a broad concept. It can refer to the holding period of shares by investors, cor-
porate objectives and behavior, the time horizon for projects and financial returns, or a combi-
nation thereof. Lynne Dallas provides an all-encompassing definition of the term, noting that
short-termism is “the excessive focus of corporate managers, asset managers, investors, and
analysts on short-term results, whether quarterly earnings or short-term portfolio returns, and
a repudiation of concern for long-term value creation and the fundamental value of firms.”68
Short-termism is not a new topic. Among others, it has already been discussed by classical
economists including Pigou and Keynes.69 However, in its modern form, it emerged as a mate-
rial concern in the 1970s in response to concerns over hostile takeovers of US companies.70
After the takeover boom period in the 1980s, short-termism was mostly seen as a problem of
international competitiveness, with US businesses investing less and with a shorter time frame
than some of their main overseas competitors.71 During the 1990s and 2000s, in both the US
and UK, short-termism became increasingly perceived as a problem relating to agency costs
in the equity ownership chain, fueled by the increasing prevalence of institutional investors
and asset managers.72 The well-known corporate accounting scandals around the turn of the
millennium have also been connected to short-termism. It was however clearly the global
financial crisis of 2007–09 that led to a marked increase in attention to short-termism in the
financial markets.73
66
Although regulators have recognized the problems created by short-termism, to date policy and
regulatory responses have been fairly muted. See Kim M. Willey, Stock Market Short-Termism:
Law, Regulation, and Reform 71–123 (2019).
67
The following discussion is partially based on Marc Moore & Martin Petrin, Corporate
Governance: Law, Regulation and Theory 119–35 (2017) and Marc T. Moore & Edward
Walker-Arnott, A Fresh Look at Stock Market Short-Termism, 41 J.L. Soc’y 416 (2014).
68
Lynne L. Dallas, Short-Termism, the Financial Crisis, and Corporate Governance, 37 J. Corp. L.
265, 268 (2012).
69
See Andrew G. Haldane & Richard Davies, Exec. Dir., Bank of England, Speech: The Short
Long 2 (May 2011), www.bankofengland.co.uk/-/media/boe/files/speech/2011/the-short-long-speech-by
-andrew-haldane.
70
Willey, supra note 66, at 36.
71
See id. at 38.
72
John Kay, The Kay Review of UK Equity Markets and Long-Term Decision Making: Final
Report 30–31 (2012); id. at 39–40.
73
Willey, supra note 66, at 1–2, 41–45.
4.2 Is Short-Termism Problematic?
Despite the considerable focus on short-termism in the press and academia, there are diverging
views on whether short-termism represents a real problem. Some commentators argue that
short-termism does not exist at all while others acknowledge its existence but are skeptical as
to whether there is clearly provable social harm resulting from short-termism.74
Due to the influence of the efficient capital market hypothesis (ECMH) within modern
financial and legal scholarship, short-termism has been dismissed by some observers as an
effective non-issue, insofar as stock markets are believed to correctly reflect companies’
long-term cash-generating potential.75 The ECMH asserts that capital markets, and in particu-
lar the prices of listed shares, are reflective of all materially relevant information,76 including
what is publicly known about facts that will have a bearing on a company’s future perfor-
mance.77 The price of a company’s share should thus be equally reflective of information that
influences corporate profitability in both the immediate and the longer term.
The problem with the above reasoning is that the ECMH, despite its prominence, is still
just that: a hypothesis, i.e. a proposed explanation. Indeed, research insights from behavioral
economics contradict the view of the perfectly rational investor and suggest the existence of
informational limitations and irrational investor biases.78 Such biases include various forms
of short-termist disposition, including investors’ tendency to overvalue short-term gains
and undervalue (discount excessively) longer-term rewards or profits.79 In this context, it is
worth pointing out the distinction between the markets’ “informational” and “fundamental”
efficiency. Even if investors have taken into account all publicly available information con-
cerning securities, they could still be applying an incorrect discount rate in pricing future
returns, which would cast doubt upon fundamental market efficiency. A recent in-depth study
of short-termism acknowledged the difficulties in proving the existence of short-termism but,
based on a review of a number of available financial analysis studies, concluded that quantita-
tive evidence suggests that investors indeed excessively discount future returns.80
Notwithstanding the above factors, a number of commentators take the position that
short-termism does either not exist or, if it does, it is not problematic. For example, Lawrence
Summers has suggested that certain forms of short-termism, in the form of investor over-
sight and pressures, are a healthy and necessary tool for firms to maintain “market disci-
74
See, e.g., P. Marsh, Short-Termism on Trial (1993); Eugene F. Fama, Efficient Capital
Markets: A Review of Theory and Empirical Work, 25 J. Fin. 383 (1970); Michael C. Jensen, Some
Anomalous Evidence Regarding Market Efficiency, 6 J. Fin. Econ. 95 (1978); Mark J. Roe, Stock Market
Short-Termism’s Impact (ECGI Working Paper No. 426/2018), https://papers.ssrn.com/sol3/papers.cfm
?abstract_id=3171090.
75
See generally Marsh, supra note 74; Fama, supra note 74; Ronald J. Gilson and Reinier H.
Kraakman, The Mechanisms of Market Efficiency, 70 Va. L. Rev. 549 (1984); Jensen, supra note 74.
76
See Fama, supra note 74, at 413; Jensen, supra note 74, at 96.
77
See Lynn Stout, The Shareholder Value Myth 63–64 (2012).
78
See, e.g., Blainaid Clarke, Where Was The Market For Corporate Control When We Needed
It?, in Corporate Governance and the Global Financial Crisis: International Perspectives
75–94 (William Sun et al. eds., 2012); Andrei Shleifer, Inefficient Markets: An Introduction to
Behavioral Finance 5–10,16–23 (2000); Gilson & Kraakman, supra note 75.
79
See Kay, supra note 72, at para. 1.1.
80
Willey, supra note 66, at 131.
pline.”81 Corporate finance professor Steve Kaplan even argues that there is no evidence
that short-termism exists in the first place, or at least not in the specific form of chronic
underinvestment in long-term projects in US companies.82 Mark Roe, another scholar whose
work has focused on short-termism, suggests that while short-termism may exist, its effects
are prone to cancel each other out. Markets over-shoot and under-shoot, Roe argues, which
means that even if there would be a net short-termist stance, other corrective devices would
counterbalance it.83
However, certain investor biases, including short-termism, tend to be systematic in nature;
that is, these biases are both common across a significant proportion of market participants
and influence individual investors’ preferences to a larger extent than other biases.84 In such
instances, the relevant bias is not cancelled out, and thus has a disproportionate impact on
share pricing with the effect that market valuations are driven substantially out of line with
fundamental values.85 Moreover, despite some market participants being aware of substantial
and systematic underpricing of long-term corporate profit opportunities, they might not be
able to take advantage of this potential arbitrage opportunity.86 This could be because they
“join the herd” and consciously purchase over-valued shares of successful short-term perform-
ers, with a view to exploiting any capital gains resulting from their continuing price appreci-
ation. As long as they are able to exit the investment, and “lock in” a short-term gain before
the over-pricing is detected by the market, this can result in returns that surpass a longer-term
contrarian strategy.87 Thus, even perfectly rational investors cannot be relied upon to act as
a structural ‘corrective’ mechanism for short-termist mispricing.
The net result is that stock markets will tend to exhibit a substantial degree of informa-
tional and, in turn, price inefficiency, including the systematic undervaluation of long-term
profit opportunities. This could be dismissed as unimportant if stock market short-termism
would not lead to any harm, but this is not the case. Short-termism has adverse effects on
the “internal” strategic and operational decisions of public company managers (discussed
further below). It can also be regarded as an uncompensated transfer of wealth from future to
current shareholders,88 which may undermine public faith in stock markets and related losses
in market liquidity coupled with increased cost of capital for prospective investee companies.
Short-termism, further, can have drastic consequences that result in negative externalities,
81
Lawrence Summers, Corporate long-termism is no panacea — but it is a start, Financial Times
(Aug. 9, 2015), www.ft.com/content/97f3db5e-3d11-11e5-bbd1-b37bc06f590c.
82
See, e.g., Steve N. Kaplan, Are U.S. Companies Too Short‐Term Oriented? Some Thoughts, 30
J. App. Corp. Fin. 8 (2018); Lizanne Thomas, Stop Panicking About Corporate Short-Termism, Harv.
Bus. Rev. (June 28, 2019), https://hbr.org/2019/06/stop-panicking-about-corporate-short-termism.
83
See, e.g., Mark J. Roe, Corporate Short-Termism – In the Boardroom and in the Courtroom, 68
Bus. Law. 977 (2013); supra note 74.
84
See Shleifer, supra note 78, at 12.
85
See Ronald J. Gilson & Reinier H. Kraakman, The Mechanisms of Market Efficiency Twenty
Years Later: The Hindsight Bias, in After Enron: Improving Corporate Law and Modernising
Securities Regulation in Europe and the US Chapter 1, 30 (John Armour & Joseph A. McCahery
eds., 2006); id.
86
Moore & Petrin, supra note 67, at 121–23.
87
Gilson & Kraakman, supra note 75, at 23–24.
88
See Kent Greenfield, The Puzzle of Short-Termism, 46 Wake Forest L. Rev. 627, 636 (2011).
such as tax-payer funded bail-outs, job losses, health and safety issues for workers and com-
munities, and environmental harm.89
4.3 Manifestations of Short-Termism
Short-termism is manifested in the form of two distinct but interlocking general practices. The
first of these practices is investor short-termism while the second is managerial short-termism.
The second dimension of short-termism typically arises in response to the first, given the
general responsiveness of public company managers to perceived stock market signals.
Investor short-termism can therefore act as a “transmission mechanism” that injects, via man-
agers, short-term thinking into the intra-corporate sphere.90
4.3.1 Investor short-termism

The practice of investor short-termism can, itself, take one of two general and overlapping
forms, namely either speculative trading or earnings-based investment. Speculative trading
involves traders – humans or machines powered by algorithms – that seek to generate gains
by anticipating the future trajectory of share price movements based on historic and current
trading patterns and volumes.91 The typical shareholding period of speculative trading is
extremely short, commonly less than a day. However, the impact of speculative trading prac-
tices on companies’ governance and strategy is thought to be low as traders seek to profit from
both rising and falling share prices and do not have any innate interest in improved corporate
profitability. It does therefore not, in and of itself, lead to managerial short-termism.92
Earnings-based investment however does have a direct impact on internal corporate strat-
egy and governance. As its name suggests, earnings-based investment involves making stock
allocation decisions exclusively or primarily in response to actual or anticipated changes in
periodic corporate earnings, and specifically a company’s “earnings per share” or “EPS”
figure.93 While corporate valuation based on earnings represents a normal, and indeed rational,
practice, the crux lies in the question of how far ahead investors are willing to look (and wait)
for profits as well as the present value discounting factors that they use for expected future
earnings. Investor short-termism arises when the relevant time horizon for investments is not
long enough and/or when future earnings are excessively discounted.
Markets are set up to provide the necessary conditions for investors that focus on the
short-term. Companies that are listed (or have a cross-listing) on a US equity market such
as the New York Stock Exchange or NASDAQ are obliged under applicable SEC Rules to
publish quarterly financial reports including a statement of quarterly earnings and EPS.94 For
companies that are listed on the London Stock Exchange, both corporate earnings and EPS
will typically be published every six months and as part of the company’s compulsory annual
89
Dallas, supra note 68, at 268; id. at 628; Robert J. Rhee, Corporate Short-Termism and
Intertemporal Choice, 96 Wash. U. L. Rev. 495, 547–51 (2018).
90
Mark J. Roe, Corporate Short-Termism, in The Oxford Handbook of Corporate Law and
Governance 430 (Jeffrey N. Gordon & Wolf-Georg Ringe eds., 2018).
91
Dallas, supra note 68, at 298.
92
Moore & Petrin, supra note 67, at 125.
93
Tony Golding, The City: Inside the Great Expectation Machine 167 (2002).
94
See US Securities and Exchange Commission (SEC) Rules 13a-13 and 15d-13.
accounts and half-yearly financial reports, respectively.95 Most companies also go beyond
regulatory requirements and report on a quarterly basis, in accordance with established stock
market norms.
The earnings estimates arrived at by analysts will ordinarily create an ongoing market expec-
tation that a company provides a steadily increasing rate of EPS growth on a quarter-to-quarter
basis, coupled with a general secondary expectation of year-on-year increases in the compa-
ny’s annually declared rate of dividend.96 The effective market demands embodied in consen-
sus earnings estimates are “enforceable” on management by investors via the latter’s actual or
threatened exit from the company in the event of a company’s failure to conform to earnings
estimates. The virtually inevitable result of such market activity – where conducted on a large
enough scale – is the material depreciation of the company’s share price, which can potentially
undermine an incumbent CEO’s continuing mandate to hold office and incentivize him or
her to focus on or prioritize activities that will likely lead to (quarterly) results that align with
investors’ short-term expectations.97 Additionally, within the chain of investment intermediar-
ies, professional fund managers also have reasons for focusing on short-term performance in
order to satisfy demands by their clients who may withdraw assets from a fund perceived to
be underperforming.98
4.3.2 Managerial short-termism

The phenomenon of managerial short-termism represents the internal response to the external
financial performance demands of the stock market and the simple managerial mantra of
“giving the market what it wants to hear.” As outlined above, the market’s typical primary
demand of an investee company is that it generates a consistently positive rate of periodic EPS
growth, preferably coupled with a corresponding rise in its declared rate of dividend.99
From a corporate perspective, however, the stock market’s general reliance upon periodic
earnings estimates as a credible tool for ongoing managerial performance-evaluation is prob-
lematic. Whereas “the market” tends to attach a premium to the perceived virtues of stability
and predictability in corporate earnings schedules, such attributes are rarely consistent with the
sales and cost profiles of business enterprises, given that contingency, volatility and occasional
destabilization are intrinsic structural features of competitive product markets.100 In the same
vein, long-term profits may require substantial upfront investments, perhaps even coupled
with periods of low or negative earnings, which may run counter to short-term oriented inves-
tors’ expectations. To be sure, there are examples of companies and corporate leaders who can
withstand market pressures and, at least for some time, afford to “disappoint” markets. Still,
for many companies and executives this will be a difficult, and unlikely, course of action.
Accordingly, where a company is incapable of generating earnings on a sufficiently predict-
able basis for the stock market’s liking via its normal productive operations, it falls upon its
95
See UK Financial Conduct Authority (FCA) Disclosure Rules and Transparency Rules, DTR
4.1–4.2.
96
Golding, supra note 93, at 178.
97
Michael C. Jensen, Agency Costs of Overvalued Equity, 34 Fin. Mgmt. 5, 7 (2005).
98
See Kay, supra note 72, at 40–41.
99
See Joel F. Houston et al., To Guide or Not to Guide? Causes and Consequences of Stopping
Quarterly Earnings Guidance, 27 Cont. Acct. Res. 143, 144 (2010).
100
Joseph Fuller & Michael C. Jensen, Just Say No to Wall Street, 22 J. App. Corp. Fin. 59, 62
(2002).
management to seek to present to the market an effective façade of corporate income-stability.

To this end, corporate managers can engage in various practices. For instance, managers can:
engage in financial and business activities geared to “smoothing” the company’s periodic
earnings figures on a continuing basis (“earnings management”);101 manage the timing of
major business activities and/or disclosures to the market about important impending business
developments;102 and inflate their company’s EPS figure through large-scale stock buy-
backs.103 Additionally, financial engineering can be supplemented by influencing expectations
of market analysts as to the company’s forthcoming results through the practice of “earnings
guidance” by senior management.104
Where the above methods fail to achieve the desired smoothing effect with respect to
a company’s periodic numbers, management may have recourse to more extreme “engineer-
ing” measures to ensure that the company is able to meet its consensus earnings estimates.
In particular, managers may make wholesale changes to the company’s underlying business
strategies, including abandoning potentially value-enhancing initiatives on the basis that they
would likely receive a hostile response from the market or, alternatively, taking actions such
as a high-profile acquisition or corporate restructuring that is motivated primarily by the antic-
ipated positive market response thereto, notwithstanding latent managerial concerns about the
initiative’s effect on long-term enterprise value.105 However, in cases where corporate acquisi-
tions and restructurings are motivated primarily by their short-term effect on periodic revenue
or costs, there is a risk that such policies may ultimately prove to be destructive of shareholder
wealth in the longer term.106
5. THE WAY FORWARD
The corporate purpose directly has an impact on short-termism by defining the role, the obli-
gations, and the ensuing actions of corporations and their leaders. Accordingly, if the aim is to
address problems of short-termism, one approach would be to rebalance the corporate purpose,
which currently focuses almost exclusively on shareholder value. From a legal standpoint,
managers are already allowed to consider broader societal interests and avoid short-term think-
ing and decision-making. Yet they often choose not to use this freedom for various reasons,
such as market and reputational pressures or simply to promote their own financial interests.
Thus, a reformulated corporate purpose that stipulates corporate actions beyond shareholder
wealth maximization is desirable.
Despite a growing trend towards supporting new thinking on the corporate purpose, most
corporations still continue to adhere to traditional shareholder wealth maximization, without
101
Dallas, supra note 68, at 277–78.
102
Id. at 279.
103
Michel Aglietta, Shareholder Value and Corporate Governance: Some Tricky Questions, 29
Econ. Soc’y 146, 151 (2000).
104
Houston et al., supra note 99, at 44.
105
David K. Millon, Why is Corporate Management Obsessed with Quarterly Earnings and What
Should be Done About It?, 70 Geo. Wash. L. Rev. 890, 893 (2002).
106
Jensen, supra note 97, at 8–14.
much regard to non-shareholder interests.107 The prevalence of factors such as periodic report-
ing requirements, investor scrutiny, managerial incentives structures, and, in the UK, a leg-
islative duty to prioritize shareholders’ financial interests, make any changes in this regard
unlikely without specific positive duties to pursue stakeholder interests.
The various negative external effects of shareholder wealth maximization, including its
contribution to promoting short-termist thinking, suggest that the way forward ought to be
along a different path. This does not mean, however, that profit should become meaningless or
that shareholders’ financial concerns are not important. The importance of the corporation as
a creator of shareholder wealth cannot be ignored but, at the same time, a singular and uncon-
strained focus on shareholder wealth maximization is unjustified. The true corporate purpose
should therefore lie somewhere on an axis between the two competing positions.
5.1 A Rebalanced Corporate Purpose
A new, rebalanced corporate purpose could be structured as follows. First, given the effects
of legal entities, and the fact that stakeholders often do not possess realistic opportunities to
protect themselves against or negotiate around externalities, there is a need for a general base-
line minimum standard of corporate behavior in relation to the public. The type of baseline
standard we envisage would be set not only by the laws constraining business activities in
a country but also by the expectations society has of business.
In countries with an adequate regulatory system, we believe that a baseline standard for
corporate behavior would have less importance, although we can contemplate applications
of it such as voluntary pay rises, commitments to exceed regulatory environmental goals, or
obligations relating to tax planning. A baseline standard of conduct would be, however, greatly
important for corporate activities conducted in countries with insufficient laws and regulations
that otherwise fail to prevent and sanction behavior falling below that standard. In these
jurisdictions, the baseline standard would dictate corporate activities, not shareholder wealth
maximization or the country’s lack of legal rules.
In addition, we envisage that corporations will be able to ascertain the ethical customs that
need to inform their baseline standard and guide their corporate actions based on a requirement
to respond to views about corporate responsibility obligations advocated by society; that is, the
participants in the relevant markets within which it operates and that represent a consensus in
that market.108 For most corporations, this will involve drawing from views of its consumers,
future and current employees, and capital market participants.109
Beyond the baseline standard, we believe that corporate law should entail duties to
non-shareholder constituencies that go beyond simply a stipulation to “consider” in good faith
their interests. A duty to “consider,” as provided in the UK, is too weak as it ultimately leaves
it to the discretion of corporations whether to act for the benefit of stakeholders. The corporate
purpose therefore needs to be clarified to the effect that shareholder interests are not supreme
107
See Cynthia A. Williams & John M. Conley, Trends in the Social [Ir]responsibility of American
Multinational Corporations: Increased Power, Diminished Accountability, 25 Fordham Envtl. L. Rev.
46 (2013).
108
See Thomas W. Dunfee, Corporate Governance in a Market with Morality, 62 L. Cont. Probs.
129 (1999).
109
Id. at 149.
but on par with other stakeholder interests. This could be complemented with a mandatory
requirement for corporations to balance the positive and negative impacts of their actions,
affecting shareholders and stakeholders, against each other.110 Putting shareholder and stake-
holder interests on the same footing would still give boards the necessary room to consider
shareholder wealth concerns but, at the same time, also allow for board decisions that are more
beneficial for non-shareholder constituents than shareholders.111
Overall, this new mandated corporate purpose would effectively require corporations to
contribute to the notion of being responsible for their impacts on society, in line with the EU
Commission’s position.112 Moreover, it would sit alongside, not replace, external regulation
and shareholder guidance and other tools for orienting corporate activities. In this way, it can
act as another tool in the arsenal for re-orienting corporations towards social good.
5.2 Complementary Measures for a Reformulated Corporate Purpose
In addition to reformulating the corporate purpose, governments should introduce comple-

mentary measures that would support this change and a move away from short-termism.
For example, governments could require that shares (or some shares) be held for a specified
period of time; introduce dual class share regimes and/or offer long term shareholders enlarged
rights; make further changes to disclosure regimes, allow stakeholders besides shareholders to
elect directors; or better incentivize managers to promote long-term interests by continuing to
pursue executive compensation reforms.113
A discussion and evaluation of the merits of all the above proposals is beyond the scope of
this chapter. However, it is worth providing herein at least some brief thoughts on what seems
to be the most frequently discussed complementary measure proposed by commentators, the
requirement to eliminate quarterly reporting requirements.114 In the UK and EU regulated
110
A similar idea underpins the duties of board of public benefit corporations. See, e.g., Del. Code
Ann. tit. 8, § 365(a) (providing that directors shall balance the pecuniary interests of shareholders, the
best interests of those affected by the corporation’s conduct, and the specific public benefits identified
the entity’s certificate of incorporation).
111
Assuming the law would shift to a broader corporate purpose, the issue of a lack of enforcement
of violations of stakeholder-oriented duties remains. Indeed, Canadian and Singaporean law already
provide for public mechanisms to enforce directors’ duty breaches. See I.M. Ramsay & B. Saunders,
Litigation by Shareholders and Directors: An Empirical Study of the Statutory Derivative Action, 6 J.
Corp. L. Stud. 397 (2006). On the problem of enforcement, see also Mihir Naniwadekar & Umakanth
Varottil, The Stakeholder Approach Towards Directors’ Duties under Indian Company Law, in The
Indian Yearbook of Comparative Law 2016 (M.P. Singh ed., 2016), at 105–10.
112
As the EU Commission has once defined CSR. See European Commission, A Renewed European
Union Strategy 2011–14 for Corporate Social Responsibility, COM (2011) 681, at para. 3.1.
113
For an overview of possible options, see Ernst & Young, Short-termism in business: causes,
mechanisms and consequences (2014); David J. Berger, Reconsidering Stockholder Primacy in an
Era of Corporate Purpose, 74(3) Bus. Law. 659 (2019); Florian Möslein & Karsten Engsig Sorensen,
Nudging for Corporate Long-Termism and Sustainability: Regulatory Instruments from a Comparative
and Functional Perspective, 24 Colum. J. Eur. L. 391 (2017).
114
See, e.g., Ernst & Young, supra note 113; W. Randy Eaddy, A Case for Eliminating Quarterly
Periodic Reporting: Addressing the Malady of Short-Termism in U.S. Markets with Real Medicine,
74(2) Bus. Law. 387 (2019); Leo E. Strine, Jr., Securing Our Nation's Economic Future: A Sensible,
Nonpartisan Agenda to Increase Long-Term Investment and Job Creation in the United States, 1 Bus.
Law. 1081 (2015–16).
markets, quarterly financial reporting obligations have already been removed.115 In other
markets, notably the US, such reporting requirements remain, albeit they are under increasing
scrutiny.116 Nevertheless, even in the markets in which the quarterly reporting requirements
have been removed, many companies continue to report on this basis to align with established
stock market norms and investor expectations.117 Surveyed CEOs indicate that they are facing
increased market pressure for short-term results and that quarterly earnings calls dominates
the discourse, constraining their ability to orient corporate actions towards the long-term.118
Indeed, some of the pressure for the quarterly results is internal; that is, it stems from the
corporation’s own board and executive team.119
Interestingly, a recent roundtable on quarterly reporting found that many US corporations
and commentators were in favor of altering quarterly reporting requirements, not because they
necessarily believed short-termism issues would be addressed, but because of the excessive
burden such reporting requirements imposed on them.120 Therefore, corporate support for
removing such requirements seems possible, even if the motive behind the support may differ
from the regulatory impetus behind it. To be sure, removing quarterly reporting requirements
is by itself unlikely to alter long-established stock market norms and investors’ desire for fre-
quent information and disclosures, meaning that voluntary reporting may continue the status
quo. Still, de-emphasizing quarterly reports might well be the correct signal and begin to set
the path in the right direction.
6. CONCLUSION
The corporate purpose and short-termism are inherently linked. The corporate purpose can
help set the course for the nature and the time horizon in which corporate activities occur. As
a result, it can be integral to propelling corporations towards numerous desirable long-term
activities ranging from addressing climate change to thwarting corruption and human rights
abuses. While short-term thinking can certainly occur under both shareholder wealth maxi-
mization and broader stakeholderist approaches, it is the former that has long been dominant
and appears to have fueled short-termism. With the current, shareholder-centric corporate
purpose’s failings having become apparent, it is time for some bolder changes that will involve
a reformulated, more balanced corporate purpose.
115
See the Transparency Directive Amendment Directive (TDAD) (Directive 2013/50/EU); Financial
Conduct Authority, Removing the Transparency Directive’s requirement to publish interim management
statements (Nov. 2014).
116
See, e.g., Trump Asks S.E.C. to Study Quarterly Earnings Requirements for Public Firms, N.Y.
Times (Aug. 17, 2019), www.nytimes.com/2018/08/17/business/dealbook/trump-quarterly-earnings
.html
117
Moore & Petrin, supra note 67, at 127 (referring to the UK market).
118
Dennis Carey et al., Why CEOs Should Push Back Against Short-Termism, Harv. Bus. Rev. (May
31, 2018), https://hbr.org/2018/05/why-ceos-should-push-back-against-short-termism; Cydney Posner,
What Happened at the Corp Fin Roundtable on Short-Termism?, Cooley PubCo (July 22, 2019), www
.jdsupra.com/legalnews/blog-what-happened-at-the-corp-fin-73868/.
119
Carey et al., supra note 118.
120
Posner, supra note 118.
6. Comparative and transnational developments
in corporate social responsibility
Cynthia A. Williams
1. INTRODUCTION
The topic of this chapter is corporate social responsibility. Even in how the concept has been
defined, one can see significant developments over the last four decades. An influential 1970s
article defined corporate responsibility as “the firm’s considerations of, and response to, issues
beyond the … economic, technical, and legal requirements of the firm to accomplish social
benefits along with the traditional economic gains which the firm seeks.”1 This definition and
the understanding of the concept in the 1970s often emphasized philanthropic efforts such
as building and supporting hospitals or schools in far-flung areas of operation, or supporting
Little League baseball teams, the local Red Cross, or even golf or tennis clubs in communities
in the United States where companies had significant local operations. By 2011, the European
Commission more simply defined corporate responsibility as “the responsibility of enterprises
for their impacts on society.”2 As the Commission stated in adopting that definition, “[e]nter-
prises should have in place a process to integrate social, environmental, ethical, human rights
and consumer concerns into their business operations and core strategy in close collaboration
with their stakeholders.”3 Thus, the emphasis has shifted from philanthropy and attention to
corporate action “beyond law” to an inquiry into how a company conducts its business.
This chapter is being drafted in 2020, as two significant trends in corporate governance
collide. One trend is the increasing awareness by multiple institutions and organizations of
the urgency of responding to global social and environmental challenges, particularly climate
change and increasing economic inequality. This awareness has heightened society’s expec-
tations for companies to respond to those challenges in the conduct of their businesses. At the
same time, global institutional investors’ emerging understanding of the financial significance
of companies’ environmental and social strategies has brought much greater attention to
companies’ societal responsibilities. In contrast, increasingly energetic shareholder activists
are putting pressure on companies to prioritize short-term strategies or transactions such as
share buy-backs, company spin-offs, mergers, and acquisitions to increase share prices and
distribute funds to shareholders.4 The former trend asks corporate directors and management
to take a long-term strategic perspective and adopt a stakeholder orientation to management
1
Keith Davis, The Case For and Against Business Assumption of Social Responsibilities, 16 Am.
Mgmt. J. 312, 312 (1973).
2
European Comm’n, A Renewed European Union Strategy 2011-14 for Corporate Social
Responsibility, COM 681, ¶ 3.1, www.europarl.europa.eu/meetdocs/2009_2014/documents/com/com
_com(2011)0681_/com_com%282011%290681_en.pdf.
3
See id.
4
See William B. Bratton & Michael Wachter, Shareholders and Social Welfare, 36 Seattle U. L.
Rev. 489, 508, 513 (2013).
92
Comparative and transnational developments in corporate social responsibility 93
of significant corporate challenges, which is a perspective that has long been associated with
countries in the EU and Japan, and more recently in China, India, and Canada. The latter
trend encourages companies to reduce the kinds of research and development which might
make contributions to these global challenges;5 to split up companies that might otherwise be
able to cross-subsidize or cross-fertilize research ideas between divisions to make significant
progress on these difficult technological issues; and as a general matter to prioritize short-term
shareholder interests, even at the expense of longer-term “permanent shareholders”6 or
stakeholders. Thus, powerful current trends encompass a collision of short-term, shareholder
pressures versus long-term challenges and asserted corporate responsibilities, both aspects of
which companies are somehow meant to accommodate.
In the collision, many elite institutions and the world’s largest institutional investors are
newly coming to support corporations taking a broader perspective on whose interests count,
and some are promoting corporate responsibility as a way to resist the short-term pressures of
shareholder activists. One clear effect of these colliding trends is that questions of corporate
responsibility are no longer peripheral to debates in law or management, and concerns with
environmental, social, and governance data (ESG) are not only of interest to socially respon-
sible investors. Rather, debates over the purpose of the corporation have become central in
many jurisdictions, including in jurisdictions such as the United States of America and the
United Kingdom, both of which have long prioritized shareholders’ interests when considering
the duties of companies and directors. And with the world poised on the precipice of a global
economic recession or even depression because of the COVID-19 pandemic, debates concern-
ing companies’ responsibilities for important social welfare outcomes, and different countries’
regulatory and normative approaches based on their different positions in those debates, take
on greater significance. Countries around the world have acted to sustain their economies
by supporting companies, targeted industries, and people who have lost jobs or who would
have lost jobs without government support to companies. As after the global financial crisis
of 2007–08, again questions of the proper relationship between the state and companies, and
what corporate obligations are inherent in significant government support, have been raised.7
This contribution does not purport to answer those important questions, but rather puts them
in the context of a sharpened societal discussion of corporate responsibilities. This context
will be discussed as follows. First, the corporate purpose discussions and some of the central
contributions will be sketched out. Next, increasing institutional investor attention to corpo-
5
See generally John C. Coffee, Jr. & Darius Palia, The Wolf is at the Door: The Impact of Hedge
Fund Activism on Corporate Governance, 41 J. Corp. L. 545 (2016) (presenting data on the declines
in R&D spending in companies targeted by shareholder activists between 2009 and 2013, from R&D
spending of 17.34% of sales in 2009 to 8.12% of sales in 2013. A control group of firms that had not been
targeted by activists showed an increase in R&D expenditures, from 6.54% of sales in 2009 to 7.65% of
sales in 2013).
6
For an analysis of the possible conflicts between undiversified, shareholder activists and diver-
sified, “permanent shareholders” such as BlackRock, Vanguard, and State Street, see John C. Coffee,
Jr., The Agency Cost of Activism: Information Leakage, Thwarted Majorities, and the Public Morality
(European Corp. Governance Inst. – Law Working Paper No. 373, 2017), www.ssrn.com/abstract_id=
3058319.
7
See James Kirkup, Returning the Favour: A new social contract for business, Soc. Mkt. Found.
(Mar. 30, 2020), www.smf.co.uk/wp-content/uploads/2020/03/Returning-the-favour-a-new-social
-contract-for-business-final.pdf.
rate responsibility issues will be described. Then, some of the more recent transnational devel-
opments most relevant to questions of corporate social responsibility (CSR) will be addressed.
This context will then be the basis for a discussion of different countries’ regulatory
approaches to issues of corporate responsibility. That discussion will be framed by focusing
on the social welfare systems in place in different countries, stakeholder versus shareholder
corporate governance systems, and then attention to some significant differences in the laws
that govern the disclosure of, and substance of, social and environmental issues at the core
of corporate responsibility concerns. Finally, the implications for further research will be
discussed.
2. THE CORPORATE PURPOSE DEBATE
In August 2019, the Business Roundtable (BRT), an organization comprised of the CEOs of
the largest American companies, adopted a new Statement on the Purpose of the Corporation.
In its press release, the BRT emphasized the significance of the new Statement:
Since 1978, the Business Roundtable has periodically issued Principles of Corporate Governance.
Each version of the document issued since 1997 has endorsed principles of shareholder primacy – that
corporations exist principally to serve shareholders. With today’s announcement, the new Statement
supersedes previous statements and outlines a modern standard for corporate responsibility.8
That “modern standard for corporate responsibility” is explicitly a stakeholder view of corpo-
rate obligation. The BRT statement articulates specific obligations to customers, employees,
suppliers, communities, the environment, and “generating long-term value for shareholders.”
It ends with a statement that essentially rejects shareholder primacy: “Each of our stakeholders
is essential. We commit to deliver value to all of them, for the future success of our companies,
our communities and our country.” In the stakeholder/shareholder collision, the BRT has, at
least rhetorically, shifted its allegiance to stakeholders.
Many questions have been raised about the Statement. The Council on Institutional
Investors (CII) issued a statement on August 19, 2019, the same day that the BRT state-
ment was announced, expressing concern that the BRT statement showed a potential lack
of accountability to shareholders.9 CII agreed that boards and managers should focus on
long-term shareholder value, and to do so, companies need to respect stakeholders. Yet, it
asserted that companies need to have “clear accountability to owners,”10 rejecting the view
of shareholders “simply as providers of capital rather than as owners.”11 Noted corporate
8
Bus. Roundtable, Business Roundtable Redefines the Purpose of a Corporation to Promote
“An Economy That Serves All Americans” (Aug. 19, 2019), www.businessroundtable.org/business
-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans.
9
Council of Institutional Inv’rs, CII Responds to Business Roundtable Statement on Corporate
Purpose (Aug. 19, 2019), www.cii.org/aug19_brt_response.
10
Id.
11
Id. Many thoughtful critiques of the “shareholders as owners” of the corporation rationale for
shareholder primacy have been developed, particularly by Profs. Simon Deakin and Lynn Stout. See,
e.g., Simon Deakin, The Corporation as Commons: Rethinking Property Rights, Governance and
Sustainability in the Business Enterprise, 37:2 Queen’s L.J. 339 (2012); Lynn A. Stout, The Toxic Side
Effects of Shareholder Primacy, 161 U. Pa. L. Rev. 2003 (2013).
governance commentator Nell Minow similarly expressed concerns that “accountability to

everyone is accountability to no one.”12 In the legal academy, the BRT statement was quickly
challenged by shareholder primacy’s leading advocate, Lucian Bebchuk, pointing out, among
other things, that the 181 BRT signatory CEOs did not discuss the BRT statement with their
board in advance of signing on.13
The BRT statement was a surprise to many observers in academia and the media, including
this Author, given how tenacious the BRT had previously been in defending shareholder
primacy. On reflection, the BRT’s shift towards a stakeholder perspective on corporate
responsibilities was part of a broader discussion among business elites and institutions about
the purpose of the corporation. One influence on the BRT was undoubtedly Oxford University
business professor Colin Mayer’s important book Prosperity: Better Business Makes the
Greater Good.14 Prosperity as a concept includes profitability, but also incorporates the
broader concepts of corporate purpose and values.15 Prosperity was also central to the annual
letter from Larry Fink, CEO of BlackRock, to the CEOs of the S&P 500, entitled “A Sense of
Purpose:”
Society is demanding that companies, both public and private, serve a social purpose. To prosper over
time, every company must not only deliver financial performance but also show how it makes a posi-
tive contribution to society. Companies must benefit all of their stakeholders, including shareholders,
employees, customers, and the communities in which they operate.16
Another important influence was the long-standing work of the law firm Wachtell, Lipton,
Rosen & Katz to reject short-term shareholder pressures. In the 1980s, Martin Lipton, one
of the founding partners of Wachtell, prominently defended companies from the pressures of
hostile takeovers by developing the poison pill based on the view that American companies
cannot be well run if they are always on the auction block.17 By now, in 2020, hedge-fund
shareholder activists are the target of Wachtell’s concern. In 2016, the World Economic
Forum asked Wachtell to develop what the firm eventually called a “new paradigm” for
corporate governance. That framework, envisioning a collaborative partnership between
corporations, long-term investors, and other stakeholders, first circulated in 2016,18 and was
then revised and an updated version circulated in 2019. Both the 2016 New Paradigm and the
updated version described in 2019 rejected shareholder primacy. Rather, the New Paradigm is
premised on the view that the purpose of a corporation is:
12
Nell Minow, Six Reasons We Don’t Trust the New “Stakeholder” Promise from the Business
Roundtable, Harv. L. Sch. F. on Corp. Governance (Sept. 2, 2019), https://corpgov.law.harvard.edu/
2019/09/02/six-reasons-we-dont-trust-the-new-stakeholder-promise-from-the-business-roundtable/.
13
See Lucian Bebchuk & Roberto Tallarita, The Illusory Promise of Stakeholder Governance, 106
Cornell L. Rev. 91 (2020), www.ssrn.com/abstract=3544978.
14
Colin Mayer, Prosperity: Better Business Makes the Greater Good (2018).
15
See generally id.
16
Larry Fink, Larry Fink’s Annual Letter to CEOs: A Sense of Purpose, BlackRock (2018), www
.blackrock.com/hk/en/insights/larry-fink-ceo-letter.
17
See Martin Lipton & Steve A. Rosenblum, A New System of Corporate Governance: The
Quinquennial Election of Directors, 58 U. Chi. L. Rev. 187 (1991).
18
See Martin Lipton, It’s Time to Adopt the New Paradigm Harv. L. Sch. F. on Corp. Governance
(Feb. 11, 2019), https://corpgov.law.harvard.edu/2019/02/11/its-time-to-adopt-the-new-paradigm/.
to nurture long-term economic growth that reaps benefits for, and avoids costly externalities on, the
broader society. A corporation that succeeds in that effort will advance the interests of all its stake-
holders, not just its shareholders. Conceived in this way, shareholder profit is not the sole objective
of the corporation, but rather the by-product of a well-functioning corporate governance regime.19
Soon after the Business Roundtable statement, the British Academy issued a report empha-
sizing a broad concept of corporate purpose, beyond narrow shareholder wealth maximizing.
The culmination of a multi-year project entitled the Future of the Corporation, with academic
leadership provided by Professor Colin Mayer, the project was much influenced by his views.
In September 2018, the project issued a report discussing the problems in society that had been
created by companies emphasizing shareholder interests (“shareholder primacy”). In November,
2019, it issued a report entitled Principles for Purposeful Business.20 That report stated that
“[t]he purpose of business is to solve the problems of people and planet profitably, and not profit
from causing problems.”21 It proposed a “framework for 21st century business based on corpo-
rate purposes; commitments to trustworthiness; and ethical corporate cultures.” 22
In December 2019, the World Economic Forum issued a document entitled the Davos
Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution.23
That document explicitly embraced a stakeholder concept of the corporate purpose:
The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In
creating such value, a company serves not only its shareholders, but all its stakeholders – employ-
ees, customers, suppliers, local communities and society at large. The best way to understand and
harmonize the divergent interests of all stakeholders is through a shared commitment to policies and
decisions that strengthen the long-term prosperity of a company.
Ten years ago, a sharp distinction between shareholder and stakeholder systems of corporate
governance could be drawn. Today, that distinction is blurring, at least with regards to rhetor-
ical commitments to broader stakeholder interests, and with implications for corporate social
responsibility. Those implications will be further discussed below.
19
Martin Lipton & William Savitt, Stakeholder Governance, Issues and Answers, Harv. L. Sch.
F. on Corp. Governance (Oct. 25, 2019), https://corpgov.law.harvard.edu/2019/10/25/stakeholder
-governance-issues-and-answers/.
20
The British Academy, Principles for Purposeful Business: How to Deliver the Framework for
the Future of the Corporation (Nov. 2019), www.thebritishacademy.ac.uk/documents/224/future-of-the
-corporation-principles-purposeful-business.pdf [hereinafter Principles for Purposeful Business]; British
Academy, Reforming Business for the 21st Century: A Framework for the Future of the Corporation
(2019), www.thebritishacademy.ac.uk/documents/76/Reforming-Business-for-21st-Century-British
-Academy.pdf. The British Academy is the UK’s national academy for the humanities and social
sciences. These two reports were stated to have been “based on research papers produced by academics
across the humanities and social sciences and from around the world, guided by the advice of prominent
business leaders.” Principles for Purposeful Business, at 4.
21
Principles for Purposeful Business, supra note 20, at 8.
22
Id.
23
Klaus Schwab, Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth
Industrial Revolution, World Econ. F. (Dec. 2, 2019), www.weforum.org/agenda/2019/12/davos
-manifesto-2020-the-universal-purpose-of-a-company-in-the-fourth-industrial-revolution/.
3. INCREASING INVESTOR INTEREST IN CORPORATE

RESPONSIBILITY
Another significant influence bringing corporate responsibility from the periphery to the core
of corporate governance concerns has been the growing institutional investor recognition of
the financial value of information about companies’ ESG performance, also referred to as the
company’s sustainability performance. In the United States, in addition to BlackRock, quoted
above, both State Street and Vanguard have recently issued statements supporting the impor-
tance of ESG topics. Thus, the world’s three largest asset managers, with $16.75 trillion of
assets under management as of August 1, 2020,24 are on record about the value of ESG data in
evaluating company performance. As put by State Street Global Advisors in a 2020 comment
letter to the U.S. Department of Labor criticizing rule proposals to discourage private pension
plans from investing in ESG-screened funds: “Addressing material ESG issues is good busi-
ness practice and essential to a company’s long-term financial performance – a matter of value,
not values. We seek to capture these drivers of long-term shareholder value for our clients.”25
This increased interest in sustainability topics is not confined to the USA. Global assets
under management with sustainability screens have risen 34 percent between 2016 and 2018 to
$30.7 trillion in five major markets (the EU, US, Canada, Japan, and Australia/New Zealand).26
Just under 40 percent of that total in 2018 ($12 trillion) is held by US investors and asset man-
agers, comprising 25 percent of money under professional management, with the dominant
strategy being ESG integration into fundamental value analysis for portfolio selection and
management ($9.5 trillion).27 Climate change is a particular focus for many investors’ evalu-
ations of risks and opportunities, given its importance as a risk multiplier and the inability of
investors to diversify fully away from that risk. As reported by the Financial Times, “European
asset managers including Nordea, Legal and General Investment Management, BNP Paribas
Asset Management, Aviva Investors and Robeco have been at the forefront of this movement”
to emphasize climate change as an investment risk (and opportunity).28 As of 2019, US $96
trillion of global invested capital backs the Carbon Disclosure Project (CDP)’s global work to
gather data on companies’ greenhouse gas emissions and efforts to reduce them.29 The CDP
analyzes these data and provides them to Bloomberg for incorporation with other ESG data
that Bloomberg sells to 18,000 investors around the world, a number of investors that has more
than tripled in the past seven years.30
24
Data obtained from: BlackRock, www.blackrock.com (Aug. 1, 2020: $7.43 trillion AUM); State
Street Global Assets, www.ssga.com (Aug. 1, 2020: $3.12 trillion AUM); and Vanguard, www.vanguard
.com (Aug. 1, 2020: $6.2 trillion).
25
Attracta Mooney, State Street Lashes Out at New US ESG Rule, Fin. Times (Aug. 1, 2020), www
.ft.com/content/128c5c92-203b-4a87-8f53-315b23018f9a. For Vanguard’s statements in support of
sustainability and a long-term investment focus, see Lipton, supra note 18.
26
Glo. Sustainable Inv. All., The 2018 Global Sustainable Investment Review, www.gsi-alliance
.org/wp-content/uploads/2019/06/GSIR_Review2018F.pdf.
27
Id. at 4.
28
Attracta Mooney & Patrick Temple-West, Climate Change: Asset Managers Join Forces
with the Eco-Warriors, Fin. Times (July 25, 2020), www.ft.com/content/78167e0b-fdc5-461b-9d95
-d8e068971364.
29
Carbon Disclosure Project, Catalyzing Business and Government Action, www.cdp.net/en-US/
Pages/About-Us.aspx. The CDP work reaches 120 states and regions and 7000 companies.
30
See Bloomberg, Impact Report 2019, www.bloomberg.com/impact/products/esg-data.
Most of this non-SRI and mainstream institutional investor interest in ESG data is recent.
Fund research entity Morningstar has noted that financial institutions and mutual fund fam-
ilies such as Goldman Sachs, Fidelity, JP Morgan, RBC, and Vanguard, among others, have
recently added sustainability criteria to the prospectuses of existing funds.31 It reported that
“[w]hile this rarely happened prior to 2017, 32 funds added sustainability criteria during 2017.
The trend gained considerable traction in 2018, with 62 funds adding sustainability criteria.”32
In part, this recent investment industry interest in ESG data is because of analyses con-
firming the financial materiality of much ESG information. For instance, a June 2017 Bank
of America Merrill Lynch study found sustainability factors to be “strong indicators of future
volatility, earnings risk, price declines, and bankruptcies.”33 Also in June of 2017, Allianz
Global Investors produced a research report with similar findings, concluding that the height-
ened transparency of ESG disclosure lowered companies’ cost of capital by reducing the
“investment risk premium” that sophisticated investors would require.34 In September of 2017,
Nordea Equity Research published an analytic research report concluding that there is “solid
evidence that ESG matters, both for operational and share price performance.”35 In April
of 2018, Goldman Sachs stated that “integrating ESG factors allows for greater insight into
intangible factors such as culture, operational excellence and risk that can improve investment
outcomes.”36 This latter report is particularly illuminating, as Goldman analyzed questions
and discussions about ESG matters reflected in earnings call transcripts and social media; asset
manager initiatives, and rising assets under management utilizing ESG screens. It concluded
that “the ESG Revolution is just beginning, as the logical, empirical and anecdotal evidence
for its importance continue to mount.”37
These industry studies are consistent with, and indeed rely upon, a number of influential
academic studies. Two such studies are particularly noteworthy. Deutsche Asset & Wealth
Management, in conjunction with researchers from the University of Hamburg, analyzed 2,250
individual studies of the relationship between ESG data and corporate financial performance.
From this analysis, the researchers concluded that improvements in ESG performance gener-
ally lead to improvements in financial performance.38 A comprehensive review published in
31
Morningstar, Sustainable Funds U.S. Landscape Report: More Funds, More Flows, and Strong
Performance in 2018 (Feb. 2019), www.morningstar.com/lp/sustainable-funds-landscape-report, at 7-8.
32
Id. at 7.
33
Bank of Am. Merrill Lynch, Equity Strategy Focus Point—ESG Part II: A Deeper Dive (June
15, 2017), www.iccr.org/sites/default/files/page_attachments/esg_part_2_deeper_dive_bof_of_a_june
_2017.pdf (cited by Sustainability Accounting Standards Board (SASB), The State of Disclosure Report
2017 (Dec. 2017), www.sasb.org/wp-content/uploads/2017/12/2017State-of-Disclosure-Report-web
.pdf.
34
Hans-Jörg Naumer, ESG Matters, Part 2: Added Value or a Mere Marketing Tool? What Does
ESG Mean for Investments?, Allianz Global Inv. (June 2017), https://uk.allianzgi.com/en-gb/
institutional/insights/esg-matters/2017-06-01-added-value-or-a-mere-marketing-tool.
35
Nordea Equity Research, Strategy & Quant: Cracking the ESG Code (Sept. 5, 2017), https://
nordeamarkets.com/wp-content/uploads/2017/09/Strategy-and-quant_executive-summary_050917.pdf.
36
Goldman Sachs Equity Research, GS Sustain ESG Series: A Revolution Rising-From Low
Chatter to Loud Roar [Redacted] (Apr. 23, 2018), www.goldmansachs.com/insights/pages/new-energy
-landscape-folder/esg-revolution-rising/report.pdf.
37
Id.
38
Deutsche Asset & Wealth Mgmt., ESG and Corporate Financial Performance: Mapping the
Global Landscape (Dec. 2015), https://institutional.deutscheam.com/content/_media/K15090_Academic
_Insights_UK_EMEA_RZ_Online_151201_Final_(2).pdf.
2015 found that 90 percent of empirical studies show that sound sustainability standards lower
firms’ cost of capital; 80 percent of studies show that companies’ stock price performance is
positively influenced by good sustainability practices; and 88 percent of studies show that
better E, S, or G practices result in better operational performance.39
Recent proxy voting trends also demonstrate that investors are increasingly perceiving ESG
factors to be material. Morningstar reported at the end of the 2019 proxy season that a record
14 shareholder resolutions seeking corporate transparency on diversity, sustainability, political
spending, lobbying, governance of opioids, gun safety and human rights received majority
votes that year.40 Over the past 16 years, average shareholder support for environmental and
social resolutions has increased from 12 percent to 29 percent, with the trend accelerating in
the last two years.41 The 2020 proxy season continued those trends. For instance, at Santos
(energy), 43% of shares supported a resolution asking the company to set Paris-aligned targets;
in Japan, the first-ever climate change resolution at Mizuho Financial, seeking a Paris-aligned
business strategy, received 35 percent support; and in the US, a motion to seek information
on climate-related lobbying passed at Chevron, while 48 percent of shares supported a reso-
lution at JPMorgan Chase & Co. seeking disclosure of the bank’s lending activities that affect
climate change.42
Demographic trends are also driving the asset management industry’s attention to ESG
matters and sustainability. Millennials are expected to receive up to $30 trillion over the next
decade as assets transfer from the baby boomer generation.43 Eighty percent of millennials
state that they are “very interested” or “interested” in sustainable investment, and they are two
times as likely to make sustainable investments compared to the average investor.44 Similarly,
high net worth individuals (HNWI) show strong preferences for sustainably-screened invest-
ments. In a 2016 survey, 85 percent of HNWI said they consider investment a way to express
their social, political and environmental values, and 93 percent agreed that a company’s
impact on these areas is an important consideration when they make investment decisions.45
In a 2018 survey, 80 percent of HNWI agreed that in addition to making a profit, companies
should take responsibility for their environmental impacts and for social well-being.46
The performance of ESG funds during the COVID-19 pandemic will only increase these
trends. As described in the Financial Times, “ESG fund performance has been strong.
Research from BlackRock in May found that sustainable strategies have outperformed during
39
See Gordon L. Clark, Andreas Feiner & Michael Viehs, From the Stockholder to the Stakeholder:
How Sustainability Can Drive Financial Outperformance (2015), http://papers.ssrn.com/sol3/papers
.cfm?abstract_id=2508281. This report analyzes the empirical literature on the financial effects of sus-
tainability initiatives by type of initiative (E, S or G) and by various financial measures of interest (cost
of debt capital; cost of equity capital; operating performance; and effect on stock prices).
40
John Hale & Jackie Cook, Proxy Season Shows ESG Concerns on Shareholders’ Minds,
Morningstar (Aug. 22, 2019), www.morningstar.com/articles/943448/proxy-season-shows-esg
-concerns-on-shareholders-minds.
41
Id.
42
See Mooney & Temple-West, supra note 28.
43
See Michal Barzuza, Quinn Curtis & David H. Webber, Shareholder Value(s): Index Fund ESG
Activism and the New Millennial Corporate Governance, 93 S. Cal. L. Rev. 101, 141–42 (2020).
44
Id. at 146–49.
45
Bank of Am., U.S. Trust, Insights on Wealth and Worth (2016), www.privatebank.bankofamerica
.com/publish/content/application/pdf/GWMOL/USTp_ARXDJKR8_2017-05.pdf.
46
Bank of Am., U.S. Trust, Insights on Wealth and Worth (2018).
this year’s period of intense volatility, with 94 per cent of leading sustainable indices beating
their parent benchmarks in the first quarter.”47 This outperformance is driving more assets
into ESG funds, increasing the pressure on companies to demonstrate their sustainability bone
fides.
As the result of the confluence of each of these trends, we can expect investors’ interest in
sustainability and ESG performance generally to continue to increase. The particular issues
will change as social trends change: today, we see Black Lives Matter and institutional racism
issues being emphasized in the US. But the societal and environmental expectations of an
engaged demographic cohort and of high net worth individuals, together with global asset
managers’ search for quality ESG data, will continue to rachet up pressure on companies to
produce data and demonstrate positive social responsibility outcomes.
4. TRANSNATIONAL INITIATIVES
Unlike the recent developments just described, a more well-established aspect of the corporate
responsibility field has been its construction by the proliferation of transnational, voluntary
standards for what constitutes responsible corporate action. Over the past two decades such
standards have been developed by countries in public/private partnerships; multi-stakeholder
negotiation processes; by industries and companies; by institutional investors; by functional
groups such as accountancy firms and social assurance consulting groups (many of which
did not exist more than ten years ago); by NGOs; and by non-financial ratings agencies.48
Standards have been developed in just about every industry, from apparel to chemicals,
extractives such as oil, gas and minerals to conflict-free diamonds; sustainable fisheries and
forestry; project finance and fair-trade goods such as coffee, tea, cocoa and cotton,49 to name
just a few examples. Thousands of individual companies have adopted voluntary codes of
conduct establishing standards for responsible behavior, and some companies then engage
third-party certifiers to ensure that their suppliers and subsidiaries are meeting those stand-
ards.50 Multi-sector codes have also been developed with standards that are designed to apply
across industries.51
Not all of the transnational initiatives that will have implications for corporate respon-
sibility are explicitly directed to the topic, nor are they all privately, or purely privately,
generated. Three recent multilateral agreements with profound implications for corporate
47
See Mooney & Temple-West, supra note 28.
48
See Benedict Kingsbury, Nico Krisch & Richard B. Stewart, The Emergence of Global
Administrative Law, 68 L. Contemp. Probs. 15 (2005). The implications of these standards for theories
of corporate governance, regulation, and economic development are profound, some of which the author
has explored in prior work. See Deborah E. Rupp & Cynthia A. Williams, The Efficacy of Regulation as
a Function of Psychological Fit: Reexamining the Hard Law/Soft Law Continuum, 12:2 Theoretical
Inquiries in Law 581 (2011); Cynthia A. Williams & John M. Conley, An Emerging Third Way? The
Erosion of the Anglo-American Shareholder Value Construct, 38 Cornell Int’l. L.J. 493 (2005).
49
For citations and discussion of these initiatives, see Cynthia A. Williams, Corporate Responsibility
and Corporate Governance, in The Oxford Handbook of Corporate Law and Governance 634,
637-39 (Jeffrey N. Gordon & Wolf-Georg Ringe eds., 2018).
50
See Margaret M. Blair, Cynthia A. Williams & Li-Wen Lin, The New Role for Assurance Services
in Global Commerce, 33 J. Corp. L. 325 (2008).
51
See Social Accountability Int’l, Social Accountability 8000, https://sa-intl.org/programs/sa8000/.
responsibility are the 2015 Paris Agreement on climate change; the United Nations (UN)
Sustainable Development Goals; and the UN Human Rights Council’s “Protect, Respect, and
Remedy” framework for corporations’ and states’ human rights obligations. An additional
multi-sector agreement, with roots in the Financial Stability Board but privately generated, is
the Task-Force on Climate-related Financial Disclosures (TCFD). These four agreements will
briefly be described, with attention to their potential effects on corporate responsibility.
In December 2015, after years of negotiations pursuant to the United Nations Framework
Convention on Climate Change, the world agreed to binding action to address climate change
in an agreement concluded in Paris. The Paris Agreement commits the world’s countries
to actions designed towards “holding the increase in the global average temperature to well
below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase
to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks
and impacts of climate change ….”52 The Paris Agreement entered into force as of November
4, 2016, when countries representing 55 percent of global GHG emissions had ratified the
Agreement.53 By August, 2020, 189 countries had ratified the Agreement, of the 197 countries
that are parties to the International Framework Convention on Climate Change (IFCCC).54
The Agreement requires each country that has ratified it to develop goals to reduce their green-
house gas emissions (GG) according to nationally determined contributions (NDCs). Smart
companies will see business opportunities from meeting the challenges of climate change; it
has been projected that there are $26 trillion of new opportunities in this field over the next
ten years.55
Another multilateral initiative that has the potential to shape the substance of companies’
social and environmental initiatives are the UN Sustainable Development Goals (SDGs).
These are 17 interrelated goals that address the global challenges of “poverty, inequality,
climate change, environmental degradation, peace, and justice.”56 A recent report by PwC
found that 72 percent of the large companies it surveyed include the SDGs in their sustainabil-
ity reports,57 which may indicate a developing consensus that these are the global standards to
which impactful corporate action should be directed.
The UN’s Guiding Principles on Business and Human Rights, adopted by the U.N. Human
Rights Council in 2011, is a multilateral agreement that has become a baseline global legal
framework for companies’ social responsibilities. It sets out the core spheres of obligation for
states and companies with respect to human rights: states have the duty to protect their citizens
from violations by third parties, including companies, by promulgating laws and regulations;
52
Paris Agreement, art. 2(1)(a), Dec. 12, 2015, http:// unfccc .int/
files/
essential
_background/
convention/application/pdf/english_paris_agreement.pdf (“Article 2(1) (a): Holding the increase in the
global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit
the temperature increase to 1.5°C above pre-industrial levels, recognizing that this would significantly
reduce the risks and impacts of climate change”).
53
United Nations Framework Convention on Climate Change, Paris Agreement: Status of
Ratification, https://unfccc.int/process/the-paris-agreement/status-of-ratification.
54
Id.
55
See Glob. Comm’n on the Econ. and Climate, The New Climate Economy (2018), https://
newclimateeconomy.report/2018/key-findings/.
56
U.N. Sustainable Dev., About the Sustainable Development Goals (2020), www.un.org/sus
tainabledevelopment/sustainable-development-goals/.
57
PwC, SDG Reporting Challenge 2018 (2018), www.pwc.com/gx/sustainability/SDG/sdg
-reporting-2018.pdf.
companies have the responsibility to act with due diligence to respect citizens’ human rights;
and both have the duty to provide access to remedies for victims. It combines global standards
supported and implemented by a broad array of governments, a standards-development process
that was inclusive, transparent and well-balanced between companies, labor and NGOs, and
a dedicated NGO collecting data and publicizing it. This combination gives the UN Guiding
Principles the potential to become the de facto global corporate responsibility standard.58
In addition to these three substantive multilateral agreements, an important public/private
transnational disclosure initiative is the Task-Force on Climate-related Financial Disclosure. In
December 2015 the Financial Stability Board established the TCFD with Michael Bloomberg
as its Chair, and 32 global industry participants as members, including leading industry par-
ticipants ranging from operating companies, banks, insurance companies, asset managers,
and credit rating agencies.59 The TCFD set out its final recommendations on June 29, 2017,60
identifying four areas for climate-related disclosure that represent the core elements of how
organizations operate: Governance, Strategy, Risk Management, and Metrics & Targets.61
Its most recent status report from 2019, TCFD evaluated the disclosures of 1,000 companies
across multiple industries and regions, finding some signs of progress, but generally conclud-
ing that “not enough companies are disclosing information about their climate-related risks
and opportunities.”62 This conclusion is consistent with a somewhat earlier analysis (2017) by
the accounting firm KPMG, which found that only 2 percent of firms were attempting to quan-
tify their financial risks from climate change or modeling those financial risks using scenario
analysis as recommended by TCFD.63 That said, TCFD has become the global standard for
disclosure on climate change risks and opportunities, which is one of the major issues promot-
ing corporations to take on societal responsibilities. Presumably, we can expect progress by
KPMG’s next report, due out in 2020.
This brief overview of some particularly cogent transnational standards will conclude with
two observations. First, as is extremely well articulated in recent work by Katelouzou and
Zumbansen, transnational standards development can be observed in many fields subject
to thick legal pluralism, such as corporate responsibility, but also corporate governance,
corporate law, shareholder stewardship and related fields.64 Thus, the transnational aspect of
58
See Phil Bloomer, Human Rights and Big Business: New Ranking Aims to Drive Race to the Top,
The Guardian (Jan. 14, 2015), www.theguardian.com/global-development-professionals-network/
2015/jan/14/human-rights-business-ranking.
59
See TCFD, Recommendations of the Task Force on Climate-Related Financial Disclosures (June
2017), www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Report-062817.pdf, at iii [herein-
after Task Force Report].
60
See id. at iv.
61
See id. at v.
62
See TCFD, 2019 Status Report Executive Summary (June 2019), www.fsb-tcfd.org/publications/
tcfd-2019-status-report/.
63
KPMG, The Road Ahead: The KPMG Survey of Corporate Responsibility Reporting (2017),
https://a ssets .kpmg/ content/ d am/ k pmg/x x/p df/2017/ 10/ kpmg -survey -of-corporate -responsibility
-reporting-2017.pdf, at 15, 31.
64
See Dionysia Katelouzou & Peer Zumbansen, The New Geographies of Corporate Law Production,
42 U. Pa. J. Int’l L. 51 (2020); Dionysia Katelouzou & Peer Zumbansen, The Transnationalization of
Corporate Governance: Law, Institutional Arrangements and Corporate Power, 37 Ariz. J. Int’l &
Comp. L. 1 ( 2020).
standards development here is possibly unique only in its prominence in constituting the field
of corporate responsibility.
Second, corporate responsibility, like many fields, is messy. Some factors shaping corporate
responsibility practices can sensibly be analyzed within a country’s domestic borders, such as
evaluating the predominant corporate governance system in the country, or laws relevant
to both substantive and discursive corporate responsibility obligations. Many other factors
will be transnational, as just discussed, and subject companies to the layered obligations and
quasi-obligations of industry standards and best practices, social and environmental disclosure
regimes, corporate governance best practices, norms for responsible companies, and pressures
from investors, NGOs, domestic and international citizens. Although messy at times, some
patterns can be discerned, a topic to which this chapter now turns.
5. LAW AND CORPORATE RESPONSIBILITY
Law shapes the corporate responsibility field in important ways: through its structuring of
domestic social welfare provisions and rights; through its effects on corporate governance;
through capital markets regulation; and, in some instances, through direct regulation. Each of
these topics will be briefly discussed.
5.1 The Social Welfare Structure of a Country
Since the social welfare provisions of different countries form the background conditions
against which corporate responsibilities evolve, and the necessity of companies taking on
social and environmental obligations, or not, it is considered first. In countries such as the
United States, which has more limited social welfare protections for its citizens as compared
to Europe, an often contentious relationship between corporate interests and labor, and lacks
widely available socialized medicine (although some progress is being made there), compa-
nies are under greater pressure from various constituents to enact corporate responsibility
programs to address social problems. Matten and Moon, focusing in particular on differences
between Europe and the United States, have called such an orientation “explicit” CSR, since
companies in such countries communicate explicitly about what they are volunteering to do
to address social problems.65 Baskin includes South Africa, Brazil, India, and some parts of
Eastern Europe in this category of countries among emerging economies, where high income
inequality and weak state provision of social services leads to a situation where companies
must become involved in health care and educational services in other to maintain their license
to operate, and to overcome skills shortages.66
In contrast, in countries with a social democratic past, such as the UK, or present, such
as in Europe, governments provide legislation that is more protective of labor and provides
more extensive social welfare benefits, so companies do not need to volunteer to address
these underlying social and economic concerns. At the same time, “merely” by following the
65
See Dirk Matten & Jeremy Moon, Implicit and Explicit CSR: A Conceptual Framework for
a Comparative Understanding of Corporate Social Responsibility, 33 Acad. Mgmt. Rev. 404 (2008).
66
See Jeremy Baskin, Corporate Responsibility in Emerging Markets, 24 J. Corp. Citizenship 29
(2006).
law, they will be acting in employees’, customers’, suppliers’ and communities’ interests,
and acting according to community norms of responsible corporate action. Matten and Moon
called this “implicit” CSR, where “the entirety of a country’s formal and informal institutions
assign corporations an agreed share of responsibility for society’s interests.”67
In 2018, Matten and Moon’s article on explicit and implicit CSR was announced as the
most important article published in the prior decade by the leading Academy of Management
Review. The authors were asked to reflect on the article, its importance, and how, if at all,
things have changed since 2008. Their reflection suggests that today, there is greater “hybrid-
ization” between systems shaping corporate responsibility. As a result, companies in Europe
are starting to be more explicit in their communications about meeting social responsibilities.68
At the same time, companies’ communications about CSR, including in the United States,
are starting to shape norms and implicit assumptions about the proper role of companies
addressing social and environmental issues.69 Matten and Moon ascribe this “hybridization”
to globalization, the types of transnational business and standards networks described above
(including multilateral initiatives, and not only addressing CSR, but also addressing corporate
governance and business generally); and CSR’s expanded issues focus from employee welfare
issues to supply chain concerns and the effects of company actions on global environmental
welfare, such as biodiversity and climate change.70 Presumably, this “hybridization” process
is also part of the reason for the BRT’s shift in August 2019 to support for a stakeholder under-
standing of the corporate purpose.
5.2 Corporate Governance
Law structures the corporate governance relationship between the company and its sharehold-
ers and/or other stakeholders, through the constructions of fiduciary duties (in common law
countries) or through specific statutes in civil law countries. In turn, the corporate governance
system in a country shapes views of companies’ social and environmental responsibilities.
Notwithstanding the corporate purpose debates now blossoming, and the suggestions even
in the United States by the BRT and Wachtell that directors and managers should consider
broader stakeholder interests, as a matter of law, directors’ and managers’ fiduciary obligations
are still understood to run only to the corporation and its shareholders in the United States,71
Australia,72 and the United Kingdom,73 among important commercial jurisdictions. Variations
do exist between these countries’ versions of shareholder primacy. In 2006, the UK concluded
a comprehensive corporate law reform process, enacting an “enlightened shareholder” defini-
tion of directors’ duties. Under section 172 of the Companies Act, the objective of directors’
67
Matten & Moon, supra note 65, at 404.
68
See Dirk Matten & Jeremy Moon, Reflections on the 2018 Decade Award: The Meaning and
Dynamics of Corporate Social Responsibility, 45:1 Acad. Mgmt. Rev. 7 (2020).
69
Id.
70
Id. at 9–12.
71
See Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L.J.
439 (2001).
72
See Jennifer G. Hill, The Persistent Debate about Convergence in Comparative Corporate
Governance, 27 Sydney L. Rev. 743 (2005).
73
See Cynthia A. Williams & John M. Conley, Triumph or Tragedy? The Curious Path of Corporate
Disclosure Reform in the UK, 31 Wm, & Mary Envtl. L.J. 317 (2007).
duties is promoting the long-term profitability of the company for the benefit of the company’s
members (shareholders), while giving regard to a wide range of stakeholders.74 In contrast,
in the United States it has been argued that regard for other constituents such as employees,
customers, suppliers, the community or even the environment, beyond the requirements of
law, would be a breach of directors’ fiduciary duties if not tied to increasing shareholder
welfare.75 While this point of view has been vigorously debated,76 to the extent that lawyers
in the United States counsel clients similarly, without updated knowledge about the positive
financial effects of well-constructed corporate responsibility strategies, the dampening effect
on robust corporate responsibility initiatives is obvious.
In stakeholder-oriented corporate governance systems, it will not be debatable that consider-
ations of employees, customers, consumers, or the environment are appropriate, such as within
Europe and the European Union,77 India,78 Japan,79 China,80 and Canada.81 Notwithstanding,
Aguilera and Jackson posited in an important 2003 analysis that these different corporate
governance systems must be more sociologically understood.82 They put forth the notion
of “hybridization,” where institutional factors in both stakeholder and shareholder systems
74
Companies Act 2006, s. 172.
75
See Leo E. Strine, Jr., The Dangers of Denial: The Need for a Clear-Eyed Understanding of the
Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake
Forest L. Rev. 761 (2015).
76
See, e.g., Lynne Dallas, The New Managerialism and Diversity on Corporate Boards of Directors,
76 Tul. L. Rev. 1363 (2002); Einer Elhauge, Sacrificing Corporate Profits in the Public Interest, 80
N.Y.U. L. Rev. 733, 770–72 (2005); Lynn A. Stout, The Toxic Side Effects of Shareholder Primacy, 161
U. Pa. L. Rev. 2003 (2013).
77
See Ruth V. Aguilera & Gregory Jackson, The Cross-National Diversity of Corporate Governance:
Dimensions and Determinants, 28:3 Acad. Mgmt. Rev. 447, 448 (2003) (providing a nuanced discus-
sion of corporate governance systems taking account of various institutional factors that shape capital,
labor and management). This chapter will return to Aguilera and Jackson when discussing further direc-
tions for research.
78
See P. Cappelli, H. Singh, J. Singh & M. Useem, The India Way: Lessons for the U.S., 24 Acad.
Mgmt. Pers. 6 (2010). Cappelli et al. were discussing informal norms of stakeholder consideration. The
Companies Act in India was revised after Cappelli et al.’s article, and explicitly adopted a stakeholder
perspective in 2013. See Afra Afsharipour, Corporate Social Responsibility and the Corporate Board:
Assessing the Indian Experiment, in Globalisation of Corporate Social Responsibility and its
Impact on Corporate Governance (Jean J. du Plessis, Umakanth Varottil & Jeroen Veldman eds.,
2018), https://ssrn.com/abstract=3355808.
79
Id.
80
See Li-Wen Lin, Mandatory Corporate Social Responsibility? Legislative Innovation and Judicial
Application in China, 68:3 Am. J. Comp. L. 576 (2020).
81
Stakeholder corporate governance was introduced by the Supreme Court of Canada in 2004 in
a case, Peoples’ Drug Stores v. Wise, that explicitly rejected shareholder primacy at paragraph 42, stating
that: “Insofar as the statutory fiduciary duty is concerned, it is clear that the phrase the ‘best interests of
the corporation’ should be read not simply as the ‘best interests of the shareholders.’ … We accept as
an accurate statement of law that in determining whether they are acting with a view to the best interests
of the corporation it may be legitimate, given all the circumstances of a given case, for the board of
directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers,
governments and the environment.” This stakeholder orientation was re-affirmed by another decision by
the Supreme Court of Canada in 2008 in BCE Inc. v. 1976 Debenture Holders, and then incorporated into
the federal corporate law statute, the federal Canada Business Corporations Act, as of 2019. See Canada
Business Corporations Act, § 122 (1.1).
82
See generally Aguilera & Jackson, supra note 77.
operate to reinforce the power of stakeholder groups, such as work councils and co-determina-
tion enhancing the power of employees within firms in Germany, or have the opposite effect.83
An example of the latter is in Canada, where a powerful institutional shareholder coalition,
the Canadian Coalition for Good Governance, which represents $4.5 trillion of assets under
management, enhances shareholder power notwithstanding the Supreme Court of Canada’s
construction of directors’ fiduciary obligations as running to stakeholders and explicitly reject-
ing shareholder primacy.84
Even if both stakeholder and shareholder systems are best understood as existing on a contin-
uum, as Aguilera and Jackson argue,85 empirical evidence does show that both country-level sus-
tainability ratings and company-level corporate responsibility ratings are higher in countries with
a stakeholder-oriented corporate governance system than in countries with a shareholder-oriented
corporate governance system. Liang and Renneboog’s quantitative study using MSCI (Morgan
Stanley Capital, International) Intangible Value Assessment data, supplemented with specific
social and environmental data from MSCI’s Risk Metrics, found that:
among different legal origins, the English common law – widely believed to be mostly shareholder
oriented – fosters CSR the least; within the civil law countries, firms of countries with German legal
origin outperform their French counterparts in terms of ecological and environmental policy, but the
French legal origin firms outperform German legal origin companies in social issues and labor rela-
tions. Companies under the Scandinavian legal origin score highest on CSR (and all its subfields).86
Liang and Renneboog also find from the analysis of country-level sustainability ratings and
financial development that countries with higher financial development (which tends to be
those with shareholder-oriented corporate governance systems) have lower country-level
sustainability ratings, including lower environmental responsibility ratings, and lower social
responsibility and solidarity ratings.87
Within a shareholder-oriented system, the types of shareholders invested in a firm also have
implications for corporate responsibility. Johnson and Greening have shown that the type
of investors in a company has a significant effect on a company’s environmental and social
performance.88 Firms with higher percentages of long term, pension fund investors had sig-
nificantly better performance on social issues and environmental issues than firms with lower
percentages, although the effect on social issues was modest.89 Neubaum and Zahra replicated
these results in 2006, finding that large (1 percent holdings) pension fund investors had a sig-
nificant and positive effect on companies’ social and environmental performance, particularly
where funds coordinated their activism. Mutual fund and investment bank holdings had
a significant and negative effect on corporate social performance, but only when these funds
83
See id. at 461–62; Matten & Moon, supra note 68, at 8, 17–21.
84
See supra note 81.
85
See Aguilera & Jackson, supra note 77, at 463.
86
See Hao Liang & Luc Renneboog, On The Foundations of Corporate Social Responsibility, 72:2
J. Fin. 853 (2017), https://doi.org/10.1111/jofi.12487.
87
See id. at 853.
88
See Richard A. Johnson & Daniel W. Greening, The Effects of Corporate Governance and
Institutional Investor Types on Corporate Social Performance, 42:5 Acad. Mgmt. J. 564 (1999).
89
See id.
engaged in activism (as opposed to being simply passive investors).90 More recent research
has shown that companies that rank higher on CSR indexes are more likely than others to be
targeted by hedge fund shareholder activists. This is explained by activists viewing money
spent on CSR as showing an insufficient focus on shareholder wealth.91 These findings have
implications for corporate responsibility going forward, as we see more hedge funds engaging
in activism, predominantly in the US but now throughout the world.92
5.3 Capital Market Regulation
Another important way that law structures corporate responsibility is through capital market
regulations requiring disclosure of social and environmental information. Indeed, in most
countries, required disclosure of social and environmental data is the primary regulatory
mechanism for specifically encouraging CSR. While it is often said that companies “manage
what they measure,” careful academic studies of multiple disclosure regimes have found
that this adage is true only when disclosure is required, with specific regulations about what
information needs to be disclosed and how it should be presented, and only if there are clearly
identified users of the information feeding back to providers.93 Here, again, we see significant
differences between Europe, the UK, and the United States.
5.3.1 Europe and the EU

Within Europe, consistent with Liang and Renneboog’s findings, several Scandinavian coun-
tries (Norway, Denmark, and Sweden) are leaders, each having promulgated detailed require-
ments for disclosure of social and environmental risks and impacts at a time (post-2003) when
the EU’s requirements for social or environmental disclosure were not as specific as they are
now.94 By 2020, however, the EU is requiring an increasing amount of environmental or social
disclosure.95 The EU’s requirement is a directive (the “Non-Financial Reporting Directive”)
that entered into force on December 6, 2014; member states had two years to transpose it into
national legislation.96 It requires approximately 6,000 large companies and “public interest
90
See Donald O. Neubaum & Shaker A. Zahra, Institutional Ownership and Corporate Social
Performance: The Moderating Effects of Investment Horizon, Activism, and Coordination, 32:1 J.
Mgmt. 108 (2006) (using KLD data).
91
See Mark R. DesJarnie, Emilio Marti & Rodolphe Durand, Why Activist Hedge Funds Target
Socially Responsible Firms: The Reaction Costs of Signaling Corporate Social Responsibility, Acad.
Mgmt J. (2020 in press) https://doi.org/10.5465/amj.2019.0238.
92
See Bratton & Wachter, supra note 4 (discussing shareholder activists and the corporate policies
they promote to produce short term gains at the possible expense of long term harm).
93
For in early introduction to this literature, see Archon Fung, David Weil, Mary Graham & Elena
Fagotto, The Political Economy of Transparency: What Makes Disclosure Policies Effective? (2004),
https://ash.harvard.edu/publications/political-economy-transparency-what-makes-disclosure-policies
-effective. See also Archon Fung, Mary Graham & David Weil, Full Disclosure: The Perils and
Promise of Transparency (2007).
94
See Williams, supra note 49, at 642–43.
95
See Beate Sjåfjell & Linn Anker Sørensen, Directors Duties and Corporate Social Responsibility,
in Boards of Directors in European Companies: Reshaping and Harmonizing Their Organisation
and Duties 25 (Hanne Birkmose, Mette Neveille & Karsten Engsig Sørensen, eds., 2013/2014), http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=2322680.
96
See Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014,
amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by
certain large undertakings and groups, Official Journal of the European Union L330/1-330/9.
organizations,” such as banks and insurance companies, to “prepare a non-financial statement

containing information relating to at least environmental matters, social and employee-related
matters, respect for human rights, anti-corruption and bribery matters.”97 This requirement
builds upon EU accounting rules (the EU Accounts Modernization Directive) that have, since
2003, required companies to report on environmental and labor issues “to the extent neces-
sary” to provide investors with an accurate view of the company’s financial position and the
risks to that position.98
As of 2020, as part of the European Green Agenda and its Sustainable Finance Agenda,
the EU Commission has begun a review of the Non-Financial Reporting Directive, since
the current non-financial reporting regime is perceived as insufficient to drive the necessary
transition to a sustainable, low-carbon economy.99 While is it too soon to know what will
emerge from that process, it seems likely that a much more specific reporting framework will
be developed, and possibly one that covers more companies. The EU Commission has invited
the European Reporting Advisory Group to begin work on a revised non-financial reporting
standard; it expects to advance legislation later in 2020 to implement such a standard.100
Within the EU, France is particularly noteworthy, having required publicly-listed com-
panies to report data on 40 labor and social criteria since 2002, followed by requirements in
2009 for companies with more than 500 employees in high-emitting sectors to publish their
greenhouse-gas (GHG) emissions.101 It has now gone further, promulgating substantive, not
just disclosure, requirements as of 2018: a “duty of vigilance.” This substantive duty will be
discussed below.
5.3.2 The UK
In the UK, as of 2020, companies meeting certain size criteria, or in finance or regulated
industries like utilities, must include a Section 172 Statement in their annual Strategic
Report.102 Section 172 is the “enlightened shareholder value” provision of UK company
law described above, which states that directors shall make decisions for the benefit of their
members, ‘having regard to’ the likely consequences of decisions in the long-term; effects on
employees, business relationships with suppliers and customers, effects on local communities
and the environment, and fairness as between shareholder groups.103 These new reporting
requirements will apply to unquoted as well as quoted companies that meet the size criteria.104
97
See id. at ¶ 6.
98
See Sjåfjell & Sørensen, supra note 95. For further discussion of the 2003 Accounts Modernization
Directive, see Williams & Conley, supra note 73.
99
See EU Commission, Consultation Document: Review of the Non-Financial Reporting Directive
(2020), https://ec.europa.eu/info/sites/info/files/business_economy_euro/company_reporting_and
_auditing/documents/2020-non-financial-reporting-directive-consultation-document_en.pdf.
100
See EU Commission, Remarks by Executive Vice-President Dombrovskis at the Conference on
implementing the European Green Deal: Financing the Transition (Jan. 28, 2020), https://ec.europa.eu/
commission/presscorner/detail/en/SPEECH_20_139.
101
See id. (citing the New Economic Regulations Act in France, 2002).
102
See Inst. of Dirs., Corporate Governance Reporting Under Section 172 of the Companies Act 2006
(June 15, 2018), www.iod.com/news/news/articles/Corporate-governance-reporting-under-Section-172
-of-the-Companies-Act-2006.
103
See id. (setting out the full text of Section 172).
104
See id.
Meeting any two of the three following criteria will bring a company into the Section 172
Reporting regime: turnover over £36 million; balance sheet assets over £18 million; or over
250 employees.105 If companies meet the size criteria for employees, specific reporting on how
the directors “have engaged with employees, how they have had regard to employee interests
and the effect of that regard, including on the principal decisions taken by the company in the
financial year” must be included in the Section 172 Report.106
The UK has also promulgated specific disclosure requirements for commercial entities
regarding their efforts to determine that their supply chains have no modern slavery or com-
pulsory labor, pursuant to the Modern Slavery Act of 2015.107 More will be said about this
legislation below, in the context of substantive corporate responsibility legislation in a small
number of countries that require companies to take responsibility for grievous harm within
their supply chains.108
These reporting requirements build upon the UK’s three-decade history of government
support for CSR reporting; statutory requirements since the early 1990s for occupational
pension funds to discuss the way ESG facts are taken into consideration in constructing their
investment portfolios; and pressures, also since the early 1990s, by institutional investors and
NGOs in London for expanded disclosure by portfolio companies.109 As a result, 99 percent
of the top 100 companies by size in the UK publish corporate social responsibility reports.110
5.3.3 Required social disclosure outside of Europe

Outside of Europe, many countries are starting to require more disclosure of social and envi-
ronmental information, through either capital markets regulations or stock exchange listing
requirements, or both, with various degrees of specificity. These countries include Argentina,
China, Ecuador, India, Indonesia, Ireland (specific to state-supported financial institutions
after the 2008 financial crisis), Japan, Malaysia, Mexico (since 2015); South Africa, Taiwan,
and the UK.111 As a result, the highest corporate responsibility reporting rates (those over 90
percent) are found among these countries, measured by CSR reporting rates among the largest
100 companies in the country: the UK (99 percent); Japan (99 percent); India (99 percent);
Malaysia (97 percent); Mexico (90 percent); and South Africa (92 percent).112 Of course,
reporting rates are only part of the story. The quality of reporting needs also to be evaluated,
and its potential to produce the kinds of reflection that undergird the oft-heard expression “you
manage what you measure.” On climate change, human rights, and linking companies’ goals
105
Id.
106
Id.
107
See Modern Slavery Act of 2015, § 54, www.legislation.gov.uk/ukpga/2015/30/contents.
108
See infra text accompanying notes 127, 131–32.
109
See Williams & Conley, supra note 73 (discussing each of these points).
110
See infra note 112.
111
See Initiative for Responsible Inv., Corporate Social Responsibility Disclosure Efforts by National
Governments and Stock Exchanges, Hauser Center (Mar. 12, 2015), http://hausercenter.org/iri/wp
-content/uploads/2011/08/CR-3-12-15.pdf.
112
KPMG, The Road Ahead: The KPMG Survey of Corporate Responsibility Reporting (2017),
https:// a ssets .kpmg/content/ d am/k pmg/ x x/ p df/ 2017/ 10/ kpmg -survey -of -corporate -responsibility
-reporting-2017.pdf, at 15. The other countries with CSR reporting rates above 90% are France (94%);
Denmark (94%); and the United States (92%). KPMG’s surveys are the most comprehensive source of
data on ESG reporting of which this Author is aware. KPMG published its first ESG report in 1993, and
its most recent in 2017.
to the UN’s SDGs, a consistent theme emerges from KPMG’s most recent global report on
corporate responsibility reporting: much more needs to be done on the quality of reporting, on
linking risks to financial metrics, and on linking GHG targets to national and global targets.113
5.3.4 The United States

The United States has high voluntary corporate responsibility reporting rates: 92 percent in
the most recent KPMG survey.114 Yet that reporting suffers from the same quality problems
previously discussed, particularly when compared to European companies: 49 percent of US
G250 (250 largest companies in the world) acknowledge climate change as a financial risk,
versus 90 percent of French G250, 61 percent of German, and 60 percent of those in the UK;115
31 percent of the G250 in the US are connecting their social responsibility impacts to the
SDGs, versus 83 percent of the G250 in Germany, 63 percent in France, and 60 percent in the
UK;116 and on human rights risks, 65 percent of companies in North America discuss those
risks versus 79 percent in the EU.117 Academic studies have confirmed the poor quality, incon-
sistency, and incomparability of the data being produced according to voluntary standards.118
Efforts in 2018 to encourage the Securities and Exchange Commission (SEC) to require
more ESG reporting in order to address some of the quality problems have so far been unsuc-
cessful, however, in contrast to the EU, which started down that path in 2003.119 Indeed, the
US Department of Labor proposed new rules in June 2020 to discourage private pension plans
from considering ESG data in their portfolio construction.120 These agencies’ actions – and
inactions – both reflect the views of the Trump administration in the United States, but also
deeper debates in the US about whether ESG disclosure and its use in investing is a matter only
of ethics or values, or of financial value, or both, and if both if it is permissible for pension
fund trustees to use ESG data.121 It is thus unlikely that there will be required ESG disclosure
in the United States soon, and certainly not in a time frame comparable to that which we are
likely to see in the EU given its current review leading in the direction of more specific ESG
disclosure requirements.
113
See id. at 30–59.
114
See id. at 15.
115
See id. at 34.
116
See id. at 42.
117
See id. at 45.
118
See Sakis Kotsantionis & George Serafeim, Four Things No One Will Tell You About ESG Data,
31:2 J. App. Fin. 50 (2019) (discussing data problems and proposed solutions); Pedros Matos, ESG and
Responsible Institutional Investing Around the World, CFA Institute Research Foundation 49–53
(2020) (discussing data quality problems).
119
See Securities and Exch. Comm’n, Petition to the SEC to Require More ESG Data (Oct. 1, 2018),
www.sec.gov/rules/petitions/2018/petn4-730.pdf.
120
See Jeanne Wilson, Financial Factors in Selecting Plan Investments, RIN 1210-AB95 (June 22,
2020), www.regulations.gov/document?D=EBSA-2020-0004-0002.
121
See Max M. Schanzenbach & Robert H. Sitkoff, Reconciling Fiduciary Duty and Social
Conscience: The Law and Economics of ESG Investing by a Trustee, 72 Stan. L. Rev. 381 (2020)
(arguing for a narrow scope for pension trustees to invest based on ESG considerations, even where an
enhanced return/risk profile can be demonstrated).
5.4 Specific CSR Substantive Legislation
Very few countries have enacted specific substantive legislation explicitly directed to CSR.
One reason for this could be that so many of the topics included in CSR are subject to separate
domestic regulation, such as employees’ rights and labor protections, consumer protections,
product safety, environmental responsibilities, data protection, and so forth. These domestic
regulations still leave gaps in every country, and don’t purport to address problems from cor-
porate action across countries.
In some countries where the government recognizes its inability to provide for its citizens
because of a lack of resources, there is legislation to enlist the assistance of companies in
filling the financial gap through required CSR philanthropy. Such legislation has been enacted
in India, Nepal, and Mauritius.122 The controversy surrounding the adoption of this legisla-
tion in India suggests that “enlisting the assistance” of companies, which the government
did by requiring large companies to use at least 2 percent of their three prior years’ profits
on community welfare, was perceived as “commandeering assistance.”123 The legislation
(adopted in 2013) may ultimately have positive effects by requiring that large companies
constitute a board committee to oversee the budgeting and spending of these contributions, but
Afsharipour’s preliminary analysis did not observe serious engagement with the goals of the
legislation by the Indian business community.124
Regarding the transnational gaps across countries that voluntary CSR initiatives have left,
they are serious: problems of violence and human rights infringements in extractive industries;
unsafe working conditions and slavery and slavery-like problems across many industries;
natural resource depletion and declining biodiversity globally; and economic patterns that are
exacerbating the over-arching risk multiplier, climate change.125 Very few of these gaps have
been addressed by mandatory CSR legislation. Countries could enact domestic social or envi-
ronmental laws with extraterritorial application, or they could require home country corporate
entities to take legal and financial responsibility for the actions of their subsidiaries or compa-
nies in their supply chains, but most countries have not done so. In one important approach,
the UK and France have passed legislation to identify, address, and disclose information about
supply chain risks, either of slavery or forced labor, as in the UK, or serious human rights or
environmental harm, as in France.126 The French approach, entitled a “duty of vigilance,” is
particularly interesting, given that it seeks information about companies’ own actions but also
those of subsidiaries or subcontractors with established relationships.127 A third approach has
been to use the mechanisms of corporate governance to address CSR, also seen in India, by
requiring companies’ boards to have a specific social and ethics committees, such as in South
122
See generally Li-Wen Lin, Mandatory Corporate Social Responsibility Legislation Around the
World: Emergent Varieties and National Experiences, 22 U. Pa. J. Bus. L. 2 ( 2020). For a discussion of
enforced philanthropy in India, Nepal, and Mauritius, see supra text accompanying notes 31–74.
123
See Afsharipour, supra note 78.
124
See id.; supra text accompanying notes 114–28.
125
See Williams, supra note 49, at 676–78.
126
See Lin, supra note 122; supra text accompanying notes 21–31.
127
See id.
Africa,128 or to require employee participation on the board in the context of a corporate duty
for CSR, as in China.129
To date, academic evaluations of these mandatory provisions have cautiously evaluated
them as promising, but with the full promise still unfulfilled.130 The French duty of vigilance,
for instance, only applies to about 300 companies, and even so reporting by those companies
has been patchy so far.131 It has been a model for other jurisdictions’ Modern Slavery Acts,
however, such as in Australia in 2018.132 At the least, one must recognize that the ambit of
mandatory CSR provisions is quite narrow as compared to the broad scope of voluntary initia-
tives, codes, standards, disclosure frameworks, and so forth. And for the most part, when gov-
ernments do act to advance CSR, it is through required disclosure or delegating responsibility
to companies through their corporate governance mechanisms, rather than enacting specific
substantive provisions. Since many aspects of companies’ social and environmental relation-
ships intersect with specific domestic laws, this is of most concern regarding problems created
by companies’ transnational engagements, use of subsidiaries, and supply chain relationships.
6. IMPLICATIONS AND FURTHER RESEARCH
In an important paper discussed above, Aguilera and Jackson described corporate governance
from a sociological perspective as the interaction of institutional factors influencing three
important stakeholder groups: capital, labor, and management.133 More specifically, they
evaluated “(1) how a country’s property rights, financial system, and interfirm networks
shape the role of capital; (2) how a country’s representation rights, union organization, and
skill formation influence the role of labor; and (3) how a country’s management ideology and
career patterns affect the role of management.”134 Their sociologically embedded view of
corporate governance evaluated how these different institutional domains “shape stakeholder
interests and their interactions within corporate governance,”135 giving a rationale for how
different corporate governance systems have arisen in different advanced capitalist countries
(the domain they were studying). Yet, that institutional analysis doesn’t determine outcomes
within organizations, such as corporations. Aguilera and Jackson’s theoretical construct is
also explicitly “actor centered,” recognizing that companies are shaping, and shaped by, the
social and political processes by which stakeholder interests are defined (and legitimized),
both externally and within the firm.136
The Aguilera and Jackson framework suggests important institutions within countries that
are also relevant for understanding corporate responsibility, a number of which this analysis
has employed, but further evaluative work could be done using their nuanced analysis. They
also caution that one must keep the actors’ agency also in the analysis. Any specific cor-
128
Id.; supra text accompanying notes 78–94.
129
Id.; supra text accompanying notes 98–115.
130
See Modern Slavery Bill 2018 (Austl.); Afsharipour, supra note 78; Lin, supra note 122.
131
See Lin, supra note 122; supra text accompanying notes 21–31.
132
See Modern Slavery Bill 2018 (Austl.).
133
See Aguilera & Jackson, supra note 77, at 448.
134
Id.
135
Id. at 450.
136
Id.
poration’s culture or leadership may overcome weak social institutions, law, and corporate
governance mechanisms to adopt rigorous CSR initiatives, and vice versa. Still, depending on
individual companies’ culture and leadership to volunteer to address critical global problems
is a weak basis on which to make social and environmental progress, as the slow progress
towards meeting the UN’s Sustainable Development Goals shows. Indeed, depending on
voluntary CSR initiatives altogether is a weak basis for addressing critical global problems.
In Europe, we can see more progress being made on corporate responsibility issues than in
many other countries, where the social welfare system, the stakeholder corporate governance
system, required disclosure, and developing Green Deal and Sustainable Finance ambitions
support each other and reinforce strong norms of corporate responsibility. Yet, Europe doesn’t
depend on companies volunteering to provide a solid foundation for peoples’ social welfare,
or for addressing climate change or biodiversity loss. It depends on law, primarily, and lots
of it, with superior outcomes as compared to, for instance, the United States.137 Thus, on many
metrics of social welfare, Europe outperforms the United States.138
Given this author’s home country bias, the question then becomes: to what extent can the
voluntary corporate responsibility initiatives of American companies overcome the weaker
social welfare provisions in the US, and the greater attention to short-term shareholders’ inter-
ests? We do see powerful institutional investors recognizing the value of ESG information,
and that will put pressure on companies to produce ESG information that reflects positively
on the company. Climate change, as an issue, has come into particular focus for investors.
Larry Fink of BlackRock, the world’s largest investor ($7.43 trillion assets under management
as of August, 2020) sees his fund and finance generally as at a tipping point towards serious
engagement and concern for climate change. He has vowed to put climate at the center of
everything BlackRock will be doing on risk analysis and engagement.139 Still, hedge fund
shareholder activists could seem to be a more immediate threat to many companies than
would BlackRock’s engagement, given that the former often seek actual power through board
representation, while the latter is “engaging” with companies and starting to vote against
directors where action on climate is too slow.140 Even if so, in the US shareholder proposals
can only request action from directors, not demand it. And given the omnipresent specter of
shareholder activists, many companies are adopting the short-term financial strategies hedge
funds promote as a defensive matter – strategies inconsistent with the kinds of investments in
research and long-term sustainability initiatives global challenges require.141
Moreover, there is a difference for companies from investments in environmental initia-
tives beyond law – thus motivated by CSR – and investments in their people: the former can
eventually save money for the firm, while the latter, particularly higher wages, can continue
137
See Robert Kagan, Neil Gunningham & Dorothy Thornton, Explaining Corporate Environmental
Performance: How Does Regulation Matter?, 37 L. Soc’y Rev. 51 (2003) (finding that differences in
environmental laws explained the most significant part of differences between the environmental perfor-
mance of paper and pulp mills being operated in different states in the US and Canada).
138
See Thomas Geoghegan, Were You Born on the Wrong Continent? How the European
Model Can Help You Get a Life (The New Press 2011) (collecting data).
139
See Letter from Larry Fink, CEO, BlackRock, A Fundamental Reshaping of Finance (2020), www
.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter.
140
See Attracta Mooney, BlackRock Punishes 53 Companies Over Climate Inaction, Fin. Times (July
14, 2020), www.ft.com/content/8809032d-47a1-47c3-ae88-ef3c182134c0.
141
See Wachter & Bratton, supra note 4; Coffee & Palia, supra note 5.
to cost money. While organizational psychologists have shown for decades that there are
positive productivity gains from workplaces perceived as fair, including from fair wages; and
investments in employee training and development become increasingly important in today’s
knowledge-based economies, accounting rules around the world still categorize all such
expenditures as costs, not “capital investments,” discouraging some companies from making
them.142 Thus, both quantitative and qualitative research should be engaged to develop the best
case possible for encouraging companies to invest in their people, even as policy initiatives
continue to work towards accounting rules that treat such investments as capital investments,
not pure costs.
Further research is also needed on the power, but also limits, of voluntary disclosure as
a regulatory mechanism. Do Fong et al.’s results from the early 2000s still hold that disclo-
sure must be mandatory to produce changes within companies. We now have the potential
to evaluate ESG disclosure on a longitudinal basis. CDP (formerly the Carbon Disclosure
Project) has 15 years of data from companies on their GHG emissions. GRI has 20 years of
data on ESG disclosure according to its evolving frameworks. Do companies that disclose
such data actually show more improvement than matched companies that do not disclose?
And how might the direction of causation be determined: do companies with better social
and environmental practices initially disclose more, which seems logical, or is engaging in
the process of developing information for disclosure causing changes in company practices?
These are important questions to further evaluate, again through both quantitative and quali-
tative research.
The BRT statement adopting a stakeholder perspective on the corporate purpose also gives
rise to important research questions. It creates a natural experiment: do the companies whose
CEOs signed the statement adopt different policies and practices after signing versus before?
Are particular industries over- or under-represented? If materials could be uncovered, an intel-
lectual history of the statement would be fascinating.
Ultimately, this author concludes as follows: CSR may be a useful, even important, develop-
ment in a world where globalizing corporate power is transforming patterns of production, and
where the world’s population is exploding. It is hardly sufficient to address the inter-connected
social and environmental challenges those transformations are producing.
142
See Securities Exch. Comm’n, Human Capital Management Coalition Petition (July 6, 2017),
www.sec.gov/rules/petitions/2017/petn4-711.pdf (discussing how accounting rules discourage human
capital investments).
PART II
THE BOARD: ITS DUTIES AND

ITS FUNCTIONS
7. The structure of the board of directors: boards
and governance strategies in the US, the UK
and Germany
Klaus J. Hopt and Patrick C. Leyens
1. INTRODUCTION
The board of directors is the nucleus of internal corporate governance. The internationally
predominant board model, as known from the US or the UK, reveals a one-tier structure.
One-tier boards of large business corporations tend to comprise a considerable number of
non-executive directors, often a majority or even a supermajority. In a two-tier structure, as
found in continental European countries like Germany, non-executive directors are members
of the supervisory board, while the management board is composed of executive directors.
Thus, the two-tier model provides for a structural division of management and monitoring,
while one-tier boards achieve such division through the appointment of non-executive direc-
tors and their membership on specific board committees.
This chapter continues our research on “Board Models in Europe – Recent Developments
of Internal Corporate Governance Structures in Germany, the United Kingdom, France and
Italy.”1 Some countries such as Germany oblige stock corporations by law to set up a super-
visory board, while other countries allow for flexibility in board structuring.2 In 2001, the EU
introduced the Societas Europaea (European Stock Corporation) as a genuine supra-national
corporate form. Businesses that incorporate as Societas Europaea are free to choose between
the one-tier and two-tier board model. Around the same time, flexibility in board structures
became a focus of legal reform in France and Italy, partly in addition to preexisting board
model choices.3 As of today, board model choices have been made available in roughly half
of the EU Member States.4
1
Klaus J. Hopt & Patrick C. Leyens, Board Models in Europe – Recent Developments of Internal
Corporate Governance Structures in Germany, the United Kingdom, France and Italy, 1 Eur. Company
& Fin. L. Rev. 135–68 (2004); also in VOC 1602-2004 – 400 Years of Company Law 281–316 (Ella
Gepken-Jager, Gerard van Solinge & Levinus Timmerman eds., 2005); in Chinese: 1 Company and
Securities Law Review (Beijing, China) 217–45 (2005) (translation: Ding Ding); European Corporate
Governance Institute (ECGI), Law Working Paper No. 18/2004; SSRN: http:// ssrn
.com/
abstract
=
487944.
2
Paul L. Davies & Klaus J. Hopt, Corporate Boards in Europe – Accountability and Convergence,
61 Am. J. Comp. L. 301 (2013).
3
For a country-by-country analysis, see Paul Davies, Klaus J. Hopt, Richard Nowak & Gerard
van Solinge (eds.), Corporate Boards in European Law: A Comparative Analysis (2013).
4
Klaus J. Hopt, Comparative Corporate Governance: The State of the Art and International
Regulation, 59 Am. J. Comp. L. 1, 23 (2011). For the country reports cited therein, see Comparative
Corporate Governance, A Functional and International Analysis (Andreas M. Fleckner &
Klaus J. Hopt eds., 2013).
116
The structure of the board of directors 117
In our earlier research, we advanced a plea for more flexibility and leaving the choice of
the suitable board model to private parties.5 Our present chapter supports this plea. It shows
that a board model only provides a basic structure to enable the use of specific corporate gov-
ernance strategies. It is the use of these specific strategies, not the preexisting use of a board
model, that determines the governance of agency relations between owners and managers,
controlling and non-controlling shareholders, and shareholder and stakeholder constituencies.
The most relevant strategies in this context relate to the well-known pairs of initiation or veto,
and reward or trusteeship.6 By using these strategies, the basic structure, as provided by a board
model, is converted into a specific allocation of control rights. Under this allocation, the initi-
ation of business decisions is often left to the board, while shareholders have a veto right with
regard to some matters. Differentiated versions of the decision rights strategy or the trusteeship
strategy aim to refine this initial allocation by further structuring the decision-making body.7
The right of shareholders to veto a transaction can be entrusted to all shareholders, or only to
those who are disinterested in the transaction at stake. Further, the trusteeship strategy can be
employed to allocate control over specific matters to independent board members as a fraction
of directors, thus excluding non-independent members from decision-making.
Throughout the chapter, we explore board structures with a view to the basic structure of
the board, i.e. one-tier or two-tier. We show that techniques of structuring the decision-making
body can be employed, independent of the board model. The chapter focuses on boards of
large business corporations with a stock exchange listing to secure cross-country comparabil-
ity. Our three sample jurisdictions are the US,8 the UK and Germany. France and Italy will be
considered to round out the discussion of selected issues. In Section 2, we explore takeover
defenses to explain basic board structures and techniques for structuring the board vis-à-vis
excluding the board from decision making. Section 3 turns to related party transactions and
shows how structuring either the board or the shareholder body can contribute to minority
shareholder protection. In Section 4, we look at stakeholder constituencies, especially the
allocation of decision rights to employees, with a view to exemplify a strategy that will prompt
private parties to choose a two-tier board and whose statutory prescription limits board model
choices. Section 5 sums up.
2. BOARDS AND MARKETS: CONTROL OVER TAKEOVER

DEFENSES
The board of directors operates within a system of corporate governance.9 Governance systems
can be roughly grouped according to whether the operation of the company by the board is
determined by market forces (outsider control), or by mechanisms within the corporation and
5
Hopt & Leyens, supra note 1, at 163.
6
John Armour, Henry Hansmann & Reinier Kraakman, Agency Problems and Legal Strategies,
in The Anatomy of Corporate Law: A Comparative and Functional Approach 29, 32 (Reinier
Kraakman et al. eds., 3d ed. 2017).
7
Paul Davies, Introduction to Company Law 143, 145 (3d ed. 2020).
8
We focus on Delaware law unless otherwise specified.
9
Ronald J. Gilson, From Corporate Law to Corporate Governance, in The Oxford Handbook of
Corporate Law and Governance 3 (Jeffrey N. Gordon & Wolf-Georg Ringe eds., 2018).
by its networks (insider control).10 Given the traditionally greater extent of dispersed owner-
ship in the US and UK, the governance systems of those countries serve as examples of pow-
erful outsider control.11 Conversely, the more concentrated ownership patterns in continental
Europe, historically including Germany, imply a strong impact of insider control.12 These
differences influence the way the board of directors provides a basic structure for the operation
of internal corporate governance vis-à-vis external market forces. In this section, we will look
at the market for corporate control. As we will see, the role of the board is not determined by
its basic structure, but by the allocation of decision rights with regard to defensive measures
against hostile takeover bids.
2.1 Director Empowerment (US)
In the US, it is widely accepted that a functioning market for corporate control can serve as
a highly effective corporate governance mechanism.13 Directors who wish to retain their posi-
tion are well advised to keep the stock price high in order to make hostile bids less likely, if
not impossible. The market for corporate control thus serves as a removal strategy that aligns
the interests of manager agents to those of shareholder principals.14 Takeovers, however,
are also a source of specific agency problems, which differ from those of other fundamental
changes like mergers.15 A takeover is executed via the market. This means that, to be effected,
a takeover does not require consent of the general meeting. Instead, its success depends on
whether a sufficient number of shareholders tender their shares. For a controlling shareholder,
this setting does not materially differ from an ordinary sale transaction. Non-controlling share-
holders, in contrast, are at risk of ending up as a minority that is vulnerable to exploitation by
the successful acquirer. Accordingly, they face a pressure to tender, independent of whether
the consideration offered by the bidder is fair or unfair.16
US corporate law seeks to solve the coordination problem of non-controlling shareholders
by vesting the board with the power to negotiate favorable tender terms.17 At the point a sale of
a corporation is imminent, under the Revlon doctrine, the role of the board directors transforms
10
Reinhard H. Schmidt & Marc Tyrell, Information Theory and the Role of Intermediaries in
Corporate Governance, in Corporate Governance in Context 481, 489 (Klaus J. Hopt, Eddy
Wymeersch, Hideki Kanda, & Harald Baum eds., 2005).
11
Gur Aminadav & Elias Papaioannou, Corporate Control around the World, 75 J. Fin. 1191, 1211
(2020).
12
On the change of ownership structures around the new millennium, see infra section 2.3 and notes
45 et seq. For accounts of the traditional structures, cf. Marco Becht & Ekkehart Böhmer, Ownership and
Voting Power in Germany, in The Control of Corporate Europe 128 (Fabrizio Barca & Marco Becht
eds., 2001); Reinhard H Schmidt, Corporate Governance in Germany: An Economic Perspective, in The
German Financial System 386 (Jan Pieter Krahnen & Reinhard H. Schmidt eds., 2004).
13
Jonathan R. Macey, Corporate Governance: Promises Kept, Promises Broken 10, 118
(2008) (“historically, the most effective corporate governance mechanism”).
14
Armour, Hansmann & Kraakman, supra note 6, at 37.
15
Paul Davies, Klaus Hopt & Wolf-Georg Ringe, Control Transactions, in Anatomy of Corporate
Law, supra note 6, at 205, 207.
16
Lucian A. Bebchuk, The Pressure to Tender: An Analysis and a Proposed Remedy, 12 Del. J.
Corp. L. 911 (1987).
17
Ronald J. Gilson & Alan Schwartz, An Efficiency Analysis of Defensive Tactics, 11 Harv. Bus. L.
Rev. (forthcoming 2020).
from “defenders of the corporate bastion to auctioneers charged with getting the best price for
the stockholders”.18 Their fiduciary duties shift from long-term corporate interest to short-term
shareholder interest and the business judgment rule will be replaced with an enhanced scrutiny
standard for judicial review.
US boards, however, are not limited to the role of a passive auctioneer. They must actively
take defensive measures to frustrate a bid if they reasonably think the tender terms are unfa-
vorable.19 It follows that, although the shareholders of the target company are the actual parties
to the dealings, the board of directors of the target company takes control over the success of
the takeover (director primacy).20
It is precisely this disjunction that explains, as we will explore further below, why some
countries like the UK adopt specific control shift regulation to overcome imminent agency
problems in takeovers.21 Absent such regulation in the US, those problems must be dealt with
by general corporate law. It is obvious that the power of the board to frustrate a bid comes at
the risk of directors taking defensive measures to serve their own positional interests rather
than those of shareholders. US courts react to this danger, since the landmark decision in
Unocal,22 by enhanced judicial scrutiny of defensive measures.23 To escape liability, directors
must satisfy a fairness standard that in effect, under current case law, requires support of the
decision by a majority of independent directors.
It follows that US law uses a technique of board structuring to channel the impact of the
takeover market as a removal strategy. By requiring approval of independent directors, the law
entrusts decision rights to a fraction of the members of the board. We will explore details of
director independence with a view to minority shareholder protection in Section 3.24 Generally,
director independence is a governance strategy that builds on trusteeship. Trusteeship can be
employed equally well in a one-tier board and two-tier board to focus board structuring. Thus,
the independence requirement goes beyond a basic structural division of the management and
the supervisory task, which is characteristic for the two-tier board.
Anecdotal evidence taken from the US Airgas case may help in understanding the differ-
ence between the basic structure, as provided by a board model, and techniques of structuring
the board as a decision maker by using the trusteeship strategy.25 In Airgas, the acquirer
initiated a proxy fight that allowed her to install three new independent directors on the board.
Upon taking independent advice, the new directors shared the view of the other directors that
18
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986).
19
Emiliano M. Catan & Marcel Kahan, The Law and Finance of Antitakeover Statutes, 68 Stan. L.
Rev. 629, 637 (2016).
20
Stephen M. Bainbridge, Director Primacy, in Research Handbook on the Economics of
Corporate Law 17 (Claire A. Hill & Brett H. McDonnell eds., 2012); Stephen M. Bainbridge, The
New Corporate Governance in Theory and Practice 17 (2008).
21
Afra Afsharipour, Corporate Governance in Negotiated Takeovers: The Changing Comparative
Landscape, in Research Handbook on Comparative Corporate Governance (Afra Afsharipour &
Martin Gelter eds., 2021); Davies, Hopt & Ringe, supra note 15, at 211, 227; Matteo Gatti, The Power to
Decide on Takeovers: Directors or Shareholders, What Difference Does It Make?, 20 Fordham J. Corp.
Fin. L. 73 (2014).
22
Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
23
Davies, Hopt & Ringe, supra note 15, at 211, 218; Afra Afsharipour & J. Travis Laster, Enhanced
Scrutiny on the Buy-Side, 53 Geo. L. Rev. 443, 458 (2019).
24
See infra section 3.1.
25
Air Products and Chems., Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Ch. 2011).
the acquirer’s bid undervalued Airgas. The fact that the new directors served as non-executive
directors does not explain why they felt prepared to oppose the acquirer to whom they owed
their office. Similarly, the division of tasks between two boards will secure disinterested
decision-making only if combined with governance strategies that specifically aim to foster an
independent review of a takeover bid or any other business matter.
2.2 Shareholder Decision-Making (UK)
In the UK, it is well accepted, like in the US, that a functioning market for corporate control
serves as a mechanism of aligning the interests of incumbent management to those of dis-
persed shareholders.26 Contrary to the general corporate law approach chosen in the US, since
1968 the UK City Code on Takeovers and Mergers has provided a set of specific control shift
rules.27 The first of the two main components of the rules relates to the acquirer’s obligation to
launch a bid to all shareholders upon crossing the control threshold of 30 percent (mandatory
bid), thus providing shareholders with an exit option at an early stage. The second relates to
the duty of the target board to refrain from taking any measure that could frustrate the success
of the bid (no-frustration rule).28 While US law empowers the board of directors to serve as
agents for shareholders, the UK no-frustration rule removes the board from decision-making
by reinstalling shareholder decision-making over defensive measures (shareholder primacy).29
The no-frustration rule is thought to preclude directors from taking self-interested defensive
measures. Removing directors from decision-making, however, deviates from the principle of
delegated management, which counts as a core prerequisite for the functioning of a large busi-
ness corporation.30 The essential rationale of delegated management lies in enabling corporate
decisions independent from the shareholder structure of the company and from changes in the
shareholder base. Where shareholders are dispersed, delegated decision-making by the board
mitigates the collective action problem pertaining to large groups. With a view to takeover
defenses, the board of directors can be understood as an institution to save coordination costs
between non-controlling shareholders. These costs re-emerge when the board is removed from
its coordination tasks.
Disclosure can help overcome the information asymmetry between the target sharehold-
ers and the acquirer, but additional information will not eliminate the re-emerging costs.31
The City Code obliges target boards to issue a reasoned fairness opinion that must include
an assessment of the bid price by an independent advisor, normally an investment bank.32
26
Paul Davies, Control Shifts via Share Acquisition Contracts with Shareholders, in The Oxford
Handbook of Corporate Law and Governance, supra note 9, at 532.
27
Panel on Takeovers and Mergers, City Code on Takeovers and Mergers (12th ed. 2016).
28
Id. at r. 9 and 21.
29
Klaus J. Hopt, Takeover Defenses in Europe: A Comparative, Theoretical and Policy Analysis,
20 Colum. J. Eur. L. 249, 254 (2014) (taking the clear position for the UK model and against the
approaches taken by the US and Germany).
30
John Armour, Henry Hansmann, Reinier Kraakman & Mariana Pargendler, What is Corporate
Law?, in Anatomy of Corporate Law, supra note 6, at 1, 11.
31
John Armour & Brian Cheffins, Stock Market Prices and the Market for Corporate Control, 2016
U. Ill. L. Rev. 1010 (2016).
32
City Code on Takeovers and Mergers, supra note 27, at r. 3.1 (board of the offeree company)
& r. 3.2 (offeror company).
However, even such qualified disclosure will not fully resolve the pressure to tender problem
of dispersed shareholders.
While the board of a target company serves as an active auctioneer and negotiator for share-
holders under US law, the directors of a target company in the UK are precluded from inter-
vention under the no-frustration rule. British control shift regulation must therefore include
some form of third-party control over the fairness of the bid price. The City Code obliges the
acquirer to set the consideration offered in a mandatory bid “at not less than the highest price
paid by the offeror … for any interest in shares of that class during the 12 months prior to the
announcement of that offer.”33 To understand the operation in practice, it should be noted that
enforcement of these terms of fairness lies in the hands of the Takeover Panel. The powers of
the Panel historically emanated from self-regulation. Despite its later statutory backing and
a general trend toward fostered state control, the Panel still comprises some typical elements
of self-regulation like public shaming of non-compliant parties.34
Although by different means, the approaches chosen in the US and the UK both seek to
give effect to market forces by eliminating dangers of self-interested takeover defenses by the
board of directors.35 As a strategy, the empowerment of the board to take defensive measures
in the US hinges on the general standard of duty for directors. Generally, standards derive
their contours through ex-post review.36 In contrast, a rule-based approach as employed by the
City Code relies on an ex-ante prescription of behavior.37 Arguably, the removal of directors
from decision making over takeover defenses has the advantage of saving shareholders from
problems of risk aversion or, as highly relevant in regard to defenses, over-confidence of their
directors.38 In theory, either problem can be tackled by constraints, but carving out directors’
duties through liability cases takes time and often does not sufficiently guide decision-making
in complex settings.39 Conversely, an ex-ante approach carries the danger of a gap in fairness
control throughout the process of a takeover bid. Under the City Code, this gap is filled by
oversight and sanctioning power of the UK Takeover Panel. The exercise of a continuing fair-
ness control by a specialized supervisory body like the Takeover Panel is said to have advan-
tages over ex-post judicial review, especially with regard to cases at the margin.40 However,
the highly specialized judiciary and bar of Delaware, together with the large body of case law,
might help avoid typical shortfalls of ex-post decision-making like hindsight bias.41
33
Id. at r. 9.5 (consideration to be offered).
34
David Kershaw, Principles of Takeover Regulation 65, 112 (2016).
35
Id. at 297. On experience with self-regulation in the UK, cf. Brian R. Cheffins, Company Law:
Theory, Structure, and Operation 364 (2004).
36
Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 Duke L.J. 557, 571 (1992).
37
John Armour & David Skeel, Who Writes the Rules for Hostile Takeovers and Why? The Peculiar
Divergence of the U.S. and U.K. Takeover Regulation, 95 Geo. L.J. 1727 (2007).
38
Michal Barzuza & Eric L. Talley, Long-Term Bias, Colum. Bus. L. Rev. 107 (2020). For a critical
discussion, see Stephen M. Bainbridge, Long-Term Bias and Director Primacy, Colum. Bus. L. Rev.
801 (2020).
39
Patrick C. Leyens & Michael G. Faure, Directors & Officers Liability: Economic Analysis, in
Directors & Officers (D&O) Liability 769, 777 (Simon F. Deakin, Helmut Koziol & Olaf Riss eds.,
2018).
40
See e.g. City Code on Takeovers and Mergers, supra note 27, at r. 9.5 (“The Panel should be
consulted where there is more than one class of share capital involved.”).
41
1137, 1144 (Mathias Reimann & Reinhard Zimmermann eds., 2d ed. 2017).
Up to this point, the comparison made four points clear: firstly, a board model only provides
a basic structure for the operation of specific governance strategies, in the example of takeo-
vers, for the disciplining force of the market for corporate control. Secondly, the board model
as such is not a proxy for the allocation of control rights to directors vis-à-vis shareholders.
Thirdly, agency problems in takeovers can be tackled by focusing board structure through the
allocation of control to independent directors, i.e. a fraction of the board members (US), or,
conversely, by a removal of the board from its coordination task through reinstalling share-
holder decision making (UK). Fourth, the merits of possible solutions hinge on the credible
threat of duty enforcement, which, as the debate stands, might be created equally well ex-ante
through continuous monitoring by a specialized body (UK), or ex-post by specialized courts
(US).
2.3 Supervisory Board Approval (Germany)
We now look into the handling of the same agency problem in a German two-tier board.
Germany is one of the countries where stock corporations are obliged to set up a two-tier
board.42 This means that management and monitoring are divided between two separate
bodies. Similar to other continental European countries, stock ownership was traditionally
concentrated in Germany.43 Cross-shareholdings and the strong role of banks created what was
known as the “German Inc.”, i.e. a particularly strong form of insider control. Decisions over
control shifts were essentially made by small groups of individuals. Thus, market forces did
not play a major role for corporate governance during that era.44
The new millennium marked a turning point.45 The takeover of German Mannesmann by
British Vodafone of 2000 was the largest cross-border acquisition in the history of the EU.
Around that time, cross-shareholdings declined and banks sold large parts of their equity.
Today, around 60 percent of the shares in the German top 30 listed stock corporations are held
by institutional investors, more than half of which are based abroad.46 Institutional investors
tend to own small bundles of less than 5 percent of the shares of a company. The rise of insti-
tutional investor ownership in Germany thus further contributes to the change in the ownership
pattern.
The German two-tier board cannot be seen as a vehicle to serve the peculiarities of a national
insider system anymore.47 To be sure, two qualifications should be made: First, relics of the
42
Aktiengesetz [Stock Corporation Act], sec. 23, para. 5, 76, 95. For a comparative overview, cf.
Paul Davies, Klaus J. Hopt, Richard G. J. Nowak & Gerhard van Solinge, Boards in Law and Practice:
A Cross-Country Analysis in Europe, in Corporate Boards in European Law: A Comparative
Analysis, supra note 3, at 3, 15.
43
Marco Becht & Ekkehart Böhmer, Ownership and Voting Power in Germany, in The Control of
Corporate Europe 128 (Fabrizio Barca & Marco Becht eds., 2001).
44
Cf. the references supra note 12.
45
Klaus J. Hopt, Law and Corporate Governance: Germany within Europe, 27 J. Applied Corp.
Fin. 15 (2015); Wolf-Georg Ringe, Changing Law and Ownership Patterns in Germany: Corporate
Governance and the Erosion of Deutschland AG, 63 Am. J. Comp. L. 493 (2015).
46
For some corporations, the percentages are considerably higher: Münchener Rück (87%), Bayer
(86%), Allianz (83%) and BASF (56%). Cf. Ipreo/DIRK, Die Aktionärsstruktur des deutschen Leitindex
DAX 30 (June 2018), at 7.
47
Davies & Hopt, supra note 2, at 312. Cf. Paul L. Davies, Board Structure in the UK and Germany:
Convergence or Continuing Divergence? 2 Int. Comp. Corp. L.J. 435 (2000) (providing an account of
the German supervisory board at the time before the new millennium).
“German Inc.” can still be found in some of the large business enterprises. Second, as we will
see in Section 4, employee co-determination sustains elements of insider control.48 These two
qualifications in mind, the changes in ownership force management boards as well as supervi-
sory boards to be aware of the market for corporate control in a way that compares to the US
and the UK much better than it did earlier.
In 2004, the EU adopted the Directive on Takeover Bids.49 After a struggle that lasted
roughly 30 years, the EU decided to follow the approach chosen by the UK.50 Generally, the
EU Member States must provide for the mandatory bid on the side of the acquirer and the
no-frustration rule on the side of the target.51 The no-frustration rule, however, was considera-
bly watered down by optional arrangements that many EU Members States used.52 Under the
German takeover statute, the most important deviation from the UK comes from the power of
the supervisory board to authorize defensive measures upon the management board’s request.53
German takeover law thus does not mirror the approach chosen by the UK. It would be
equally misguided to believe that entrusting the supervisory board with the right to author-
ize defensive measures resembles board empowerment in the US. It is true that the role of
non-executive directors in a one-tier board and of supervisory directors in a two-tier board
are similar.54 Because both types of directors serve on a non-executive basis, they are mainly
expected to secure due decision-making through giving or withholding their approval.55 The
German Stock Corporation Act codifies this expectation by limiting the supervisory board to
vetoes, while reserving the right to initiate business decisions for the management board.56 In
practice, however, cooperation between the two boards will often lead to undamped imple-
mentation of defensive measures.57
German supervisory boards, it appears, are prone to support defensive measures against
a hostile takeover, primarily due to two factors: first, case law carved out a duty to continu-
ously consult with and proactively give advice to the management board which, in sum, results
in cooperation between the two boards.58 Second, co-determination legislation obliges large
business corporations to give half of the supervisory board seats to employee representatives.
48
Cf. the anecdotal examples infra notes 187, 188.
49
Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover
bids, OJ L 142, 30.4.2004, at 12.
50
High Level Group of Company Law Experts, Report on Issues Related to Takeover Bids
(European Commission, 2002); the report is printed in Reforming company and takeover law in
Europe 825 (Guido Ferrarini, Klaus J. Hopt, Jaap Winter & Eddy Wymeersch eds., 2004).
51
Klaus J. Hopt, European Takeover Reform of 2012/2013 – Time to Re-examine the Mandatory Bid,
15 EBOR 143 (2014) (taking sides for the mandatory bid, but pleading for reforms).
52
European Commission, Application of Directive 2004/25/EC on takeover bids, Report, 28.6.2012,
COM(2012) 347 fin. See Paul Davies, Edmund-Philipp Schuster & Emilie van de Walle de Ghelcke, The
Takeover Directive as a Protectionist Tool?, in Company Law and Economic Protectionism: New
Challenges to European Integration 105, 148 (Ulf Bernitz & Wolf-Georg Ringe eds., 2010).
53
Wertpapiererwerbs- und Übernahmegesetz [Securities Acquisition and Takeover Act], sec. 33,
para. 1.
54
Hopt & Leyens, supra note 1, at 160.
55
Stephen M. Bainbridge & M. Todd Henderson, Outsourcing the Board 45 (2018).
56
Aktiengesetz, supra note 41, at sec. 111, para. 4.
57
See also infra section 4.3.
58
BGH, Judgment of 25.03.1991 – II ZR 188/89, BGHZ 114, 127, para. 10; BGH, Judgment of
04.07.1994 – II ZR 197/93, BGHZ 126, 340, para. 8. See also infra section 3.3; Renée B. Adams &
Daniel Ferreira, A Theory of Friendly Boards, 62 J. Fin. 217 (2007) (explaining benefits of cooperation).
We will explore details of employee co-determination in section IV with a view to stakeholder

protection. To understand its impact on takeover defenses, it is important to recognize that
one cannot realistically expect employee representatives to easily accept the job losses that
normally follow the acquisition of one business by another. Thus, employee representatives
might team up with management or a controlling shareholder who wishes to frustrate the bid.
The risk of being held liable for doing so appears to be negligible. As it stands, employee
representatives widely act unconstrained in regard to furthering takeover defenses which run
counter to the interests of minority shareholders.
As we have seen, in theory, the approaches to takeover defenses differ considerably. The
differences, however, do not result from the adoption of either a one-tier or a two-tier board.
Rather, they follow from the use of specific governance strategies like the empowerment of
independent directors as a fraction of the board (US), the complete removal of the board from
decision making (UK), or the cooperation between two boards (Germany). It is not surprising
that, connected to this, we find different modes of third-party control: ex-ante by the Takeover
Panel as a specialized body (UK) or, at least in theory, ex-post by courts (US, Germany).59
The foregoing observations show a rather counterintuitive grouping of the sample juris-
dictions. Germany, as an EU Member State, follows UK control shift regulation in that its
takeover law foresees the no-frustration rule. In practice, however, the right of the supervisory
board to approve a takeover defense better compares to board empowerment. Thus, it appears
more adequate to group the US and Germany together. A major difference that we will explore
in the next section relates to the structuring of the decision-making body by the use of the
trusteeship strategy.
3. BOARDS AND MINORITY SHAREHOLDERS:

INDEPENDENT DIRECTORS AND RELATED PARTY
TRANSACTIONS
Boards of large listed corporations regularly comprise a certain proportion of independent

directors everywhere.60 The appointment of independent directors does not modify the
legal concept of the unitary board according to which all (supervisory) directors, including
independent ones, are vested with equal voting rights and powers. Rather, it focuses internal
decision-making by making use of two different sets of incentives. Independent directors
are believed to be primarily motivated by reputation, pride, and conscience (low-powered
incentives).61 Their incentives accordingly differ from those of their non-independent board
colleagues, for whom constraints and rewards count as predominant incentives (high-powered
incentives). The involvement of independent directors in board decision-making makes use of
59
Bernard S. Black, Brian R. Cheffins & Michael D. Klausner, Liability Risk for Outside Directors:
A Cross-Border Analysis, 11 Eur. Fin. Mgmt. J. 153 (2005) (finding that dangers of out-of-pocket
liability are similarly weak in common law countries like Australia, Canada, Britain, US, and civil law
countries like France, Germany, and Japan).
60
Jeffrey N. Gordon, The Rise of Independent Directors in the United States, 1950-2005: Of
Shareholder Value and Stock Market Prices, 59 Stan. L. Rev. 1465, 1514 (2007); Hopt, supra note 4,
at 35; Dan W. Puchniak & Kon Sik Kim, Varieties of Independent Directors in Asia, in Independent
Directors in Asia 89 (Dan W. Puchniak, Harald Baum & Luke Nottage eds., 2017).
61
Armour, Hansmann & Kraakman, in Anatomy of Corporate Law, supra note 6, at 35.
a governance strategy known as trusteeship. Independence from management serves to miti-

gate the agency conflicts between shareholders and management, and thus primarily evolved
in dispersed ownership countries like the US and the UK.62 In this section, we will not focus on
independence from management, but rather on independence from a controlling shareholder.
Director independence is primarily seen as a strategy to mitigate agency conflicts between
minority and majority shareholders in countries with concentrated ownership like many of
the continental EU Member States.63 In all sample jurisdictions, the agency conflict between
minority and majority shareholders becomes relevant following a change of control, and thus
appears to be the next logical step following our analysis of board structures and defensive
measures against takeovers in the previous section. Parallel to new developments in US case
law, the amended EU Shareholder Rights Directive of 2017 moved related party transactions
(RPTs) to the center of the debate.64 The fundamental challenge of regulating RPTs relates
to balancing the minority interest in setting the terms at arm’s length against the controlling
shareholder interest in wealth transfers or economies of cooperation, especially within groups
of companies.65 The legal regimes within the EU Member States use different tests to identify
an RPT, but the typical choice is 5 percent of the company’s value (in Germany, 1.5 percent).66
The directive leaves it to the Member States to decide whether the fairness of RPTs should be
secured by structuring the board and putting the decision in the hands of independent directors,
or by using an alternative governance strategy.
3.1 Director Independence (US)
Boards of large US companies often comprise a considerably high proportion of independent

directors, with many cases comprising up to a supermajority.67 Companies listed on the NYSE
must have a majority of independent directors.68 To be independent under the NYSE Listing
Rules, a director shall not have a material relationship with company.69 However, to ensure
that the controller’s views prevail with regard to corporate strategy, this rule does not apply to
companies where half or more of the voting power is held by an individual or a company.70 To
62
Gordon, supra note 60, at 1514; Brian R. Cheffins, Corporate Ownership and Control:
British Business Transformed 8, 26 (2008).
63
EU Commission Recommendation of 15 February 2005 on the role of non-executive or supervi-
sory directors of listed companies and on the committees of the (supervisory) board (2005/162/EC), OJ
EU L 52 of 25.2.2005, at 51, preamble no. 7.
64
Article 9c Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017
amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, OJ
L 132, 20.5.2017, at 1.
65
Luca Enriques & Tobias H. Tröger, The Law and (Some) Finance of Related Party Transactions:
An Introduction, in The Law and Finance of Related Party Transactions 1 (Luca Enriques &
Tobias H. Tröger eds., 2019).
66
European Company Law Experts Group (ECLE), Implementation of the SRD II Provisions on
Related Party Transactions (ECGI - Law Working Paper No. 543/2020), https://ssrn.com/abstract=
3697257, at 19, 22. See also Andreas Engert & Tim Florstedt, Which Related Party Transactions Should
be Subject to Ex Ante Review? Evidence from Germany, 20 J. Corp. L. Stud. 263 (2020) (showing
pitfalls of the single factor test).
67
Gordon, supra note 60, at 1473, 1481.
68
NYSE Listed Company Manual (Nov. 25, 2019), sec. 303A.01.
69
Id.
70
Id. at section 303A.00 (noting the exemption for controlled companies).
balance out the interests of the majority against those of the controller, US law focuses board
structuring not on the board in general, but rather on decision-making with regard to the spe-
cific RPT.71 Driven by case law, the approval by independent directors became the paradigm
for achieving transaction certainty.72
As a default rule, courts will review the terms of RPTs under the stringent “entire fairness
test,” which implies both procedural and substantive fairness.73 The controller bears the burden
of proving fairness. Litigation risks can be avoided, or at least substantially reduced by setting
up a special committee composed of substantially independent directors. The committee must
be vested ab initio with the task of negotiating the RPT and with the authority to say no if the
terms are not favorable. The judicial standard remains entire fairness, but the burden of proof
will be shifted to the party who challenges the substantive fairness of the transaction. In the
MFW case of 2014, the Delaware Supreme Court went one step further.74 The court held that
the standard of review was the less stringent business judgment review if a controller’s trans-
action received prior approval by an effectively functioning independent committee that is
fully authorized, and, in addition, by the majority of the non-controlling shareholders in a fully
informed and uncoerced vote (minority of the majority approval, MOM).75
The US approach to RPTs does not prescribe the use of one specific governance strategy,
but instead offers a choice between three options:76 Firstly, if the board abstains from taking
any measures to safeguard the interests of non-controlling shareholders, the success of the
transaction will depend on the uncertain outcome of the entire fairness review by a court.
Secondly, the use of the trusteeship strategy puts the fairness review into the hands of inde-
pendent directors whose evaluation will often appear more foreseeable than that of a court.77
Thirdly, the greatest degree of transaction certainty will be reached by using a combination of
the trusteeship and the decision rights strategy, thus leaving the determination of the transac-
tion terms to an independent committee and obtaining approval of unrelated shareholders prior
to concluding the transaction. It follows that the choice between these options depends on how
the board evaluates the risks of ex-post judicial review or, given the importance of the burden
of proof, the risk of litigation.
71
To be disinterested, a director shall not benefit from the transaction at stake. In addition, the direc-
tor shall not have ties to an interested individual or be otherwise controlled by that individual in a way
that could compromise her ability to make objective decisions with respect to that individual. Cf. Cede &
Co. v. Technicolor, Inc., 634 A.2d 345, 362 (Del. 1993).
72
Zapata Corp. vs. Maldonado, 430 A.2d 779 (Del. 1981).
73
Edward B. Rock, MOM Approval in a World of Active Shareholders, in The Law and Finance
of Related Party Transactions, supra note 65, at 105; Zohar Goshen & Assaf Hamdani, Corporate
Control, Dual Class, and the Limits of Judicial Review, 120 Colum. L. Rev. 941 (2020) (conducting
a critical assessment of the entire fairness test); Amir N. Licht, Farewell to Fairness: Towards Retiring
Delaware’s Entire Fairness Review, 44 Del. J. Corp. L. 1 (2020) (arguing that the entire fairness test
should be retired).
74
Kahn v. M&F Worldwide Corp., 88 A.3d 635, 645 (Del. 2014) (concerning a controlling share-
holder freezeout).
75
The ab initio requirement was recently clarified. See In re HomeFed Corporation Stockholder
Litigation, C.A. 2019-0592-AGB (Del. Ch. July 13, 2020).
76
Rock, supra note 73.
77
For a counter-example, see Air Products and Chems., Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Ch.
2011), cf. supra note 25.
The choice between these options is up to the board which, of course, will normally follow
the wishes of the controller. The controller may well decide to stick to the trusteeship strategy
and to independent director approval instead of seeking MOM approval although this means
to dispense with the chance to mere business judgement review. The outcome of providing
the MOM with a decision right can be highly uncertain and, since it must be announced to
the shareholder public, the vote might also create opportunities for third parties to build up
leverage with respect to the transaction through buying shares in the corporation.78 It appears
plausible to believe that, by numbers, the use of the trusteeship strategy will outweigh the use
of the decision rights strategy. It follows that director independence takes a predominant role
for the governance of RPTs.
For trusteeship to be a viable strategy, two factors must be taken care of: firstly, it is
essential to find the right proportion of independent directors.79 Independence, per definition,
requires a certain distance between the director and the corporation or, in other words, from
the affairs that directors should actually monitor.80 A supermajority of independent directors, it
appears, reflects a somehow stern belief in the merits of decision-making by untainted agents
who will often lack the necessary amount of inside knowledge. While this criticism gained
special momentum through the monitoring failures of bank boards during the global financial
market crisis of the years 2008 et seq., it might be less applicable for the case of RPTs.81 Under
US law, the assessment of an RPT by a special committee, at least de facto, will often replace
third-party control by courts. Thus, it appears to be a coherent inference to demand a fully
independent special committee.
Secondly, one might ask: “how independent are independent directors?”82 If ownership is
dispersed, independent directors owe their position to the nomination by the incumbent board,
or, more precisely, to the chairperson. Conversely, if there is a controlling shareholder, the
appointment of the independent director by majority vote reflects the choice of the controller.
In both settings, independent directors face the difficult task of rigorously scrutinizing the
performance of those to whom they owe their office. Against this background, it is difficult to
see how they serve as natural agents of minority shareholders.83 The US Airgas case, which
we already touched upon,84 is often used to show that genuinely independent directors may
feel prepared to oppose a controlling shareholder. However, one example can hardly dispel
all doubts.
78
Suneela Jain, Ethan Klingsberg & Neil Whoriskey, Examining Data Points in Minority Buy-Outs:
A Practitioners’ Report, 36 Del. J. Corp. L. 939, 950 (2011).
79
Lucian A. Bebchuk & Asssaf Hamdani, Independent Directors and Controlling Shareholders, 165
U. Pa. L. Rev. 1271, 1297 (2017).
80
Arnoud Boot & Johnathan R. Macey, Monitoring, Corporate Performance: The Role of
Objectivity, Proximity and Adaptability in Corporate Governance, 89 Cornell L. Rev. 356 (2004).
81
Klaus J. Hopt, Corporate Governance of Banks and Other Financial Institutions After the
Financial Crisis, 13 J. Corp. L. Stud. 219 (2013). Cf. Harald Hau & Marcel Thum, Subprime Crisis and
Board (In-)Competence: Private v. Public Banks in Germany, 24 Econ. Pol. 701 (2009).
82
Ronald W. Masulis & Emma Jincheng Zhang, How Valuable are Independent Directors?
Evidence from External Distractions, 132 J. Fin. Econ. 226 (2020).
83
Luca Enriques, Related Party Transactions: Policy Options and Real-World Challenges (With
a Critique of the European Commission Proposal), 16 EBOR 1, 19 (2015); Lisa M. Fairfax, The Elusive
Quest for Director Independence, in Research Handbook on the Economics of Corporate Law,
supra note 20, at 170.
84
See supra Section 3.1, note 25.
A nearby option would be to give minority shareholders a stronger say in the appointment
and removal of independent directors.85 So far, proposals did not find their way into US law
reform.86 The introduction of a so-called minority appointed director de facto would have
enhanced the role of institutional investors who, despite their small shareholdings, already
exercise considerably influence.87
Italy is one of the rather rare examples of a jurisdiction that provides for minority directors
on the board, and requires their involvement in the approval of RPTs.88 In an Italian listed
corporation, at least one director must be elected from the minority slate.89 Similar to the US
approach, the board must set up a committee composed of independent directors whose vote
will normally bind the board in its handling of the transaction.90 However, a transaction that
has not received approval of the independent directors can still be authorized with the vote of
the majority of unrelated shareholders (whitewash).91 Different from the US, MOM approval
thus does not serve as a supplement to the obligatory approval by a fully authorized independ-
ent committee, but rather as an alternative to the procedural fairness that such independent
committees otherwise provide. Accordingly, the vigor of minority protection is less articulated
than it is under the US approach. Regarding the role of minority appointed directors, the pre-
vailing view is that their presence on boards may be helpful in bringing matters of minority
protection to the attention of the board, but the involvement of one minority appointed director
will hardly prevent unfair RPTs.92
In sum, we saw that US law creates a nexus between the use of the trusteeship strategy
through requiring independent director involvement and third-party control by courts. In Italy,
the nexus between director independence and third-party control is less articulated due to the
possibility of ex-post authorization of RPTs by the general meeting. Enforcement is entrusted
to the financial market authority CONSOB, with the possible shortcoming that public enforce-
ment tends to catch only the most flagrant cases.93
85
Alessio M. Pacces, Procedural and Substantive Review of Related Party Transactions: The Case
for Noncontrolling Shareholder-Dependent Directors, in The Law and Finance of Related Party
Transactions, supra note 65, at 181.
86
Ronald J. Gilson & Reinier Kraakman, Reinventing the Outside Director: An Agenda for
Institutional Investors, 43 Stan. L. Rev. 863 (1991).
87
For more detail on institutional investors, see infra section 4.
88
Guido Ferrarini, Gian Giacomo Peruzzo & Marta Roberti, Corporate Boards in Italy, in
Corporate Boards in European Law: A Comparative Analysis, supra note 3, at 367, 392; Giovanni
Strampelli, How to Enhance Directors’ Independence at Controlled Companies, 44 J. Corp. L. 103, 126
(2018); Corrrado Malberti & Emiliano Sironi, The Mandatory Representation of Minority Shareholders
on the Board of Directors of Italian Listed Corporations: An Empirical Analysis (Bocconi Legal Studies
Research Paper No. 18, 2007), https://ssrn.com/abstract=965398.
89
Testo unico delle disposizioni in materia di intermediazione finanziaria [Consolidated Financial
Services Act], art. 147-ter et seq.
90
Art. 8 para. 1 Regulation Containing Provisions Relating to Transactions with Related Parties
(Mar. 12, 2010), art. 8 para. 1 (currently under review). Cf. http://www.consob.it.
91
Id. at art. 8 para. 2.
92
Guido Ferrarini & Marilena Filippelli, Independent Directors and Controlling Shareholders, in
Research Handbook on Shareholder Power 269 (Jennifer G. Hill & Randall S. Thomas eds., 2015).
93
Marcello Bianchi, Luca Enriques & Mateja Milic, Enforcing Rules on Related Party Transactions
in Italy: One Securities Regulators Challenge, in The Law and Finance of Related Party
Transactions, supra note 65, at 477.
3.2 Shareholder Approval (UK)
In the UK, the practice of appointing independent board directors has been continuously
fostered since the Cadbury Code of 1992, a soft law instrument similar to the City Code on
Takeovers & Mergers.94 The UK Corporate Governance Code of 2018, a successor of the
Cadbury Code, recommends that at least half of the board should be non-executive directors
whom the board considers to be independent.95 The chair should be filled with a non-executive
independent director assuming that independence will be lost upon appointment, while in US
corporations, the position of CEO and chairperson are often combined. Different from the
NYSE Listing Rules, the UK Corporate Governance Code operates on a comply or explain
basis. Under the UK Listing Rules, the annual financial report must include a statement as to
whether the listed company has complied with all relevant provisions of the Code or in case
of non-compliance, given reasons (comply or explain).96 Although this approach allows devi-
ations, it will hardly be an option for a large business corporation to ignore the Code’s best
practice standards.
There is no direct analogue to the Italian minority director, but the UK Listing Rules seek
to give minority shareholders a more effective voice in companies with a premium listing that
have a controlling shareholder. To be elected or re-elected, an independent director must be
approved vis a dual voting process in an ordinary resolution of the shareholders, as well as by
a separate ordinary resolution of the independent shareholders (dual voting).
To safeguard fairness of RPTs, the UK Listing Rules do not focus decision-making by the
board, but rather by the shareholder body.97 Companies with a premium listing must disclose
transactions above a ratio of 5 percent to shareholders and obtain ex-ante approval from the
unrelated shareholders, while excluding the controller from voting.98 This approach to RPTs
results in complete removal of the board from decision making, and thus counts as a strong
form of MOM approval.
MOM approval is also used in other countries as a primary technique to secure fair RPTs
but often, as seen in France, although with important two deviations:99 Firstly, the UK uses
a rule-based approach by specifying a fixed percentage ratio that triggers the disclosure duty.100
French law relies on a standard in that it leaves the distinction between routine transactions (no
reporting duty) and non-routine transactions (duty to report) to the board.101 Secondly, the UK
requires ex-ante MOM approval. In contrast, France allows ex-post authorization which, as
94
Committee on the Financial Aspects of Corporate Governance (Cadbury-Report), December
1992; cf. Sir Adrian Cadbury, The Response to the Report of the Committee on the Financial Aspects of
Corporate Governance, in Perspectives on Company Law 23 (Fiona Macmillan Patfield ed. 1995).
95
Financial Reporting Council, UK Corporate Governance Code (July 2018), Provision 11.
96
Financial Conduct Authority, FCA Handbook, r. 9.8.6(6) (Dec. 2019).
97
Paul Davies, Related Party Transactions: UK Model, in The Law and Finance of Related
Party Transactions, supra note 65, at 361. For background information, cf. Brian R. Cheffins, The
Undermining of UK Corporate Governance, 33 Oxford J.L. Stud. 503, 505 (2013).
98
Financial Conduct Authority, FCA Handbook, r. 7.3.7(3) (Oct. 2012), r. 10.2.2, and r.
11.1.7(2–3) (July 2005).
99
Enriques & Tröger, in The Law and Finance of Related Party Transactions, supra note 65,
at 1; ECLE, supra note 66, at 8, 30.
100
Davies, supra note 97.
101
Code de Commerce [Commercial Code], art. L225-39.
noted by observers, makes approval of RPTs an automatism.102 In sum, French boards exercise
considerable control over the treatment of transactions at the margin. The French approach can
thus be seen as a weak form of MOM approval.
It is argued that the governance of RPTs by MOM approval follows the logic of a property
right:103 only those transactions that are acceptable to both sides, to the controller and to the
unrelated shareholders will go forward. MOM approval creates bargaining power for minority
shareholders that is disproportional to their stock ownership. This approach might not nec-
essarily lead to fairer RPTs in comparison to a strategy that relies on board structuring. To
name only three aspects of the ongoing discussion: firstly, non-controlling shareholders will
often lack the capacity or the incentive to do the analytical work that is needed to distinguish
between value-enhancing and value-destroying transactions. Secondly, small investors tend to
favor exit over voice, and will thus fear the risk of a lock-in as a result of receiving non-public
information that would preclude them from trading. Thirdly, there may also be a hold-up risk
for the controlling shareholder due to the enhanced bargaining power of the minority.104 With
regard to the latter aspect, observers note that the more specific EU squeeze-out rule has often
motivated strategic investment in France and elsewhere.105 This rule provides a controller who
holds 90–95 percent with the right to acquire the shares of the minority against a compensation
payment. Whether strategic investments are a realistic danger in regard to RPTs in general is
still a point of discussion.106 Building-up a blocking majority might require a considerably
large amount of funds that, if used for a single investment, might severely limit the exit options.
In sum, it seems much less clear than might be expected that mandatory MOM approval,
either ex-ante like in the UK or ex-post like in France, is needed for adequate minority pro-
tection. As it stands, it seems that the two alternative strategies, i.e. structuring the board (US)
or structuring the shareholder body (UK, France), each have their strengths. To fully unfold,
these strengths either need sophistication of courts in finding a suitable standard for the review
of RPTs, or sophistication of the legislator or rule maker in setting a suitable threshold, pre-
venting approval automatisms and white washing. These needs come in addition to the basic
governance structure as provided equally well by one-tier and two-tier boards.
3.3 Supervisory Board Approval (Germany)
In Germany, the independence of supervisory board directors has been controversial since
the beginning of the corporate governance movement.107 In line with its counterpart in the
102
Genevieve Helleringer, Related Party Transactions in France: A Critical Assessment, in The Law
and Finance of Related Party Transactions, supra note 65, at 400.
103
Zohar Goshen, The Efficiency of Controlling Corporate Self-Dealing: Theory Meets Reality, 91
Calif. L. Rev. 393, 402 (2003).
104
Suneela Jain, Ethan Klingsberg & Neil Whoriskey, Examining Data Points in Minority Buy-Outs:
A Practitioners’ Report, 36 Del. J. Corp. L. 939, 950 (2011).
105
Alain Pietrancosta, “Going Private Transactions” in France, Revue trimestrielle de droit finan-
cier (RTDF) N° 4 - 2013 / N° 1 - 2014 Colloque, at 65, 80.
106
Rock, supra note 73 (assuming that the dangers are low). See also Pacces, supra note 85 (taking
the opposite position).
107
Deutscher Corporate Governance Kodex [German German Corporate Governance Code] (Dec.
16, 2019); cf. www.dcgk.de (providing a translation).
UK, the German Corporate Governance Code operates on the basis of comply or explain.108
The Code recommends giving half of the seats for shareholder representatives to independent
directors but, in contrast with the approach taken in the UK, does not mention ties to the con-
trolling shareholder as a general obstacle to independence.109 Instead, a controlled company
with a supervisory board of more than six members should have at least two directors and
a chairperson of the audit committee who are independent from the controlling sharehold-
er.110 It follows that a large supervisory board of 20 members, as obligatory under employee
co-determination legislation, will have ten shareholder representative members, of which two
should be independent from the controlling shareholder plus ten workforce representatives.111
The arguably small proportion of two independent directors can be seen as a compromise
between the majority independence requirement under the UK Corporate Governance Code
and the exclusion of the otherwise applicable majority independence rule for controlled
companies under the NYSE Listing Rules.112 However, it is clear that the two directors who
are independent from the controlling shareholder will only be able to trump the votes of their
non-independent colleagues if they team up with the employee representatives. For the reasons
discussed with regard to takeover defenses, it can hardly be expected that employee represent-
atives will serve as neutral referees with regard to RPTs when furthering the controller’s inter-
est promises better outcomes for their electoral body, or when doing so provides a concrete
chance for bargaining on working conditions, salaries or similar matters.113
The cautiousness of the German Corporate Governance Code on the issue of independent
directors is a result of mainly three path-dependencies: Firstly, as we have already seen,
the traditional system of insider corporate control relied on ownership by powerful fami-
lies, cross-holdings between corporations and monitoring by banks.114 Secondly, German
law provides for specialized rules that allow the deferral of surpluses within a group of
companies, provided that controlling and controlled companies comply with a mandatory
scheme of intra-group compensation.115 Thirdly, as already touched upon, statutory employee
co-determination obliges large corporations to give half of the supervisory board seats to
employee representatives, which already limits the controller’s influence.116
These observations probably also explain the intense discussions that forewent and proba-
bly determined the adoption of an optional design for RPTs by the amended EU Shareholder
Rights Directive of 2017.117 In its transposition of the directive, Germany did not make use
108
Patrick C. Leyens, Self-Commitments and the Binding Force of Self-Regulation with Respect to
Third Parties, in Self-regulation in Private Law in Japan and Germany 157, 165 (Harald Baum,
Moritz Bälz, Marc Dernauer eds., 2018).
109
Deutscher Corporate Governance Kodex, supra note 107, recommendation C.7.
110
Id. at recommendation C.9 and C.10.
111
On co-determined supervisory boards, cf. infra section 4.3.
112
See supra sections 3.1 (US) and 3.2 (UK).
113
Cf. supra section 2.3 (Germany).
114
See supra section 2.3.
115
Klaus J. Hopt, Groups of Companies: A Comparative Study of the Economics,
Law, and Regulation of Corporate Groups, in The Oxford Handbook of Corporate Law and
Governance, supra note 9, at 603; Tobias H. Tröger, Corporate Groups: A German’s European
Perspective, in German and Nordic Perspectives on Company Law and Capital Markets Law 157,
176 (Holger Fleischer, Jesper Laus Hansen & Wolf-Georg Ringe eds., 2015).
116
For further details of co-determination, see infra section 4.3.
117
See supra note 64. For background information, cf. ECLE, supra note 66, at 10.
of the option to adopt the UK approach to structuring the shareholder body through MOM
approval. Instead, it focuses board structure, at first glance, in a way similar to the approach
chosen in the US.118 According to the amended German Stock Corporation Act, RPTs of 1.5
percent of the fixed assets and current assets must be approved by the supervisory board or one
of its committees.119 Supervisory board members who are parties to the transaction or might
be conflicted as a consequence of their ties to a related party are excluded from voting.120 In
the case that the supervisory board withholds approval, the management board might, at least
theoretically, still seek MOM approval of the general meeting. In contrast with the Italian
example, MOM approval cannot be used as a cleansing device, as it must be obtained prior to
the transaction.121
The differences to the US approach become apparent at second glance. The powers of
a special committee in a one-tier model are subject to a special authorization by the board. In
the German two-tier model the supervisory board is vested with its own powers and does not
depend on special authorization. These powers, however, do not extend to initiation, but only
comprise a veto right. Unlike a fully authorized special committee of a US board, a German
supervisory board is limited to vetoing an RPT while the task of negotiating the transaction
terms firmly lies in the hands of the management board.
The major strength of the two-tier model, it is believed, lies in structuring the decision-making
in a way that separates management from monitoring. The supervisory board provides for
self-contained internal review as a second layer of the decision-making process.122 In contrast,
the outcome of negotiations conducted by a fully empowered US-style special committee
are not subject to further internal review, and, as we have seen, external review by courts is
restricted to cases where plaintiffs think they have a realistic chance of challenging the RPT,
despite the shifted burden of proof.
On a closer look, the differences are less stark than they seem. Supervisory boards of com-
panies with a controlling shareholder have never restricted themselves to a mere review of
management decisions. As already noted, case law has enhanced the role of the supervisory
board as an advisor to the management board.123 Since its beginnings, the German Corporate
Governance Code considers close cooperation between the two boards to be best practice.124
Especially major RPTs will normally be treated as an informal process between the man-
agement and the supervisory board. In the case of doubt, evaluations might be backed up by
the opinion of an expert whose appointment will be consented between the boards rather than
commanded by the supervisory board. In most cases, the outcome of this interaction between
the boards will be a transaction that de facto already carries the approval of the supervisory
board or of its special committee. Against this background, the treatment of an RPT arguably
better compares to a decision that, in a one-tier model, is commissioned to the full board rather
than to the operation of a US style special committee.
118
ECLE, supra note 66, at 31.
119
Aktiengesetz, supra note 41, at sec. 111b, para. 1. Cf. Engert & Florstedt, supra note 66 (discuss-
ing pitfalls of a single factor test).
120
Id. at sec. 111b, para. 2.
121
Id. at sec.111b, para 4. On Italian law, cf. supra section 3.1.
122
Marcus Lutter, Comparative Corporate Governance: A German Perspective, 2 Int. Comp. Corp.
L.J. 423 (2000).
123
See supra note 58.
124
Deutscher Corporate Governance Kodex, supra note 107, principle 13.
In sum, RPTs of flagrant unfairness will likely be screened out in all sample jurisdictions.
For cases on the margin, the viability of a strategy that relies on structuring the shareholder
body by MOM approval (UK) hinges on whether problems of group decision-making can be
overcome, while structuring the board (US, Germany) must secure a substantively independ-
ent fairness review. The German approach, which we saw at the end of this section, shows
that subjecting approval of RPTs to a second board does not necessarily eliminate or alleviate
agency problems. Arguably, the cooperation between the two boards in a German corporation
provides a basis for manager-friendly results one would only expect from a jurisdiction that
openly promotes board empowerment.
4. BOARDS AND STAKEHOLDERS: EMPLOYEE VOICE ON

BOARDS
Boards of large business corporations need to orchestrate a number of interests to secure the
success of the corporation. In the present section, we look at the board as an institution to
secure the corporations’ regard to non-shareholder interests, especially those of employees
as stakeholders. Driven by the ESG125 movement, stakeholder protection moved into the
center of the debate on corporate governance reform. To understand the impact of the ESG
movement, it is important to consider the strong increase of indirect equity ownership on both
sides of the Atlantic. In many developed countries today, a high percentage of the stock of
large business enterprises is no longer held by single private investors themselves, but rather
through intermediaries. Institutional investors like investment and pension funds or insurance
companies now dominate stock ownership and trading.126 The investment guidelines of those
entities often exclude a holding of stock in a corporation that does not show a sufficient ESG
engagement. The role of institutional investors, especially their capacity and incentives to
serve a monitoring task, is heavily debated.127 While this controversy goes on, some insti-
tutional investors openly pressure corporations to rethink their purpose. The best-known
example is the letter to CEOs by Larry Fink, the head of BlackRock.128 The proposals on how
to make corporations more accountable to the public are multi-facetted and we will focus on
some central points of the current debate.129 Among existing legal strategies one of the most
far-reaching proposals relates to reallocating a proportion of the appointment rights from
125
ESG is sometimes also referred to as EESG (employee, environmental, social, and governance).
126
John C. Coffee, The Future of Disclosure: ESG, Common Ownership, and Systematic Risk (ECGI
- Law Working Paper 541/2020), https://ssrn.com/abstract=3678197.
127
Ronald J. Gilson & Jeffrey N. Gordon, The Agency Costs of Agency Capitalism: Activist Investors
and the Revaluation of Governance Rights, 113 Colum. L. Rev. 864 (2013) (providing a critical
account). For a more optimistic account, cf. Lucian Bebchuk & Scott Hirst, Index Funds and the Future
of Corporate Governance: Theory, Evidence, and Policy, 119 Colum. L. Rev. 2029 (2019).
128
Larry Fink’s 2021 letter to CEOs, BlackRock (Jan. 2021), https://www.blackrock.com/corporate/
investor-relations/larry-fink-ceo-letter.
129
Firstly, we discuss directors’ duties in the US, constituency statutes, corporate purpose clauses
in the articles of the company, and benefit corporations (see infra section 4.1). Secondly, we turn to
what is called (enlightened) stakeholder value in the UK and to enforcement by stakeholders (see infra
section 4.2). Finally, we explore employee voice on board in its most far-reaching form under German
co-determination (see infra section 4.3).
shareholders to employees, with a view to give employees a voice on the board as known from
German employee co-determination.
4.1 Shareholder Value (US)
US corporate law traditionally builds on the shareholder value approach.130 Under the share-
holder value approach, as phrased by Milton Friedman in 1970, “the social responsibility of
business is to increase its profits.” 131 As clear cut as this dictum might seem, its translation into
legal duties has always proven to be troublesome.132 Investors and markets can tend to favor
short-term spending, especially on dividends, where an efficient use of corporate resources
might require long-term decisions. Furthering social goals, and, especially, providing extra
benefits to employees can be in line with shareholder interests. For example, the business of
some corporations strongly depends on idiosyncratic services of its personnel. The board is
then well advised to provide benefits that might go (far) beyond statutory labor protection
to motivate firm-specific investments of human capital.133 Furthering stakeholder interests
can thus be a necessary component of creating resilience.134 While the long-term interests of
shareholders and the interests of some stakeholders like employees or even of society at large
might coincide, perfect alignment is implausible.135 Accordingly, the ongoing debate on the
corporate purpose needs to answer the narrower question of how the law should treat a spend-
ing of corporate resources when the interests of shareholders and stakeholders do not coincide
under a long-term perspective.
Existing legal strategies relate to altering the terms of affiliation for shareholders under
enhanced disclosure obligations of corporations or of institutional investors that serve as inter-
mediaries for investors.136 Other attempts aim to encourage board diversity, especially gender
130
Armour, Hansmann, Kraakman & Pargendler, in Anatomy of Corporate Law, supra note 30, at
22.
131
Milton Friedman, The Social Responsibility of Business is to Increase its Profits, N.Y. Times Mag.
(Sept. 13, 1970) (“[T]here is one and only one social responsibility of business – to use its resources and
engage in activities designed to increase its profits so long as it stays within the rules of the game, which
is to say, engages in open and free competition without deception or fraud.”).
132
For a more recent account of the economic rationale, see Oliver Hart & Luigi Zingales, Companies
Should Maximize Shareholder Welfare Not Market Value, 2 J.L. Fin. Acct. 247 (2017).
133
Erik G. Furubotn, Codetermination and the Modern Theory of the Firm: A Property-Rights
Analysis, 61 J. Bus. 165, 170 (1988).
134
Leo Strine, Kirby Smith & Reilly Steel, Caremark and ESG, Perfect Together: A Practical
Approach to Implementing an Integrated, Efficient, and Effective Caremark and EESG Strategy, Iowa
L. Rev. (forthcoming 2020), https://ssrn.com/abstract=3664021.
135
Luca Enriques, Henry Hansmann, Reinier Kraakman & Marina Pargendler, The Basic Governance
Structure: Minority Shareholders and Non-Shareholder Constituencies, in Anatomy of Corporate
Law, supra note 6, at 79, 94.
136
Id. (on corporate disclosure). Edward B. Rock, For Whom is the Corporation Managed in 2020?:
The Debate over Corporate Purpose (ECGI - Law Working Paper No. 515/2020), https://ssrn.com/
abstract=3589951. See also Paul L. Davies, The UK Stewardship Code 2010-2020: From Saving the
Company to Saving the Planet, in Festschrift für Klaus J. Hopt 131 (Stefan Grundmann, Hanno
Merkt & Peter O. Mülbert eds., 2020) (on disclosure by institutional investors). On possible amendments
of the company’s articles in France see infra note 154.
equality, by modifying the appointment rights of shareholders.137 Recently, contenders for the
Democratic presidential nomination went further and embraced the idea of strengthening cor-
porate accountability by vesting employees of large corporations with the right to appoint up to
45 percent of the board members.138 This option is known as employee co-determination, and
marked a center point of the reform discussion in the 1980s.139 The afresh proposals are loosely
modeled on the German system of co-determination that we will explore further below.140 As
it stands, proposals of reallocating appointment rights to non-shareholder constituency groups,
especially to employees, will not find their way into law reform in the US (or the UK).141
The US debate on the corporate purpose mainly focusses on setting standards of behavior
which include the goal of social responsibility. In August 2019, the influential Business
Roundtable (BRT) published its “Statement on the Purpose of a Corporation.”142 Signed by
181 CEOs of large US corporations, the statement mentions long term-value for shareholders
as only one out of five commitments. These commitments include, inter alia, the interests of
employees. Advocates of the ESG movement diagnosed a paradigm shift that will ultimately
lead to a redefinition of the corporate purpose and eventually to material changes of direc-
tors’ duties. However, a study conducted by Lucian Bebchuk and Roberto Tallarita in 2019
revealed that the vast majority of the CEOs signed the statement without obtaining approval
of their boards, while, at the same time, the board approved corporate governance guidelines
of their companies that continued to clearly reflect shareholder primacy.143 These findings
reinforce the view taken by many that the wording of the BRT Statement does not promise
137
California seems to take the lead in furthering equality goals with a new bill filed with the Secretary
of the State on September 30, 2020. Cf. Assemb. B. No. 979 (Ca. 2020) (an act to amend Section 301.3
of, and to add Sections 301.4 and 2115.6 to, the Corporations Code, relating to corporations).
138
Elisabeth Warren’s “Accountable Capitalism Act,” a one-pager published in 2018, proposed
that employees of corporations with more than $1 billion in annual gross receipts are to elect 40%
of the board directors. Cf. Elizabeth Warren, Accountable Capitalism Act (Aug. 2018), www.warren
.senate.gov/imo/media/doc/Accountable%20Capitalism%20Act%20One-Pager.pdf. Bernie Sanders’s
“Corporate Accountability and Democracy Plan” aimed at corporations that are publicly traded or have
assets or revenues of at least $100 million and argued for an even higher proportion of 45% of the direc-
tors to be elected by employees. Cf. Bernie Sanders, Corporate Accountability and Democracy, https://
berniesanders.com/issues/corporate-accountability-and-democracy/ (last visited: October 12, 2020).
139
For a comparative account, see Klaus J. Hopt, New Ways in Corporate Governance: European
Experiments with Labor Representation on Corporate Boards, 82 Mich. L. Rev. 1338 (1984).
140
See infra section 4.3.
141
Jens Damman & Horst Eidenmüller, Codetermination: A Poor Fit for U.S. Corporations, Col.
Bus. L. Rev. 870 (2020); Leo E. Strine, Aneil Kovvali & Oluwatomi O. Williams, Lifting Labor’s Voice:
A Principled Path Toward Greater Worker Voice And Power Within American Corporate Governance
(Faculty Scholarship at Penn Law 2021/2256), https://scholarship.law.upenn.edu/faculty_scholarship/
2256, at 50 (arguing in favor of an introduction of co-determination and presenting far reaching propos-
als); Konstantinos Sergakis & Andreas Kokkinis, A Flexible Model for Efficient Employee Participation
in UK Companies, 20 J. Corp. L. Stud. 453 (2020) (arguing for formal employee panels in a mere
advisory role). For a state of the discussion in the UK, cf. infra section 4.2.
142
Business Roundtable, Statement on the Purpose of a Corporation (Aug. 19, 2019), www
.businessroundtable.org.
143
Lucian Bebchuk & Roberto Tallarita, “Stakeholder” Capitalism Seems Mostly for Show, Wall St.
J. (Aug. 6, 2020), www.wsj.com/articles/stakeholder-capitalism-seems-mostly-for-show-11596755220;
Lucian Bebchuk & Roberto Tallarita, The Illusory Promise of Stakeholder Governance, 106 Cornell L.
Rev. 91 (2020).
more than what one might call due regard to factors that must be considered by directors under
a shareholder value approach anyways (“mere rhetoric”).144
It is clear that the Business Roundtable lacks authority for rewriting legal standards. For
Delaware business corporations, it appears, “directors must make stockholder welfare their
sole end, and that other interests may be taken into consideration only as a means of promoting
stockholder welfare.”145 Some Federal States like New York decided to adopt constituency
statutes that would allow directors to consider the interests of employees and other stakehold-
ers, to be sure, without creating a legal duty to any party, thus ultimately shielding directors
from litigation by shareholders.146 Delaware declined such legal amendments in 1990. Like
some other US Federal States, instead, Delaware introduced a so-called public benefit corpo-
ration (B-corporation) in 2010 whose charter may be amended to expand fiduciary duties to
stakeholder interests.147 From a US perspective, the B-corporation counts as a modification
to the constraints strategy in that it provides legal protection to directors when they decide to
promote non-shareholder interests.
In the EU, the discussion on introducing a social enterprise company might soon gain trac-
tion.148 While in Germany law discussions are at an early stage,149 Italy already introduced its
Societá Benefit in 2015.150 Contrary to the US Delaware, for Italy, a B-corporation arguably
does not add much to the stakeholder approach as embodied in general company law.151 The
French counterpart (société à mission) was introduced in 2019.152 Moreover, since 2019,
French law allows for inclusion of a set of principles in the articles that the company is com-
mitted to and the furtherance of which it expects to devote resources to in the course of its
144
Luca Enriques, The Business Roundtable CEOs Statement: Same Old, Same Old, Promarket
(Sept. 9, 2019), https://promarket.org/2019/09/09/the-business-roundtable-ceos-statement-same-old
-same-old/; Luigi Zingales, Don’t Trust CEOs Who Say They Don’t Care About Shareholder Value
Anymore, Wash. Post (Aug. 20, 2019), www.washingtonpost.com/opinions/2019/08/20/dont-trust-ceos
-who-say-they-dont-care-about-shareholder-value-anymore/.
145
Leo E. Strine, The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and
Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L.
Rev. 761, 768 (2015). Strine was Delaware Chief Justice at the time the Business Roundtable published
its statement.
146
NY Bus. Corp. Law, sec. 717(b). On the real effect of shielding managers, see Roberta Romano,
A Guide to Takeovers: Theory, Evidence, and Regulation, 9 Yale J. Reg. 119, 171 (1992).
147
Del. Gen. Corp. L. § 361. Cf. Michael B. Dorff, James Hicks & Steven Davidoff Solomon, The
Future or Fancy? An Empirical Study of Public Benefit Corporations, Harv. Bus. L. Rev. (forthcoming
2020).
148
Holger Fleischer, Corporate Purpose: A Management Concept and its Implications for Company
Law (ECGI - Law Working Paper No. 561/2021), https://ssrn.com/abstract=3770656 (presenting a com-
parative account of the corporate purpose discussion and of the developments in Europe); J. S. Liptrap,
The Social Enterprise Company in Europe: Policy and Theory, 20 J. Corp. L. Stud. 495 (2020).
149
Anne Sanders et al., Entwurf eines Gesetzes für die Gesellschaft mit beschränkter Haftung
in Verantwortungseigentum (June 2020), www.gesellschaft-in-verantwortungseigentum.de/
der-gesetzesentwurf/(presenting a draft law on a German benefit corporation as published by
a non-governmental expert group).
150
Legge 28.12.2015, note 208, Disposizioni per la formazione del bilancio annuale e pluriennale
dello Stato (legge di stabilitá 2016), Gazzetta Ufficiale, Serie Generale note 302, 30.12.2015, Suppl.
Ordinario note 70/L.
151
Gianluca Riolfo, The New Italian Benefit Corporation, 21 Eur. Bus. L. Rev. 279, 295 (2020).
152
Code de Commerce, supra note 101, at art. L210-10.
business (raison d’être).153 The charter amendments of large French companies reveal a high
degree of generality, lack quantifiable goals, and thus avoid the risk of being held accountable,
or worse, liable for failure to achieve any of those goals.154 It thus seems that the inclusion of
purpose clauses which the board must respect does not change much in the business reality of
a company.
To sum up the observations made up to this point, the board can be used as an institution to
further stakeholder interests but, depending on the arrangements of the applicable law, only in
a limited way. While directors of a Delaware business corporation arguably breach their duties
when they spend corporate resources on matters that are outside the intersection with share-
holder interests, the charter of a benefit corporation as available in Delaware, or, for example,
in Italy and France, might oblige them to do so. As a result of the availability of either duty
set, furthering of stakeholder interests that do not intersect with shareholder interests is left to
investors’ choice.155
4.2 Enlightened Shareholder Value (UK)
Similar to US law, English law traditionally follows a shareholder value approach.156 As

Bowen LJ phrased in 1883: “The law does not say that there are to be no cakes and ale, but
there are to be no cakes and ale except such as are required for the benefit of the company.”157
Later, the reformed Companies Act of 2006 enshrined what is called enlightened shareholder
value in its section 172: a director “must act in the way he considers, in good faith, would be
most likely to promote the success of the company for the benefit of its members as a whole.”
The remainder of the section adds a list of matters to which directors must “have regard”.
These matters especially include the interests of the company’s employees and, as it seems,
the components of the list that may have strongly inspired the Statement by the US Business
Roundtable of 2019.158
Following the prevailing view, the concept of enlightened shareholder value builds on the
insight that without profits, a company will disappear and accordingly the success in achiev-
ing social goals must be seen as a derivative of making profits.159 Some seem to believe the
153
Code Civile [Civil Code], art. 1835 (“Les statuts peuvent préciser une raison d’être, constituée
des principes dont la société se dote et pour le respect desquels elle entend affecter des moyens dans la
réalisation de son activité.”).
154
Alain Pietrancosta, Intérêt social et raison d’être: Considérations sur deux dispositions clés de
la loi PACTE amendant le droit commun des sociétés, Annales des Mines – Réalités Industrielles,
Nov. 2019, at 55, 58 (noting a number of examples, including Atos, Carrefour, Sanofi, Michelin, Sanofi
and Total); Alain Viandier, La raison d’être d’une société (C. civ. Article 1835), Bulletin Rapide
Droit des Affair, 10/2019, at 30.
155
Eugene F. Fama, Market Forces Already Address ESG Issues and the Issues Raised by Stakeholder
Capitalism, Harv. L. Sch. F. on Corp. Governance (Oct. 9, 2020); cf. Eugene F. Fama & Kenneth
French, Disagreement, Tastes, and Asset Prices, 83 J. Fin. Econ. 667 (2007) (illustrating a model in
which investors also have “tastes” for assets as consumption goods).
156
Davies, supra note 7, at 307.
157
Hutton v. West Cork Railway Co. 23 Ch D 654 (1883).
158
See supra note 142.
159
Davies, supra note 7, at 333.
opposite, i.e. that the company’s profits are a derivative of achieving the company’s goals.160
It is doubtful though that section 172 Companies Act will serve as a trajectory for redefining
the corporate purpose, primarily for the following two reasons:161 firstly, the statute creates
a subjective framing by obliging a director to “act in the way he considers, in good faith.” It is
not clear how such subjective framing could contribute to judicial deference to directors, who
use corporate resources for interests outside the intersection with shareholder value. In sum,
the duty description, coupled with the list of interests that directors must give regard to, shows
a degree of generality that arguably will rarely unfold constraining force.
Secondly, third parties, although their interests might form part of the list, do not have
standing in court. Accordingly, they lack enforcement power at the outset, much alike under
the constituency statutes in the US which, as we have seen, appear to shield managers from
litigation.162 This situation could change in the EU, which the UK, of course, is about to leave
under terms currently negotiated. The EU wishes to adopt a directive to foster sustainable
corporate governance by 2021. It recently commissioned a study by Ernst & Young to sort
out the possible ways of action.163 The final report issued in July 2020 is controversially dis-
cussed due to presumed methodological weaknesses and highly questionable assumptions.164
The study proposes to redefine directors’ duties and to allow stakeholders to instigate legal
proceedings against directors that fail to address the social risks and impacts.165 The heroic
assumption which underlies this proposal seems to be that stakeholders will take enforce-
ment action only to pursue legitimate social goals. As known, litigation can also be used for
blackmail, coercion, or simply as a means for political opposition against a market economy.
Providing stakeholders that do not have a clear relationship to the company with legal standing
could attract plaintiffs from inside and outside the country.166 The report seems to dangerously
underestimate the consequences of an increase of litigation risks that is impossible to insure
against.167 It would be mistaken to see the report as a blueprint for law reform, if not for its
imprudence, simply for the reason that it fails to explain how the relevant stakeholder groups
can be delineated and distinguished from the public.
160
Colin Mayer, Prosperity 31 (2018). For the opposite position, see Bebchuk & Tallarita, supra
note 143, at 96 note 13, and Davies, supra note 7, at 333. Cf. Colin Mayer, Shareholderism Versus
Stakeholderism – a Misconceived Contradiction. A Comment on “The Illusory Promise of Stakeholder
Governance” by Lucian Bebchuk and Roberto Tallarita (ECGI - Law Working Paper No. 522/2020),
https://ssrn.com/abstract=3617847.
161
Enriques, Hansmann, Kraakman & Pargendler, supra note 135, at 98.
162
See supra note 146.
163
Ernst & Young, Study on Directors’ Duties and Sustainable Corporate Governance (July
2020). For a roadmap of future legislation in the EU, cf. European Commission, Sustainable Corporate
Governance Initiative, https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548
-Sustainable-corporate-governance.
164
European Company Law Experts (ECLE), Feedback Paper (Sept. 28, 2020), https://ec.europa.eu/
info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance/feedback
?p_id=8270916
165
Ernst & Young, supra note 163, at 152.
166
Mark J. Roe, Holger Spamann, Jesse M. Fried & Charles C. Y. Wang, The European Commission’s
Sustainable Corporate Governance Report: A Critique (October 14, 2020), https://ssrn.com/abstract=
3711652, at 16.
167
Paul Krüger Andersen et al., Response to the Study on Directors’ Duties and Sustainable
Corporate Governance by Nordic Company Law Scholars (Nordic & European Company Law Working
Paper No. 20-12), https://ssrn.com/abstract=3709762, at 17 (“a recipe for disaster”).
Employees form an identifiable group, and they have a clear relationship to the company.
This is why institutional representation of employees on the board of directors has been a topic
of law reform in the UK several times similar to the US.168 The proposals made by the British
Bullock Commission in the late 1970s, however, did not gain momentum.169 In 2016, Theresa
May started her term as UK prime minister with a new advance but, upon strong opposition,
quickly took her reform vision back.170 As it stands, the UK uses disclosure duties to indi-
rectly enhance the position of employees within the company. Since 2013, a detailed list of
aspects must be addressed in the directors’ report of companies with more than 250 employ-
ees working in the UK.171 The 2018 version of the UK Corporate Governance Code takes
the disclosure duties of companies with a premium listing one step further. It recommends
adopting one out of the following options that can be seen as a mild form of board structuring:
a director appointed from the workforce, a formal workforce advisory panel, or a designated
non-executive director.172 As we have seen, under the comply or explain approach, companies
must disclose non-compliance with code recommendations and explain their reasons.173
To sum up, the recent upheavals in the corporate purpose debate have led to a considerable
increase in proposals to use the board of directors as an institution to channel legal strategies
which aim to promote social goals. Out of our sample jurisdictions the US and the UK, only
the UK uses board structuring, and only on a comply or explain basis. Despite recurring reform
debates, neither of the two samples vest employees with the right to appoint a board represent-
ative. The use of the appointment rights strategy thus remains the major difference to our third
sample jurisdiction Germany, which we will discuss in the remainder of the chapter.
4.3 Employee Co-Determination (Germany)
Contrary to the US or the UK, German company law is known for its tradition of following
a stakeholder approach that obliges directors to include the interests of constituencies other
than shareholders into their business judgments. Interests of non-shareholder constituencies,
168
Sergakis & Kokkinis, supra note 141.
169
Report of the Committee of Inquiry on Industrial Democracy (Bullock Report), Cmnd 6706
(1977). Cf. Paul Davies, The Bullock Report and Employee Participation in Corporate Planning in the
UK, 1 J. Comp. Corp. L. & Sec. Reg. 245 (1978); Lord Wedderburn of Charlton, The Legal Development
of Corporate Responsibility: For Whom Will Corporate Managers Be Trustees?, in Corporate
Governance and Directors Liabilities 36 (Klaus J. Hopt & Gunther Teubner eds., 1985, reprint
2012).
170
Dep’t for Bus., Energy & Indus. Strategy, Corporate Governance Reform, Green Paper (Nov. 29,
2016), at 2, 34.
171
The Companies (Miscellaneous Reporting) Regulations 2018, S.I. 2018 No. 860, Sch. 7, Part 4,
reg. 11 (as amended). The directors’ report “must contain a statement describing the action that has been
taken during the financial year to introduce, maintain or develop arrangements that aim at (i) providing
employees systematically with information on matters of concern to them as employees, (ii) consulting
employees or their representatives on a regular basis so that the views of employees can be taken into
account in making decisions which are likely to affect their interests, (iii) encouraging the involvement of
employees in the company’s performance through an employees’ share scheme or by some other means,
and (iv) achieving a common awareness on the part of all employees of the financial and economic
factors affecting the performance of the company.”
172
UK Corporate Governance Code (July 2018), provision 5.
173
On comply or explain, see supra section 3.2.
however, may or even must stand back if necessary for reasons of economic viability.174 The
practical implications, arguably, will rarely differ from what is called enlightened shareholder
value in the UK or what could be justified as long-term shareholder value in the US. The
crucial difference does not concern directors’ duties in general, but rather the process of inter-
nal decision-making by boards under employee codetermination.
German companies with over 500 employees must give one-third of the supervisory board
seats to employee representatives.175 Proponents argue that co-determination is a means of bal-
ancing out shareholder and stakeholder interests. In fact, the close involvement of employee
representatives has often been useful to handle severe interest clashes that may occur in
a restructuring or merger. The major controversy concerns the scheme known as half-parity
codetermination, which applies to companies with 2,000 employees or more, and obliges
to give half of the seats to employee representatives.176 Under this scheme, a company with
20,000 employees has to form a supervisory board of 20 directors. The chairperson, normally
a shareholder representative, is vested with a casting vote to resolve deadlocks between the
shareholder and employee benches.
The path-dependent reasons for the strong form of co-determination in Germany reach back
to the rebuilding of the country’s economy after World Wars I and II. It is true that within the
EU, only 10 out of the 27 Member States do not provide a form of employee participation.177
The institutional designs, however, differ strongly.178 For example, in Austria, delegates
are sent out by the workforce only.179 In Germany, the employee bench is split up between
workforce and worker unions, which can cause severe conflicts as representatives might be
employed by competing companies or important suppliers.180 The expectations that employees
and unions set into their representatives are irreconcilable with a neutral role.181 As other
representatives of single constituencies, employee or union representatives will naturally and
understandably tend to champion the interests of their electorate body, of course, only as far as
compatible with their own individual interests.182
To avoid pitfalls of generalization, we should remember that two-tier board structures differ
strongly between countries. The real-world impact of German co-determination is a result
of at least three factors:183 firstly, in addition to its veto right on business decisions, German
supervisory boards are responsible for the selection and the removal of the members of the
174
Patrick C. Leyens, Corporate Social Responsibility: Developments, Challenges and Perspectives,
in Globalisation of Corporate Social Responsibility and its Impact on Corporate Governance
157, 162 (Jean J. du Plessis, Umakanth Varottil & Jeroen Veldman eds., 2018).
175
Drittelbeteiligungsgesetz [One-third Co-determination Act], sec. 1, para. 1 & sec. 4, para. 1.
176
Mitbestimmungsgesetz [Co-determination Act], sec. 7, para. 1, no. 3.
177
Belgium, Bulgaria, Cyprus, Estonia, Italy, Latvia, Lithuania, Malta, Romania, and the UK. Cf. S.
Vitols, The European Participation Index (EPI): A Tool for Cross-National Quantitative Comparison
(Oct. 2010), http://www.worker-participation.eu, at 6.
178
Davies, Hopt, Nowak & van Solinge, supra note 3, at 72, 74.
179
Arbeitsverfassungsgesetz [Labour Organisation Act], sec. 110 (Austria).
180
See supra note 176.
181
Klaus J. Hopt, Labor Representation on Corporate Boards: Impacts and Problems for Corporate
Governance and Economic Integration in Europe, 14 Int. Rev. L. Econ. 203, 206 (1994).
182
Roberta Romano, Metapolitics and Corporate Law Reform, 36 Stan. L. Rev. 923, 964 (1984).
183
Otto Sandrock & Jean J. du Plessis, The German System of Supervisory Codetermination by
Employees, in German Corporate Governance in International and European Context 188, 196
(Jean J. du Plessis et al. eds., 3d ed. 2017).
management board, and for enforcing liability claims of the company against the management
board.184 German supervisory boards further set the remuneration of management directors
while shareholders only have a consultative vote.185
Secondly, the large proportion of 10 out of 20 parity votes vests the employee bench with
considerable bargaining power and makes them a highly attractive coalition partner for the
management board.186 Due to the inherent antagonism between capital and labor the two
fractions of the supervisory board will be unlikely to cooperate. The casting vote of the chair-
person, in theory, could turn the table in favor of shareholders, but compromising employees
might come at the cost of a severe disturbance of the cooperation within the supervisory board
or with the management board. Evidence might be anecdotal, but well known cases show that
labor will use its powers to force concessions.187
Thirdly, on the side of the supervisory board, a coalition of only one shareholder represent-
ative with the employee bench forms a majority, provided that employee representatives act
unanimously, which they do, as known by other examples.188 Representatives of controlling
shareholders on supervisory boards thus find a basis for forming coalitions with employees on
matters of common interest. The strongest example we discussed relates to the authorization of
defensive measures against a hostile takeover that could further the interests of non-controlling
shareholders but, simultaneously endanger job safety for employees.189
To take the example of rewards, experience shows that the mitigating effect of labor voice
on exaggerated remuneration of managing directors was rather negligible in the past.190 Still,
by making use of an optional arrangement of the EU Shareholder Rights Directive of 2017,
the German legislator chose to leave the task of setting the remuneration in the hands of the
supervisory board, and provided shareholders with a mere consultative vote.191 The decision to
avoid a mandatory say-on-pay by shareholders – right or wrong – was also made because oth-
184
Aktiengesetz, supra note 41, at secs. 84, 112. The duty to enforce liability claims was further
carved out by case law. Cf. BGH, Judgment of 21.4.1997 – II ZR 175/95 (ARAG/Garmenbeck), BGHZ
135, 244. The case is discussed in Marco Ventoruzzo et al., Comparative Corporate Law 312
(2015).
185
Aktiengesetz, supra note 41, at secs. 87, 87a, 120a. See also infra note 192.
186
Katharina Pistor, Co-Determination in Germany: A Socio-Political Model with Governance
Externalities, in Employees and Corporate Governance 163 (Margaret Blair & Mark Roe eds., 1999).
187
For example, Herbert Diess, CEO and chairman of the management board of the Volkswagen
group, received strong opposition by labor against his strategy to streamline production and to implement
new technologies in the Volkswagen car division. It was only upon support by large block owners that
he could stay in office. However, as a concession to labor, he had to turn down the management of the
Volkswagen car division. Cf. Frankfurter Allgemeine Zeitung, June 10, 2020, at 15, 22.
188
Ferdinand Piëch, blockholder and supervisory board chairman of Volkswagen, was known for
“instrumentalizing” the employee bench whenever needed for asserting his views within the supervisory
board. One of those coalitions led to the appointment of Horst Neuman as a new management board
director for human resources in 2005 against the will of the other shareholder representatives on the
supervisory board. Cf. Frankfurter Allgemeine Zeitung, May 2, 2006, at 17.
189
Cf. supra Section 2.3.
190
Lucian A. Bebchuk & Jesse M. Fried, Pay Without Performance: The Unfulfilled
Promise of Executive Compensation 121 (2004) (discussing the general problems of exaggerated
remuneration).
191
Aktiengesetz, supra note 41, at secs. 87, 87a, 120a as amended. Cf. Gesetz zur Umsetzung
der zweiten Aktionärsrechterichtlinie [Law on the Transposition of the Second Shareholder Rights
Directive] (Dec. 12, 2019), BGBl. I 2019, 2637, Art. 1.
erwise, the co-determined supervisory boards and therein labor and trade unions would have
lost considerable influence. In 2009, law reform precluded the supervisory board from dele-
gating remuneration decisions to one of its committees.192 The well-intentioned motive was
to prevent excessive remuneration packages. The real effect of reserving matters for plenary
decision of the supervisory board, on a closer look, again gives greater say to employees and
worker unions.193
Out of the governance strategies treated in this chapter, solely employee co-determina-
tion calls for a basic governance structure that, from the viewpoint of private parties, only
a two-tier board model can provide.194 In a one-tier board, co-determination would provide
employee representatives with the power (and the responsibility) for co-determining all
business decisions. In fact, this option would be available for a Societas Europaea (European
Company).195 As far as is known, it has never been made use of by a large business enter-
prise.196 In fact, the Hans Böckler Foundation, which is run by the German Trade Union
Confederation, observes that private parties try to circumvent co-determination legislature.197
Some choose a foreign corporate form. Others make use of a special scheme applicable to the
Societas Europaea which allows to freeze the current level of co-determination, thus avoiding
parity co-determination upon a further increase in the number of the company’s employees.198
5. SUMMARY
1. Board models like the one-tier board, as used in the US and the UK, or the two-tier board,
as used in Germany, provide a basic governance structure that enables the use of specific
governance strategies. It is the use of specific governance strategies, not the choice of
a board model, which determines the role of the board in alleviating agency problems
between owners and managers, controlling and non-controlling shareholders, and share-
holder and stakeholder constituencies. Based on this finding, the choice of the suitable
board model should be left to private parties.
192
Aktiengesetz, supra note 41, at sec. 107, para. 3 as amended. Cf. Gesetz zur Angemessenheit der
Vorstandsvergütung [Law on the Adequateness of the Remuneration of Managing Directors] (July 31,
2009), BGBl. I 2009, 2509, Art. 1.
193
Mariana Pargendler, The Corporate Governance Obsession, 42 J. Corp. L. 101 (2016) (showing
how corporate governance reform is used to further external goals).
194
Henry Hansmann, The Ownership of Enterprise (1996) (“[T]here is no legal reason why large
corporations are capital rather than labor cooperatives” (emphasis added)).
195
Article 38 Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European
company (SE), OJ EC L 294 of 10.11.2001, at 1.
196
Horst Eidenmüller, Andreas Engert & Lars Hornuf, Incorporating Under European law: The
Societas Europaea as a Vehicle for Legal Arbitrage, in The Law and Economics of Corporate
Governance 82, 88, 117 (Alessio M. Pacces ed. 2010); Martin Gelter & Mathias Siems, Letting
Companies Choose Between One-Tier and Two-Tier Board Models: An Empirical Analysis of European
Jurisdictions (Dec. 2, 2018) (unpublished manuscript) (on file with the authors).
197
Cf. Böckler Impuls (16/2020), www.boeckler.de/de/boeckler-impuls.htm; Sebastian Sick, Erosion
als Herausforderung für die Unternehmensmitbestimmung, Mitbestimmungsreport 58/2020 (April
2020), at 13; Abschied von der Mitbestimmung, Handelsblatt April 20, 2016, at 9.
198
Gesetz über die Beteiligung der Arbeitnehmer in einer Europäischen Gesellschaft [Law on the
Partcipation of the Employees in a European Company] (22.12.2004), at sec. 21.
2. The market for corporate control is known as a removal strategy that alleviates the agency
problem between owners and managers of potential target companies. To achieve this
effect, it must be ensured that takeover defenses are adopted in the interest of shareholders
rather than to shield the incumbent board from removal by the acquirer. The governance
options include focusing the board structure through the allocation of decision-making
power to independent directors (US) or to the supervisory board (Germany), and, as an
alternative, reinstalling shareholder decision-making and thus removing the board from
its coordination task (UK). Counter-intuitively, one might group US and German law
together, despite differences in their basic board structures and despite the European
Union’s adoption of UK-style control shift regulation.
3. The three sample jurisdictions follow a similar pattern for securing fairness of related party
transactions (RPTs). The UK relies on a structuring of the shareholder body, requiring
ex-ante approval of the disinterested shareholders (MOM approval), a strategy that is also
used in France but in a weaker form due to the possibility of ex-post authorization. In the
US, the predominant choice seems to be structuring the board so as to leave the decision
to independent directors, a strategy that Italy has, on one hand, sought to enhance with the
obligatory involvement of a minority appointed director but, on the other hand, has weak-
ened by allowing the board to override a recommendation of the independent directors.
Germany also relies on board structuring in that it requires supervisory board approval of
RPTs, but compared to the use of independent directors, the cooperation between the two
boards provides a basis for manager-friendly results one would expect only from a juris-
diction that openly promotes board empowerment.
4. The most far-reaching advance of the corporate purpose debate relates to a further struc-
turing of the board so as to provide employee representatives with a voice, as known from
German co-determination. Proposals to reallocate a proportion of the appointment rights
from shareholders to employees have not found their way into legal reform in the US or
the UK. Out of the governance strategies discussed in this chapter, it is only employee
co-determination that calls for a basic governance structure which solely a two-tier board
model can provide.
8. Board composition: between independent
directors, minority representatives and
employee representatives
Jean Jacques du Plessis
1. INTRODUCTION
Board composition is core to corporate governance as the board is an essential part of any cor-
poration. When we talk about “board composition” the impression could be that we only talk
about one type of board, but that is far from true. There are different types of corporate boards
and different statutory requirements on board composition in many different jurisdictions. The
different approaches to address governance problems via different board structures, can be
explained because of historic developments and the particularities of the applicable laws in dif-
ferent jurisdictions. First, this chapter will focus on one of the most basic distinctions between
the role of the board in directing, supervising and monitoring, and the role of management to
manage the business of the corporation under the supervision of the board. Different board
structures, namely unitary board structures, two-tier board structures, and the board of auditors
structure or auditing body structure will be discussed. These different board structures will
be analyzed with reference to a few specific jurisdictions. These jurisdictions were selected
for their unique approach to board structures and board composition and for recognizing the
interests of other stakeholders, such as employees. Germany is the ultimate example of a juris-
diction requiring a two-tier board structure for certain companies and is also unique because of
codetermination, which requires employees to sit on the supervisory board. In Section 3.2.2,
some other jurisdictions where a two-tier board structure is required will be mentioned, but
the focus will primarily be on the Chinese two-tier board structure. The Dutch model is then
discussed. It deserves attention as it recognizes the importance of employee interests in large
public corporations through an employee-focused works council. The final part of Section 3.2
contains a short discussion of the board of auditors model, with a particular focus on Japan.
Section 4 is dedicated to some significant former initiatives regarding board composition and
board structures that are seldom discussed together. The 1971 Dickerson Report is touched
upon because it was a comprehensive Canadian corporate law reform initiative that had an
impact on several other jurisdictions, most notably the New Zealand Companies Act of 1993.
The specific aspect of the Dickerson Report focused on in this chapter is the different ways the
Report considered to give various stakeholders a say at the board level. The EU Fifth Directive
on Company Law will be analyzed as it illustrates the jurisdictional difference regarding board
structures and board composition. It was never implemented and stands in sharp contrast with
developments regarding the European Company (Societas Europaea (SE)), which also had
a stormy history, but an EU Directive of 2004 enabled existing companies incorporated in the
EU member states to convert into SEs. The 1977 UK Bullock Report is analyzed, not only
144
Board composition 145
because of its in-depth discussion of ways to give employees a voice on UK boards, but also
because there were two diverging Reports.
2. BOARD STRUCTURES GENERALLY1
Generally speaking, there are three types of board structures, namely the unitary board
structure (adopted in most countries based on US and UK corporate law), the two-tier board
structure (most prominently Germany, but also mandatory for certain types of companies in,
for example, Austria,2 Belgium,3 China (see discussion below)4 and Indonesia5) and the board
of auditors structure or auditing body structure (for example in Japan (see discussion below),
Italy6 and Portugal).7
Figure 8.1 The board and management differentiated
1
For a useful summary of the corporate law and corporate governance models used in several
countries, see The Corporate Governance Review (Willem J. L. Calkoen ed., 9th ed. 2019).
2
Martin Abram & Clemens Philipp Schindler, Austria, in The Corporate Governance
Review, supra note 1, at 1–2.
3
Elke Janssen, Belgium, in The Corporate Governance Review, supra note 1, at 14.
4
Vivienne Bath, China, in Principles of Contemporary Corporate Governance 359,
363–71 (Jean Jacques du Plessis, Anil Hargovan & Jason Harris eds., 4th ed. 2018).
5
Daniel Pardede & Syafrullah Hamdi, Indonesia, in The Corporate Governance Review,
6
Called “a board of statutory auditors (Collegio sindacale).” Andrea Melis, Corporate
Governance in Italy, 8 Corp. Gov. Int’l Rev. 347, 352 (2000).
7
Paulo Olavo Cunha & Cristina Melo Miranda, Portugal, in The Corporate Governance
Review, supra note 1, at 311–12.
However, the term “two-tier board structure” is also used to categorize board structures
that differ slightly from the board structures mentioned above. Hans-Jakom Diem and Tino
Gaberhüel point out that Swiss law allows flexibility regarding the board structure that com-
panies may adopt, but then explain that day-to-day management is “regularly delegated,”
including to the CEO or an executive board in listed companies, thus “resulting in a two-tier
structure.”8 In other words, such an approach would have almost all the characteristics of
a two-tier board structure where managerial and oversight functions are separated. Tricker pro-
vides very good illustrations of various board structures by starting off with a basic distinction
between a so-called “managerial pyramid” and a “governance circle” and illustrates this by
way of five figures, seen in Figures 8.1 to 8.5.9
Figure 8.2 All-executive board
Figure 8.2 portrays the typical board structure for proprietary, private or privately-held com-
panies10 and the board structure most public corporations had in the past. However, with the
drive to have objective checks on management and to bring independence into the board, the
move was clearly towards the board structure depicted in Figure 8.3. Over the last 20 years or
so, the focus was on non-executive directors and independent non-executive directors (Figure
8
Hans-Jakop Diem & Tino Gaberhüel, Switzerland, in The Corporate Governance Review,
9
Robert I. Tricker, International Corporate Governance 44–45 (1994).
10
The terminology varies in different jurisdictions, but they all refer to companies where shares
were not offered or issued to the public and in several jurisdiction the number of non-employee share-
holders are limited to 50.
8.4). The German system is perhaps best described by Figure 8.5, with the governance circle
represented by the supervisory board and the managerial pyramid by the management board.
Figure 8.3 Majority executive board
The South African close corporation illustrates a modern example where there is complete
overlap between the governance circle and the managerial triangle. In 1984, South Africa
adopted the Close Corporations Act 69 of 1984. The close corporation is a separate legal
entity, but the number of members are limited to 10 natural persons. Based on principles of
the law of partnership, all members are entitled to participate in the management of the corpo-
ration and cannot be excluded from this in any agreement. In other words, there is a complete
overlap between the managerial triangle and the supervisory circle, which in effect makes the
distinction between supervision and oversight and management superfluous.11
Except when there is mandatory legislation dictating a particular board structure, the way
in which a board can be structured will depend on many variables, for example whether it is
a listed public company or a proprietary company, market and investor expectations regarding
gender diversity, and the corporate culture. Although several jurisdictions effectively impose
a particular governance model on, in particular listed public companies, there are some con-
cerns in getting too prescriptive regarding governance systems and structures. In Australia,
Justice Owen puts it as follows in the HIH Royal Commission Report:
11
For a more comprehensive discussion of the South African close corporation, see Jean J. du
Plessis, Reflections and Perspectives on the South African Close Corporation as a Business Vehicle for
SMEs, 15 N.Z. Bus. L. Q. 250 (2009).
I think that any attempt to impose governance systems or structures that are overly prescriptive or
specific is fraught with danger. By its very nature corporate governance is not something where
“one size fits all”. Even with companies within a class, such as public listed companies, their capital
base, risk profile, corporate history, business activity and management and personnel arrangements
will be varied. It would be impracticable and undesirable to attempt to place them all within a single
straitjacket of structures and processes. A degree of flexibility and an acceptance that systems can
and should be modified to suit the particular attributes and needs of each company is necessary if the
objectives of improved corporate governance are to be achieved.12
As will be seen below, there are several jurisdictions that do not allow their companies, espe-
cially listed public companies, much of a choice regarding how their boards must be structured.
3. BOARD COMPOSITION
3.1 A Unitary Board, Non-Executive Directors and Independent Non-Executive

Directors
In the case of proprietary, privately-held or private companies it is unlikely to have any

non-executive or independent non-executive directors on their boards. The directors are
usually also the shareholders of proprietary companies and the company’s business will be run
by the directors, who will also perform managerial functions. However, in most jurisdictions
there are no statutory provisions that prohibit proprietary companies from structuring their
boards in any way they want.
Although there is in principle no difference in the duties expected of “executive” and
“non-executive” directors, the distinction between “executive” and “non-executive” directors
became prominent since at least 1992 when the UK Cadbury Report came out.13 This distinc-
tion became progressively more important with the emphasis on the board’s role to “direct,
govern, guide, monitor, oversee, supervise or comply.”14
It has been realized for several years that non-executive directors can play an important part
in the boards, in particular, of larger corporations, because they can bring broader perspectives
and a variety of skills and experience to the board. In addition, they often provide a beneficial
objective and independent viewpoint and thus a crucial check on self-interest and abuse within
corporate management. The “dramatic shift” away from boards controlled by inside directors
to boards controlled by outside directors is largely due to the growing concern that inside
directors “tend to be self-serving.”15 Tricker explains the shift away from boards controlled by
inside directors and also the reason for this shift:
12
Department of the Treasury, Report of the HIH Royal Commission 105 (2003).
13
Committee on the Financial Aspects of Corporate Governance, Report of the
Committee on the Financial Aspects of Corporate Governance, 1992, ¶ 4.10 (UK).
14
Principles of Contemporary Corporate Governance 79–81 (Jean Jacques du Plessis, Anil
Hargovan & Jason Harris eds., 2018).
15
Tricker, supra note 9, at 15. For an in-depth discussion of development regarding independ-
ent directors in the US, see Jeffrey N. Gordon, The Rise of Independent Directors in the United States,
1950-2005: Of Shareholder Value and Stock Market Prices, 59 Stan. L. Rev. 1465 (2007).
Figure 8.4 Majority outside board
In the last several decades there has been a dramatic shift away from boards dominated by inside
directors towards boards dominated by outside directors … A principle reason for this change has
been the growing concern that inside directors (i.e. corporate employees) tend to be self-serving.
Both in the US, and in other jurisdictions, requiring more independent directors on boards, was
closely linked with the important “monitoring” role of boards.16
In 1992, the UK Cadbury Report emphasized the important role of non-executive directors to
bring an “independent judgment” into the boardroom.17 However, the Committee stopped short
of recommending that the majority of the board should consist of independent non-executive
directors. The only recommendation was that there should be at least three non-executive
directors on the board of listed companies and that the majority of non-executive directors
should be “independent of the company.”18 The Cadbury Report only defined independence
as being “independent of management and free from any business or other relationship which
could materially interfere with the exercise of their independent judgment.”19 In 1998, the UK
Hampel Committee observed that they “do not consider that it is practicable to lay down more
16
Id. at 1514; Principles of Contemporary Corporate Governance, supra note 14, at 79–81;
and OECD, G20/OECD Principles of Corporate Governance 9, 45 (2015), www.oecd.org/daf/ca/
Corporate-Governance-Principles-ENG.pdf.
17
Committee on the Financial Aspects of Corporate Governance, supra note 13, at ¶4.10.
18
Id. at ¶¶ 4.11–4.12.
19
Id. at ¶ 4.12.
Figure 8.5 Two-tier board
precise criteria for independence.”20 As recently as 2002, it was stated that in the UK there
were only minimal indications of what is meant by “independence” and that it was primarily
for the board to set standards regarding the definition of independence.21
Although the practice of having a significant number of independent directors on boards
was the norm in other jurisdictions like the US and India, it was only in 2003 that this was
accepted in the UK. In the Higgs Report (2003) it was not only recommended that at least
Committee on Corporate Governance, Final Report, 1998, ¶ 3.9 (UK).

20
Stephen M. Davis, Leading Corporate Governance Indicators, in Corporate Governance:

21
An Asian-Pacific Critique 57, 61 (Low Chee Keong ed., 2002).

Figure 8.6 The South African close corporation
half of the board (excluding the Chair) should be “independent non-executive directors,”22
but circumstances that could affect the “independence” or “non-independence” were given by
way of examples.23 These recommendations were accepted and they currently form part of the
UK Corporate Governance Code of 2018 that came into effect 1 January 2019. Provision 11
provides that “[a]t least half the board, excluding the Chair, should be non-executive directors
whom the board considers to be independent.” Provision 10 provides for the type of circum-
stances that might affect a director’s independence including, but not limited to, whether
a director is or has been an employee within the last five years, there has been a material
business relationship, the director receives additional remuneration, has close family ties, or
holds cross-directorship positions.
Several other jurisdictions have comparable provisions in their Corporate Governance
Codes, but they differ slightly.24 These guidelines are designed to give companies guidance on
what matters can taint a board member’s independence. Ultimately, the aim is to have a signif-
icant group of directors who can exercise independent judgment, not affected by the judgments
of executives and the CEO and not tainted by self-interest.
22
The Department of Trade and Industry, Review of the Role and Effectiveness of
Non-executive Directors, 2003, ¶ 9.5 (UK).
23
Id. at ¶ 9.11, 37 box.
24
See for example, ASX Corporate Governance Council’s Principles of Good Corporate
Governance and Best Practice Recommendations (4th ed., 2019), Box 2.3.
3.2 Other Board Structures and Forms of Codetermination
3.2.1 Overview
This section will focus first on Germany because it is considered the country with the longest
history of a two-tier board structure, although the requirement of reserving seats for employees
on the supervisory board has not always been part of the German two-tier model.25 In this part,
other jurisdictions where two-tier board structures are mandatory, are mentioned, but the focus
will primarily be on China. The Chinese two-tier board structure for certain companies and
enterprises differs considerably from the German two-tier board structure. The Dutch model
will also be discussed as a very good example of when the interests of employees are primarily
recognized through works councils, and not by allowing employees to be part of a supervisory
board. The focus is also on Japan where, like in some other jurisdictions, a board of auditors is
mandatory under certain circumstances. It can, therefore, be seen as a unique form of a two-tier
board system as managerial functions are not vested in the auditors board.
3.2.2 The German two-tier board structure26

Numerous books and academic articles describe the role, functions and composition of the
German two-tier board system, consisting of a management board (Vorstand) and a supervi-
sory board (Aufsichtsrat).
The German corporate governance and corporate law models are renowned for employees
serving on the supervisory boards of certain types of companies. This is also called the code-
termination model, meaning that the best interests of the corporation is codetermined by the
providers of capital (the shareholders) and the providers of labor (the employees), by requiring
employee participation at the supervisory board level. Although the German codetermination
model is closely associated with the German two-tier board structure, the two-tier German
board structure did not originally provide for employee representation on the supervisory
board. As Du Plessis et al explain:27
The two-tier system and the system of supervisory codetermination by employees developed
separately in Germany. The two-tier system had already been introduced by the General German
Commercial Code (Allgemeines Deutsches Handelsgesetzbuch: ADHGB) of 1861 and was made
compulsory in 1870 though only for Aktiengetz (AktG) and not yet for GmbHs (Gesellschaften mit
25
Some form of codetermination was expected of all important German companies between 1922
and 1934. See Otto Sandrock & Jean J. du Plessis, The German System of Supervisory Codetermination
by Employees, in Jean J. du Plessis et al., German Corporate Governance in International and
European Context 172 (3rd ed. 2017). It is, however, the different forms of codetermination that
developed after the Second World War that receive the most attention in academic literature.
26
This part is based on J. J. du Plessis, Corporate Governance: Some Reflections the South
African Law and the German Two-tier Board System, in Perspectives on Company Law 2, 131–48
(Fiona Macmillan Patfield ed., 1997); Jean J. du Plessis, Some Thoughts on the German System of
Supervisory Codetermination by Employees, in Festschrift für Bernard Grossfeld 875–88 (Ulrich
Hubner & Werner F. Ebke eds., 1999); Jean J. du Plessis, The German Two-Tier Board and the German
Corporate Governance Code, 15 Eur. Bus. L. Rev. 1139, 1139–64 (2004); and du Plessis et al., supra
note 25, at chs. 4 & 5.
27
Otto Sandrock & Jean J. du Plessis, The Impact of European Developments on German
Codetermination, in du Plessis et al., supra note 25, at 183.
beschränkter Haftung),[28] which were regulated in a special statute of 1892 (i.e. about 30 years
later). One thing is certain: even if the different explanations for introducing the supervisory board
in German law are apprehended, the inception of the supervisory board was not motivated or even
affected by the urge to recognize or to accommodate the interests of employees. In fact, the statutory
history of supervisory codetermination by employees goes back to 1922 and that of parity employee
representation at supervisory board level to 1951.[29] This means that more than 80 years stand
between the introduction of the two-tier system and the system of parity employee participation at
supervisory board level.
It was the Codetermination Act of 1976 (MitbestG (1976))30 that introduced another kind of
codetermination outside the mining, coal, iron, and steel industries.31 The effect of the MitbestG
(1976) was that all companies engaged in industry and commerce were now brought in under
another kind of codetermination regime. All public limited companies (Aktiengesellschaften
(AGs)), private companies (Gesellschaften mit beschränkter Haftung (GmbHs)), companies
with one or more general partners but limited by shares (Kommanditgesellschaften auf Aktien
(KGaAs)), and cooperatives (Genossenschaften)32 are subject to the MitbestG (1976), if they
employ more than 2,000 employees.33 The MitbestG (1976) therefore has the widest general
application across German industry and commerce. Half of the seats on the supervisory
board are reserved for the representatives of the shareholders, while the other half of seats are
reserved for representatives of the employees.34 The MitbestG (1976) ensures that the chairper-
son is appointed by the representatives of the shareholders, while the employee representatives
have the right to appoint the vice-chairperson.35 The chairperson was given a casting vote in
1976, after considerable political deliberation on the issue.36 The casting vote of the chairper-
28
The Gesellschaft mit beschränkter Haftung (GmbH) is the equivalent to what is called private
or proprietary companies in other jurisdictions.
29
Through the Mining, Iron and Steel Industry Codetermination Act of 1951 (generally known
as the Montan-Mitbestimmungsgesetz (Montan-MitbestG (1951)), the system of parity employee rep-
resentation or parity codetermination at supervisory board level was made compulsory for all industries
involved in the mining, iron, coal and steel industry – see further Sandrock & du Plessis, supra note 25,
at 173–74.
30
Mitbestimmungsgesetz [MitbestG] [Codetermination Act of 1976], May 4, 1976,
Bundesgesetzblatt , Teil I [BGBl I] at 1153 (Ger.).
31
This part is based on Sandrock & du Plessis, supra note 25, at 175–78.
32
MitbestG, May 4, 1976, BGBl I at § 1(1)1.
33
MitbestG, May 4, 1976, BGBl I at § 1(4). Exempt, however, from its application are com-
panies in pursuit of the following purposes: political, trade union or employer oriented, religious,
charitable, educational, scientific, scholarly or artistic. The same is true for publishing-related companies
enjoying the freedom of information and freedom of opinion under the German Federal Constitution, §
5.
34
Similar to, but not because of the provisions of the Montan-MitbestG (1951), the supervisory
board has to be composed of (i) six representatives of the employees and six representatives of the share-
holders if the company has less than 2,000 employees, (ii) eight representatives of the employees and
eight representatives of the shareholders if the company employs between 10,000 and 20,000 persons,
and (iii) ten representatives of the employees and ten representatives of the shareholders if the company
has more than 20,000 employees. MitbestG, May 4, 1976, BGBl I at § 27(1)).
35
In principle, all members of the supervisory board are entitled to participate in the election of
the chairperson. But in case of a 50:50 vote, only the representatives of the shareholders may appoint the
chairperson while the vice-chairperson will be elected exclusively by the employee representatives on
the supervisory board. See MitbestG, May 4, 1976, BGBl I at § 27.
36
Friedrich Kübler & Heinz-Dieter Assmann, Gesellschaftsrecht 522 (6th ed. 2006).
son (elected by the general meeting) has tilted the power balance on the supervisory board
slightly towards the shareholders,37 evoking considerable opposition both from the corporate
side and from labor organizations. As a result of a petition by some well-known German com-
panies, the matter was referred to the Federal Constitutional Court (Bundesverfassungsgericht
(BVerfG)).38 The Court found that the provisions of the MitbestG (1976) which, in the opinion
of the plaintiffs, violated particularly their constitutionally guaranteed right of property, was
not unconstitutional.39 As it is clear that for these types of corporations the power balance is in
favor of the shareholder representatives, commentators refer to this form of codetermination
as “quasi-parity codetermination” rather than “parity codetermination.”40
There are not only different statutes applying to employee participation at the supervisory
board level, but employee participation is also regulated differently in different industries and
for different types of companies. Basically, if a corporation falls under the codetermination
regime, through the various pieces of legislation, there can be from one-third to one-half of the
supervisory board seats filled by employees.41
There are many different ways in which the employees can have an impact on how
co-determined corporations are supervised and governed. For instance, it is a statutory
requirement that the supervisory board must appoint the members of the management board.
The wishes of the employees sitting on the supervisory board will not easily be ignored, even
if they do not form the majority of the supervisory board. They also have an impact on the
remuneration of the management board members, as it is the supervisory board that determines
the remuneration of management board members. The way in which the supervisory board
“supervises” is quite complex.42 It is mandatory for the supervisory board to “supervise,” and
this power cannot be delegated. However, the exact scope of the supervision is not always
clear. What the supervisory board cannot do, based on specific statutory provisions, is to
directly interfere with the management of the business of the corporation or override manage-
rial decisions of the management board, because managing the business of the corporation is
a statutory power of the management board only.
The way in which the supervisory board supervises will also vary when the corporation is
a healthy and financially viable undertaking or when some financial or other major crises face
37
Id. at 526.
38
Bundesverfassungsgericht [BVerfG] [Federal Constitutional Court], 50 Entscheidungen Des
Bundesverfassunggerichts [BVerfGE] 290.
39
Friedrich Kübler & Heinz-Dieter Assmann, supra note 36, at 522. See also Thomas Raiser,
Der neue Koalitionskompromiß zur Mitbestimmung, 31 Der Betriebs-Berater (Zeitschrift) 145
(1976).
40
Klaus J. Hopt, The German Two-Tier Board: Experience, Theories, Reforms, in Comparative
Corporate Governance: The State of the Art and Emerging Research 242, 246–47 (K. J.
Hopt et al. eds., 1998); Hans-Christoph Hirt, Germany: The German Corporate Governance Code:
Co-determination and Corporate Governance Reforms, 23 Co. Lawyer 349, 352 (2002).
41
Jean J. du Plessis & Ingo Saenger, The Supervisory Board as Company Organ, in du Plessis
et al., supra note 25, at 138–51.
42
Otto Sandrock & Jean J. du Plessis, The Impact of European Developments on German
Codetermination, in du Plessis et al., supra note 25, at 172.
the corporation.43 Generally speaking, the normal scope of a supervisory board’s supervisory
functions will be the following:44
●● Compare the financial statements over a period of time;

●● Act pro-actively by scrutinizing the way in which the management board directs the busi-
ness of the corporation;
●● Allow for consultation with regard to the management board’s policy decisions;
●● Ensure that the management board acts lawfully, orderly, according to acceptable business
practices and appropriately as far as the business of the corporation is concerned;
●● Scrutinize the information which it obtains from the management board; and
●● Act promptly whenever they think that the management board does not act appropriately.
However, when the corporation experiences financial difficulties, there is a clearer view of the
“extended scope” of the supervisory board’s supervision under these circumstances.45 In addi-
tion, there are provisions in various pieces of legislation which complement the supervisory
board’s ordinary function to supervise.46
This section will briefly touch on the German Corporate Governance Code (GCGC), as
versions prior to the 2019 GCGC are well-explained in other sources.47 However, it is worth
mentioning that the GCGC contains many provision on the functions and roles of the supervi-
sory board, the management boards, and the general meeting. The GCGC was first adopted on
February 26, 2002. Since then it was amended on several occasions, the most recent version
was adopted by the German Government’s Corporate Governance Commission in December
2019, with the 2019 GCGC only approved officially on February 7, 2020.48
A rather long list of some of the GCGC’s core (“comply or explain”) provisions are sum-
marized by Du Plessis et al,49 but a few examples provide an idea of the scope of the GCGC:
●● The supervisory board shall specify the management board’s information and reporting
duties in greater detail.
●● The management board and supervisory board shall report each year on the enterprise’s
corporate governance in the annual report (Corporate Governance Report) and publish this
report in connection with the statement on Corporate Governance.
●● The management board shall comprise several persons and have a Chairperson or
Spokesman.
●● The supervisory board shall form specialized committees “with sufficient expertise,” but
apart from two such committees that are specifically mentioned, there is no indication
43
Du Plessis & Saenger, supra note 41, at 138–46.
44
Id. at 144.
45
Id. at 144–46.
46
Id. at 146–47.
47
Jean J. du Plessis et al., An Overview of the Corporate Governance Debate in Germany, in du
Plessis et al., supra note 25, at 17-57.
48
For the official German version of the 2019 GCGC, see Deutscher Corporate Governance
Kodex [German Corporate Governance Code], www.dcgk.de/files/dcgk/usercontent/de/download/
kodex/DCGK%202020%20Vorlage%20BMJV%20FINAL.pdf. For the translated English version, and
press releases, media releases and conference papers, see Regierungskommission, Deutscher Corporate
Governance Kodex, www.dcgk.de/en/home.html.
49
Du Plessis & Saenger, supra note 41, at 45–48.
in the GCGC which committees there should be. An audit committee and a nomination
committee shall be appointed by the supervisory board.
●● The total compensation of each member of the management board is to be disclosed by
name, divided into fixed and variable compensation.
●● The supervisory board, in consultation with the management board, shall ensure that there
is long-term succession planning for management board members.
3.2.3 Other jurisdictions with two-tier board structures

There are several other jurisdictions where a two-tier board structure is dictated by legislation,
in particular for listed public companies. As mentioned above, there are several jurisdictions
where a two-tier board system is mandatory for either all public companies or for some
larger listed public companies. Austria, Belgium, and Indonesia are examples. However,
we will only focus on China in this chapter. Before we do so, one important point should
be made. Under the principle of freedom to arrange business structures in any way through
a company’s articles of association, constitutions, or by-laws, there is no legal prohibition for
companies under most corporate law systems where a two-tier system is not mandatory, to
adopt a two-tier board structure.50 An infamous recent example of this is the Steinhoff group
in South Africa, which resulted in the largest corporate collapse in South Africa’s history and
affected numerous companies in many jurisdictions. Some argued that it was because of the
two-tier board structure adopted that bad corporate governance practices, and the true scale of
the financial problems the group experienced, could not be detected easily.51
As far as China is concerned, there are at least five types of enterprises recognized by the
Regulations of the People’s Republic of China for Controlling the Registration of Enterprises
as Legal Persons:52
(1) enterprises owned by the people as a whole;

(2) enterprises under collective ownership;
(3) jointly operated enterprises;
(4) Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and
foreign-capital enterprises established within the territory of the PRC;
(5) privately operated enterprises.
The 1993 Company Law is the main piece of legislation applying to companies, but “various
ministries, administrations and other bodies under the State Council can also issue rules,
decrees and other instruments with legislative impact.”53 The Companies Law provides for
three organizational governance bodies: a shareholders’ meeting, a board of directors, and
a supervisory board.54 The shareholders’ meeting is where the dominant power of Chinese
50
As an illustration, see Paul White, Ireland, in The Corporate Governance Review, supra
note 1, at 164 and Margaretha Wilkewnhuysen, Luxembourg, id. at 209–10.
51
See Owen Skae, Did Steinhoff’s Board Structure Contribute to the Scandal?, The Conversation
(Jan. 28, 2018), https://theconversation.com/did-steinhoffs-board-structure-contribute-to-the-scandal
-89704.
52
Yin Chen, Corporate Social Responsibility Analysed from Chinese Cultural and Political
Perspectives 9 (2019) (unpublished Ph.D. thesis, Deakin University) (on file with author).
53
Bath, supra note 4, at 361.
54
Id.
companies is based as power over most management issues occurs in the shareholders’
meeting.55
The way in which the boards of some Chinese companies must be structured vary and are
either mandatory or allow for some deviation. For instance, for companies limited by shares,
the management board or management body should have 5–19 members, but it is optional to
have employees on this board. It is also required that these companies must have a board of
supervisors, consisting of least three members, including representative(s) of shareholders,
and at least a third of the members democratically elected by the employees.56 Examining the
financial affairs of the company, “supervising the activities of the directors and requiring them
to rectify wrongful actions … (Articles 53 (54) and 118 (119) of the Company Law)” are some
of the functions of the supervisory board.57 In 2005, the powers of the supervisory board were
expanded and now include the following:58
[It can] investigate the company’s financial affairs, supervise the directors and officers and recom-
mend their removal, require a misbehaving officer or director to ‘rectify’ their misbehavior, propose
that shareholders’ meetings be convened and convene them themselves if the directors fail to do so,
and initiate litigation against directors for breach of duty if requested to do so by at least 1 per cent
of the shareholders.
Chapter 4 of the Chinese Code of Corporate Governance for Listed Companies (2018) deals
with the supervisory board.59 In article 59, the functions of the supervisory board are listed as
follows:
The supervisory board of a listed company shall be accountable to all shareholders. The supervisory
board shall supervise the corporate finance, the compliance and legitimacy of directors, managers and
other senior management personnel’s performance of duties, and shall protect the company’s and the
shareholders’ legitimate rights and interests.
In articles 60–68 other expectations of the supervisory board are dealt with in greater detail.
In addition to the three organizational bodies, “a limited liability company, a wholly
state-owned company and a joint stock company should each have a manager whose powers
are also specified in the Company Law … including responsibility for operations and produc-
tion and internal management.”60
As far as State-owned enterprises (SOEs) are concerned, there is ultimate control by the
State, meaning the Communist Party, as it is the only shareholder of SOEs. Vivienne Bath
explains as follows:
In the corporate governance context, the fact that there may be a dual organization within the entity,
or that important decisions about managers and management are actually made by the Party organiza-
55
Id. at 368–69.
56
Chen, supra note 52, at 10; Bath, supra note 4, at 370–71.
57
58
Id. at 370.
59
Shangshi gongsi zhili zhun ce [Code of Corporate Governance for Listed Companies] (promul-
gated by China Securities Regulatory Comm’n and State Economic and Trade Comm’n, Sept. 30, 2018),
art. 49, www.csrc.gov.cn/pub/csrc_en/laws/rfdm/DepartmentRules/201804/P020180427400732459560
.pdf.
60
Id.
tion rather than the board of directors, has the potential to affect the effectiveness of measures taken
(based on the structures set out in the Company Law) to improve internal management structures and
activities.
The State-owned Assets Supervision and Administration Commission of the State Council
(SASAC) has the dominant function for centrally administering “state-owned enterprises and
plays a regulatory, legislative and supervisory role in relation to those enterprises.”61
Since 2001 there have been considerable efforts to improve the Chinese corporate govern-
ance model. This was done by way of the Code of Corporate Governance for Listed Companies
in China (2001); the Guidelines on Introducing the Independent Director System in Listed
Companies (2001); the reiteration by the China Securities Regulatory Commission (CSRC) of
the importance of corporate governance (2005); the Notice on Matters concerning Carrying
out a Special Campaign to Strengthen the Corporate Governance of Listed Companies (2007);
and the Ministry of Finance, China Securities Regulatory Commission, National Audit Office
and China Insurance Regulatory Commission joint release of Basic Internal Control Norms
for Enterprises (2008).62
The original Guidelines for Introducing Independent Directors to the Board of Directors of
Listed Companies was issued by the China Securities Regulatory Commission in 2001.63 Like
in most Western countries, no independent non-executive director needs to be appointed to
the management board of unlisted companies. For listed companies, the minimum number of
independent directors on the management board or body must be one-third.64 Independence
is defined as directors who hold no other posts in the company and who have no relationship
with the listed company and its major shareholder that may interfere with the director’s ability
to make objective judgments.65
Independent directors have all the duties as other directors and must “earnestly perform
their duties in accordance with laws, regulations and the company’s articles of association,
shall protect the overall interests of the company, and shall be especially concerned with pro-
tecting the interests of minority shareholders from being infringed.”66
The 2001 Guidelines focus on the many aspects related to the intended role and function
of the independent directors. This does not differ in any significant way from the role and
functions expected of independent directors in other countries. It should be noted that the
requirement of one-third independent directors for listed Chinese companies does not form
part of the Chinese Code of Corporate Governance for Listed Companies (2018), but it is pro-
vided in article 49 that “[a] listed company shall introduce independent directors to its board
of directors in accordance with relevant regulations,”67 meaning that the 2001 Guidelines will
apply. Independence is defined slightly differently from the 2001 Guidelines in the Chinese
61
62
Id. at 362.
63
Guan Zai Shangshi Gongsi Jianli Duli Dongshi Zhidu De Zhidao Yijian [Guidelines for
Introducing Independent Directors to the Board of Directors of Listed Companies] (promulgated by the
China Sec. Regulatory Comm'n, Aug. 16, 2001), art. I, ¶ 3, www.csrc.gov.cn/pub/csrc_en/newsfacts/
release/200708/t20070810_69191.html.
64
Id.
65
Id. at art. I, ¶ 1.
66
Id. at art I, ¶ 2.
67
Code of Corporate Governance for Listed Companies, supra note 59, at art. 49.
Code of Corporate Governance for Listed Companies: “Independent directors shall be inde-
pendent from the listed company that employs them and the company’s major shareholders.
An independent director may not hold any other position apart from independent director in
the listed company.”
Article 52 of the Chinese Code of Corporate Governance for Listed Companies deals with
the establishment of board committees and refers to the following committees: strategy com-
mittee, an audit committee, a nomination committee, a remuneration, and appraisal committee.
In addition, the board may also establish any “other special committees in accordance with the
resolutions of the shareholders’ meetings.” It is then provided that
the audit committee, the nomination committee and the remuneration and appraisal committee shall
be chaired by an independent director, and independent directors shall constitute the majority of
the committees [and that] [a]t least one independent director from the audit committee shall be an
accounting professional.
On the face of it, the roles and functions of management board of directors, supervisory board
members, and independent directors of listed Chinese companies appear almost identical
to that in other jurisdictions where a two-tier board system is compulsory. The roles and
expectations of independent directors are also almost identical to that of countries where
Corporate Governance Codes or Listing Rules expect that independent directors are appointed
to a unitary board. However, a few significant differences between most Western corporate
governance models and the Chinese corporate governance model should be noted.
First and foremost, the Chinese supervisory board for listed companies does not need to be
independent of management in listed Chinese companies and, thus, as Vivienne Bath points
out, “the supervisory board will continue to be a relatively ineffective check upon the powers
of the board of directors.”68 In Germany, it is prohibited for members of the management board
to also be a member of the supervisory board for the same company. Even though German
supervisory boards falling under the codetermination regime can never be “independent from
the company” as at least one-third to one-half of the supervisory board seats are filled by
employees, the German supervisory board has significantly more powers than the Chinese
supervisory board. They can, inter alia, appoint and remove the members of the management
board; determine their remuneration and the number of years they are appointed; and institute
action on behalf of the company against directors for breaches of their duties.
In China, it is not the case that there has not been admirable efforts to focus on the supervi-
sory board, but it still has a long way to go before it could be seen as on par with the powers
and functions of German supervisory boards. Vivienne Bath puts it well:69
[I]n relation to listed companies, although the role of the supervisory board continues to be included
by regulators as an essential part of a coherent corporate governance regime, more emphasis has been
put on improving the board of directors itself than in turning the supervisory board into an effective
monitoring and control mechanism.
68
69
Id.
3.2.4 The Dutch model and employee interests

3.2.4.1 Background
Under Dutch law, the two main business forms providing the advantage of limited liability,
and considered as companies limited by shares, are the naamlooze vennootschap (NV) and
the besloten vennootschap (BV). The official Dutch Governmental webpage translate this as
“public limited company” and “private limited company” respectively.70 The Wetboek van
Koophandel (Commercial Code) came into effect in 1838, which provided for an oversight
board, called “commissarissen” (commissioners/supervisors), that was primarily tasked with
oversight (toezicht), but it could also exercise some form of control over management.71 In
1879 and 1890, there were efforts to reform the Commercial Code, but it did not lead to any
changes to the law.72 There were several other corporate law reform proposals made from
1910–70, but the most significant reform of the Dutch corporate law took place in 1971,73
based on significant law reform proposals at the end of the 1960s and the early 1970s. Maeijer
observed that there was a remarkably large degree of agreement (vrij grote eenstemmigheid)
on most issues, except for the proposed restructuring of public limited companies and the
powers and composition of supervisory boards for larger Dutch companies.74
3.2.4.2 The Dutch two-tier board structure

For centuries the Dutch corporate law model was based on the two-tier board system – the
Vereenigde Oostindische Compagnie (VOC), formed in 1602, “introduced a form of a super-
visory board in 1623 following shareholder pressure to improve the company’s governance.”75
Based on the underlying two-tier board system for listed Dutch companies, the 2016 Dutch
Corporate Governance Code still considers the two-tier board structure as the basic board
structure for listed companies:76
5.1 One-tier governance structure

The Code is focused on companies with a two-tier governance structure, but also applies to companies
with a one-tier governance structure. In addition to Chapters 1 to 4 inclusive, Chapter 5 contains one
principle and five best practice provisions which apply specifically to companies with a one-tier
governance structure.
Since 2013, it is possible that the articles of association or constitution of a company can
provide that the governance, supervision, and oversight over managers not be undertaken by
70
See Public Limited Company (NV), Business.gov.nl, https://business.gov.nl/starting
-your-business/choosing-a-business-structure/public-limited-company; Business Structures in the
Netherlands: Overview, Business.gov.nl https://business.gov.nl/starting-your-business/choosing-a
-business-structure/business-structures-in-the-netherlands-overview.
71
J. M. M. Maeijer, De naamloze en de besloten vennootschap, in Mr. C. Asser’s Handleiding
tot de beoefening van het Nederlands Burgerlijk Recht 4 (1994).
72
Id. at 4.
73
Id. at 6. See also Lars van Vliet, The Netherlands: New Developments in Dutch Company Law:
The ‘Flexible’ Close Corporation, 8 J. Civ. L. Stud. 271, 274–75 (2014).
74
Maeijer, supra note 71, at 7. It was introduced by the Wet op de ondernemingsraden van 6 mei,
1971, Stb. 1971, 287.
75
J. van Bekkum et al., Corporate Governance in the Netherlands, 14 Electronic J. of Comp.
L. 3 (2010), www.ejcl.org/143/art143-17.pdf.
76
Dutch Corp. Governance Code Monitoring Comm., The Dutch Corporate Governance Code
(2016), www.mccg.nl/?page=4738.
the supervisory board, but instead by specially appointed managers. These specially appointed
managers are also referred to as non-executive managers (niet-uitvoerende bestuurders) that
are responsible for governance, supervision, and oversight of the executive managers (uit-
voerende bestuurders). The specifically appointed managers can also provide the executive
managers with advice.77
3.2.4.3 The Dutch two-tier or structure companies regime (structuurregime)78

The idea of codetermination (medezeggenschap),79 under which both the shareholders and
employees codetermine the destiny of corporation, was introduced in 1971 by way of the
Works Council Act.80 It was originally based on the idea that in large public companies there
should also be recognition of the importance and interests of the employees in determining the
future of the corporation.81 Companies fall under the two-tier or structure companies regime
(structuurregime) when they meet the following criteria:82
1. If a company or a dependent company employs more than 100 employees in the

Netherlands;
2. When the balance sheet, with explanatory notes, show that the issued capital together
with the reserve amounts are equal to or exceed a limit set by Royal Decree (currently
€16,000,00083 (before the Netherlands adopted the Euro as currency, 1994 the amount was
stipulated in gulden or guilder (ƒ or fl.) 25,000,000)84; and
3. The company or its dependent companies have established a works council.
The distinctive and mandatory requirement for these companies is that they must form a super-
visory board (raad van commissarrisen) under the two-tier companies regime (structuurre-
gime; a company – NV or BV – applying this regime is called a structuurvennootschap). Thus,
these companies are required to have a management board, a supervisory board, and a works
77
G. van Solinge & M.P. Nieuwe Weme, Raad van Commissarissen van Structuurvenootschap,
in Asser’s Rechtspersonenrecht: NV en BV 2IIB pt. 5.4, ¶ 501 (2019). See also Frank Röben,
Commissaris of Niet-uitvoerend Bestuurder? Aan u de Keuze!, Kienhuis Hoving (Nov. 12, 2013), www
.kienhuishoving.nl/nl/blogs/commissaris-of-niet-uitvoerend-bestuurder-aan-u-de-keuze.
78
I would like to thank K. J. (Koen) Bakker (LL.M, PhD Candidate & Lecturer in Company
Law | Van der Heijden Institute, Radboud Business Law Institute, Radboud University, Nijmegen) for
providing me with some additional academic literature and some clarifications to refine the analysis of
this part.
79
For a detailed historic analysis of the Dutch codetermination (medezeggenschap) model,
see Johan Matthijs de Jongh, Tussen societas en Universitas: De Beursvennootschap en Haar
Aandeehouders in Historisch Perspectief 344–66 (2014), https://repub.eur.nl/pub/78641/SSRN
-id2368748_reduced.pdf.
80
Id. at 24–25.
81
Id. at 24.
82
The “structure regime” is the terminology used in the translated Peters Report – see Committee
on Corporate Governance, Corporate Governance in the Netherlands: Forty Recommendations (June 25,
1997), https://ecgi.global/code/peters-report-recommendations-corporate-governance-netherlands.
83
M. J. Kroeze, L. Timmerman & J. B. Wezeman, De Kern van het Ondernemingsrecht 24
(2019).
84
Maeijer, supra note 71, at 25.
council. Some companies are exempted from this regime, for instance, if the company is a sub-
sidiary of a holding company which already falls under the two-tier regime.85
Before 2004 the members of the supervisory board, that had to be established, were
appointed by the shareholders, but after the supervisory board was formed, the shareholders’
influence on the supervisory board was reduced considerably. Although shareholders could
later (pre-2004) propose individuals to become members of this supervisory board, the
supervisory board could reject such a nomination and could appoint anybody they want.86 In
addition (pre-2004), only the supervisory board had the power to:87
●● approve the issuing of new shares;

●● amend the corporation’s constitution;
●● approve significant and expensive agreements of collaboration involving the
structuurvennootschap.
Another major reform initiative in the 1990s in the Netherlands resulted in the 1997 Peters
Report, making 40 recommendations for corporate law and corporate governance reform in
the Netherlands.88 The 1997 Peters Report observed that many listed companies did not fall
under the two-tier or structure companies regime, requiring more flexibility in the corporate
governance model they wanted to adopt.89 This Report contained 40 recommendations primar-
ily applying to these listed companies.
The Report resulted in a major overhaul of the Dutch corporate law and corporate govern-
ance model by way of amendments in 2004.90 The most fundamental change was to move the
Dutch corporate law model away from a stakeholder-orientated model towards a shareholder
primacy model.91 The amendments included, inter alia:
●● the new power of shareholders to approve major transactions that will have a material
impact on the nature of the company, including acquisitions or divestures of a value
exceeding one-third of the company’s balance sheet total; and
●● the right of the general meeting of companies governed by the structure regime to appoint
supervisory directors (who previously appointed themselves) and to dismiss the supervi-
sory board as a whole.
However, a German-based form of codetermination was also introduced, making it compul-

sory for structure companies, where a supervisory board is mandatory, that one-third of the
members must be employees, nominated by the works council.92
85
Kroeze, Timmerman & Wezeman, supra note 83, at 25.
86
B. G. N. Gubblels, De structuurvennootschap met de raad van commisarrisen, Wet & Recht,
www.wetrecht.nl/de-structuurvennootschap-met-de-raad-van-commissarissen.
87
Id. See also Johan Matthijs de Jongh, supra note 79, at 364–66.
88
Committee on Corporate Governance, supra note 82.
89
Id. See also Frans Gerrit Koenraad Overkleeft, De Positie van Aandeelhouders in
Beursvennootschappen: Een Analyse van Recht, Gebeurtenissen en Ideeën 324–26 (2017).
90
Van Bekkum et al., supra note 75. See also Gerrit, supra note 89, at 323–46.
91
Van Bekkum et al, supra note 75.
92
Id. at 3.
3.2.4.4 The Dutch works councils and employees’ interests

Under Dutch law, works councils play a central role in looking after the interests of employ-
ees. A works council was made compulsory under the Works Councils Act 1971 for all entre-
preneurs and enterprises employing more than 50 employees,93 but if less than 50 employees
are employed in several individual related companies, a single works council is permissible.94
On the official Business website of the Dutch Government, it is explained as follows:95
In the Netherlands a works council (ondernemingsraad, OR) promotes and protects the interests of
the employees in a company. The Works Council has rights, such as:
• the right to prior consultation in the event of major decisions and measures;
• the right of consent in the event of certain changes regarding terms of employment;
• the right of consent concerning the appointment of prevention officers.
The works council meets with the employer at least twice a year.
The Works Councils Act 1971 provides for several significant ways in which the interests of
the employees could not be ignored by the management board or the supervisory board. The
works council is given formal statutory recognition as part of the enterprise96 and the size is
determined depending on the number of employees employed.97
The works council is seen as a semi-organ of the company, without any direct authority to
interfere with the way in which the business of the corporation is conducted. However, the
corporation must mandatorily consult with the works council under Chapter IV of the Works
Council Act 1971. Section 1(e) defines “director” as “an individual who, alone or jointly with
others, exercises the highest direct authority in managing work within an enterprise.” The
director will most likely be the chief executive officer (CEO) or managing director, which will
be the Chair of the management board. However, there is flexibility in this regards as section
23(4) provides that the mandatory consultations with the works council “shall be conducted
on behalf of the entrepreneur by the director of the enterprise.” It also provides that “[i]f the
enterprise has more than one director, the directors shall decide jointly who of them is to
conduct consultations with the works council.”
Section 24(1) of the Works Councils Act also provides that “[t]he general operation of the
enterprise shall be discussed at least twice a year in consultation meetings [with the works
council].” The corporation must inform the works council at the two meetings about any
decisions the corporation is considering relating to the matters mentioned in sections 25 and
27 of the Works Councils Act. The corporation or works council can also request additional
meetings, which must be held within 14 days after such a request.98 Section 25 entitles the
works council to be consulted on very significant issues that form part of the corporation’s
business and operations.99
93
Wet op de ondernemingsraden [Works Council Act] van 6 mei, 1971, Stb. 1971, § 2. See also
Structuurvennootschap, Wikipedia, https://nl.wikipedia.org/wiki/Structuurvennootschap.
94
Id. See also Works Council or Staff Representation, Business.gov.nl, https://business.gov.nl/
regulation/works-council-staff-representation/.
95
Works Council or Staff Representation, supra note 94.
96
Wet op de ondernemingsraden [Works Council Act] § 4(1).
97
Id. at § 6(1).
98
Id. at § 23(1).
99
The following issues are listed in the Wet op de ondernemingsraden [Works Council Act] § 25:
a. transfer of control of the enterprise or any part thereof;
Section 27 also requires the approval of the works council on significant issues.100
It could, without any doubt, be concluded that the rights and interests of employees cannot
be ignored by corporations. In this sense, when a works council is mandatory, it is indeed
a model aimed at codetermination of the corporation’s business, involving the supervisory
board, management board, the works council, and the shareholders.
b. the establishment, take-over or relinquishment of control of another enterprise, or entering

into, making a major modification to or severing a continuing collaboration with another
enterprise, including the entering into, effecting of major changes to or severing of an impor-
tant financial holding on account of or for the benefit of such an enterprise;
c. termination of operations of the enterprise or a significant part thereof;
d. any significant reduction, expansion or other change in the enterprise’s activities;
e. major changes to the organization or to the distribution of powers within the enterprise;
f. any change in the location of the enterprise’s operations;
g. recruitment or borrowing of labor on a group basis;
h. making major investments on behalf of the enterprise;
i. taking out major loans for the enterprise;
j. granting substantial credit to or giving security for substantial debts of another entrepreneur,
unless this is normal practice and part of the activities of the enterprise;
k. the introduction or alteration of an important technological provision;
l. taking an important measure regarding the management of the natural environment by the
enterprise, including the taking or changing of policy-related, organizational or administrative
measures relating to the natural environment;
m. adopting a provision relating to the bearing of financial risks as mentioned in Article 75,
paragraph 1 of the Disablement Benefits Act [Wet op de arbeidsongeschiktheidsverzekering];
n. commissioning an expert from outside the enterprise to advise on any of the matters referred
to above and formulating his terms of reference.
100
The following matters are listed in section 27:
a. any regulation relating to a pension insurance scheme, a profit-sharing scheme or a savings
scheme;
b. regulations relating to working hours or holidays;
c. pay or job-grading systems;
d. regulations relating to working conditions, sick leave or reintegration;
e. regulations relating to policy on appointments, dismissals or promotion;
f. regulations relating to staff training;
g. regulations relating to staff appraisals;
h. regulations relating to industrial social work;
i. regulations relating to job coordination meetings;
j. regulations relating to complaints procedures;
k. regulations relating to the handling and protection of personal information of persons working
in the enterprise;
l. regulations relating to measures aimed at or suitable for monitoring or checking the attend-
ance, behavior or performance of persons working in the enterprise;
all the above matters only insofar they relate to all the persons working in the enterprise or to
a group thereof.
3.2.5 Board of auditors model

Another governance model is the board of auditors model that is in place in countries like
Japan, Portugal, and Italy.101 As far as Japan is concerned, Kozuka and Nottage102 succinctly
capture the importance of politics to corporate law and practice since 1869 when modern Japan
reopened fully to the world. There were two dominant corporate forms in Japan, namely the
kabushiki kaisha (KK) and is translated as stock company, joint stock company, or public
limited liability company with a share capital. The other type of company called the yugen
kaisa (YK) was based on the German GmbH, but was replaced by the Companies Act of Japan
2005, that came into effect on May 1, 2006. It replaced the YK with the godo giasa (GG),
which was based on the American limited liability company. Since then, no new YKs could be
formed, but existing ones could continue as KKs under special rules.103
Kozuka and Nottage point out that the 2005 Act contains provisions on the available
governance structures based on “‘large’ and/or ‘public’ (meaning that transferability of any
class of shares is unrestricted – to be a listed public company, by contrast, all shares be fully
transferable).” They point out that the law is “somewhat complex,” but provide three subcate-
gories of governance structures for KKs.104 The first category is for non-public and non-large
companies: the most practicable structure is likely to involve just one or several directors (but
no requirement for a board). Shareholders seeking to add a governance mechanism likely to
appeal to banks might also add a statutory auditor.
Statutory auditors (kansayaku) are a traditional governance body internal to the corporation
that generally assess accounting matters, including supervising outside accounting auditors
as well as the legality of directors’ actions, somewhat inspired by German law but without
powers to hire or fire directors. For non-public and non-large public companies, however,
statutory auditors may be restricted through the articles of association to assessing accounting
matters, not the legality of directors’ actions.
The second and third corporate governance subcategories Kozuka and Nottage mention are
for non-public but large companies: all possible structures require accounting auditors (CPAs).
It may involve statutory auditors (with or without full powers).105
The third subcategory is for public, but not large, companies. For these companies a board
of directors is mandatory. The most practicable structure is likely to involve a board of direc-
tors plus one statutory auditor.106
101
For a useful summary of the corporate law and corporate governance models used in several
countries, see The Corporate Governance Review, supra note 1.
102
Souchirou Kozuka & Luke Nottage, Japan, in Principles of Contemporary Corporate
Governance, supra note 4, at 339 (referring to Harald Baum & Eiji Takahashi, Commercial and
Corporate Law in Japan: Legal and Economic Developments After 1868, in History of Law in Japan
since 1868 330 (Wilhelm Röhl ed., 2005) for a summary of the Japanese corporate law and corporate
governance models.)
103
Kozuka & Nottage, supra note 102, at 342; and Yūgen gaisha, Wikipedia, https://en.wikipedia
.org/wiki/Y%C5%ABgen_gaisha.
104
Kozuka & Nottage, supra note 102, at 342 (referring to Keiko Hashimoto, Corporations, in
Japanese Business Law 102–05 (Gerald McAlinn ed., 2007)). I want to thank Professor Luke Nottage,
The University of Sydney Law School, for additional clarification added after the quoted paragraphs.
105
Kozuka & Nottage, supra note 102, at 342.
106
Id.
For public and large companies, there are three options.107 One is the traditional (partly
German-style) “company with a board of statutory auditors” (kansayakukai setchi kaisha).
The second is the (Anglo-American-style, single-board) “company with nominations and
other committees” (shimei iinkaitô setchi kaisha), but very few listed companies have adopted
this corporate form since permitted from 2002. It replaces statutory auditors with committees
of directors tasked with nominating directors, renumerating directors, and auditing their
actions and accounting matters more broadly. The third is the company with an “audit and
supervisory committee” (kansatô iinkai setchi kaisha). It was introduced by amendment to the
Corporate Law in 2015 and is proving significantly more popular. All of these three structures
further require one or more accounting auditors.
Since labor market shortages in the 1950s, the main Japanese corporate governance model
was based on a philosophy to care for employees and to provide employees with job security
and life-long affiliation to the company.108 However, some new employment trends that started
in the 1980s expanding “non-regular labor”109 erode the pre-1980s approach.
3.2.6 Some comparisons

The biggest difference between the German two-tier board structure and the Chinese two-tier
board structure is that the Chinese supervisory board does not appoint the management board
members. In addition because of full control by the Communist Party as far as SOEs are
concerned, the dynamics of the entire Chinese corporate governance model is very different in
these enterprises than that of public companies in other jurisdictions.
The Dutch model is aimed at the protection of employee rights through works councils.
The supervisory board or non-executive managers fulfil an important governing, supervisory,
and monitoring role over the management of the business of the corporation when a corpo-
ration falls under the two-tier or structure companies regime (structuurvennootschapen). The
Japanese board of auditors model could perhaps be described as a two-tier system, but it is dif-
ferent from other more traditionally two-tier systems in Germany, China, and the Netherlands.
4. SOME SIGNIFICANT FORMER INITIATIVES REGARDING

BOARD COMPOSITION AND BOARD STRUCTURES
4.1 Background
This section will discuss the 1971 Canadian Dickerson Report, the EU Draft Fifth Directive
on Company Law (1972–88), the European Company (Societas Europaea (SE)), and the 1977
UK Bullock Report. They were selected based on the fact that they illustrate some significant
former initiatives regarding board composition and board structures. It is only the SE that cur-
rently forms part of EU corporate law, but as it basically experienced similar difficulties than
107
Id.
108
Id. at 338.
109
See Andrew Gordon, New and Enduring Dual Structures of Employment in Japan: The Rise
of Non-Regular Labor, 1980s-2010s, 20 Soc. Sci. Japan J. 6 (2017); Ryo Kambayashi & Takao Kato,
Good Jobs, Bad Jobs, and the Great Recession: Lessons from Japan’s Lost Decade (Inst. for the Study
of Labor, Discussion Paper No. 6666, 2012), http://ftp.iza.org/dp6666.pdf.
the EU Draft Fifth Directive, it illustrates that if there is a will to make something work, there
is a way to do so and that could have been the case with the EU Draft Fifth Directive as well.
4.2 The Canadian Dickerson Report (1971) and Non-Shareholder Appointed

Directors
In Canada, a comprehensive report on corporate law reform, the Dickerson Report, came out
in 1971. Under the heading “Creditors, employees and others as directors” it was pointed out
that some argue that the shareholder-focused approach “focuses too narrowly on shareholders,
and ignores the reality that others, especially the corporation’s employees and creditors, are
affected by and concerned with what corporations do.”110 Others argued that the stakeholders
mentioned should have some say in who should be appointed as directors and that even
“a broad public interest in corporations . . . should also be represented in corporate board-
rooms.”111 Practical realities, including over allocation of voting rights, made the Committee
skeptical about such an approach.112 It was then explained that under the Draft Act it was not
prohibited for corporations to make “arrangements with its creditors, employees or others
under which directors representing those groups could be elected,” but to allow them to
demand such representation was considered to be “inconceivable” and illustrated with this
example:113 “[I]f a major creditor demanded representation on a corporation's board of direc-
tors, he would not be accommodated, because, presumably, he would not extend credit unless
the shareholders did accede to his wishes.” Thus, it was concluded that no law reform was
required, but it is interesting that it was discussed and that the German two-tier board model
with employees sitting on the supervisory board was not even mentioned.
4.3 The EU Fifth Directive
The Fifth Directive on Company Law accentuated the vast differences between the UK
approach and the approach in other countries in Continental Europe. These differences were
the primary reason that the Fifth Directive on Company Law was never adopted by the
European Union.114 Originally, the basic aim of the Draft Fifth Directive was to promote the
German and Dutch concepts of employee participation and a two-tier board system through-
out the European Economic Community (EEC).115 The Directive was intended to apply to all
public companies and consisted of five parts, dealing respectively with the structure of the
company; the management organ and supervisory organ; the general meeting; the adoption
of, and audit of, the annual accounts; and general provisions. It proposed a mandatory two-tier
structure for public companies, called a managing organ and a supervisory organ.116
110
Robert Warren Vincent Dickerson et al., Proposals for a New Business Corporations
Law for Canada 9 (1971), http://publications.gc.ca/site/eng/407454/publication.html.
111
Id.
112
Id. at 9–10.
113
Id. at 10.
114
Du Plessis & Dine, supra note 77, at 27–28.
115
Id. at 30-31. The name of the European Economic Community (EEC) was changed to
European Community (EC), and then became the current European Union (EU).
116
Id. at 30.
The form of codetermination or recognizing the interests of employees brought the German
and Dutch approaches in conflict and several compromises were made to try and accommo-
date both models. As was seen above, when a company falls under the codetermination regime
in Germany, a certain percentage of employees must be appointed on the supervisory board.
The Dutch approach was far less direct in recognizing employee participation at the super-
visory board level. It only allowed employees the right to object on specific grounds to the
appointment of the members of the supervisory boards of certain public companies.117
Since the UK became part of the EU, further compromises were made in a second Draft
Fifth Directive. Although certain larger companies were allowed a choice between a unitary
and a two-tier board structure, employees had to be appointed on this unitary board.118 Further
compromises were made in the third Draft Fifth Directive, allowing for different forms of
employee participation, including a body representing company employees and the possibil-
ity of a collectively agreed system adopted by companies. There was still a choice between
a unitary and two-tier board structure, but individual Member States could allow companies to
“opt-out” of any form of employee participation at the board level or other forms or ways to
recognize the interests of employees,119 which, to a large extent, made a mockery of a Directive
intended to “harmonize” EU company law.
Du Plessis and Dine summarizes ways in which employee interests could be recognized
under the third Draft Fifth Directive as follows:120
(i) employees (or their representatives) electing between one-third and one-half of the
members of the supervisory or administrative organ;
(ii) employees (or their representatives) having the right to nominate candidates eligible for
appointment to the supervisory or administrative organ combined with the right to object
to the appointment of any person as member of these organs;
(iii) employee participation through a body representing company employees;
(iv) employee participation through a collectively agreed system.
Efforts to get the Fifth Directive on Company Law adopted were later abandoned, but provides
a good illustration of various board models and various forms of recognizing the interests of
employees.
4.4 The European Company (Societas Europaea (SE))121
4.4.1 Background
As pointed out above, the European company law harmonization program had a stormy
history, in particular because of the concept of employee or worker participation and the
tensions between the traditional UK one-tier board system and the two-tier board system in
effect in some EU member states on Continental Europe. These different approaches were
117
For more detail, see id. at 30–31.
118
Id. at 34.
119
Id. at 37–38.
120
Id. at 41.
121
Most of this part is based on extracts from Otto Sandrock & Jean J. du Plessis, The German
Corporate Governance Model in the Wake of Company Law Harmonisation in the European Union, 26
Co. Lawyer 88, 91–93 (2005) and Sandrock & du Plessis, supra note 31, at 172.
the primary reason why the Draft Fifth Directive never was implemented in the European
Union.122
The SE is of particular interest for current purposes because of the way in which the boards
of SEs can be structured. In developing the legal regimes of SEs, the two-tier board system,
used in some states on the European continent, and the traditional English unitary board
system had to be reconciled with each other. The most serious challenge was the opposition,
especially by Unions, of German companies falling under the German codetermination
regime. The fear was that these companies would be able to effectively convert into SEs and
escape the German law applying to codetermination laws.
Getting the SE adopted by the EU Parliament was a long and tedious process that started
in the early 1950s.123 The process was strongly driven by a Dutch Professor, Pieter Sanders. It
was only after almost 50 years that the SE became a reality.124 However, it was worth its while
as it has been proven to be a very successful creation of the EU.125
4.4.2 Different board structures for SEs

On October 8, 2001 an EU Council Regulation126 (SE Statute) was adopted making it possible
for companies incorporated in any of the EU member states to be converted into an SE. Article
1(4) of the SE Statute provides that “[e]mployee involvement in an SE shall be governed by
the provisions of Directive 2001/86/EC.” This Directive was also adopted on October 8, 2001
(“SE Employee Participation Directive”).127 The SE Statute and the SE Employee Participation
Directive ensured that different employee participation models of the different Member States
are recognized and in fact entrenched.128
The basic provision of Article 38(b) of the SE Statute allows Member States the choice
between “either a supervisory organ and a management organ (two-tier system) or an admin-
istrative organ (one-tier system) depending on the form adopted in the statutes”129 of the SE.
Under the regime of the two-tier board system, Article 40(3) of the SE Statute provides that
“[t]he number of members of the supervisory organ or the rules for determining it shall be
122
Du Plessis & Dine, supra note 77, at 23–25. See also Judith Marychurch, Societas Europaea:
Harmonisation or Proliferation of Corporations Law in the European Union?, 2002 Australian Int.
L.J. 80, 82–83, 94.
123
See Marychurch, supra note 122, at 84–88.
124
Andreas Kellerhals & Dirk Trüten, The Creation of the European Company, 17 Tulane Eu. &
Civil L. Forum 71, 71–72 (2002).
125
Sandrock & du Plessis, supra note 27, at 230, 285–87.
126
Council Regulation 2157/2001, 2001 O.J. (L 294) 1 [hereinafter SE Statute] (it became effec-
tive on October 18, 2004).
127
Council Directive 2001/86/EC, O.J. (L 294), https://eur-lex.europa.eu/legal-content/EN/TXT/
HTML/?uri=CELEX:32001L0086&from=GA [hereinafter SE Employee Participation Directive] (it
became effective from November 10, 2001).
128
See, e.g., Kellerhals & Trüten, supra note 124; Peter Hommelhoff, Einige Bemerkungen
zur Organisationsverfassung der Europäischen Aktiengesellschaft, 46 Die Aktiengesellschaft
(Zeitschrift) 279 (2001); Heribert Hirte, Die Europäische Aktiengesellschaft, 5 Neue Zeitschrift
für Gesellschaftsrecht 1 (2002); Christoph Teichmann, Die Einführung der Europäischen
Aktiengesellschaft – Grundlagen der Ergänzung des Europäischen Statuts durch den deutschen
Gesetzgeber, 31 Zeitschrift für Unternehmens- und Gesellschaftsrecht 38 (2002).
129
Article 6 the SE Statute defines the meaning of “statures” as follows: “For the purposes of this
Regulation, ‘the statutes of the SE’ shall mean both the instrument of incorporation and, where they are
the subject of a separate document, the statutes of the SE.”
laid down in the statutes” of the SEs. A similar rule is laid down for a one-tier board system
in Article 43(2) of the SE Statute. Thus, the SE Statute respects the wide diversity between
the laws of the Member States not only with respect to the basic organization of the boards of
directors (one-tier versus two-tier system), but also with regard to the codetermination rules
applicable in each Member State of the EU.
4.4.3 Employee participation in process of converting into an SE

Article 3(1) of the SE Employee Participation Directive provides specific steps and arrange-
ments to be in place during the process of converting an existing company, or existing com-
panies, into an SE:
Where the management or administrative organs of the participating companies draw up a plan for
the establishment of an SE, they shall as soon as possible after publishing the draft terms of merger
or creating a holding company or after agreeing a plan to form a subsidiary or to transform into an
SE, take the necessary steps, including providing information about the identity of the participating
companies, concerned subsidiaries or establishments, and the number of their employees, to start
negotiations with the representatives of the companies’ employees on arrangements for the involve-
ment of employees in the SE.
A “special negotiating body,” representing the employees of the participating companies, must
be created. There are several articles in the SE Employee Participation Directive specifically
dealing with the composition and roles of this special negotiating body. Other aspects also
covered in the SE Employee Participation Directive include the mandatory contents of the
agreements to be negotiated with the competent organs of the participating company or com-
panies to be converted into an SE, the number of members and the allocation of its seats, the
duration of the negotiations, the legislations applicable to the negotiation procedure, and the
standard rules to be issued by the Member States of the EU on employees’ involvement, which
moreover have to satisfy the respective provisions set out in the Annex of the Directive.130
If no agreement could be reached by the deadline laid down in Article 5 of the SE Employee
Participation Directive, then the Standard Rules contained in the Annex to the Directive will
apply. Part 3 of the Annex provides, first, that in the case of an SE established by transfor-
mation, all aspects of employee participation shall continue to apply to the SE, if the rules of
a Member State relating to employee participation in the administrative or supervisory body
applied to the former company before its transformation into the SE. Secondly, Part 3(b) of the
Annex provides as follows:
In other cases of the establishing of an SE, the employees of the SE, its subsidiaries, and establish-
ments and/or their representative body shall have the right to elect, appoint, recommend or oppose
the appointment of a number of members of the administrative or supervisory body of the SE equal to
the highest proportion in force in the participating companies concerned before registration of the SE.
The words “equal to the highest proportion” are significant as it leaves no doubt that if the
negotiations between the companies and the employees’ representatives fail, then the employ-
ees’ codetermination will not be effected as far as the codetermination model applicable under
the home countries laws. Thus, in the last resort, the employees – particularly of German SEs
130
SE Employee Participation Directive art. 4-7.
– can never be deprived of their right of codetermination under German law if no agreement
could be reached on codetermination or other forms of employee participation. Employees can
ensure that the negotiations come to nothing and will then still fall under the codetermination
applicable to them before the SE was formed.
4.4.4 Some perspectives

It is inevitable that there will be at least some form of employee participation for all SEs, either
as agreed upon131 or contained in the Annex to the Directive. The interesting aspect is that the
SE Statute and the Employee Participation Directive enshrine some form of codetermination,
but did not do so specifically in the context of the typical German two-tier board system.
It is thus possible – though rather improbable – even for German corporations that want to
convert into an SE, that agreement could be reached with the Special Negotiating Body not to
use a two-tier board system. Companies can, however, not opt out of some form of employee
participation, most probably because of pressures from German Trade Unions of companies
falling under the German codetermination model.132 It is because of this arrangement that it has
been argued that the SE is a corporate form that will have codetermination without necessarily
having a supervisory board.133
4.5 The 1977 UK Bullock Report: Perspectives on Board Structures and

Employees Sitting on Boards
In 1973,134 the UK Department of Trade and Industry (DTI) issued a command paper on
Company Law Reform.135 The recognition of various interests in the company was promi-
nent:136 “The boards of companies, and their managements, … have a manifest obligation
towards all those with whom they have dealings – and none more so than the employees
of the company.” Employee participation was specifically mentioned, with the intention to
issue a Green Paper, inter alia, dealing with this aspect.137 The Green Paper followed in the
131
The agreement could apparently be to exclude any form of codetermination, which will proba-
bly be the case with most non-German SEs, but it will hardly be possible for a dominant German company
to escape a German-type of codetermination as it is unlikely that the Trade Unions will agree that
codetermination is excluded completely. Klaus J Hopt, Unternehmensführung, Unternehmenskontrolle,
Modernisierung des Aktienrechts – Zum Bericht der Regierungskommission Corporate Governance in
Corporate Governace: Gemeinschaftssymposion der Zeitschriften (ZHR/ZGR) 27, 42 (2002)
(arguing that this may once again give dominant German SEs a disadvantage in comparison with other
SEs in the European Union).
132
See Hopt, supra note 40; SE Employee Participation Directive, supra note 127.
133
Johannes Gruber & Marc-Philippe Weller, Societas Europaea: Mitbestimmung ohne
Aufsichtsrat?, 6 Neue Zeitschrift für Gesellschaftsrecht 297 (2003).
134
Prior to 1973, the United Kingdom debate on employee participation at board level was
dominated by post-war reconstruction programs, by trade union views on it and later by an unsuccessful
experiment with a hybrid form of employee participation at board level in the British Steel Corporation
– see Andre C. Côté, Legal Regulation and Workers' Participation in the Enterprise 101–11 (1973)
(unpublished Ph.D. thesis, London School of Economics and Political Science); Tom Hadden, Company
Law and Capitalism 467–69 (2nd ed. 1977).
135
Department of Trade and Industry, Company Law Reform, 1973, Cm. 5391 (UK).
136
Id. at 5 ¶ 3.
137
Id. at 20 ¶ 59.
beginning of 1974.138 Once again the rights of employees were noticeable. Ron Hayward, the
General Secretary of the Labour Party at that time, explained the Labour Party’s interest in
company law reform:
Some socialists may wonder why the Labour Party should devote its time to a consideration of
a major reform of company law. The reason is that even when the whole of our current program of
nationalization is carried through, there will still be a very substantial private sector in the economy
… Through a socialist reform of Company Law the private sector can be made responsible to employ-
ees and to the general public.139
The idea of “industrial democracy” was strongly promoted by the Labour Party,140 dealing in
a Green Paper with matters like “employees as ‘members’ (i.e. shareholders),”141 “company
works councils,”142 “workers’ representation at board level,”143 and “a two-tier system for the
United Kingdom.”144 The Labour Party criticized the idea of “employees as ‘members’” on the
grounds that it does not really empower the employees and that it might establish alternative
channels which could be used to bypass trade union machinery145 and for the Labour Party to
support any scheme undermining the trade unions’ power base would obviously have been
detrimental.146 Also on the grounds that it would impair the power base of trade unions, the
idea of works councils was not favorably considered by the Labour Party.147 Thus, it was
stressed that “trade union participation at board level must be a supplement to, and not in any
way detract from, the trade unions’ position in collective bargaining.”148 It is interesting to
note that although the Labour Party was well aware of some of the problems involved with
a two-tier system, on balance, it expressed its support “to innovate with a two-tier structure.”149
This approach was based on the sound argument that the supervisory and management func-
tions could then be kept apart:150
[B]oth trade unions and managers would probably agree that there is an area properly to be desig-
nated as pertaining to day-to-day “managerial functions” and that this should be the responsibility of
138
Labour Party (Great Britain), The Community and the Company: Reform of Company
Law: Report of a Working Group of the Labour Party Industrial Policy Sub-committee (1974).
139
Id. at foreword. See also similar sentiments already expressed in 1965 by Lord Wedderburn in
Kenneth William Wedderburn, Company Law Reform 1–2 (1965). See generally Côté, supra note 79,
at 102–03.
140
Labour Party (Great Britain), supra note 138, at 10.
141
Id. at 10–11.
142
Id. at 11–12.
143
Id. at 12.
144
Id.
145
Id at 10. See also Côté, supra note 79, at 103–04.
146
Labour Party (Great Britain), supra note 138, at 10 (“The Labour Party NEC statement
on Industrial Democracy, accepted by Annual Conference in 1968, endorsed the principle; ‘That the
development of industrial democracy should be pursued through the creation of a single channel of
communication between workers' representation and management. That channel is the machinery of the
trade union.’”).
147
Id. at 11.
148
Id. at 12.
149
Id. at 13.
150
Id. Cf. D. B. Broadhurst, Director and Shareholder Control in English and French Company
Law 102 (1976) (unpublished M.Phil. dissertation, University of London).
a designated Board rather than diffused through a series of committees sub delegated by a one-tier
board of directors.
After this Green Paper, the Bullock Committee (1977)151 was set up by the Conservative Party
to deal with the concept of industrial democracy comprehensively. The Committees’ members
were announced on December 3, 1975152 and their Report published in 1977. The terms of
reference of the Committee are of particular interest, since it suggested radical change and was
clearly worded in such a way not to antagonize the trade unions:153
Accepting the need for radical extension of industrial democracy in the control of companies by
means of representation on boards of directors, and accepting the essential role of trade union organ-
izations in this process, to consider how such an extension can best be achieved, taking into account
in particular the proposals of the Trade Union Congress report on industrial democracy as well as
experience in Britain, the EEC and other countries.
This Report is of particular interest because it consists of a Main Report and of a Minority
Report (associate primarily with Lord Wedderburn), and because the Main Report’s recom-
mendations were rejected by the government of the day.
In 1978, a completely new command paper was issued154 promoting a two-tier board system,
namely a “management board” and a “policy board”155 and making it optional to employ either
this system or the traditional one-tier system.156 Once again, these proposals were overtaken by
political events and due to another change in Government were never implemented.157
With the Conservative Party comfortably in the seat, the debate on industrial democracy in
the United Kingdom underwent a slight shift of emphasis after 1978. It was not purely an issue
utilized for political gain,158 but the focus was shifted to the EU arena and more in particular
to the Draft Fifth Directive.
As the Bullock Report is undoubtedly the most comprehensive investigation into industrial
democracy undertaken in the United Kingdom and, since it deals with more than one system
of employee participation at board level, the Report deserves particular attention.
The Main Report of the Bullock Committee came out in favor of the unitary, single tier
structure for all public companies employing more than 2,000 employees. The basic argu-
ment against the two-tier system was that it could confuse, rather than clarify, the process of
management and responsibility for decision making within the company. Another argument
submitted against such a system was that it was in any case possible for United Kingdom
companies to adopt a two-tier system, since companies may arrange their internal structure
151
Bullock Committee of Enquiry on Industrial Democracy, Report of the Committee of
Inquiry on Industrial Democracy, 1977, Cm. 6706 [hereinafter Bullock Report 1977].
152
Id. at v.
153
Id. at 1, ¶ 5, 26, ¶ 2 for comments on the “terms of reference.” See generally Hadden, supra
note 134, at 458–59.
154
Industrial Democracy, 1978 (Cm. 7231).
155
Id. at 6.
156
Id. at 16–17.
157
Paul Davies, The Bullock Report and Employee Participation in Corporate Planning in the
UK, 1 J. Comp. Corp. L. Sec. Reg. 245, 267–68 (1978).
158
See Côté, supra note 79, at 144–45 for some of the political issues involved during the early
seventies.
according to their own needs, and that many companies in the United Kingdom have devel-
oped a de facto two-tier system, delegating responsibility for the formulation and implemen-
tation of policy from the main board to a management committee.159 The Committee felt that
a two-tier system could indeed be counterproductive in that employee representation occurs on
the supervisory board only, thus limiting their influence in the decision-making process, which
takes place in the management board where they do not have representation.160 The Committee
suggested that the system should only become compulsory for companies employing more
than 2,000 employees.161
Coupled with the unitary system, the Main Report concluded that minority representation
restricted the potential effectiveness of employee participation and therefore recommended
a parity basis of representation, but on a 2X + Y formula, where 2X denotes equal numbers of
shareholder and worker directors and Y denotes co-opted independent members. Two things
were hoped to be achieved through this system, namely the advantage of bringing outside
expertise into the boardroom and, secondly, to ensure the retention of consensus as the norm
for board room decision making.162
The Minority Report (associate primarily with Lord Wedderburn) supported the view that
the two-tier system would reduce the risk of confrontation because the employee members
of the supervisory board would be involved only in less contentious long-term policy issues
rather than immediate strategies and decisions at the managerial level.163 The Minority Report
clearly outlined the dangers of a unitary board with employee representatives serving on such
a board: “[It] might provoke confrontation or extend the scope of collective bargaining into top
level management decision-making.”164
Regarding the parity basis of representation, it was pointed out that such a system could
lead to polarization between employee and shareholder representatives, with the independent
directors being required to act in some form of arbitration role and that this might lead to
a decision-process not actually based on consensus as the norm.165
It is worth remembering that both the Main Report and the Minority Bullock Reports came
out in favor of employee participation at the board level. The two parts of the Report only
differ with regards to the details of implementing employee participation,166 either in a unitary
board or at supervisory board level for a two-tier board structure.
If one looks at the approach regarding codetermination and giving employees a voice on UK
boards in recent years, one can find some renewed enthusiasm for this by looking at Theresa
May’s maiden speech on June 13, 2016 in the House of Commons, expressing a strong inten-
tion to give workers a voice on UK boards:167
159
Bullock Report 1977, supra note 151, at 72.
160
Id. at 77.
161
Id. at 129.
162
M. W. Salamon, Industrial Relations: Theory and Practice 317 (1987).
163
Id. at 314. See also Roy Lewis & Jon Clark, The Bullock Report, 40 Mod. L. Rev. 323 (1977).
164
Bullock Report 1977, supra note 151, at 176.
165
Id. at 163-66. See also Salamon, supra note 162, at 317.
166
See Kenneth William Wedderburn, The Legal Development of Corporate Responsibility, in
Corporate Governance and Directors’ Liability 37 (Klaus J. Hopt & Gunter Teubner eds., 1984).
167
See https://static.rasset.ie/documents/news/theresa-may-speech.pdf for the full text of the
speech.
Indeed, under my leadership, not only will the Government protect the rights of workers’ set out in
European legislation, we will build on them. Because under this Conservative Government, we will
make sure legal protection for workers keeps pace with the changing labor market – and that the
voices of workers are heard by the boards of publicly-listed companies for the first time.
One could gather from this that the intention was to force certain companies to give the
employees a voice on UK company boards, but that never happened and there are now only
guidelines in the 2018 UK Corporate Governance Code on how such a voice could be created
for employees. One can assume that it was because of Theresa May’s views on employee
participation at the board level that the UK Financial Reporting Council (FRC) in July 2016
published a Report where the issue of codetermination and employee participation at the board
level were discussed pertinently as part of the broader stakeholder focus of the Report, namely
a focus on “broad aspects of company culture – the role of the board in delivering sustainable
success, engagement with employees, customers, shareholders and other stakeholders, how
to embed the desired culture, and how to assess culture.”168 In the Executive Summary, the
importance of employees’ interests was emphasized:169
The values of the company need to inform the behaviors which are expected of all employees and sup-
pliers. Human resources, internal audit, ethics, compliance, and risk functions should be empowered
and resourced to embed values and assess culture effectively. Their voice in the boardroom should
be strengthened.
The issue was once again raised in October 2016 as part of the FRC’s response to the BEIS
Select Committee Corporate Governance Inquiry.170 The Financial Reporting Council made
the following recommendation:171
Consideration should be given to a possible future review of the UK Corporate Governance Code
and the associated guidance to develop best practice and provide further guidance for boards about
how to deliver their responsibilities to a range of stakeholders. There is also scope to revise the UK
Corporate Governance Code to explore how to take account of the views of wider stakeholders either
through assigning responsibility to a non-executive director or creating other methods of stakeholder
engagement such as stakeholder advisory committees …
And this was indeed done as part of the consultation process of reviewing the 2016 UK
Corporate Governance Code. The FRC made three suggestions that companies could consider
to give employees a voice on the board:172
168
Financial Reporting Council, Corporate Culture and the Role of Boards: Report of
Observations 5 (2016).
169
Id. at 7.
170
Financial Reporting Council, FRC Response to the BEIS Select Committee Corporate
Governance Inquiry (Oct. 26, 2016), www.frc.org.uk/getattachment/e1e0b17a-b0b9-444f-9ef4
-e5b91dd37b45/FRC-Response-to-the-BEIS-Select-Committee-Corporate-Governance-Inquiry.pdf.
171
Id. at 7. See generally Hélène Vletter-van Dort & Titiaan Keijzer, Revision of the UK
Corporate Governance Code: Some Observations from Continental Europe, Oxford Bus. L. Blog
(June 5, 2018), www.law.ox.ac.uk/business-law-blog/blog/2018/06/revision-uk-corporate-governance
-code-some-observations-continental.
172
Financial Reporting Council, Proposed Revisions to the UK Corporate Governance Code:
Appendix B – Revised Guidance on Board Effectiveness 6 (Dec. 2017), www.frc.org.uk/getattachment/
With the aim of strengthening the “employee voice” in the boardroom, the Code requires boards to
establish a method for gathering the views of the workforce and suggests three ways this might be
achieved: a director appointed from the workforce, a formal workforce advisory panel, or a desig-
nated non-executive director. These are not the only possible methods and boards should be open
innovative alternatives if they believe these would be as or more effective. Boards may feel it would
be most effective to adopt a combination of methods or multiple channels for engagement at different
levels. Provided the method chosen delivers meaningful, regular two-way dialogue and a means of
listening to the workforce, the Code requirement will be met.
These recommendations are now contained under the “Provisions” under the main heading
“Board Leadership and Purpose”:173
The board should keep engagement mechanisms under review so that they remain effective. For
engagement with the workforce, one or a combination of the following methods should be used:
• a director appointed from the workforce;
• a formal workforce advisory panel;
• a designated non-executive director.
If the board has not chosen one or more of these methods, it should explain what alternative
arrangements are in place.
It seems unlikely that, especially after Brexit, it will be a high priority for Boris Johnson and
his Government to focus on codetermination with a view of enforcing it on companies through
legislation as there are far too many other pressing issues that will require their serious atten-
tion after Brexit became a reality on January 31, 2020. In addition, except for the early 1970s,
there has never been a serious appetite for codetermination in the UK, and it will probably
remain that way for the foreseeable future.
However, these comments were made before the world basically came to a standstill with
the COVID-19 pandemic. There are many lessons to be learned from this pandemic, but it
also exposes very widely some aspects that are probably fundamentally wrong with most
countries’ corporate law and corporate governance models. One such aspect is the realization
that short-termism and shareholder greed affected all stakeholders, in particular millions of
employees who lost their jobs worldwide because of COVID-19, resulted in something that
could be described as a revolution. Employees are “up in arms” and it seems to be a dangerous
trend if their pleas for greater employee democracy and codeterminations are ignored.174 There
was a blatant neglect of many corporations to build up reserves to be used during periods of
crisis. These corporations rather have spent billions of corporate profits on paying dividends
to shareholders and on stock- or share buy-backs.175 There is no doubt that all over the world
fe7a3cc7-e076-4ee4-ad1e-5f6aa91b2159/Proposed-Revisions-to-the-UK-Corporate-Governance-Code
-Appendix-B-Dec-2017.pdf.
173
Financial Reporting Council, The UK Corporate Governance Code 5, Provision 5
(2018).
174
Nancy Fraser et al, Humans are not resources. Coronavirus shows why we must democratise
work, The Guardian (online, 16 May 2020) www.theguardian.com/commentisfree/2020/may/15/
humans-resources-coronavirus-democratise-work-health-lives-market?CMP=share_btn_link
175
Leo E. Strine Jr. & Dorothy S. Lund, How to Restore Strength and Fairness to Our Economy,
New York Times (online, 10 April 2020) www.nytimes.com/2020/04/10/business/dealbook/coronavirus
-corporate-governance.html
worker democracy, and all forms of codetermination, will now, more than ever before, be in
the spotlight for many years to come.176
4.6 Perspectives
Several aspects of the 1971 Canadian Dickerson Report, the EU Draft Fifth Directive on
Company Law (1972–88), the European Company (Societas Europaea (SE)), and the 1977
UK Bullock Report are still relevant today. Issues raised by them regarding board composition
and board structures should be considered for future corporate law and corporate governance
reforms globally.
5. SOME CONCLUDING COMMENTS
There are several different corporate governance models in place in different jurisdictions. On
the face of it some look the same, but on deeper analysis significant differences are revealed.
A good example is the difference between the German and Chinese two-tier board structures.
In Germany, the supervisory board is seen as a true supervisory board, whereas the supervisory
board in China has little actual powers to supervise and is not necessarily “independent” from
the management board, as is the case in Germany.
The way in which the important role of employees is recognized varies from jurisdiction
to jurisdiction. The most significant and high-level recognition is in Germany where up to
one-half of the seats on the supervisory board of some corporations are filled by employees. In
China, one-third of the seats on the supervisory board is reserved for employees. Under Dutch
law, it is the works councils that look after the interests of employees, with several provisions
in the Works Council Act 1971 requiring mandatory consultation with the works councils or
even their approval before a board decision can be executed.
Although it is possible in most jurisdictions that a corporation can structure its internal gov-
ernance structure in any way it likes, even having a two-tier board structure with employees
sitting on the supervisory board, it is very rare that corporations will adopt such a structure
voluntarily. Looking at board composition, different types of directors and ways to protect
the interests of employees emphasize the fact we should not stop looking at effective ways
of recognizing the interests of all stakeholders of corporations. This reality is illustrated very
176
Jean du Plessis & Andrea Anastasi, 2020 Vision: Current Reflections and Stakeholder
Governance in a Post-Covid-19 World 38 C&SLJ (forthcoming) (2020). For some recent develop-
ments and challenges in the areas of corporate law and corporate governance, see Jean du Plessis,
“Contemporary corporate governance developments: Reporting on non-financial matters and the rise
and fall of shareholder primacy”, Online-Workshop, Companies, Capital Markets & Taxes – CoCap /
BISS-Veranstaltung, University of Bayreuth, Germany, 12 February 2021 <www.youtube.com/watch?v
=oVnTgQ7vNPo&feature=youtu.be>.
clearly by Larry Fink’s 2018 and 2019 Letters177 to CEO of companies BlackRock invests in
and the American Business Roundtable’s statement on August 19, 2019.178
177
Larry Fink, A Sense of Purpose: Larry Fink’s 2018 Letter to CEOs, Blackrock, www
.blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter; Larry Fink, Purpose and Profit:
Larry Fink’s 2019 Letter to CEOs, Blackrock, www.blackrock.com/americas-offshore/2019-larry-fink
-ceo-letter.
178
Statement on the Purpose of a Corporation, Bus. Roundtable (Aug. 19, 2019), https://
opportunity.businessroundtable.org/wp-content/uploads/2019/08/BRT-Statement-on-the-Purpose-of-a
-Corporation-with-Signatures.pdf.
9. Diversity and the board of directors:
a comparative perspective
Darren Rosenblum
1. INTRODUCTION
In 2003, Norwegian feminists, frustrated by intractably stark sex inequality in the private
sector, initiated sex quotas to mandate inclusion of women on corporate boards. In the short
span of our nascent century, this legislation established that diversity – sex diversity in particu-
lar – is a mark of legitimate corporate governance. When Norway adopted a corporate board
quota in 2003, it appeared to be an extreme example of Scandinavian overreach.1 Within eight
years, France had followed suit and other leading countries copied the regulation in some
form. Now six of the top ten economies mandate sex diversity on corporate boards.2 This
chapter will explore how this tectonic shift transpired, the contours of state-driven diversity
regulation and its effects, and what we may expect from further attention to diversity.
As we look at the movement towards increased diversity regulation over the past 15 years,
we must note the focus on one specific kind of diversity – sex. Regulating inclusion for
women, but not people of color, poor people, disabled people or sexual minorities reflects
a choice of political economy around which difference matters and which does not, and what
changes may prove palatable in the corporate sector. Although sex difference drives regulatory
efforts, this chapter will also consider other efforts.
Comparative inquiry on board diversity raises crucial methodological questions. Identities
have distinct meanings in different contexts. Socioeconomic and legal distinctions change
what it means to be a woman in one country versus another. Identity-related regulation usually
presents differences as natural and unproblematic, but one cannot compare inclusion mandates
in India and Norway in a neat functionalist fashion. Too much analysis, especially corporate
analysis, flattens not only distinctions between legal cultural contexts, but also the identities
themselves.3
1
For a more detailed analysis of Norway’s corporate board quota, see Aaron Dhir, Challenging
Boardroom Homogeneity: Corporate Law, Governance, And Diversity (2015).
2
Mari Teigen, Gender Quotas on Corporate Boards: On the Diffusion of a Distinct National Policy
Reform, in Firms, Boards And Gender Quotas: Comparative Perspectives 115, 116 (Mari Teigen
and Frederick Engelstad eds., 2012).
3
Gender itself varies substantially from country to country. See Darren Rosenblum, Internalizing
Gender: Why International Law Theory Should Adopt Comparative Methods, 45 Colum. J. Transnat’l
L. 759 (2007). Socioeconomic factors such as labor participation, reproductive rights, and childcare
access construct power differentials between men and women. Familial roles permit or bar work
outside the home. Within the European context, see generally Mary Anne Case, Perfectionism and
Fundamentalism in the Application of German Abortion Laws, in Constituting Equality: Gender
Equality and Comparative Constitutional Law (2009) (emphasizing how gender has a different
meaning in Germany, in part drawing on the historical focus on motherhood in the role of women).
Workforce participation affects women’s leadership across national lines. Those same variations exist
179
Accurate trans-border and trans-identity comparisons cannot produce neat apple-to-apple

discussions. This chapter attempts to begin to account for some of these differences to
cross-fertilize crucial, but often wooden debates over diversity and inclusion.
This chapter will first explore the history, since the turn of the century, of the adoption of
quotas and other mandates related to board sex diversity. It will then describe the range of
current regulatory frameworks, and, to the extent possible given current scholarship, what the
real effects of corporate governance may be. Last, this chapter will explore the broader ques-
tions – around identity, as well as state-private sector relations – that surface as board diversity
mandates proliferate. It will conclude by suggesting the direction further scholarship may take
with regard to diversity mandates.
2. THE RISE OF CORPORATE BOARD QUOTAS
At the turn of the twenty-first century, nobody would have predicted that within two decades
most of the world’s largest economies would have corporate board quotas for women. This
section briefly traces the development of these quotas.
In the late nineteenth century, Hubertine Auclert, a French suffragist, wrote that women
should have half the seats in the Assembly.4 The idea re-emerged in the 1980s and 1990s
with quotas for political representation, first adopted in Scandinavian countries.5 The quotas
required a certain level of representation among party candidacies or even seats in legislatures.
For example, Parity, as France’s statute was called, required political parties to name women
as half of their candidates.6
While France implemented Parity, Norway had begun to look at the issue of inequality in
the corporate sector, which stood out in contrast to women’s substantial inclusion in most
across many national lines. One element that creates these distinctions is family structures. Access to
family planning and abortion affect how people of different sexes experience their gender, daycare,
public education, and healthcare. In social democracies, families often have more security on these
elements, freeing women to work more. For example, French women benefit from extensive social
services as compared to United States women. In countries with less gender equality, remedies that force
inclusion may confront more resistance. Id.
4
Hubertine Auclert, La Citoyenne, Articles de 1881–1891 52 (1982).
5
In 1972, the Swedish Liberal Party was the first Swedish party to require a minimum level of
women’s representation of 40 percent. During the 1980s and 1990s the rest of the Swedish parties
represented in the parliament also set numerical goals for women’s participation. Women in Parliament:
Beyond the Numbers, International Institute for Democracy and Electoral Assistance 238–39
(2005), www.idea.int/sites/default/files/publications/women-in-parliament-beyond-numbers-a-revised
-edition.pdf. Norway’s other political parties (Socialist Left, Centre, Christian People’s, and Liberal)
also have 40 percent quotas for electoral candidates of either gender. The International IDEA and
Stockholm University Global Database of Quotas for Women (2007), www.quotaproject.org/
displayCountry.cfm?CountryCode=NO. In Denmark, the Socialist People's Party was the first party to
introduce a 40 percent quota in 1977; candidate quotas for the European Parliament were adopted in 1983
(of 40 percent for both sexes); the Social Democratic Party adopted party quotas of 40 percent for women
in 1983; and candidate quotas for local and regional elections in 1988 of 40 percent for both sexes. The
International IDEA and Stockholm University Global Database of Quotas for Women (2007),
www.quotaproject.org/displayCountry.cfm?CountryCode=DK.
6
Guillaume R. Fréchette et al., Incumbents’ Interests and Gender Quotas, 4 Am. J. Pol. Sci. 891
(2008).
Diversity and the board of directors 181
other sectors. This mass exclusion, in the face of long-standing equal numbers of women in
the workforce and higher education, stood out to feminists as a failure of their efforts to foster
equality.
Feminist activists such as Mari Teigen began to consider quotas as a way to balance the
corporate sector.7 As challenging as it is to intercede in corporate hiring, Norway, like many
other European countries, had a history of requiring worker representatives on boards. Even
with prominent leaders elsewhere in the economy, the pool of women candidates for corporate
leadership positions remained small.
2.1 The Board Focus
Boards provide both a challenge and an opportunity as a focus for such remedies. Traditionally,
board members were senior, current or former executives with deep generalist experience in
business and macro-economic cycles.8 Thus, board members typically have already had exec-
utive experience. It is for that reason that the pool had so few women. Mandating women’s
representation would require, at some level, that firms change the typical profile of the board
member.
Boards are not legislatures – they react to and generally approve decisions made by execu-
tives within the corporate governance structure.9 Their work is part-time, but they sit at the top
of the firm hierarchy. Boards provide oversight and hire executives. Boards adopt resolutions
and approve financial statements for publication. While a capable, independent board can hold
management to high expectations, on some occasions, such as modifying bylaws, a board can
have an explicitly managerial role.
Because the board does not operate the firm on a day-to-day basis, it provided an easier
target for regulation. Had regulators attempted to alter executive management, it would have
engendered formidable corporate resistance. Even over a decade after Norway’s full imple-
mentation of its corporate board quota, women’s representation among CEOs worldwide
remains around 5 percent. Requiring board seats simply does not hit firms with a mandate
that alters their operations. For that reason, it is a politically feasible place in which to force
diversity.10
Even so, the board does have the power to hire the executive, and its oversight with regard
to the firm makes it highly symbolic. Having women on board may not alter the way firms
fundamentally operate, but it marks an important shift.
2.2 Feminist Engagements Prove Successful
Fuller histories of the Norwegian law exist, but I want to focus on several feminist choices
that ensured the quota’s subsequent influence. Norwegian feminists distinguished this remedy
7
See Teigen, supra note 2; see generally Dhir, supra note 1, at 105.
8
Id.
9
Stephen M. Bainbridge, Corporate Governance After the Financial Crisis 44–45 (2012).
10
Empirical work could show whether firms with higher numbers of women on boards lead to higher
numbers of female CEOs. Because the shift in inclusion of women is relatively recent, data has yet to
surface on the potential link here. Only recently have some scholars begun to look at diversity in CEO
positions and how it matters to their work. Afra Afsharipour, Bias, Identity and M&A, 2020 Wis. L. Rev.
469 (2020). http://ssrn.com/abstract=3600534.
from prior interventions by locating the problem of inequality in the private sector. As early
as 1999, feminists noted that women had achieved substantial inroads in public employment,
but that the corporate sector lagged substantially. As I noted previously, this choice drew on
the feminist notion of the porous nature of the public/private divide.11 The state could impose
representation requirements on firms because the firms depended on the state for their status
as private entities.12
Feminist practices involved four innovations that took root and led to the proliferation of
corporate board quotas. They did not always articulate these elements, but they remained
present throughout the effort to adopt the quota and played a key role in its success as a leg-
islative agenda.
First, the board focus marked a shift from the more common feminist practice of empha-
sizing equality remedies for the most vulnerable. Unlike most beneficiaries of feminist inter-
ventions, the elite women who would populate these boards were not vulnerable subjects who
deserved social justice interventions. Feminist advocates saw that their taking power would
yield broader effects. Given the left commitments of most feminists, it was novel to focus on
elites rather than everyday women.
Second, feminists focused on the corporate sector, which had previously been overlooked
as a site of inquiry. While social networks had cropped up, it was new to think about policy
remedies for exclusion. Lawyers for the justice department drafted the law in the context of
corporate regulation rather than leave it under the mantle of gender and family law.
Third, inserting the provision into the corporate statute was novel, and doing so made the
legislation instantly more effective. With this goal of improving firm processes, Norway
amended the Public Limited Companies Act rather than the Act Relating to Gender Equality.13
This shift from strengthening the Gender Equality Act brought with it the more robust penalties
found in the Companies Act.14 While gender and family legislation involved softer carrots and
sticks to incentivize compliance, mandates within the corporate code automatically involved
far more severe penalties for noncompliance, including delisting from the stock exchange.15
Fourth, once they chose to focus on firms, they reframed the purpose of their intervention
as improving the pool of candidates for corporate leadership positions. It was here that femi-
nists made a business case for inclusion. With a nearly all-male pool of candidates, advocates
argued, firms suffered from a substantial lack of choice given that women constituted half
of the educated population. Rather than rely on how the public benefitted from the law, they
framed the exclusion of women as a market failure, in which the pool of candidates for board
positions suffered as a result.16
11
Darren Rosenblum, Feminizing Capital: A Corporate Imperative, 6 Berkeley Bus. L.J. 55, 68–73
(2009).
12
Id. at 63.
13
Teigen, supra note 2 at 122–23; see also, Rosenblum, supra note 11, at 55, 63.
14
Teigen, supra note 2, at 124.
15
Rosenblum, supra note 11, at 55, 57. See also Siri Linstad, A Story of Success, kilden (Feb. 13,
2009), http://kjonnsforskning.no/en/2015/10/story-success.
16
Rosenblum, supra note 11, at 55, 65–66; see also, Mari Teigen, Gender Quotas on Corporate
Boards: On the Diffusion of a Distinct National Policy Reform, in 29 Forms, Boards & Gender Quotas:
Comparative Perspectives 115 (2012).
2.3 How Norway’s Statute Became a Marked Trend
Norway’s Corporate Board Quota mandated that largest corporations in Norway – its public
limited liability companies – repopulate their boards to include at least 40 percent women by
January 1, 2008.17
With regard to identity, it was a deft move to shift to a focus of critical mass – the
widely-supported notion from social science that for a group to have influence within
a decision-making body, it had to have representation that went beyond the token.18 In so
doing, it skirted the minority representation arguments that plagued earlier political quota
efforts.19 However, the Parity frame held other risks. While it was not the reason feminists
avoided it, a 50 percent figure depended on an essentialist notion of the sex binary. Setting
a floor of 40 percent for either sex gave firms flexibility while ensuring critical mass for either
sex.20 The resulting gender balance could prove more palatable to firms.
The feminists who led the effort proved successful at convincing the left to support their
proposals for a quota. The right also acquiesced despite substantial concerns about the impo-
sition on private decision-making. At least some feminists had an awareness that including
women meant not including other excluded groups, like Norway’s relatively small racial,
ethnic and national minorities. As one advocate commented, “In Norway it’s all about gender,
if anyone raises race or ethnicity in Norway it’s cut off as immoral.”21 Feminists knew that, to
be successful, the remedy could not focus on exclusions beyond sex.
Broader inclusion, some feared, would come with a daunting slippery slope. As one
scholar noted: “If you, I mean, if you go into this logic that you should have women, why
only women? I cannot see why there should, why not have immigrants, and I mean which
immigrants? Which immigrant group should be represented?”22 When I posed questions to
advocates in 2008 regarding the potential issue of including transgender people, advocates’
responses reflected that this question had not occurred to them. It may seem clear today that,
as identities go, sex is at least as complex as race, but this seems absent from contemporaneous
discussions.
From passage in 2003 to full implementation in 2008, Norway’s dramatic intervention
proved successful: all covered corporations complied with the quota.23 As with political
quotas before them, corporate board quotas have spread rapidly. After Norway’s successful
implementation in 2008, French leaders, including Representative Marie-Jo Zimmermann,
17
Teigen, supra note 16, at 62–63. Translated Norwegian Legislation, University of Oslo, https://
app.uio.no/ub/ujur/oversatte-lover/cgi-bin/sok.cgi?dato=19970613&nummer=45&tittel=&type=LOV&
S%F8k=Search (last visited June 22, 2020). Some scholars assert that firms delisted themselves to avoid
the law’s constraints. Kenneth Ahern and Amy Dittmar, The Changing of the Boards: The Impact on
Firm Valuation of Mandated Female Board Representation, 127 Q.J. Econ. 137 (2012).
18
Rosabeth M. Kanter, The Men and Women of the Corporation (2d ed. 1977).
19
Darren Rosenblum, Sex Quotas and Burkini Bans, 92 Tul. L. Rev. 469, 472–73 (2017).
20
Darren Rosenblum, Loving Gender Balance: Reframing Identity-Based Inequality Remedies, 76
Fordham L. Rev. 2873 (2008).
21
Interview with Siri Sorenson, Ph. D candidate & Mari Teigen, Director, Norwegian Institute for
Social Research, in Oslo, Norway (March 18, 2008).
22
Rosenblum, supra note 11, at 55.
23
Telephone Interview with Siri Øyslebø Sørensen, Researcher, Norwegian Univ. of Sci. and Tech.
(Feb. 25, 2008).
grew interested in this legislative remedy.24 France’s quota, adopted in 2011, was the first to
be implemented by a large economy. Its quota mirrored that of Norway in most respects.25
France’s status as the fifth-largest economy (at that time) and a driver of the European Union
led neighboring countries to initiate their own quotas. Eventually, even the country that
seemed most reticent to adopt this remedy, Germany, followed suit, albeit with a more modest
30 percent quota.26
Many European leaders who initially opposed quotas changed their minds in the face of
their smooth adoption in other countries. As one leader said: “I used to be against quotas, but
we need to reflect reality. And reality is that not merely enough women are in high positions
across Europe today. Maybe you could say that it’s a necessary evil.”27 Eventually many
European countries adopted quotas of some form, and these quotas inspired others to follow
suit.
3. THE NEW REALITY: LEGISLATED INCLUSION
This section will delineate how these quotas have transformed the landscape of corporate
governance by presenting both what quota laws require and whether the laws meet their goals.
First, it will summarize the range of quotas that currently exist. Second, it will focus on “hard”
remedies that impose strict mandates. Third, it will focus on mid-range remedies that impose
certain levels but have softer penalties. Fourth, it will examine disclosure-related mandates.
Last, it will suggest prospects for future statutory intervention.
Among the range of quota remedies, at the top sit hard mandates, such as those adopted
by France, Norway, and others, which impose existential penalties on noncompliant firms.28
Below are firm quotas with minor impositions, such as India’s one-woman rule,29 Italy’s sunset
quota, or California’s hard financial penalties. It is worth noting that even in countries that
provide quotas based on caste, such as India, corporate board quotas only address inequality
based on sex, not other categories, even though quotas exist based on caste for other purpos-
es.30 Below that, sits a range of still softer public remedies, including the comply-or-explain
24
Darren Rosenblum & Daria Roithmayr, More Than a Woman: Insights into Corporate Governance
After the French Sex Quota, 48 Ind. L. Rev. 889, 894 (2015).
25
Id. at 897.
26
Aktiengesetz [AktG] [Stock Corporation Act] Sept. 6, 1965, BGBl I at 1089), last amended by
Gesetz [G], July 17, 2017, BGBl at. 2446, art. 9 (Ger.).
27
Samuel D. Vesterbye, Gender Quotas: Bad for Business or a ‘Necessary Evil’?, Euractiv
(Mar. 8, 2013), www.euractiv.com/section/social-europe-jobs/news/gender-quotas-bad-for-business-or
-a-necessary-evil/.
28
Andrew Osborn, Norway Sets 40% Female Quota for Boardrooms, Guardian (Aug. 1, 2002,
3:46 AM), www.theguardian.com/society/2002/aug/01/publicsectorcareers.genderissues, https://perma
.cc/9L4L-K8T6.
29
Afra Afsharipour, The One Woman Director Mandate: History and Trajectory, in Corporate
Governance in India: Change and Continuity 85, 85–86 (Asish K. Bhattacharyya ed., 2016).
30
India has quotas for “scheduled” and “backward” castes in other contexts – up to 10 percent, but
not in the corporate board context even though exclusion in that context is quite marked. Id.
model used in the United Kingdom31 and Canada,32 and the United States’ much-criticized
optional reporting regime. Private remedies fall at the bottom of the spectrum, as they seek
to inspire rather than mandate progress. Each of these quotas imposes new requirements for
corporate governance to include women.
Figure 9.1 Corporate diversity remedies
Some countries followed suit, but with softer requirements that have proven less effective.
Other quotas mandated levels of representation, but only required an explanatory disclosure
when firms failed to meet public goals. Other countries adopted quotas with explicit sunset
provisions. Jurisdictions elsewhere in the world have begun to follow suit. Notably, California
passed a hard quota in 2018, although it is subject to challenge in the courts.33
3.1 Hard Statutes
3.1.1 Norway
Norway’s quota set a clear 40 percent floor and ceiling for either sex, without defining those
terms. This statute extends Norway’s long history of gender balance advancement.34 Norway
31
Fin. Reporting Council, The UK Corporate Governance Code 9 (2018), www.frc.org
.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code
-FINAL.pdf (explaining United Kingdom’s comply-or-explain model).
32
Dhir, supra note 1, at 247–48; see also Alexandra Bosanac, Gender-Equity “Comply or Explain”
Rules for Boards Are Working—Sort Of, Can. Bus. (Jun. 18, 2015), www.canadianbusiness.com/
innovation/osc-comply-and-explain-boards-torys-study/ (detailing Canada’s comply-or-explain model
and its consequences since taking effect).
33
Darren Rosenblum, California Dreaming?, 99 B.U. L. Rev. 1435, 1439–42 (2019).
34
Danuta A. Tomczak, Gender Equality Policies and Their Outcomes in Norway, 4 Zarządzanie
Publiczne 379, 380–83 (2016). When the law passed in 2003, women’s participation in government
leadership and civil society approached parity, but female representation on boards was below 10
percent. This reflected, as some assert, the predominantly socialist orientation of the feminist movement,
instituted the quota as a corporate governance requirement, with a threat of dissolution for
noncompliance, leading to near-complete compliance by the 2008 deadline.35
Norway’s statute found effective implementation by firms. Given the draconian penalty
threatened, it comes as no surprise that compliance neared 100 percent.36 Because Norway
was the first mover in the quota movement, it was the subject of a variety of theoretical and
empirical studies. The principal outcome was that while firms complied with the statute, few
if any detrimental effects surfaced. Two elements stand out from that research as to the effects
of the quota.
3.1.1.1 Research data: golden skirts

Two elements of Norwegian corporate law undermined the quota’s initial efficacy. One
concern focused on how Norwegian firms faced no restrictions on whom they could include.
Norway, unusually, did not restrict an individual from serving on many boards. Some women
served on more boards than they could effectively serve. As a result, more than a few com-
panies repeatedly selected the same small group of women – women deemed to be “board
ready.”37 These overboarded “golden skirts” proved a temporary phenomenon. Reports
suggest that this effect dissipated as more women became available for board work.38
Another factor was the argument by some scholars that the quota led share prices to dip,
potentially owing to the inexperience of the recently joined board members.39 Several scholars
have contested the veracity of these short-term hiccups, and in retrospect, it appears unlikely
that the quota harmed Norway’s corporate sector.40
which led to women’s reluctance to participate in capital, perhaps viewed as the “enemy,” as well as
lower levels in private sector work by women as compared to state sector employment. Carrie Seim
Medill, Closing the Corporation Gender Gap, 60 News of Norway 8 (2003). The 1978 Gender Equality
Act, amended in 2002, emphasized equal opportunities in education, employment, and cultural and pro-
fessional advancement. See Press Release, Comm. on Elimination of Discrimination Against Women,
Norway Called ‘Haven for Gender Equality,’ as Women’s Anti-Discrimination Committee Examines
Reports on Compliance with Convention, U.N. Press Release WOM/1377 (Jan. 20, 2003) (describing
Norway as a country standing at the forefront of combating discrimination against women).
35 .
The law covers state-owned limited liability companies, state-owned enterprises, companies
incorporated by special litigation, inter-municipal companies, and privately-owned public limited
liability companies, of which there are about 500 on the Norwegian stock exchange. Norway Ministry
of Trade, Industry and Fisheries, Fact Sheet: The Legislation on Representation of Both Sexes in
Boards, Government.no (Sept. 19, 2011), https://web.archive.org/web‌/2015‌09‌21004531/https://www
.regjeringen.no/en/dep/nfd/contact/press-centre/fact-sheets/fact-sheet-the-legislation-on-representa/
id641431/; see Rosenblum, supra note 20, at 2879.
36
Rosenblum, supra note 11, at 57.
37
Id. at 64–65.
38
In Norway then, women were overtaxed and perhaps less prepared. This may explain the part
of Amy Dittmar’s study of the Norwegian quota which concluded that firm values dipped after the
quota’s implementation because of the inclusion of less experienced board members. Kenneth R. Ahern
& Amy K. Dittmar, The Changing of the Boards: The Impact on Firm Valuation of Mandated Female
Board Representation, 127 Q. J. Econ. 137 (2012). By contrast, French law allows board members to
serve on a maximum of four boards, whereas Norway does not limit board participation. Rosenblum &
Roithmayr, supra note 24.
39
Id.
40
Id.
3.1.1.2 Stakeholder orientation of new boards

Various studies in advance of the quota argued that women possessed traits that would make
them especially valuable to the firm, including risk aversion. Rather than adopting stereo-
typically male leadership behavior (power, confidence, aggression, objectivity), women may
exhibit a more collaborative “transformational style,” which takes greater account of others.41
Effective corporate decision-making requires board members to explore a wide range of ques-
tions, and diversity among board members may facilitate more methodical decision making.42
By extension, women leaders may consider stakeholders more than men might,43 and may
consequently think in ways that are more “altruistic” and “long-term.”44 Such stereotyping,
however, can exclude women from typical models of “effective” leadership.
3.1.2 France
As of 2009, two years before France enacted the corporate board quota, only 10 percent of
the directors of French listed companies and 5 percent of new board members were women,
well below the level of other countries.45 The private sector had failed in its attempt at
self-regulation. Inspired by the Norwegian quota, the conservative Union pour la Majorité
Parlementaire (UMP) Party’s Marie-Jo Zimmermann decided to act.46 In addition to the
conservatives, a range of stakeholders – government, labor, and others – also supported the
quota.47 After a revision process involving the Constitutional Council, the French legislature
passed another constitutional amendment to permit private quotas to promote women “to
positions of professional and social responsibility.”48
The final version of the law, passed in early 2011, replicated many features of the Norwegian
quota. Like Norway, the implementing legislation in France established the principle that
boards of directors, supervisory boards of private companies or joint-stock companies of any
size, listed and unlisted, must strive for equal representation.49 The law set a strict requirement
for firms to comply fully by the end of 2016. The quota included sanctions against noncom-
pliant firms, namely by revoking or declaring invalid the board nominations of companies
that did not comply. The French quota stopped short of the Norwegian penalty, which permits
dissolution of noncompliant firms.50
The French quota had an immediate effect. Firms of all sizes sharply increased their levels
of women’s representation. Nominations for women from general meetings doubled. Almost
one-third of new directors proposed were women, and 30 percent of CAC-40 companies had
reached the FCBQ’s 20 percent intermediate level by the end of 2010.51 By 2014, French
41
David A. Matsa & Amalia R. Miller, A Female Style in Corporate Leadership? Evidence From
Quotas, 5 Am. Econ. J.: Applied Econ. 136 (2013).
42
Darren Rosenblum, When Does Sex Diversity on Boards Benefit Firms?, 20 U. Pa. J. Bus. L. 429,
450 (2017) (citing Juliet Bourke, Which Two Heads are Better Than One? (2016)).
43
Id.
44
Id. (citing Irwin W. Silverman, Gender Differences in Delay of Gratification: A Meta-Analysis, 49
Sex Roles 451 (2003)).
45
Rosenblum & Roithmayr, supra note 24, at 894.
46
Id.
47
Id. at 895.
48
Id. at 897.
49
Id. at 898.
50
Id. at 898.
51
Id. at 889.
firms had nearly achieved the required compliance level, and by 2017, nearly full compliance
blossomed as it had in Norway. On the whole, France’s economy continued to function as it
had prior to the quota. While France’s full implementation is more recent, some research has
surfaced.
3.1.2.1 Research data: process changed but substance did not

My study with Daria Roithmayr included qualitative interviews of 11 male and 13 female
directors from 13 public companies in the CAC-40 index. Other interviewees included two
civil society leaders, two legislators, two recruiters, one coach, and one non-CAC-40 board
member. In general, interview participants reported that adding women to corporate boards
affected the process of board decision-making, improved the quality of participation through
more methodical questioning of proposals and the introduction of new points for discussion.
Members reported discussions were less confrontational with other members than previously.
It did not have an effect of changing the substance of decision-making by the boards, as
women members concurred with men. Boards typically decide most matters by consensus, so
this is not a surprising result.52
However, firms were more likely to add outsider women owing to the limited pool of inter-
nal female candidates stemming from the glass ceiling they face in senior management.53 This
led to the introduction of fresh, outsider perspectives, and this fact played a larger role than
the gender of the new members. Members reported that it was more likely that new members
would be foreigners, have expertise in more diverse business issues and functions than their
male counterparts, and have risen through the ranks outside the traditional elite networks.
French forms were more likely to increase the number of outsiders than Norwegian ones given
the existing provision that limited board memberships to four per individual.54
The fact that France’s economy is so much larger than that of Norway served as the basis for
the principal notable effect of their quota. As the first major economy to adopt a hard quota, it
alone made an important change in the data on inclusion – French companies surged to occupy
the top-ten list of large firms with high levels of board sex diversity.55
Other countries, most notably Germany, have adopted quotas, but their implementation is
generally too recent to have produced much scholarship.
3.2 Moderately Hard Quotas
3.2.1 Italy
Shortly after France passed its statute, Italy followed suit. Its law mandates that either gender
should be represented at 20 percent for the first election after August 2012, or at 33 percent for
the following two board elections.56 The unique element with the Italian quota is that it follows
52
Id.
53
Id.
54
Id.
55
Id. at 899.
56
In 2011, Italy introduced “Law 120/2011,” also called the “Golfo-Mosca” law, a mandatory
gender quota with respect to members of the boards of directors and statutory auditors of publicly traded
companies. Unlike some of the other gender quotas in Europe, the Italian quota’s implementation is
gradual. Board elections occur every three years. The quota requires that the fraction of women on the
board (and that of men) is at least 1/5 at the first board election and 1/3 at the following two elections.
the idea of having a “temporary shock measure” which will occur only for three consecutive
board elections – nine years for each firm.57 Within the past decade, then, women went from
6 percent on boards to the current 30 percent.58 This sunset provision will affect firms then for
a specific period and then expire. While no conclusive estimates exist, some expect that levels
of women on boards will remain high even after the mandate sunsets.59 What is remarkable is
that the inclusion of women on boards has begun to upend the “gerontocracy” that rules Italy’s
corporate sector.60
3.2.2 California
On September 30, 2018, California Governor Jerry Brown signed the quota into law which
requires any publicly traded firm with a principal office in California to include women on
their boards.61 The quota, built on a 2013 voluntary quota, establishes a weak requirement for
2019 of one woman on each board, and a much stronger, almost parity, requirement for the
end of 2021.62
The 2019 one-woman requirement63 mirrors what became a widespread norm in the middle
of this decade after Twitter released its IPO plans. They included an all-male board, which
aroused widespread criticism.64 Concerned that this response would mar the sale price of the
After three election cycles, the quota ends. If a company fails to comply with the quota, CONSOB (the
regulator of the Italian stock exchange) issues a warning. If the company still fails to comply, CONSOB
can fine the noncompliant company. If the company fails to comply after the second warning, the elec-
tion is invalidated by law. See Guila Ferrari, Valeria Ferraro, Paola Profeta, Chiara Pronzato, Do Board
Gender Quotas Matter? Selection, Performance and Stock Market Effects 7, IZA Institute of Labor
Economics Discussion Series (April 2018), http://ftp.iza.org/dp11462.pdf.
57
Paola Profeta, In Italy’s ‘male gerontocracy’, gender quotas induced the restructuring of company
boards, The London School of Econ. and Pol. Science (Oct. 18, 2016), https://blogs.lse.ac.uk/
businessreview/2016/10/18/in-italys-male-gerontocracy-gender-quotas-induced-therestructuring-of
-company-boards/ (citing Paola Profeta et al., Women Directors the Italian Way and Beyond
(1st ed. 2014)).
58
Giavanni S. F. Bruno et al., Boardroom Gender Diversity and Performance of Listed Companies
in Italy (CONSOB, working paper No. 86, 2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=
3251744.
59
Id. at 7–10.
60
Id. at 26. (“We also find that, following the appointment of new women pursuant to the law, boards
have become more diverse in terms of age and professional background. In addition, the average age of
board members has declined, while the average degree of formal education has risen. Moreover, the law
has affected the percentage of interlocker directors, as their overall presence has decreased while the
opposite holds for the percentage of female interlockers.”)
61
See Vaishnavee Sharma, Jerry Brown signs bill to make California the first state to require
corporate boards to include women, Washington Examiner (Sept. 30, 2018, 6:19 PM), www
.washingtonexaminer.com/news/jerry-brown-signs-bill-to-make-california-the-first-state-to-require
-corporate-boards-to-include-women/.
62
Cal. Corp. Code § 301.3 (West 2019) (“No later than the close of the 2021 calendar year, a pub-
licly held … corporation shall comply with the following: (1) If its number of directors is six or more,
the corporation shall have a minimum of three female directors; (2) If its number of directors is five, the
corporation shall have a minimum of two female directors; and (3) If its number of directors is four or
fewer, the corporation shall have a minimum of one female director.”).
63
Id. § 301.3(a).
64
Bronwen Clune, There’s Absolutely No Excuse for Twitter Not to Have a Woman on Its Board,
Guardian (Oct. 11, 2013, 12:42 AM), www.theguardian.com/commentisfree/2013/oct/11/twitter-ipo
stock, management quickly revamped the board to include a woman.65 After that incident,
many boards began to add at least one female member.66
California’s short-term requirement of one woman per board also echoes India’s 2013
quota.67 Over 75 percent of California firms already complied with this rule at the time of
passage, so it was a mandate that imposed little on relatively few firms. One study showed that
82 percent of firms with over $5 million in revenue meet this basic criterion.68 It is a credit to
CalPERS and other activist investors that firms have already diversified to this basic level.69
The 2021 requirement places at least two women on boards of five and three women on
boards of six or more.70 This near parity requirement diminishes as boards grow larger. A
12-member board’s mandate is only one quarter women.71 It is a novel structure, but one that
may arouse discontent among firms with smaller boards whose compliance standards will
prove relatively more onerous as compared to firms with larger boards.
This next stage of enforcement will prove challenging – currently 79 percent of firms
would be noncompliant.72 Compliance will come more easily to larger firms with the means to
perform broader searches.73
Will some try to avoid enforcement? Firms may change the size of their boards. They may
even, as a last option, include “token” women to comply.
For noncompliance, though, California imposes fines rather than the existential penalties
common in Europe.74 The Secretary of State will perform a manual review to ascertain com-
pliance.75 Fines of $100,000 will accrue for firms with one violation, and a second will garner
a $300,000 fine.76 While these strict fines may inspire compliance, they could also dispropor-
-women-board; see also Nilofer Merchant, Viewpoint: Twitter’s All-Male Board Spells Failure, Time
(Oct. 7, 2013), http://ideas.time.com/2013/10/07/viewpoint-twitters-all-male-board-spells-failure/.
65
Jessica Guynn, Twitter Adds First Female Board Member, ex-Pearson CEO—#abouttime, L.A.
Times (Dec. 5, 2013, 9:16 AM), www.latimes.com/business/technology/la-fi-tn-twitter-adds-first-femal
e-board-member-20131205-story.html.
66
See Rosenblum, supra note 11.
67
See Afsharipour, supra note 29, at 84–85.
68
Thomas Pereira, Gender Quotas in California Boardrooms, Harv. L. Sch. F. Corp. Governance
& Fin. Reg. (Aug. 29, 2018), https://corpgov.law.harvard.edu/ 2018/08/29/gender-quotas-in-californi
a-boardrooms/.
69
See Howard Dicker et al., Mandated Gender Diversity for California Boards, Harv. L. Sch.
F. on Corp. Governance & Fin. Reg. (Oct. 18, 2018), https://corpgov.law.harvard.edu/2018/10/18/
mandated-gender-diversity-for-california-boards/ (acknowledging actions of BlackRock, Glass Lewis,
Institutional Shareholder Services, and State Street).
70
Supra, note 62, § 301.3(b).
71
See id. (requiring a minimum of three women on boards for any company with six or more board
members).
72
Pereira, supra note 68.
73
Interview with 4F, in Paris, France (2011); Interview with 14F, in Paris, France (2011). The author
interviewed twenty-four current and former corporate board members from CAC-40 firms. A full tran-
script, a redacted transcript, and a translated redacted transcript are on file with the author. Interviews are
referred to by an identification number and M or F to indicate sex.
74
Supra, note 62, § 301.3(e); see Pereira, supra note 68. For example, non-conformity can lead to
the dissolution of public limited companies in Norway and that all acts by a non-confirming Board of
Directors in France and Germany would be considered void.
75
Supra, note 62, § 301.3(c); see Dicker et al., supra note 69.
76
Supra, note 62, § 301.3(e).
tionately punish smaller firms. Other states, including New York, New Jersey and Maryland,
have begun to debate some form of corporate board quota.77
3.2.3 South Africa

South Africa has government mandates for women’s representation on the boards of
state-owned companies. The private sector, by contrast, has integrated gender diversity
into principles of good corporate governance.78 On the Johannesburg Stock Exchange, the
large-capitalization firms tend to do better in appointing women to board seats. The JSE
implemented a mandate that listed firms adopt a gender diversity policy starting in 2017.79
South African laws generally promote gender equity in state-owned institutions, but women
constitute about 33 percent of those institutions.80
3.2.4 India
India stands out from other common law contexts in that it does mandate women on corporate
boards, but the requirement is only for one seat on the board.81 The one-seat rule has obvious
flaws. It mandates a token representation – meaning there is no actual voice for women.
Instead of a critical mass of a third, most firms simply have a minor female presence. This
is especially true in a context in which many family members end up serving in these posi-
tions.82 The rule does not impose any broader effort to deepen the pool of talent for corporate
leadership, rendering it likely that current exclusions will continue. What the one-woman
requirement may achieve, however, is to introduce some women into the leadership space, and
also deprive firms of a male-only boardroom. This last point may matter more than it seems in
that it could force men to behave in a more professional fashion than they might in an all-male
environment.83
77
Alisha Haridasani Gupta, California Companies Are Rushing to Find Female Board Members,
N.Y. Times (Jan. 14, 2020), www.nytimes.com/2019/12/17/us/california-boardroom-gender-quota.html.
78
Geraldine J. Fraser-Moleketi, Simon Mizrahi, WHERE ARE THE WOMEN: Inclusive Boardrooms
in Africa’s top listed companies?, African Development Bank 3 (2015). www.afdb.org/fileadmin/
uploads/afdb/Documents/Publications/Where_are_the_Women_Inclusive_Boardrooms_in_Africa%E2
%80%99s_top-listed_companies.pdf.
79
See Press Release, PwC South Africa, Positive Picture of Women Emerging on Corporate Boards
(Aug. 2017), www.pwc.co.za/en/press-room/women-emerging-on-corporate-boards.html.
80
Kwamboka Oyaro, Corporate Boardrooms: Where are the Women?, UN Africa Renewal
(Dec. 2017– Mar. 2018), www.un.org/africarenewal/magazine/december-2017-march-2018/corporate
-boardrooms-where-are-women (check); Marit Hoel, Chapter 7: The Quota Story: Five Years of
Change in Norway, in Women On Corporate Boards Of Directors: International Research And
Practice (Susan Vinnicombe OBE et al., eds., 2008).
81
Under Section 149(1)(b) of the Companies Act, 2013, India has mandated that one seat on the
board of directors of listed companies be reserved for women. Under SEBI’s newly adopted listed
company rules, every listed company now must have at least one independent woman director: https://
economictimes.indiatimes.com/news/company/corporate-trends/not-enough-women-on-board-for-a
-success-story/articleshow/69604330.cms?from=mdr (fix).
82
The official figures presented by the Minister of Corporate Affairs show that nearly 21 percent of
the companies have not appointed a woman director. Ayushi Agarwal, India’s ‘One Woman Quota’ on
Board of Directors Fails to Bring About Gender Equality, Oxford Hum. Rights Hub (Feb. 28, 2018),
https://ohrh.law.ox.ac.uk/indias-one-woman-quota-on-board-of-directors-fails-to-bring-about-gender
-equality/.
83
June Carbone, Women, Rule-Breaking and the Triple Blind, 87 Geo. Wash. L. Rev. 1105 (2020).
India’s requirement sits at the weakest end of the jurisdictions which impose absolute
mandates, but it stands in contrast with the softer remedies that typically rule in the rest of the
common law world. At least one scholar has suggested that hortatory rules in India typically
fail to motivate compliance, justifying the use of mandates such as the quota.84
3.3 Common Law Regulation: Disclosure Remedies
Several common law jurisdictions such as Canada and the United Kingdom have
comply-or-explain models.85 These requirements engage in much softer pressure on firms by
setting a 30 percent target and obligating firms to explain if they fail to meet that number.86
These requirements prove surprisingly effective thanks to rigorous disclosure requirements.
In general, common law countries share a distinct response to the same concerns about
inclusion. Rather than jump to hard mandates, they move toward methods centered around
disclosure and softer forms of pressure.
One reason that common law countries prefer softer quotas is their tendency to take
a laissez-faire approach to the regulation of the private sector. In that context, it is thought that
firms should be able to self-regulate, because governmental regulation will “stifle the ability
of the market to craft superior solutions.”87 Those that hold liberal economic views resist the
government mandate of quotas as inefficient. Market forces, they may assert, will lead to an
increase in diversity if doing so will be good for business, as Becker originally argued.88
3.3.1 UK
The UK and Ireland both have reporting requirements but have not created a legislative man-
dated quota.89 The 2018 UK Corporate Governance Code states that the annual report should
84
Umakanth Varottil, Corporate Governance in India: The Transition from Code to Statute, in
Corporate Governance Codes for the 21st Century, 97, 101–02 (Jean J. du Plessis & Chee
Keong Low eds., 2017). Umakanth Varottil, argues that a voluntary code will only be successful under
certain conditions, and that those conditions are prevalent in the UK (and in other developed markets),
but not in India. First, India has seen a “continued dependence on government regulation of the corporate
sector,” despite the fact that “India’s company law initially constituted a transplant of English company
law and displayed a laissez faire approach in its early years.” Id. at 104. Second, India lacks a dispersed
shareholding structure in which “a large body of institutional investors exerts sufficient influence to
justify the implementation of corporate governance norms through a code.” Id. Third, shareholder activ-
ism, though increasing in India, has not reached the same level as in developed markets; and in order
for a soft law approach to be successful, shareholders need to “take on a more active role in companies
based on disclosures made by them regarding compliance (or otherwise) with the corporate governance
norms.” Id. at 105. Fourth, “the prevalent legal institutions and mechanisms in India have not engendered
a culture of voluntary compliance.” Id. at 106.
85
Dhir, supra note 32, at 247–48.
86
Id. at 240.
87
Sandeep Gopalan & Katherine Watson, An Agency Theoretical Approach to Corporate Board
Diversity, 52 San Diego L. Rev. 1, 64 (2015).
88
David H. Autor, Lecture Note: The Economics of Discrimination – Theory, 14.661 Labor
Economics I (2003), https://economics.mit.edu/files/553; see Gary S. Becker, The Economics of
Discrimination (1957).
89
Ireland, in its corporate governance annex published in 2019, stated that it would continue to
comply with the corporate governance principles set out by the UK. The Irish Corporate Governance
Annex, The Irish Stock Exchange plc trading as Euronext Dublin (2019), www.ise.ie/Products
discuss how the nomination committee encourages diversity and inclusion, what it has done
and how it will influence board composition. It also requires data on the gender balance of
those in the senior management and their direct reports. It urges firms to follow “a formal,
rigorous and transparent procedure,” and to pursue an effective succession plan. Appointments
and succession plans must follow “merit” and “objective” criteria, and promote diversity of
gender, social and ethnic backgrounds, as well as cognitive and personal strengths.90
3.3.2 Canada
Canada, like other common law countries, has no quota mandate. Canada uses
a comply-or-explain model similar to the other common law countries previously mentioned.
Canada’s Corporate Governance Guideline of 2018 states that “[t]he Board should be diverse
and, collectively, bring a balance of expertise, skills, experience, competencies and perspec-
tives …” It specifies that diversity should factor in discussions of overall Board succession or
Board renewal plans, and with particular attention to the positions of the Chair of the Board
and Chairs of the Board committees.91
3.3.3 Australia
Australia relies on a comply-or-explain model, like Canada. It provides methods for achieving
board diversity in their governance principles and recommendations.92 However, these recom-
mendations are not binding and do not result in punishment for noncompliance. It states that
“the diversity objectives the board or a committee of the board sets should include appropriate
and meaningful benchmarks that are able to be, and are, monitored and measured.” These
could involve achieving specific numerical targets for the proportion of women on its board, in
senior executive roles and in its workforce generally within a specified timeframe, or realizing
specific targets for the “Gender Equality Indicators” in the Workplace Gender Equality Act.
3.4 Summary: Successful Integration of the Corporate Sector
One goal of Norway’s quota was to balance opportunities for people without regard to sex by
improving women’s opportunities.93 Quotas reflect the way in which the private depends on
the public – extending public norms into the private sphere fosters sex equality.94 The sheer
-Services/Sponsors-and-Advisors/Irish-Corporate-Governance-Annex.pdf; UK Corporate Governance

Code, Financial Reporting Council (2018), www.frc.org.uk/directors/corporate-governance-and
-stewardship/uk-corporate-governance-code.
90
UK Corporate Governance Code, supra note 89, at 8–9.
91
Canada’s Corporate Governance Guideline, Office of the Superintendent of Financial
Institutions Canada (Sept. 2018), https://ecgi.global/sites/default/files/codes/documents/cg_guideline
_2018.pdf; see also Lisa Culbert & Ramandeep Grewal, How Board Diversity is Shifting in Canada,
Corporate Secretary (Mar. 23, 2020), www.corporatesecretary.com/articles/boardroom/32016/how
-board-diversity-shifting-canada; Virginia Schweitzer & Caroline Zechel, Promoting Diversity in the
Boardroom and within Management: New Diversity Disclosure Requirements for CBCA Distributing
Companies, Fasken (Sep. 19, 2019), www.fasken.com/en/knowledge/2019/09/ott-newsletter--
-promoting-diversity-in-the-boardroom-and-within-management/.
92
Corporate Governance Principles and Recommendations, ASX Corporate Governance
Council (4th ed. 2019).
93
Rosenblum, supra note 11, at 55, 87.
94
Id.
number of firms with board positions now reserved for women will elevate thousands of
women to corporate boards.
This expansion created a rapid and immense distributive shift, a sort of gold rush for women
with a stream of new organizations.95 While this was a far broader network than the tight
group that previously held board positions, it remained one that benefited people of relative
privilege. In France and elsewhere, an “old girls network” grew, as did alumnae networks,
social groups, educational programs, and coaching and executive search firms, all in the effort
to identify, train and place women on boards.96 The annual “Women’s Forum,” a conference
devoted to promoting women’s business leadership, now draws thousands of women.97 But the
fact remains that the corporate board quota necessarily provides an advantage to elites – often
white, bourgeois women – not broader groups of women.98
95
This gold rush had the support of French corporate leadership. The Institut Français des
Administrateurs (IFA), along with “the union of bosses” AFEP/MEDEF engaged fully in the efforts to
implement the CBQ. See Cécile Daumas, Davantage de femmes à la table des patrons, Libération (Jan.
20, 2010), www.liberation.fr/futurs/2010/01/20/davantage-de-femmes-a-la-table-des-patrons_605353.
It created a directory of CAC 40 directors – the CAC 40 being the largest and most actively traded
companies listed on France’s stock exchange – with detailed profiles in order to make it easier to hire
women. Véronique Bruneau-Bayard & Dominique Pageaud, Panorama 2010 des pratiques de gou-
vernance des bigcaps: Les tendances 2010, administrateur: La lettre de l’IFA 3 (2010); CAC 40
Factsheet, Euronext (Sept. 30, 2017), www.euronext.com/en/products/indices/FR0003500008-XPAR/
market-information. In some sense, this effect may reflect Frances Olsen’s work decades ago on how the
intermingling of public norms that give rise to private goals as parties outside the state take advantage of
the regulatory regime. See Frances E. Olsen, International Law: Feminist Critiques of the Public/Private
Distinction, 25 Stud. Transnat’l Legal Pol’y 157–59 (1993).
96
There are more than 400 women’s social networks today in France. Les réseaux féminins
permettent-ils aux femmes de réussir dans l’entreprise?, Ressources Humaines par Sia Partners
(Dec. 18, 2013), http://rh.sia-partners.com/les-reseaux-feminins-permettent-ils-aux-femmes-de-reussir
-dans-lentreprise. For examples of social groups, see Arborus, www.arborus.org (last visited Oct. 11,
2017) (association created by the European observatory of equality that contains various associations and
firms with the goal of helping promote equality in management); Femmes 3000, http://www.femmes3000
.fr (last visited Oct. 11, 2017) (association that strives to increase women’s participation in public life);
Professional Women’s Network, www.pwnglobal.net/(last visited Oct. 11, 2017) (global federation
with 3000 members created to promote women in business firms in Europe and provide networking and
training platforms for professional women).
97
Women’s Forum for the Economy & Society Chooses Paris for 2017 Global Meeting, Women’s F.
for the Econ. & Soc’y (Aug. 3, 2017), www.womens-forum.com/news/global-meeting-2017-in-paris.
For example, Fédération Femmes Administratuers was created after the Copé-Zimmermann law to help
women to be ready to work in CAC 40 administrations. Fédération Femmes Administrateurs, www
.federation-femmes-administrateurs.com/(last visited Sept. 28, 2017). It is a network in which experi-
enced women can help non-experienced women in their future careers. This federation regroups diverse
associations like Association Femmes AAA+, which was created in January 2011 to promote women
lawyers in director positions of big companies, but also Administration Moderne, created in 1998, and
Association des Femmes Diplômées d’Expertise Comptable Administrateur, created after the CBQ law
to obtain the goal of 40 percent women directors in CAC 40 firms. See Administration Moderne, www
.administrationmoderne.com (last visited Oct. 11, 2017) (created in 1998 as the first interministerial
association of women civil servants that fights for sex equality in the administration).
98
Anne Sweigart, Women on Board for Change: The Norway Model of Boardroom Quotas as a Tool
for Progress in the United States and Canada, 32 Nw. J. Int’l L. & Bus. 81A, 103A (2012).
While this redistribution from elite men to elite women may serve equality ends,99 the cor-
porate governance effects are undeniable. Good governance benefits may – as many studies
suggest – flow to the firm. However, these benefits may not be reflected in stock price, as skep-
tics note the attenuated relationship between board members and corporate performance.100
One benefit is undeniable – the symbolic role of having more women at the top. It signals
to other women in the pipeline that the firm is an inclusive place, at least with regard to sex.
Those women in the pipeline may be potential CEOs, potential board members, or even people
in middle management or on the factory floor. Firms may find that having a critical mass of
women on the board helps them succeed at recruiting women.101
Last, it is particularly notable that not much happened to the firms in the countries that
mandated inclusion. While some data shows some minor market shifts or potential governance
benefits, firms across Europe now operate at least as well as they did prior to the quotas, but
now with women holding nearly equal sway over firm governance. Newly inclusive boards
have not disrupted firm governance in any significant way. Even if skeptics prove correct that
governance benefits do not accrue to the firm, there is no basis for inferring any disruption to
firm success. Some of the lack of an effect from the quotas’ adoption may result from the fact
that boards do not affect firm value substantially. It may be safe to argue that the inclusion
and its equality benefits prove cost-free. Quotas may or may not drive the future direction for
legislation, as this next section explores.
4. DIRECTIONS FOR FUTURE EFFORTS
This section draws on the previous descriptions to envision where future legislation may
head. Various possibilities surface, and this section will draw on existing paradigms, as well
as potential ones, to suggest what we may expect as diversity continues to become a central
element of corporate governance legitimacy.
First, “more of the same” quotas present themselves as prospects to join the already existing
range of quotas. Second, additional, distinct identities may surface as the basis for legislated
inclusion. A third direction presents an opposing prospect – to realize greater diversity using
non- or less-identitarian mandates, such as term limits.
99
To retain their class power, business elites choose women who reflect their own existing
elite-driven norms. Quotas may prove useful even if the least progressive women attain power through
them—one could argue that they would still advance gender balance more than the patriarchal leftovers
that occupy our corporations and government. Flipping the male/female binary toward a more balanced
power relationship would entail undermining entrenched subordinations, including those of gender ine-
quality. See Michel Pinçon & Monique Pinçon-Charlot, Sociologie de la bourgeoisie (3rd ed. 2005). In
addition, to get these positions, women may “man up:” engage in professional performances that demon-
strate their masculinized skill sets to a male-driven marketplace. Women in the workplace face a double
bind as they need to perform masculinity to appear skilled but must also perform femininity to appeal
to (most of) the men who may hire them. Ultimately, thanks to their gender performance-balancing act,
these women may “feminize” the firm somewhat less than feminists hope. Darren Rosenblum, Manning
Up (draft on file with author).
100
Id.
101
Darren Rosenblum, Quotas and the Transatlantic Divergence of Corporate Governance, 34 NW.
J. of Int’l Bus. L. 249 (2014).
4.1 Prospects for Future Legislation
Given the relatively uneventful transition to inclusive boards in quota countries, more and
more jurisdictions have been looking at how to adopt their own version of a corporate
board quota. California’s adoption of a quota portends further interest in the United States.
Maryland, New Jersey and New York also have bills under consideration, and other jurisdic-
tions in the U.S. may follow suit. Given the general penchant of common law jurisdictions for
comply-or-explain mandates, such rules may prove more promising particularly within the
U.S. context. Other areas of the world, such as Latin America, Africa and Asia, may be more
likely to follow the harder civil law mandates of European first-mover countries.
One particular variant may prove attractive: the Italian statute’s nine-year sunset provision.
Whether Italy’s short-term mandate will lead to a permanent inclusion of women on corporate
boards remains to be seen, but legislation with sunsets may elicit less opposition, even if its
sunsets carry a risk that subsequent legislatures may extend them.102
Many arguments surface to criticize quotas. State-driven equality mandates arouse sharp
responses, particularly from those who prefer limited regulatory regimes.103 Beyond the bri-
dling over-identitarianism, critics argued that the private sector alone can fix sex inequality.
The private sector has made advances, in part thanks to the rise of shareholder activism, but
these efforts may come up short, which is why states regulate in the first place.104
Future legislation will have to respond to these challenges. It may consider the need for
remedies and accept a deeper role for the state in fostering equality, or it may move in the
opposite direction toward less identity-driven regulation.
4.2 Advancing Inclusion with More Identitarian Regulation
Some criticize quotas because they elevate sex above other types of diversity as a basis for
remedy.105 One way around this is to embrace the focus on identity and include other groups
as beneficiaries of quotas. Baker McKenzie recently adopted a 40 percent quota for women,
40 percent for men, and the balance of 20 percent reserved for nonbinary people, as well as
women and men – a voluntary provision that suggests the potential flexibility in merging
identity categories in quotas.106 It is likely that, given the paucity of transgender and nonbinary
people in leadership roles, this quota will end up as 60 percent men, 40 percent women, but at
least it creates space for moving beyond the binary. Other jurisdictions may eventually adopt
provisions that focus on increasing attention on identity, including race, caste, national origin,
or even class and sexual identity.
102
Kristin Underhill, Ian Ayres and Pranav Bhandarkar, Sunsets are for Suckers: An Experimental
Test of Sunset Clauses (working draft, 2020).
103
See Darren Rosenblum, Parity/Disparity: Electoral Gender Inequality on the Tightrope of Liberal
Constitutional Traditions, 39 U.C. Davis L. Rev. 1119, 1133–35, 1165–83 (2006) (exploring U.S. resist-
ance to quotas as a remedy for inequality).
104
See David Webber, The Rise of the Working Class Shareholder: Labor’s Last Best
Weapon 134 (2018). See also, Unfinished Business on CA S.B.826 Before the S. Floor, 2018 Leg.,
2017–2018 Sess. (Cal. 2018).
105
See Darren Rosenblum, California Dreaming?, 99 B.U. L. Rev. 1435, 1446 (2019).
106
Baker McKenzie First Global Law Firm to Set 40:40:20 Gender Target; Baker McKenzie (June
24, 2019), www.bakermckenzie.com/en/newsroom/2019/06/gender-targets.
The slippery slope of multiple identity quotas might prove daunting for people to assess
and enact. Another option would be to require generalized “underrepresented group member”
quotas that include said groups. The risk of this framing is that there may be a lack of a critical
mass of any given group. The research suggests that underrepresented groups bring new per-
spectives thanks to their outsider status. It may be that a critical mass of “outsiders” still proves
effective to include new perspectives.
4.3 Advancing Inclusion without Identity
Those who resist quotas present some legitimate arguments around a mistaken focus on
identity, which I will focus on here. The broadest argument made against quotas is that they
unfairly disfavor men, leaving them bearing the costs of this legislation.107 Absent state
intervention, men form a monopolistic elite that cyclically replaces itself with like-minded
men. With quotas, men lose the near-exclusivity of their economic and social power and their
attendant network dominance. The CBQ institutes a temporary glass ceiling for men, in place
until the boards actually have 40 percent women. The ceiling means that most, if not all, new
members for a period of time will be women; thereby ensuring that the few remaining “male”
slots become more competitive. Many qualified men suffer real loss, especially those whose
advanced career status renders their experience less transferrable.108
A second, related argument is that by definition, quotas essentialize sex. That sex differ-
ence, the essentialist binary, will determine who gets board positions. Gender equality reme-
dies require that individuals – board members, political candidates, or students – fit into the
male/female binary. The binary excludes persons of other sexes and genders, who then fall into
a precarious uncertainty.109 Given the performativity demands of elite positions, the hurdles for
gender non-conforming individuals to rise to the top seem largely insurmountable. Critics also
suggest that quotas set jurisdictions on a slippery slope toward racial quotas.110 Others argue
107
Id.; scholars have begun to label the way in which men have dominated political and corporate
elites as men’s overrepresentation. Increasing women’s political and corporate representation reduces
male advantages in leadership. If men no longer benefit from an extensive advantage in leadership
competition, it would prove quotas’ efficacy. See Elin Bjarnegård & Rainbow Murray, The Causes
and Consequences of Male Over-Representation: A Research Agenda, European Consortium of
Political Research (ECPR) Joint Sessions Workshop on “The Causes and Consequences of Male
Over-Representation” 6 (Apr. 2, 2015), https://ecpr.eu/Filestore/PaperProposal/88304081-30f9-4fe6
-902a-d2323f3b37c9.pdf.
108
Some economists argued that men supported Parité because they believed it increased their
incumbency power and dominance. Guillaume R. Fréchette et al., Incumbents’ Interests and Gender
Quotas, 52 Am. J. Pol. Sci. 891, 892 (2008). Even if that study’s assertion faced criticism, it exposes the
political complexity around Parité.
109
People may transition from one sex to another, or occupy a middle ground as a third sex or intersex
people. They may also change from one gender to another, with or without medical assistance, without
the purpose of “passing” as the other gender. Categories such as drag queens and drag kings involve
people who play around with gender identity and may not fall into such easy categorization. See gener-
ally Kate Bornstein, Gender Outlaw: On Men, Women and the Rest of Us 65–69 (1994) (discussing the
fluidity of gender and sex).
110
See Jeff Jacoby, California’s Latest Bad Idea: Gender Quotas for Corporate Boards, Bos. Globe
(Sept. 15, 2018), www.bostonglobe.com/opinion/2018/09/15/california-latest-bad-idea-gender-quotas
-for-corporate-boards/N2nOYGvqwRkLszi4a5mySK/story.html.
that the quota’s overreaching puts at risk other affirmative action programs.111 While these
critiques challenge the legitimacy of quotas, they can also prompt alternate remedies that may
account for these issues and accordingly encounter less resistance.
The quotas explored in this chapter so far all reference to specific identities. Even the
broader “underrepresented groups” term requires some identification process. What if some
diversity could be achieved merely by speeding up the merry-go-round of corporate board
membership? If governance suffers from stultified groupthink, non-identitarian term limits
may be the perfect remedy. Limiting the service of directors on the board to a maximum
term would force boards to incorporate new arrivals, each of whom would add experiential
diversity.112 A mechanism such as term limits could avoid the controversy surrounding
gender-classification policies, like a gender quota, entirely.
Though term limits have proven controversial as a means of improving governance,113
they are a workable method to advance board diversity. Scholars and advocates have recently
begun to look toward term limits’ potential for improving governance generally,114 and
a small but diverse cohort of US firms already has adopted board term limits.115 Term limits
may provide comparable results to softer quotas. Forcing more turnover and creating more
opportunities for people to join boards could inspire a broader group of people to seek board
positions. This hypothesis, of course, assumes that there are people who currently opt out of
the pool because they do not think there is a real opportunity to break into the board club that
is currently dominated by white males.
111
See Rosenblum, supra note 33.
112
See Darren Rosenblum & Yaron Nili, Board Diversity by Term Limits?, 71 Ala. L. Rev. 211
(2019).
113
It is argued that term limits can threaten director performance, and that board composition assess-
ments and evaluations are more likely to contribute to corporate performance than term limits. Robert
C. Pozen, The Trend Towards Board Term Limits is Based on Faulty Logic, Harv. L. Sch. F. on Corp.
Governance & Fin. Reg. (June 1, 2015), https://corpgov.law.harvard.edu/2015/06/01/the-trend-towards
-board-term-limits-is-based-on-faulty-logic/. Additionally, because experienced directors make positive
contributions to companies in the area of strategic and monitoring decisions, implementing term limits
may be a short-sighted solution to independence issues. Ying Dou et al., Should Outside Directors Have
Term Limits? The Role of Experience in Corporate Governance 1, 5 (U. New S. Wales Working Paper,
2015), http://ssrn.com/abstract=2089175.
114
See Yaron Nili, The “New Insiders”: Rethinking Independent Directors’ Tenure, 68 Hastings L.J.
97, 108–11 (2016) (yet, some argue that term limits can threaten director performance, and that board
composition assessments and evaluations are more likely to contribute to corporate performance than
term limits). Robert C. Pozen, The Trend Towards Board Term Limits is Based on Faulty Logic, Harv.
L. Sch. F. on Corp. Governance & Fin. Reg. (June 1, 2015), https://corpgov.law.harvard.edu/2015/
06/01/the-trend-towards-board-term-limits-is-based-on-faulty-logic/. Additionally, because experienced
directors make positive contributions to companies in the area of strategic and monitoring decisions,
implementing term limits may be a short-sighted solution to independence issues. Ying Do et al., Should
Outside Directors Have Term Limits? The Role of Experience in Corporate Governance 1, 5 (U. New
S. Wales Working Paper, 2015), http://ssrn.com/abstract=2089175; Na Li & Aida S. Wahid, Director
Tenure Diversity and Its Impact on Governance, Colum. L. Sch: CLS Blue Sky Blog (Apr. 13, 2017),
http://clsbluesky. law. columbia‌.edu/2017/04/13/director-tenure-diversity-and-its-impact-on-governance/
(proposing to further explore ideas of optimal average board tenure).
115
Only 5 percent of the S&P 1500 firms have term limits. See Jon Lukomnik, Board Refreshment
Trends at S&P 1500 Firms, Harv. L. Sch. F. on Corp. Governance & Fin. Reg. (Feb. 9, 2017), https://
corpgov.law.harvard.edu/2017/02/09/board-refreshment-trends-at-sp-1500-firms/.
Moreover, newness itself may connect to diversity, as some work demonstrates. When
new members join a group, they are more likely to come from distinct backgrounds and have
distinct experiences and identities.116 Some of the most persuasive work on diversity demon-
strates that the diversity of experience matters far more than diversity of identity.117 If boards
pursue better governance, they may deliberately seek out people with distinct experiences and
identities so as to advance new or diverse voices on the board.
5. CONCLUSION
Upon Norway’s adoption of the quota, nobody would have predicted that, within fifteen years,
most of the top ten economies would follow suit. When Norway adopted its corporate board
quota in 2003, it took a clear, new direction for corporate governance and for equality law. In
so doing, it recognized two things: (1) the central role that the private sector plays in determin-
ing questions of equality, and (2) the responsibility of the state to ensure that the private sector
would rectify entrenched discrimination.
And yet, the rapid adoption of quotas has exposed challenges in implementation. Subtle
differences between jurisdictions may lead to flaws in implementation. Hard quotas may result
in short-term fixes that are less than ideal, such as Norway’s “golden skirts.” But softer quotas,
such as comply-or-explain regimes, may fail to achieve inclusion.
Sex quotas have rapidly realized substantial inclusion of women in corporate elites. But
their success raises additional questions of equity. Two contexts reveal the difficulties: How is
it that France, which so strenuously insists on colorblindness that they keep no official records
on race, found sex quotas unproblematic? Why is California’s corporate board quota facing
such resistance when the US has affirmative action? National cultures and identities interact in
complex ways to frame dilemmas of blindness and consciousness. How will states respond to
competing demands from advocates, governance experts, and investors?
For scholars, these policy changes pose real challenges to draw coherent lessons from the
limited comparative data about the transnational quota movement. As the urgency of inclusion
mounts, and as countries continue to adopt remedies, researchers must maintain the methodo-
logical rigor and currency of their work to allow policymakers, the public and firms to account
for a newly inclusive world.
116
See generally Scott E. Page, The Difference: How The Power Of Diversity Creates Better
Groups, Firms, Schools, And Societies (Princeton Univ. Press rev. ed. 2008) (explaining how women
who were newly appointed to French boards were more likely to be foreign, from non-elite professional
and educational networks, less experienced, and from specialties not traditionally represented on boards).
117
Id.
10. Board duties: the duty of loyalty and
self-dealing
Marco Corradi and Geneviève Helleringer
1. GENERAL INTRODUCTION
There are several inherent challenges when comparing the duty of loyalty within different
legal systems. First, different legal systems derive loyalty rules from distinct areas of the law.
For instance, in the common law, directors’ duty of loyalty derives from trust law.1 By con-
trast, in many civil law jurisdictions,2 loyalty rules derive from the statutory rules on corporate
directors’ interest,3 or develop in case-law, as judges are able to refer to such principles as
corrective mechanisms.4 Secondly, the Anglo-American tradition has influenced other juris-
dictions in this area of the law.5 Institutional investors in equity have come to request higher
protection for their investments and directors’ duty of loyalty6 is an important component of
such protection.7 Thirdly, because of the different origins of such rules and because of subse-
quent legal transplants from Anglo-American systems into civil law ones, there might have
been a degree of “confusion of tongues.”8 Nowadays, the terms “duty of loyalty,” “conflict of
interest,” “self-dealing,” “corporate opportunities,” “directors’ duty not to compete” and their
respective translations exist in most jurisdictions of developed economies.9
1
Leonard Sealy, The Director as Trustee, 25(1) Cambridge L.J. 83 (1967); Joseph W. Bartlett &
Kevin R. Garlitz, Fiduciary Duties in Burnout/Cramdown Financings, 20 J. Corp. L. 593, 599 (1995).
2
Martin Gelter & Geneviève Helleringer, Fiduciary Principles in European Civil Law Systems in
Oxford Handbook of Fiduciary Law 583–602 (Evan J. Criddle, Paul B. Miller & Robert H. Sitkoff
eds, 2018).
3
As in the case of Italy, where the Civil Code original provision was known under the name of
“conflitto di interessi degli amministratori” (directors’ conflict of interests). For an in-depth analysis of
the provision, see Luca Enriques, Il Conflitto di Interessi degli Amministratori di Societa per
Azioni (2000).
4
For a sophisticated explanation of the French and German approaches, see Carsten
Gerner-Beuerle & Michael Anderson Schillig, Comparative Corporate Law 565–74 (2019).
5
See Holger Fleischer, Legal Transplant in European Company Law – The Case of Fiduciary
Duties, 2 Eur. Company & Fin. L. Rev. 378 (2005).
6
Director’s duties are often deemed owed to the corporation, but the matter is disputed and under
evolution; see Martin Gelter & Geneviève Helleringer, Lift Not the Corporate Veil! To Whom Are
Directors’ Duties Really Owed?, 3 U. Ill. L. Rev. 1069(2015).
7
Frank Easterbrook & Daniel Fischel, The Economic Structure of Corporate Law (1996).
8
The problem of inconsistency among semantic fields may be said to be inherent to normative
language. See, e.g., Stephen Finlay, Confusion of the Tongues: a Theory of Normative Language
(2014) (analyzing the meaning and use of the words “ought,” “good” and “reason” in the philosophical
debate). This phenomenon is even more meaningful in the legal context, where legal terms recall sophis-
ticated concepts, to which a complex acquis of case law and jurisprudential interpretation is connected.
9
E.g., Respectively in French “devoir de loyauté” and “conflit d’intérêts”; in Italian “dovere di
lealta” and “conflitto di interessi.”
200
Board duties 201
Nonetheless, there is some doubt as to whether the semantic is consistent across the board.
Apart from the nuances inherent in each language, when a given rule is developing within
a specific jurisdiction, it often follows unpredictable paths determined by the specific cases
brought to the attention of the courts and other institutional variables.10 This is true not only
when one compares common law to civil law jurisdictions, but also when one compares
different common law jurisdictions with each other, or different civil law jurisdictions with
each other. For instance, the “duty of loyalty” law has distinct features in the UK and the
US.11 Therefore, trying to adopt cross-border common legal definitions may never be entirely
possible. Finally, the Anglo-American comparative legal culture – based on the economic
analysis of the law – has largely structured the debate on this subject.12 However insightful
it is, such an approach may downplay the importance of the presence of different legal roots.
As a consequence, it misses idiosyncratic institutional13 and sociological14 dynamics that bear
directly onto the reality of the legal system and the way it operates.
With awareness of all the above-mentioned limits, we propose an analysis of the two major
sets of rules that are usually understood as falling under the umbrella of the duty of loyalty:
on the one hand self-dealing rules and related party transactions rules; on the other hand,
corporate opportunity rules and the prohibition on competition with the corporation. We find
that despite certain similarities in function of the two above-mentioned sets of rules (e.g.,
containing agency costs), the attention of legislatures and of courts has mostly focused on
self-dealing and related party transactions in recent times, especially in Europe.15 A potential
explanation may reside, on one hand, in the recent introduction of corporate opportunity rules
10
First, any time a court analyzes a new case, it enters in a completely new universe. Second, there
are notable differences in terms of procedural, decision-making, rules in common law versus civil law
countries. This is true with reference to the rule of precedents, the role of judicial dissent, and the role
of economics analysis of the law. See Vincy Fon & Francesco Parisi, Judicial precedents in civil law
systems: A dynamic analysis 26 Int’l Rev. L. & Econ. 519 (2006); Michael Kirby, Judicial dissent -
common law and civil law traditions, 123 L. Q. Rev. 379 (2007); Richard Posner, Law and Economics in
Common‐Law, Civil‐Law, and Developing Nations, 17 Ratio Juris 66 (2004). Such institutional differ-
ences among legal families – which may well show further diversification within legal systems members
of the same families – is indeed particularly meaningful. Therefore, even in the unlikely hypothesis that
the same exact case was decided by court belonging to different judicial systems, it would be likely to
observe the same outcome.
11
David Kershaw, The Foundations of Anglo-American Corporate Fiduciary Law (2018);
Andrew F. Tuch, Reassessing Self-Dealing: Between No Conflict and Fairness, 88 Fordham L. Rev. 939
(2019).
12
One of the most influential publications on comparative corporate law, Reiner Kraakman et al.,
The Anatomy of Corporate Law: A Comparative and Functional Approach 4 (Reinier Kraakman
ed., 3rd ed. 2017), provides, in the words of its authors, “a common language and a general analytic
framework with which to understand the purposes that can potentially be served by corporate law.”
Nonetheless, it is also true that most of the functional economic analysis employed in the book has been
conceived by Anglo-American authors within the Anglo-American legal systems.
13
For examples of comparative strength of enforcement mechanisms or the role of criminal law,
comp. Pierre-Henri Conac, Luca Enriques & Martin Gelter, Constraining Dominant Shareholders’
Self-dealing: The Legal Framework in France, Germany, and Italy, 4 Eur. Co. & Fin. L. Rev. 491,
518–23 (2007).
14
For examples of clubby relations in national corporate elite, see Lagardère: No, no Arnaud.
Emmanuel Macron should look to curb France’s clubby corporate relations, Financial Times (Aug. 27,
2019), www.ft.com/content/96b40af4-8282-3095-939e-6b7a785c82ce.
15
Infra Section 2.1.
in most continental Europe jurisdictions despite the absence of harmonization or debate on the
taking of opportunities at the EU level16 and, on the other hand, in a sort of path dependency
at the level of the legislative and judicial debate, which has focused on self-dealing for several
decades.17 In the US, the most recent debate on corporate opportunity rules has mostly focused
on the introduction of corporate waivers to this rule.18
We also believe that the legal rules mentioned above and comprised within the boundaries
of directors’ duty of loyalty present structural differences. Therefore, we divide our analysis
in two sections, whose titles stress such difference. Section 2 deals with cases of directors’
involvement on each side of corporate transactions, i.e. cases of self-dealing and of related
party transactions. Section 3 deals with directors’ entrepreneurial activity outside the bound-
aries of the corporation, i.e. corporate opportunities and directors’ duty not to compete with
the corporation.
2. DIRECTORS’ INVOLVEMENT ON EACH SIDE OF

CORPORATE TRANSACTIONS: SELF-DEALING AND
RELATED PARTY TRANSACTIONS
It is not uncommon for corporations to enter into contracts with parties with whom they are
connected, such as dominant shareholders, board members or executives. Such transactions
limit the need to explore the market and may thereby limit transactions costs. In other words,
they can create opportunities for efficient transactions and improved allocation of resources,
typically when outside counterparties are not readily available for value enhancing trans-
actions.19 However, the connection between the contracting parties means that insiders are
effectively influencing both sides of the transaction: the party with which the corporation is
dealing is in a position to affect the corporation’s decision to enter into the contract. If the
purchaser of assets is also a director of the selling company, he will have a say in setting the
price; similarly, a service provider who is represented on the board will also be involved in
determining the scope and budget of the services to be provided. Such insiders may potentially
secure better terms for themselves than they would get following arm’s-length bargaining.
Known as self-dealing transactions20 – or as “related-party” transactions (RPTs) by reference
16
Infra Section 2.2.
17
Infra Section 3.
18
See for instance Gabriel Rauterberg & Eric Talley, Contracting out of the Fiduciary Duty of
Loyalty: An Empirical Analysis of Corporate Opportunity Waivers, 117 Colum. L. Rev. 1075 (2017).
19
See Luca Enriques, Gerard Hertig, Hideki Kanda, & Mariana Pargendler, Related-Party
Transactions in Anatomy, supra note 12, at 145, 146.
20
Andrei Shleifer & Robert Vishny, A Survey of Corporate Governance, 72 J. Fin. 737, 752 (1997)
(referring to “managerial self-dealing, such as outright theft from the firm, excessive compensation, or
issues of additional securities … to the management and its relatives”); Luca Enriques et al., id., at 145
n.10 (“Self-dealing typically refers to purchases or sales of assets, goods, or services by related parties”).
Board duties 203
to accounting definitions21 – such contracts are instruments through which value may be tun-
neled away from the company.22
It should be stressed that, as some legal requirements apply to “related-party” transac-
tions only, the law may in effect treat differently two tunneling techniques that provide the
same outcome. This situation creates a risk of tunneling arbitrage. For instance, if a legal
system provides that the procedural safeguards for RPTs have to be followed in the case of
parent-subsidiary mergers, while much looser rules apply to tender offers initiated by the
dominant shareholder and followed by a squeeze-out (again executed other than via a merger),
the latter will be the preferred avenue to freeze out minorities.23 Tunneling practices have been
observed with a welfare enhancing effect, in Russia or Venezuela for instance, in reaction to
ill-functioning public institutions, featuring arbitrary governmental expropriation or punitive
tax system in the hands of corrupted officials.24 Such practices may also persist because of
path dependence in jurisdictions in which the institutional environment has improved only
quite recently, like Italy or South Korea.25 In countries with healthy institutions, the agency
relationships between managers and shareholders often create a dynamic in which agents will
try to appropriate as much value as they can get away with, after having taken into account the
probability of detection and punishment. As a way for fiduciaries to appropriate wealth, rather
than sharing it with other investors, self-dealing can be practiced under the guise of legitimate
business transactions.26
A number of jurisdictions have implemented provisions that address self-dealing transactions
specifically. Some operate often via accounting norms.27 For example, accounting standards,
including the US GAAP and the International Financial Reporting Standards (IFRS), provide
for disclosure with this type of transactions.28 In addition, the UK has for a long time provided
21
Accounting definitions usually restrict the scope of related-party transactions to contracts entered
into between the company and an entity related to a given director, even if some transactions outside
this perimeter may qualify as conflict-of-interest transactions, see, e.g., Luca Enriques, Related Party
Transaction, in Oxford Handbook of Corporate Law and Governance 506, 513–14 (Jeffrey
Gordon & Wolf-Georg Ringe, eds., 2015).
22
See Simeon Djankov et al., The law and economics of self-dealing, 88 J. Fin. Econ. 430 (2008).
23
Courts in Delaware used to treat treated tender offers more leniently than mergers, until they
recognized that the two transaction forms are functionally equivalent. See, e.g., Suneela Jain, Ethan
Klingsberg & Neil Whoriskey, Examining Data Points in Minority Buy-Outs: a Practitioners’ Report, 36
Del. J. Corp. L. 939, 941–48 (2011). Legal scholars’ criticism of Delaware’s double approach nudged
the Court to acknowledge their functional equivalence. See Ronald J. Gilson & Jeffrey N. Gordon,
Controlling Controlling Shareholders, 152 U. Pa. L. Rev. 785 (2003); Guhan Subramanian, Fixing
Freezeouts, 115 YALE L.J. 2 (2005).
24
Enriques, supra note 21, at 506–12.
25
See Marcello Bianchi, Luca Enriques & Mateja Milic, Enforcing Rules on Related Party
Transactions in Italy: Securities Regulators, in The Law and Finance of Related party Transactions
477 (Luca Enriques & Tobias Tröger, eds., 2019); Kon Sik Kim, Related Party Transactions in East
Asia, in The Law and Finance of Related party Transactions 285 (Luca Enriques & Tobias Tröger,
eds., 2019).
26
By contrast with appropriation of private benefits via excessive compensation.
27
28
See Research and Dev. Arrangements, Statement of Fin. Accounting Standards No. 57, (Fin.
Accounting Standards Bd. 1982); International Accounting Standards Board, International
Accounting Standard No. 24, (2010). No mention of materiality is made in the International Accounting
Standard 24. However, it is an overarching principle of IFRS that disclosure is only to be made when it
is material. See International Accounting Standards Board, International Accounting Standard No. 1, ¶
for procedural safeguards and immediate disclosure of larger self-dealing transactions in listed
companies.29 Wealth tunneling via RPTs contributed to the financial crisis that plagued Asia
in the late 1990’s.30 Since then, and under the influence of international economic organiza-
tions such as the OECD and the World Bank,31 corporate governance mechanisms developed,
including the regulation of RPTs.32 India and a number or other Asian countries33 have recently
broadened the scope of the rules and tightened their content, namely requiring approval by the
majority of the minority for certain transactions.34 Sales of assets below market price remain,
however, a feature, in the context of state owned enterprises in particular.35
The EU’s recently revised Shareholder Rights Directive (SRD), which regulates corporate
governance aspects of European listed companies,36 introduced a new set of provisions on
transactions with related parties. The Directive required an ex ante review of self-dealing
transactions through public disclosure and approval by either a shareholders’ meeting or by
the board.37 This regime, which might have been modelled on the UK’s listing rules (appli-
cable to listed companies only), is not dissimilar from the Italian regime that was adopted
for publicly traded companies in 2010.38 It also has many common elements with the French
mechanism, known as conventions réglementées (“regulated conventions”), that has been in
place since 1863, with periodical amendments of which the most recent were introduced in
2014.39 While French law does not include a materiality threshold, transactions “within the
31 (2011) (“An entity need not provide a specific disclosure required by an IFRS if the information is
not material”).
29
See Paul L. Davies & Sarah Worthington, Gower & Davies Principles of Modern Company
Law 689–90 (Sweet & Maxwell eds., 9th ed. 2012).
30
Simon Johnson et al., Corporate governance in the Asian financial crisis, 58 J. Fin. Econ. 141
(2000).
31
The World Bank’s Doing Business Report has been instrumental in focusing lawmakers’ minds
on improving RPTs laws by ranking countries, inter alia, according to how strictly they regulate them
(according to a methodology derived from Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes
& Andrei Shleifer, The Law and Economics of Self-Dealing, 88 J. Fin. Econ. 430 (2008)). See Doing
Business 2017 Equal Opportunity for All, world bank group 66 (14th ed. 2016), available at www
.doingbusiness.org.
32
Dan Puchniak & Umakanth Varottil, Related Party Transactions in Commonwealth Asia.
Complexity Revealed, in The Law and Finance of Related party Transactions 327 (Luca Enriques
& Tobias Tröger, eds., 2019).
33
See, e.g., Organisation for Economic Cooperation and Development (OECD), Guide on Fighting
Abusive Related Transactions in Asia, 25–31 (2009).
34
For additional elements of comparison, see The Law and Finance of Related Party
Transactions (Luca Enriques & Tobias Tröger, eds., 2019).
35
When Coal India sold coal below market prices, a UK hedge fund engaged in an activist campaign.
See TCI in legal threat against Coal India, Financial Times (Mar. 13, 2012), www.ft.com/content/
7e70ca02-6d12-11e1-ab1a-00144feab49a.
36
Shareholder Rights Directive (EU) 2017/828 of 17 May 2017, Amending Directive 2007/36/EC as
regards the encouragement of long-term shareholder engagement.
37
Id., art. 9c (4).
38
See Regulations Containing Provisions Relating to Transactions with Related Parties, Resolution
no. 17221 (2010), amended by Resolution no. 17389 (2010).
39
These provisions relate to public limited companies (sociétés anonymes or “SA”). Similar provi-
sions exist for other corporate forms, such as limited partnerships with share capital (sociétés en com-
mandite par actions) (Code de Commerce [C. com.] art. L. 226-10 (Fr.) ) and private limited liability
companies (sociétés à responsabilité limitée or “SARL”) (Code de Commerce [C. com.] art. L. 223-19
(Fr.)).
Board duties 205
ordinary course of business” are exempted from regulation40 and the regime applies to both
listed and non-listed companies.41 By contrast the amended Shareholder Rights Directive will
require an in-depth change in German law, which had adopted a different approach to policing
assets tunneling, based on a codified law of corporate groups, imposing stringent liability rules
against the directors of the parent company and the subsidiary.42
This section will focus on transactions giving rise to a transfer of resources43 between
directors and the company to which they owe fiduciary duties.44 Given persistent differences,
it reviews in turn the requirements and practices in common law jurisdictions and civil law
jurisdictions, with a particular focus on European jurisdictions and the impact of EU law.
2.1 Self-Dealing in the Common Law
In the common law, the duty of loyalty owed by fiduciaries has traditionally structured the
boundaries of lawful behavior. This section shows that, as the law of self-dealing developed, it
gained some autonomy from the strict enforcement of the duty of loyalty.
2.1.1 The common law tradition and the standard of loyalty

2.1.1.1 English law
Historically, the UK adopted the “no-conflict” rule45 that bans directors from entering con-
flicted transactions.46 Lord Cranworth L.C. provided what became the classic formulation of
the rule in Aberdeen Ry. v. Blaikie:47 “[n]o one, having [fiduciary] duties to discharge, shall be
allowed to enter into engagements in which he has, or can have, a personal interest conflicting,
or which may possibly conflict, with the interests of those whom he is bound to protect.”48
In addition, where the rule operates, “no inquiry on [the merits of the conflicted transaction
are] permitted.”49 Any self-dealing transaction is voidable, and directors cannot salvage
40
See Geneviève Helleringer, Related Party Transactions in France: A Critical Assessment, in The
Law and Finance of Related Party Transactions 400 (Luca Enriques & Tobias Tröger, eds., 2019).
41
Rules are enshrined in articles L. 225-38 to L. 225-43 of the Commercial Code, which relate to
public limited companies (sociétés anonymes or “SA”) in general, whether listed or not. Similar provi-
sions exist for other corporate forms, such as limited partnerships with share capital (sociétés en com-
mandite par action) (article L. 226-10 of the Commercial Code) and private limited liability companies
(sociétés à responsabilité limitée or “SARL”) (article L. 223-19 of the Commercial Code).
42
See Klaus Hopt, Comparative Corporate Governance: The State of the Art and International
Regulation, 59 Am. J. Comp. L. 1, 45 (2011) (referring to the limited number of jurisdictions that follow
the German approach [Portugal, Brazil, Croatia, Slovenia, and Albania], or adopted it for a period
[Hungary and the Czech Republic]).
43
A fiduciary may pay for the authorization to capture a corporate opportunity, but this does not
entail a transfer of resources from the company to the fiduciary.
44
Executive compensation is governed by specific rules, see Chapter 12 in this Volume.
45
See, e.g., Paul L. Davies, Related Party Transactions: U.K. Model n. 4 (ECGI Law Working
Paper No. 387/2018), https://ssrn.com/abstract=3126996 (focusing on the law of England and Wales as
representative of UK law ).
46
For an historical overview of the no-conflict rule, see Tuch, supra note 11, at 945 n. 28.
47
1 Macq. 461.
48
Id.
49
Id. at 471-72.
a self-dealing transaction by demonstrating that the bargain is fair to the company. The rule
requires directors to act in the principal’s sole interests.50
In 2006 the UK Parliament codified corporate fiduciary duties in the Companies Act leg-
islation.51 The relevant sections of the Companies Act did not substantially alter directors’
fiduciary obligations relevant to self-dealing, but rather reproduced the practical effect of the
common law no-conflict rule.52 The statutory duties are “based on” rules and principles under
the common law pursuant to Section 170(3) of the Companies Act: the Act makes constant
reference to common law when setting general principle. Such codification style is inherently
different from the one usually adopted in civil law jurisdictions where precedents are not
binding in most cases.
2.1.1.2 US law
The US – and more particularly its most corporate-friendly jurisdiction for company law,
Delaware – departed from the “no-conflict rule” in the late nineteenth century and adopted a
“fairness test,”53 under which the onus is on directors who are on both sides of a transaction
to demonstrate their utmost good faith “and the most scrupulous inherent fairness of the bar-
gain.”54 That is to say, is the process equivalent to an arm’s length transaction?55 Courts assess
fairness by reference to both the price and dealing, even if it only constitutes one test.56
As Tuch argues, “[b]oth fiduciary rules require strict loyalty, imposing liability for
self-dealing, but provide multiple exceptions.”57 The English no-conflict rule enables compa-
nies to determine when and how the rule may be departed from, while the US “fairness test”
rule specifies the exception, whose requirements turn out to be very strict.58
2.1.2 Similarity of practices in the UK and the US: the centrality of approval by
neutral or disinterested directors
A standard provision in the Articles of Association of English companies requires directors
who wish to engage in a transaction in which they have an interest to disclose its nature and
extent, and to obtain approval from the disinterested directors.59 In the US, a similar approach
has developed, as courts expressly recognized that disinterested directors could approve
50
The rule is also known as the “sole-interest rule.” See John H. Langbein, Questioning the
Trust-Law Duty of Loyalty: Sole Interest or Best Interest, 114 Yale. L.J. 929, 931 (2005).
51
Available at www.legislation.gov.uk/ukpga/2006/46/contents.
52
For further analysis, see Tuch, supra note 11, at 946.
53
For a fuller analysis of the differences between US and English law summarized in this section,
see Tuch, supra note 11. See also David Kershaw, The Path to Fiduciary Law, 8 NYU J. L & Bus. 395,
439–40 (2012).
54
See Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983).
55
See Valeant, 921 A.2d 735 (Del. Ch. 2007) (“The process pursued by the directors was deeply
flawed with self-interest and no way substituted for arm’s-length bargaining.”).
56
Weinberger, 457 A.2d at 711 (“However, the test for fairness is not a bifurcated one as between
fair dealing and fair price. All aspects of the issue must be examined as a whole since the question is one
of entire fairness.”).
57
Tuch, supra note 11, at 942.
58
Id. at 942-943. As Tuch explains, there is an ongoing debate assessing whether the UK or US
framework is more effective. See id. at 941.
59
Companies Act 2006, § 175 (UK).
Board duties 207
self-dealing.60 Empirical findings show that under both the UK and US rules, interested
directors tend to favor approval by neutral or disinterested directors.61 As Tuch notes, “[]n
their operations, the rules closely mirror one another: they enlist neutral directors to patrol
self-dealing, a commercially sensitive response.”62
2.2 Self-Dealing in Continental European Jurisdictions
In contrast to the common law world, the duty of loyalty has never been the starting point in
Continental Europe.63 More recently, EU Law has been a driving force, shaping self-dealing
law around mostly procedural requirements.64 The effect of such requirements remains disap-
pointing, namely because of under-involvement of independent third parties.65 The traditional
“club” culture in Continental European business had long opposed any reform seeking to
tighten the grip on tainted transactions: it could not oppose the latest attempt but has watered
down the restrictions initially contemplated by the European Commission.
2.2.1 Domestic and European requirements

2.2.1.1 Domestic civil law
In civil law jurisdictions, duty of loyalty was not the starting point: loyalty is usually not
mentioned in the code and is hardly ever relied upon by courts in the context of transactions
between directors and the company.66 In some jurisdictions, commercial codes have included
procedural rules setting limits on self-dealing transactions since the end of the 19th Century
(France67 and Italy).68 Recent developments in domestic civil law result from the transposi-
tion of EU law that further marginalize the role of the duty of loyalty69 in the monitoring of
self-dealing and the importance of procedural requirements.70
60
See Tuch, supra note 11.
61
See id. at 968–76.
62
Id. at 943.
63
Martin Gelter & Geneviève Helleringer, Fiduciary Principles in European Civil Law Systems in
Oxford Handbook of Fiduciary Law 587, 587–89.
64
Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017,
Amending Directive 2007/36/EC with regards to the encouragement of long-term shareholder engage-
ment. The Directive requires Member States to introduce tougher rules on related party transactions by
June 2019, including rules on approval, public announcement, and optional fairness reporting.
65
While the main feature of the original proposal was a mandatory ratification of significant RPTs
by outside shareholders after full disclosure and independent fairness assessment, the final legislative
compromise made both procedures optional, and recognizes that the administrative or supervisory body
may give the fairness assessment or the consent, provided that the related party cannot take advantage of
its dominant position in the procedure.
66
By contrast, the duty of loyalty has been referred to in the context of business opportunity cases,
see infra note 122 and accompanying text.
67
Helleringer, supra note 40, at 400.
68
The Italian Commercial Code contains a rule requiring directors to disclose their interests in the
transactions concluded by the company and preventing directors from voting in such board decisions.
Codice di Commercio [C. comm.] art. 150 (Italy).
69
As already stressed, this is also true for the UK, which had been an EEC and later EU Member
State from 1973 till 2020, including in the UK despite its common law heritage.
70
Supra notes 64 and 65.
2.2.1.2 EU law
As mentioned before, after a lengthy process starting in April 2014, the recently amended
Shareholder Rights Directive (SRD) has harmonized procedural requirements within Europe.71
The final version of the directive is evidence of the protracted agreement process, as it leaves
Member States far more discretion in the way they can implement the directive. Typically,
Member States can decide whether shareholders or directors must approve RPTs.72 However,
aspects of the Article 9c SRD regulating related party transactions also remain stricter than
what had been in place in most Member States.73
First, “related party” has the same meaning in the directive as in the vocabulary of account-
ing,74 and extends therefore to transactions not necessarily involving a significant shareholder,
and to transactions between a company’s subsidiaries and a related party. Although not
explicitly stated, one can also expect the term “transaction” to be used in accordance with this
accounting standard, meaning that Article 9c SRD will cover a broad range of transactions. As
such, it was necessary to allow Member States to exclude transactions that do not pose a real
risk of potential abuse.75
Secondly, article 9c only affects “material” transactions, which can be defined by the
Member States based on quantitative ratios. Non-material transactions with the same related
party are aggregated in any 12-month period. Member States may set different materiality
thresholds for different company sizes and procedural safeguards.76 This approach has proven
effective in jurisdictions like the UK, where FCA Listing Rule 11 only applies to transac-
tions when one of the ratios resulting from the application of class tests77 is greater than 0.25
percent.78 However, by not setting the quantitative ratios for the materiality threshold, the
European legislation leaves the decision to Member States as to whether they want to enact
a strict regulatory regime or merely a protection against the most substantive related-party
transactions.79 This option creates a lot of leeway for Member States and the most important
choice in implementing the directive concerns the definition of “materiality.”80
71
Supra note 64.
72
Supra note 65.
73
Supra note 36.
74
See for instance International Accounting Standard [IAS] 24(9).
75
Infra notes 86 and accompanying text.
76
Shareholder Rights Directive (EU) 2017/828 of 17 May 2017 prec, art. 9c (6).
77
FCA HANDBOOK, LR 10 ANNEX 1, www.handbook.fca.org.uk/handbook/LR/10/Annex1.html
#D256.
78
See LR 11.1.6 (1) and ¶ 1 of LR 11 Annex 1.
79
By way of illustration, the Austrian implementation requires an approval by the supervisory only
if it exceeds 5% of total assets, and a publication only of it exceeds 10%. Aktiengesetz [AktG] [Stock
Corporation Act] March, 31, 1965, § 95a (Austria). This way most transactions will remain under the
radar. Outside shareholders will never know about the transactions. In Germany, the threshold appears
to be 1.5% of the sum of current and non-current assets. Aktiengesetz [AktG] [Stock Corporation Act],
September, 6, 1965, §§ 111b-c (Ger.).
80
Engert and Florstedt used data based on IAS 24 reporting of related party transactions to estimate
the number of German companies affected by quantitative materiality thresholds based on accounting
assets, sales, market capitalization, and other financials. They conclude that for effectiveness purposes
multiple quantitative tests should be used to define material related party transactions. Andreas Engert
& Tim Florstedt, Which related party transactions should be subject to ex ante review? Evidence from
Germany, J. Corp. L. Stud.1 (2019).
Board duties 209
Thirdly, material transactions must be publicly announced by the time of their conclusion,
with the announcement containing all relevant information to enable outside shareholders to
decide whether the transaction is on fair and reasonable terms.81
Fourthly, in addition to the disclosure provisions, material transactions must also be
approved by the general meeting and/or the administrative or supervisory body of the compa-
ny.82 In principle, related parties are excluded from the approval process. However, Member
States may allow related shareholders to take part if they are not able to outvote the majority
of outside shareholders or independent directors. To take an example, in a case where related
shareholders hold 60 percent of the voting rights, they may be entitled to vote in the general
meeting if the majority threshold is at least 80 percent.
The approval procedure has been a very controversial aspect in the legislative process,
since the Commission initially wanted to provide for a mandatory vote by the general meeting
as in the FCA’s Listing Rule 11.83 However, such vote would have been detrimental to the
existing regulatory frameworks in many continental European countries, which are far more
board-centered than in the United Kingdom. The alternative board approval mechanism cur-
rently provided is, however, a weak safeguard: By not excluding representatives of the related
party from the voting process, the EU relies on the Member States to set procedures which
“prevent a related party from taking advantage of its position.”84 In this regard, the directive
is unnecessarily vague, creating the potential circumvention of its intended restriction of the
voting power of related parties.
Fifthly, transactions in the ordinary course of business which are concluded on normal
market terms are excluded from the directive’s requirements. The administrative or supervi-
sory body of the company is only obliged to establish a periodic assessment of their custom-
ariness and fairness.85 In addition to this important exemption, Member States are given the
option of excluding or allowing companies to exclude several types of transactions.86
The paragraph lists a variety of transactions that are unlikely to be used as a means of
misappropriation, such as those for which national law already requires shareholder approval,
which are already regulated by the say-on-pay provision in the SRD, or which are offered to
all shareholders on the same terms.87
It is worth noting that there is no exemption for corporate groups.88 Instead, only transac-
tions with subsidiaries that are wholly-owned, in which no other related party has an interest
or when national law provides for adequate alternative protection, may be excluded. The new
81
In contrast to the initial proposal by the Commission, Member States only may provide, but need
not require, that a fairness report accompanies the announcement, see supra note 65.
82
Supra note 36, art. 9 ¶ 4.
83
FCA HANDBOOK LR 11.1, www.handbook.fca.org.uk/handbook/LR/11/1.html.
84
Shareholder Rights Directive (EU) 2017/828 of 17 May 2017, Amending Directive 2007/36/EC,
art. 9 ¶ 2.
85
Id. at art 9c ¶ 5.
86
Id. at art. 9c ¶ 4.
87
Id. at art. 9a.
88
Though many German scholars and practitioners, used to specific corporate law provisions
applicable to corporate groups, called for one: see, e.g., Common position of the Bundesverband der
Deutschen Industrie and Deutsches Aktieninstitut, (Nov. 12, 2015), www.dai.de/files/dai_usercontent/
dokumente/positionspapiere/2015-11-12%20SHRD-Position%20BDI%20und%20DAI.pdf.
regime, therefore, fully applies to transactions between listed subsidiaries and their parent
company.89
2.2.2 Tensions between civil law traditions and EU requirements

Enforcement conditions the effectiveness of RPT rules – but access to information is, in turn,
one of the key conditions of the enforcement of the rules. It is, however, a weak point in many
European jurisdictions. Typically, enforcement has remained exceedingly rare in Germany,
not least because shareholders cannot access the audited “dependency report” on intra-group
dealings.90
Beyond that, the evolution of self-dealing transactions law at the European level reflects
a deep change in European corporate culture. The foundation of a more modern corporate
culture in most Member States can be traced back to the numerous green and white papers
that were published in the early 2000s, following the string of corporate scandals: Enron,
WorldCom, Parmalat, etc.91 Under the pressure of international scrutiny exemplified by the
World Bank Group's Doing Business reports and OECD reviews, as well as structural evo-
lutions such as the feminization and internationalization of boards, the increasing number
of independent directors,92 and the growing role of proxy advisors and activist bodies,93
continental European corporate governance is progressively breaking free from the deeply
entrenched “club” culture that once characterized the top management of many companies in
Italy, Germany, France, and most other jurisdictions in continental Europe. Their corporate
governance is as a result, becoming more professional. In particular, conflicts of interest
and tunneling have now been recognized as issues that must be addressed, as the European
Commission’s intervention demonstrates.
Nevertheless, there is a risk that harmonized EU related party law may still promise more
than it can deliver for three main reasons. First, continental European jurisdictions have so far
made relatively little use of the “trusteeship” strategy.94 The importance of independent third
parties remains limited: involvement of independent experts, independent board members,
and a more active role of auditors would directly improve the effectiveness of RPT law.
Skepticism towards independent third parties may reflect a remaining trace of the traditional
“club” culture in business.
89
This is true, even if there is an alternative system of compensation. See, e.g., Aktiengesetz [AktG]
[Stock Corporation Act], Sept. 6, 1965, § 291-307 (Ger.). the German Enterprise Agreement.
90
Tobias Tröger, Germany’s Reluctance to Regulate Related Party Transactions in France.
A Industrial Organization Perspective, in The Law and Finance of Related party Transactions 426
(Luca Enriques & Tobias Tröger, eds., 2019).
91
See for example, in France, Daniel Bouton, Report on Better Governance in Listed Companies
(2002) available at www.paris-europlace.net/files/a_09-23-02_rapport-bouton.pdf.
92
For recent figures on the composition of listed companies’ board, see High Committee for
Corporate Governance Annual Report, Haut Comité de Gouvernement d’entreprise, 37–47
(2017), https://hcge.fr/wp-content/uploads/2018/01/Rapport_annuel_Haut_Comite_EN_201710.pdf.
93
See European Securities and Market Authorities (ESMA), An Overview of the Proxy Advisory
Industry (2012) (Discussion paper), available at www.esma.europa.eu/document/discussion-paper
-overview-proxy-advisory-industry-considerations-possible-policy-options.
94
John Armour, Henry Hansmann, & Reiner Kraakman, Agency Problems and Legal Strategies in
Anatomy, supra note 12, at 2, 35.
Board duties 211
Secondly, the scope of the law lacks clarity. In particular, EU regulations use the expres-
sions of “indirect interest” without defining them or providing guidance as to their limits. As
a consequence, parties err on the side of error, which is not efficient.
Thirdly, as most requirements introduced by the EU directive are already included in
the rules applicable in France and Italy,95 assessment of the effectiveness of self-dealing
rules in these jurisdictions is relevant. It can be noted that, there, advocates of shareholders’
rights argue that the law is often ineffective to prevent abuse for want of effective reporting
systems and enforcement.96 Meanwhile, business associations argue in favor of less burden-
some reporting requirements, for instance requesting a materiality threshold.97 In France, the
recently introduced requirement that the board must not only vote, but must justify its vote,98
has the potential to improve the quality of decision-making, as well as increasing transparency
for shareholders, and facilitating enforcement against the board.
3. DIRECTORS’ ENTREPRENEURIAL ACTIVITY OUTSIDE

THE BOUNDARIES OF THE CORPORATION: CORPORATE
OPPORTUNITIES AND THE DIRECTORS’ DUTY NOT TO
COMPETE WITH THE CORPORATION
Corporate directors’ entrepreneurial skills and business networks may enable them to pursue
profitable investments outside the boundaries of their corporation. Directors’ personal busi-
ness activities may conflict with the economic interests of the corporation whose success they
are committed to pursue.99 The richer an economic environment is in terms of new investment
opportunities, the more directors may be tempted to divert their attention outside the bounda-
ries of the corporation. Hence, it is unsurprising that corporate opportunity rules have been at
the core of US corporate law since the end of the nineteenth century, when the US economy
became the largest in the world.100
Today, two models address this issue in theory and practice.101 The first is the corporate
opportunity rules or doctrines, which is a set of rules strongly rooted in common law tradi-
tions.102 The second is the directors’ duty not to compete with the corporation, which origi-
95
See Helleringer, supra note 40; Bianchi, Enriques & Milic, supra note 25.
96
See Helleringer, supra note 40 at 418–21.
97
For an article discussing the ambivalent assessments of the regulation in place, see Pierre-Henri
Conac, Related Party Transactions in French Company Law, Revue Trimestrielle de Droit Financier
no.3 26 (2014).
98
Act n° 2019-486, May 22, 2019 on Corporate Growth and Transformation (Loi relative à la crois-
sance et la transformation des entreprises), art. 198.
99
See, e.g., Companies Act 2006, § 172 (UK).
100
David Kershaw, The Foundations of Anglo-American Corporate Fiduciary Law (2018).
101
For an in-depth comparison between these two models in the light of the theory of the firm, see
Marco Claudio Corradi, Corporate Opportunities Doctrines Tested in the Light of the Theory of the Firm
– A European (and US) Comparative Perspective, 27 Eur. Bus. L. Rev. 755, 782–819 (2016).
102
The Delaware seminal case is Guth v. Loft Inc., 5 A.2d 503 (Del. Ch. 1939). US Courts had
already developed a corporate opportunity doctrine in the second half of nineteenth century. See the line
of “connected assets” cases decided by New York courts, Murray v. Vanderbilt, 39 Barb. 140 (1863);
Blake v. Buffalo Creek R.R. Co., 11 Sickels 485 (1874); Averill v. Barber, 53 Hun. 636 (1889); Robinson
v. Jewett, 22 N.E. 224 (1889). An explanation of the rationale underlying this line of cases is offered
nated in civil law systems.103 Both models have been subjects to legal transplant. Corporate
opportunity rules were introduced by means of legal reforms104 or judicial interpretation105 in
most civil law jurisdictions.106 Such introductions occurred gradually, after national courts had
acknowledged in some form the existence of corporate directors’ fiduciary duties, inspired
by the way they are conceived in Anglo-American jurisdictions.107 The directors’ duty not to
compete was in turn adopted only within US case-law.108 By contrast, in the UK legal system,
the existence of a directors’ duty not to compete – separate from the UK corporate opportunity
doctrines – has not yet been acknowledged.109
Despite their different denominations, the core economic function played by these two sets
of rules are similar, albeit not identical. Both types of rules prevent insiders from expropri-
ating private benefits of control from the corporation.110 The main differences between them
can be identified with reference to the corresponding legal framework adopted to target such
expropriation. Corporate opportunity rules are often embedded in a proprietary framework. In
by Kershaw, supra note 53, at 430–35. The UK seminal cases are R. v. Gulliver [1942] UKHL 1 and
Boardman v. Phipps [1966] UKHL 2.
103
In France, such duty has been mostly intended as referring to concurrence déloyale. See, e.g.,
Cour de cassation [Cass.] [supreme court for judicial matters] com., Feb. 24, 1998, Bull. Joly 1998, 813.
In Germany this rule is known as Wettbewerbsverbot and is regulated by Aktiengesetz (German Stock
Corporation Act). Supra note 79, ¶ 88. Codice Civile (Italian Civil Code) contains rules on directors’
divieto di concorrenza (duty not to compete) with the company. Codice civile [C.c.] art. 2390. Unlike
the self-dealing rule – which pre-dates the Italian Civil Code (see supra note 66) – the duty not to
compete was introduced in Italian law only with the 1942 unification of the Civil and Commercial Codes.
104
The 5th section of Article 2391 of Codice Civile – on business opportunities – was introduced with
Dlgs. 6/2003. Gazzetta Ufficiale n. 17 del 22 gennaio 2003 - Supplemento Ordinario n. 8.
105
Seminal French corporate opportunities cases are Cass. 1e civ., Dec. 1, 2010, Bull. civ. I, No. 248;
Cass. com., Dec. 18, 2012, Rev Soc 2013, 262. The foundational German case is Bundesgerichtshof
[BGH] [Mo. Date] 1977, 361.
106
Whether this was a successful transplant is debatable. For an in-depth analysis, see Martin Gelter
& Geneviève Helleringer, Opportunity Makes a Thief: Corporate Opportunities as Legal Transplant and
Convergence in Corporate Law, 15 Berkeley Bus. L.J. 92 (2018).
107
For France, see Cass. com., Feb. 27, 1996, JCP E. 1996, II, 838; Cass. com, 24 February 1998,
Bull Joly 1998, 813; Cass. com., May 12, 2004, Rev. Soc. 2005, 140. For Italy, see Corte di cassazione
[Cass.] [court of last appeal on issues of law in civil and criminal matters] Foro it. I, Aug. 24, 2004, No.
16707, 1844f. Such transplant has not been unproblematic from a theoretical perspective. See Fleischer,
supra note 5.
108
US case law acknowledges the existence of directors’ duty not to compete with the corporation
as a consequence of a misappropriation of a corporate opportunity (e.g., Burg v. Horn 380 F.2d 897 (2d
Cir. 1967)) and as a cause of misappropriation of a corporate opportunity (e.g. Abbott Redmont Thinlite
Corp. v. Redmont, 475 F.2d 85, 88 (2d Cir. 1973)). It also refers to directors’ duty not to compete
as a fiduciary duty that is clearly independent from the corporate opportunity doctrine. See Foley v.
D’Agostino 21 A.D.2d 60 (1964). Finally, there are interpretations of the directors’ duty not to compete
with the corporation that seem to show a rationale inspired to unfair competition law. See Red Top Cab
Co. v. Hanchett, 48 F.2d 236 (N.D. Cal. 1931). For an in-depth analysis of the relationships between
US corporate opportunity rules and directors’ duty not to compete, see Jodi L. Popofsky, Corporate
Opportunity and Corporate Competition: A Double-Barreled Theory of Fiduciary Liability, 10 Hofstra
L. Rev. 1193 (1982).
109
London & Mashonaland Exploration Co. v New Mashonaland Exploration Co., [1891] WN 165.
See also Plus Group Ltd. v Pyke [2002] EWCA (Civ) 370.
110
Robert H. Sitkoff, The Economic Structure of Fiduciary Law, 91 B.U. L. Rev. 1039, 1043 (2011);
Alexander Dyck & Luigi Zingales, Private Benefits of Control: An International Comparison, 59 J. Fin.
537 (2004).
Board duties 213
fact, the protection of business opportunities is granted to the extent that they are “corporate”
– that is, they belong to the corporation.111 By contrast, the directors’ duty not to compete
with the corporation is a legal provision that focuses on the external economic activity carried
out by directors – which must be in competition with the corporation.112 Hence, directors’
non-compete rules do not completely overlap with corporate opportunity rules. Some corpo-
rate opportunities may be taken which do not entail setting up a competing activity with the
corporation, and vice versa.113
US constituent states are the jurisdictions where corporate opportunity rules are most often
invoked before courts.114 Although US corporate opportunity doctrines can be traced back
to the nineteenth century,115 Guth v. Loft is considered the seminal Delaware case because
it introduced the renowned “line of business test.”116 According to this test, only investment
opportunities deemed as being in the line of business of the corporation are considered as
corporate. The test is based on a “no-conflict” paradigm, showing no per se concern for the
enrichment of a corporate director through their economic activity outside the boundaries of
the corporation – provided that such activity causes no harm to the corporation.117 US courts
have also produced alternative corporate opportunity tests, such as the fairness test118 or the
so-called “mixed tests.”119
Nonetheless, such tests did not prevail over the Guth v. Loft doctrine in Delaware corporate
law.120 In fact, the Delaware Supreme Court confirmed the “line of business test” in Bros v.
Cellular Information Systems.121 Such an approach strikes a convenient balance in the trade-off
between directors’ freedom of enterprise and their loyalty to the corporation – although US
legal scholars have advocated for a stricter approach.122 This relatively lenient approach is
based on the idea that many valuable and business-skilled individuals may be discouraged
111
Michael J. Whincop, Painting the Corporate Cathedral: The Protection of Entitlements in
Corporate Law, 19 Oxford J. L. Stud. 19 (1999).
112
For a comparison between the two sets of rules, see Corradi, supra note 101.
113
See Popofsky, supra note 108, at 1194–96.
114
A quick look to the oldest and newest US corporate opportunity cases shows that they have been
decided across a vast spectrum of US constituent states. See Lagarde v Anniston Lime & Stone Co.,
28 So. 199, 201 (Ala.1900); Lindenhurst Drugs, Inc. v. Becker, 506 N.E.2d 645 (Ill. App. Ct. 1987);
Rapistan Corp. v. Michaels, 511 N.W.2d 918 (Mich. Ct. App. 1994).
115
See Guth v. Loft Inc., 5 A.2d 503 (Del. Ch. 1939).
116
Id. at 238–40.
117
Kershaw, supra note 100.
118
Durfee v. Durfee & Canning, Inc., 80 N.E.2d 522 (1948).
119
Miller v. Miller, 222 N.W.2d 71 (1974). For the unclear relationships among the cited tests, see
Eric G. Orlinsky, Corporate Opportunity Doctrine and Interested Director Transactions: A Framework
for Analysis in an Attempt to Restore Predictability, 24 Del. J. Corp. L. 451 (1999).
120
It has been suggested that also the Delaware Chancery has supported the fairness test in the past.
See Johnston v. Greene, 121 A.2d 919, 922 (Del. Ch. 1956); Edward Welch et al., Folk on Delaware
General Corporation Law: Fundamentals 292–93 (2014).
121
Broz v. Cellular Info Sys., Inc., 673 A.2d 148 (1996).
122
Victor Brudney & Robert Charles Clark, A New Look at Corporate Opportunities, 94 Harv. L.
Rev. 997, 999 (1981); the authors are convinced that directors’ overt compensation should be enough
to incentivize their pro-corporate behaviors, without need to revert to covert compensation. The more
general divergence between Delaware’s interpretation of directors’ fiduciary duties and the positions
adopted by American academia is stressed by David Charny, Competition among Jurisdictions in
Formulating Corporate Law Rules: An American Perspective on the Race to the Bottom in the European
Communities, 32 Harv. Int'l. L.J. 423, 447 (1991).
from taking up directorships if they are totally prevented from exercising their freedom of
enterprise outside the boundaries of the corporation.123
In the UK, where the corporate opportunity doctrine evolved in a way distinct from the
US,124 the prevailing doctrinal orientation still supports a no-profit approach, under which
a director is not allowed to make any unauthorized profit out of the exploitation of a corporate
opportunity – even when this would cause no harm to the corporation.125 Such a rigid approach
clearly shows that the phylogenetic connection to the law of trust126 – from which corporate
directors’ duties originate as a distinctive set of rules127 – is still extremely pervasive in the UK
legal system.128
It is also worth recalling that the UK corporate law model has been extremely influ-
ential worldwide. It has shaped the legal treatment of corporate opportunities across the
Commonwealth jurisdictions,129 including some of the most economically developed Asian
economic areas, such as Hong Kong130 and Singapore.131 The UK’s rigid approach has
been heavily criticized.132 In fact – especially when combined with the very effective UK
remedial system – it may discourage directors from exploiting business opportunities even
when their external business activities may produce positive welfare effects, while in no way
harming the corporation.133 At present, the only safe way for UK directors to pursue external
business opportunities is by obtaining an authorization or a ratification from a majority of
non-conflicted directors or from the shareholders’ assembly.134
Nonetheless, such procedures may stifle directors’ will to swiftly pursue external business
opportunities which in no way damage the corporation, given the uncertainty as to their capac-
ity to appropriate the fruits of their efforts.135 As noted by Klaus Hopt, a legally different but
123
Richard Ramsey, Director's power to compete with his corporation, 18 Ind. L.J. 293 (1942).
124
Gelter & Helleringer, supra note 106, at 118–26.
125
Companies Act 2006, § 175(4) (UK) (“[t]he duty is not infringed if the situation cannot reasonably
be regarded as likely to give rise to a conflict of interest.”) This might be interpreted as an opening to
potential no-conflict based interpretations. Nonetheless, even from recent case law, it is clear that UK
courts are decided to stick to the no-profit paradigm as enunciated in R. v. Gulliver [1942] UKHL 1. See,
e.g., Bhullar v. Bhullar [2003] EWCA (Civ) 424 (Eng.).
126
Keech v. Sandford [1726] EWHC Ch J76.
127
Sealy, supra note 1. In US corporate law as well, it has been clear throughout the whole XX
century that directors are not agents nor trustees of the corporation. See Warner Fuller, Restrictions
Imposed by the Directorship Status on the Personal Business Activities of Directors, 26 Wash. U. L.Q.
189 (1940).
128
Kershaw, supra note 53, at 439–40.
129
For Canada, see Canadian Aero Services Ltd. v. O'Malley [1973] 40 D.L.R. (3d) 371 (Can.). For
Australia, see Paul A Davies (Aust) Pty Limited v. Davies [1983] 1 NSWLR 440 (Austl.). For New
Zealand, see Pacifica Shipping Co. Ltd. v. Anderson [1985] 2 N.Z.C.L.C (N.Z.).
130
See for instance the recent case Poon Ka Man Jason v. Cheng Wai Tao [2016] 19 HKCFAR 144
(HK.).
131
Tokuhon (Pte) Ltd. v. Seow Kang Hong [2003] SGHC 65 (Sing.).
132
See David Kershaw, Does It Matter How the Law Thinks about Corporate Opportunities, 25
Legal Stud. 533 (2005).
133
Id.
134
See Companies Act 1985, §§ 85, 94 (on the exclusion of the conflicted director).
135
This depends on the profit tracing system which characterizes the common law corporate oppor-
tunity remedial system. See Marco Claudio Corradi, Securing corporate opportunities in Europe – com-
parative notes on monetary remedies and on the potential evolution of the remedial system, 18 J. Corp.
L. Stud. 439, 449–52 (2018).
Board duties 215
economically similar economic problem of inefficient regulatory rigidity may arise in the case
of a resigned director willing to join a business offer by a third party in the field of business in
which the corporation he used to work for is active.136 In a similar case, the BGH, the German
Supreme Court, has rejected an economically efficient approach proposed by the Court of
Appeals of Stuttgart, which had allowed the resigned director to take the opportunity.137 When
such a rigid approach is adopted, “[d]irectors who have expertise, but not enough capital of
their own, are prevented from opening their own business which is negative for themselves
and the market as a whole.”138
Another remarkable trait of the UK corporate opportunity law is its overreaching applica-
tion. As a way to prevent strategic resignation, the UK corporate opportunity doctrine also
applies to resigning directors.139 Moreover – and more importantly – unlike in Delaware law,140
not only business opportunities which the director has come to know about in their capacity
as a director are deemed corporate. Any business opportunity, including those that the director
may have acquired in their private life, are considered as belonging to the corporation.141
This is a unique trait of UK (and Commonwealth) corporate opportunity doctrines. In fact,
most civil law jurisdictions have made it clear that only those corporate opportunities that are
acquired by the director while discharging their duties are considered corporate.142 Finally, in
UK law, the financial inability of the corporation to exploit a business opportunity does not
excuse directors in the event of misappropriations.143 This is another notable feature of rigidity
which distinguishes UK law from US law.144
Civil law jurisdictions such as France, Germany and Italy have applied a duty not to
compete with the corporation since the mid-nineteenth century.145 The transplant of corporate
opportunities has taken place at different times within different European jurisdictions. In
West Germany, academics have been developing a corporate opportunity doctrine inspired by
US law (Geschäftschancenlehre) since the 1950s.146 Such a doctrine was then introduced by
the German Supreme Court at the end of the 1970s.147 In France, a corporate opportunity doc-
trine has been elaborated progressively and rather cautiously by courts in more recent times,148
while the Italian civil code corporate opportunity rule has never been applied by Italian courts.
136
Klaus J. Hopt, Conflict of interest, secrecy and insider information of directors, A comparative
analysis, 10 Eur. Company & Fin. L. Rev. 167, 179 (2013).
137
BGH Sept. 23 1985, 1443 (Ger.).
138
Id.
139
Foster Bryant Surveying Ltd v. Bryant [2007] EWCA (Civ) 200 (Eng.).
140
Guth v. Loft Inc., 5 A.2d 503 (Del. Ch. 1939).
141
Bhullar v. Bhullar [2003] EWCA (Civ) 424 (Eng.).
142
For instance, the Italian civil code, refers to corporate opportunities of which directors became
aware “became aware of in the exercise of their duties.” C.c. art. 2391(5).
143
R. v. Gulliver [1942] UKHL 1.
144
Cfr. Broz v. Cellular Info Sys., Inc., 673 A.2d 148 (1996).
145
See supra note 103.
146
Ernst Mestmäcker, Verwaltung, Konzerngewalt und Rechte der Aktionäre 166 (Müller
1958).
147
BGH [Mo. Day, 1977], 361 (Ger.)
148
See the French case law cited supra note 105.
Given the limited number of cases that have been brought to the attention of civil law courts,
the interpretation of such rules may still be considered a work-in-process.149
The main reason why corporate opportunity rules are not frequently the subject of dis-
putes in continental Europe might be traced to the rather ineffective remedial systems by
which they are assisted in those countries. In fact, the main civil law remedy applied against
misappropriations is usually damages.150 Damages are rather difficult to calculate, given the
uncertainty that surrounds the potential success of a given investment opportunity.151 This
is why, where alternative rules (such as the duty not to compete with the corporation) are
assisted by more effective remedies, such rules may turn out to be more advantageous to the
corporation. For instance, this is the case for the German Wettbewerbsverbot, which is assisted
by an Eintrittsrecht (a subrogation right), a remedy whose effects are very similar to the US’
disgorgement of profits or the UK’s account of profits.152
Nonetheless, it may be worth recalling that even the most cogent civil law remedies cannot
easily replicate the deterrence effects attached to an account of profits assisted by a construc-
tive trust (i.e. the ordinary equity remedy applied by Anglo-American courts). An account of
profits allows for profit tracing. The plaintiff is therefore able to retrieve all of the subsequent
reinvestments of the proceeds of a misappropriation of corporate opportunities.153
Such a remedy may have an intrinsic psychological deterrence effect, due to its long-term
reach. A director who has misappropriated a corporate opportunity may be asked to disgorge
their profits to the corporation. This is regardless of the steps the director has undertaken
to create legal distance from the original asset, through subsequent sales and purchases.154
Another point of strength of the Anglo-American system is represented by the fact that,
when this proves more effective, the plaintiff can also claim damages in the form of equitable
compensation155 or common law damages.156 This may turn out to be easier in cases where it
is clear that the same corporate opportunity would have been exploited far more profitably by
the corporation.157
149
This is acknowledged by national legal jurisprudence. For an explanation of the state of the art in
French law, see Geneviève Helleringer, Le dirigeant à l'épreuve des opportunités d’affaires, 24 Etudes
et Commentaires- Chroniques Recueil Dalloz 1560 (2012). For the interpretative difficulties still
found in Italian law, see Marco Claudio Corradi, Le opportunità di affari all'ultimo comma dell’art. 2391
cc: profili interpretativi tra “società” ed “impresa”, 38 Giurisprudenza commerciale 597, 597–98
(2011). For several hermeneutical problems still debated in German law, see Holger Fleischer, Gelöste
und Ungelöste Probleme der Gesellschaftsrechtlichen Geschäftschancenlehre, 21 Neue Zeitschrift
für Gesellschaftsrecht 985 (2003).
150
For France, see Thibaut Massart, Note to Cass com 18 December 2012, 2013 Rev. Soc. 262, 266.
For Germany, see Aktiengesetz Kommentar § 88, ¶ 33, Rz. 2 (3rd ed., Karsten Schmidt & Marcus
Lutter 2015). For Italy, see Marco Ventoruzzo, Commento all’Articolo 2391 del Codice Civile, in
Commentario alla Riforma delle Società 490–99 (Piergaetano Marchetti et al., eds., 2006).
151
See Ventoruzzo, id., at 499.
152
See Gerald Spindler, in 2 Münchener Kommentar zum Aktiengesetz § 88, ¶¶ 32–38 (Wulf
Goette & Mathias Habersack eds., 2019).
153
See, e.g., A-G for Hong Kong v. Reid, [1994] 1 AC 324 (UK).
154
Corradi, supra note 135.
155
See Joshua Getzler, Equitable Compensation and the Regulation of Fiduciary Relationships, in
Restitution and Equity 235–57 (Peter Birks & Francis Rose eds., 2000).
156
See Davies & Worthington, supra note 29, at ¶ 16–181.
157
Jeff Berryman, Equitable Compensation for Breach by Fact-Based Fiduciaries: Tentative
Thoughts on Clarifying Remedial Goals, 37 Alta. L. Rev. 95, 99 (1999).
Board duties 217
The cogency of Anglo-American corporate opportunity remedies certainly represents

a point of strength in relation to the original function of corporate opportunity rules – i.e. secur-
ing corporate fiduciaries’ loyalty.158 Nonetheless, the increasing importance of less traditional
forms of financing, such as venture capital (VC),159 has challenged the role of corporate oppor-
tunity rules – especially in highly innovative environments known as industrial clusters.160
VC funds often invest in competing start-ups.161 As a way to support start-up development
and as a means of controlling their investment, VC funds often appoint their general partners
as directors in the board of the start-ups in which they invest.162 As within each VC fund there
is normally a limited number of general partners, the same general partner may sit on the
board(s) of competing start-ups. Even when this does not occur, each general partner may
easily communicate with their colleagues. Hence, VC fund-appointed directors may find
themselves in a position of divided loyalty.163 First, they may be unable to decide on which
of their start-ups they should offer the same business opportunity to. In fact, corporate oppor-
tunity rules may require them to offer the same opportunity to all the start-ups in which they
have invested, while at the same time excluding each competitor from communicating with
each other. Second, entrepreneurs that have obtained VC backing may easily accuse general
partners of misappropriating corporate opportunities even after the exit phase, as opportunities
in the same line of business are likely to be exploited by competing start-ups.164
For the reasons mentioned above, the Delaware General Corporation Law (DGCL) was
reformed in 2000, introducing § 122(7), which contains a new rule granting companies the
possibility to introduce a corporate opportunity waiver. Empirical research shows that such
waivers have been widely employed by Delaware corporations in recent years – even though
Delaware courts have not yet had a chance to identify the limits within which such waivers
may be formulated.165 The overall impression one may have of the development of US
Delaware law is a progressive flexibilization of the use of corporate opportunity rules, which
may still retain their importance in the protection of several corporate investments without
conflicting with modern financing strategies.166
158
Sitkoff, supra note 110, at 1043.
159
On venture capital in general, see Michael Gorman & William A. Sahlman, What Do Venture
Capitalists Do?, 4 J. Bus. venturing 231 (1989).
160
A vivid depiction of the thriving business environment of one of the most renowned industrial
clusters, the Silicon Valley, is offered by AnnaLee Saxenian, Regional Advantage. Culture and
Competition in Silicon Valley and Route, 128 (Harvard University Press 1996).
161
Terence Woolf, The Venture Capitalist's Corporate Opportunity Problem, Colum. Bus. L. Rev.
473, 489 (2001).
162
Id.
163
Id.
164
This is what occurred in a recent Delaware corporate opportunity case, Alarm.com Holdings, Inc.
v. ABS Capital Partners, Inc., et al., C.A. No. 2017- 0583-JTL, at 1 (Del. Ch. June 15, 2018).
165
Gabriel Rauterberg & Eric Talley, supra note 18.
166
Other kinds of investors, such as angel investors, are increasingly organized in associations. This
may pose corporate opportunity problems similar to those occurring in the venture capital industry. See
Scott Shane, Angel Groups: An Examination of the Angel Capital Association Survey, Jan. 1, 2008,
https://ssrn.com/abstract=1142645 or http://dx.doi.org/10.2139/ssrn.1142645. Differences in investment
techniques still exist between venture capital and angel investment. See Dan Hsu et al., What matters,
matters differently: a conjoint analysis of the decision policies of angel and venture capital investors, 16
Venture Capital 1 (2014).
The development of corporate opportunity rules in the sense of a progressive flexibilization

and customization seems to represent a very lively trend in US corporate law. Meanwhile,
European corporate laws seem to devote limited attention to this problem. Indeed, the pos-
sibility of a corporate opportunity waiver has not been expressly acknowledged yet in most
European corporate laws – although it has been debated in German literature.167 This limited
attention to this specific problem mirrors the general underdevelopment of European corporate
opportunity doctrines compared to the US alternatives. Nonetheless, it is clear that corporate
opportunity rules are still very important in defending the boundaries of the corporation, while
they also remain crucial with regard to VC investments. In fact, waivers are likely to be unilat-
eral, while entrepreneurs who also sit on the board of directors of a start-up may find it difficult
to obtain a waiver through VC funds. This is why more attention being paid by European legal
scholars to this topic may enhance the chances of efficient legislation being introduced.
4. CONCLUSIONS
Self-dealing, RPTs, the taking of corporate opportunities and directors’ competing activities
are ways to extract private benefits of control from the corporation and can be read under
the economic agency costs paradigm. Most of these rules have also been the object of legal
reforms across a vast number of jurisdictions. Despite their similarities in function, the legal
patterns emerging on a global scale allow us to identify several differences when comparing
self-dealing and RPTs rules on one hand and corporate opportunity rules and directors’ duty
not to compete on the other.
First, self-dealing rules have existed in common and civil law jurisdictions under different
denominations for a long time. By contrast, corporate opportunity rules have been introduced
in civil law jurisdictions in the form of a legal transplant – being directors’ duty not to compete
with the corporation only a partial substitute for corporate opportunity rules. Hence, it is not
surprising that the corpus of jurisprudence on self-dealing is far more developed than the one
on corporate opportunities.
Second, unlike corporate opportunity and non-compete rules, requirements relating to
self-dealing and RPTs are at the core of the law of listed corporations and, after the 2007–08
scandals, have emerged as part of the corpus of post-crisis, “modern” corporate law – across
the globe. They are now periodically disclosed to the public in most jurisdictions and therefore
are easily observable also by the common layman. By contrast, corporate opportunity doc-
trines are still a “matter for specialists,” especially in Europe: Although corporate opportuni-
ties are in fact an important component of modern corporate culture in the US, namely in the
VC sector, in Europe they are rarely recalled in the corporate law debate.
One of the possible reasons may be the focus of a large part of legal scholars and innovative
corporate lawyers on listed corporations. In addition – although misappropriations of corpo-
rate opportunities probably occur daily worldwide – only the US has produced a vast series of
legal precedents on this subject matter. Hence, the interpretation of such rules is still uncertain
for legal practitioners in most jurisdictions. Moreover, and in contrast to RPTs rules, there
167
Alexander Hellgardt, Abdingbarkeit der gesellschaftsrechtlichen Treuepflicht, in Unternehmen,
Markt und Verantwortung: Festschrift für Klaus J. Hopt zum 70. Geburtstag am 24. August
2010 765–94 (2010).
Board duties 219
is no common EU legislation in this area of the law. This absence of harmonization may be
justified not only in terms of scarce interest by the EU legislator, but also as a consequence
of the strong divergences in terms of corporate opportunity doctrines across EU jurisdictions,
where the UK one represents the most peculiar and divergent model.
11. The duty of care and the business judgment
rule: a case study in legal transplants and local
narratives
Carsten Gerner-Beuerle1
1. INTRODUCTION
The duty of care and, increasingly, the business judgment rule are common features of any
developed system of corporate law. The duty of care is one of the oldest legal institutions to
impose constraints on the behavior of corporate directors (and more generally persons acting
in various commercial relationships). In an early form, it can be found in Roman law on the
societas, which required each partner to exercise the care that they were accustomed to display
in their own affairs in matters of business management.2 It is also a near-universal rule; it exists
in one form or another in virtually every jurisdiction.3 This is unsurprising, given that the duty
of care is concerned with a central economic problem to which the use of the corporate form
gives rise: the managerial agency problem. This economic problem exists whenever man-
agement authority is delegated and has prompted regulatory intervention around the world,
irrespective of legal tradition or form of market economy.
The duty of care has given rise to a “judicial offshoot” that qualifies the enforceability
of breaches of the duty of care and has resulted, in particular in the United States, in a clear
separation of a standard of conduct and a standard of review: the business judgment rule. The
business judgment rule gives legal expression to the idea that questions of business judgment
1
I am grateful to Afra Afsharipour, Christopher Bruner, Martin Gelter, Uriel Procaccia, and partici-
pants in workshops at Fordham University and the University of Pennsylvania for valuable comments on
earlier versions of this chapter.
2
Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian
Tradition 461–65 (1996).
3
See David Kershaw, The Foundations of Anglo-American Corporate Fiduciary Law
135–281 (2018), for a detailed comparison of the duty of care in the United States and the United
Kingdom. See generally Jennifer G. Hill, Evolving Directors’ Duties in the Common Law World, in
Research Handbook on Directors’ Duties 3, 3 (Adolfo Paolini ed., 2014), for further selected
common law jurisdictions; Carsten Gerner-Beuerle & Edmund-Philipp Schuster, Mapping Directors’
Duties: The European Landscape, in Boards of Directors in European Companies 13, 14–23 (Hanne
Birkmose, Mette Neville & Karsten Engsig Sørensen eds., 2013), for European civil law countries;
Guangdong Xu et al., Directors’ Duties in China, 14 Eur. Bus. Org. L.Rev. 57, for China; Hideki
Kanda & Curtis J. Milhaupt, Re-Examining Legal Transplants: The Director’s Fiduciary Duty in
Japanese Corporate Law, 51 Am. J. Comp. L. 887 (2003), for Japan. See also Bernard S. Black et al.,
Comparative Analysis on Legal Regulation of the Liability of Members of the Board of Directors and
Executive Organs of Companies (ECGI - Law Working Paper Series 103/2008); Paul Davies et al.
(eds.), Corporate Boards in Law and Practice (2013); and Andreas M. Fleckner & Klaus J. Hopt
(eds.), Comparative Corporate Governance: A Functional and International Analysis (2013),
for broad comparative studies.
220
The duty of care and the business judgment rule 221
are best left to the honest decision of the directors. Courts are not well placed to substitute their
own discretion for that of the directors, since they typically lack the necessary expertise and
act with the benefit of hindsight.4 Allowing courts to fully review business decisions adopted
in good faith and without a conflict of interest could give rise to the risk of false positives:
instances where courts might identify a breach of the duty, even though the decisions of direc-
tors, assessed from an ex-ante perspective under conditions of uncertainty about the future,
were duty-compliant. Since this economic problem exists in all jurisdictions, legal systems
can be expected to have developed solutions that restrict the liability of directors.5 One such
solution is the business judgment rule,6 which has diffused increasingly widely over the last
few decades and can now be found, for example, in eight European countries that all belong
to the civil law tradition.7
Both the duty of care and the business judgment rule exhibit remarkable consistency across
jurisdictions. Formulations of the two rules vary in details, but the basic contours of the duty
of care and the business judgment rule (where it has been adopted) are similar. This may be
the result of conscious borrowing, especially in the case of the business judgment rule, or
independent decisions driven by the realization that it was eminently reasonable to impose an
expectation to act with due care on persons dealing with other people’s money, or a combina-
tion of both. Whatever the reason may be, the question arises whether legal institutions that
exist in two or more jurisdictions and are formulated in such similar terms as the duty of care
and the business judgment rule, operate similarly, as one would perhaps expect, or, if they do
not, why they fail to produce similar outcomes.
These questions are taken up in the two main parts of this chapter. The first part, Section 2,
is a mapping exercise that shows the extent to which the duty of care and the business judg-
ment rule, or functional equivalents, have diffused and converged in selected jurisdictions. The
second part, Section 3, challenges the degree of convergence that Section 2 has, ostensibly,
illustrated. This section claims that the inherent meaning of transplanted legal institutions is
not necessarily transferred together with the text of the norm, and perhaps will only rarely
be transplanted together with it, since meaning is context-specific and a function of a variety
of non-legal factors, such as a certain understanding of the benefits and risks of different
socio-economic systems that is prevalent in an economy.8 In making this claim, I draw on
prior research that has highlighted that the content of norms, even norms that are ostensibly
well-defined, will often be open-ended in the sense that a “multiplicity of meaning”9 can attach
4
See Kershaw, supra note 3, 68–92, for an overview of the historical development of the business
judgment rule.
5
It can be shown that restricting liability for breaches of the duty of care is efficient. See Holger
Spamann, Monetary Liability for Breach of the Duty of Care?, 8 J. of Legal Analysis 337.
6
Functionally equivalent solutions exist, as we will see in Section 2. &
7
These eight countries are Austria, the Czech Republic, Croatia, Germany, Greece, Portugal, Spain
and Romania. See Luis Hernando Cebría, The Spanish and the European Codification of the Business
Judgment Rule, 15 Eur. Co. & Fin. L. Rev. 41 (2018).
8
Whether the context-specific nature of meaning leads to the “impossibility of legal transplants”, as
claimed by Pierre Legrand, The Impossibility of ‘Legal Transplants’, 4 Maastricht J. Eur. & Comp. L.
111 (1997), may remain an open question. The goal of this chapter is less ambitious, namely to examine
whether the transplantation of two particular legal institutions (the duty of care and the business judg-
ment rule) has taken place not only in a formal, but also a substantive sense of the word in a particular set
of countries.
9
Robert M. Cover, Nomos and Narrative, 97 Harv. L. Rev. 4, 16 (1983).
to one norm. This multiplicity of meaning is culturally determined,10 it centers on “narrative

traditions”,11 with judges being in a privileged position to control and shape these narratives.12
Section 3 focuses on the Delaware business judgment rule and its German counterpart in
order to substantiate the claim that narratives influence the prevalent local understanding of
a transplanted legal institution, and to show that they may, in some cases, influence the under-
standing of a rule to an extent that two similarly formulated rules lead to diametrically opposed
outcomes in comparable cases. These two jurisdictions are often held out as paradigmatic
examples of distinct legal traditions and models of the market economy, falling on different
sides of the divide between liberal and coordinated market economies proposed by the vari-
eties of capitalism literature.13 It has been pointed out that the way market actors coordinate
their activities, and thus the type of market economy that arises, is a function of the shared
experiences of these actors and the cultural norms that are prevalent in a society.14 The concept
of narratives, as it is used in this chapter, is closely related to such cultural determinants. Where
narratives differ across types of the market economy, it is reasonable to assume that they also
shape legal institutions differently. At the same time, in spite of clearly distinct approaches to
ordering the market economy, the duty of care and the business judgment rule are largely iden-
tical in Delaware and Germany, as will be shown in Section 2. The two jurisdictions, therefore,
constitute an ideal case to test the impact of local narratives on the codified law.
2. DIFFUSION OF THE DUTY OF CARE AND THE BUSINESS

JUDGMENT RULE
2.1 Origins
The common law duty of care has its origins in eighteenth and nineteenth century trust law and
the law of bailment, from which it was adapted to corporate directors.15 Early English case law
concerning the duties of corporate directors emphasized that directors were “in the position of
10
Id. at 11.
11
Id. at 17.
12
Cover speaks of judges as “one source of privileged precept articulation”. Id. at 17, n. 44. See also
id. at 40.
13
In a liberal market economy, coordination takes place primarily via hierarchies within firms
and competitive market arrangements between firms. In a coordinated market economy, in contrast,
economic actors rely more frequently on collaborative non-market relationships to coordinate their activ-
ities, for example relational networks or collectivist strategies implemented through organized associa-
tions, such as trade unions. See Peter A. Hall & David Soskice, An Introduction to Varieties of Capitalism
in Varieties of Capitalism: The Institutional Foundations of Comparative Advantage 1, 8
(Peter A. Hall & David Soskice eds., 2001). Britain, the United States and many other common law
countries are typically referred to as liberal market economies, Germany, Japan, Switzerland and other
countries in the German and Scandinavian legal traditions as coordinated market economies, and several
Mediterranean countries, including France, Italy and Spain, are regarded as occupying an ambiguous
position. Id. at 19–21.
14
Id. at 12–14.
15
Kershaw, supra note 3, 229–63.
trustee” or “quasi trustees”.16 As such, they were required “to use all the ordinary prudence that
can be properly and legitimately expected from any person in the conduct of the affairs of the
world”.17 In the development of the duty of care in the United States, it has been shown that the
law of bailment was more influential than trust law, a difference that has been associated with
differences in the conceptualization of companies incorporated by registration. In the United
States, the general incorporation statutes of the nineteenth century were intended to open up
access to the corporate form and make it unnecessary to petition state legislatures for a cor-
porate charter. Registered companies could therefore be seen as a continuation of chartered
companies, and there was no question that both were the legal owners of the assets devoted
to the business enterprise. In Britain, in contrast, incorporation by registration was introduced
to remedy the defects to which the widespread use of so-called deed-of-settlement companies
had given rise, which were based on partnership law and hence were not separate legal entities
that owned the assets of the business.18 The law of bailment was a more natural analogy in the
United States, since a bailee, just as a director, was entrusted with the management of assets
owned by other persons, while there was an actual trustee in a deed-of-settlement company,
who was the legal owner of the association’s property.19 These conceptual differences had
implications for the standard of care applicable to directors,20 but not the fact that directors, as
fiduciaries akin to either bailees or trustees, were subject to a duty of care. In the early duty
of care case Briggs v. Spaulding, for example, the US Supreme Court held that directors, “as
mandataries … are … bound to apply ordinary skill and diligence”.21
In their reliance on analogies with agents or bailees,22 the early approach in the United States
resembles the origins of the duty of care in civil law countries. The first European piece of
legislation to develop a general set of rules governing stock corporations and other business
associations, the French Code de Commerce of 1807, described the directors as mandataries
who were only responsible for carrying out their contractually agreed duties: “Les adminis-
trateurs ne sont responsables que de l’exécution du mandat qu’ils ont reçu”.23 In addition to
France, the Code de Commerce applied in some western states of the former Holy Roman
Empire from 1806–13 (the so-called Confederation of the Rhine). It also influenced the first
Germany-wide codification of stock corporation law, the General German Commercial Code
of 1861, and the corporate laws of other continental European states, for example Portugal and
Spain. These jurisdictions drew on agency law to require directors to discharge their duties
with appropriate care, but had nothing to say about duties not conferred on the directors as part
16
Re Exchange Banking Co (Flitcroft’s Case) (1882) 21 Ch. D. 519, 534–35. But see also In Re City
Equitable Fire Insurance Company [1925] Ch. 407, 426, where Romer J. adopted a more nuanced view
eschewing direct analogies. For a careful analysis of the extent to which courts relied on analogies to trust
law and the law of bailment, see Kershaw, supra note 3, 230–35.
17
Overend & Gurney v Gibb (1871–72) L.R. 5 H.L. 480, 494.
18
Kershaw, supra note 3, 176, 233–35.
19
Id. at 234.
20
Early case law in the United States was pulled in the direction of a gross negligence standard,
arguably informed by the bailment analogy, since the standard of care pursuant to the law of bailment
was gross negligence if the bailee acted gratuitously. See id. at 143–59, 174–96.
21
Briggs v. Spaulding, 141 U.S. 132, 148 (1891) (quoting Spering’s Appeal, 71 Pa. 11, 21 (1872)).
22
Id.
23
Code de Commerce [French Commercial Code], Art. 32.
of their mandate.24 Early European statutes, accordingly, focused only on the transgression
of the mandate by a director or the failure to comply with the law and the articles, but did
not describe the position of directors in terms of duties. They did not recognize obligations
that existed by virtue of the appointment to a position of power and were separate from the
contractually established obligations governing directorial behavior, and hence did not regard
directors as being subject to a general duty of care (or indeed a duty of loyalty25).26
The prevalent civil law approach changed over time, as commentators and policy makers
came to realize that a formulation of the duty of care that focused on the position of direc-
tors within the corporate hierarchy, rather than their contractual obligations, was necessary
to capture certain pathologies of the corporate form.27 For example, a sweeping reform of
German stock corporation law of 1884,28 which was adopted in response to widespread
corporate misconduct that had led to the first major stock exchange crash in German history,
replaced the contractual focus of the formulation of directorial behavioral expectations with
a positional focus. The General Commercial Code, as revised in 1884, provided that, “in
managing the corporation, the members of the management board have to exercise the care
of a diligent businessman”.29 The provision has not been amended substantially since 1884,
and the current Stock Corporation Act requires directors to “exercise the care of a diligent and
conscientious manager in managing the company”.30 A similar shift away from a contractual
understanding of directors’ duties occurred in other continental European systems at different
times, for example in France in the 1940s.31 Some remnants of the tripartite reference to the
24
For a contemporary comparative overview, see Achilles Renaud, Das Recht der
Actiengesellschaften 538–39 (1863).
25
The narrow conceptualization of the obligations of directors proved particularly obstructive to
the development of the duty of loyalty. Many continental European jurisdictions operated for a long
time (and to some degree still operate) with fragmentary rules, rather than an all-encompassing behav-
ioural standard, to address conflicts of interest. See Carsten Gerner-Beuerle & Michael Schillig,
Comparative Company Law 508, 565–69, 574–75 (2019).
26
See, e.g., Allgemeines Deutsches Handelsgesetzbuch [ADHGB] [General German Commercial
Code], May 31, 1861, Art. 241(2) (providing that “members of the management board who exceed the
limits of their mandate or act in contravention of the provisions of this title [of the Commercial Code] or
the articles of association are personally and jointly liable for the damage thus caused”).
27
See, for example, the criticism of the General German Commercial Code of 1861 by Renaud,
supra note 24, 537, who argued that the scope and content of the duties of directors should be deter-
mined by the law, articles, resolutions of the general meeting, and what was inherent in their position as
a director.
28
Gesetz, betreffend die Kommanditgesellschaften auf Aktien und die Aktiengesellschaften
[Act concerning Limited Partnerships by Shares and Joint Stock Corporations], Jul. 18, 1884,
REICHSGESETZBLATT [RGBl] 1884, no. 22, at 123 (Ger.).
29
Allgemeines Deutsches Handelsgesetzbuch [ADHGB] [General German Commercial Code], Art.
241(2) (emphasis by author). The standard of the “diligent businessman” is translated from “ordentlicher
Geschäftsmann”. The same standard of care applied to members of the supervisory board. Id. § 226(1).
30
Aktiengesetz [AktG] [Stock Corporation Act], Sept. 6, 1965, BUNDESGESETZBLATT TEIL I
[BGBl. I] at 1089, § 93(1) (Ger.). The slightly different formulation in comparison with the ADHGB
of 1884, which includes the word “conscientious”, was not intended to modify the applicable standard
of care. See Marcus Lutter, Der Aufsichtsrat im Wandel der Zeit – von seinen Anfängen bis heute in
Aktienrecht im Wandel II: Grundsatzfragen des Aktienrechts 389, 407 (Walter Bayer & Mathias
Habersack eds., 2007).
31
Carsten Gerner-Beuerle, Philipp Paech & Edmund Schuster, Study on Directors’ Duties
and Liability, Annex: Directors’ Duties and Liability in France, p. A304 (2013), available at
http://personal.lse.ac.uk/schustee/2013-study-reports_en.pdf.
director’s mandate (contract), the articles of association, and corporate law as sources of direc-
torial obligations is nevertheless still discernible in the formulation of the duties of directors
in some civil law jurisdictions. The relevant provision of the French Commercial Code, for
example, bears little resemblance to the duty of care of Anglo-American provenance: “The
directors … shall be individually or jointly and severally liable to the company or third parties
either for infringements of the laws or regulations applicable to public limited companies, or
for breaches of the memorandum and articles of association, or for management mistakes”.32
2.2 Standard of Care
Despite the different genesis of the duty of care and certain remaining differences in the
formulation of the codified duties, the standard of care across both common and civil law
countries is remarkably similar. Legal systems typically use variations of the “ordinary man”
or “ordinary businessman” to describe the standard of care expected of directors. In the
leading English duty of care case until the codification of the duties in 2006, City Equitable
Fire Insurance Company,33 Romer J held that directors were expected to act with “reasonable
care”, which was “to be measured by the care an ordinary man might be expected to take
in the circumstances on his own behalf”.34 The English common law standard, thus, was
ostensibly an objective standard. However, City Equitable infused this objective standard
with subjective elements distilled from earlier case law. Importantly, Romer J stated that “[a]
director need not exhibit in the performance of his duties a greater degree of skill than may
reasonably be expected from a person of his knowledge and experience”.35 It was unclear
how the reference to the defendant director’s subjective attributes was to be reconciled with
the objective benchmark and, in particular, whether lack of competence or experience was
liable to reduce the standard of care below that of the reasonably ordinary businessman.36 The
uncertainty was resolved in the 1990s with two High Court judgments that established a dual
objective-subjective standard, which was later codified in section 174 of the Companies Act
2006.37 Pursuant to section 174, directors are required to “exercise reasonable care, skill and
diligence”, which is defined as
the care, skill and diligence that would be exercised by a reasonably diligent person with … the
general knowledge, skill and experience that may reasonably be expected of a person carrying out the
functions carried out by the director in relation to the company, and … the general knowledge, skill
and experience that the director has.38
Delaware law and many other common law and civil law jurisdictions have adopted a standard
of conduct that closely conforms to the objective leg of the UK’s dual standard. The Delaware
32
Code de Commerce [French Commercial Code], Art. L225-251.
33
City Equitable Fire Insurance Company [1925] Ch. 407.
34
Id. at 428.
35
Id. (emphasis added).
36
For an overview of the discussion and references, see Gerner-Beuerle & Schillig, supra note
25, 477–78.
37
Norman v. Theodore Goddard (1992) B.C.C. 14; Re D’Jan of London Ltd. [1993] B.C.C. 646.
38
UK Companies Act 2006, s. 174(2).
Court of Chancery, in Re Walt Disney Co. Derivative Litigation,39 held that “[t]he fiduciary
duty of due care requires that directors of a Delaware corporation ‘use that amount of care
which ordinarily careful and prudent men would use in similar circumstances,’ and ‘consider
all material information reasonably available’ in making business decisions”.40 There is little
difference between this formulation and the “care of a diligent and conscientious manager”
under German law.41 In both jurisdictions, it is undisputed that the standard of care is objective,
but varies with the circumstances, including the type of company and industry, the financial
situation of the company, general market conditions, and the director’s role and responsibil-
ities within the corporate hierarchy. Furthermore, the requirement mentioned in Walt Disney
that directors “consider all material information reasonably available” is almost identical to
the expectation under the German Stock Corporation Act that they act based on “appropri-
ate information”,42 which has been held to mean that directors must avail themselves of all
available information, provided the costs are not disproportionate to the benefits.43 As a final
example from yet another legal tradition, we may consider the central provision of the French
law on the public stock corporation concerning the liability of directors, which was already
quoted above.44 According to this provision, directors are liable for so-called management
mistakes, in addition to breaches of the law and the memorandum and articles of association.
What constitutes a management mistake is measured against the benchmark of the care that
can reasonably be expected from a “prudent and diligent manager”.45 Again, the precise
behavioral expectations that are derived from this standard depend on the circumstances of
the case, in particular the director’s role in the company and the type of company.46 Thus, in
all four jurisdictions reviewed briefly in this section, the formulation of the standard of care is
largely interchangeable, in spite of the fact that these jurisdictions represent three distinct legal
traditions that embody distinct approaches to ordering the market economy.47 This does not
mean, of course, that the operation of the duty of care is interchangeable. We will come back
to this point in Section 3 below.
2.3 Business Judgment Rule
While a formal business judgment rule does not exist in many jurisdictions, the economic
problem discussed above—the inefficiencies created by the full review of business judg-
ments by a court with the benefit of hindsight and, possibly, without the necessary expertise
and experience48—has been addressed in some form by most legal systems. It is clear that
courts were acutely aware of this problem early on in the development of the duty of care, as
39
Walt Disney Co. Derivative Litig., 907 A.2d 693 (Del. Ch. 2005).
40
Id. at 749.
41
Aktiengesetz [AktG] [Stock Corporation Act], § 93(1) sentence 1.
42
Id., § 93(1), sentence 2.
43
Gerald Spindler, § 93 AktG, in Münchener Kommentar zum Aktiengesetz, vol. 2 para. 55
(Wulf Goette, Mathias Habersack & Susanne Kalss eds., 5th ed. 2019).
44
Code de Commerce [French Commercial Code], Art. L225-251.
45
Cour de cassation [Supreme Court for Judicial Matters], Mar. 30, 2010, 08-17841 (Crédit
Martiniquais), Revue des sociétés 2010, 304, note P. Le Cannu (Fr.).
46
Philippe Merle, Droit commercial: Sociétés commerciales (22nd ed. 2018), para. 458.
47
See supra, text accompanying note 13.
48
Supra, text accompanying notes 3–5.
illustrated by the following quote from one of the leading English cases from the nineteenth
century, Overend & Gurney v Gibb:49
I think it would be a very fatal error in the verdict of any Court of justice to attempt to measure … the
amount of prudence that ought to be exercised by the amount of prudence which the judge himself
might think, under similar circumstances, he should have exercised. I think it extremely likely that
many a judge, or many a person versed by long experience in the affairs of mankind, as conducted in
the mercantile world, will know that there is a great deal more trust, a great deal more speculation,
and a great deal more readiness to confide in the probabilities of things, with regard to success in
mercantile transactions, than there is on the part of those whose habits of life are entirely of a different
character. It would be extremely wrong to import into the consideration of the case of a person acting
as a mercantile agent in the purchase of a business concern, those principles of extreme caution which
might dictate the course of one who is not at all inclined to invest his property in any ventures of such
a hazardous character.
English courts have not formalized the considerations expressed in the above excerpt and
delineated the boundaries of a director’s business judgment, within which the courts will only
exercise limited review. However, implicitly, they apply two distinct standards of care that
have the effect of shielding a director’s good faith business decisions from judicial review.
The first is a good faith standard that applies to the content of a director’s decision. Directors
must act in what they consider, in good faith, to be in the best interest of the company.50 Good
faith is analyzed, in the absence of evidence of a director’s actual state of mind, based on the
reasons given for the challenged decision. While the case law is not entirely consistent and
courts tend to ask whether a particular course of action was “reasonable”, they also stress that
the relevant test is subjective. It does not involve an assessment of whether the decision was,
in the court’s view, objectively in the best interest of the company.51 This implies that the
test may be seen, more accurately, as a form of plausibility or rationality test. Courts will not
second-guess a business decision that is supported by rational business reasons, in the sense of
reasons that could have been regarded by at least some directors as suggesting that the decision
was in the company’s interest.52
The second standard is the one described in Section 2.2 above, which is now laid down in
section 174(2) Companies Act 2006: an ordinary due care standard that imposes heightened
behavioral expectations if the director has particular knowledge, skill or expertise. The duty
of care pursuant to section 174 Companies Act 2006 and the duty to act bona fide in the best
interest of the company perform complementary functions. The former focuses on the process
of decision-making. In arriving at a decision, directors are required to exercise the care, skill
and diligence that can be expected of a reasonably diligent person. The latter concerns the
quality of the decision itself, which must promote the success of the company.53
49
Overend & Gurney v Gibb (1871–72) L.R. 5 H.L. 480, 494–95.
50
See, e.g., Re Smith & Fawcett [1942] Ch 304. The duty to act in the best interest of the company
is now codified in s. 172 Companies Act 2006.
51
See, e.g. Regentcrest plc v. Cohen [2001] B.C.C. 494 at 513–14.
52
The standard has, accordingly, also been called the “any reasonable director” standard. See
Kershaw, supra note 3, at 47–58 for a careful and critical analysis of the terminology used by the courts
and inconsistencies in the case law.
53
“Success of the company” is the formulation used in s. 172(1) Companies Act 2006, which codi-
fies the common law duty to act in good faith in the interest of the company.
This bifurcated standard is already discernible in Overend & Gurney. The case concerned
the acquisition of a banking business that had initially been very successful, but, at the time
of the purchase, had incurred heavy losses and was balance sheet insolvent. The House of
Lords found that the purchase itself, while risky and “imprudent”,54 was not irrational. The
directors had restructured the debts of the business and relied on its continuing good reputa-
tion in their expectation that the company would improve its financial situation and become
again profitable.55 This was enough for the court to conclude that the directors had acted in
good faith, which, in turn, prevented the court from questioning whether they had exercised
sufficient “prudence”.56 The court then outlined a second, more stringent standard of review.
It explained that the directors were also under an obligation to inquire into “any circumstance
or transaction which ought to have been inquired into by the persons making [the challenged]
purchase” and ascertained “every fact that was to be ascertained” in the circumstances.57 This
is clearly a process-related inquiry that is to be distinguished from an assessment of the merits
of the business decision. In Overend & Gurney, no due-process failures had been alleged by
the complaint and the court, accordingly, rejected any liability of the defendant directors for
the decision to purchase the business.
Subsequent cases have not always been similarly clear in their differentiation of the two
standards.58 Nevertheless, where directors were found liable, this was generally (albeit not
always59) because they were not sufficiently well informed,60 unquestioningly and uncritically
complied with instructions and accepted information given by a corporate insider who engaged
in fraudulent activity,61 had failed to ensure that internal reporting and control systems worked
effectively,62 or had remained completely inactive.63 Furthermore, the process-related nature
of the duty is evidenced by the fact that directors are less likely to be held liable for a breach of
the duty of care if they take certain procedural precautions, such as obtaining expert advice.64
A more explicit delineation of an area of protected business judgement and a more formal
distinction between a standard of conduct and a standard of review can be found in the United
States. This chapter will focus on Delaware law, where the courts began to grapple with the
problem of determining the standard of review applicable to business decisions in the 1920s.
In a string of decisions, the Delaware courts established the rule that directors were presumed
to exercise their business judgment bona fide and in the best interest of the company.65 Further,
54
Overend & Gurney v. Gibb (1871–72) L.R. 5 H.L. 480 at 493.
55
Id. at 493–94.
56
Id. at 494–95.
57
Id. at 495.
58
See City Equitable Fire Insurance Company [1925] Ch. 407. See also Kershaw, supra note 3,
at 257–63, for a discussion of the influence that City Equitable had on corporate law scholarship and
policy debates in the UK before the duty of care was codified in 2006 (arguing that City Equitable sowed
“dissonance and confusion about the scope of the care standard”, id. at 263).
59
See Roberts v. Frohlich [2012] B.C.C. 407.
60
See, e.g., Re D’Jan of London Ltd. [1993] B.C.C. 646; Raithatha v. Baig [2017] EWHC 2059.
61
Weavering Capital (UK) Ltd. v. Dabhia [2013] EWCA Civ. 71.
62
Re Barings plc and others (No 5) [1999] 1 BCLC 433.
63
Lexi Holdings Plc v. Luqman [2007] EWHC 2652.
64
Kershaw, supra note 3, at 28081.
65
Allied Chem. & Dye Corp. v. Steel & Tube Co., 122 A. 142 (Del. Ch. 1923) (speaking of “[a]
presumption which the law would ordinarily accord in favor of the fairness of [the] official acts [of
directors]” (i.e. their business judgment), id. at 146).
they held that the presumption did not apply if the directors were either interested in the
challenged transaction66 or the circumstances of the transaction (for example the price paid
for the assets of a corporation) were “so manifestly unfair as to indicate fraud”.67 The latter
was the case if the directors’ actions were “so unreasonable as to be removed entirely from
the realm of the exercise of honest and sound business judgment”.68 These decisions relied
on older, non-Delaware precedents that had sketched an area of business dealings—typically
characterized, as a minimum, by the absence of fraud or bad faith, illegality, and conflicts of
interest—that was regarded to be beyond judicial control.69 Similar to the reasoning of the
House of Lords in Overend & Gurney, the rationale given for such judicial restraint was that
intervening in “[q]uestions of policy of management”, which were left to the honest decision
of the directors, would amount to “substitut[ing] the judgment and discretion of others in the
place of those determined on by the scheme of incorporation”.70
In the first decades of its development, the Delaware approach was not yet known under
the name “business judgment rule”, and the precise contours of the rule were not yet well
established.71 Two decisions of the Delaware Supreme Court from the first half of the 1980s
gave the business judgment rule its modern form: Zapata Corp v. Maldonado72 and Aronson v.
Lewis.73 In Aronson, the Supreme Court described the business judgement rule as “a presump-
tion that in making a business decision the directors of a corporation acted on an informed
basis, in good faith and in the honest belief that the action taken was in the best interests of
the company”.74 Furthermore, the protections of the business judgment rule “can only be
claimed by disinterested directors … [T]his means that directors can neither appear on both
sides of a transaction nor expect to derive any personal financial benefit from it in the sense of
self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders
generally”.75 The burden is on the plaintiff to rebut the presumption, in which case the burden
of proof shifts (generally76) to the defendant director to show the entire fairness of the chal-
lenged decision.77 On the other hand, if the three conditions—acting on an informed basis, in
good faith, and without a conflict of interest—are met, the courts will not engage in a review
66
Id. at 146.
67
Robinson v. Pitt. Oil Ref. Corp., 126 A. 46, 48 (Del. Ch. 1924).
68
Id. at 49.
69
For example, Allied Chem. & Dye Corp. v. Steel & Tube Co., 120 A. 486, 493 (Del. Ch. 1923),
relied on the New Jersey case Hodge v. U.S. Steel Corp., 64 N.J. Eq. 807 (N.J. Ct. Err. & App. 1903).
70
Ellerman v. Chi. J.R. & U.S.Y. Co., 49 N.J. Eq. 217, 232 (N.J. Ch. 1891). A similar explanation is
given by U.S. Steel Corp., 64 N.J. Eq. at 812.
71
The diffusion of the term “business judgment rule” is traced by Kershaw, supra note 3, at 80–81
(identifying Nadler v. Bethlehem Steel Corp., 154 A.2d 146 (Del. Ch. 1959), as the first case employing
the term).
72
430 A.2d 779 (Del. 1981).
73
473 A.2d 805 (Del. 1984).
74
Id. at 812.
75
Id.
76
Unless a conflict of interest has been “cleansed” pursuant to Del. Gen. Corp. Law, § 144 (1972).
77
In re Walt Disney Co. Derivative Litig., 907 A.2d, 693, 747 (Del. Ch. 2005).
of the quality of the business decision (with one very limited exception, the so-called waste
claim or irrationality review).78
This basic operational framework of the business judgment rule has remained in place,
although some of the conditions on which the presumption is based have shifted since Aronson.
Importantly, while Aronson identified the applicable standard of care on which director liabil-
ity was predicated as a gross negligence standard,79 the duty-of-care limb of the presumption
(that is, the requirement to act on an informed basis) has become all but irrelevant in the wake
of the controversial Delaware Supreme Court decision of Smith v Van Gorkom.80 First, the
Delaware courts interpret gross negligence in the corporate context in a demanding manner
that conflates rationality, bad faith and gross negligence.81 They define gross negligence as a
“reckless indifference to or a deliberate disregard of the whole body of stockholders”,82 involv-
ing actions “without the bounds of reason”,83 or “a wide disparity between the process the
directors used … and that which would have been rational”.84 Second, in order to counteract
the risk that corporations incorporate elsewhere to evade the heightened risk of liability sug-
gested by Van Gorkom, the Delaware legislature included a provision in the Delaware General
Corporation Law enabling companies to exclude liability of a director for monetary damages
for a breach of the duty of care, provided the director did not act in bad faith.85 Furthermore,
subsequent decisions subsumed good faith under the duty of loyalty. Lack of good faith does
not, by itself, establish liability for a breach of a fiduciary duty.86 Rather, bad faith may be,
in some circumstances, a necessary condition for liability, and where it is, liability may then
arise as a result of a breach of the duty of loyalty.87 Importantly, this has been held to be the
case where director oversight liability is concerned.88 As a consequence, under Delaware law,
qualitatively different conduct gives rise to liability for director action and failure to act. The
leading case on oversight liability, Caremark,89 held that lack of good faith as a necessary con-
dition for director oversight liability required “a sustained or systematic failure of the board to
78
For a definition of waste, see In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 74 (Del. 2006):
“To recover on a claim of corporate waste, the plaintiffs must shoulder the burden of proving that the
exchange was “so one sided that no business person of ordinary, sound judgment could conclude that the
corporation has received adequate consideration.” A claim of waste will arise only in the rare, “uncon-
scionable case where directors irrationally squander or give away corporate assets.” This onerous stand-
ard for waste is a corollary of the proposition that where business judgment presumptions are applicable,
the board’s decision will be upheld unless it cannot be “attributed to any rational business purpose”.
79
Aronson v. Lewis, 473 A.2d 805, 812 (1984).
80
488 A.2d 858 (Del. 1985).
81
William T. Allen, Jack B. Jacobs & Leo E. Strine, Realigning The Standard Of Review Of Director
Due Care With Delaware Public Policy: A Critique Of Van Gorkom And Its Progeny As a Standard Of
Review Problem, 96 Nw. U. L. Rev. 449, 453 (2002).
82
Tomczak v. Morton Thiokol, Inc., CIV.A. No. 7861, 1990 WL 42607, at 12 (Del. Ch. 1990)
(quoting Allaun v. Consolidated Oil Co., 147 A. 257, 261 (Del. Ch. 1929); see also Gimbel v. Signal
Cos., 316 A.2d 599, 615 (Del. Ch. 1974)); In re Walt Disney Co. Derivative Litig., 907 A.2d at 750 (Del.
Ch. 2005).
83
Walt Disney, id.
84
Guttman v. Huang, 823 A.2d 492, 507 n.39 (Del. Ch. 2003) (emphasis in the original).
85
Del. Gen. Corp Law, § 102(b)(7) (2019).
86
Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).
87
Id.
88
Id. at 369.
89
In re Caremark Int’l, 698 A.2d 959 (Del. Ch. 1996).
exercise oversight—such as an utter failure to attempt to assure a reasonable information and

reporting system exists”.90 This is, as the Court of Chancery noted in Caremark, “a demanding
test of liability”, but it was thought to be in the economic interest of the shareholders.91 We will
come back to this rationale in Section 3.2 below.
Disregarding the separate standard of review for oversight liability, Delaware and UK law
operate largely in parallel, in spite of the absence of an explicit business judgement rule in the
UK. The quality of a business decision is shielded from judicial review in both jurisdictions
unless the plaintiff can show bad faith. Lack of good faith will lead to liability under the
further conditions of section 172 Companies Act 2006 in the UK and the entire fairness test in
Delaware. The process of decision-making is ostensibly assessed against different standards
of conduct: ordinary negligence (and heightened behavioral expectations in the case of special
knowledge, skill or experience) in the UK and gross negligence, interpreted as recklessness
or irrationality, in Delaware. However, it has been observed that British courts apply the
objective limb of section 174(2) Companies Act 2006 so restrictively, and perform a skills
adjustment pursuant to the subjective limb of the provision so reluctantly, that the standard of
care is, in practice, close to the gross negligence standard of US jurisdictions.92
The deployment of a good faith standard to review the quality of business decisions is
less common in civil law jurisdictions, although the risk of liability is often not higher (and
typically lower) than in the United States and in Britain, mostly for procedural reasons.93
A good example of the less well developed distinction between decision-making process
and decision quality (and indeed between the duty of care and the duty of loyalty) is France,
where the notion of the company’s interest (l’intérêt social) guides the courts’ assessment of
liability for management mistakes.94 Directors are responsible for all acts or omissions that are
contrary to the interests of the company.95 The infusion of considerations of the company’s
interest into the duty of care, something that, as we have seen, would be a matter for section
172 Companies Act 2006 in the UK, naturally invited the French courts to review not only
the process of director decision-making, but also the quality of their decisions. Examples of
management mistakes that gave rise to liability, accordingly, include transactions that were
excessively risky, for example the ill-advised expansion of business operations without proper
financing,96 the distribution of extraordinary dividends financed out of reserves during a time
of contracting business operations,97 and the granting of excessive executive compensation.98
90
Id. at 971.
91
Id.
92
Kershaw, supra note 3, at 281.
93
Carsten Gerner-Beuerle & Edmund-Philipp Schuster, The Evolving Structure of Directors’ Duties
in Europe, 15 Eur. Bus. Org. L. Rev. 191, 214–22 (2014).
94
See Code de Commerce [French Commercial Code], Art. L225-251. See also supra, text accom-
panying notes 44–45. On the conflation of the duties of care and loyalty in French corporate law, see also
Gerner-Beuerle & Schillig, supra note 25, 574–75.
95
Jean-Paul Valuet & Alain Lienhard, Code des Sociétés (34th ed. 2018), Com. Art. L225-251,
Commentaire, I. Principe.
96
Cour de cassation [Supreme Court for Judicial Matters], Jan. 3, 1995, 91-18109, Bull. Joly
Sociétés 1995, 432 (Nasa Electronique), note A. Couret (Fr.).
97
Cour de cassation [Supreme Court for Judicial Matters], Oct. 25, 2011, 10-23671, Bull. Joly
Sociétés 2012, 243 (Sté Sorim), note D. Poracchia (Fr.).
98
Cour d’appel [Regional Court of Appeal] Rennes, Dec. 13, 1995, 86-19215, Droit des sociétés
1996, no. 195, note Y. Chaput (Fr.).
Notwithstanding these examples, courts in many civil law jurisdictions exhibit restraint in
reviewing good-faith business decisions.99 Such restraint may be informal, in the sense of an
acknowledgement that directors must be allowed to take risks inherent in economic activity
and, hence, should benefit from an area of discretion that will not be fully reviewed by the
courts,100 or formalized as a rule modelled after the Delaware business judgment rule. As
mentioned, the latter approach is increasingly common, and business judgment rules similar to
the Delaware rule can now be found in seven Member States of the EU belonging to the civil
law tradition.101 Similar to Delaware law, the continental European variants of the business
judgment rule apply if several threshold conditions are satisfied, which typically include the
requirement that the challenged business decision was based on appropriate information, there
was no conflict of interest, and the defendant director reasonably believed that the decision
was in the best interest of the company.102
In the following paragraphs, we will examine the German version of the business judgment
rule in more detail, which was the first such rule adopted in Europe in 2005103 and which will
form the basis for an assessment of the influence of narratives in Section 3 below. The rule
is laid down in § 93(1) and (2) Stock Corporation Act, which are here reproduced in relevant
parts:104
(1) … A management decision shall be deemed not to be a violation of this duty if the member of
the management board reasonably believed that he acted in the best interest of the company and
the decision was based on appropriate information. …
(2) Members of the management board who violate their duties shall be jointly and severally liable
to the company for the resulting damage. They shall bear the burden of proving that they exer-
cised the care of a diligent and conscientious manager. …
The German business judgment rule applies if the following threshold conditions are met:
(1) The defendant director must have acted in the best interest of the company105 and (2) the
decision was based on appropriate information.106 Furthermore, even though not explicitly
mentioned, because it was considered to be self-evident, challenged conduct is only protected
99
For a more detailed discussion, including references, see Gerner-Beuerle & Schuster, supra note
93, 205–06.
100
Id. at 205.
101
Supra note 7.
102
See Gerner-Beuerle & Schuster, supra note 93, at 205, for references.
103
Gesetz zur Unternehmensintegrität und Modernisierung des Anfechtungsrechts [UMAG]
[Law on Corporate Integrity and Modernization of the Action of Annulment], Sept. 22, 2005,
BUNDESGESETZBLATT TEIL I [BGBl I] at 2802, Art. 1, no. 1a (Ger.). The codified business judg-
ment rule, in turn, is based on a decision of the Bundesgerichtshof [BGH] [Federal Court of Justice], Apr.
21, 1997, ENTSCHEIDUNGEN DES BUNDESGERICHTSHOFES IN ZIVILSACHEN [BGHZ] 135,
244 (ARAG/Garmenbeck) (Ger.), which adopted principles resembling the business judgment rule.
104
The translation is from Gerner-Beuerle & Schillig, supra note 25, 506–07. Aktiengesetz
[AktG] [Stock Corporation Act], § 93(1), second sentence codifies the business judgment rule, and §
93(2) allocates the burden of proof.
105
Business decisions are in the best interest of the company if they “further the long-run profita-
bility and competitiveness of the company and its products or services”, Gesetzesentwurf [Draft Law],
DEUTSCHER BUNDESTAG: DRUCKSACHEN [BT-Drs.] 15/5092, at 11 (Ger.).
106
What is appropriate depends on the available time, potential market pressures, the importance of
the decision for the company, and generally accepted views of what constitutes good managerial practice,
id. at 12.
by the business judgment rule if (3) it is not tainted by bad faith and (4) there is no conflict
of interest.107 The director bears the burden of proving that these conditions are met, since the
general allocation of the burden of proof pursuant to § 93(2), sentence 2 also applies to the
threshold conditions.
On a cursory reading, the German business judgment rule follows closely its Delaware
counterpart. The three prerequisites of the Delaware business judgment rule—duty of care,
loyalty, and good faith—are all present. In two respects, the German version is more stringent
(from the perspective of the director): in addition to the three conditions just mentioned,
a director must also have reasonably believed that he or she acted in the best interest of the
company. Furthermore, the burden of proof is on the director, whereas the plaintiff has to
rebut the “presumptions” of the business judgment rule in Delaware. In two other respects, it
is more lenient: The business judgment rule applies if the defendant director could reasonably
assume that the threshold conditions of the rule were satisfied. Thus, the law does not provide
for a negligence or gross negligence standard, but asks whether the director’s subjective
assessment was reasonable in light of the circumstances of the case.108 Second, if the conduct
of a director is protected by the German business judgment rule, it will not be reviewed any
further by the court. In this sense, the presumption of compliance with the duty of care that
is established by the business judgment rule is non-rebuttable. In the US, on the other hand,
courts will engage in a limited substantive review of well-informed business decisions adopted
in good faith and without a conflict of interest and inquire whether a decision was “irrational”
or constituted a “waste of corporate assets”.109 However, whether these differences are of
any consequence may be doubted. The waste claim plays virtually no role in practice and
the benchmark of “reasonable belief” under German law is similar to the standard of care
that applies in Delaware if the restrictive interpretation of gross negligence by the courts and
the possibility to limit liability to bad faith in the certificate of incorporation are taken into
account.110 Therefore, in terms of substance (disregarding procedural questions such as the
allocation of the burden of proof), it is difficult to hold that there is a meaningful difference
between the Delaware and German business judgment rules. However, an analysis not only of
the codified German rule, but also its application by the courts, may lead to a different conclu-
sion. We turn to this question next.
3. LOCAL NARRATIVES AND THE MULTIPLICITY

OF MEANING: A COMPARISON OF THE BUSINESS
JUDGMENT RULE IN DELAWARE AND GERMANY
3.1 Multiplicity of Meaning
The multiplicity of meaning potentially inherent in similarly formulated legal institutions

can be illustrated with the business judgment rule cases brought in the wake of the global
107
Id. at 11.
108
For example, the assessment is unreasonable where a director “misjudges the risks associated with
a managerial decision in an entirely irresponsible way”. Id.
109
Supra, text accompanying note 78.
110
financial crisis in Delaware and Germany. These cases concerned the liability of executive
and non-executive directors of financial institutions who had accepted excessive exposures
to the subprime mortgage market and caused significant losses to their institutions, which
necessitated, in some cases, a bailout by the government.111 The decisions present useful case
studies, because in most of the cases, there was no evidence of bad faith,112 and the claim that
the defendant directors had breached their duty of care rested mainly on the allegation that
they had engaged in excessive risk-taking and ignored warning signs that the CDO market was
overheating.
In Delaware, the first case addressing investment decisions made in the lead-up to the sub-
prime mortgage crisis was In re Citigroup Inc. Shareholder Derivative Litigation,113 decided
by the Delaware Court of Chancery in 2009. The plaintiffs claimed that the defendant directors
and officers of Citigroup had breached their fiduciary duties by investing in collateralized debt
obligations (CDOs) and accumulating an exposure of $55 billion to the subprime mortgage
market. The plaintiffs further alleged that the directors continued to invest in spite of mounting
warning signs that market conditions were worsening, such as the bankruptcy of subprime
lenders or the downgrade of mortgage backed securities by Moody’s and Standard and
Poor’s.114 Applying the Caremark standard for directorial neglect (here the failure to monitor
risk exposure),115 the court observed:116
To the extent the Court allows shareholder plaintiffs to succeed on a theory that a director is liable
for a failure to monitor business risk, the Court risks undermining the well settled policy of Delaware
law by inviting Courts to perform a hindsight evaluation of the reasonableness or prudence of direc-
tors’ business decisions. Risk has been defined as the chance that a return on an investment will be
different than expected. The essence of the business judgment of managers and directors is deciding
how the company will evaluate the trade-off between risk and return. Businesses—and particularly
financial institutions—make returns by taking on risk; a company or investor that is willing to take
on more risk can earn a higher return. Thus, in almost any business transaction, the parties go into the
deal with the knowledge that, even if they have evaluated the situation correctly, the return could be
different than they expected. It is almost impossible for a court, in hindsight, to determine whether
the directors of a company properly evaluated risk and thus made the “right” business decision. …
It is well established that the mere fact that a company takes on business risk and suffers losses—
even catastrophic losses—does not evidence misconduct, and without more, is not a basis for per-
sonal director liability. That there were signs in the market that reflected worsening conditions and
suggested that conditions may deteriorate even further is not an invitation for this Court to disregard
111
See In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009); Am. Int’l
Grp., Inc. v. Greenberg, 965 A.2d 763 (Del. Ch. 2009); In re Goldman Sachs Grp., Inc. S’holder Litig.,
CIV.A. No. 5215–VCG, 2011 WL 4826104 (Del. Ch. Oct. 12, 2011); Oberlandesgericht [OLG] [Higher
Regional Court] Düsseldorf, Dec. 9, 2009, 6 W 45/09, BeckRS 2010, 532 (IKB) (Ger.).
112
With the exception of American Int’l Grp., where the court found evidence of “pervasive, diverse,
and substantial financial fraud involving managers at the highest levels of AIG”, 965 A.2d at 776.
Consequently, the court held that it was inferable that the defendants “knew that AIG was engaging in
illegal conduct”, and hence acted in bad faith. Id. at 782.
113
In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009).
114
Id. at 115.
115
The court expressed some doubts as to whether this was indeed a Caremark claim, or the essence
of the plaintiffs’ pleadings was rather to hold the defendant directors accountable for business decisions,
namely the bank’s investment strategy, see the discussion Id. at 123–24. The court nevertheless engaged
in a substantive analysis of the merits of the Caremark claim, as presented by the plaintiffs.
116
Id. at 126–31.
the presumptions of the business judgment rule and conclude that the directors are liable because they
did not properly evaluate business risk. …
The excerpt bears the hallmarks of what can be called an economic narrative that substantiates
many recent duty of care decisions in Delaware. The court refers to hindsight bias to justify
judicial deference and employs a finance-theory inspired (albeit somewhat non-technical)
definition of risk and the risk-return trade-off. The excerpt also underlines the force of the
protections of the business judgment rule. If the rule applies, which means in the case of
a Caremark claim117 that the plaintiffs did not succeed in establishing bad faith, no liability will
attach to the directors’ decisions, even decisions that entail “catastrophic losses”. In Citigroup,
accordingly, all claims against the directors based on the CDO transactions failed.
A similar line of reasoning can be observed in a second high-profile case that dealt with
excessive risk taking during the global financial crisis, In re Goldman Sachs Group, Inc.
Shareholder Litigation.118 In this case, the plaintiffs advanced, again to no avail, the Caremark
claim from a different angle. They alleged that Goldman’s compensation structure, which
linked compensation to the company’s performance and awarded management a significant
proportion of net revenue,119 gave an incentive to engage in risky trading practices and max-
imize short-term profits. It thus led, in the words of the plaintiffs, to “unethical and illegal
practices”, and the directors “failed to satisfy their oversight responsibilities with regard to
those practices”.120 The court examined the plaintiffs’ claim under two aspects: the “original”
Caremark claim, which involved the failure to oversee conduct that led to violations of the
law, and the Citigroup version of the claim, which is in some sense a product of the subprime
mortgage crisis in that it seeks to hold directors responsible for not identifying and addressing
business risks that lead to substantial losses. The original Caremark claim failed because the
plaintiffs’ identification of one possibly illegal trade, Goldman’s Abacus 2007–AC1 transac-
tion, did not cross the threshold of “a sustained or systematic failure of the board to exercise
oversight” that had been established by Caremark.121 As regards the “business risk” version of
the Caremark claim, the court reiterated that such a claim could only succeed if the plaintiffs
showed a conscious failure to implement any sort of risk monitoring system.122 In the case at
hand, in contrast, the plaintiffs had based their claim on arguments that would have required
a “substantive evaluation by a court of a board’s determination of the appropriate amount of
117
Or if the company has made use of Del. Gen. Corp. Law, § 102(b)(7).
118
In re Goldman Sachs Grp., Inc. S’holder Litig., CIV.A. No. 5215-VCG, 2011 WL 4826104 at *1
(Del. Ch. 2011).
119
In the years 2007–09, total compensation paid by Goldman to its employees ranged between 36
percent and 48 percent of total net revenue. Id. at *3.
120
Id. at *2. The plaintiffs also alleged that the directors breached their duty of care by approving the
compensation structure and that the payments under the compensation structure constituted corporate
waste. These two claims also failed.
121
See id. at *21.
122
The court emphasized that plaintiffs would be unlikely to succeed on a “business risk” Caremark
claim, requiring that “the plaintiff would essentially have to show that the board consciously failed to
implement any sort of risk monitoring system or, having implemented such a system, consciously dis-
regarded red flags signaling that the company’s employees were taking facially improper, and not just
ex-post ill-advised or even bone-headed, business risks. Such bad-faith indifference would be formidably
difficult to prove.” Id. at *22, n.217.
risk … [that is, a decision that] plainly involve[s] business judgment”, which was outside the
remit of a court.123
These holdings are diametrically opposed to the treatment of the problem of excessive
risk-taking in Germany. The case that discusses the problem in greatest detail, a decision of
the Higher Regional Court Düsseldorf from 2009, IKB, concerned the near-insolvency of
a German lender that focused on the provision of loans to medium-sized enterprises, IKB
Deutsche Industriebank.124 Owing to its investments in collateralized debt obligations backed
by US subprime mortgages, IKB suffered heavy losses in the aftermath of the financial
crisis and had to be bailed out by the German government. Minority shareholders requested
the appointment of an auditor to investigate potential breaches of the duty of care, arguing,
inter alia, that the directors had violated their duties by creating an exposure to the subprime
CDO market that had amounted at one point to 47 per cent of the bank’s total business
volume, leading to excessive, undiversified risk. They further alleged that the supervisory
board had failed to monitor the management board’s investment strategy properly and had
not addressed the bank’s skewed risk exposure. On appeal, the Higher Regional Court found
that the members of both the management board and the supervisory board were liable for
a breach of the duty of care. The court’s arguments deserve close attention. First, because
of the difficulties in assessing the risks associated with multi-layered structured finance
products, the court doubted whether directors could ever be fully informed when investing in
securitized product.125 Second, irrespective of any failure to be fully informed, the court held
that “[n]o management board acts in compliance with the duty of care if they take risks that
will render the company insolvent if they materialise” and relate to “foreign, largely unknown
and ultimately uncontrollable securities”.126 The court did not explicitly identify the threshold
condition on which it based the conclusion that the protections of the business judgment rule
did not apply. However, it stressed that the “knowing” acceptance of “excessive risks”127 led,
in the present case, to a breach of duties, thus implying that the business judgment rule was
inoperable because the directors could not have reasonably believed that they were acting in
the best interest of the company, or they had acted in bad faith. Given that the directors were
not protected by the business judgment rule, the court went on to discuss whether their invest-
ment decisions were compatible with the actions of a prudent and conscientious manager and
concluded that they were not, because the directors had failed to follow basic principles of
prudent banking, such as diversifying the investment portfolio sufficiently well and ensuring
that concentration risk was manageable.128
Of course, there are several relevant factual differences between IKB on the one hand
and Citigroup and Goldman Sachs on the other. Most importantly, IKB is a medium-sized
bank with clearly specified objects, notably the purpose of serving the financing needs of
123
Id. at *22.
124
Oberlandesgericht [OLG] [Higher Regional Court] Düsseldorf, Dec. 9, 2009, 6 W 45/09, BeckRS
2010, 532 (IKB) (Ger.).
125
Id. at II 2 b) bb) aaa) (1).
126
Id. at II 2 b) bb) bbb). Translation from Gerner-Beuerle & Schillig, supra note 25, at 518.
127
BeckRS 2010, 532 at II 2 b) bb): “[I] it is reasonable to assume that the respondent’s management
board violated its duties grossly because the board did not act on the basis of sufficient information and
knowingly took excessive risks, in particular concentration risks”. Translation from Gerner-Beuerle &
Schillig, supra note 25, at 517.
128
BeckRS 2010, 532 at II 2 b) bb) bbb).
medium-sized enterprises. It may therefore be speculated whether IKB would have been
decided differently from Citigroup and Goldman Sachs in Delaware. Nevertheless, the dif-
ference in outcome in the three cases is striking, and, importantly, it is not related to any of
the legal differences in the formulation of the German and Delaware business judgment rules
identified above,129 but to elements identical in the two jurisdictions: the fact that the business
judgment rule does not protect conduct in violation of the law or the articles or carried out in
bad faith. Consequently, on the assumption that the factual differences are not sufficient in
explaining the diverging outcomes, it can be concluded that the interpretive approaches of the
two courts render the textual identity of most elements of the German and Delaware business
judgment rules, at least in these particular cases, irrelevant. The next section offers a tentative
explanation of why the interpretive approaches of the courts may differ.
3.2 Local Narratives
The court in Citigroup, as in many other recent duty of care decisions, embraced an economic
narrative to justify the understanding of the business judgment rule underlying the judgment.
The perhaps most eloquent example of this economic narrative in Delaware is Chancellor
Allen’s opinion in In re Caremark Intern. Inc. Derivative Litigation,130 where the Chancellor
qualified earlier case law131 to apply the protections of the business judgment rule also to
director neglect or failure to monitor, and indeed extended the protections in comparison with
cases involving director action.132 In the opinion of the Chancellor, the policy rationale of the
business judgment could be summarized as follows:133
What should be understood, but may not widely be understood by courts or commentators who are
not often required to face such questions, is that compliance with a director’s duty of care can never
appropriately be judicially determined by reference to the content of the board decision that leads to
a corporate loss, apart from consideration of the good faith or rationality of the process employed.
That is, whether a judge or jury considering the matter after the fact, believes a decision substantively
wrong, or degrees of wrong extending through “stupid” to “egregious” or “irrational”, provides no
ground for director liability, so long as the court determines that the process employed was either
rational or employed in a good faith effort to advance corporate interests. To employ a different
rule—one that permitted an “objective” evaluation of the decision—would expose directors to sub-
stantive second guessing by ill-equipped judges or juries, which would, in the long-run, be injurious
to investor interests. Thus, the business judgment rule is process oriented and informed by a deep
respect for all good faith board decisions.
Noteworthy is also the following footnote from the above excerpt:134
The vocabulary of negligence while often employed, … is not well-suited to judicial review of board
attentiveness, … especially if one attempts to look to the substance of the decision as any evidence of
129
130
In re Caremark Int’l, 698 A.2d 959 (Del. Ch. 1996).
131
See, e.g., Rabkin v. Philip A. Hunt Chemical Corp., CIV.A. No. 7547, 1987 WL 28436, at *1 (Del.
Ch. 1987) (holding that ordinary negligence is the appropriate standard of liability in director neglect
claims).
132
133
In re Caremark Int’l, 698 A.2d at 967–68 (emphases in the original).
134
Id. at 967, n.16 (emphasis in the original).
possible “negligence.” Where review of board functioning is involved, courts leave behind as a rele-
vant point of reference the decisions of the hypothetical “reasonable person”, who typically supplies
the test for negligence liability. It is doubtful that we want business men and women to be encouraged
to make decisions as hypothetical persons of ordinary judgment and prudence might. The corporate
form gets its utility in large part from its ability to allow diversified investors to accept greater
investment risk. If those in charge of the corporation are to be adjudged personally liable for losses
on the basis of a substantive judgment based upon what persons of ordinary or average judgment and
average risk assessment talent regard as “prudent” “sensible” or even “rational”, such persons will
have a strong incentive at the margin to authorize less risky investment projects.
Similar rationalizations of the business judgment rule, which adopt concepts of economic
theory, behavioral economics and corporate finance, such as utility maximization, incentives,
hindsight bias, risk aversion, diversification, or value of an investment project, can be found
in an increasing number of decisions since the 1980s.135 The contrast in the style of judicial
reasoning with the foundational decisions on the business judgment rule in Delaware is strik-
ing. Before the 1990s, not a single Delaware case discussed investor diversification in the
context of the business judgment rule.136 In only one case, a decision from 1988, the Delaware
Court of Chancery referred to the second-guessing of good-faith business decisions to argue
that judicial intervention would discourage the socially efficient “allocation of assets and
… assumption of economic risk by those with [the] skill and information [to evaluate such
risk]”.137 Since 1996, the year in which Caremark was decided,138 economic reasoning as a jus-
tification for the business judgement rule has proliferated. The dangers of second-guessing
good-faith business decisions were discussed in 55 business judgment rule cases,139 and the
economic consequences of investor diversification in 17 cases.140
This shift in the narrative underpinning the business judgment rule coincided with a trans-
formation of the dominant approach in legal thought, initially in the United States, but later
also in the UK and other countries, to conceptualizing the business corporation and interpreting
central elements of the regulatory framework governing the corporate economy, such as share-
holder rights, fiduciary duties, appraisal rights, takeover regulation, mandatory disclosure in
financial markets, and the regulation of insider dealing. This new approach, epitomized by the
135
One of the earliest decisions using hindsight bias, risk aversion and portfolio theory to justify
the business judgment rule, albeit not from a Delaware court, is Joy v. North, 692 F.2d 880 (2d Cir.
1982) (drawing heavily on a newly published law and finance textbook, William Klein, Business
Organization and Finance (1980)).
136
According to a Westlaw search of all Delaware state cases using the search algorithm (diversif! /p
investor!) & “business judgment rule”.
137
Solash v. Telex Corp., CIV.A. No. 9518, 1988 WL 3587, at *1 (Del. Ch. 1988). The results were
generated by a Westlaw search of all Delaware state cases using the search algorithm (hindsight risk +1
avers! second +1 guess!) & “business judgment rule”. In a number of further cases, the courts argued
that it would be inappropriate to second-guess business decisions, without, however, considering the
effects of such second-guessing on the risk attitudes of directors, see, e.g., Freedman v. Rest. Assocs.
Indus., Inc., CIV.A. No. 9212, 1987 WL 14323, at *1 (Del. Ch. 1987); and Thompson v. Enstar Corp.;
Huffington v. Enstar Corp., 509 A.2d 578 (Del. Ch. 1984).
138
As well as Gagliardi v. TriFoods, 683 A.2d 1049 (Del. Ch. 1996).
139
The results were generated by a Westlaw search of all Delaware state cases using the search
algorithm (second +1 guess! /p “business judgment rule”) (not counting Caremark and Gagliardi v.
TriFoods).
140
The results were generated by a Westlaw search of all Delaware state cases using the search algo-
rithm (diversif! /p investor!) & “business judgment rule” (not counting Caremark).
writings of Frank H. Easterbrook and Daniel R. Fischel,141 drew heavily on recent innovations
in economic theory and financial economics in order to develop a theory of corporate law
based on an efficiency calculus, sometimes simply referred to as “agency theory”.142 It is not
the goal of this contribution to establish causality between the normative proposals of agency
theory and the outcomes of judicial decisions and reform initiatives by policy makers. The
important point is that they have plausibly had an impact on the nature of the legal discourse,
in particular the role that economic reasoning plays in this discourse.
This influence was absent in Germany, where the legal discourse has only very recently
begun to absorb agency cost theory, and economic reasoning does not feature prominently in
court decisions. Instead, in order to unearth a potential explanation for the different approach
of the German courts, it is necessary to go back to the reforms of corporate law of 1884, which,
as discussed above, introduced important changes to the formulation of the duty of care and
established a regulatory framework for the public stock corporation that is, in its general tenets,
still in force today.143 The reforms have to be seen against the backdrop of the stock exchange
crash, in response to which they were adopted. In the years before the crash, the incorporation
regime in Germany had been liberalized and the law had, for the first time, allowed incorpora-
tion by simple registration.144 The liberalization of the incorporation regime led to a dramatic
increase in incorporations, including of many companies that were incorporated merely with
a view to raising funds for the promoters, without having a viable business model.145 In the
crash, many of these companies, as well as a large number of financial institutions and other
listed companies, became insolvent, the market capitalization of German stock corporations
decreased by about 46 percent, and the real economy contracted considerably, leaving both the
public and policy makers deeply suspicious of speculative activity and capital markets more
generally.146
141
See, Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate
Law (1991).
142
Important economic building blocks of the emerging agency theory in corporate law were the
efficient market hypothesis, which posits (in its semi-strong form) that in efficient capital markets all
publicly available information is incorporated quickly into securities prices (Eugene F. Fama, Efficient
Capital Markets: A Review of Theory and Empirical Work, 25 J. Fin. 383 (1970)), the Coase-theorem,
which holds that in the absence of transaction costs the initial allocation of rights is irrelevant because the
parties will negotiate to bring about Pareto-efficient outcomes (Ronald H. Coase, The Problem of Social
Cost, 3 J.L. & Econ. 1, 2–8 (1960)), and modern portfolio theory, which presents a framework for the
design of an optimal portfolio of assets given a particular level of risk (or variance) (Harry Markowitz,
Portfolio Selection, 7 J. Fin. 77 (1952)). These developments laid the groundwork for a conceptualization
of the business corporation built on agency costs, proposed first by the two economists Michael C. Jensen
and William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership
Structure, 3 J. Fin. Econ. 305 (1976), and then assimilated into corporate theory by Easterbrook, Fischel,
and others.
143
144
Gesetz betreffend die Kommanditgesellschaften auf Aktien und die Aktiengesellschaften
[Act concerning Limited Partnerships by Shares and Joint Stock Corporations], Jun. 11, 1870,
Bundesgesetzblatt des Norddeutschen Bundes [BGBl. Norddt. Bund] 1870, at 375 (Ger.).
145
For data and references, see Carsten Gerner-Beuerle, Law and Finance in Emerging Economies,
80 Mod. L. Rev. 265, 272–73 (2017).
146
Rainer Gömmel, Entstehung und Entwicklung der Effektenbörsen im 19. Jahrhundert bis 1914, in
Deutsche Börsengeschichte 153–55 (Hans Pohl ed., 1992).
The legislative memorandum that was published together with the draft law of 1884
reflected these sentiments. According to the memorandum, the reforms pursued a twofold
policy goal: They sought to curtail speculative investments by
investors who are both credulous and avaricious … have no personal relationship with the company,
do not want to take part in business operations, reject any responsibility beyond their contribution,
want to receive dividends that are as high as possible, and have the option of withdrawing from the
company at any time by selling their shares.147
At the same time, the reforms were adopted with somewhat diffuse macroeconomic goals
in mind. It was believed that the incorporation of a large number of companies gave rise to
overproduction and the law should ensure that only socially useful firms were incorporated.148
However, the legislator also acknowledged that it could not be the role of the law to differenti-
ate between economically productive and less productive uses of the corporate form.149 Instead
of imposing some form of merit requirements, the legislator therefore focused on tightening
the incorporation regime, curtailing access to the equity markets by small, potentially naïve
and speculative investors, and limiting the influence of investors over the management of
corporations. The centerpieces of the reform, accordingly, were the introduction of an onerous
and costly incorporation regime characterized by high minimum legal capital requirements
and stringent rules on capital contributions150 and a clearer separation of the function and
composition of the management board and supervisory board.151 The liability provisions, with
their emphasis on a clearly defined, objective standard of care and reversal of the burden of
proof reinforce the narrative of an untrammeled finance capitalism that took advantage of the
impressionable retail investor and hence had to be reined in. As I have argued elsewhere, the
legislative decisions made at this critical juncture determined not only the path of German
corporate law, but, at least as a contributing factor, also the trajectory of financial devel-
opment and the structure of the corporate economy in Germany, in particular by rendering
equity capital more expensive than debt.152 It is not useful to speculate about the motives of
147
Stenographische Berichte über die Verhandlungen des Reichstages, 5. Legislatur-Periode,
IV. Session 1884 [Stenographic protocols of the proceedings of the Reichstag, 5th parliamentary term,
session IV 1884], vol. 3, document no. 21 (hereinafter ‘Stenographische Berichte’), p. 241. Most of
the document (except appendix B containing statistical information) is reprinted in Werner Schubert
& Peter Hommelhoff (eds.), Hundert Jahre modernes Aktienrecht: eine Sammlung von Texten
und Quellen zur Aktienrechtsreform 1884 mit zwei Einführungen 387–559 (1985). Page
numbers here refer to the original Reichstag document.
148
Id. See also the references in Werner Schubert, Die Entstehung des Aktiengesetzes vom 18. Juli
1884 in Schubert & Hommelhoff (eds.), supra note 147, at 1, 49.
149
Stenographische Berichte, supra note 147, at 242.
150
Most importantly, the minimum par value of shares was increased to 1,000 marks, Allgemeines
Deutsches Handelsgesetzbuch [ADHGB] [General German Commercial Code], as amended in 1884,
Art. 207a. The increase was intended to both prevent small savers from accessing the capital markets,
because the legislator believed that they were not well placed to assess the value of equity securities and
should place their savings in safe instruments, such as government bonds, and incentivize professional
investors to participate more actively and with a longer-term horizon in the affairs of the company, given
the less liquid market in equity securities, Stenographische Berichte, supra note 147, at 245.
151
Id. at Art. 225a.
152
Gerner-Beuerle, supra note 93, at 289–93, 296–98. The precise effect of individual legal institu-
tions on financial development is hotly contested. It is beyond the scope of this contribution to revisit the
debate; for an overview, see id. at 266–67.
the judges deciding IKB, but it is noteworthy that the decision is in line with a narrative that is
characterized by a suspicion and distrust of finance capitalism, which justifies, in appropriate
circumstances, a judicial review of socially harmful business decisions.
4. CONCLUSION
History matters. While the duty of care and, increasingly, the business judgment rule have
diffused widely and exhibit a considerable degree of consistency across jurisdictions and legal
families, similarly formulated rules may mean something very different in two legal systems
that are shaped by different regulatory approaches, schools of thought, and historical experi-
ences with the market economy, just as two differently formulated rules may mean something
very similar. A case in point regarding the latter is the presence of a business judgment rule in
Delaware, and the absence of such a rule in the UK. As case in point regarding the former is,
again, the Delaware business judgment and its German counterpart. Two decades ago, judicial
innovation and legislative intervention imported a slightly modified version of the Delaware
business judgment rule into German law. However, the legal changes heralded only ostensibly
a development towards convergence. The underlying narratives that determine the meaning
of the two rules remained distinct—one shaped by considerations of economic efficiency and
the other by a distrust of finance capitalism. The findings suggest that where policy makers
embrace foreign legal institutions, or supranational efforts are made to harmonize legal rules,
it is important to be aware of the existence of local narratives and their impact on the law.
12. Board duties: monitoring, risk management
and compliance
Virginia Harper Ho1
1. INTRODUCTION
One of the most important functions of modern corporate boards is their oversight role,
a responsibility that in most jurisdictions is enforced in part as a matter of fiduciary duty. At
its core, board risk oversight is understood as a responsibility to establish appropriate internal
controls and procedures to prevent violations of law and to ensure the integrity of financial
reporting.2 However, board monitoring extends beyond legal (i.e. compliance) risk to an
ever-expanding range of risks that must be addressed holistically and transnationally on an
enterprise-wide basis. Risk oversight and risk management is therefore also tied to other core
roles of corporate boards, namely to set corporate strategy, to hire, remove, and compensate
senior executives, and to communicate with shareholders and other corporate stakeholders.
This chapter looks at the mechanisms of risk oversight, risk management, and compliance
through a comparative lens, drawing on examples from international guidance and from
different legal systems, primarily, the United States, the United Kingdom, several European
jurisdictions, and China. Beyond the comparative focus of this volume, there are two justifi-
cations for this approach. The first is the interconnectedness of global business. Many risks,
including the threat of terrorism, cybersecurity, and climate-related risk, are potentially global
in scope and impact. The other is that despite formal similarities in the role of corporate boards
and the common demands of enterprise risk management (ERM) across jurisdictions, there is
considerable variation in the nature and source of the risk oversight responsibility of corporate
directors and officers and in the institutional settings in which risk monitoring occurs.3
Several themes emerge in this chapter. First, the complexity of modern corporations and
of the risk environments in which they are situated challenge boards’ capacity to monitor and
manage risk effectively. Second, in a context where risk oversight has quite simply become
harder, corporate boards’ role in monitoring compliance and in overseeing ERM is now
defined less by corporate law and fiduciary duty than it may have been in the past. Instead, cor-
porations and boards themselves operate within a transnational network of inter-related actors,
regulatory regimes, and other institutions that affect how far the board’s duty to monitor
extends, how seriously it takes its monitoring role, and how it carries out that function. Board
monitoring as an internal source of accountability and control must therefore be understood in
relation to these other sources of corporate oversight.
1
I wish to thank Diana Jarek and Blake Wilson for exceptional research assistance.
2
G20/OECD Principles of Corporate Governance 47–50 & § VI(D) (2015) [hereinafter
“OECD Principles”].
3
See Klaus J. Hopt, Comparative Corporate Governance: The State of the Art and International
Regulation, 59 Am. J. Comp. L. 1, 6 (2011).
242
Board duties: monitoring, risk management and compliance 243
2. RISK MANAGEMENT AND THE MONITORING BOARD
Decades of corporate scandal from Enron and Parmalat, to the global financial crisis, to
Volkswagen have made corporate risk management and oversight a focal point for corpo-
rations, regulators, and the public. These external shocks have also renewed attention to
the internal monitoring role of corporate boards with respect to legal compliance, the audit
function, and ERM. The scale and frequency of these crises also raises questions about the
ability of current legal frameworks to motivate appropriate oversight by corporate boards. The
following discussion introduces risk concepts and the relationship between ERM, compliance,
and board fiduciary duties. Because the unique risk management responsibilities of financial
institutions cannot be addressed effectively here due to space constraints, this chapter focuses
on operating companies outside the financial sector.
2.1 Risk Concepts
Risk can be defined simply as “the possibility that events will occur and affect the achievement
of strategy and business objectives,” a definition that includes both positive and negative
events, their probability and severity, and both quantifiable and unquantifiable outcomes. 4
Firms may be exposed to financial risks such as the risk of inflation, market risk – the risk to
firms and their investors that arises from exposure to the volatility of expected returns in the
capital markets – or if they engage in lending, to credit risk associated with the likelihood of
default, non-repayment, or insolvency.5 They are also exposed to operational or business risks:
(i) strategic risk associated with the effect of the company’s strategy on investor or consumer
demand;6 (ii) business risk arising from the uncertainty associated with the costs of firm inputs
and project investments relative to their expected return, and with the people and processes
the firm relies on to produce goods and services; (iii) regulatory risk associated with potential
new regulatory requirements that may impose new compliance costs on the company; and (iv)
reputational risk, which is the potential for loss to the firm’s reputation beyond the economic
loss from the risk event itself.7 Finally, legal or compliance risk is the risk that the company, its
directors, officers, or employees or other agents will violate legal or regulatory requirements,
which may have financial and reputational consequences for the company. Managing these
different types of risks effectively requires different approaches and different measures of
success.
4
Paul Sweeting, Financial Enterprise Risk Management 1–3 (2011); Comm. of Sponsoring
Org. of the Treadway Comm’n. (COSO), Enterprise Risk Management: Integrating with
Strategy and Performance 9 (2017) [hereinafter “COSO ERM”]; COSO & World Bus. Council for
Sustainable Dev. (WBSCD), Enterprise Risk Management: Applying Enterprise Risk Management to
Environmental Social and Governance-Related Risks (Oct. 2018), www.coso.org/Documents/COSO
-WBCSD-ESGERM-Guidance-Full.pdf [hereinafter, “COSO ESG”].
5
Sweeting, supra note 4, at 93–111 (defining various forms of risk); see also Felix I. Lessambo,
The International Corporate Governance System: Audit Roles and Board Oversight 315–34
(2014).
6
See COSO ESG, supra note 4, at 42 & tbl. 3a.2.
7
Philippe Jorion, Value at Risk: The New Benchmark for Managing Financial Risk 495 (3d
ed. 2007).
Because many forms of risk-taking are expected to positively affect return for both firms
and investors, the goal of risk management is not the elimination of risk, but rather ensuring
that the company assumes an optimal level of risk and is able to manage it effectively. 8 The
company’s risk appetite, risk tolerance, and capacity to absorb risk all set parameters for
decision-making and are therefore integral to corporate governance.9 Indeed, these parameters
must be established by corporate boards and management in alignment with business goals
and corporate strategy.10
However, not all risks are created equal. In contrast to the other risks companies must
manage, legal (i.e. compliance) risk arising from legal or regulatory violations externalizes
harms to the public and other corporate stakeholders. A high likelihood of material penalties
or damages would also be expected to reduce returns to shareholders.11 Even when the prob-
ability of meaningful enforcement is low, the role of board monitoring internally is not to
maximize legal risk, but to manage it. This is because high legal risk is unlikely to translate
into higher return on investment for most firms. Private and public risk impacts may also
be impossible to separate, since many of the tools that firms use to manage risk, such as the
limited liability of the corporation and the use of financial derivatives, can also shift risk to
third parties or amplify it across a company or an economy.12 For these reasons, many aspects
of risk management and risk oversight are of concern to regulators and other stakeholders, as
well as to firms and investors.
2.2 The Monitoring Board
Despite important differences in the regulatory environment, sources of financing, and

dominant ownership structures across jurisdictions, a shared feature of corporate governance
systems is the existence of a control structure that is separate from the shareholders and is
8
Indeed, one justification for granting executive stock options is to overcome managerial
risk-aversion. See, e.g., John C. Coffee, Jr., Shareholders versus Managers: The Strain in the Corporate
Web, 85 Mich. L. Rev. 1 (1996).
9
Under the COSO ERM Framework: (i) risk appetite is “the types and amount of risk, on a broad
level, that an entity is willing to accept or reject in pursuit of value;” (ii) tolerance is “the boundaries of
acceptable variation in performance related to achieving business objectives;” and (iii) risk capacity “is
the maximum amount of risk that an entity is able to absorb in the pursuit of strategy and business objec-
tives, [considering] liquidity, stakeholder relationships, capabilities and other factors.” COSO ERM,
supra note 4, at 11; COSO ESG, supra note 4, at 34 & tbl. 2.9.
10
OECD Principles, supra note 2, at 47–49 & § VI(D).
11
For examples, see generally Donald C. Langevoort, Disasters and Disclosures: Securities Fraud
Liability in the Shadow of Corporate Catastrophe, 107 Geo. L.J. 967 (2019). See also Benjamin J.
Richardson & Beate Sjåfjell, Capitalism, The Sustainability Crisis, and the Limitations of Current
Business Governance, in Company Law and Sustainability: Legal Barriers & Opportunities 1,
9–12 (Beate Sjåfjell & Benjamin J. Richardson eds., 2015) (tracing the common roots of environmental
externalities and recurrent financial crises).
12
See, e.g., Kenneth Ayotte, Subsidiary Legal Entities & Innovation, 6 Rev. Corp. Fin. Studies
39 (2017) (pointing to limited liability’s role in isolating risk as an incentive to (risky) innovation by
subsidiaries); see also Marc Moore & Martin Petrin, Corporate Governance: Law, Regulation,
and Theory 206 (2017) (“[A]s is now widely acknowledged, the major banking company failures of
2007 and 2008 were [in part] attributable to practices that were regarded at the time as an intrinsic and
valuable part of the strategic operations of the firms involved”). The literature on how derivatives can
amplify risk is too vast to reference here.
responsible for the management of the company – a corporate board or boards.13 Since the
1970s, corporate boards have emerged as “monitoring boards,” where directors do not engage
directly in management, but exercise independent oversight of management in order to reduce
the agency costs that might otherwise arise from the separation between shareholder-owners
and management.14 This trend has been strengthened by regulatory reforms since the 1990s,
widely diffused internationally, that have mandated or encouraged reliance on independent
directors.15 Depending on the jurisdiction, the board’s monitoring role may be established in
company and securities law, in accounting principles, in stock exchange listing rules, or in
“soft law” guidance and corporate governance codes.16
There is also broad agreement across jurisdictions about the basic obligation of corporate
boards to monitor corporate legal compliance, to oversee risk management policies and pro-
cedures and internal financial controls, and to set corporate strategy. Under the strong global
influence of the U.S. Sarbanes-Oxley (SOX) Act on corporate governance reform in the early
and mid-2000s, most countries have now adopted formally similar internal mechanisms of
risk oversight and risk management, including internal controls, an internal audit function,
and related disclosure requirements.17 Regulators around the world are also paying increased
attention to the connection between executive compensation and risk management.18
The OECD Principles of Corporate Governance reflect some of the common expectations
that have developed as best practices for corporate board oversight, particularly with respect
to board committee structures. For example, they recommend that larger companies establish
specialized committees to oversee the risk management, audit, and compensation functions,19
and that jurisdictions where employees participate on the supervisory board ensure that those
representatives have adequate access to information and training on risk oversight.20 The
International Corporate Governance Network (ICGN) recommends further that companies
consider the appointment of a chief risk officer, establish avenues of direct engagement
13
See Alan Dignam & Michael Galanis, The Globalization of Corporate Governance 56–60
(2009).
14
Kraakman et al., The Anatomy of Corporate Law 29–31 (3d ed. 2017) (discussing the core
agency problems of the firm).
15
See, e.g., Véronique Magnier, Comparative Corporate Governance: Legal Perspectives
147–56 (2017) (surveying the diffusion of director independence requirements across Europe and Asia);
Jeffrey N. Gordon, The Rise of Independent Directors in the United States, 1950-2005: Of Shareholder
Value and Stock Market Prices, 59 Stan. L. Rev. 1465 (2007).
16
See OECD, Risk Management and Corporate Governance 15-16 (2014), www.oecd.org/daf/
ca/risk-management-corporate-governance.pdf [hereinafter “OECD Risk Management”] (identifying
sources of these obligations in OECD countries).
17
See generally Ali Gregoriou, International Corporate Governance After Sarbanes-Oxley
(2006); Rainer Kulms, European Corporate Governance After Five Years With Sarbanes-Oxley, in
Perspectives on Corporate Governance 413–58 (F. Scott Kieff & Troy A. Paredes eds., 2010).
18
See, e.g., Kulms, supra note 17, at 441 (discussing European responses). The United States
requires disclosure of the risk effects of executive compensation practices under the Dodd–Frank Wall
Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. 1376 (2010) § 953,
and the proxy rules. See Securities and Exchange Commission (SEC), Proxy Disclosure Enhancements,
74 Fed. Reg. 68,334 (Dec. 23, 2009) (amended Feb. 23, 2010).
19
OECD Principles, supra note 2, at 52–53 & VI (E)(2).
20
Id. at 54 & VI(G).
with investors on risk oversight, and task the full board with ultimate responsibility for risk
oversight.21
Nonetheless, the monitoring function may work differently across jurisdictions depending
on the local corporate governance framework and the dominant ownership structures in the
economy. In dual board systems that have a supervisory board and a managerial board such
as Germany, Austria, the Netherlands, Denmark, and Sweden, the supervisory board bears
primary oversight responsibility.22 Direct shareholder monitoring has historically been more
important in the “insider” corporate governance systems that are the norm in much of the
world; in these systems, ownership by families, banks, the state, or cross-shareholding within
business conglomerates predominates, in contrast to the U.S. and the U.K., where the equity
markets are a primary source of capital and where diversified shareholders were, until rela-
tively recently, content to delegate monitoring to corporate boards.23 Concentrated ownership
also increases agency conflicts between controlling and minority shareholders, since con-
trolling shareholders will set the firm’s strategic direction and align its risk appetite with their
interests. Yet even in these contexts, the monitoring board has emerged within large firms.24
2.3 Enterprise Risk Management
Enterprise risk management (ERM) is “a process, effected by an entity’s board of directors,

management, and other personnel, applied in strategy setting and across the enterprise,
designed to identify potential events that may affect the entity, and manage risk to be within
its risk appetite, to provide reasonable assurance regarding the achievement of entity objec-
tives.”25 ERM includes, but extends beyond, internal financial controls and legal compliance.
While ERM frameworks emphasize the role of the CEO, CFO, and corporate risk officers in
implementing risk management processes, ERM also depends on and facilitates the oversight
role of the corporate board and internal and external auditors.26 Globally, the predominant
ERM frameworks are the ISO 31000 guidelines on risk management and the COSO ERM
Integrated Framework.27
ERM has its origins in the 1990s, when the first ERM framework was developed by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). However,
21
Int’l Corp. Gov. Network (ICGN), Guidance on Corporate Risk Oversight 13–16 (3d ed.
2015), www.icgn.org/sites/default/files/ICGN%20Corp%20Risk%20Oversightweb_0.pdf.
22
OECD Principles, supra note 2, at 49 & VI(D)(7). On dual board systems, see Dignam &
Galanis, supra note 13, at 57, 264–65; Paul L. Davies & Klaus J. Hopt, Corporate Boards in Europe –
Accountability and Convergence, 61 Am. J. Comp. L. 301, 314–15 (2013).
23
See Dignam & Galanis, supra note 13, at 43, 67–69, 246 (citations omitted); see also Kraakman
et al., supra note 14, at 73–74 (discussing state ownership in Brazil); Moore & Petrin, supra note 12,
at 10–12 (discussing insider systems as standard across continental Europe, Latin America, and Asia).
24
See generally Davies & Hopt, supra note 22; see also Dignam & Galanis, supra note 13, at 7,
292–302 (citing cross-shareholding and the scale of large firms as impeding direct control by banks,
families, or state owners).
25
COSO, Enterprise Risk Management Executive Summary 2 (Sept. 2004), www.coso.org/
Documents/COSO-ERM-Executive-Summary.pdf.
26
See generally Bruce Branson, The Role of the Board of Directors and Senior Management in
Enterprise Risk Management, in Enterprise Risk Management (John Fraser & Betty J. Simkins eds.,
2010).
27
OECD Risk Management, supra note 16, at 16.
ERM systems became widespread after Sarbanes-Oxley, as similar rules were introduced
outside the U.S. in regulation or in stock exchange listing rules that mandated internal controls,
audit quality, management responsibility for internal controls, and audit committee oversight
of risk management.28 Both COSO and the ISO 31000 guidelines emphasize the internal and
external environment of risk management and include risk identification, assessment, imple-
mentation, monitoring, external validation, and communication.29
Although many jurisdictions encourage ERM, they do not generally require specific ERM
systems or specify the type of internal controls, compliance, or risk management systems
firms must adopt.30 One noteworthy exception is China, which built on the core principles of
the COSO ERM framework and Sarbanes-Oxley to develop Internal Control Norms or “China
SOX,” as well as guidance on specific aspects of internal controls and ERM that is effectively
mandatory.31 This approach is readily explained by the unique features of China’s state-led
economy.
2.4 Corporate Compliance
The corporate compliance function is part of ERM and is focused on preventing and detecting
violations of law and regulations – in other words, reducing legal risk.32 It emerged as a dis-
tinct internal function in response to the enforcement of anti-bribery statutes in the U.S. and
expanded with the passage of Sarbanes-Oxley. Legal scholarship on the compliance function
has largely centered on its relation to the general counsel’s office33 and to whether liability for
compliance violations should extend to directors and officers, or instead to the corporation.34
There is, however, agreement that board oversight of compliance and direct communication
channels to the board are key.
The compliance function is linked to corporate law insofar as corporate law establishes
a monitoring role for the corporate board or includes compliance oversight as a fiduciary
obligation. In the United States, oversight duty as articulated by the Delaware courts requires
the board of directors to “attempt in good faith to assure that a corporate information and
reporting system, which the board concludes is adequate, exists,” and that the board has not
willfully disregarded compliance “red flags” or other indications that the system is ineffec-
28
See Susan Hume, Financial Reporting and Risk Management, in Enterprise Risk Management,
29
Sweeting, supra note 4, at 5–6, 485–87, 496–99 (summarizing these elements).
30
See Virginia Harper Ho, Corporate Governance as Risk Regulation in China: A Comparative View
of Risk Oversight, Risk Management, and Accountability, 4 Eur. J. Risk Reg. 463, 468–69 (2012).
31
See Harper Ho, Comparative Risk Oversight, supra note 30, at 472–73 (citing authorities).
32
The COSO framework includes regulatory compliance within its governance elements. COSO
ERM, supra note 4, at 13, 17–18.
33
See, e.g., Robert C. Bird & Stephen K. Park, The Domains of Corporate Counsel in an Era of
Compliance, 53 Am. Bus. L.J. 203 (2016); Michele DeStefano, Creating a Culture of Compliance: Why
Departmentalization May Not Be the Answer, 10 Hastings Bus. L.J. 71 (2014). On compliance struc-
tures in Germany, see Fabian Hertel, Effective Internal Control and Corporate Compliance
292–95 (2019).
34
See Asaf Eckstein & Gideon Parchomovsky, The Agent’s Problem, 70 Duke L. J. 1509 (2021)
(arguing that companies have incentives to implicate directors, officers, or employees in criminal
enforcement actions).
tive.35 However, under both corporate governance codes and common law principles, boards
enjoy broad discretion over the type of compliance system to adopt.36
The expansion of the corporate compliance function has therefore been driven by external
regulators and the threat of corporate prosecutions more than as a matter of corporate law or
capital markets regulation.37 For example, the U.S. Department of Justice’s guidance regarding
corporate criminal prosecutions indicates specific elements of the corporation’s compliance
program, internal controls, and risk management systems that will allow them to be considered
“adequate and effective,” potentially aiding the company in obtaining a more favorable out-
come.38 At the same time, the expansion of the compliance function may indirectly strengthen
traditional fiduciary duty, since the information flows generated by compliance systems may
help plaintiffs more easily establish bad faith or scienter with respect to compliance “red
flags.”39
3. FIDUCIARY DUTIES AND THEIR LIMITS
Although there is some variation among jurisdictions in how these duties apply to risk
management, fiduciary duties of care and loyalty are widely used to hold corporate boards
accountable for carrying out their oversight function, and fiduciary principles are ubiquitous
even beyond the common law jurisdictions where they first developed.40 Depending on the
jurisdiction, they may be incorporated into corporate governance codes, or applied under other
bodies of law beyond corporate or commercial law.41
35
In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 971 (Del. Ch. 1996); see also Stone v.
Ritter, 911 A.2d 362, 370, 373 (Del. 2006).
36
See, e.g., In re Caremark, 698 A.2d at 971 (leaving this determination to the board’s business judg-
ment); see also Hertel, supra note 33, at 295 (discussing the similar German approach). Challenging
the choice of compliance system is difficult even in jurisdictions that subject director conduct to tighter
judicial scrutiny. Beate Sjåfjell et al., Shareholder Primacy: the Main Barrier to Sustainable Companies,
in Company Law and Sustainability, supra note 11, at 14–120 (citing examples from France, Brazil,
the Benelux countries, and other European jurisdictions, with Japan and South Africa offering greater
deference to directors).
37
H. Lowell Brown, The Corporate Director’s Compliance Oversight Responsibility in the
Post-Caremark Era, 26 Del. J. Corp. L. 1, 106–28 (2001) (discussing the U.S. federal guidelines’ role in
defining “effective” compliance programs); cf. Hertel, supra note 33, at 417–20 (noting the influence
of U.S. stock exchange compliance rules on German companies).
38
U.S. Dept. of Justice Evaluation of Corporate Compliance Programs (June 2020), www
.justice.gov/criminal-fraud/page/file/937501/download (stating, for example, that the program must
integrate risk management across the organization, be subject to board and external auditor oversight,
and demonstrably work in practice).
39
See Stavros Gadinis & Amelia Miazad, The Hidden Power of Compliance, 103 Minn. L. Rev.
2135, 2179–84, 2188 (2019).
40
Dignam & Galanis, supra note 13, at 57.
41
See Martin Gelter & Genevieve Helleringer, Fiduciary Principles in European Civil Law Systems,
in Handbook of Fiduciary Law 583 (Evan J. Criddle et al. eds., 2019) (discussing the diverse origins
of fiduciary duties in Europe); see also Bruce E. Aronson, Reconsidering the Importance of Law in
Japanese Corporate Governance: Evidence from the Daiwa Bank Shareholder Derivative Case, 36
Cornell Int’l L.J. 11, 21–25 (2003) (discussing the revival of fiduciary oversight principles in Japan).
3.1 Common Understandings and Points of Divergence
In general, fiduciary duties require that directors act in the best interests of the company (or
the company and its shareholders), on an informed basis, and with due diligence and care.42
Oversight, compliance, and access to information are key to satisfying these obligations.43
Similarly, statutory board duties in many European Union member states require diligent
management in the best interests of the company and compliance with applicable law, require-
ments that extend to risk management.44 In the United States, the board’s oversight duty is
established by state corporate law and has been defined as an expression of the duty of loy-
alty.45 China’s Company Law and code of corporate governance for listed companies do not
impose specific duties on corporate directors or supervisors with regard to risk oversight and
risk management, but do codify general director duties of loyalty and due diligence, and a duty
to comply with relevant laws, regulations, and the company’s organic documents.46
Although the basic expectations of due care in decision-making and loyalty to the corpora-
tion are widely recognized, the precise contours of the duties, their sources, and what enforce-
ment mechanisms motivate boards to carry them out all vary according to the firm’s ownership
structure, internal corporate governance rules, and its broader institutional context.47 Key
among these differences are who owes fiduciary duties and whose interests must be considered
in carrying them out.
With respect to the question of who owes duties, most jurisdictions recognize duties for
both directors and officers. However, Japanese corporate governance law does not extend to
officers or senior management, but only to directors.48 In China, as in Germany, controlling
shareholders owe fiduciary duties, while in the U.K., France, and Switzerland, they do not.49
Another fundamental difference among jurisdictions is the question of whose interests are
relevant to risk management and oversight, which relates to the question of to whom fiduciary
duties are owed. If duties run to shareholders alone, then only risk that affects returns to share-
holders should be relevant. If, however, duties run to the corporation itself, then the interests
of a broader class of corporate stakeholders and risks impacting those stakeholders may also
42
See Andrew Keay, Board Accountability in Corporate Governance 114–15 (2015)
(observing that the duty to act in good faith in the best interests of the company is the “overarching
duty of directors in over 40 jurisdictions around the world”); OECD Principles, supra note 2, at 45 & §
VI(A).
43
OECD Principles, supra note 2, at 46 & § VI.
44
In Germany, these duties apply to both management and supervisory boards. German Stock
Corporation Act (1965) (codified as amended on May 10, 2016 at §§ 93, 116).
45
Stone v. Ritter, 911 A.2d 362, 372-73 (Del. 2006). In the U.K., the duty to monitor is part of the
duty of care and also aligns with the duty of loyalty. Moore & Petrin, supra note 12, at 220–21.
46
See Harper Ho, Comparative Risk Oversight, supra note 30, at 470–71 (discussing these
authorities).
47
See Gelter & Helleringer, supra note 41, at 596–601. See generally Chapter 11 of this volume.
48
Aronson, supra note 41, at 21.
49
See generally Nicholas C. Howson, Fiduciary Principles in Chinese Law, in Handbook of
Fiduciary Law 603 (Evan J. Criddle et al. eds., 2019). Cf. Gelter & Helleringer, supra note 41, at
599–600 (contrasting controlling shareholders’ duty to minority shareholders in Germany with other
European jurisdictions).
matter.50 The most common rule is that fiduciary duties run to the company and are enforce-
able by it,51 although corporate governance structures generally render directors ultimately
accountable to the shareholders.52
Despite strong expectations in the early 2000s of convergence toward shareholder-oriented
governance and toward shareholder primacy as a normative goal,53 the past decade has wit-
nessed a shift toward a greater stakeholder orientation.54 In Germany and France, for example,
courts have articulated the interests of the corporation to include stakeholder interests apart
from those of shareholders.55 Although the U.K. remains strongly shareholder-oriented, the
“enlightened shareholder value” approach encapsulated in its Company Law defines fiduciary
duties to require directors to act “in good faith [to] promote the success of the company for
the benefit of its members as a whole, and in doing so [to] have regard” to the interests of
various stakeholders.56 Most corporate governance codes also address corporate board atten-
tion to sustainability, stakeholder interests, environmental and social risks, and other aspects
of corporate responsibility.57 These trends reflect broader recognition among business leaders
of stakeholder contributions to firm success and the financial repercussions of environmental
and social risk.58
In keeping with this shift, COSO’s 2018 ERM guidance explains the importance of man-
aging environmental, social and governance (ESG)-risks to ERM system effectiveness and
corporate “profitability, success and even survival.”59 COSO’s framework recommends that
boards reference ESG risks in the board charter, task a board committee with focusing on ESG
issues, and ensure that ESG expertise is part of the skills reflected on the board. It also high-
lights the need for ERM and risk management functions to be better aligned with the firm’s
sustainability function.60
50
See Dignam & Galanis, supra note 13, at 58 (referencing examples from the U.S., Germany, and
France).
51
See Keay, supra note 42, at 114–16 (citing as examples the U.K., Germany, Canada, and the
Netherlands).
52
See id. at 57–62, 119–35. Keay also notes that the “best interests of the company” has been inter-
preted in commonwealth jurisdictions to refer to shareholders. Id. at 115-18 (discussing U.K. and U.S.
courts, though noting contrary opinions in Australia and Canada).
53
See Henry Hansmaan & Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L.J.
439 (2001).
54
Alice Klettner, Corporate Governance Regulation: The Changing Roles and
Responsibilities of Boards of Directors 6–7, 141–70 (Routledge 2017) (observing these trends
globally). But see Martin Gelter, The Dark Side of Shareholder Influence: Managerial Autonomy and
Stakeholder Orientation in Corporate Governance, 50 Harv. Int’l. L.J. 129 (2009) (arguing that
shareholder- and stakeholder-orientations within corporate governance reflect local optima for different
institutional contexts).
55
Dignam & Galanis, supra note 13, at 58 (citations omitted).
56
Companies Act 2006 (U.K.) (2018 amend.) at c. 46 § 172(1).
57
Klettner, supra note 54, at 141–70.
58
See generally Andrew Keay, The Enlightened Shareholder Value Principle and Corporate
Governance (2013).
59
COSO ESG, supra note 4, at 1.
60
Id. at 5, 18.
3.2 The Limits of Fiduciary Duty
Fiduciary duties are a potentially powerful tool for incentivizing individual accountability for
risk oversight. Although fiduciary duties of oversight are enforceable only under domestic law
or in local courts, the obligation they place on directors extends to risk monitoring across the
entire corporate enterprise. As I have noted elsewhere, the application of fiduciary duties to
directors of the parent corporation or headquarters of a corporate group therefore gives them
potentially powerful extraterritorial effect.61
In practice, however, fiduciary duties offer only weak incentives for risk management and
oversight. Joel Seligman has linked this weakness in common law jurisdictions to features of
the common law itself that limit its predictability and deterrent force,62 but fiduciary duties are
also weakly enforced in jurisdictions that are the most vigilant, irrespective of differences in
enforcement approaches and the nature of the duties themselves.63
First, some courts in common law jurisdictions have not strictly enforced fiduciary duties
because of the conviction that corporate boards are better positioned than shareholders or
courts to engage in risk assessment.64 For example, it is nearly impossible to attach liability
for a breach of oversight duty under Delaware law, which requires a lack of good faith, as
evidenced by “a sustained or systematic failure of the board to exercise oversight – such as an
utter failure to [establish] a reasonable information and reporting system,”65 or evidence that
the directors have consciously disregarded their fiduciary duties by ignoring “red flags” or
otherwise disabling themselves from learning about compliance problems.66 In addition to pro-
cedural obstacles that impede derivative claims, particularly oversight claims based on board
inaction,67 the Delaware Chancery Court has responded to cases arising out of the financial
crisis by limiting the scope of board oversight duty to legal or compliance risk and shutting
the door on claims alleging that the corporation assumed excessive business risk.68 Finally, as
noted above, Delaware courts defer to boards’ business judgment regarding the type of internal
compliance system to adopt.
61
See generally Virginia Harper Ho, Of Enterprise Principles and Corporate Groups: Does
Corporate Law Reach Human Rights?, 52 Colum. J. Transnat’l L. 113 (2013).
62
Joel Seligman, Epilogue: Three Secular Trends of Corporate Law, in Perspectives on Corporate
Governance, supra note 17, at 459, 461–62 (observing that the common law is “too fact specific,”
unsettled, and “erratic” compared to statutory law).
63
Davies & Hopt, supra note 22, at 356–59.
64
Stephen M. Bainbridge, Caremark and Enterprise Risk Management, 34 J. Corp. L. 967, 986
(2009); see, e.g., In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 131 (Del. Ch. 2009) (“To
impose oversight liability on directors for failure to monitor ‘excessive’ risk would involve courts in
conducting hindsight evaluations of decisions at the heart of the business judgment of directors.”).
65
In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967, 971 (Del. Ch. 1996) (“[Oversight
liability] is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win
a judgment.”); Stone v. Ritter, 911 A.2d 362, 369–70 (Del. 2006).
66
Stone v. Ritter, 911 A.2d at 370; In re Citigroup, 964 A.2d at 106, 123.
67
See, e.g., Anne Tucker Nees, Who’s the Boss? Unmasking Oversight Liability Within the
Corporate Power Puzzle, 35 Del. J. Corp. L. 199, 216–34 (2010) (discussing these limits).
68
See, e.g., In re Citigroup, 964 A.2d at 126 (dismissing claims arising from the subprime mortgage
crisis); see also id. at 237 (noting that none of the more than 25 U.S. derivative suits following the sub-
prime mortgage crisis imposed liability).
In cases alleging a breach of the duty of oversight, courts in other jurisdictions have at
times engaged in a more searching review. For example, in the late 1990s, Japanese courts
recognized a board duty to establish a system of internal controls in a case involving the Daiwa
Bank; in related litigation, the court also imposed liability under the Japanese commercial
code for directors’ negligent failure to ensure compliance with foreign law.69 As Carsten
Gerner-Beuerle’s chapter in this volume observes, German courts have also afforded less
deference to directors’ business judgment than Delaware courts in some cases; nonetheless,
individual liability for breach of fiduciary duty is rarely imposed.70 Marc Moore and Martin
Petrin similarly observe that in the U.K., where the duty of oversight is similar to that of the
U.S., “personal liability for oversight failures … at least in theory—is expansive and provides
a substantially lower liability threshold” than in the U.S.,71 but in practice, liability for breach
is still highly unlikely.72
Board monitoring and risk oversight expectations are also reflected in corporate governance
codes, which are typically adopted at the national level. But corporate governance codes
are a form of soft law, as they apply on a “comply-or-explain” basis, and their enforcement
varies.73 In general, regulatory authorities do not enforce comply-or-explain principles, which
must be enforced, if at all, through shareholder engagement or stock exchange listing stand-
ards.74 Shareholder litigation in Europe is rare.75 As a result, codes’ effectiveness rests on
private market forces rather than public administrative enforcement.76 There is some evidence
that voluntary compliance with corporate governance codes is quite high in common law juris-
dictions where shareholder engagement and monitoring is more robust.77 However, boards in
code-based jurisdictions generally enjoy expansive deference in monitoring risk.
69
See Aronson, supra note 41, at 26–31.
70
See Petri Mantysaari, Comparative Corporate Governance: Shareholders as Rule-Maker
413 (2005) (noting that fiduciary duties against German management boards are rarely enforced).
71
Moore & Petrin, supra note 12, at 222–25 (comparing the negligence-based standard for over-
sight liability of U.K. directors in the Barings Bank case with the Delaware standard in In re Citigroup).
72
Id. at 222–23 (noting limits in the U.K. Company Law on liability for director oversight breaches
other than disclosure violations).
73
See Klettner, supra note 54, at 8–11 (discussing the origin, scope, and effectiveness of corporate
governance codes as relates to board monitoring).
74
Eur Eur. Comm’n, Green Paper - Corporate governance in financial institutions and remuneration
policies, COM (2010) 284 final (June 2, 2010), eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=
CELEX:52010DC0284&from=EN [hereinafter “European Corporate Governance Green Paper”], at 2;
Andrew Keay, Comply or Explain: In Need of Greater Regulatory Oversight, 34 Leg. Stud. 279 (2014)
(discussing the soft law nature of the codes and the lack of shareholder enforcement); Moore & Petrin,
supra note 12, at 63 (noting that U.K. financial regulators do not enforce comply-or-explain obligations);
see also Magnier, supra note 15, at 104–08 (observing that administrative and civil penalties are not
commonly levied for code violations).
75
See generally Martin Gelter, Why Do Shareholder Derivative Suits Remain Rare in Continental
Europe?, 37 Brook. J. Int’l L. 843 (2012).
76
77
See generally Klettner, supra note 54 (evaluating code compliance by Australian companies).
See also Virginia Harper Ho, ‘Comply or Explain’ and the Future of Nonfinancial Reporting, 21 Lewis
& Clark L. Rev. 317 (2017) (reviewing results from empirical studies in nine jurisdictions).
3.3 Risk Oversight Challenges
Despite the limited incentives that fiduciary duties provide, risk oversight and risk manage-
ment have taken on greater importance since the early 2000s and particularly since the 2008
financial crisis.78 Regulatory reforms focused on curtailing risky behavior, improving corpo-
rate governance, and mandating new forms of risk disclosure have expanded the compliance
dimension of risk management and increased expectations of corporate boards. Over this same
period, risk oversight has also become more challenging.
From an agency perspective, management has incentives to under-monitor and under-disclose
risk, particularly when investor short-termism, quarterly reporting pressures, and executive
compensation benchmarks incentivize profitable risk-taking and when competitors may not
be similarly vigilant.79 Also, risk is by definition uncertain and forward-looking, requiring
analysis of dynamic, competing factors and market conditions beyond management’s con-
trol.80 Long-term risks are particularly difficult to assess.81 The scope of risk management is
also constantly expanding, and emerging risks such as cybersecurity and climate risk are now
salient for many corporations.82
The sheer complexity of modern corporations has also made risk oversight more chal-
lenging. Large corporations must manage risk through a mix of human and technological
tools in rapidly changing global business environments.83 The structure of large corporations
themselves has evolved from the traditional hierarchy or pyramidal structure with control and
oversight concentrated at a single corporate headquarters, to more “heterarchical” matrix or
“networked” organizations where multiple “command centers” and reporting lines control
information flows and contribute to decision-making and strategic planning.84 The efficiency
of these structures amplifies not only their productive capacity but also their ability to external-
78
See, e.g., European Corporate Governance Green Paper, supra note 74, at 2–3, 6–7 (identifying
deficiencies in board risk oversight that contributed to the 2008 financial crisis); see also Report of the
Reflection Group on the Future of EU Company Law (Apr. 5, 2011), www.ceuropeens.org/sites/
default/files/report_company_law_0.pdf, at 40 (reviewing EU risk management reforms).
79
See Zohar Goshen & Gideon Parchomovsky, The Essential Role of Securities Regulation, 55 Duke
L.J. 711, 759–62 (2006) (discussing these disincentives).
80
See Virginia Harper Ho, Nonfinancial Disclosure & The Costs of Private Ordering, 55 Am. Bus.
L.J. 407, 440–41 (2018) (summarizing these challenges).
81
For example, standard discount rates may not be appropriate for long-term benefits and liabilities.
Moritz A. Drupp et al., Discounting Disentangled, 10(4) Am. Econ. J.: Econ. Pol’y 109 (2018). Data
quality and reliability may also be weaker for long-term risks. COSO ESG, supra note 4, at 62–64.
82
See generally Beate Sjåfjell, Beyond Climate Risk: Integrating Sustainability into the Duties of
the Corporate Board, 23 Deakin L. Rev. 1 (2018). See also Nat’l Ass’n Corp. Directors (NACD),
2019 Governance Outlook: Projections on Emerging Board Matters 4–7 (2019) (identifying
cybersecurity risk as a top risk for certain sectors).
83
See, e.g., Andreas G. Scherer & Guido Palazzo, Globalization and Corporate Social Responsibility,
in The Oxford Handbook of Corporate Social Responsibility 413, 415–24 (discussing transna-
tional risks).
84
Virginia Harper Ho, Team Production & the Multinational Enterprise, 38 Seattle U. L. Rev. 499,
504–13 (2015); see Gunther Teubner, The Many-Headed Hydra: Networks as Higher-Order Collective
Actors, in Corporate Control and Accountability: Changing Structures and the Dynamics of
Regulation 41 (Joseph McCahery et al. eds., 1993) (discussing the emergence of business networks);
see also Greg Satell, What Makes an Organization Networked?, Harv. Bus. Rev. (June 8, 2015), hbr.org/
2015/06/what-makes-an-organization-networked.
ize risk, making enterprise-wide risk monitoring more important, but also more difficult.85 At
the same time, the sheer size of multinational enterprises can lead to “materiality blindspots”
– even high-risk operations may appear minor relative to the enterprise as a whole.86
Paralleling this shift, firms’ external regulatory environment has also evolved into a system
of “networked governance,” where private and public standards and enforcement struc-
tures overlap and where regulation is both integrated and fragmented across jurisdictions.87
Networked governance enhances regulatory risk for transnational companies, presenting new
oversight challenges even as it offers greater external accountability. It also makes external
enforcement more difficult because, just as no single individual officer or agent of a “net-
worked” corporation possesses all of the information that gives rise to high-risk decisions or
even legal violations,88 no single regulator or third-party monitor does either.89
All of this complexity has several practical implications for corporate boards. It has
increased demand for board expertise in areas of emerging risk, as well as attention to board
diversity.90 The importance of shareholder and stakeholder engagement is also rising. At the
same time, cognitive limits and behavioral biases may prevent corporate boards and managers
from accurately assessing risk and developing appropriate responses to complexity.91 While
technology may ease this burden, technological developments are themselves a new source of
risk, and risk management tools that draw on artificial intelligence (AI) and other forms of data
analytics may amplify or entrench biases.92
In fact, the rapid advance of technological innovation is already transforming the tools of
risk management and the nature of risk itself. The emergence of Chief Technology Officers
(CTOs) shows that technology is already a governance domain and may soon reframe current
legal standards. For example, as risk management systems that incorporate data analytics and
machine learning become standard, can an internal compliance system that lacks them still
be adequate as a matter of fiduciary duty?93 The expansion of big data, artificial intelligence,
85
Harper Ho, Team Production, supra note 84, at 533–35.
86
See generally George S. Georgiev, Too Big to Disclose: Firm Size and Materiality Blindspots in
Securities Regulation, 64 UCLA L. Rev. 602 (2017).
87
See generally Stephen Goldsmith & William D. Eggers, Governing By Network (2004). On
private regulatory networks, see generally Grainne de Búrca, Robert O. Keohane & Charles Sable, New
Modes of Pluralist Governance, 45 N.Y.U. J. Int’l L. & Pol. 723 (2013).
88
Harper Ho, Team Production, supra note 84, at 534.
89
See Andrea Minto, Enlisting Internal and External Financial Gatekeepers: Problems of Multiple
Centres of Knowledge Construction, 9 Eur. J. Risk Reg. 283, 285–86 (2018).
90
See Blanaid Clarke, The Role of Board Directors in Promoting Environmental Sustainability,
in Company Law and Sustainability, supra note 11, at 165–69 (referencing authorities in the U.K.
and the European Union on the importance of board diversity); see also Kristin N. Johnson, Banking
on Diversity: Does Gender Diversity Improve Financial Firms’ Risk Oversight?, 70 SMU L. Rev. 327
(2017) (surveying empirical evidence on how gender affects risk oversight).
91
See generally Donald C. Langevoort, Organized Illusions: A Behavioral Theory of Why
Corporations Mislead Stock Market Investors (and Cause Other Social Harms), 145 U. Pa. L. Rev. 101
(1997) (exploring how hubris and other biases lead to oversight failures).
92
See generally John Armour & Horst Eidenmueller, Self-Driving Corporations? 10 Harv. Bus. L.
Rev. 87 (2020).
93
I thank Chris Bruner for raising this question.
and blockchain technologies also raises questions about the future of the corporate board as
a monitoring body or indeed whether we will need boards at all.94
4. ALTERNATIVE INCENTIVES AND SOURCES OF RISK

OVERSIGHT
In 2014, the OECD surveyed risk management practice across 27 jurisdictions, including
China and four other non-OECD jurisdictions.95 The survey found that:
●● Companies underestimate the cost of risk management failures.

●● Companies began to pay greater attention to risk management in the wake of the financial
crisis, but most still saw risk management as a line manager issue, not as a matter of board
oversight.
●● Some companies had begun to evaluate the potential links between executive compensation
and risk-taking, but most had not yet established incentives for executives to manage risk.
●● Most companies focused largely on financial risk, not on operational or strategic risk.
In sum, risk management practices had not improved quickly, despite the external shock of
successive compliance crises.
Part of the explanation no doubt lies with the limits of board fiduciary duties outlined
above. In any event, the accountability of corporate boards for risk oversight must derive from
multiple sources, of which fiduciary duty is but one. It is also clear that effective corporate
boards are essential, but are not enough in the face of a dynamic, complex, and expanding risk
landscape. This section considers alternative incentives for board risk oversight that may also
independently reinforce, inform, and complement the board’s monitoring role.
4.1 Internal Monitoring and the Role of Corporate Officers
One possibility is the enforcement of fiduciary duties against corporate officers who are failing
to adequately manage risk.96 In most jurisdictions, corporate directors and officers are bound
by similar fiduciary duties.97 In addition, corporate officers and other management personnel
are those most directly charged with risk management, implementing internal controls and
reporting, and with legal compliance more broadly. The responsibilities of executive officers
such as the Chief Financial Officer, the Chief Compliance Officer, or the Chief Risk Officer
all relate to some aspect of risk management. Since few officers also sit on the board as “inside
directors,” fiduciary duty law may reach few corporate insiders unless it is applied equally to
94
See generally Armour & Eidenmueller, supra note 92; Martin Petrin, Corporate Management in
the Age of AI, 2019 Colum. Bus. L. Rev. 965 (2019).
95
OECD Risk Management, supra note 16, at 7–8.
96
Officer liability may also arise under the securities laws or under criminal law. See Gadinis &
Miazad, supra note 39, at 2185–90.
97
See, e.g., Gantler v. Stephens, 965 A. 2d 695, 708–09 (Del. 2009) (holding that directors and
officer duties are the same under Delaware law).
officers. Unfortunately, officer duties are not often well-articulated and are chronically under-
enforced, in part due to procedural obstacles.98
4.2 Shareholder Monitoring
Since the early 2000s, academic debate has raged among corporate and securities law scholars
over whether institutional investors can play an effective monitoring role for portfolio com-
panies and about how they should use their power.99 Whether shareholder monitoring is seen
only as an incentive for board monitoring or as a substitute for it depends on the jurisdiction.
For example, shareholders in U.K. companies have the ability to mandate board action,
whereas shareholders of U.S. companies do not.100 In addition, closely held corporations and
state-owned enterprises (SOEs) exhibit a weaker separation of ownership and control, and so
their shareholders may more readily engage in direct management oversight.
Concentrated share ownership has long been the norm in European and Asian markets, but
has now become a hallmark of capital markets in the U.S., U.K., and other commonwealth
economies, which are now dominated by a relative handful of institutional investors.101
Concentrated ownership helps overcome the rational passivity and free-riding of dispersed
shareholders and makes shareholder monitoring possible.102 Shareholder “say on pay” voting
rights and expanded proxy access rights to nominate directors have also increased shareholder
power.103
Despite these changes, debate continues over the extent to which institutional investors have
adequate incentives to engage in active monitoring and whether their interests are aligned with
the long-term interests of fund beneficiaries, portfolio companies themselves, or the broader
98
On procedural barriers, see generally Megan W. Shaner, The (Un)Enforcement of Corporate
Officers’ Duties, 48 U.C. Davis L. Rev. 271 (2014). See also Lyman P. Q. Johnson & Mark A. Sides,
The Sarbanes-Oxley Act and Fiduciary Duties, 30 Wm. Mitchell L. Rev. 1149, 1208 (2004) (noting,
for example, that Delaware courts could not exercise personal jurisdiction over corporate officers until
2004).
99
On the role of institutional investors, see Chapter 18 in this volume. See also Bernard Black, Agents
Watching Agents: The Promise of Institutional Investor Voice, 39 UCLA L. Rev. 811 (1992) (arguing
that institutional investors can play an oversight role). But see John C. Coffee, Jr., Liquidity Versus
Control: The Institutional Investor as Corporate Monitor, 91 Colum. L. Rev. 1277 (1991) (emphasizing
institutional investor passivity); Zohar Goshen & Richard Squire, Principal Costs: A New Theory for
Corporate Law and Governance, 117 Colum. L. Rev. 767 (2017) (arguing that large institutional inves-
tors lack monitoring capacity); Edward B. Rock, The Logic and (Uncertain) Significance of Institutional
Shareholder Activism, 79 Geo. L.J. 445 (1991) (emphasizing institutional investor passivity).
100
Christopher M. Bruner, Power and Purpose in the “Anglo-American” Corporation, 50 Va. J.
Int’l L. 579, 604–05 (2010) (discussing these differences).
101
For example, institutional investors hold 90 percent of UK listed company shares and ownership
control is concentrated among the largest fund managers. See Suren Gomtsian, Shareholder Engagement
by Large Institutional Investors, 45 J. Corp. L. 659, 665–75, 679 & n.93 (2020) (citations omitted). For
further detail on ownership trends, see Chapter 15 in this volume.
102
See Ronald J. Gilson & Jeffrey N. Gordon, The Agency Costs of Agency Capitalism: Activist
Investors and the Revaluation of Governance Rights, 113 Colum. L. Rev. 44 (2011) (identifying hedge
funds as the key blockholders with such incentives).
103
For a cross-jurisdictional survey of say-on-pay policies and their effectiveness, see generally
Randall S. Thomas & Christoph Van der Elst, Say on Pay Around the World, 92 Wash. U. L. Rev. 653
(2015). On say-on-pay voting in the United Kingdom, see Gomtsian, supra note 101, at 661.
economies across which they invest.104 Which of these goals should be preeminent is also
widely debated.105
Surveys of U.S. companies find that corporate risk oversight is a significant focus of investor
engagement with corporate boards.106 In the U.K. as well, there is evidence of increased activ-
ism by institutional investors, particularly around governance concerns that have industry-wide
effects.107 Interestingly, these trends are not limited to more shareholder-oriented markets like
the U.S. and the U.K. For example, there is some indication of an increase in activism by both
foreign and domestic shareholders of German firms.108 In Europe, too, corporate governance
reforms under the revised Shareholder Rights Directive anticipate a greater role for share-
holder monitoring, including shareholder voice in executive compensation.109
To be sure, stronger institutional investor power has raised new agency costs concerns in
many jurisdictions about how to “monitor the monitors.” 110 In response, nearly 20 govern-
ments have introduced voluntary investor stewardship codes or mandates to encourage greater
transparency and investor responsibility for managing portfolio risk on behalf of beneficial
owners.111 However, as the ICGN Guidance on Corporate Risk Oversight states, “investors
are not themselves responsible for risk oversight of corporations.”112 Instead, shareholder
oversight should extend to corporate governance structures, such as specialized risk com-
mittees and proactive risk oversight processes, and should encompass “financial, strategic,
operational, environmental, and social risk.”113 Further research is needed on the effectiveness
of such measures, and current evidence is mixed.114
104
See European Corporate Governance Green Paper, supra note 74, at 8 & para. 3.5 (discussing
shareholder short-termism and risk-taking as contributors to the global financial crisis); see also Lynne
Dallas, Short-termism, the Financial Crisis and Corporate Governance, 37 J. Corp. L. 264 (2012).
105
See, e.g., Leo E. Strine, Jr., Fiduciary Blind Spot: The Failure of Institutional Investors to Prevent
the Illegitimate Use of Working Americans’ Savings for Corporate Political Spending, 97 Wash. U. L.
Rev. 1007 (2019). But see Virginia Harper Ho, Risk-Related Activism: The Business Case for Monitoring
Nonfinancial Risk, 41 J. Corp. L. 647 (2016) (discussing institutional investor incentives to focus on
long-term risks).
106
See, e.g., NACD, supra note 82.
107
See generally Gomtsian, supra note 101.
108
See Amadeus Moeser, Shareholder Activism in Germany, Harv. L. Sch. F. Corp. Governance
(Jan. 29, 2019), corpgov.law.harvard.edu/2019/01/29/shareholder-activism-in-germany-2/. Contributing
to these trends is a rise in the level of institutional ownership. See Wolf-Georg Ringe, Changing Law and
Ownership Patterns in Germany: Corporate Governance and the Erosion of Deutschland AG, 63 Am. J.
Comp. L. 493, 518, 524–26 (2015).
109
See generally, Maria L. Passador & Federico Riganti, Shareholders’ Rights in Agency Conflicts:
Selected Issues in the Transatlantic Debate, 42 Del. J. Corp. L 569 (2018) (analyzing these reforms).
110
See Lucian Bebchuk et al., The Agency Problems of Institutional Investors, 31 J. Econ. Persp. 89,
92 (2017) (discussing the implications of ownership concentration).
111
ICGN, supra note 21, at 6. The U.K. introduced the first stewardship code in 2010, which was
updated in 2019. Fin. Reporting Council, The U.K. Stewardship Code 2020 (2019), www.frc.org
.uk/getattachment/5aae591d-d9d3-4cf4-814a-d14e156a1d87/Stewardship-Code_Final2.pdf.
112
Id.
113
ICGN, supra note 21, at 11.
114
For an early critique of the U.K. investor stewardship code, see generally Brian Cheffins, The
Stewardship Code’s Achilles’ Heel, 73 Mod. L. Rev. 985 (2010). See also Daniëlle Melis, The
Institutional Investor Stewardship Myth (2014) (questioning the potential of investor steward-
ship based on data from the Netherlands). Some studies find that investor stewardship does not reach
firm-specific risk, but instead focuses more on industry-wide governance concerns. See Gomtsian, supra
4.3 Stakeholder Monitoring
Regardless of the different perspectives jurisdictions take on corporate accountability to

stakeholders,115 corporations and their boards are increasingly embedded within a global
network of other internal and external actors who monitor corporate activity, including local
and international NGOs, employees, consumers, and creditors. Now that most of the largest
companies produce sustainability reports116 and many jurisdictions have introduced some form
of mandatory sustainability reporting,117 internal and external stakeholders have greater access
to information on corporate impacts and firm-specific risks. Internal and external stakeholders
therefore offer an alternative source of managerial oversight and an added incentive to effec-
tive board monitoring.
4.3.1 Organized labor and employee participation

In addition to the potential positive effects of consumer pressure on corporate accountability
for operational risks, labor unions and employees can also drive better board risk oversight
and serve as an alternative source of risk monitoring.118 Although labor unions are declining
in influence in some countries, employees may have greater oversight capability in Germany
and other markets that have employee board representation or where labor unions are more
vibrant.119 The 2018 amendments to the U.K. corporate governance code also contemplate
board responsibility for workforce engagement through employee representation on the board,
a designated non-executive director, or the creation of a workforce advisory panel.120
4.3.2 Creditors
Creditors are expected to insist on protections against some forms of risk-enhancing behavior,
and so managerial incentives to improve risk management and legal compliance may also be
stronger for companies with higher levels of debt in the capital structure.121 Although there is
as yet limited evidence on their effectiveness, the United Nations, global NGOs, and capital
note 101, at 680-681 (citations omitted); see also Alexander I. Platt, Index Fund Enforcement, 53 U.C.
Davis. L. Rev. 1453 (2020). But see Alexander Dyck et al., Do Institutional Investors Drive Corporate
Social Responsibility? International Evidence, 131 J. Fin. Econ. 693 (2019) (surveying over 40 juris-
dictions and finding a causal link between institutional ownership and positive environmental and social
performance).
115
On board accountability for stakeholder concerns, see Keay, supra note 42, at 135–50, 187–90.
116
See KPMG, The Time Has Come: The KPMG Survey of Corporate Responsibility Reporting
2020 10-20 (2020), assets.kpmg/content/dam/kpmg/xx/pdf/2020/11/the-time-has-come.pdf.
117
More than 70 governments have adopted sustainability reporting measures; 80 percent of these are
mandatory. Reporting Exchange, www.reportingexchange.com (subscription based).
118
See Brian Cheffins, Corporate Governance and Countervailing Power, 74 Bus. Law. 1 (2018–19).
119
Id.
120
Fin. Rep. Council, U.K. Corporate Governance Code (2018) (Jan. 1, 2019), www.frc.org
.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code
-FINAL.PDF, at par. 5; see also Magnier, supra note 15, at 167–70 (surveying European approaches to
employee representation).
121
On creditor monitoring, see generally Douglas G. Baird & Robert K. Rasmussen, Private Debt and
the Missing Lever of Corporate Governance, 154 U. Pa. L. Rev. 1209 (2006); Frederick Tung, Leverage
in the Board Room: The Unsung Influence of Private Lenders in Corporate Governance, 57 UCLA
L. Rev. 115 (2009). See also George G. Triantis & Ronald J. Daniels, The Role of Debt in Interactive
Corporate Governance, 83 Cal. L. Rev. 1073, 1081–90 (1995) (discussing monitoring mechanisms).
market regulators also encourage creditor monitoring of business, legal, and regulatory risks
related to environmental and human rights impacts.122
4.4 Gatekeepers and Board Outsourcing
In addition, John Coffee’s seminal work on gatekeepers has highlighted the role of lawyers,
accountants, auditors, and other professionals in promoting better risk management and com-
pliance.123 Gatekeepers can expand the firm’s compliance capacity and can play an important
role in helping boards understand and manage risk. However, evidence of gatekeepers’ role in
facilitating, or failing to prevent, corporate malfeasance has caused regulators to focus on the
challenging questions of gatekeeper oversight and accountability.124 Examples include regula-
tory reforms directed at credit rating agencies,125 proxy advisors,126 auditors,127 and corporate
counsel.128
A more radical reworking of corporate governance that also relies on risk monitoring by
third parties is Stephen Bainbridge and Todd Henderson’s proposal to outsource board moni-
toring to “board service providers.”129 Although this proposal raises many practical questions,
Bainbridge and Henderson argue that continued corporate governance failures and the limits
of current corporate board monitoring are compelling justifications for such reforms.130
4.5 Self-Regulation and Reputational Incentives
The rich literature on new governance, self-regulation, voluntary regulation and other “soft
law” regimes identifies firms’ reputational interests as another potential incentive for better
122
Examples include the United Nations’ environmental credit risk management (ECRM) framework.
See UNEP-FI, UNEP FI Guide to Banking and Sustainability (Oct. 2011), europa.eu/capacity4dev/file/
11476/download?token=A56RslOv; see also Equator Principles, The Equator Principles (June 2013),
equator-principles.com/about/(introducing the voluntary regime adopted by global banks for project
finance lending).
123
John C. Coffee, Jr., Gatekeepers: The Professions and Corporate Governance 116–19
(2006).
124
See id. at 333–56 (proposing solutions); see also Niamh Moloney, EU Securities and Financial
Markets Regulation 634–37 (3d ed. 2014) (discussing gatekeepers in the EU).
125
See Moloney, supra note 124, at 637–82, 683–94 (detailing EU regulation of credit rating agen-
cies and investment analysts, respectively, and their effect on risk pricing).
126
See Passador & Riganti, supra note 109, at 584–92 (discussing the effect of the European Union’s
second Shareholder Rights Directive); see also U.S. Sec. & Exch. Comm’n, Exemptions from the Proxy
Rules for Proxy Voting Advice, 85 Fed. Reg. 55082 (July 22, 2020), www.sec.gov/rules/final/2020/34
-89372.pdf (amending the procedural requirements and disclosure rules for proxy advisors).
127
On the effect of Sarbanes-Oxley and the European Union’s Statutory Audit Directive, see
Lessambo, supra note 5, at 159–301. See also Branson, supra note 26, at 61–62.
128
See Coffee, supra note 123, at 192–232 (discussing corporate counsel’s obligations under
Sarbanes-Oxley).
129
See generally Stephen Bainbridge & Todd Henderson, Outsourcing the Board: How
Board Service Providers Can Improve Corporate Governance 65–84 (2018).
130
See id. They acknowledge that this proposal would be banned in countries that require all directors
to be natural persons. Id. at 137–48.
board oversight and as a direct constraint on managerial behavior.131 For example, corpo-
rations who voluntarily endorse the United Nations’ Global Compact or industry-specific
commitments like the Extractive Industry Transparency Initiative (EITI), commit to monitor,
mitigate, and disclose certain operational risks that might externalize harms to corporate stake-
holders. Transparency and the threat of reputational harm or exclusion from participation in
the voluntary regime are the two primary enforcement mechanisms.132
Self-regulation and soft law standards may in fact be more effective than law in shifting
behavioral norms, as they are flexible, adapted to firm-specific conditions, less costly, and
internal to the corporation.133 Indeed, these goals undergird comply-or-explain corporate
governance codes, which are designed to urge companies to adopt code best practices.
Self-regulation has been particularly important in attempting to address supply chain risks,
such as human rights impacts.134
Some aspects of corporate governance may of course be improved “voluntarily” for
market-driven reasons. 135 However, absent strong external regulation or a clear ethical “tone
at the top,” market pressure also drives companies to externalize risk or take “excessive” risks.
The business case for self-regulation is therefore constrained by firms’ assessment of regula-
tory, compliance, and reputational risk.136
4.6 Regulation
Finally, government responses to corporate scandal are among the most visible external
drivers of corporate risk management and compliance reforms. In fact, even in common law
jurisdictions, fiduciary duty is being displaced by regulatory corporate governance stand-
ards established by securities or financial regulators, and by the emergence of international
accounting, corporate governance, and anti-fraud standards.137 These regulatory drivers fall
into four different categories, and together may be more effective than autonomous board
monitoring in improving corporate risk management.
4.6.1 Direct regulation of business conduct

The most obvious of these – direct regulation governing corporate environmental, labor,
human rights practices, and the like – deserves only a brief mention since it is beyond the scope
131
For a survey of this literature, see Orly Lobel, The Renew Deal: The Fall of Regulation and the
Rise of Governance in Contemporary Legal Thought, 89 Minn. L. Rev. 342, 344 (2004). On voluntary
regulation, see generally David Vogel, Private Global Business Regulation, 11 Ann. Rev. Pol. Sci. 261
(2008); Voluntary Programs: A Club Theory Perspective (Matthew Potoski & Aseem Prakash eds.,
2009).
132
Matthew Potoski & Aseem Prakash, A Club Theory Approach to Voluntary Programs, in
Voluntary Programs, supra note 131, at 17, 26–29.
133
Klettner, supra note 54, at 62–63.
134
See generally David V. Snyder & Susan A. Maslow, Human Rights Protections in International
Supply Chains – Protecting Workers and Managing Company Risk, 73 Bus. Law. 1093 (2018). See
also Andrew Millington, Responsibility in the Supply Chain, in The Oxford Handbook of Corporate
Social Responsibility 363 (2008).
135
See Cheffins, supra note 118, at 31–34 (discussing these mechanisms).
136
See generally David Vogel, The Market for Virtue: The Potential and Limits of Corporate
Social Responsibility (2005).
137
Seligman, supra note 62, at 463–64.
of this chapter. Tougher regulation expands firms’ compliance obligations and therefore also
the scope of legal risk oversight that boards must undertake.
4.6.2 Meta-regulation of risk oversight, risk management and compliance

The second form of regulation is the “meta-regulation” of risk oversight, risk management,
or the compliance function itself. Meta-regulation is the regulation of voluntary conduct, such
as the introduction of standards for codes of conduct, mandating of codes of ethics and risk
management policies, disclosure regimes, and the use of regulatory incentives to shape how
companies design compliance systems.138
Meta-regulation of risk captures most of the regulatory responses to financial crisis by
governments worldwide. These include the Sarbanes-Oxley and Dodd-Frank reforms in the
United States, which represented a marked expansion of meta-regulation and enforcement
of otherwise voluntary corporate governance policies. 139 Other jurisdictions followed suit.140
Guidance from criminal prosecutors on corporate fraud investigation and sentencing policy,
described above, is another example of meta-regulation dictating otherwise discretionary
internal governance structures.141 Corporate governance codes are perhaps the most widely
used example of meta-regulation.142 Many forms of meta-regulation create significant external
incentives for board oversight that are more robust than fiduciary duty litigation or other forms
of shareholder enforcement.143
4.6.3 Mandatory disclosure

The fourth form of regulation is the indirect regulation of corporate transparency and risk
management behavior through disclosure.144 Disclosure’s growing importance cannot be
overstated; as Joel Seligman has observed, “disclosure standards today are the essence of what
we mean by the ‘duty of loyalty’ and the ‘duty of care’.”145 Some form of risk-related disclo-
sure is required for listed companies as a matter of capital markets regulation or under stock
exchanges’ listing rules. In most jurisdictions, it is also mandatory for other large privately
held firms. These disclosure requirements are enforced by capital market authorities and, in
some jurisdictions, by shareholder litigation.
Mandatory reporting regimes generally require disclosure of risk factors affecting the
business, and of executive compensation policies and other corporate governance structures
that may affect risk management. For example, the OECD Principles emphasize the impor-
tance of disclosing material “foreseeable risk factors,” risk monitoring and risk management,
and matters related to the company’s stakeholders, in addition to disclosures on executive
138
Christine Parker, The Open Corporation 246 (2000).
139
See generally Johnson & Sides, supra note 98.
140
See generally Harper Ho, Comparative Risk Oversight, supra note 30 (discussing examples from
Europe and China).
141
Griffith, supra note 37.
142
Meta-regulation is also ubiquitous for state-sector firms; over half of the 47 jurisdictions (OECD
and non-OECD) the OECD surveyed in 2014 had already implemented risk governance standards for
non-listed SOEs. OECD Risk Management, supra note 16, at 25 & tbl. 1.2.
143
See Gadinis & Miazad, supra note 39, at 2186–87, 2189 (discussing fraud prosecutions).
144
Disclosure is also a form of meta-regulation, but given its distinct features, I discuss it separately
here.
145
Seligman, supra note 62, at 459–66.
compensation, governance structure and policy, share ownership, and the audit function.146
The EU Amended Accounting Directive requires reporting on a comply-or-explain basis
about compliance with the relevant corporate governance code, adoption of internal controls
and risk management systems, and disclosure of risk factors that can impact the business.147
EU member states, as well as the U.K., are also among the more than 70 countries that now
encourage or require companies to disclose ESG-related risks in some form.148
Academic commentary identifies two potentially separate rationales for disclosure: the
first is to generate information about corporate operations and impacts that can inform capital
market prices, shareholder voting and engagement, and investment decision-making; the
second is to indirectly motivate changes in corporate behavior through reputational pressure.149
However, serial corporate scandals offer evidence that even for the narrow purpose of fairly
representing investment risk, mandatory disclosure is seriously deficient.150 Disclosure should
therefore be viewed as an aid to improved corporate accountability and board oversight, but
not as a substitute for it.
5. CONCLUSION
This chapter has highlighted several developments that are transforming the risk oversight
function of corporate boards and shaping how companies assess and respond to risk. First, the
rise of risk oversight, risk management, and compliance as key governance functions for large
companies worldwide has been matched by their increasing complexity and scope. Second, the
relevance of fiduciary duties in motivating effective board risk oversight has declined, even
in common law jurisdictions, as external risk regulation has expanded under capital market
regulation, other statutory regimes, soft law corporate governance codes, and international
corporate governance standards.
These observations raise a number of questions for further research. Key issues include how
to strengthen ERM, how to help companies fully internalize their operational costs and risks,
and how to strike the right balance between appropriate risk-taking and corporate accounta-
bility. Given the persistent variation in different jurisdictions’ approach to these questions,
finding answers will continue to require a comparative lens.
Corporate boards have a critical risk oversight function, but effective board governance
alone is not enough to prevent new corporate scandals or to keep corporations from external-
izing risk. The crucial, yet limited role of the monitoring board across jurisdictions therefore
calls for greater focus on complementary sources of oversight, including personal liability for
corporate officers, monitoring by shareholders, stakeholders, and gatekeepers, and the external
regulation of risk governance in its various forms.
146
See OECD Principles, supra note 2, at 37–44.
147
Council Directive 2014/95, of the European Parliament and of the Council of 22 October 2014,
2014 O.J. (L 330), amending Directive 2013/34/EU as regards disclosure of non-financial and diversity
information by certain large undertakings and groups.
148
See Reporting Exchange, supra note 117; EU NFR Directive, supra note 76.
149
See Virginia Harper Ho & Stephen Park, ESG Disclosure: Optimizing Private Ordering in Public
Reporting, 41 U. Penn. Int’l L.J. 249, 270–76 (2019) (discussing these rationales).
150
See generally Langevoort, Disasters and Disclosures, supra note 11.
13. Who decides executive pay? A comparative
perspective
Li-Wen Lin
1. INTRODUCTION
Executive compensation is one of the most important mechanisms to incentivize top managers
to work hard and make good decisions for the corporation. In a company, who holds this
important power over executive compensation? Perhaps the most common answer is the board
of directors. Many corporate statutes around the world indeed grant this power to the board
of directors. However, this common answer is an oversimplified one, especially for public
companies. In many jurisdictions, the board of directors of a public company is not the only or
even not the legal body that holds the power over executive remuneration.
This chapter presents different legal arrangements about the decision-making power over
executive compensation in six jurisdictions, including the United States, the United Kingdom,
Germany, Japan, India, and China. The United States and the United Kingdom are currently
the most studied jurisdictions in executive compensation literature. While both countries share
many similarities in corporate governance, they have recently adopted quite different legal
rules with respect to restricting the board’s power over executive pay. The United States rep-
resents a legal model that relies on independent compensation committees with advisory input
from shareholders, while the United Kingdom requires the board of directors’ remuneration
policy subject to a binding shareholder vote. Germany represents a two-tier board structure
where the supervisory board has the power to set compensation for members on the manage-
ment board, while shareholders may provide advisory input. The cross-national differences
are more glaring when comparison is done beyond the Western context. In Japan, the extent
to which the board of directors’ remuneration power is limited by shareholders depends on
the company’s choice of the governance structure. India represents an aggressive approach
in which the government may have a say on specific pay packages even for non-state-owned
enterprises. China demonstrates a complex case in which the role of the board of directors is
legally bypassed through corporate group structures and organs of the Chinese Communist
Party.
The review of the national experiences speaks to the convergence-divergence debate in cor-
porate governance. It shows an emerging tendency towards restraining directors’ power over
executive pay. The increasing limitation on directors’ discretion in executive compensation is
not merely a result of the global diffusion of the “say-on-pay” movement in the aftermath of
the 2008 financial crisis, but in some cases, has deep legal, cultural or political roots specific
to a given national context. The different institutional environments lead to wide-ranging
strategies to restrain the board’s power over executive pay, including mandated disclosure,
shareholder voting, fiduciary duties, regulatory caps, and shadow regulatory bodies. There
remains great divergence in the legal arrangements of who decides executive pay.
263
2. THE STANDARD PARADIGM
Who should have the power to decide executive compensation? The common approach
to answering this question focuses on the power allocation between the board of directors
and shareholders. Conflicts of interests arise when executives themselves hold the power to
decide their own remuneration. Executives may have self-interests to maximize their own pay
at the expense of the corporation. As a result, it is commonly recommended that executive
compensation should be set by actors other than executives themselves. One of the potentially
appropriate actors to undertake the role is the board of directors. As recommended by the
OECD Principles of Corporate Governance, one of the board of directors’ responsibilities is
to select, compensate and monitor executives.1 The board of directors is expected to engage in
arm’s-length negotiations with executives. To ensure arm’s length bargaining, it is considered
good practice that a special board committee comprising either wholly or a majority of inde-
pendent directors must be the organ that handles executive remuneration policy and contracts.2
Besides the board of directors, shareholders are an important actor on the rise. In the past,
the role of shareholders in executive compensation was merely a recipient of executive pay
information disclosed by the company. For instance, the 1999 OECD Principles of Corporate
Governance provided that the board of directors should have the power to determine exec-
utive compensation while shareholders should have the right to executive pay information.
However, the legal role of shareholders in executive compensation has been expanding over
the recent years. The 2004 and following versions of the OECD principles recommend that
shareholders should be able to make their views known on executive pay and any use of
equity-based compensation should be subject to shareholder approval.3 The legal mechanism
through which shareholders air their views on executive pay is now commonly called “say
on pay.” The standard rationale for “say on pay” is that shareholder monitoring would both
restrict overall pay levels and encourage boards to link executive pay more closely with firm
performance. In other words, “say on pay” is expected to provide an additional layer of moni-
toring and increase director accountability.
According to the OECD’s recent survey of the legal arrangements in 49 jurisdictions, most
of which are developed economies, all the surveyed jurisdictions give the board of directors
some or exclusive powers over executive compensation and a great majority of the jurisdic-
tions adopt some form of “say on pay” for shareholders to voice their views on executive pay.4
Generally, the decision-making power over executive compensation is legally vested in the
board of directors with increasing empowerment in shareholders.
1
Organisation for Economic Co-operation and Development [OECD], G20/OECD Principles of
Corporate Governance, at V.D.3 (2015), www.oecd.org/corporate/ca/Corporate-Governance-Principles
-ENG.pdf.
2
Id.at V.D.4.
3
Id. at II.C.3.
4
Organisation for Economic Co-operation and Development [OECD], Corporate Governance
Factbook 2019, at tbl. 4.16 (2019), www.oecd.org/corporate/Corporate-Governance-Factbook.pdf.
Who decides executive pay? 265
3. NATIONAL VARIETIES
Although many countries in the world appear to share the basic legal paradigm of executive
compensation, a closer look at their legal rules and practices reveals great diversity. The auton-
omy of the board of directors with respect to executive compensation decisions varies widely
from country to country.
To date, most discussion on executive compensation has been focused on Western coun-
tries, particularly the United States and the United Kingdom. Although the United States and
the United Kingdom share many common features in corporate governance including execu-
tive compensation, they have recently diverged on shareholders’ legal authority over executive
pay. While cross-national variations are observable among Western countries, the national
differences are far more striking when extending the focus beyond non-Western countries.
As illustrated below, Japan provides an example where the board’s authority depends on the
choice of corporate governance structure. India provides an extreme example where the law
gives the government the approval power even in non-state-owned enterprises. China provides
a case where the board of director is legally circumvented.
3.1 United States
Corporate statutes in the United States typically provide that, unless stated otherwise in the
articles of incorporation, the board of directors has the authority to fix remuneration for direc-
tors and officers.5 In practice, U.S. publicly traded companies typically delegate this power to
a compensation committee composed of independent directors.6 For listed companies, the use
of an independent compensation committee is more than a norm but a requirement under the
listing rules of the stock exchanges. Since 2003, the NYSE has required companies subject
to its corporate governance listing standards to have a compensation committee composed
entirely of independent directors.7 Under the NYSE rules, the independent compensation
committee rather than the plenary of the board of directors (unless entirely composed of
independent directors) should have the authority to decide the CEO’s compensation package.8
Moreover, the use of an independent compensation committee has significant legal implica-
tions when the board’s compensation decisions are challenged in court. U.S. courts do not
investigate the substance of the executive pay or even examine too closely the process so long
as the corporation follows quite easy procedural requirements, namely setting up a compen-
5
Del. Code Ann. tit. 8, § 141(h).
6
Randall S. Thomas, Explaining the International CEO Pay Gap: Board Capture or Market
Driven?, 57 Vand. L. Rev. 1171, 1190 (2004).
7
NYSE Listed Company Manual § 303A.05. Also because of the Dodd-Frank Act, the SEC issued
a rule in 2012 which required the national securities exchanges to modify their listing standards for
compensation committees entirely composed of independent directors.
8
Under the rules, a compensation committee must (1) review and approve corporate goals and
objectives relevant to CEO compensation, (2) evaluate the CEO’s performance in light of those goals
and objectives, and (3) either as a committee or together with the other independent directors determine
and approve the CEO’s compensation based on such evaluation. In contrast, NASDAQ allows the board,
whether entirely independent or not, to determine executive pay.
sation committee composed of independent directors and seeking advice of compensation

experts for approval of any executive pay packages.9
The role of the independent compensation committee has been a subject of debate in the
United States. The optimal contracting theory proposes that independent directors engage in
arm’s length bargaining with executives to strike a deal in the best interest of shareholders.10
In contrast, the managerial power theory argues that directors, including inside and outside
directors, are captured by the company’s CEO, who wields influence over whether a director
is nominated for reelection.11 The compensation committee composed of entirely independent
directors is said to stand in a much weaker position.12 Independent directors are part-time
directors, who spend only a few days a year focusing on the company’s business and are much
less knowledgeable than the executives with whom they are bargaining.
The compensation committee often hires consultants for advice as compensation plans
become increasingly complex. The use of consultants’ expertise legitimizes the compensation
committee’s decision especially given that there is no one right answer to the question about
the appropriate level and structure of executive compensation.13 While compensation consult-
ants provide help, they themselves have become part of the executive compensation problem.
In the United States, a few large consulting firms that offer a wide range of consulting services
dominate the compensation consulting market.14 The committee’s consultants are or may wish
to become advisors to the company on other business matters that are typically more lucrative
than compensation consulting. Consultants may be inclined to recommend compensation
packages favorable to the CEO who decides the award of other business work. Accordingly,
a popular proposition is that the use of compensation consultants is associated with higher
executive compensation. However, empirical studies in the United States provide mixed
results about the relationship between the pay level and the use of compensation consultants.15
Shareholders of U.S. public companies used to have limited formal power over executive
compensation. Previously, U.S. public companies only sought shareholder approval on
performance-based compensation plans for tax reasons.16 After the 2008 financial crisis,
American shareholders gained more legal voice. Under the Dodd-Frank Act and the SEC
implementation regulations, public companies are required to provide their shareholders with
an advisory vote at least once every three years on the compensation of the most highly remu-
9
Lucian A. Bebchuk & Jesse Fried, Pay Without Performance: The Unfulfilled Promise Of
Executive Compensation 45–46 (2004); Randall S. Thomas & Harwell Wells, Executive Compensation
in the Courts: Board Capture, Optimal Contracting and Officers’ Fiduciary Duties, 95 Minn. L. Rev.
865–84 (2011) (reviewing the history of executive compensation court cases in Delaware).
10
Alex Edmans & Xavier Gabaix, Is CEO Pay Really Inefficient? A Survey of New Optimal
Contracting Theories, 15 Eur. Fin. Mgmt. 486 (2009).
11
Bebchuk & Fried, supra note 9.
12
Thomas, supra note 6.
13
Ruth Bender, Executive Compensation Consultants, in Research Handbook On Executive Pay
321 (Randall S. Thomas & Jennifer G. Hill eds., 2012).
14
Id., at 324–25.
15
For a brief review of empirical evidence, see id., at 330–31.
16
The tax deduction limit under Internal Revenue Code Section 162(m) used to exclude
performance-based compensation if performance criteria used in the compensation plan were approved
by shareholders at least once every five years. The exclusion of performance-based compensation was
removed with the passage of the Tax Cuts and Jobs Act (2017). As a result, there is no need to seek
shareholder approval for performance-based compensation for tax deduction reasons.
nerated executives. Shareholders are required to vote on the total compensation package but
are not allowed to vote on specific elements of compensation such as salaries, bonuses or stock
options. Empirical evidence on whether the say-on-pay vote reduces the level or growth rate
of executive compensation is inconclusive. Some recent evidence shows that the say-on-pay
vote increases the proportion of equity components in pay structure and the sensitivity of
CEO pay to poor performance.17 Meanwhile, other evidence suggests the say-on-pay vote is
largely a vote on performance, through which shareholders signal their dissatisfaction with the
company’s financial performance rather than their concerns about the compensation itself.18
Given that the shareholder vote is merely advisory, the U.S. system mainly relies on disclo-
sure and market pressure to discipline executive compensation. Mandated disclosure of exec-
utive pay was first introduced in the 1930s as a regulatory response to the perceived excessive
pay problem surfacing during the Great Depression.19 The disclosure requirements have
expanded ever since. Recent major disclosure overhauls include the 2006 reform following
a series of scandals involving accounting frauds, options backdating, excessive severance pay
and self-interested compensation consultants, and the 2011 reform in response to the financial
crisis.20 The common rationale of transparency is to expose pay practices to public scrutiny
thereby fixing unreasonable pay. However, U.S. empirical evidence shows that disclosure
facilitates comparison with high-paying peers and creates a ratchet-up effect.21
In comparative perspective, a key feature of the U.S. disclosure regime is the mandatory
disclosure of the ratio of CEO pay to the median employee pay.22 The CEO pay ratio disclosure
aims to fix the pay inequality problem in the United States, whose income inequality often
ranks the worst among developed economies. Available evidence shows that the pay ratios
vary widely across companies and industries, with the highest ratio as multiple thousands to
one and the lowest ratio as zero (where CEOs do not take any reportable compensation).23 It
is difficult to interpret and misleading to compare the pay ratios across companies due to an
array of organizational, industrial and methodological factors.24 As 2018 was the first year to
implement the pay ratio rule, it is too early to tell how such disclosure and its market implica-
tions will change the board’s decisions on executive pay.
17
Stephani A. Mason et al., Say-on-Pay: Is Anybody Listening?, 20 Multinational Fin. J., 273
(2016).
18
Jill E. Fisch et al., Is Say on Pay All About Pay? The Impact of Firm Performance, 8 Harv. Bus.
L. Rev. 101 (2018).
19
Kevin J. Murphy, The Politics of Pay: A Legislative History of Executive Compensation, in
Research Handbook On Executive Pay, supra note 13, at 12.
20
Id. at 13–17.
21
Thomas A. DiPrete et al., Compensation Benchmarking, Leapfrogs, and the Surge in Executive
Pay, 115 Am. J. Soc. 1671 (2010).
22
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 953(b), 124
Stat. 1376 (2010); Regulation S-K, Item 402, 17 C.F.R. § 229.402(u) (2018).
23
The Ceo Pay Ratio: Data And Perspectives From The 2018 Proxy Season, Pearl Meyer, www
.pearlmeyer.com/ceo-pay-ratio-data-and-perspectives-2018-proxy-season.pdf.
24
Steven A. Bank & George S. Georgiev, Securities Disclosure As Soundbite: The Case of CEO Pay
Ratios, 60 B.C.L. Rev. 1123 (2019).
3.2 United Kingdom
In the United Kingdom, there used to be limited regulation, other than the operation of
fiduciary duties, on how the board of directors should determine executive compensation.
Contemporary efforts to regulate executive remuneration in the United Kingdom began to
emerge in the 1990s. An important initiative was the Greenbury Report published by the
Confederation of British Industry in 1995.25 The report was undertaken in response to the
public’s concerns about the increasing executive pay in the privatized utility companies, coin-
ciding with employee layoffs, wage control for ordinary employees, and rising prices for con-
sumers. The Greenbury Report aimed to provide good practices for executive compensation in
furtherance of the governance principles of the 1992 Cadbury Report. It recommended that the
power to determine executive compensation should be vested in the compensation committee
composed of non-executive directors with full disclosure about their decisions to shareholders.
The Greenbury Report also recommended the pay level and structure, the link between pay
and performance, and the adoption of a voluntary and non-binding say on pay.
The key recommendations of the Greenbury Report were subsequently incorporated into
the Combined Code of Corporate Governance in 1998 (later renamed as the U.K. Corporate
Governance Code). Listed companies in the United Kingdom were required to report in
their annual reports whether and how they comply with the best standards set forth in the
corporate governance code. Except for disclosure, listed companies could decide whether to
adopt the good practices of executive compensation. In practice, the compliance level was
unsatisfactory, leading to the Directors’ Remuneration Report Regulations 2002. The regu-
lations required a listed company’s board to prepare a remuneration report, which included
detailed information about the executive compensation policy. Importantly, the regulations
required a mandatory non-binding vote on the directors’ remuneration report. At every annual
shareholder meeting, shareholders would have the opportunity to vote on the director’s remu-
neration report; nevertheless, the board of directors retained the final say, as the vote was only
advisory. Given the advisory nature of the vote, most empirical studies unsurprisingly show
that there was no change in the growth rate of executive compensation after the mandatory
non-binding say-on-pay regulation.26 Shareholders rarely dissented except in a few extreme
cases.27
In 2013, the government tightened its regulations.28 Under the new regulatory framework,
the power to determine executive compensation is no longer entirely with the board of direc-
tors. The new rules require two different shareholder votes on executive compensation. First,
the rules require a binding shareholder vote on the directors’ remuneration policy at least once
25
Confederation of British Industry (CBI), U.K. Greenbury Report (Study Group On Directors’
Remuneration), available online at https://ecgi.global/code/greenbury-report-study-group-directors
-remuneration.
26
Guido Ferrarini et al., Executive Remuneration in Crisis: A Critical Assessment of Reforms in
Europe, 10 J. Corp. L. Stud. (2010); Randall Thomas, Say on Pay Around the World, 92 Wash. Univ.
L. Rev. 653, 665 (2015).
27
Id.
28
For detailed discussion, see Martin Petrin, Executive Compensation in the United Kingdom – Past,
Present, and Future, 36 Company Lawyer 196 (2015); Betty Wu et al., “Say on Pay” Regulations and
Director Remuneration: Evidence from the UK in the Past 15 Years (Jan. 2019) (unpublished manu-
script), https://ssrn.com/abstract=3321328.
every three years. Second, the rules require an annual, non-binding advisory vote by share-
holders on the annual remuneration report that includes total pay (single figure) awarded to
each executive for the financial year. If at an annual general meeting the advisory vote is not
approved by shareholders, the company will be required to submit its remuneration policy for
shareholder approval at the following year’s annual general meeting or a special shareholder
meeting. Any pay arrangement inconsistent with the policy will not be binding unless it is
specifically approved in a shareholder resolution. Some empirical evidence shows that unlike
the previous voluntary say on pay that had no effect on the level or growth of remuneration,
the binding vote is associated with a halt in the pay growth.29
3.3 Germany
A salient feature of German corporate governance is the mandatory two-tier board structure of
the stock corporation. The management board is in charge of running the business while the
supervisory board is responsible for monitoring the management board. Directors that sit on
one board cannot sit on the other board of the same company. Shareholders elect members of
the supervisory board and the supervisory board appoints members of the management board.
The size and composition of the supervisory board varies with the value of the company’s
capitalization and the applicability of codetermination.30
As noted, the main responsibility of the supervisory board is to monitor the management
board. As part of its monitoring duty, the supervisory board is tasked with deciding the
remuneration of the management board. As early as 1937, the German Stock Corporation Act
(Aktiengesetz, “AktG”) provided that the supervisory board had a duty to ensure the reasona-
bleness of remuneration paid to the management board by taking into account the duties per-
formed by the respective director and the financial condition of the company. The 1965 AktG
maintained this reasonableness requirement.31 On the face of it, the reasonableness require-
ment could be an important legal constraint on the supervisory board’s authority in setting
executive compensation. In practice, German courts have been reluctant to second-guess the
supervisory board’s judgment on what constitutes a reasonable compensation package.32
Meanwhile, under the 1965 AktG, it was not easy to accommodate the incentive-based
compensation. The use of incentive-based compensation usually involves repurchase of shares
from the market. However, repurchasing shares to fulfill the obligations under stock option
plans was prohibited until an amendment to the AktG in 1998.33 After the deregulation, the
use of variable pay by German stock corporations increased considerably. The average per-
29
Wu et al., supra note 28; Carsten Gerner-Beuerle & Tom Kirchmaier, Say on Pay: Do Shareholders
Care? (European Corp. Governance Inst. (ECGI) - Finance Working Paper No. 579/2018), https://ssrn
.com/abstract=2720481.
30
One-half of the members of the supervisory board shall be employee representatives for com-
panies with more than 2,000 employees and one-third for companies with the number of employees
between 500 and 2,000.
31
Aktiengesetz [AktG] [Stock Corporation Act], Sept. 6, BGBl I, at § 87 [hereinafter German Stock
Corporation Act].
32
Brigitte Haar, Executive Compensation Under German Corporate Law: Reasonableness,
Managerial Incentives And Sustainability in Order to Enhance Optimal Contracting and to Limit
Managerial Power, in Research Handbook On Executive Pay, supra note 13, at 491.
33
Id.
centage of variable pay in executive compensation rose from 19 percent in 1998 to 70 percent
in 2005.34 This increasing trend of variable pay came to a halt after the 2008 financial crisis.
In the aftermath of the financial crisis, Germany enacted a new law to tighten regulations on
executive pay. The Law on the Appropriateness of Management Board Remuneration, which
took effect in August 2009, requires the supervisory board to monitor the remuneration of the
management board more closely than before. The law provides that the plenary of the supervi-
sory board must decide on the management board’s remuneration.35 It prohibits any delegation
of this decision to a committee of the supervisory board, which used to be a common practice
in German stock corporations prior to the law. As such, all supervisory board members may be
personally liable.36 Notably the law explicitly imposes a duty on the supervisory board of listed
companies to tie remuneration to the “sustainable” development of the company. This require-
ment is intended to fix the short-termism that was believed the culprit of the financial crisis.
The law provides that variable pay components should be based on long-term assessment. In
particular, it requires stock options to be exercised at the earliest four years after the options
have been granted. Furthermore, the supervisory board must exercise clawback measures in
case that a continued payment of remuneration would be unreasonable for the company.37
In November 2019, the German government adopted new say-on-pay rules in an effort to
implement the revised European Shareholders’ Rights Directive (Directive (EU) 2017/828).
Under the new rules, the supervisory board of a listed company should prepare a detailed remu-
neration policy for the management board and submit it to the shareholders if there are major
changes to the policy or in any event at least once every four years. The new rules also require
a shareholders vote on the remuneration policy for the supervisory board of a listed company
at least once every four years. In addition, each year shareholders of a listed company vote to
approve the remuneration report that includes the remuneration details of each management
board member. Both votes on the remuneration policy and the report are advisory.
Recent empirical evidence shows that the average shareholder approval rate has been
high and stable, over 90%, albeit with a significant decline in 2016 and 2017.38 Empirical
evidence finds that supervisory boards rarely revise existing compensation contracts even if
the shareholder approval rate is low; nevertheless, supervisory boards are responsive to the
shareholder discontent when it comes to designing compensation contracts for new board
candidates.39 This observation is probably an outgrowth of the operation of contract law.40
Although the supervisory board is able to determine the remuneration of management board
members when they are appointed, it generally does not have the power to unilaterally change
existing employment contracts without cause. Therefore, the supervisory board is unlikely
to amend existing employment agreements even in the face of the low shareholder approval
rate. However, there is no such contractual concern for management board members who are
appointed after an opposing resolution.
34
Id.
35
German Stock Corporation Act, §107 para. 2.
36
An Overview of the Glass Lewis Approach to Proxy Advice: Germany, Glass Lewis, www
.glasslewis.com/wp-content/uploads/2018/11/2019_GUIDELINES_Germany.pdf.
37
German Stock Corporation Act, §87, para. 2.
38
Tobias H. Tröger & Uwe Walz, Does Say on Pay Matter? Evidence from Germany, 16 Eur. Com.
& Fin. L. Rev. 381 (2019).
39
Id.
40
Id.
3.4 Japan
A salient feature of Japanese executive compensation is that Japanese executives earn signif-
icantly less than their international counterparts.41 The relatively low level of executive pay
in Japan has been a puzzling issue in a comparative perspective. Some scholars attributed
the relatively low pay to the three features of the traditional Japanese corporate governance
model: main bank capital markets, keiretsu cross-shareholdings and lifetime employment.
Under the main bank system, companies relied on bank financing. Main banks through
lending and cross-shareholding relationships had access to detailed corporate performance
information and had incentives to monitor management including executive compensation.
Cross-shareholdings kept keiretsu-affiliated firms from the threats of external takeovers and
thus made main banks as the primary corporate governance monitor. Empirical evidence
showed that executive compensation of keiretsu-affiliated firms was significantly lower than
that of independent firms and was more determined by corporate growth and capital invest-
ment.42 Main bank monitoring substituted for high pay to induce performance. However, with
the deregulation of the financial system in the 1990s, Japanese firms decreased bank-based
debt financing and increased equity financing, resulting in the decline of main bank monitor-
ing. A recent study showed that unlike in the past where main banks were an effective solution
to agency problems, they were no longer a substitute for incentive compensation.43
While the main bank system’s monitoring function has significantly declined, life employ-
ment appears to continue to play a role in disciplining executive compensation.44 The internal
career pattern of top management remains the norm in Japanese firms. The lack of the external
executive market dispenses the use of compensation to attract and retain talent and keeps the
executive pay at a modest level.
Meanwhile, some scholars attribute the relatively low level of executive compensation to
Japanese culture.45 It is said that the Japanese business culture is intolerant toward greed and
is attentive to the interests of multiple stakeholders.46 In such a cultural context, executive
compensation is unlikely to be excessive.
A little known fact about Japanese executive compensation is that for a long time director
compensation has been required by law to be approved by shareholders. Since the promulga-
tion of the Commercial Code in 1898, all remuneration paid to directors must be approved in
41
Robert J. Jackson Jr. & Curtis J. Milhaupt, Corporate Governance and Executive Compensation:
Evidence from Japan, 2014 Colum. Bus. L. Rev. 111 (2014).
42
Takao Kato, Chief Executive Compensation and Corporate Groups in Japan: New Evidence from
Micro Data, 15 Int’l J. Industrial Org. 455 (1997).
43
Hideaki Sakawa et al., Relation between Top Executive Compensation Structure and Corporate
Governance: Evidence from Japanese Public Disclosed Data, 20 Corp. Governance: Int’l Rev. 593
(2012).
44
Franz Waldenberger, “Company Heros” versus “Superstars”: Executive Pay in Japan in
Comparative Perspective, 25 Contemporary Japan 189 (2013).
45
Luyao Pan & Zianming Zhou, CEO Compensation in Japan: Why So Different from the United
States? 53 J. Fin. & Quantitative Analysis 2261 (2018); Alberto R. Salazar & John Ragguinti, Why
Does Executive Greed Prevail in the United States and Canada but not in Japan? The Pattern of Low
CEO Pay and High Worker Welfare in Japanese Corporations, 64 Am. J. Comp. L. 721 (2016).
46
Id.
the articles of incorporation or by a shareholder resolution.47 Although the law applies only to
directors rather than executives, in practice most directors are also executives.48 In this regard,
Japan has had a mandatory and binding say-on-pay law for more than a hundred years.
Prior to 2005, Article 50 of the Commercial Code was read as “If the amount of remuneration
to be received by directors has not been fixed by the articles of incorporation, it shall be fixed
by the resolution of a general meeting of shareholders.” In 2005, all the corporate law provi-
sions in the Commercial Code were repealed and transferred to the newly enacted Companies
Act. Article 361 of the Companies Act provides that any financial benefits paid to directors
by the corporation must be fixed by a resolution at a shareholders meeting or prescribed in the
articles of incorporation. As the articles of incorporation are subject to shareholder approval,
the determination of director remuneration must be approved by shareholders. Article 361
further provides what exactly shareholders are asked to vote on: (1) if the remuneration is
in a fixed amount, that amount; (2) if the remuneration is not fixed, the specific method for
calculating that amount; (3) if the remuneration is not monetary, the specific contents thereof.49
At first glance, shareholders of Japanese companies appear to have great power over
executive compensation. However, there are great limitations in practice. First, the Supreme
Court of Japan held that shareholders only approve the total amount paid to all the directors
rather than the individual amount paid to each director.50 After shareholder approval, the board
decides how to apportion the total amount among themselves. In practice, the allocation power
is with the president/chairman.51 Second, although shareholder approval is mandatory, it does
not have to occur periodically. As long as there is no change to the total remuneration pre-
viously approved by shareholders, the board has no obligation to seek shareholder approval.
Thus, it does not require a shareholder vote even when the company reduces the board size and
each director may receive a larger amount of compensation.52
In addition, the application of the Japanese say-on-pay rule varies with the governance
structure of the company. Japan made important corporate governance reforms in 2002 and
2015. Because of the reforms, Japanese companies now have three choices with regard to
board structure. The first choice is the traditional model where the company has a board of
directors and a board of auditors, both elected by shareholders. The responsibility of the board
of auditors is to monitor the board of directors’ compliance with law. In practice, the board
of auditors performs a weak governance function partly because it has a narrow mandate and
47
Sean McGinty & David Green, What Shareholders in Japan Say about Director Pay: Does Article
361 of Japan’s Companies Act Matter?, 31 Asian J. Comp. L. 87 (2018).
48
Executive Compensation Disclosures In Asia, Mercer, www.mercer.com/content/dam/mercer/
attachments/asiapacific/asia/Mercer_Executive_Remuneration_Disclosures_in_Asia (providing
a summary of disclosure requirements of Asian countries including Japanese); Kazuaki Nagata,
Corporate Japan: Woeful Lack Of Outside Directors, Japan Times (Jan. 17, 2012), www.japantimes
.co.jp/news/2012/01/17/reference/corporate-japan-woeful-lack-of-outside-directors/#.XO7T-YhKiM8
(reporting that in 2012 “only 35 percent of the companies listed on the first section of the Tokyo Stock
Exchange have outside directors, with 1.8 for any given firm.”).
49
Kaisha-ho [Japanese Companies Act], Law No. 86 of 2005, art. 361, translated in (Japanese Law
Translation [JLT DS]), www.japaneselawtranslation.go.jp/law/detail/?id=3206&vm=04&re=02.
50
Saiko Saibansho [Sup. Ct.] Mar. 26, 1985, Sho 59 (O) no. 1559, at 150 (Japan).
51
Remuneration Committee Briefing (2009), Willis Towers Watson, www.towerswatson.com/en
-GB/Insights/IC-Types/Ad-hoc-Point-of-View/2009/Remuneration-Committee-Briefing (surveying 12
countries including Japan with regard to who has the authority to sign off on executive pay).
52
McGinty and Green, supra note 47.
partly because the board is often composed of long-term employees who made good contribu-
tions to the company but do not yet deserve a seat on the board of directors. The second choice
is a model where the company does away with the board of auditors and instead establishes
three mandatory committees (including audit, nomination, and compensation) under the board
of directors. Each of the mandatory committees must be composed of a majority of outside
directors.53 The third choice is a hybrid model where the board of auditors is replaced with
an audit and supervisory committee.54 The say-on-pay rule set out in the Article 361 of the
Companies Act applies to companies with the board of auditors and companies with the audit
and supervisory committee. It does not apply to companies with three mandatory committees,
where the power to fix remuneration of directors and executives is statutorily vested in the
compensation committee.
To date, the vast majority of Japanese companies listed on the Tokyo Stock Exchange
remain organized with the board of auditors.55 Therefore, most of the companies require share-
holder approval for director/executive compensation. A recent empirical study shows that
about 70 percent of the companies with the traditional governance structure did not have a vote
on compensation proposals in the sample year (2014).56 The absence of shareholder voting was
mainly because most of the companies did not have any change to their compensation pack-
ages and thus did not trigger the shareholder approval requirement under the Article 361 of the
Companies Act. For those that did have a vote, all the compensation proposals were approved
by shareholders, though the approval rate varied with the nature of the proposals and the level
of foreign ownership. Proposals with incentives plans have more favorable voting than those
without; greater foreign ownership is associated with more negative voting.57
Unlike companies with the board of auditors, companies with the three mandatory commit-
tees are not subject to the say-on-pay rule. In view of agency theory, it raises a hypothesis that
executive compensation of companies with committees is higher than that of companies with
the board of auditors. However, available empirical evidence does not show any statistically
significant difference in the pay levels between these two types of governance structure.58
Available empirical evidence also suggests that Japanese companies that have higher exposure
to the international market and a higher level of foreign ownership are more likely to adopt
the U.S.-style committee structure59 and performance-based compensation practices such as
bonuses and stock options.60
The infamous scandal about the remuneration of Nissan Chairman and CEO Carlos Ghosn
provides an example of the limitations of the Japanese traditional model and the Japanese
53
Ronald J. Gilson & Curtis J. Milhaupt: Choice as Regulatory Reform: The Case of Japanese
Corporate Governance, 53 Am. J. Comp. L. 343 (2005).
54
McGinty and Green, supra note 47.
55
Id., at 96 (reporting that 98.3% of companies listed on the Toronto Stock Exchange in the year of
2015 were organized with the board of auditors); Jackson & Milhaupt, supra note 41, at 136 (reporting
that of the sample firms, 93% retained the traditional auditor structure while only 7% adopted the three
committees).
56
Id., at 98.
57
Id.
58
Jackson & Milhaupt, supra note 41.
59
Amon Chizema & Yoshikatsu Shinozawa, The Company with Committees: Change or Continuity
in Japanese Corporate Governance, 49 J. Mgmt. Stud. 77 (2012).
60
Jackson & Milhaupt, supra note 41.
say-on-pay rule. Before the scandal occurred in 2018, Nissan was organized with the board of
auditors. It did not have a compensation committee. Nor did the board of directors or auditors
issue a compensation report explaining the rationale and metrics for setting director/executive
remuneration. Nissan's shareholder meeting approved about 3 billion yen per year as remuner-
ation for board members since 2010. However, the actual amount the board members received
was around one billion yen short of the approved amount each year. It is suspected that part of
the one billion balance each year was secretly diverted to Ghosn. The Nissan board said that
Ghosn had the authority to decide how to allocate the approved compensation.61 In response to
the scandal, Nissan revamped its governance structure by adopting the audit, nomination and
compensation committees and filling each committee with a majority of outside directors.62
Given that Japanese corporate law does not require executive compensation to be approved by
shareholders when the company is structured with mandatory committees, it provides an inter-
esting opportunity to observe that empowering independent directors rather than shareholders
is regarded as a solution to executive compensation misconduct.
In December 2019, Japan amended its Companies Act partly because of the Nissan scandal.
The amendment includes, among other things, the requirement of at least one outside director
and enhanced disclosure of director compensation for listed companies. As noted, the power to
decide individual directors’ compensation is often delegated to a managing director. The legis-
lative proposal originally included a prohibition on such delegation but eventually abandoned
it due to the opposition from the business sector.63 The adopted rules focus on disclosure,
including disclosure of compensation policy and disclosure of whether the power to decide
individual directors’ pay is delegated to a representative director.
3.5 India
Since India’s independence in 1947, the government has strictly regulated executive compen-
sation, though the regulatory strictness was relaxed to some extent along with the economic
liberalization starting in the 1990s.64 Past legislation used to impose salary caps and compen-
sation composition restrictions, regardless of profitability or industry. The salary caps were
generally fairly low. These pay ceilings were eliminated with the liberalization reform of
India’s capital market in 1993–94.65
Despite the economic liberalization, other pay restrictions persisted. The Companies Act
1956 provided that the total maximum remuneration payable by a public company to its direc-
tors and CEO was 11 percent of the company’s net profits.66 The Act further provided that the
61
Kenji Tatsumi et al., Part of Remunerations For Nissan Executives Diverted to Ghosn, Mainichi
Japan (Nov. 21, 2018), https://mainichi.jp/english/articles/20181121/p2a/00m/0na/003000c.
62
Hans Greimel, Nissan Considers Sweeping Reforms in Wake of Ghosn Scandal, Auto News (Mar.
27, 2019), www.autonews.com/executives/nissan-considers-sweeping-reforms-wake-ghosn-scandal.
63
Gen Goto & Nobuko Matsumoto, The Upcoming Reform of the Japanese Companies Act, Oxford
Bus. L. Blog (June 28, 2019), www.law.ox.ac.uk/business-law-blog/blog/2019/06/upcoming-reform
-japanese-companies-act.
64
Umakanth Varottil, India, in Corporate Governance In Asia: A Comparative Approach 191
(Bruce Aronson & Joongi Kim, eds., 2019).
65
Rojesh Chakrabarti et al., Executive Compensation in India, in Research Handbook On
Executive Pay, supra note 13, at 437.
66
The Companies Act, 1956, No. 1, Acts of Parliament,1956 (India), § 198.
remuneration set by the board of directors in accordance with the maximum amount should
be set out in the articles of incorporation or approved by a shareholder resolution in a general
meeting.67 In addition, the Act provided specific maximum pay levels for loss-making
companies. The managerial compensation of an unprofitable company could not exceed the
maximum unless with a prior approval by the central government.68 These pay restrictions in
the Companies Act 1956 continue, albeit with some refinements, under the Companies Act
2013, the current version of India’s corporate statute.69
In addition to the abovementioned requirements, the Companies Act 2013 requires each
listed company to form a nomination and remuneration committee.70 The committee must be
composed of at least three non-executive directors and the majority of the members must be
independent directors. One of the major responsibilities of the committee is to formulate the
executive compensation policy. Meanwhile, the Companies Act 2013 maintains that the total
compensation paid to the directors and CEO of a public company must not exceed 11 percent
of the net profit in a financial year; however, it permits a company to exceed the maximum
limit with shareholder authorization in a general meeting and in some cases also the central
government’s approval.71 Moreover, the law adds elaborated requirements with regard to the
maximum pay level for individual executive directors and CEO. For example, a profitable
company can only pay up to 5 percent of its net profits to its executive director or 10 percent if
the company has two or more executive directors.72 In short, the board of directors of an Indian
public company recommends executive compensation within the maximum pay constraints
set by the government while shareholders and sometimes the government hold the power to
approve the pay package recommended by the board.
In comparative perspective, India’s approach to regulating executive compensation appears
aggressive – imposing specific substantive limits on executive compensation, rather than
merely disclosure or procedural requirements. Arguably, the regulatory pay cap may function
as a substitute for judicial protection for minority shareholders, given the huge backlog of cases
in Indian courts. Meanwhile, the direct regulations encounter limitations in achieving the goal
of restricting executive pay given India’s ownership structure. Indian companies have concen-
trated ownership structure in which founders and their families typically form a controlling
group and occupy the management positions of the company.73 Controlling shareholders may
not mind the meager pay level set by the government because they have means other than
executive compensation, such as tunneling, to extracts rents from the company. More impor-
tantly, controlling shareholders usually have no difficulty to obtain the requisite approval for
executive compensation in a shareholder general meeting. In particular, the law permits that
with shareholder approval companies may pay executives over the maximum limit. Empirical
67
Id. § 309.
68
Id. § 198.
69
For a comparison between 1956 and 2013, see Companies Act 2013: Key Highlights and
Analysis, PwC India, www.pwc.in/assets/pdfs/publications/2013/companies-act-2013-key-highlights
-and-analysis.pdf.
70
The Companies Act, 2013, No. 18, Acts of Parliament, 2018 (India), § 178.
71
Id. § 197.
72
Id.
73
Rajesh Chakrabarti et al., Corporate Governance in India, 20 J. Applied Corp. Fin. 59 (2008).
evidence shows that executives related to the founding family of a family-controlled corpora-
tion in India are paid more rather than less.74
Nevertheless, occasional cases suggest that institutional shareholders are becoming active
in utilizing the law to monitor executive compensation. For instance, in 2014, the board of
directors of Tata Motors, which is part of the Tata Group, sought a shareholder approval for
its compensation proposal. The proposal required a supermajority rather than ordinary vote
because the compensation exceeded the prescribed limits due to the company’s inadequate
financial condition for the relevant years. Despite the support of the controlling group, the
proposal failed to gain the requisite vote due to opposition by 64 percent of the company’s
institutional shareholders and 30 percent of other shareholders. Tata Motors returned to share-
holders in January 2015 with an explanation that the compensation was consistent with the
industry standard and as a result, the shareholders approved the proposal.75 Another example
is in 2018 the minority shareholders of India's second largest tire manufacturer, Apollo Tyres,
disapproved the re-appointment of Neeraj Kanwar as Managing Director of the company
amid concerns of excessive compensation.76 After the board reduced the compensation by
30 percent, the shareholders approved the reappointment. It suggests that with the rise of
institutional shareholder activism,77 the say-on-pay vote in India may be no longer a matter of
routine.
3.6 China
Chinese corporate law adopts the dual board structure: the board of directors is responsible
for managing the corporation’s business and affairs, including appointing senior officers and
determining their compensation; the board of supervisors is responsible for supervising direc-
tors and senior officers in performing their duties.78 Both boards are elected by shareholders,
who are entitled to receive periodic disclosure of executive compensation at the general share-
holder meeting.79 Note that unlike the United States and similar regimes where directors have
the statutory power to decide their own compensation, Chinese corporate law requires that
directors’ and supervisors’ compensation must be approved by shareholders.80
74
Id.
75
Varottil, supra note 64, at 192.
76
CEO Remuneration: Competition to Pay More, Institutional Inv’r Advisory Serv.:
Institutional EYE (Apr. 08, 2019), https://80cb29c1-d47b-4d4e-a4b4-a262ad35f48b.filesusr.com/
ugd/91c61f_87e6afe451ed4a3e95bbbbce078cf80a.pdf.
77
As of June 2019, foreign institutional ownership accounted for 19.8% of India’s equity market,
while domestic institutional ownership accounted for 13.78%. Ashley Coutinho, Domestic Institutional
Investors’ Bump Up Holding in Indian Stocks in June, Business Standard (July 29, 2019), www
.business-standard.com/article/markets/domestic-institutional-investors-bump-up-holding-in-indian
-stocks-in-june-119072901038_1.html.
78
The Company Law of the People’s Republic of China (promulgated by the Standing Comm. Nat'l
People's Cong., Dec. 29, 1993, effective July 1, 1994, amended Dec. 28, 2013, amendment effective Mar.
1, 2014), § 46 [hereinafter Company Law 2013].
79
The Company Law of the People’s Republic of China (promulgated by the Standing Comm. Nat'l
People's Cong., Dec. 29, 1993, effective July 1, 1994, amended Oct. 27, 2005, amendment effective Jan.
1, 2006), §§ 38, 47 [hereinafter Company Law 2006].
80
Company Law 2013, § 37.
Besides the corporate statute, public companies’ executive compensation is subject to the
regulations of the China Securities Regulatory Commission (CSRC), the main government
agency overseeing listed companies in China. CSRC’s Code of Corporate Governance for
Listed Companies provides that a listed company may establish a compensation committee to
study and review the company’s remuneration policies for directors and senior officers and to
make compensation recommendations to the board.81
While the corporate statute and the regulations for listed companies make it clear that the
board of directors holds the authority to determine executive compensation, the board’s actual
role in executive pay is significantly weakened by the government, the corporate group struc-
ture and the governance system of the Chinese Communist Party.
Over the past decade, the Chinese government has issued many guidelines and policies
to restrict executive pay of SOEs and even non-SOEs.82 The measures impose pay caps and
demand specific pay structures. While such pay restriction measures (i.e. guidelines, internal
rules, policies) are legally unenforceable,83 they have profoundly affected the pay practices
of the publicly listed SOEs. A recent empirical study shows a significant decrease in the
executive pay of the SOEs subject to the pay restrictions along with a significant decrease in
pay-performance sensitivity.84 To compensate for the pay cut, executives have increased their
perquisites and tunneling activities. As a result, the performance of these firms has signifi-
cantly declined after the pay restriction measures.85
In addition to the government measures limiting the board’s discretion in executive pay, the
corporate group structure relocates the power over executive pay from the listed company’s
board to its parent company. A significant number of directors, supervisors and senior officers
of Chinese listed companies report their compensation as zero.86 According to the corporate
annual reports, many directors and executives are not paid in cash or equity by the listed
companies that they serve. At first glance, the zero-pay phenomenon appears puzzling. Why
would directors and executives work for free? The answer lies in the organizational structure
in which the listed firms are embedded. Chinese listed companies are often members of busi-
ness groups. Member firms within a group often have dense personnel interlocks among each
other. Top managers of a listed firm often occupy top management positions of other member
firms (often non-listed firms) in the same group. The listed company’s top managers are often
paid by the parent company rather than the listed company itself. From the perspective of
agency theory, the zero-pay phenomenon raises concerns about unpaid executives’ ability to
act in the best interest of the listed company. They might favor the interests of the controlling
81
Company Law 2006, §§ 52, 56; Shangshi gongsi zhili zhun ce [Code of Corporate Governance
for Listed Companies] (promulgated by China Securities Regulatory Comm’n and State Economic and
Trade Comm’n, Sept. 30, 2018), at Zhengjianfa No.1 of 2002.
82
For an overview, see Li-Wen Lin, Behind the Numbers: State Capitalism and Executive
Compensation in China, 12 U. Pa. Asian L. Rev. 140 (2017); Li-Wen Lin, Revisiting Executive Pay of
China’s State-Owned Enterprises: Formal Design, Fresh Data, and Further Doubts, 19 UC Davis Bus.
L.J. 27 (2019).
83
Nicolas Howson, Enforcement without Foundation? - Insider Trading and China’s Administrative
Law Crisis, 60 Am. J. Comp. L. 955 (2012).
84
Kee-Hong Bae et al., Restricting CEO Pay Backfires: Evidence from China (European Corp.
Governance Inst. (ECGI) - Finance Working Paper No. 670/2020), https://ssrn.com/abstract=3081822.
85
Id.
86
Li-Wen Lin, supra note 82.
shareholder who pays their compensation at the expense of the interests of the listed company.
A recent empirical study however shows that the firms with unpaid CEOs perform at least as
well as those with paid CEOs.87
While the Chinese corporate statute provides that the board of directors is the central
decision-making institution of the corporation, for a long time the actual decision-making
authority of state-controlled firms has been with the party committee composed of members
of the Chinese Communist Party.88 The members of the party committee and the board of
directors routinely overlap. This party institution used to be an informal norm operating in
the shadow. However, since 2015 the party committee has increasingly become a formal
institution expressly recognized in the constitution of the corporation. As per CSRC’s rules,
state-controlled listed corporations are required to establish the party committee and write
it into the articles of incorporation while non-state-controlled corporations are required to
provide necessary support to party construction within the organizations.89 Empirical evi-
dence shows that at least 83 percent of the 900 state-controlled listed companies90 and 143
non-state-controlled listed companies91 have revised their articles of incorporation to reflect
the importance of the party committee in corporate governance. Their revised articles of incor-
poration provide that important decisions including executive compensation must be subject
to deliberation by the party committee before being submitted to the board of directors for any
discussion. The board makes decisions based on the party committee’s recommendations. It
is likely that the board simply routinely defers to the party committee’s decision given that
there is a significant personnel overlap between the board and the party committee and the
party holds the ultimate power over personnel decisions including director and executive
appointments.
4. DISCUSSION AND CONCLUSION
The review of the national experiences shows that some of the restrictions on the board’s
power over executive compensation are associated with the recent say-on-pay movement in
which shareholders are empowered to have a say on executive compensation. The United
States and the United Kingdom provide the classic examples. According to the OECD’s recent
survey of 49 jurisdictions, 33 percent of the jurisdictions require binding votes on remuner-
ation policy and another 18 percent of the jurisdictions require advisory votes.92 The United
87
Hui Chen et al., Career Concerns and “Unpaid” Executives (May 2018) (unpublished manu-
script), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2822622.
88
Nicholas Howson, China’s Restructured Commercial Banks: Nomenklatura Accountability
Serving Corporate Governance Reform?, in China’s Emerging Financial Markets: Challenges And
Global Impact 123 (Zhu Min et al. eds., 2009); Li-Wen Lin & Curtis J. Milhaupt, We Are the (National)
Champions Understanding the Mechanisms of State Capitalism in China, 65 Stan. L. Rev. 697 (2013).
89
Code of Corporate Governance for Listed Companies, supra note 81.
90
John Zhuang Liu & Angela Huyue Zhang, Ownership and Political Control: Evidence from
Charter Amendments, 60 Int’l Rev. L. Econ. 1 (2019).
91
Lauren Yu-Hsin Lin & Curtis J. Milhaupt, Party Building or Noisy Signaling? The Contours
of Political Conformity in Chinese Corporate Governance (European Corp. Governance Inst. - Law
Working Paper No. 493/2020), https://ssrn.com/abstract=3510342.
92
Organisation for Economic Co-operation and Development [OECD], supra note 4, at 129.
Kingdom, which adopted the law in 2002, is commonly viewed as the first country to enact
say-on-pay legislation.93 The movement then diffused among many European countries.94
The financial crisis in 2008 accelerated the diffusion to the rest of the world. In reviewing the
rise of say-on-pay legislation in eight Western countries, Professor Randall Thomas provides
a number of reasons for the recent adoption of the law, including (1) the increased ownership
by institutional shareholders who are worried about the rationality of executive pay; (2) the
decline of concentrated ownership in European countries resulting in the need to enhance
shareholder monitoring through say-on-pay legislation; (3) cultural intolerance of increased
income inequality (except for the United States); (4) the left-leaning political parties in power
facilitating the passage of the law; (5) the government’s attempt to regulate executive com-
pensation of state-owned enterprises (especially in some European countries such as France,
Belgium and Sweden).95 The dispersed ownership structure is particularly relevant to the
United States and the United Kingdom while socialist culture and politics are more visible in
European countries such as Germany. Nevertheless, the extent to which the same reasons are
applicable to jurisdictions outside Western countries remains a subject of further research.
As illustrated, India already gave shareholders a formal voice on managerial compensation
long before the recent say-on-pay movement. When India adopted its 1956 corporate statute,
Indian corporate ownership structure remained highly concentrated and institutional share-
holders probably did not even exist there.96 Yet, the other three factors including politics,
culture and state ownership could be relevant. After its independence, India was a socialist
state. In the 1950s, the Indian government took control of steel, mining, telecommunications,
insurance, banking and many other critical industries.97 As a result, the Indian government
seized the commanding heights of the economy. Although the Indian government began to
liberalize the economy and privatize state-owned enterprises in the late 1980s, until today
the dominant political parties in India remain to espouse a socialist bent and the state-owned
sector remains a significant part of the Indian economy.98 The center-left political parties in
power passed the 2013 corporate law revision that not only continues the government control
and shareholder approval over executive compensation but also expands the directors’ fiduci-
ary duty to a wide range of stakeholders including shareholders, employees, and the broader
community.99
Japan’s say-on-pay law also predates the recent say-on-pay movement by more than
a hundred years. The Japanese law, which requires director compensation to be fixed in the
articles of incorporation or set by a shareholder resolution in a general meeting, is originally
93
Thomas, supra note 26, at 664; Ricardo Correa & Ugur Lel, Say on Pay Laws, Executive
Compensation, CEO Pay Slice, and Firm Value around the World, 122 J. Fin. Econ. 500 (2016).
94
Thomas, supra note 26, at 711–28.
95
Thomas, supra note 26.
96
Tarun Khanna & Krishna Palepu, The Evolution Of Concentrated Ownership in India Broad
Patterns And A History of The Indian Software Industry, in The History Of Corporate Governance
Around The World: Family Business Groups To Professional Managers (Randall Morck ed.,
2005).
97
Sushil Khanna, State-Owned Enterprises in India: Restructuring and Growth, 30 Copenhagen J.
Asian Stud. 5 (2012).
98
Elizabeth Chatterjee, Reinventing State Capitalism in India: A View from the Energy Sector, 25
Contemp. South Asia 85 (2017).
99
Afra Afsharipour, Redefining Corporate Purpose: An International Perspective, 40 Seattle U. L.
Rev. 465 (2017).
part of the transplantation of its Commercial Code from Germany in 1898. The original adop-
tion of the say-on-pay law in Japan had nothing to do with the recent say-on-pay movement
in the Western countries. Moreover, Japan provides an interesting case where the low level of
executive compensation is largely unrelated to the say-on-pay legislation but more attributable
to the labor market structure and culture.
In China, again, the legal rules that restrict the board’s power over executive pay are largely
unrelated to the global diffusion of the say-on-pay movement. The way that the Chinese
government intervenes in SOE executive compensation is very different from the say-on-pay
legislation adopted by some European governments to regulate SOE executive pay. The legal
restrictions on the board’s power are concerned with the domestic political demands rather
than the international trend. The politicized anti-corruption and party-building campaigns
underlie the pay cap restrictions and the formalization of the party committee in corporate
constitutions.
From a normative point of view, it raises the question about which regulatory approach is
effective in curbing excessive pay and more importantly, incentivizing executives for better
performance. The answer is complicated and incomplete without reference to the institutional
context. For example, shareholders in Germany rarely disapprove executive compensation
plans subject to the advisory say-on-pay legislation. The rareness of disapproving votes may
not suggest the ineffectiveness of say on pay but a result of other pay-control mechanisms
working in tandem with the shareholder vote, including the co-determination corporate
governance system, the socialist politics, and the equality culture in Germany. Executive
compensation plans subject to the stakeholder-oriented management style may be less likely
to become excessive. As such, the shareholder advisory vote may function as a complementary
monitoring mechanism and a formal reconfirmation of the pay adequacy.
The recent halt in the growth of executive remuneration in the United Kingdom is closely
related to the binding say-on-pay vote while the low executive compensation in Japan is more
concerned with the culture and the executive market condition than the say-on-pay legislation.
In light of the global say-on-pay movement, Nissan’s post-scandal reform provides an interest-
ing case where the adopted solution is to empower the independent compensation committee
but incidentally disfranchise shareholders. The recent Japanese corporate governance law
reforms focus on disclosure and independent compensation committees, as shareholder voting
has been in place for a long time but seemed unable to prevent compensation scandals when
the board is dominated by insiders, as illustrated in the Nissan case.
Both India and China adopt an aggressive approach in which the government steps into the
shoes of the board of directors for deciding executive pay. Despite the common criticism of
pay caps imposed by the government, India’s statutory caps on executive pay might be jus-
tified as an expedient substitute for the lack of minority shareholder protection under India’s
notoriously inefficient judicial system. In China, the party involvement in the governance of
SOEs clearly conflicts with the good SOE governance model as recommended by the OECD.
Yet, recent empirical evidence suggests that the Chinese SOEs may in fact have better, rather
than worse, corporate governance than their privately-owned counterparts do, indicating the
monitoring function of the government/party within the Chinese institutional context.100
100
Yu-Hsin Lin & Yun-Chien Chang, Do State-Owned Enterprises Have Worse Corporate
Governance? An Empirical Study of Corporate Practices in China (NYU Law & Econ. Research
Paper No. 19-28, 2019), https://ssrn.com/abstract=3111820; Governance: The Evolution Of Corporate
Overall, as with other corporate governance arrangements, executive compensation rules

vary from country to country. The board’s power over executive compensation may be con-
strained or even removed depending on the ownership structure, political conditions, and other
institutional factors. On the face of it, there appears some apparent convergence on a legal
model where the board of directors is the central decision-making organ while shareholders
have increasing voice. However, upon a closer look, significant divergence remains.
Governance In China, Asian Corp. Governance Ass’n, at 98 (2018), www.acga-asia.org/advocacy

-detail.php?id=158&sk=&sa= (showing that a majority of foreign investors believe that Chinese have
better corporate governance then privately-owned enterprises).
14. Accounting and convergence in corporate
governance: doctrinal or economic path
dependence?
Martin Gelter1
1. INTRODUCTION
Convergence in corporate governance has been debated for the past 20 years, particularly in
the legal and the law and economics literature. Broadly speaking, proponents argue that laws
and practices in corporate governance have been converging to a single standard that empha-
sizes the interests of shareholders, including outside investors (as opposed to prioritizing, for
example, employees, other stakeholders, controlling shareholders, or the “public interest”).
In their famous polemic “The End of History for Corporate Law,” Hansmann and Kraakman
suggested that the end point for convergence was efficiency.2 In this view, more open markets
and increased competition have forced firms and legislators to converge to the efficient best
practice of shareholder primacy. This chapter seeks to explain convergence – and the lack
thereof – in accounting standards and laws, within the context of the debate in comparative
corporate law, focusing mainly on the continuing divergence between US GAAP (Generally
Accepted Accounting Principles) and IFRS (International Financial Reporting Standards).
One can plausibly argue that accounting has undergone international convergence, but the
contrary view is equally tenable. On the one hand, at least on a superficial level, the objec-
tive of the dominant accounting standards – i.e., both IFRS and US GAAP – is to provide
timely and useful information to investors in capital markets. On the other hand, in spite of
the convergence project formerly pursued by FASB (Financial Accounting Standard Board),
which is primarily responsible for developing GAAP, and IASB (International Accounting
Standards Board), which promulgates IFRS, differences between the two sets of standards
remain (and may reduce the comparability of financial statements).3 While the SEC has per-
1
For helpful comments, I thank Afra Afsharipour, Marco Corradi, Aurelio Gurrea-Martínez, Sean
Griffith, Zehra Kavame Eroglu, Uriel Procaccia, Richard Squire, Andrew Tuch, Umakanth Varottil,
and Cynthia Williams, as well as attendees of a presentation at WU Vienna University of Economics
(January 2018), participants of a Fordham 10-10 Workshop (March 2018), of the SASE Annual Meeting
at Doshisha University (Kyoto, Japan, June 2018), and of the Research Handbook conference at Fordham
Law School (September 2019).
2
Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L. J. 440,
450–53 (2001).
3
The “convergence project” between FASB and IASB began with the 2002 Norwalk Agreement
and came to an end in 2014 with the declaration that the two standard setters would continue to differ on
lease accounting. See Robert H. Herz & Kimberley R. Petrone, International Convergence of Accounting
Standards – Perspectives from the FASB on Challenges and Opportunities, 25 Nw. J. Int’l L. & Bus.
631, 642–43 (2005); Zehra G. Kavame Eroglu, The Political Economy of International Standard Setting
282
Accounting and convergence in corporate governance 283
mitted foreign private issuers to use IFRS since 2008,4 it still requires domestic issuers to use
GAAP. Moreover, while publicly traded firms in the EU are required to use IFRS for their
consolidated financial statements under the IFRS Regulation,5 many countries, including some
of the major Member States, persist in requiring or permitting the use of traditional domestic
accounting standards for private firms, and/or for entity-level accounting.6
Path dependence is often an explanation why corporate governance systems continue to
diverge, or why they converge only superficially. It is often thought to be dominated by vested
interests.7 Coordinated interest groups such as controlling shareholders or unions might resist
efficient corporate governance reform to preserve their own rents. However, path dependence
can also be driven by transition costs inherent in the legal system. Transitioning to a possibly
more efficient system may entail a transition cost and be costly, not just because new rules
need to be written, but also because legal intermediaries such as lawyers may have to famil-
iarize themselves with new laws. Legal professionals may resist change to avoid losing the
competitive advantage from their human capital investment.
This chapter suggests that looking at the accounting industry as a key interest group helps
to explain patterns in the adoption of accounting standards. While in Continental Europe, the
internationalization of accounting has benefited large international firms such as the Big 4,8
in the US, the accounting industry would not have been served well by the adoption of IFRS.
Unlike most other jurisdictions, including the UK, corporate governance in the US is char-
acterized by a strong prevalence of investor litigation. A rules-based system, as opposed to
introducing the arguably more principles-based IFRS,9 may help to reduce the cost of liability
for accounting firms. While we cannot clearly say that lobbying by accounting firms shaped
patterns of adoption of IFRS, the emerging landscape benefits the strongest interest groups.
This chapter proceeds as follows. Section 2 surveys convergence debates in corporate law
and governance, as well as factors hindering convergence, and situates accounting within
them. Section 3 discusses two cases – the US and Continental Europe – where different posi-
tions of key forces within the accounting industry lead to different outcomes for convergence.
Section 4 summarizes and concludes, suggesting that divergent interests of the industry can
help to explain why accounting standards have not converged.
in Financial Reporting: How the United States Led the Adoption of IFRS Across the World, 37 Nw. J.
Int’l L. & Bus. 459, 496–97, 512 (2017).
4
Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with
International Financial Reporting Standards Without Reconciliation to U.S. GAAP, 73 Fed. Reg. 986
(Jan. 4, 2008) (codified in 17 CFR § 230.701(e)(4)). See also Roberta S. Karmel, The EU Challenge to
the SEC, 31 Fordham Int’l L.J. 1692, 1704–05 (2008).
5
Regulation (EC) 1606/2002 of 19 July 2002, 2002 O.J. (L 243) 1 [hereinafter IAS Regulation].
6
Infra note 94 and accompanying text.
7
E.g., Lucian Arye Bebchuk & Mark J. Roe, A Theory of Path Dependence in Corporate Ownership
and Governance, 52 Stan. L. Rev. 127, 142–53 (1999).
8
The “Big 4” are the largest accounting firms that audit most publicly traded firms. See Hannah
L. Buxbaum, The Viability of Enterprise Jurisdiction: A Case Study of the Big Four Accounting Firms,
48 U.C. Davis L. Rev. 1769, 1791–801 (2015).
9
On the US debate on IFRS, see generally Peter White, It’s Greek to Me: The Case for Creating
an International Agency to Enforce International Accounting Standards to Promote Harmonization
and International Business Transactions, 27 Wis. Int’l L.J. 195 (2009). On the parallel rules-standards
debate in legal theory, see Louis Kaplow, Rules versus Standards: An Economic Analysis, 42 Duke L.J.
557 (1992).
2. CONVERGENCE, PATH DEPENDENCE, AND ACCOUNTING
2.1 Convergence and the Transplant Phenomenon
“Convergence” in corporate governance refers to the idea that corporate and securities laws
across countries are evolving toward a single model – namely one favoring the interest of
shareholders, including outside investors – over those of other groups. Advocates of conver-
gence expected the shareholder model to displace other, presumably less efficient models
over time, including managerialist, employee-oriented, state-oriented and stakeholder models
of corporate governance: With international competition in product and financial markets,
efficient firms will outcompete less efficient ones, and laws will eventually adjust to the
pressure.10
As an actual phenomenon and a subject of scholarly interest, convergence emerged mainly
during the late 1990s and early 2000s.11 In Asia and the developing world, corporate govern-
ance reforms were spearheaded by organizations such as the World Bank, the OECD, and the
G-20.12 In Continental Europe, besides a number of corporate law reforms,13 the best example
may be the spread of the concept of corporate governance throughout the region during the
late 1990s, as well as the subsequent proliferation of “corporate governance codes” inspired
by the UK model.14 The 2000s also saw the reinvigoration of EU Company Law harmoniza-
tion, which had reached an impasse during the “eurosclerotic” period of the 1990s.15 The EU
Commission’s 1999 Financial Services Action Plan and 2003 Company Action Plan laid the
groundwork for a period of vigorous lawmaking, of which the Takeover Directive of 200416
and the (original) Shareholder Rights Directive of 2007 are prime outcomes.17 Changes in
10
Hansmann & Kraakman, supra note 2, at 450–51; see also Mark J. Roe, The Shareholder Wealth
Maximization Norm and Industrial Organization, 149 U. Pa. L. Rev. 2063 (2001) (suggesting that diver-
gences from shareholder primacy are more sustainable in smaller, closed economies).
11
See, e.g. Jeffrey N. Gordon & Mark J. Roe, Convergence and Persistence in Corporate
Governance (2004).
12
Jeffrey N. Gordon, Convergence and Persistence in Corporate Governance, in Oxford Handbook
of Corporate Law and Governance 28, 30 (Jeffrey N. Gordon & Georg Ringe eds. 2018).
13
See, e.g., Mariana Pargendler, State Ownership and Corporate Governance, 80 Fordham L.
Rev. 2917, 2952 (2012); Pierre-Yves Gomez & Harry Korine, Entrepreneurs and Democracy 192
(2008); Ben Clift, French Corporate Governance in the New Global Economy: Mechanisms of Change
and Hybridisation within Models of Capitalism, 55 Pol. Stud. 546, 553–57 (2007); Luca Enriques &
Paolo Volpin, Corporate Governance Reforms in Continental Europe, 21 J. Econ. Persp. 117, 127–37
(2007).
14
See, e.g., Ruth V. Aguilera & Alvaro Cuervo-Cazurra, Codes of Good Governance, 17 Corp. Gov.
376, 377–79 (2009) (describing the spread of codes from their English origins).
15
See Martin Gelter, EU company law harmonization between convergence and varieties of capital-
ism, in Research Handbook on the History of Corporate and Company Law 323, 338–42 (Harwell
Wells ed., 2018).
16
Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover
bids, 2004 O.J. L 142/12. Arguably, the CJEU’s case law on “Golden Shares” was a major motivating
factor reinvigorating the Takeover Directive. See Klaus J. Hopt, Takeover regulation in Europe — The
battle for the 13th directive on takeovers, 15 Austl. J. Corp. L. 1, 14 (2002).
17
Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the
exercise of certain rights of shareholders in listed companies, 2007 O.J. (L 184) 17, revised by Directive
2017/828/EU of 17 May 2017, 2017 O.J. (L 132) 1.
Germany’s corporate governance system and the withdrawal of German banks from signifi-
cant share ownership, which has often been identified as a transformation of the structure of
“Germany, Inc.” from the late 1990s onwards,18 provide an extralegal example of a corporate
governance change.
However, corporate governance systems will often converge only formally, or superficial-
ly.19 The “legal transplant” effect may be one reason:20 a rule may be adopted superficially,
but operate quite differently within the context of a different legal system.21 This phenomenon
applies even more strongly in the context of supranational harmonization. EU Directives
– including those governing accounting22 – often exhibit gaps, member state options and
compromises to accommodate interest groups across national borders, thus reducing their
harmonizing effects.23 Likewise, the adoption of an international or foreign accounting system,
such as IFRS or US GAAP, constitutes a form of legal transplant.24 Empirical evidence sug-
gests that national accounting practices continue to affect the application of IFRS after they
have been formally implemented.25
2.2 Economic and Doctrinal Path Dependence
Convergence theory posits that market forces reward efficient economies and legal systems
and push them towards adopting efficient rules. However, often there is no single rule that
is optimal across countries. Desirability of a law – even when defined in efficiency terms –
depends on its legal, cultural and economic context.26 In the short and medium term, diversity
in legal rules will therefore dominate the global competition for convergence. In other con-
18
E.g., Wolf-Georg Ringe, Changing Law and Ownership Patterns in Germany: Corporate
Governance and the Erosion of Deutschland AG, 63 Am. J. Comp. L. 493, 518–19 (2015).
19
E.g., Ronald J. Gilson, Globalizing Corporate Governance: Convergence of Form or Function,
49 Am. J. Comp. L. 329 (2001); Martin Gelter & Geneviève Helleringer, Opportunity Makes a Thief:
Corporate Opportunities as Legal Transplant and Convergence in Corporate Law, 18 Berkeley Bus.
L.J. 92, 102 (2018).
20
See generally Alan Watson, Legal Transplants: An Approach To Comparative Law 21
(1974).
21
Hideki Kanda & Curtis Milhaupt, Re-examining Legal Transplants: The Director’s Fiduciary
Duty in Japanese Corporate Law, 51 Am. J. Comp. L. 887, 889–91 (2003).
22
Infra notes 74–78 and accompanying text.
23
See Richard M. Buxbaum & Klaus J. Hopt, Legal Harmonization and the Business
Enterprise 235 (1988); Luca Enriques, EU Company Law Directives and Regulations: How Trivial are
They?, 27 U. Pa. J. Int’l Econ. L. 1, 23–33 (2006).
24
E.g., Loukas Panetsos, Accounting Standards and Legal Capital in EU Law, 12 Utrecht L. Rev.
139, 144 (2016).
25
E.g., Luzi Hail, Christian Leuz & Peter Wysocki, Global Accounting Convergence and the
Potential Adoption of IFRS by the U.S. (Part I): Conceptual Underpinnings and Economic Analysis, 24
Acct. Horizons 355, 360, 366 (2010); Erlend Kvaal & Christopher Nobes, IFRS Policy Changes and
the Continuation of National Patterns of IFRS Practice, 21 Eur. Acct. Rev. 343 (2012); Isabel Costa
Lourenco, Raquel Sarquis, Manuel Castelo Branco & Claudio Pais, Extending the Classification of
European Countries by their IFRS Practices: A Research Note, 12 Acct. in Eur. 223, 223–24 (2015);
see also Mark T. Bradshaw & Gregory S. Miller, Will Harmonizing Accounting Standards Really
Harmonize Accounting? Evidence from Non-U.S. Firms Adopting U.S. GAAP, 23 J. Acct. Aud. & Fin.
233 (2008).
26
E.g., Curtis J. Milhaupt, Property Rights in Firms, 84 Vand. L. Rev. 1145, 1189–90 (1998);
on culture as a driver of path dependence in accounting see Amir N. Licht, The Mother of All Path
texts, a corporate governance system could create greater wealth if it adjusted to a specific set
of rules, such as accounting standards that provide the most useful disclosures for investors.
In open financial markets, firms subject to the best set of rules should be more successful in
attracting investment.27
In the presence of path dependence, a country will be locked into particular rules because it
embarked on a path in the past from which it is difficult to deviate. Even if change would be
economically efficient in principle, switching could be prohibitively costly. A jurisdiction may
be at a local optimum that can be reached without incurring a prohibitive cost, but it will not
move to the global optimum because the cost would fall heavily on one interest group that has
the political power to block change.
Conceptually, one could distinguish between economic and doctrinal path dependence.
Scholars often suggest that path dependence persists because of economic interests of key
pressure groups. Past institutional choices have created interest groups whose members enjoy
advantages from the present system. Such interest groups will lobby against changes that elim-
inate rents they draw from the current institutional arrangement. Powerful controlling share-
holders may effectively oppose broader disclosure and approval requirements for related-party
transactions. Families dominating the largest firms in a medium-size country may constitute
a well-organized constituency that can easily convert their intra-firm power into political
influence undercutting beneficial reform to protect their rents.28
However, sometimes path dependence arises simply because a past choice, which has tied
up significant institutional capital, makes it hard to construct a new, more efficient path.29
Doctrinal pathways that solidify over decades (or centuries) frequently depend on the hap-
penstance of a specific court decision or legislative choice that was reasonable at the time,
but may be suboptimal today. Legal doctrine self-perpetuates. Eva Micheler points out that
“[l]egal systems have a certain limited set of doctrinal tools which they apply whenever a new
challenge for the law appears.” While market participants may be willing to take risks, they
put a premium on legal certainty. Lawyers therefore proceed on trodden paths. Likewise, leg-
islators and judges that need to address new problems “apply existing legal concepts to accom-
modate new developments rather than adopt new solutions that may create more efficient,
but less well-tested, results.”30 Doctrinal path dependence thus refers to the constraints on
legal developments because of past choices within a particular legal system. After employing
a framework of rules for a long time, these rules are hard to change, e.g., because of doctrinal
structures to which the current generation of lawyers has adjusted, because of stare decisis, or
Dependencies: Toward a Cross-Cultural Theory of Corporate Governance Systems, 26 Del. J. Corp. L.

147, 180 (2001).
27
Bebchuk & Roe, supra note 7, at 169. See also Ronald Dye & Shyam Sunder, Why Not Allow
FASB and IASB Standards to Compete in the U.S.?, 15 Acct. Horizons 257, 257 (2001) (discussing the
introduction of “competition into the accounting standard-setting process” by allowing firms to choose
between US GAAP and IFRS).
28
E.g., Mark J. Roe, Chaos and Evolution in Law and Economics, 109 Harv. L. Rev. 641, 651–52
(1996).
29
See Simon Deakin, Evolution for our Time: A Theory of Legal Memetics, 55 Cur. Leg. Probs. 1,
11 (2002).
30
Eva Micheler, English and German securities law: a thesis in doctrinal path dependence, 123 L.Q.
Rev. 251, 254 (2007).
because new legislation would have to amend large bodies of law, which could have unfore-
seeable ripple effects and undermine legal certainty.
However, doctrinal path dependence may just be a specific type of economic path depend-
ence. Not only are legal professionals creatures of habit, but they also have human capital
specialized in the current rules. Most obviously, they will generally oppose the abolition of
requirements that generate revenue stream. Attorneys will support the requirement of legal
representation at trial; civil law notaries will support rules that require notarial deeds for certain
transactions; similarly, public accountants will want to uphold mandatory audit obligations.
But legal professionals’ human capital can also be destroyed through obsolescence. The
German jurist Julius von Kirchmann famously wrote in 1848 that with “three correcting words
of the legislature […] and entire libraries become useless.”31 An incumbent generation of
professionals with considerable knowledge has a competitive advantage over newcomers and
has more at stake in the maintenance of a particular legal structure or system. A fundamental
reform that does not organically grow out of the existing law would eliminate this advantage,
making their past investment obsolete by equivalizing their position in the market with new-
comers. They will therefore often oppose change to a more efficient system on plausible, but
ultimately dubious grounds, such as when the proposed reform would provide a bad match
relative to other aspects of the law or reduce coherence within the system.
Moreover, lawyers may have incentives to obfuscate a body of rules, thus creating a high
startup cost for potential competitors. For example, Delaware corporate law has been described
as “surprisingly indeterminate.”32 One possibility is that “[a] lack of clarity requires more lit-
igation – benefiting Delaware lawyers and courts – and makes Delaware’s body of law more
difficult to copy.”33 To the extent that Delaware obtains economic rents from maintaining its
preeminent position in US corporate law (captured by its bar and judiciary), this state of affairs
could be described as an example of doctrinal path dependence.
2.3 Applying Path Dependence Theory to Accounting
Financial reporting requirements obviously benefit the accounting profession to a certain

extent. All countries mandate that publicly traded firms disclose audited financial statements,34
which clearly benefits the firms that will audit them. Some jurisdictions, notably the EU
members as well as the UK, require that all limited liability business entities must deposit at
least some (not necessarily audited) financials with the register of companies.35 This helps to
31
Julius von Kirchmann, Die Werthlosigkeit der Jurisprudenz als Wissenschaft 23 (1848).
32
Jill E. Fisch, The Peculiar Role of the Delaware Courts in the Competition for Corporate Charters,
68 U. Cin. L. Rev. 1061, 1071 (2000).
33
Brian J. Broughman & Darian M. Ibrahim, Delaware’s Familiarity, 52 San Diego L. Rev.
304 (2015); see also Jonathan R. Macey & Geoffrey P. Miller, Toward an Interest-Group Theory of
Delaware Corporate Law, 65 Tex. L. Rev. 469, 504–05 (1987).
34
E.g., Martin Gelter, General Report: Global Securities Litigation and Enforcement, in Global
Securities Litigation and Enforcement 3, 28 (Pierre-Henri Conac & Martin Gelter eds., 2019).
35
Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating
to certain aspects of company law (codification), 2017 O.J. (L 169) 46, art. 14(f) [hereinafter Codified
Company Law Directive] (codifying a requirement previously found in the First Company Law Directive
of 1968).
create a class of accounting firms specializing in preparing such statements for small business
entities.
It is less clear if the creation or benefit of an interest group must necessarily be linked to
a particular choice of content of accounting standards (or other norms). If accounting firms are
limited to working within one jurisdiction and are dominated by the interests of local profes-
sionals, one would expect them to protect the interests of these incumbents. Local accountants
would then prefer a sufficiently complex jurisdiction-specific web of rules that protects their
rents against outside competitors. Newcomers must play by the incumbents’ rules to enter the
market.
Over the past decades, the top tier of the accounting industry has integrated globally and
coalesced into the Big 4 firms. International cooperation clearly has advantages given the
presence of multinational corporations that require accounting services and prefer coordinat-
ing them across borders.36 Increased cross-border economic activity and large corporations
operating internationally logically fosters the development of a more international accounting
industry to provide these services.37
In many countries, international accounting firms have grown by absorbing local firms into
their network,38 but they have little to gain from protecting a local turf with a highly specific
set of standards. To the contrary, they are in a better position to scale their operations with
standardization across markets, which allows them to better scale training and human capital.39
In this situation, individual employees with localized human capital may be more easily dis-
pensable, which will shift bargaining power toward owners (partners) from mere employees.40
But even more importantly, with an international set of accounting standards applying to pub-
licly traded and other large corporations, international accounting firms may be in a position
to gain market share at the expense of purely domestic ones. International firms likely have
an incentive to make it difficult for local firms to scale internationally. It is thus not surprising
that the Big 4 are the group exerting the most influence on the development of IFRS.41 Both
the complexity of IFRS as well as their ever-changing nature may in part be explicable with
the interests of the large firms dominating the market for large audits.
2.4 Accounting Standards and Varieties of Financial Systems
Americans following the debate about US GAAP and IFRS are often not aware that the biggest
cleavage between accounting “languages” is not between these two sets of standards, but
36
E.g., Axel Haller, Financial accounting developments in the European Union: past events and
future prospects, 11 Eur. Acct. Rev. 153, 160–62 (2002); Stephen A. Zeff, The Evolution of the IASC
into the IASB, and the Challenges It Faces, 87 Acct. Rev. 807, 819 (2012); Kavame Eroglu, supra note
3, at 504–09.
37
Buxbaum, supra note 8, at 1794.
38
Id. at 1791–92.
39
See Mary Tokar, Convergence and the Implementation of a Single Set of Global Standards: The
Real-Life Challenge, 25 Nw. J. Int’l L. & Bus. 687, 692–709 (2005).
40
See generally Luigi Zingales, In Search of New Foundations, 55 J. Fin. 1623, 1648 (2000) (com-
paring capital-owned firms with firms dominated by human capital, where employees are less easily
replaced, using an advertising agency as an example).
41
See James Perry & Andreas Nölke, International Accounting Standard Setting: A Network
Approach, Bus. & Pol., Dec. 2005, art. 5, at 6; Peter Walton, Accounting and Politics in Europe:
Influencing the Standard, 17 Acct. in Eur. 303, 311–12 (2020).
between accounting standards oriented toward capital and other markets. The most obvious
superficial distinction, at least between Continental European countries and the Anglo-Saxon
world, is the stronger integration of accounting standards into formal law in Continental Europe,
whereas in the US and the UK, accounting standards have traditionally been promulgated by
private standard setting bodies.42 For example, in Germany financial statements traditionally
had to be drawn up according to provisions in the respective Commercial Code;43 this is still
true outside of the scope of application of the EU’s IFRS Regulation. The situation is similar
in France.44 While German law also refers to “principles of proper bookkeeping” (Grundsätze
ordnungsmäßiger Buchführung),45 the body of legislation into which the EU Accounting
Directives were transposed is referred to as “accounting law” (droit comptable or Bilanzrecht)
in both France and Germany,46 a term rather alien to Anglophone ears. While both GAAP and
IFRS are promulgated by private standard-setting bodies,47 in Continental European countries
the role of the government is greater. While professional accounting organizations always
issued recommendations, in Germany “accounting principles [were] considered to be legal
rules (‘Rechtsnormen’) and not professional standards (‘Fachnormen’).”48 In practice, these
principles have since the 1950s been understood as the set of rules deductively developed from
the principles underlying accounting law and codified in it.49 In France, the commercial code’s
provisions on accounting50 were supplemented by a general accounting plan (plan comptable
général) developed by a ministerial committee with the representation of various interest
groups.51 These standards were subordinate to the applicable law and had to be promulgated
42
See, e.g., Vanessa Edwards, EC Company Law 119 (1999).
43
Handelsgesetzbuch (HGB) (Germany) §§ 238–342e.
44
Loi 83-353 du 30 avril 1983 (introducing art. L.123-12 to L.123-28 into the Code de Commerce
[France]).
45
HGB §§ 238(1), 264(2) (requiring the application of “principles of proper bookkeeping”).
46
For France, see Christian Hoarau, International accounting harmonization. American hegemony
or mutual recognition with benchmarks, 4 Eur. Acct. Rev. 217, 224 (1995); Lucia Quaglia, The EU
and Global Financial Regulation 133 (2014).
47
In the US, only § 108 of the Sarbanes-Oxley Act of 2002 created an explicit legal basis for the
recognition of FASB by the SEC.
48
Christian Leuz & Jens Wüstemann, The Role of Accounting in the German Financial System,
in The German Financial System 450, 457 (Jan Pieter Krahnen & Reinhard H. Schmidt eds., 2004).
Germany did not have a formally recognized standard setting body until 1999, and even the one created
then has a very limited scope of tasks relating mainly to the use of IFRS in consolidated accounts in the
specific German context. See id. at 458-59; Matthias Schmidt, On the Legitimacy of Accounting Standard
Setting by Privately Organised Institutions in Germany and Europe, 54 Schmalenbach Bus. Rev. 171,
173 (2002).
49
Lisa Evans, Language, translation and the problem of international accounting communication,
17 Acct. Aud. & Accountability J. 210, 227–28 (2003); Leuz & Wüstemann, supra note 48, at 456–57;
David Alexander, Legal Certainty, European-ness and Realpolitik, 3 Acct. in Eur. 65, 71–72 (2006).
See Georg Döllerer, Grundsätze ordnungsmäßiger Bilanzierung, deren Entstehung und Ermittlung, 14
Betriebs-Berater 1217, 1220 (1959) (famously suggesting that principles of proper financial reporting
were to be developed “through reflection”).
50
Code de Commerce art. L. 123-12 to L. 123-28, L. 233-16 to L. 233-28 (Fr.).
51
See Christopher Nobes & Robert Parker, Comparative International Accounting 331
(12th ed., 2012). Between 1998 and 2009, the National Accounting Council (Conseil national de la
comptabilité or CNC) and the Accounting Regulation Committee (Comité de Réglementation Comptable
or CRC) shared the standard-setting role. See Christian de Lauzainghein, Jean-Louis Navarro &
Dominique Nechelis, Droit comptable ¶ 24 (3rd ed., 2004).
by the ministry of the economy until 2009.52 Only after a 2007 reform were these replaced with
an independent regulatory agency which, however, is still subject to considerable government
influence.53
The different nature of accounting standards is linked to different purposes of accounting
that grew out of wholly different economic and financial environments. Unlike the US, where
financial statements are a securities law requirement intended to inform investors,54 European
accounting had to encapsulate multiple goals. First, the disclosure of at least simplified finan-
cial statements is required of all limited liability business associations as a creditor protection
instrument.55 Second, the accounting provisions harmonized by EU law were also to be used
for purposes of the legal capital system, and thus to limit the amount of funds distributable
to shareholders.56 Third, Continental European countries tended to exhibit a greater deal of
book-tax conformity, i.e., corporate taxes are based on the entity-level financial accounts.57
These features tend to lead to conservatism in accounting.58 Under such conditions, firms may
then make accounting choices that will reduce earnings to minimize their tax loss. Arguably,
this should not affect group-level consolidated accounts that are of interest to investors;
however, these are sometimes not as independent from individual entity accounts in practice
as they are in theory.59
52
See Hoarau, supra note 46, at 224 (discussing state and private-sector influence on accounting
standard setting in France).
53
A 2007 law creating the Accounting Standards Authority (Autorité des normes comptables
or ANC) came into force in 2009. Bernard Colasse & Christine Pochet, De la genèse du nouveau
Conseil National de la Comptabilité (2007): un case d’isomorphisme institutionnel?, 15 Comptabilité
Contrôle Audit 7 (2009) (arguing that the AMC rather resembles the SEC than FASB); Rouba
Chantiri-Chaudemanche & Christine Pochet, La normalisation comptable: l’expert, le politique et
la mondialisation, in Comptabilité, Société, Politique. Mélanges en l’honneur du Professeur
Bernard Colasse 143, 145 (Marc Nikitin & Chrystelle Richard eds., 2012).
54
Martin Gelter & Zehra Kavame Eroglu, Whose Trojan Horse? The Dynamics of Resistance
Against IFRS, 36 U. Pa. J. Int’l L. 89, 138–39 (2014).
55
Codified Company Law Directive, art. 14(f) (requiring disclosure of at least a limited set of finan-
cial statements for all firms). See Edwards, supra note 42, at 123 n.41.
56
See Codified Company Law Directive, art. 56(1). Leuz & Wüstemann, supra note 48, at 459; see
also Eilís Ferran, The Place for Creditor Protection on the Agenda of Company Law in the European
Union, 3 Eur. Company & Fin. L. Rev. 178, 200–01 (2006).
57
For Germany, see Werner F. Ebke, Accounting, Auditing and Global Capital Markets, in
Corporations, Capital Markets and the Business in the Law: Liber Amicorum Richard M.
Buxbaum 113, 124 (Theodor Baums et al. eds., 2000); Wolfgang Schön, The Odd Couple: A Common
Future for Financial and Tax Accounting?, 58 Tax L. Rev. 111, 119–22; for Germany, see A. Frydlander
& D. Pham, Relationship between accounting and taxation in France, 4 Eur. Acct. Rev. 845, 845–46
(Supp. 1996); see generally Peter Essers & Ronald Russo, The Precious Relationship between IAS/
IFRS, National Tax Accounting and the CCCTB, in The Influence of IAS/IFRS on the CCCTB,
Tax Accounting, Disclosure and Corporate Law Accounting Concepts 29, 33 (Peter Essers
et al. eds., 2009); Daniel Shaviro, The Optimal Relationship between Taxable Income and Financial
Accounting Income: Analysis and a Proposal, 97 Geo. L.J. 423, 428 n.13 (2009).
58
See Jonathan Rickford, Legal Approaches to Restricting Distributions to Shareholders: Balance
Sheet Tests and Solvency Tests, 7 Eur. Bus. Org. L. Rev. 135, 146–55 (2006); Wolfgang Schön,
Balance Sheet Tests or Solvency Tests – or Both?, 7 Eur. Bus. Org. L. Rev. 181, 186–87 (2006); Leuz
& Wüstemann, supra note 48, at 459; Ferran, supra note 56, at 209–10.
59
Maria Gee, Axel Haller & Christopher Nobes, The Influence of Tax on IFRS Consolidated
Statements: The Convergence of Germany and the UK, 7 Acct. in Eur. 97, 100–06 (2010) (describing
the reduction of “tax pollution” in German consolidated accounts in the 2000s).
Accounting regulation may match the respective financial system of a country. Scholarship
has long divided countries into “arm’s length finance” (or outsider) and “control-oriented
finance” (insider) systems. While in the former, firms rely on dispersed equity ownership
as well as bonds for debt finance, firms in the latter system are characterized by control or
significant blocks (e.g., by families or other key shareholders) on the equity side, and on rela-
tional lending arrangements with a main bank on the debt side.60 The debate on the origins of
dispersed and concentrated ownership structures maps onto this dichotomy.61
Accounting principles developed for financial markets, such as both US GAAP and IFRS,
are aimed at providing useful information for investors. Mandatory disclosure of accounting
information is of far greater importance in an outsider system, where it increases market
liquidity by giving dispersed stockholders and bondholders access to credible financial infor-
mation.62 By contrast, inside investors – such as family blockholders, other large shareholders
with a longstanding relationship with the firm, and banks with a long-term lending relationship
in an insider finance country – will typically have direct access to internal information of the
investee firm, either through representation on the board or through their bargaining power.
While they will certainly be interested in the firm’s financials, they will be less dependent on
standardized financial information.63 Such investors are both in the position to request infor-
mation about financial idiosyncrasies or unusual accounting choices, and sufficiently sophisti-
cated to evaluate them. Differences between IFRS, GAAP and other accounting principles are
unlikely to pose a hurdle.
The timing of the “internationalization” of accounting standards in many jurisdictions tra-
ditionally characterized as following a “control” model, particularly in civil law countries, is
therefore not a surprise. During the 1990s, the EU’s accounting directives were increasingly
seen as a failure because Member State options meant that financial statements were not com-
parable between countries.64 Continental financial statements were criticized as insufficient in
providing useful information for investors.65 Arguably, an accounting system serving different
60
E.g., Erik Berglöf, A Note on the Typology of Financial Systems, in Comparative Corporate
Governance 151, 159–64 (Klaus J. Hopt & Eddy Wymeersch eds., 1997); Alan Dignam & Michael
Galanis, The Globalization of Corporate Governance 64 (2009); Christian Leuz, Different
approaches to corporate reporting regulation: how jurisdictions differ and why, 40 Acct. & Bus. Res.
229, 236–37 (2010).
61
E.g., Marco Becht & Alisa Roëll, Blockholdings in Europe: An International Comparison, 43 Eur.
Econ. Rev. 1049 (1999); Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, Corporate
Ownership Around the World, 54 J. Fin. 471–517 (1999).
62
E.g., Mark H. Lang, International Accounting in Light of Enron: Evidence from Empirical
Research, 28 N.C. J. Int’l L. & Comm. Reg. 953, 956 (2003); Hail et al., supra note 25, at 357; Dimitrios
Katsikas, Global Regulation and Institutional Change in European Governance, 34 West. Eur. Pol.
819, 826 (2011); Kavame Eroglu, supra note 3, at 471.
63
Yuan Ding, Jacques Richard & Hervé Stolowy, Towards an understanding of the phases of good-
will accounting in four Western capitalist countries: From stakeholder model to shareholder model, 33
Acct. Org. & Soc. 718, 723 (2008); Hail et al., supra note 25, at 361.
64
Buxbaum & Hopt, supra note 23, at 235; Ebke, supra note 57, at 119–20; Enriques, supra note 23,
at 26–27; Martin Gelter & Alexandra M. Reif, What is Dead May Never Die: The UK’s Influence on EU
Company Law, 40 Fordham Int’l L.J. 1413, 1436 (2017).
65
The Daimler-Benz 1993 cross-listing in New York and use of US GAAP famously exposed that
German accounting standards were maybe not as conservative as previously believed. E.g., Walter
Mattli & Tim Büthe, Global Private Governance: Lessons from a National Model of Setting Standards
in Accounting, 68 L. & Cont. Probs. 225, 256 (2005); Lawrence A. Cunningham, Accounting and
purposes would necessarily have to be different, for example, when creditor protection is an
important goal. The permissive attitude of IFRS toward “fair value” accounting66 thus became
an issue of debate when contrasted with the traditional Continental European adherence to
historical cost. Using fair values to value an asset above its historical cost could lead to the
creation of fictitious equity that might result in the distribution of unrealized profits.67
Critics of traditional accounting would counter that creditors would be better served by
timely information rather than legal capital,68 even if some evidence suggests that creditors
often prefer conservative accounting.69 Moreover, the information needs of bondholders are
different from a bank with a close relationship with the debtor, who may also be more inter-
ested in long-term value rather short-term movements in fair value. Historically, banks tended
to prefer balance sheets comprising only tangible assets and preferred the exclusion of intan-
gible values such as goodwill, whereas investors on capital markets preferred financial state-
ments emphasizing current values.70 Consequently, in a finance system with little arm’s length
lending, the benefits of information disclosure are smaller than in a system relying on outside
investment. The EU’s turn toward IFRS – beginning with some reforms of the directives71 and
culminating in the IAS Regulation in 200272 – thus coincides with an increased orientation
toward capital markets, and an increasing desire to attract foreign institutional investors; the
same phenomenon can be observed in other countries.73
3. CONVERGENCE AND DIVERGENCE IN ACCOUNTING

SYSTEMS IN HISTORICAL PERSPECTIVE
This section presents two case studies where the accounting industry, especially international
firms, had different interests and incentives. Section 3.1 suggests that Continental European
countries, specifically Germany, superficially adopted IFRS, but under the radar clung to
Financial Reporting: Global Aspirations, Local Realities, in Oxford Handbook, supra note 12, at 489,
490.
66
IFRS permit fair value accounting more broadly and allow its use in many asset classes beyond
those permissible under US GAAP. E.g., for property, plant and equipment, see IAS 16.
67
E.g., Giovanni Strampelli, The IAS/IFRS after the crisis: limiting the impact of fair value account-
ing on companies’ capital, 2011 Eur. Company & Fin. L. Rev 1, 8. Technically, such distributions can
be prevented by a reconciliation from IFRS or the creation of a fair value reserve that is maintained as
a contra-account to the asset and is removed only when the asset in question is removed from the finan-
cial statement. E.g., Bernhard Pellens & Thorsten Sellhorn, Improving Creditor Protection through IFRS
Reporting and Solvency Tests, 2006 Eur. Company & Fin. L. Rev. 365, 377–78; Strampelli, supra, note
67, at 21.
68
Pellens & Sellhorn, supra note 67, at 376–77. For a survey of the criticism of legal capital rules
see, e.g., Panetsos, supra note 24, at 151–52.
69
Stefano Cascino, Mark Clatworthy, Beatriz García Osma, Joachim Gassen, Shahed Imam
& Thomas Jeanjean, Who Uses Financial Reports and for What Purpose? Evidence from Capital
Providers, 11 Acct. in Eur. 185, 196 (2017).
70
See Ding et al., supra note 63, at 723, 726–27.
71
E.g., Directive 2001/65/EC of the European Parliament and of the Council of 27 September 2001,
2001 O.J. (L 283) 28 (“Fair Value Directive”).
72
Supra note 5 and accompanying text.
73
E.g., for Japan, see Noriyuki Tsunogaya et al., Adoption of IFRS in Japan: challenges and conse-
quences, 27 Pac. Acct. Rev. 3 (2015).
domestic traditions. Conversely, Section 3.2 argues that in the US the interests of the account-
ing industry ultimately favored the retention of US GAAP. In combination, these two devel-
opments mean that accounting ultimately did not converge.
3.1 Europe: IFRS with a Substratum of Traditional Domestic Accounting
In Europe, there have been two vehicles for convergence, namely the EU Accounting
Directives and IFRS. The EEC (later EC, then EU) put accounting harmonization on its agenda
during the 1960s, when company law harmonization began. The original accounting directives
date back to 1978 and 1983, respectively.74 Scholars often find the success of the EU Company
Directives questionable in general. Hansmann and Kraakman called them a weak force of con-
vergence,75 and Enriques describes them as trivial, as they often govern unimportant matters,
provide many Member State options, and are insufficiently enforced.76 While the directives
superficially seemed to govern financial reporting comprehensively, in fact they created
a large number of Member State options.77 With the increasing significance of capital markets
during the 1990s, many scholars, accountants and investors criticized that there still was no
comparability between financial reports drawn up from different Member States.78
Paralleling EEC harmonization, IASC – the predecessor to today’s IASB – was formed
in 1973 following an early initiative of the British and American accounting professions.79
Arguably, it was a response to the impending European harmonization and promoted particu-
larly by the British accounting industry, which feared the dominance of Continental European
models and sought to set up a more respectable international counterweight.80 Even if repre-
sentatives from other countries were involved, Anglo-Saxon accounting culture dominated, as
the individuals involved were typically trained in the English-speaking countries and social-
ized within the large international accounting firms.81 While common law countries did not
immediately form a majority in the representation on IASC, the English-speaking jurisdictions
dominated.82
74
Fourth Council Directive 78/660/EEC, of 25 July 1978, O.J. (L 222) 11; Seventh Council Directive
of 13 June 1983, O.J. (L 193) 1. Both directives were recast as Directive 2013/34/EU of the European
Parliament and of the Council of 26 June 2013, O.J. (L 182) 19 [hereinafter Accounting Directive].
75
Hansmann & Kraakman, supra note 2, at 454.
76
77
E.g., id., at 27 n.95.
78
E.g., Ebke, supra note 57, at 119–20; Gelter, supra note 15, at 331–32.
79
Kavame Eroglu, supra note 3, at 490–91.
80
E.g., John Flower, The Future Shape of Harmonization: The EU Versus the IASC Versus the SEC,
6 Eur. Acct. Rev. 281, 288–89 (1997); Leonardo Martinez-Diaz, Strategic Experts and Improvising
Regulators: Explaining the IASC's Rise to Global Influence, 1973-2001, Bus. & Pol., Dec. 2005, art. 3,
at 8; Zeff, supra note 36, at 809; Gelter & Kavame Eroglu, supra note 54, at 147–48.
81
Mattli & Büthe, supra note 65, at 254; Alain Burlaud & Bernard Colasse, Normalisation comp-
table internationale: le retour du politique?, 16 Comptabilité Contrôle audit 153, 155–56 (2010);
see also Eve Chiapello & Karim Medjad, Une privatisation inédite de la norme : le cas de la politique
comptable européenne, 49 Sociologie du travail 46, 49 (2007); Stavros Gadinis, Three Pathways to
Global Standards: Private, Regulator, and Ministry Networks, 109 Am. J. Int’l L. 1, 23–24 (2015).
82
E.g., id. at 255; Leo van der Tas & Peter van der Zanden, The International Financial Reporting
Standards, in The Influence Of IAS/IFRS On The CCCTB, Tax Accounting, Disclosure And
Corporate Law Accounting Concepts 1, 3 (Peter Essers et al. eds., 2009); Katsikas, supra note 62, at
Compromises within the Directives sometimes catered to UK views. For example, they took
up the UK principle that accounting disclosure should constitute a “price” for the privilege of
limited liability, which is why all limited liability entities must disclose at least an abridged
balance sheet.83 Another famous example is the European “true and fair view” requirement,84
which originated in the UK Companies Act of 1948.85 The directive also included the “overrid-
ing principle,” according to which reporting firms must deviate from specific accounting rules
if their application would be incompatible with a “true and fair view” of the company’s assets,
liabilities, profit and loss and financial position.86 This provision was also met with resistance,
especially in the German-speaking and Scandinavian countries, where it was not properly
implemented in national law for several decades.87 Arguably, such a principle may not be
a good fit for a system with strong book-tax conformity, which might lead to more instances
of questionable manipulation of taxable income.
From today’s perspective, the Directives were an instrument that helped entrench Continental
European accounting systems that were not in line with a shareholder primacy vision of con-
vergence in corporate law.88 However, IAS (which later became IFRS) eventually carried the
day with the rise of capital markets in the 1990s. During this period, an increasing number
of companies sought to cross-list their stock in the US, which created pressure of accounting
standards that would be useful to investors and acceptable from an American perspective.89 By
supporting the internationalizing of accounting, the European Commission sought to address
a competitive disadvantage for multinational European firms.90 Given that the wholesale adop-
tion of US GAAP – which cross-listed companies were already using – was not an option, IAS/
IFRS were the only international alternative.91
The EU adopted IFRS with the IFRS Regulation of 2002,92 which requires publicly traded
firms to disclose consolidated financial statements using IFRS, but includes Member State
options to permit or require listed firms to draw up their entity-level accounts under either
IFRS or domestic standards, and also includes the same choice for both entity-level and con-
solidated accounts of non-listed firms.93 Since many countries still use these options to require
830; Burlaud & Colasse, supra note 81, at 155–56; Gelter & Kavame Eroglu, supra note 54, at 113–14;
Quaglia, supra note 46, at 137–38.
83
Supra note 55 and accompanying text; on the idea of publicity as a price or collateral for limited
liability, see Edwards, supra note 42, at 123 n.41.
84
Accounting Directive, art. 4(3).
85
E.g., Lawrence E. Cunningham, Semiotics, Hermeneutics, and Cash: An Essay on the True and
Fair View, 28 N.C.J. Int’l L. & Com. Reg. 893, 904 (2003); Dieter Ordelheide, True and Fair View:
A European and a German Perspective, 2 Eur. Acct. Rev. 81, 82 (1993).
86
Accounting Directive, art. 4(3).
87
See David Alexander & Eva Jermakowicz, A True and Fair View of the Principles/Rules Debate,
42 Abacus 132, 139 (2006); Cunningham, supra note 85, at 910–11 (2003); Bernhard Großfeld,
Comparative Corporate Governance: Generally Accepted Accounting Principles v. International
Accounting Standards, 28 N.C. J. Int’l L. & Comm. Reg. 847, 861–62 (2003).
88
See Gelter, supra note 15, at 341–42.
89
Quaglia, supra note 46, at 135.
90
Katsikas, supra note 62, at 828.
91
Philippe Maystadt, Why and How EFRAG was Reformed, Acct. Econ. & L., 31, 32 (2017).
92
The IFRS Regulation was preceded by laws in the late 1990s in several Member states permitting
firms to use IAS or GAAP in consolidated accounts. Gelter & Kavame Eroglu, supra note 54, at 150–52.
93
IFRS Regulation, art. 5.
domestic accounting standards for entity level financial statements,94 convergence to IFRS is
incomplete. In most countries, those firms that have the choice still select domestic accounting
standards.95 Borrowing from linguistics, one could argue that national accounting standards
and laws constitute a “substratum” to the prestige language of IFRS:96 a substratum of the
traditional accounting principle persists in low-prestige financial statements (entity-level
accounts, non-listed firms, tax accounting), while high-profile accounts – consolidated state-
ments of publicly traded firms – use the lingua franca of IFRS.
While from the US perspective, IFRS may look like an intrusion from abroad, from the
Continental European perspective they look like an invader coming from the Anglo-Saxon
world of capital markets. Nevertheless, the eventual compromise carved out a prominent
space for IFRS. While IFRS must be officially endorsed by the European Commission to
become part of EU law, the Commission exercises this power through a delegated committee
procedure involving a body called EFRAG (European Financial Reporting Advisory Group).
At least initially, it had limited oversight from the commission and, under the rubric of “exper-
tise,” strong representation from the large accounting firms.97
International accounting was in the interest of large, capital-market oriented firms, which
were on the ascendency during the “convergence in corporate governance” phase. But the shift
toward IFRS also suited the domestic branches of the large accounting firms, who benefited
in terms of market share in the audit market, relative to more locally oriented professionals.98
Large firms such as the Big 4 are typically better able to “scale” human capital by training staff
in IFRS across countries and applying uniform methods.99 Moreover, they may be better able
to handle the complexity of IFRS, having been more closely involved in the standard setting
process.100 In addition, there may be audit tasks at which large firms are better than small ones,
94
See Thomas Sellhorn & Sylwia Gornik-Tomaszewski, Implications of the ‘IAS Regulation’ for
Research into the International Differences in Accounting Systems, 3 Acct. in Eur. 187, 195 (2006);
Strampelli, supra note 67, at 10; Gelter & Kavame Eroglu, supra note 54, at 153–56, Panetsos, supra
note 24, at 147; Paul André, The Role and Current Status of IFRS in the Completion of National
Accounting Rules – Evidence from European Countries, 14 Acct. in Eur. 1, 2–5 (2017).
95
André, supra note 94, at 6.
96
A substratum occurs when a lower-prestige language influences the development of a higher-prestige
language in the area was formerly spoken. A now extinct language might influence a new language that
superseded it (e.g. Gaulish likely influenced the Latin spoken in the Roman province of Gaul, and con-
sequently French).
97
Chiapello & Medjad, supra note 81, at 58; but see van der Tas & van der Zanden, supra note 82,
at 9 (noting the influence of accountants, but also the disagreement between IASB and EFRAG about
parts of IAS 39). After its 2014 reorganization, EFRAG now has stronger input from national standard
setters and European supervisory authorities. Carien Van Mourik & Peter Walton, The European IFRS
Endorsement Process – in Search of a Single Voice, 15 Acct. in Eur. 1, 17 (2018).
98
See Martin Glaum & Donna L. Street, Compliance with the Disclosure Requirements of Germany’s
New Market: IAS Versus US GAAP, 14 J. Int’l Mgmt. & Acct 64 (2003) (finding that firms with a Big 4
auditor were more likely to use US GAAP or IAS rather than German accounting standards); Chen Chen
& Zili Zhuang, How does Mandatory IFRS Adoption Affect the Audit Service Market (2014) (finding that
mandatory IFRS adoption favored the Big 4 relative to other firms).
99
See Tokar, supra note 39 (discussing KPMG’s international training activities regarding IFRS);
Hichem Khlif & Imen Achek, IFRS Adoption and Auditing: a review, 24 Asian Rev. Acct. 338, 340
(2016) (summarizing tentative evidence that IFRS compliance is associated with Big 4 auditors).
100
Chen & Zhuang, supra note 98, at 7–8.
such as reviewing the fair values under IFRS.101 Empirical research found that European firms
were significantly more likely to switch to an international accounting firm in the year of man-
datory IFRS introduction.102 Studies in a number of countries found that IFRS were associated
with increased audit fees.103
That said, it is not clear that the Big 4 caused the introduction of IFRS;104 the interests of
large businesses also played a role. However, it certainly suited the large accounting firms’
interests.105 At the same time, the entrenched doctrinal system was too strong for a complete
transition to IFRS. This may be in part a consequence of purely doctrinal path dependence that
would have made a transition too costly. Local accounting professionals would have favored
preserving the status quo.
3.2 The US: Resistance to IFRS is NOT Futile
The US has not adopted IFRS for domestic issuers, which like GAAP are in principle geared
to investor interests, thus creating a distinction within the Anglo-Saxon world of arm’s length
financial systems. While in Europe there is no full convergence “in substance,” US accounting
requirements failed to converge “in form” to the international trend.106
The SEC, the US profession and FASB have supported IASC/IASB for decades.107 IASC
began to grow in influence through its cooperation with IOSCO (International Organization
of Securities Commissions) from 1987 onwards, which aimed at facilitating international
cross-listings.108 The leading national regulator within IOSCO, which formally endorsed IAS
in May 2000,109 was the American SEC. IOSCO and IASC were thus often seen as instruments
of American influence, with IASC representing the interests of FASB above all.110 IOSCO’s
endorsement was instrumental in lending credibility to IFRS, for which SEC approval and
sufficient similarity with US GAAP were crucial.111 When IASC became IASB, it had not only
101
Id. at 8–11.
102
Maria Wieczynska, The “Big” Consequences of IFRS: How and When Does the Adoption of IFRS
Benefit Global Accounting Firms?, 91 Acct. Rev. 1257 (2016).
103
Jeong-Bon Kim, Xiaohong Liu & Liu Zheng, The Impact of Mandatory IFRS Adoption on Audit
Fees: Theory and Evidence, 87 Acct. Rev. 2061 (2012); Khlif & Achek, supra note 99, at 344–45.
104
See Karthik Ramanna & Ewa Sletten, Network Effects of Countries’ Adoption of IFRS, 89 Acct.
Rev. 1517 (2014) (finding a strong univariate correlation between the presence of the Big 4 and IFRS,
which does not show up as statistically significant in multivariate regressions including other variables).
105
Tony Porter, Private Authority, Technical Authority, and the Globalization of Accounting
Standards, Bus. & Pol. 2005, issue 3, art. 2, at 9–10.
106
See Ronald J. Gilson, Globalizing Corporate Governance: Convergence of Form or Function, 49
Am. J. Comp. L. 329 (2001) (distinguishing formal and functional convergence).
107
See Zeff, supra note 36, at 811–12.
108
Zeff, supra note 36, at 814–15.
109
Cunningham, supra note 65, at 491; Zehra Kavame Eroglu, Why and How the World Adopts IFRS,
§ 1.2, forthcoming Geo. Wash. Int’L. Rev.
110
Gordon L. Clark et al., Emergent Frameworks in Global Finance: Accounting Standards and
German Supplementary Pensions, 77 Econ. Geography 250, 255 (2001).
111
Beth A. Simmons, The International Politics of Harmonization: The Case of Capital Market
Regulation, 55 Int’l Org. 589, 611 (2001); Kavame Eroglu, supra note 3, at 493–94.
adopted an organizational structure resembling FASB’s, but IAS (now re-christened IFRS)
were by many observers considered similar to US GAAP.112
After the scandals of 2001, Enron and WorldCom, US GAAP increasingly came under scru-
tiny in public debates as being too “rules-based.”113 Firms that followed accounting standards
in letter, but not in spirit, were able to hide malfeasance with great skill, and auditors approved
their financial statements.114 IFRS became the alternative system of reference against which
US GAAP were frequently compared. If IFRS are indeed more “principles-based,” then they
are less at risk for circumvention in cases of accounting practices pushing the envelope.115
For a number of years, the SEC considered adopting IFRS, or at least giving firms the choice
between the two now relatively similar systems.116 Ultimately, the SEC only allowed foreign
issuers to use IFRS for purposes of US securities trading in 2008, which means they no longer
need to reconcile their IFRS statements to US GAAP.117 With the 2008/09 financial crisis,
international accounting became a side issue for the SEC, whose staff issued a final work plan
in 2012. Subsequently, the adoption of IFRS was permanently put on hold.118
Arguably, there is no need for further convergence from the perspective of the US. As Zehra
Kavame Eroglu pointed out, US actors such as FASB and the SEC strategically promoted
IASC/IASB to export a vision of accounting standards more in line with American practices.119
Given the hegemonic position of US capital markets, US issuers have little to gain from adjust-
ing to international standards that are already quite similar to the American ones. US institu-
tional investors have a foreign system available that suits their needs oversees, and the foreign
multinationals listed in the United States can use IFRS in American markets. The reduction
in comparability between financial statements using IFRS and US GAAP does not appear to
impose sufficient additional cost on the local investing public to create pressure to adjust.120
Within the US, there are good reasons to believe that the political economy of accounting is
further stacked against IFRS. First, there is a natural level of inertia. An established domestic
standard setter (FASB) that is firmly entrenched into the securities law framework will likely
be reluctant to give up its role to a foreign competitor.
112
William W. Bratton, Heedless Globalism: The SEC’s Roadmap to Accounting Convergence, 79
U. Cin. L. Rev. 471, 475–76 (2010); Leuz, supra note 60, at 250; Cunningham, supra note 65, at 492;
Kavame Eroglu, supra note 3, at 497.
113
Lance J. Phillips, The Implications of IFRS on the Functioning of the Securities Antifraud
Regime in the United States, 108 Mich. L. Rev. 616–17 (2010); see also William W. Bratton, Enron,
Sarbanes-Oxley and Accounting: Rules Versus Principles Versus Rents, 48 Vill. L. Rev. 1036–37
(2003); John C. Coffee, Jr. & Hillary A. Sale, Redesigning the SEC: Does the Treasury Have a Better
Idea?, 95 Va. L. Rev. 707, 749–59 (2009).
114
John C. Coffee, Jr., Understanding Enron: “It’s About the Gatekeepers, Stupid,” 57 Bus. Law.
1403, 1416–17 (2002); see also Bratton, supra note 113, at 1041–43.
115
Frederick Gill, Principles-Based Accounting Standards, 28 N.C. J. Int’l L. & Comm. Reg.
967 (2003); van der Tas & van der Zanden, supra note 82, at 4; but see Lawrence A. Cunningham,
A Prescription to Retire the Rhetoric of Principles-Based Systems in Corporate Law, Securities
Regulation, and Accounting, 60 Vand. L. Rev. 1409, 1453–60 (2007).
116
Cunningham, supra note 65, at 492.
117
Supra note 4 and accompanying text.
118
119
Kavame Eroglu, supra note 3, at 514–15.
120
Id.
Second, the US accounting industry would likely have something to lose from a full tran-
sition to IFRS. As discussed in Section 2, one could interpret this as a case of doctrinal path
dependence, resulting from professionals having human capital tied up in the existing system,
which will make a changeover difficult and costly. This cost did not prevent the introduction
of IFRS in Europe; to the contrary, international accounting firms there benefited from IFRS.
Arguably, the Big 4 might have used the opportunity in the United States for the same purpose,
as there are still publicly traded issuers audited by other large (significantly smaller) account-
ing firms.
It is also possible that they would not have a similar advantage as in European countries,
given that US GAAP themselves are even more complex than IFRS.121 International account-
ing firms can make bigger gains in jurisdictions where domestic standards are very different
from IFRS and they hence enjoy an advantage as market disrupters.122 Given the relative sim-
ilarities between US GAAP and IFRS compared to, say, the larger distance between German
accounting law and IFRS, large accounting firms would not have been in the position to sell
international accounting as fundamentally new as in Europe.123
Moreover, the debate about rules-based and principles-based accounting standards ties back
into larger themes in comparative corporate governance. Within comparative corporate law, it
is easy to overemphasize similarities between common law jurisdictions, particularly the US
on one hand, and the UK and other Commonwealth jurisdictions on the other. A distinguishing
factor is the extent to which each of the two systems relies on investor litigation to discipline
management and boards. In the US, shareholder litigation has long been thought to be impor-
tant to curb managerial agency cost.124 There are a relatively large number of investor lawsuits
every year, including both corporate and securities law actions.125 By contrast, in the UK
institutional ownership has been stronger.126 British institutional investors were geographically
concentrated in the City of London and were historically in a better position to monitor man-
agement through a higher level of direct engagement.127 Correspondingly, securities lawsuits
against issuers have remained rare.128
121
Hail et al., supra note 25, at 375–76.
122
See Chen & Zhuang, supra note 98 (finding that auditors with high IFRS expertise make bigger
gains in markets requiring greater adjustment in the changeover).
123
Hail et al., supra note 25, at 371.
124
Alessio M. Pacces, Controlling the Corporate Controller’s Misbehavior, 11 J. Corp. L. Stud.
177, 203–04 (2011).
125
See Robert B. Thompson & Randall S. Thomas, A New Look at Shareholder Litigation:
Acquisition-Oriented Class Actions, 57 Vand. L. Rev. 133, 169 (2004); Jesssica Erickson, Corporate
Governance in the Courtroom: An Empirical Analysis, 51 Wm. & Mary L. Rev. 1749, 1764 (2010).
126
E.g., John Armour, Enforcement Strategies in UK Corporate Governance, in Rationality in
Company Law 71, 108 (John Armour & Jennifer Payne eds., 2009).
127
See Alessio M. Pacces, Rethinking Corporate Governance 286–87 (2012) (discussing
policing of activities of controlling shareholders by boards in the UK); see also Marc T. Moore, United
Kingdom, in Comparative Corporate Governance 913, 925–26, 929 (Andreas Fleckner & Klaus Hopt
eds., 2013) (discussing the relatively larger powers of UK shareholders); Andrew F. Tuch, Proxy Advisor
Influence in a Comparative Light, 99 B.U.L. Rev. 1459, 1488 n.175, 1502–03, 1511 (2019) (noting
changes in UK ownership patterns because of increasing foreign ownership).
128
Christopher Hung Nie Woo, United States Securities Regulation and Foreign Private Issuers:
Lessons from the Sarbanes-Oxley Act, 48 Am. Bus. L.J. 132 (2011); Iris H.-Y. Chiu, United Kingdom:
A Confidence Trick: Ex Ante versus Ex Post Frameworks in Minority Investor Protection, in Global
Securities, supra note 34, at 627, 642.
The heavy reliance on litigation in the US likely contributed to the shape of accounting
standards.129 Litigation distinguishes the US from the UK, in whose capital market ecosystem
IFRS evolved, and whose GAAP are thought to be closest to IFRS.130 A high level of litigation
generates cost as well as higher liability risks and higher insurance premia.131 Issuers and
accounting professionals therefore have greater incentives to push for accounting standards
that will help them avoid liability.132
With a rules-based accounting system, which arguably exists in the US, accounting firms
and issuers may be better able to avoid liability and minimize insurance premia by following
the rules to the letter. If courts tend to defer to accounting standard setters, then defendants
will have less to fear from plaintiff lawyers and be in a much better position when negotiating
a settlement. By contrast, in a principles-based system, financial statements must conform
to general requirements such as “fair presentation” to comply with accounting standards.
IFRS implements an open-ended “fair presentation standard” goal that is paired with an
“overriding principle” requiring deviations from specific rules where they do not achieve fair
presentation.133 Writing in 1995, Stephen Zeff explains that auditors “want to be able to cite
express provisions of GAAP in support of their clients’ financial reporting” to avoid litigation,
especially in an environment where clients often engage in “opinion shopping.”134 Given
the considerable fear of investor litigation among US professionals, IFRS might expose the
accounting industry to greater liability risks (and potentially incentivize them to make less
aggressive accounting choices) by generating additional grey areas in accounting.135
One objection to this argument is that the federal courts have also typically found that
following GAAP does not create a safe haven from criminal or civil liability.136 However, as
Cunningham explains, this was the position of both the SEC and the federal courts up to the
1970s, but subsequently fell into disuse.137 Zeff summarized this situation by saying that the
“standard of quality … is conformity with GAAP. There is no subjective override” compa-
rable to “true and fair view.”138 After Enron, the federal courts failed to return to the position
129
E.g., Phillips, supra note 113, at 608–12; Moritz Pöschke, Incorporation of IFRS in the United
States: An Analysis of the SEC’s Options and the Implications for the EU, 9 Eur. Corp. & Fin. L.
Rev. 66–69 (2012); Robert M. Bushman & Joseph D. Piotroski, Financial Reporting Incentives for
Conservative Accounting: The Influence of Legal and Political Institutions, 42 J. Acct. & Econ. 107
(2006).
130
E.g., Kee-Hong Bae, Hongping Tan & Michael Welker, International GAAP differences, The
impact on foreign analysts, 83 Acct. Rev. 593, 601–02 (2008); François Brochet, Alan D. Jagolinzer,
Edward J. Riedl, Mandatory IFRS Adoption and Financial Statement Comparability, 30 Cont. Acct.
Res. 1373, 1376 (2013); Karthik Ramanna, The International Politics of IFRS Harmonization, Acct.
Econ. & L. 2013, iss. 2., at 1, 3–4, 10–11.
131
See Dain C. Donelson, John M. McInnis & Richard D. Mergenthaler, Rules Based Accounting
Standards and Litigation, 87 Acct. Rev. 1247 (2012) (finding an empirical link between rules-based
accounting and a lower incidence of litigation).
132
See also Gill, supra note 115, at 979.
133
IAS 1.19 passim.
134
Stephen A. Zeff, A Perspective on the U.S. Public/Private-Sector Approach to the Regulation of
Financial Reporting, 9 Acct. Horizons 52, 65 (1995).
135
See also Hail et al, supra note 25, at 376–77.
136
United States v. Simon, 425 F.2d 796 (2d Cir. 1969).
137
Cunningham, supra note 115, at 1468 n.254.
138
Zeff, supra note 134, at 65.
that GAAP do not create a safe haven.139 Arguably, cases against auditors are hard to win in
practice. First, for a 10b-5140 securities fraud claim, plaintiffs must show scienter,141 which is
hard to establish with respect an auditor who did not uncover a misapplication of accounting
standards. Second, the US Supreme Court found that 10b-5 does not allow aiding and abetting
liability,142 which would be one way in which an outside auditor could be held liable for an
issuer’s false disclosures. Third, the usefulness of section 11 of the Securities Act,143 which
may be a basis for liability resulting from false disclosures in registration statements, is limited
by a “tracing requirement,” which reduces the plaintiff class typically to the initial purchaser
of securities.144
Nevertheless, the general prevalence of investor litigation in the United States keeps the
possibility of auditor liability alive. At the very least, the rules-based approach seems to
provide comfort to the accounting industry,145 even if it may ultimately be an illusion in serious
cases. Consequently, one may well say that a transition to IFRS would not serve the interests
of the accounting industry. In Continental European countries, there are at least a subset of
internationally affiliated accountants in the position to gain from the transition; this is not true
in the US. The persistence of US GAAP is thus not merely a case of doctrinal path dependence,
but one of economic path dependence as well.
4. CONCLUSION
This chapter attempted to highlight links between accounting and convergence in corporate
governance. Accounting professionals are another interest group affecting the political
economy of comparative corporate governance. Convergence on shareholder and capital
market orientation is influenced by developments in accounting and accounting law. As we
have seen, in Continental European jurisdictions, the introduction of IFRS served the interest
of international accounting firms, while in the US their adoption would likely not have bene-
fited the accounting industry. Consequently, the persistence of certain accounting standards is
best characterized as an incidence not only of doctrinal, but also of economic, path dependence
subject to the influence of coordinated interest groups.
139
In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 340 (S.D.N.Y. 2004); Cunningham,
supra note 115, at 1468 n.254.
140
17 C.F.R. § 240.10b-5, based on Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b).
141
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).
142
Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994).
143
15 U.S.C. § 77k(a).
144
Franklin A. Gevurtz, United States: The Protection of Minority Investors and Compensation of
their Losses, in Global Securities, supra note 34, at 109, 119.
145
PART III
SHAREHOLDERS
15. Shareholder proposals shaking up shareholder
say: a critical comparison of the United States
and Europe
Sofie Cools1
1. INTRODUCTION
One of the most remarkable recent developments with regard to shareholder power is how
American shareholders have taken matters in their own hands and have forced boards and
management to amend even charters to strengthen shareholder rights. Roughly speaking,
shareholders have traditionally had fewer substantive statutory powers in the United States
than in Europe.2 However, in the past 15 years, shareholders have successfully made propos-
als in individual American corporations to de-stagger the board, elect directors by majority
instead of plurality, allow shareholders to request special meetings, replace supermajority
requirements with simple majority requirements, and allow shareholders to include director
nominees on the company’s proxy. In contrast, shareholder proposals have been relatively
rare in Europe.3
Is the American abundance of successful shareholder proposals the epitome of strong
shareholder power? This chapter critically analyzes the role of such shareholder proposals and
their effects on shareholder power, and warns of too much euphoria. A comparative analysis
of shareholder proposal rights and substantive shareholder rights yields two important lessons.
First, shareholder power related proposals in American companies are essentially closing the
gap in substantive shareholder power that existed between the United States and Europe, an
evolution to which developments in Europe are contributing as well. Second, empirical data
on shareholder proposals in the United States and Europe are barely comparable, due to the
different purposes for which such proposals are used, differences in prevailing ownership
structures and in the average size (in terms of market capitalization) of listed companies, etc.
The geographic scope of the comparative analysis includes Delaware, France, Germany,
Belgium, and the Netherlands. The comparison covers shareholder proposals in listed corpo-
rations, with a focus on shareholder proposals relating to shareholder power.
This chapter is structured as follows. Section 2 traces how the historical allocation of power
within public companies has evolved to its current state on both sides of the Atlantic. It largely
focuses on the law in books and the ideology behind it, while temporarily setting ownership
1
I would like to thank Afra Afsharipour, Martin Gelter, Tom Vos and Marieke Wyckaert for their
helpful comments.
2
Sofie Cools, The Real Difference in Corporate Law Between the United States and Continental
Europe: Distribution of Powers, 30 Del. J. Corp. L. 697, 739–50 (2005).
3
Luc Renneboog & Peter Szilagyi, Shareholder Engagement at European General Meetings, in
Boards and Shareholders in European Listed Companies 315, 327 (Massimo Belcredi & Guido
Ferrarini eds., 2013).
302
Shareholder proposals shaking up shareholder say 303
structure aside (as its importance will be discussed in Section 4). Section 3 compares share-
holder power to bring proposals to a shareholder vote and to convene a shareholder meetings
among the jurisdictions mentioned above. This comparison also shows why international
comparisons of the number of proxy fights are meaningless. Section 4 discusses the effects
of American shareholder proposals on substantive shareholder powers and compares the
resulting power allocation with the power allocation in Europe. Section 5 explains how stock
ownership structures and a host of other factors interfere with the above comparisons and with
empirical comparisons of shareholder proposals in the United States and Europe. It follows
that some conclusions one may be tempted to make from existing empirical research are seri-
ously flawed. Section 6 concludes.
2. A BRIEF DIACHRONIC COMPARISON OF

SHAREHOLDER POWER
In order to see how shareholder proposals have contributed to the development of substantive
shareholder power, this section compares the evolution of shareholders’ substantive powers
and initiative powers among the jurisdictions referenced in this study. This section focuses
on legal developments – the influence of stock ownership patterns will be discussed further.4
2.1 Seventeenth and Eighteenth Centuries
In the East India Companies, particularly the Dutch,5 and other chartered corporations of the
seventeenth century, shareholder power was severely limited. Corporations were considered
a state affair, meant to serve a public purpose such as colonization and construction of public
infrastructure, and its governors were appointed by the crown.6 This gradually changed in the
eighteenth century. Even though the establishment of corporations still needed government
approval, corporations no longer had to pursue public goals. On both sides of the Atlantic,
corporations were increasingly used for private business and could focus on shareholders’
interests. Shareholders’ clout increased accordingly.7
2.2 Nineteenth Century
In the nineteenth century, stock corporations emerged in the new corporate laws of several
European jurisdictions.8 By then, the shareholder meeting was considered the supreme cor-
4
See infra text accompanying notes 180–87.
5
Bastiaan Kemp, Aandeelhoudersverantwoordelijkheid: de positie en rol van de aandeel-
houder en aandeelhoudersvergadering 15–22 (2015).
6
Alexander Schall, Corporate Governance after the Death of the King – the Origins of the
Separation of Powers in Companies, 8 Eur. Comp. & Fin. L. Rev. 476, 478–80 (2011).
7
Lawrence M. Friedman, A History of American Law 132, 138 (3d ed. 2005); Kemp, supra
note 5, at 23.
8
Sofie Cools, Europe’s Ius Commune on Director Revocability, 8 Eur. Comp. & Fin. L. Rev. 199,
223–29 (2011).
porate body with absolute power.9 Much of this was through practice and application of civil
law agency principles,10 as both the French Commercial Code of 1807 and the Prussian Stock
Corporations Act of 1843 were silent on the organization of corporate decision-making.11 In
addition, the French government frequently steered towards an expansion of the competences
of the shareholder meeting in its review of all deeds of incorporation and charter amendments.12
The view of shareholders as owners was deemed in line with the fictitious theory of legal
personality.13 Shareholder primacy also fit snugly into the contractual theory of the corpo-
ration, which dominated French legal thinking during the nineteenth and beginning of the
twentieth century.14 Under this theory, the corporation is a contract between shareholders, and
is governed by contract law.15 Accordingly, the wills of shareholders are determinative in cor-
porate decision-making, and there is no role for a superior corporate interest.16 The shareholder
meeting was then logically the highest and most powerful corporate body,17 a view further
buttressed by the revolutionary political ideals of equality and democracy.18 In the contractual
conception of the corporation (long before agency theory), directors were legally qualified as
agents.19 An important source of inspiration in designing the relationship between shareholders
and directors was, therefore, agency law, which provided the basis for at will removability of
directors.20
A commensurate norm of shareholder primacy was prevailing in American jurisprudence
and case law,21 and conformed with the then dominant view of a corporation as an aggregate.22
However, in the last decades of the nineteenth century, shareholder power was curbed, while
9
Sabrina Bruno, Directors’ Versus Shareholders’ Primacy in U.S. Corporations Through the Eyes
of History: Is Directors’ Power ‘Inherent’?, 9 Eur. Comp. & Fin. L. Rev. 421, 434–36 (2012).
10
Sofie Cools, The Dividing Line Between Shareholder Democracy and Board Autonomy: Inherent
Conflicts of Interest as Normative Criterion, 11 Eur. Comp. & Fin. L. Rev. 258, 261 (2014); see also text
accompanying notes 19–20.
11
With regard to the Prussian statute, see Holger Fleischer, Kompetenzen der Hauptversammlung,
in 2 Aktienrecht im Wandel 430, 432 (Walter Bayer & Mathias Habersack eds., 2007). The French
Commercial Code confined itself to stipulating that directors were appointed temporarily and removable
from office. Art. 31 Code de Commerce of 1807; see also Arts. 44 & 46 Code de Commerce of 1807.
12
René Piret, L’évolution de la législation belge sur les sociétés anonymes 29 (1946); see
also Yves De Cordt, L’égalité entre actionnaires 189 (2004).
13
Bruno, supra note 9, at 436–37.
14
Art. 13 Code Civil of 1804; art. 18 Code de Commerce of 1807; Jacques Malherbe et al., Droit
des sociétés. Précis 206 (2020); Philippe Merle, Sociétés commerciales 43 (2018); T. Tilquin &
V. Simonart, 1 Traité des sociétés 95, 99 (1996); Nicholas H.D. Foster, Company Law Theory in
Comparative Perspective: England and France, Am. J. Comp. L. 573, 589 (2000).
15
Merle, supra note 14, at 43; Tilquin & Simonart, supra note 14, at 99.
16
De Cordt, supra note 12, at 215; Malherbe et al., supra note 14, at 206.
17
J. Van Ryn, 1 Principes de droit commercial 320 (1954); Martin Gelter, Taming or Protecting
the Modern Corporation? Shareholder-Stakeholder Debates in a Comparative Light, 7 N.Y.U. J.L. &
Bus. 641, 665, 667 (2011).
18
Kemp, supra note 5, at 25.
19
Fleischer, supra note 11, at 433; Tilquin & Simonart, supra note 14, at 100; Morton J. Horwitz,
Santa Clara Revisited: The Development of Corporate Theory, 88 W. Va. L. Rev. 173, 183, 215–16
(1985–86); see Art. 31 Code de Commerce of 1807.
20
Art. 2004 Code Civil of 1804.
21
Bruno, supra note 9, at 431–34.
22
John C. IV Coates, State Takeover Statutes and Corporate Theory: The Revival of an Old Debate,
64 N.Y.U. L. Rev. 806, 816–17, 823 (1989).
the business judgment rule became more protective of directors.23 In both the United States and
Europe, most directors were also shareholders. Thus, the main issue in corporate law related to
the powers of minority shareholders.24
2.3 Twentieth and Twenty-First Centuries
In the twentieth century, boards started to take on a larger role in practice, as stock ownership
dispersed (more so in the US than in continental Europe) and, except with regard to large
shareholders, shareholder meetings were plagued by apathy, absenteeism and shareholder
incompetence.25 Confidence in shareholder meetings eroded quickly, and European legislators
started attributing more authority to the board of directors.26 During the twentieth century,
there was a growing aspiration to protect minority shareholders from expropriation contrib-
uting to the evolution.27 Two-tier boards were also introduced, most notably in Germany and
the Netherlands, among others to reduce the board’s dependence on controlling shareholders.28
As the role of the board of directors changed, the conception of the corporation in Europe
evolved. The contractual view lost popularity to the institutional view, which began to appear
halfway into the nineteenth century.29 According to the institutional theory, the corporation is
a long-standing structure governed by a set of rules the parties cannot modify and it furthers
a common corporate interest over the individual interests of the shareholders.30 The authority
of the corporate bodies under the theory no longer emanates from the shareholder meeting,
but instead from the law. Powers are distributed hierarchically in function of the corporate
interest31 and tend to be generously allocated to the board of directors.32 The directors are no
longer qualified as agents, but as (members of) corporate organs with independent authority.33
23
Harwell Wells, Shareholder Power in America, 1800-2000: a Short History, in Research
Handbook on Shareholder Power 15, 17–18 (Jennifer G. Hill & Randall S. Thomas eds., 2015).
24
For France, see Anne Lefebvre-Teillard, L’intervention de l’Etat dans la constitution des sociétés
anonymes (1807-1867), RHDFE 383, 405–06 (1981); Henri Lévy-Bruhl, Histoire juridique des
sociétés de commerce en France aux XVIIe et XVIIIe siècles 52 (1938); Piret, supra note 12, at 35.
For the US, see Wells, supra note 23, at 17.
25
For the US, see Adolf A. Berle Jr. & Gardiner C. Means, The Modern Corporation
and Private Property 2–3 (1933). For France, see Léon Rycx, 1 Traité juridique et pratique
des sociétes anonymes 220 (1913); Van Ryn, supra note 17, at 392. For Germany, see Walther
Rathenau, Vom Aktienwesen 23–27 (1917).
26
Sofie Cools, De bevoegdheidsverdeling tussen algemene vergadering en raad van
bestuur in de NV 131–40 (2015); Fleischer, supra note 11, at 435.
27
Dalia Tsuk Mitchell, Shareholders as Proxies: The Contours of Shareholder Democracy, 63
Wash. & Lee L. Rev. 1503, 1512–13, 1554–60 (2006).
28
See Klaus J. Hopt, The German Two-Tier Board: Experience, Theories, Reforms, in Comparative
Corporate Governance 227 (Klaus J. Hopt et al. eds., 1998).
29
Isabelle Corbisier, La société: contrat ou institution? 224–26 (2011) (France); Kemp, supra
note 5, at 37 (Netherlands).
30
Emile Gaillard, La théorie institutionnelle et le fonctionnement de la société anonyme
37–43 (1932); Maurice Hauriou, Précis élémentaire de droit administratif 26 (1943); Van Ryn,
supra note 17, at 205–07.
31
De Cordt, supra note 12, at 216; Gaillard, supra note 30, at 39–40.
32
Gelter, supra note 17, at 665, 667.
33
Merle, supra note 14, at 44; Tilquin & Simonart, supra note 14, at 108; Van Ryn, supra note
17, at 320.
The stronger position of the board is thus also connected with the organic theory and, more
generally, the conception of the legal personhood as a real entity.34
In the United States, non-voting common stock, blank check stock, proxy rules hindering
shareholder initiative, the courts’ expansive reading of the business judgment rule and other
legal developments continued to deplete shareholder power.35 These developments were
supported by the managerialist belief that professional managers were better positioned than
shareholders to defend the corporate interest.36 Additionally, like in Europe, corporate theorists
in the United States had moved on to consider corporations as real, or “natural” entities.37 Yet,
in 1942, the SEC laid down modest foundations for shareholder activism by allowing share-
holders to submit proposals for precatory resolutions for inclusion on the corporate proxy. In
the following decades, this new right was used frequently by individuals and religious and
political groups,38 but without noteworthy success.39
2.4 1980s and Onwards
In Europe towards the end of the twentieth century, the pendulum swung again in the direc-
tion of increased shareholder power. The early European harmonization efforts of the 1970s
and 1980s had already confirmed and sometimes expanded shareholder authority in capital
matters and domestic mergers and divisions.40 The takeover wave of the 1980s, and especially
legislative responses to it, turned the tide towards stronger shareholder meetings. Although
this was not exactly the case in the United States – Delaware courts have taken a notably
more management-friendly stance in response to the takeover wave41 – American law and
economics theory buttressed the increased shareholder focus in Europe. Agency theory and
the efficient markets hypothesis in particular, which tie managers’ responsibility and bench-
marks to shareholder interests, may have had this effect.42 After the turn of the millennium, the
European Commission’s Action Plan of 200343 emphasized the need for improved shareholder
democracy. The powers of the shareholders meeting with regard to takeover protection were
an important theme in the planned Takeover Directive. Yet, the directive had little influence
in this regard as these powers were not mandatorily imposed on the member states.44 The
34
Bruno, supra note 9, at 438–39; Horwitz, supra note 19, at 183.
35
Wells, supra note 23, at 20–22.
36
Id.
37
Coates, supra note 22, at 823–24.
38
Stuart Gillan & Laura Starks, The Evolution of Shareholder Activism in the United States, 19 J.
Applied Corp. Fin. 55, 55–56 (2007).
39
Wells, supra note 23, at 22.
40
Fleischer, supra note 11, at 442–44.
41
42
Kemp, supra note 5, at 38; Wells, supra note 23, at 23.
43
Commission Communication of May 21, 2003, Modernising Company Law and Enhancing
Corporate Governance in the European Union – A Plan to Move Forward, Brussels, COM 284 (2003),
https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2003:0284:FIN:EN:PDF.
44
Shareholder Rights Directive of 2007 harmonized, but only moderately improved,45 sharehold-
ers’ procedural shareholder rights, such as shareholders’ agenda-setting rights.46
Since the late 1980s, shareholder activism has advanced in the United States. Large institu-
tional investors have assumed increasingly active roles as shareholders, submitting proposals
on antitakeover provisions, cumulative voting and independent directors.47 Since the turn
of the millennium, their proposals have garnered wide support by fellow shareholders.48
Inefficiencies and abuses brought to light by the financial crisis of 2007–08 fueled the demand
for more shareholder influence, especially on director and executive compensation. Around
the world, including in the United States, legislators have granted shareholders some degree
of “say on pay.”49 Additionally, activist shareholders have taken matters in their own hands
after the SEC and the Delaware General Corporation Law (DGCL) left the door open. Via
shareholder proposals, they have pushed for stronger shareholder rights in individual compa-
nies. As a result, American corporations have massively moved away from staggered boards
and plurality voting in director elections and, more recently, many have adopted proxy access
and special meeting rights.50 This trend of shareholder activism seems to have abated recently.
In the 2018, 2019 and 2020 proxy seasons, the number of shareholder proposals declined.51
At the same time, European companies, which have traditionally been relatively spared from
public activist campaigns, have gradually seen more of this type of shareholder activism.52 The
COVID-19 pandemic will likely also cause a surge in shareholder activism in the American
2021 proxy season, in which ESG matters will become more prominent.53
3. COMPARING INITIATIVE POWERS
In order to be able to fully exercise their voting rights, shareholders must be able to initiate
a vote on matters of their competence. This includes both the right to propose resolutions for
45
Renneboog & Szilagyi, supra note 3, at 327 (pointing out that Belgium was the only EU member
state that had to lower the ownership requirement for agenda-setting rights).
46
47
Gillan & Starks, supra note 38, at 58–59.
48
Randall S. Thomas & James F. Cotter, Shareholder Proposals in the New Millennium: Shareholder
Support, Board Response, and Market Reaction, 13 J. Corp. Fin. 367 (2007).
49
Randall S. Thomas & Christoph Van der Elst, Say on Pay Around the World, 92 Wash. U. L. Rev.
653 (2015).
50
See infra text accompanying notes 97, 119, 132 & 134.
51
Matteo Tonello, Proxy Voting Analytics (2016-2019) and 2020 Season, Harv. L. Sch. F. on
Corp. Governance (Jan. 6, 2020), https://corpgov.law.harvard.edu/2020/01/06/proxy-voting-analytics
-2016-2019-and-2020-season-preview; Keith E. Gottfried, Preparing for Shareholder Activism in the
Wake of COVID-19, Harv. L. Sch. F. on Corp. Governance (Nov. 30, 2020), https://corpgov.law
.harvard.edu/2020/11/30/preparing-for-shareholder-activism-in-the-wake-of-covid-19.
52
Lazard, 2020 Review of Shareholder Activism, 1, 8-10, https://www.lazard.com/media/451536/
lazards-2020-review-of-shareholder-activism-vf.pdf.
53
Keith E. Gottfried, Preparing for Shareholder Activism in the Wake of COVID-19, Harv. L. Sch.
F. on Corp. Governance (Nov. 30, 2020), https://corpgov.law.harvard.edu/2020/11/30/preparing-for
-shareholder-activism-in-the-wake-of-covid-19; Bruce H. Goldfarb and Alexandra Higgins, Shareholder
Activists Gear up for a Busy 2021 – With New Tools and Tactics, Harv. L. Sch. F. on Corp.
Governance (Mar. 1, 2021), https://corpgov.law.harvard.edu/2021/03/01/shareholder-activists-gear-up
-for-a-busy-2021-with-new-tools-and-tactics.
the annual meeting (or another meeting that has been convened by the incumbent board), and
the right to convene a special meeting between annual meetings.54 Both rights are compared
among the jurisdictions subject of this study in subsections 2 and 3 respectively.
3.1 Adding Proposals to a Convened Meeting
In Europe, the shareholders meeting cannot, in principle, decide on issues other than those
included in the agenda of the meeting that the board sends out at the company’s expense.55
Shareholders wishing to submit proposals to the shareholders meeting (such as director
removal) must therefore have them included in the meeting agenda. Shareholders can do this
by using their agenda-setting rights. They cannot put new items up to a vote by soliciting their
own proxies. Where the law does regulate the public solicitation of proxies, these proxies still
refer to the agenda set by the company.56 Indeed, in the European jurisdictions of this study,
proxy solicitation is merely a means to convince shareholders to vote in a certain way about
preset agenda items. The function of proxy solicitation in Europe is thus fundamentally differ-
ent from its function in the United States, where it is used as a means to bring new proposals
to a shareholder vote and where it is de facto also the only means to propose candidates for
a director election. This difference renders international comparisons of the number of proxy
fights meaningless.
In the European Union, the right of shareholders to propose agenda items and draft reso-
lutions is ensured by the Shareholders Rights Directive. Shareholders can exercise this right
by means of a letter or e-mail to the company, upon which the company will communicate
a revised agenda to all shareholders. The Shareholders Rights Directive also limits the
ownership thresholds member states may require for shareholders’ agenda-setting right to
a maximum of 5 percent of the share capital,57 which is high compared to the American
standard.58 National laws often require lower ownership percentages such as 3 percent59
and the articles of association can usually further reduce this percentage.60 Some member
states instead work with a sliding scale that goes below and above 3 percent (depending
54
The possibility of acting via written consent is beyond the scope of this chapter.
55
In France, shareholders can propose the removal of a director during a shareholders meeting.
In other jurisdictions, proposals can be made during the meeting only in limited circumstances such
as urgency. Art. L. 225-105, al 3 Commercial Code (France); § 124(4) AktG (Germany); Bernard
Tilleman, De Geldigheid van Besluiten van de Algemene Vergadering 226–27 (1994) (Belgium).
56
Art. 7:145 Code of Companies and Associations of 2019 [hereinafter CCA] (Belgium); art.
L.225-106-2 & R.225-81 Commercial Code; Maurice Cozian et al., Droit des sociétés 427 (31st ed.
2018) (France).
57
Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies [2007]
OJ L184/17, art. 6.
58
See infra text accompanying note 71.
59
Art. 7:130 CCA (Belgium); art. 2:114a Civil Code (Netherlands).
60
Wulf Goette & Mathias Habersack, 3 Münchener Kommentar zum AktG § 122 Nr. 78 (4th
ed. 2018) (Germany); An Goris, De Wet Aandeelhoudersrechten: een praktische benadering, TRV 81,
89 (2012) (Belgium).
on the amount of the capital of the company)61 or with alternative criteria.62 Although the
Shareholders Rights Directive does not explicitly allow any grounds for exclusion, it has been
accepted that directors can exclude items from the agenda that are illegal, harmful or outside
of the competence of the shareholders meeting.63 The Dutch Corporate Governance Code even
allows the board a “response time” of up to 180 days for proposals that may result in a change
of corporate strategy.64 In March 2021, the Dutch Parliament also adopted a bill that allows
boards to invoke up to 250 days of “reflection time" before the shareholders meeting can vote
on shareholder proposals with regard to the appointment or removal of directors.65 Pursuant to
the Shareholders Rights Directive, member states may also limit the right to add agenda items
and to table draft resolutions to the annual meeting. In that case, however, the national law
must allow shareholders who meet the ownership threshold to call a special meeting with an
agenda including the agenda items requested by these shareholders.66
In American listed companies, the agenda function is practically assumed by proxies.
A proxy is de facto the only avenue to put forward a resolution with a reasonable chance of
obtaining enough votes. Thus, the relevant question in the United States is whether sharehold-
ers have an effective right to have their proposals included in the company’s proxy or to solicit
proxies themselves. The latter option includes filing a proxy statement with the SEC and solic-
iting their own proxies. It is extremely costly for dissident shareholders, with cost estimations
exceeding 10 million USD.67 While incumbents are almost systematically reimbursed for their
expenses, win or lose, insurgents have to win control over the board in order to be able to claim
reimbursement.68 Consequently, proxy contests are mostly aimed at taking board control.69
Specifically with regard to director elections, however, the bylaws of Delaware corporations
since 2009 may provide for reimbursement of proxy solicitation expenses.70
Pursuant to Exchange Act Rule 14a-8, for shareholders to be entitled to include proposals in
the company’s proxy materials, they traditionally needed to have held at least $2,000 in market
value or 1 percent of the company’s securities for at least one year by the date the proposal is
61
In France, for instance, the required percentage ranges between 0.5% and 5%. Art. L.225-105,
R.225-71 Commercial Code.
62
Under German law, ownership of either 5% or 500.000 EUR of the capital is required. § 122(2)
AktG.
63
Robby Houben, Het recht van de aandeelhouders van een NV om de algemene vergadering te
laten samenroepen en de agenda ervan te bepalen, in In het vennootschapsbelang 261, 264 (Eddy
Wymeersch et al. eds., 2017) (Belgium); Supreme Court, April 20, 2018 (Boskalis/Fugro), ECLI:NL:
HR:2018:652 (Netherlands).
64
Dutch Corporate Governance Code No. 4.1.6 and No. 4.1.7.
65
Kamerstukken II 2019/20, 35367, nr. 2; Verslag Eerste Kamer 2020/2021, nr.31, 8. Although the
Council of State judged differently (Bijlage bij Kamerstukken II 2018/19, 29752, nr. 12), the compatibil-
ity with the Shareholders Rights Directive is, in our opinion, debatable.
66
Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies [2007]
OJ L184/17, art. 6(1), al 3.
67
Nickolay Gantchev, The Costs of Shareholder Activism: Evidence From a Sequential Decision
Model, J. Fin. Econ. 610 (2013).
68
Lucian A. Bebchuk, The Case for Shareholder Access to the Ballot, 59 Bus. Law. 43, 64 (2003).
69
Id. at 45; Melissa Sawyer et al., Review and Analysis of 2018 U.S. Shareholder Activism, Harv. L.
Sch. F. on Corp. Governance (Apr. 5, 2019), https://corpgov.law.harvard.edu/2019/04/05/review-and
-analysis-of-2018-u-s-shareholder-activism.
70
submitted.71 In September 2020, the SEC eliminated the 1 percent threshold and elevated the
first requirement to three years of continuous ownership of $2,000 of the company’s securities,
two years for investments of at least $15,000, or one year for investments of at least $25,000.72
The board can rely on a broad variety of permissible grounds for excluding the proposals
from the company’s proxy materials. This includes cases where the proposal relates to the
company’s ordinary business operation or to the election of directors, where the proposal is
improper under state law or where it conflicts with a proposal made by management for the
same meeting.73
Shareholders of American companies can avoid the objection of impropriety under state
law by framing their resolutions in a “precatory” form.74 Such non-binding proposals had little
success in the 1980s and the 1990s. In the past 15 years, however, activist shareholders have
successfully used (mostly) precatory shareholder proposals to push for corporate governance
changes on a company-by-company basis. These governance changes include de-staggering
boards, replacing plurality with majority election of directors, introducing special meeting
rights, simple majority vote thresholds and proxy access.75 More recently, shareholder pro-
posals have increasingly been used for social and environmental policy issues.76 The rising
impact of precatory proposals has been a crucial development, as the shareholders meeting
cannot, without resolution of the board, approve charter amendments under Delaware law77
and binding proposals to amend the charter could therefore be rejected for being improper
under state law.
Although non-binding votes on matters beyond the competence of the shareholders meeting
are not common practice in Europe, they are deemed permissible in Germany,78 Belgium79
and France.80 In the Netherlands, it had long been accepted that shareholders could discuss or
vote on a non-binding “motion” (but not a binding resolution) in matters that do not belong to
the shareholders meeting’s authority.81 These motions have, in several cases, proven to exert
real pressure on the board to follow the shareholders’ wishes.82 Recently, however, the Dutch
71
17 C.F.R. § 240.14a-8(b).
72
Securities Exchange Commission, Procedural Requirements and Resubmission Thresholds under
Exchange Act Rule 14a-8 (Sep. 23, 2020), https://www.sec.gov/rules/final/2020/34-89964.pdf. The new
rules apply to proposals submitted for shareholders meetings to be held on or after January 1, 2022.
73
Id. at § 240.14a-8(i)(1)-(13).
74
See id. at § 240.14a-8(i)(1) note.
75
Doron Levit & Nadya Malenko, Non-Binding Voting for Shareholder Proposals, 66 J. Fin. 1579,
1579–80 (2011); Leo E. Strine, Jr., The Soviet Constitution Problem in Comparative Corporate Law:
Testing the Proposition that European Corporate Law is More Stockholder Focused than U.S. Corporate
Law, 89 S. Cal. L. Rev. 1239, 1269 (2016); see infra text accompanying notes 97, 119, 132 & 134.
76
Tonello, supra note 51.
77
78
Wulf Goette & Mathias Habersack, 3 Münchener Kommentar zum AktG § 119, Nr. 18 (4th
ed. 2018).
79
Cools, supra note 26, at 626–29; Hellemans, De algemene vergadering 240 (2001).
80
See AMF, Rapport sur les assemblées générales d’actionnaires de sociétés cotées 13–14 (Feb. 7,
2012) (the item may not merely serve the individual shareholder’s interest).
81
Asser-Van Solinge-Nieuwe Weme, 2-II*, 440; Sven Dumoulin, Het recht van amendement, in
LT Verzamelde ‘Groninger’ opstellen aangeboden aan Vino Timmerman 53, 55 (2003); Gerard
van Solinge, Vergaderorde, in Problemen rondom de algemene vergadering 41, 44 (1994).
82
F.G.K. Overkleeft, Het agenderingsrecht voor aandeelhouders in beursvennootschappen: een
aanzet tot (her)bezinning, Ondernemingsrecht 714, 717 (2009).
Supreme Court held, in a criticized83 decision, that shareholders cannot circumvent limitations
of their powers by requesting a non-binding vote. According to the court, with regard to
matters outside of their competence, shareholders can merely request that they be included in
the agenda for discussion without a vote (not even a non-binding one).84
3.2 Convening a Special Meeting
Unless EU member states limit shareholders’ agenda-setting rights to the annual meeting,85
they are not required under EU law to grant shareholders a statutory right to have a special
meeting convened. Nevertheless, many member states provide some sort of convocation right.
In Germany and Belgium, shareholders representing 5 percent and 10 percent of the com-
pany’s capital respectively (or a lower percentage stated in the articles of association)86 can
oblige directors to convene a special shareholders meeting.87 In the Netherlands, shareholders
representing 10 percent of the issued capital, whose request with the management (and the
supervisory board) was neglected, can seek authorization from the court to call a meeting.88
They must, however, prove that they have a reasonable interest in doing so,89 and Dutch courts
are not always very willing in this respect.90 In France, shareholders seeking to have a meeting
convened must address the court as well, and the court can verify whether the convocation
serves the interests of the company.91 The right to request a judge to convene the shareholders
is attributed to any shareholder representing at least 5 percent of the capital, any shareholder
demonstrating urgency, and shareholder associations representing a certain percentage of the
capital ranging from 1 percent to 5 percent, depending on the size of the company.92
Under the DGCL, shareholders do not have a statutory right to have special meetings con-
vened. This right appertains to the board of directors, but the charter or bylaws may authorize
other persons to call a special meeting.93 For a long time, shareholders were mostly deprived
of the right to call a special meeting,94 in part as a strategy to delay hostile acquirers.95 In 2018,
however, shareholders’ rights to call special meetings made a noticeable surge following
a wave of (mostly precatory)96 shareholder proposals introducing such rights or reducing the
83
F.M. Peters & F. Eikelboom, De strijd over het agenderingsrecht tussen Boskalis en Fugro, WPNR
7061 (2015); Pieter van der Korst, Bescherming van minderheidsaandeelhouders, Ars Aequi 290 (2020);
J.H.M. Willems, Mogen aandeelhouders strategische onderwerpen agenderen?, Ondernemingsrecht
654 (2017). Contra Overkleeft, supra note 82, at 717.
84
See supra note 6, regarding the Boskalis case.
85
See supra text accompanying note 66.
86
§ 122(1) AktG (Germany); Hellemans, supra note 79, at 419–20 (Belgium).
87
§ 122(1) AktG (Germany); art. 7:126 CCA (Belgium).
88
Art. 2:110 Civil Code.
89
Art. 2:111, §1 Civil Code.
90
See Tom Vos, The AkzoNobel Case: An Activist Shareholder’s Battle against the Backdrop of the
Shareholder Rights Directive, 14 Eur. Comp. L. 238 (2017).
91
Paul Le Cannu & Bruno Dondero, Droit des sociétés 610 (7th ed. 2018).
92
Art. 225-103.II, 2°; 225-120 Commercial Code.
93
Del. Code Ann. tit. 8, § 211(d).
94
Mark J. Roe, Corporate Law’s Limits, 31 J. Legal Stud. 233, 252 n.28 (2002).
95
Geeyoung Min, Shareholder Voice in Corporate Charter Amendments, 43(2) J. Corp. L. 289, 308
(2018).
96
Emiliano M. Catan & Marcel Kahan, The Neverending Quest for Shareholder Rights: Special
Meetings and Written Consent, 99 B.U. L. Rev. 743 (2019).
required ownership threshold for doing so. Nearly two-thirds of S&P 500 companies now
have charter or bylaw provisions allowing shareholders to call a special meeting, and typical
ownership thresholds have decreased from 25 percent to 10–15 percent.97 In many of these
companies, however, the special meeting rights are not particularly helpful. Special meetings
would be most useful for changing the composition of the board in between annual meetings,
but that possibility is hampered in a substantial number of firms.98
4. COMPARING (EFFECTS ON) SUBSTANTIVE POWERS
In the United States, precatory shareholder proposals have not just been used to circumvent
limitations on substantive shareholder power and to introduce the right to convene a special
meeting. They have also served to enhance substantive shareholder power in the charters and
bylaws of numerous American companies. The fact that shareholder proposals are deployed
to this effect is made possible by the default character of relevant legal provisions. The fol-
lowing paragraphs discuss the main substantive powers that have been targeted by activist
shareholders in American companies, and compare the resulting distribution of powers with
that in Europe.
4.1 Amendment of the Governing Documents
In Europe, the corporate “constitutional” provisions are usually contained in one single doc-
ument, referred to in English as the “articles of association.” With some very limited excep-
tions,99 a shareholder vote is required for amending any of its provisions.100 The board does not
need to agree with an amendment or propose the amendment.101
Shareholder power to amend the company’s governing documents has traditionally been
much more limited in Delaware. American companies are governed by two types of doc-
uments: the “charter” and the “bylaws.” Under Delaware law, provisions in the charter (or
“certificate of incorporation”) can be amended only upon the board’s proposition and with
approval of the shareholders meeting.102 As a result, the board effectively has a veto over any
97
Marc Treviño, 2019 Proxy Season Review: Review: Part 1—Rule 14a-8 Shareholder Proposals,
Harv. L. Sch. F. on Corp. Governance (July 26, 2019), https://corpgov.law.harvard.edu/2019/07/26/
2019-proxy-season-review-part-1-rule-14a-8-shareholder-proposals; see also Catan & Kahan, supra
note 96, at 759.
98
Catan & Kahan, supra note 96, at 749–58 (stating that this is the case when shareholders
cannot remove directors without cause, add board seats and/or fill vacancies, or can do so only with
a supermajority).
99
In particular, amendments within a board’s authorization to issue capital, amendments that imple-
ment decisions of the shareholders meeting or purely redactional amendments. See Cools, supra note 26,
at 441.
100
E.g., § 179 AktG (Germany); art. 7:153 CCA (Belgium; since 2019 with a limited exception in
case of domestic transfer of seat: art. 2:4 CCA); art. L. 225-96 Commercial Code (France); art. 2:121
Civil Code (Netherlands).
101
In the Netherlands, it is possible to stipulate in the articles of association that the board needs to
agree with amendments. J.B. Huizink, Rechtspersoon, vennootschap en onderneming 201 (5th ed.
2019).
102
Del. Code Ann. tit. 8, § 242(b)(1).
changes to provisions in the charter. This power is far-reaching, given the wide range of issues
that can be addressed in the charter, such as the rights and powers of stockholders, directors
and officers,103 and the veto power it holds over the bylaws. Indeed, bylaw provisions may
not be inconsistent with the provisions of the certificate of incorporation.104 This significantly
restrains shareholders’ statutory power to amend the bylaws as well.105 In addition, the board
has the authority to amend the bylaws if the certificate of incorporation so stipulates,106 which
it generally does.107 Together with management, the board is in a better position to amend the
bylaws, mainly due to statutory limitations and the shareholders’ collective action problem.108
Since the early 2000s, however, activist shareholders have been able to amend bylaws in
a great number of listed companies. Despite the absence of statutory shareholder power with
regard to charter amendments, shareholders have managed to pressure directors into proposing
certain charter amendments via non-binding shareholder proposals.109 These amendments not
only relate to the special meeting rights discussed above,110 but also, as explained in the next
subsections, to rules more directly related to substantive powers, namely director elections and
takeover protection and, with less direct success, say on pay.
4.2 Director Election and Removal
In Delaware, shareholders have the authority to elect and remove directors.111 In exercising
these powers, shareholders have long been hampered by procedural rules favoring incumbent
directors.112 In the past decade, however, shareholders have actively and successfully cam-
paigned to break down some of these barriers in individual companies by altering the relevant
charter or bylaw provisions.
The first barrier that has long prevented meaningful shareholder voice in director elections
in Delaware companies relates to the nomination of candidates, either through the company’s
proxy or by solicitation of shareholders’ own proxies. Theoretically, insurgent stockholders
could nominate candidates at the meeting. However, this would be too late, since the vast
majority of shareholder votes is normally already cast by proxy, on the basis of the proxy
materials that are distributed before the meeting.113 Thus, as explained above,114 the proxy is de
facto the only means to nominate directors.
103
Id. at § 102(b).
104
Id. at § 109(b). In addition, a bylaw may not force directors to breach their fiduciary duty. See CA,
Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227 (Del. 2008).
105
Del. Code Ann. tit. 8, § 109(a) (after the corporation has received any payment for any of its
stock).
106
Id. at § 109(a) (after the corporation has received any payment for any of its stock).
107
Jill E. Fisch, Governance by Contract: The Implications for Corporate Bylaws, 106 Cal. L. Rev.
373, 380 (2018).
108
Id. at 382–99; Min, supra note 95, at 295–99.
109
Min, supra note 95, at 289.
110
See supra text accompanying notes 93–98.
111
Del. Code Ann. tit. 8, §§ 141(k), 211(b).
112
Cools, supra note 2, at 745–50.
113
David C. Donald, The Nomination of Directors under U.S. and German Law 9-10 (Institute for
Law and Finance, Working Paper No. 21, 2005), www.ilf-frankfurt.de/fileadmin/_migrated/content
_uploads/ILF_WP_021.pdf.
114
See supra text accompanying notes 56 and 67.
As mentioned above,115 the incumbent board can exclude shareholder proposals with regard
to director elections, such as a slate of director candidates, from the company’s proxy.116
However, in 2011, SEC Rule 14a-8 was amended to permit shareholders to bring proposals
that would introduce proxy access for director nominations in individual firms,117 after the
Delaware legislator had already taken a similar initiative in 2009.118 Over two-thirds of S&P
500 companies have adopted proxy access in 2015–18 following pressure from shareholder
proposals by institutional investors.119 Small companies have not followed this trend, with
just 4 percent of Russell 2000 companies having adopted proxy access by the end of 2018.120
Typically, access to the company’s proxy is subject to significant restrictions, for instance
relating to the number of director nominees. The standard proxy access bylaw follows the
“3/3/20/20” structure, permitting a shareholder or a group of up to 20 shareholders who have
together held 3 percent of the company’s stock for three years to nominate candidates for up
to 20 percent of the board seats.121 To date, no shareholders have successfully made use of
their proxy access rights as provided for in the bylaws or in the charter. This may be because
proxy access only eliminates the mailing costs of soliciting own proxies, but leaves the activist
shareholder with high legal costs involved in obtaining proxy access.122
The alternative way to propose director candidates, by soliciting own proxies, is even
more expensive.123 At least theoretically, shareholders of Delaware companies have room to
improve their situation through private ordering. In 2009, the DGCL was amended to enable
shareholders to adopt bylaws governing the process of corporate decision-making, including
provisions determining which proxy contestants are entitled to reimbursement of proxy
solicitation expenses.124 However, companies are allowed to condition or limit the right to
reimbursement on the basis of certain criteria, like the number of directors nominated by the
proxy contestant and the proportion of votes cast in favor of the contestant’s nominees.125 In
addition, there are still important questions, among others regarding the fiduciary duties of
incumbent directors, that may create difficulties.126
The second barrier that is eroding as a result of shareholder activism is the threshold for
election. In the absence of a different provision in the charter or the bylaws, directors are
115
116
17 C.F.R. § 240.14a-8 (2004).
117
Press Release, Securities Exchange Commission, Facilitating Shareholder Director Nominations
(Sept. 15, 2011), www.sec.gov/rules/final/2010/33-9136.pdf.
118
See Del. Code Ann. tit. 8, § 112 (as amended by 77 Del. Laws, c. 14, § 1).
119
Stephen T. Giove, Arielle L. Katzman & Daniel Yao, Proxy Access Proposals, Harv. L. Sch.
F. on Corp. Governance (Oct. 19, 2018), https://corpgov.law.harvard.edu/2018/10/19/proxy-access
-proposals-2.
120
Holly J. Gregory, Rebecca Grapsas & Claire Holland, The Latest on Proxy Access, Harv. L. Sch.
F. on Corp. Governance (Feb. 1, 2019), https://corpgov.law.harvard.edu/2019/02/01/the-latest-on
-proxy-access.
121
See Treviño, supra note 97.
122
Holger Spamann, Corporations 56–57 (2d ed. 2018).
123
124
Del. Code Ann. tit. 8, § 113.
125
Id.
126
Amy L. Goodmann et al., Practical Guide to SEC Proxy and Compensation Rules 9–78
(6th ed. 2019).
elected not by majority, but by plurality vote.127 This means that, in order to win an election,
a candidate simply needs to receive more votes than a competing candidate. Consequently, if
there is only one candidate, a single “for” vote suffices for him to get (re-)elected, irrespective
of the number of withhold votes.128 Proposing an alternative candidate at the yearly elections
thus used to be indispensable, not just to appoint own nominees, but also to prevent the election
of incumbent candidates in uncontested elections. In 2006, the DGCL was amended to allow
for bylaws requiring a majority vote to elect directors.129 When shareholders manage to pass
a bylaw imposing the majority voting standard, a candidate will only get elected if he receives
more “for” than “withhold” votes. In other words, withhold votes can then be used to prevent
the election of a director, even in uncontested elections.130 Prior to 2006, only 16 percent of
the S&P 500 had majority voting;131 by the beginning of 2014, this number increased to almost
90 percent.132
The third barrier that has been attacked in recent years is the difficulty shareholders faced
to create vacancies on the board. Even at the annual election, shareholders’ ability to replace
directors used to be severely limited. Since the 1980s, boards have been staggered (or “classi-
fied”) in a majority of corporations, which means that each year, only one-third of the directors
were up for re-election.133 In the past 15 years, the situation has turned around. Since 2003,
successful precatory shareholder proposals have led to a wave of board de-staggering. Today,
only approximately 10 percent of S&P 500 companies (but still around 40% of mid and small
cap companies) still feature a staggered board.134 However, it seems that companies going
public increasingly do so with a staggered board.135
Perhaps more important is the ability to remove directors during their terms, also in between
annual meetings. For that right to be effective, removal of directors during their term should be
possible without cause and outside the takeover context.136 Although it must be noted that the
RMBCA137 and just over half of the American states138 feature a default rule of at will removal,
Delaware law provides that outside of the election at the end of directors’ terms, sharehold-
ers can remove members of a staggered board only for cause.139 Thus, the recent trend to
declassify boards also had as a consequence that, in companies that declassified their boards,
127
Del. Code Ann. tit. 8, § 216(3).
128
Lucian A. Bebchuk, Symposium on Corporate Elections 95 (Harvard Law and Econ. Discussion
Paper No. 448, 2003), http://ssrn.com/abstract=471640.
129
Del. Code Ann. tit. 8, § 216.
130
Min, supra note 95, at 307.
131
Jay Cai, Jacqueline L. Garner & Ralph A. Walkling, A Paper Tiger? An Empirical Analysis of
Majority Voting, 21 J. Corp. Fin. 119 (2013).
132
Stephen J. Choi et al., Does Majority Voting Improve Board Accountability, 83 U. Chi. L. Rev.
1119, 1121 (2016).
133
Lucian A. Bebchuk & Alma Cohen, The Costs of Entrenched Boards, 78 J. Fin. Econ. 409 (2005).
134
Sullivan & Cromwell LLP, 2018 Proxy Season Review 6 (July 12, 2018), www.sullcrom.com/
files/upload/SC-Publication-2018-Proxy-Season-Review.pdf; Sullivan & Cromwell LLP, 2014 Proxy
Season Review 4 (June 25, 2014), www.sullcrom.com/siteFiles/Publications/SC_Publication_2014
_Proxy_Season_Review.pdf.
135
Ryan Derousseau, Why ‘Staggered’ Boards are Paying Off for Stock Investors, Fortune (Apr. 30,
2019), https://fortune.com/2019/04/30/staggered-boards-stock-investors.
136
The alternative technique of increasing the number of board seats will not be discussed here.
137
MBCA §8.08(1).
138
See Cools, supra note 8, at 232, n.251.
139
Del. Code Ann. tit. 8, § 141(k).
directors can be removed without cause. Together with the increased ability to convene special
meetings, this results in shareholders being able to use this removal power any time. This
comes in handy not only for shareholders willing to replace inept directors, but also for hostile
takeover candidates, who no longer have to await the annual meeting.
The first two barriers discussed above to shareholders exercising their authority to appoint
and remove directors are not as present in Europe. Shareholders of European companies can
nominate their own candidates when they meet the requirements described above for adding
items and draft resolutions to the meeting’s agenda. Elections in Europe have traditionally
required a simple majority rather than a plurality vote.140
In Europe, directors are not always up for re-election every year, as in Delaware (except
for classified boards). The statutes set out maximum terms of up to six years141 (but actual
terms are usually shorter).142 Purposefully staggered boards, in which each year the term of
one-third or one-fourth of the directors expires, are uncommon in the European jurisdictions
examined here. Nevertheless, boards are often staggered in practice, when newly appointed
directors do not finish their predecessor’s term, but instead start a new term. However, this
kind of board staggering traditionally did not insulate directors. Instead, it was – and primarily
still is – the pervasiveness of controlling shareholders that discouraged initiatives by minority
shareholders.143
The inability of staggered boards to provide entrenchment resulted from the fact that direc-
tors of European companies could traditionally be removed from office at will (ad nutum). At
will removability means directors can be dismissed at any time, at the discretion of a majority
of the shareholders. The only hurdle is getting director removal on the agenda of the share-
holders meeting. If they meet the requirements discussed above, shareholders can use their
agenda-settings rights to do so.144 In France, the shareholders assembly can revoke and replace
directors (or, in two-tier structures, supervisory directors) even if that issue was not included
on the agenda.145
The rule of at will removal used to be mandatory.146 Over the years, it has become more
moderate. In many European jurisdictions, at will removal no longer excludes indemnification
upon dismissal,147 has become a default rule from which the shareholders meeting can devi-
ate,148 and/or has been limited to the supervisory board in two-tier board structures149 (or, in
140
Art. 2:41 jo. 7:85, § 2 & 7:105, § 3 CCA (Belgium); Paul Le Cannu & Bruno Dondero,
Droit des sociétés 597 (7th ed. 2018) (France); 2 Wulf Goette & Mathias Habersack, Münchener
Kommentar zum AktG § 101, Nr. 27 (5th ed. 2019) (Germany); art. 2:132 & 2:142 jo. 2:120 Civil Code
(see however 2-IIb Asser/Van Solinge & Nieuwe Weme, NV en BV – Corporate Governance Nr.
74(d) (2019)) (Netherlands).
141
Art. 7:85, § 2, 7:105 CCA (Belgium).
142
Paul Davies et al., Corporate Boards in Law and Practice 39, 209 (2013).
143
See Paul Davies et al., Boards in Law and Practice: A Cross-Country Analysis in Europe, in
Corporate Boards in Law and Practice 38 (Paul Davies et al. eds., 2013).
144
145
Art. L. 225-105, al 3 Commercial Code. This is one of the few departures from the general rule
mentioned in Section 3.2.
146
147
Id. at 208.
148
E.g., in 2019, Art. 7:85, §3 and 7:105, § 4 CCA (Belgium).
149
Cools, supra note 8, at 209–14; see also art. 7:107 CCA (Belgium, since 2019).
the case of codetermination, its shareholder representatives).150 So, while shareholder say in
director appointment and removal has somewhat improved in the United States, the opposite
development has taken place in Europe.151
4.3 Say on Pay
Like elsewhere, say on pay has been a main topic in the shareholder empowerment movement
in the United States. Between 2006 and 2010, activist shareholders submitted hundreds of
shareholder proposals to introduce say on pay. Despite winning a majority vote frequently, the
proposed changes were often not adopted by the companies in question.152 However, support
for these proposals seems to have influenced the legislator: after earlier say on pay require-
ments in the framework of TARP aid in 2008, the Dodd-Frank Act of 2010 introduced the
obligation for US public firms to grant shareholders a non-binding vote on the remuneration
policy at least every three years and on the frequency of such a vote every six years.153
In 2017, the European Shareholders Rights Directive was revised (among others) to require
member states to permit the shareholders meeting to hold an advisory vote on the remuneration
report on a yearly basis, and a binding or advisory vote on the remuneration policy every four
years.154 In comparative studies on say on pay, it is often overlooked that many European
jurisdictions (just like Japan)155 have (since) long had as a starting point that the shareholders
meeting determines the remuneration of the directors for their services as director156 or, in
two-tier boards, at least the supervisory directors.157 Therefore, more specific say on pay pro-
visions, like those to implement the Shareholders Rights Directive, often come on top of this
general competence.
4.4 Takeover Protection
In Delaware, directors have been able to set up unsurmountable takeover protection since the
Delaware Supreme Court validated the poison pill in 1985.158 Boards can adopt a pill without
a shareholder vote at any time, even after a hostile bid has been launched.159 At the time, most
150
For an elaborate discussion of these restrictions and the remaining importance of at will removal,
see Cools, supra note 8, at 206–17.
151
For a possible explanation, see infra text accompanying notes 180–87.
152
Fabrizio Ferri, Say on Pay, in Research Handbook on Shareholder Power 321 (Jennifer G.
Hill & Randall S. Thomas eds., 2015); Thomas & Van der Elst, supra note 49, at 659.
153
Art. 14a-21 Exchange Act (as introduced by § 951 Dodd-Frank Wall Street reform and consumer
protection Act of July 21, 2010).
154
Directive 2017/828 amending Directive 2007/36/EC as regards the encouragement of long-term
shareholder engagement [2017] OJ L132/1, art. 1 (introducing art. 9a and 9b).
155
See Li-Wen Lin’s chapter in this book, Chapter 13, Section 2.3.
156
Art. L.225-45 Commercial Code (global amount for all directors) (France); art. 2:50 CCA
(Belgium).
157
§ 113(1) AktG (Germany); Art. L.225-83 Commercial Code (global amount for all supervisory
directors) (France); Art. 2:145(1) Civil Code (Netherlands).
158
Moran v. Household Int’l, 500 A.2d 1346 (Del. 1985); see Cools, supra note 2, at 748–49.
159
John C. Coates IV, Takeover Defenses in the Shadow of the Pill: A Critique of the Scientific
Evidence, 79 Tex. L. Rev. 271, 286–91 (2000).
companies had staggered their boards.160 The combination of a staggered board provided for
in the charter with a poison pill ensured that a hostile bidder had to wait two elections to have
a chance to gain a majority of the board seats.161 In addition, the hostile bidder had to win
those two elections (while overcoming the difficulties described above)162 and keep the bid
open during this entire period. As a consequence, the takeover threat was theoretical in these
circumstances, with no bidder ever breaking through a pill with a charter-based staggered
board.163
Here too, activist shareholders have tilted the situation in their favor. As explained above,164
they managed to dismantle staggered boards, and as a result the described takeover protections,
through shareholder proposals. They have also since long attempted to remove the poison pill.
Initially, such shareholder proposals received low levels of shareholder support.165 From 2003
to 2009, however, (mostly precatory)166 shareholder proposals to remove poison pills increased
significantly.167 These proposals brought down the occurrence of poison pills from 60 percent
of the S&P 500 firms in 2002 to 7 percent of them in 2013.168 It is questionable whether this
achievement is of any use, now that hostile takeovers have become rare169 and poison pills can
be put in place at any time, even after a takeover bid is made170 – an option used by several
firms in reaction to the uncertainty caused by COVID-19.171
In Europe, boards seldom need takeover defenses, as they are often appointed (and protected)
by controlling shareholders.172 If not, their defense options are usually not as far-reaching as
American-style poison pills. In Germany and Belgium, poison pills, share buy-backs, and
capital increases by the board are either not available or severely limited in the takeover
context.173 Even the French protectionist “bons Breton” (a shareholder rights plan introduced
by the legislator in 2006) and the Dutch foundation construction (somewhat misleadingly
160
Lucian A. Bebchuk et al., The Powerful Antitakeover Force of Staggered Boards: Theory,
Evidence & Policy, 54 Stan. L. Rev. 887, 890–91, 895 (2002).
161
Airgas, Inc. v. Air Prods. and Chems., Inc., 8 A.3d 1182 (Del. 2010).
162
163
Bebchuk, supra note 160, at 890.
164
165
Cynthia J. Campbell, Stuart L. Gillian & Cathy M. Niden, Current Perspectives of Shareholder
Proposals: Lessons From the 1997 Proxy Season, 28 Fin. Mgmt. 89 (1999).
166
Thomas W. Christopher & Stephen Fraidin, Shareholders at the Door, N.Y. L.J. 16 (2004).
167
Paul Rose, Shareholder Proposals in the Market for Corporate Influence, 66 Fla. L. Rev. 2179,
2213 (2014).
168
Strine, supra note 75, at 1269.
169
Steven D. Solomon, With Fewer Barbarians at the Gate, Companies Face a New Pressure, N.Y.
Times Dealbook (July 30, 2013).
170
Coates, supra note 159, at 278.
171
Ofer Eldar & Michael Wittry, The Return of Poison Pills: A First Look at “Crisis Pills” (Duke
Law School Public Law & Legal Theory Series 2020-18), https://ssrn.com/abstract=3583428; Ethan
Klingsberg, Paul Tiger & Elizabeth Bieber, A Look at the Data Behind Recent Poison Pill Adoptions,
Harv. L. Sch. F. on Corp. Governance (Apr. 24, 2020), https://corpgov.law.harvard.edu/2020/04/24/
a-look-at-the-data-behind-recent-poison-pill-adoptions.
172
173
Carsten Gerner-Beuerle, David Kershaw & Matteo Solinas, Is the Board Neutrality Rule Trivial?
Amnesia about Corporate Law in European Takeover Regulation, 2011 Eur. Bus. L. Rev. 559, 585–608
(Germany); art. 7:202 and 7:215 CCA (Belgium).
called the “Dutch poison pill”) are subject to shareholder approval.174 In an attempt to step up
shareholder say, the Takeover Bids Directive of 2004 contains a so-called “board passivity”
rule, which prohibits the board from frustrating a takeover bid without prior authorization by
the shareholders meeting.175 However, member states are allowed to opt out of this rule,176
and several of them have done so.177 For example, in Germany, supervisory board approval
suffices as authorization for the management board to take defensive measures.178 Overall,
the Takeover Directive seems to have been implemented in a protectionist spirit, which may
actually have increased, rather than reduced, the obstacles in the market of corporate control.179
5. COMPLICATING THE COMPARISON

Like in any other comparative law exercise, a full understanding of the role of shareholder
proposals requires taking into account a host of related factors. This section first focuses on
the role of stock ownership structures in the development of shareholder rights through private
ordering in the United States and through legislative action in Europe. Subsequently, it alerts
the reader to some methodological difficulties that complicate the assessment of whether the
popularity of shareholders proposals is to be understood as a sign of a well-functioning share-
holder democracy.
5.1 Stock Ownership Structures
The degree of shareholder power should not be compared between the United States and
Europe without due attention to other relevant differences, particularly with regard to the
prevailing stock ownership structures. In American listed corporations, stock ownership
has traditionally been dispersed among many small shareholders.180 In continental Europe,
a large stake is typically in the hands of one or more controlling shareholders.181 This contrast
has become less pronounced over the past twenty years. Over 70 percent of the stock of the
174
Art. L.233-32-II and L.233.33 Code de Commerce (France); Leonard Chazen & Peter Werdmuller,
The Dutch Poison Pill: How is it Different from an American Rights Plan?, Harv. L. Sch. F. on Corp.
Governance (Dec. 1, 2015), https://corpgov.law.harvard.edu/2015/12/01/the-dutch-poison-pill-how-is
-it-different-from-an-american-rights-plan (Netherlands).
175
Directive 2004/25/EC on Takeover Bids [2004] OJ L142/12, art. 9.
176
Id. at art. 12.
177
Eur. Comm. Report, Application of Directive 2004/25/EC on takeover bids, June 28, 2012,
COM(2012) 347 final, at 3, 8.
178
See Hopt & Leyens’ chapter 7 in this book.
179
Klaus J. Hopt, Takeover Defenses in Europe: A Comparative, Theoretical and Policy Analysis, 20
Colum. J. Eur. L. 249, 255 (2014).
180
Marco Becht, Beneficial Ownership in the United States, in The Control of Corporate Europe
289 (Fabrizio Barca & Marco Becht eds., 2001). Some authors argued that ownership dispersion was
overestimated. See Ronald C. Anderson & David M. Reeb, Founding-Family Ownership and Firm
Performance: Evidence from the S&P 500, 58 J. Fin. 1301 (2003); Clifford G. Holderness, The Myth of
Diffuse Ownership in the United States, 22 Rev. Fin. Stud. 1377 (2009).
181
Rafael La Porta et al., Corporate Ownership Around the World, 54 J. Fin. 471 (1999).
largest 1000 US public corporations is now in the hands of institutional investors,182 and quite
a few American companies have gone public with dual class shares, allowing incumbents to
maintain control in the shareholders meeting. At the same time, there are signs that ownership
concentration in Europe is eroding slowly,183 and institutional ownership is on the rise, albeit
to a lesser degree than in the United States.184
In any case, in a concentrated ownership structure, extensive shareholder rights are less
likely to be useful, as the controlling shareholders may dominate the vote in the shareholders
meeting. In the United States, where ownership was long dispersed and hence shareholder say
could actually be used well, directors and managers have traditionally had a stronger position.
It is possible that this negative correlation between shareholder say and ownership dispersion
is no coincidence. The barriers to removing directors that traditionally existed in the United
States, combined with takeover protection once the takeover wave hit corporate America,
allow entrepreneurs to sell of almost all of the company’s stock, and thus let ownership
disperse without losing control over their business. Conversely, with stronger shareholder
say and the traditional European rule of at will director removal, entrepreneurs who are not
ready to give up control must maintain their dominant position in the shareholders meeting.185
It may well be that stock ownership structures came first, for other reasons, and that majority
shareholders in Europe lobbied with legislators for strong shareholder rights to maintain
control over management, while directors and managers in the United States were able to push
through board entrenchment techniques.186
From this view, it should not come as a surprise that shareholder power is on the rise in the
United States now and that this happens mainly through private ordering, even for matters that
are hardly firm-specific.187 The new importance of institutional investors allowed for some
influence on legislators, but – unlike the European shareholders’ lobby – was still to a large
extent countervailed by a private interest group that has an even stronger and older lobbying
apparatus: managers. Leaving things up to private ordering is then an easy compromise for
the legislator. On the European side, a mirror-image evolution might be taking place now that
ownership is slowly disintegrating. For instance, the comparative account above has already
shown that the at will removability of directors has been softened gradually. Whether all of
this will lead to convergence of shareholder say, however, will depend on a myriad of other
possible contributing factors.
182
Ronald J. Gilson & Jeffrey N. Gordon, Agency Capitalism: Further Implications of Equity
Intermediation, in Research Handbook on Shareholder Power 32 (Jennifer G. Hill & Randall S.
Thomas eds., 2015).
183
Christophe Clerc et al., A Legal and Economic Assessment of European Takeover
Regulation 79 (2012); Wolf-Georg Ringe, Changing Law and Ownership Patterns in Germany:
Corporate Governance and the Erosion of Deutschland AG, in Research Handbook on Shareholder
Power 404 (Jennifer G. Hill & Randall S. Thomas eds., 2015); Leon Yehuda Anidjar, Toward Relative
Corporate Governance Regimes: Rethinking Concentrated Ownership Structure around the World, 30
Stan. L. & Pol’y Rev. 197, 215 (2019).
184
Jennifer G. Hill, Images of the Shareholder – Shareholder Power and Shareholder Powerlessness,
in Research Handbook on Shareholder Power 55 (Jennifer G. Hill & Randall S. Thomas eds.,
2015).
185
186
Id. at 757–58.
187
5.2 Some Problems with Empirical Comparisons
Are the numerous shareholder proposals in the United States displays of a strong shareholder
democracy at work?188 There is a burgeoning literature empirically measuring the number of
shareholder proposals in the United States and, to a lesser extent, in Europe, with a comparison
between both continents. This is welcome, but there are pitfalls to be avoided that largely
follow from the above comparative analysis.
First, one should realize that the number of shareholder proposals is not a measure of the
effectiveness of shareholder power. There is more to shareholder power than shareholder
proposals. At least equally important are the matters on which shareholders can vote, without
having to take the initiative for it, such as profit distribution in Europe, and the possibility of
effectively voting against director candidates under a rule of majority voting. Also, share-
holder activism can take other forms. Hedge fund activism, for instance, is far more developed
in the United States than in continental Europe.
Second, differences in stock ownership structure render a representative comparison
extraordinarily difficult. Controlling shareholders obviously do not need to take recourse
to shareholder proposals. Can empirical studies then still compare the number of initiatives
between companies with concentrated and companies with dispersed ownership, or between
jurisdictions with different prevailing ownership patterns? Controlling shareholders have
large investments at stake and may on that ground take initiatives that, in the absence of a con-
trolling shareholder, small shareholders would take.189 To that extent, there is a lesser need
for shareholder proposals, but controlling shareholders may as well not take these beneficial
initiatives and remain preoccupied with their private interests. Irrespective of the choice one
makes in this regard, another issue comes up: in companies with concentrated ownership,
there simply are fewer small shareholders. One could hope that cross-country comparisons
correct for the number of listed companies in the various jurisdictions examined,190 but should
they also control for differences in the number of small shareholders per company? For dif-
ferences in the number of shares (or voting rights) in free float? In addition, should empirical
studies control for differences in type of investors, as some of them are less inclined to make
proposals?191
Third, the above analysis of shareholder proposals in the United States revealed significant
differences in the amount of successful shareholder proposals according to the size of compa-
nies.192 The successes of shareholder activism cited above predominantly took place in large
caps. Many European jurisdictions boast very few large cap companies. To compare between
jurisdictions, it is therefore recommended to control for the size of the companies concerned.
The implications of the different company size should also be investigated. On the one hand,
one could argue that in small and medium sized companies, other forms of shareholder activ-
188
Whether proposals are efficient in that they increase corporate performance is a separate question
that will not be dealt with here.
189
They may even do better. Zohar Goshen & Assaf Hamdani, Corporate Control and Idiosyncratic
Vision, 125 Yale L.J. 560 (2016).
190
Despite the high number of shareholder proposals, most American public companies do not
receive any shareholder proposals. Council of Institutional Investors, Fact Sheet on Proxy Advisory
Firms and Shareholder Proposals (Nov. 5, 2019).
191
See Renneboog & Szilagyi, supra note 3, at 328.
192
See supra text accompanying notes 120 & 134.
ism are possibly more appropriate, cheaper, and thus more frequent than in large companies.
On the other hand, it could well be that small and medium sized companies are more resistant
to improving shareholder rights, as they face a higher risk of hedge fund activism or hostile
takeovers.193 The relatively high ownership thresholds for shareholder proposals in Europe (up
to 5 percent of the capital, compared to 1 percent under Rule 14a-8 – albeit connected with
other requirements – in the United States) may also be explained, and perhaps not harder to
meet, in light of the lower capital of most listed companies, as compared to the United States.
A final question is whether the subject of shareholder proposals should be given consider-
ation. A major part of the shareholder proposals in the United States would be redundant in
Europe, as they call for provisions in the charter or bylaw that in Europe are provided for by
statute, such as majority voting, board de-staggering, proxy access, say on pay and the poison
pill. Should these be excluded from comparisons? In that case, one should exclude all propos-
als that do not make sense in any of the compared jurisdictions, which potentially leaves very
few proposals to examine.
One could go a step further and argue that the sheer number of non-firm-specific proposals
in the United States are a sign that the legislator failed to provide for the rule that most parties
would have wanted. Are rules like majority voting, that are adopted in a majority of corpo-
rations, not the “majoritarian default” that corporate law should – according to conventional
law and economics analysis194 – offer in order to reduce transaction costs? The transaction
costs of inserting these rules on a company-by-company basis, including not only the costs
for the activist shareholders, but also the costs of managerial time and SEC discussions, are
enormous.195
The issue of the subject of shareholder proposals once again points to a fundamental tenet
in comparative law: it is not only the form that should be compared, but also the function. In
the United States, shareholder proposals cannot be used for director elections, while this is an
important topic in European shareholder proposals.196 In a functional comparative analysis,
it is neither proxy contests197 nor shareholder proposals that should be compared, but the
instances in which directors are being appointed or dismissed upon (minority) shareholders’
initiative, whatever mechanism they deploy for that purpose.
6. CONCLUSION
Despite a relatively similar historical evolution, European corporate laws have traditionally
granted shareholders broader substantive authority than American corporate law did. The
picture has become more nuanced in the past two decades. In the United States, private order-
ing instigated by shareholder proposals has brought about gradual shareholder empowerment,
193
Alon Brav, Wei Jiang, and Hyunseob Kim, Hedge Fund Activism: A Review, 4 Found. & Trends
Fin. 185, 206–12 (2009).
194
Frank Easterbrook & Daniel Fischel, Voting in Corporate Law, 26 J.L. & Econ. 395, 401–02
(1983).
195
See Nickolay Gantchev & Mariassunta Gianetti, The Costs and Benefits of Shareholder
Democracy 2 (ECGI -Fin. Working Paper No. 586, 2018), https://papers.ssrn.com/sol3/papers.cfm
?abstract_id=3269378.
196
Renneboog & Szilagyi, supra note 3, at 333.
197
especially in large companies. In Europe, shareholders have not (yet?) embraced shareholder
proposals (or, more generally, shareholder activism) with the same vigor. Does this imply that
shareholder democracy is stronger in the United States than in Europe? Maybe, but not so
fast. A significant part of American shareholder proposals have simply introduced shareholder
rights that European corporate laws already provide, and comparing the figures is a delicate
exercise in light of different stock ownership structures and company sizes. This chapter
showed the necessity of comparative legal knowledge for comparing empirical data, and thus
the necessity of interdisciplinary research with regard to shareholder activism, and suggested
new avenues for empirical research.
16. Controlling shareholders and their duties
Gaia Balp and Marco Ventoruzzo
1. INTRODUCTION
In virtually all developed jurisdictions, including in Europe and the US, controlling share-
holders have certain duties toward minority shareholders and, potentially, the corporation
and/or other stakeholders (especially creditors, in specific circumstances). To a minor degree,
this might be true generally of all shareholders, which might have duties toward their fellow
co-adventurers. In the Anglo-Saxon world and in common law systems, these duties fall pri-
marily under the category of “fiduciary duties,” an expression that does not recur in the civil
law tradition. While the specific legal tools and rules used might differ in different traditions,
the underlying substantive concepts, and specifically the fact that under certain conditions
controlling shareholders owe duties of loyalty, good faith and possibly – but this is more
uncertain – care to fellow investors, exist in most modern corporate governance systems. With
a rough simplification, these fiduciary duties are different in both nature and intensity from the
ones owed by directors.
Unlike with respect to directors, controllers are generally not required to act “proactively”
to protect other shareholders’ interests and are not responsible for nonfeasance. A breach
of shareholders’ duties, in this context, amounts to an active conduct or act that violates the
canons of good faith or pursues a selfish and conflicting interest damaging, sometimes also
only potentially, other shareholders and/or the corporation. This explains why under the
general label of shareholders’ fiduciary duties, at least as a matter of fact, the duty of loyalty
is more relevant than the duty of care. But shareholders’ duties differ from those of directors
also in terms of intensity because they are not generally held to the same standard of agents.
The historical roots of these duties, as well as the legal techniques used to establish and
enforce them, differ, sometimes significantly, in different systems, with both theoretical and
practical implications. Nonetheless, when we consider the law in action and go beyond labels
and forms, we find functionally similar principles. Divergence among jurisdictions is more
a matter of degree and intensity of protection of minority shareholders (and other stakehold-
ers), types of remedies, and burden of the proof, rather than the expression of a radically
different conceptual framework.
This observation is, in fact, almost obvious. The need to curb the latitude of economic actors
in a position of power is ubiquitous. Controlling shareholders exercise discretion in pursuing
certain interests in a situation of incomplete contracts and vis-à-vis potential market failures
due to information asymmetries, collective action problems, externalities and transaction
costs. In all modern legal systems, therefore, the conduct of controlling shareholders – and
shareholders generally, including in some situations minority shareholders – is subject to
specific limitations and controls. While in common law countries the malleable, potentially
broad, but also slippery and uncertain concept of fiduciary duties – as molded by precedents
– serves this purpose together with other, specific provisions, rules aimed at sanctioning
abuses obviously exist and apply also in other systems. Sometimes they are rooted in general
324
Controlling shareholders and their duties 325
contractual duties of good faith and correctness in the performance of the (corporate) contract;
sometimes they are based on categories historically borrowed from other fields (such as the
concept of oppression of the minority and the related issue of abuse of the majority, derived
from administrative law principles1); and sometimes – indeed, increasingly so – these rules are
enshrined in specific and explicit statutory or regulatory provisions, such as those on corporate
groups, related party transactions, or takeovers, just to mention some of the major examples.
Of course, the differences concerning the roles of the judiciary and precedents in common
and civil law systems in functionally shaping, bending, shrinking or expanding these rules
and principles should not be over-emphasized, and can hardly be invoked to establish rigid
“genetic” differences in approaches. If we truly want to find a feature distinguishing common
law and civil law approaches in this area, it probably has to do more with the different reliance
on ex post litigation as a policy tool in the former, and on ex ante rules and mandatory proce-
dural protections in the latter.
This chapter will focus primarily on comparing the major differences in the rules governing
controllers’ duties toward minority shareholders in three jurisdictions: the US, Germany and
Italy. We will occasionally offer some insights from other systems, but these three systems,
representatives of different traditions, illustrate some basic and general differences among
regulatory models. Taking the US as our starting point, after a brief overview of the basic con-
cepts of fiduciary duties and their close civil law approximations in general contractual duties
of good faith and correctness, we will examine how these tools contribute to placing limits
on the power of majority shareholders with respect to the exercise of their corporate rights
and prerogatives (“intra-corporate issues”). More specifically, we will discuss – with a focus
on listed corporations – voting at shareholders’ meetings, related party transactions, sale of
a control stake, or influence over the decisions of a controlled entity through different means.
In a certain sense, controllers’ duties in listed corporations also include prohibitions against
market abuses such as insider trading. These rules are designed to protect market integrity
but also to ensure information parity among equity investors: we will therefore also briefly
consider (negative) obligations concerning the use of inside information – something that is
obviously not limited to controlling shareholders, but that might be of particular relevance for
controllers due to their easier access to the inner workings of the business. To conclude, we
will briefly attempt to draw some insights on whether significant differences in the structure of
these duties and the applicable remedies exist among the legal systems considered.
2. BACKGROUND
Except primarily for the UK, the European corporate landscape is characterized by remarkable
levels of ownership concentration. Publicly listed corporations often feature the presence of
controlling shareholders or large influential blockholders who rank close to corporate control.
To the contrary, widespread corporate ownership generally prevails in the US.2 As corporate
1
Disiano Preite, Abuso di maggioranza e conflitto di interessi del socio nelle società per azioni, in
Trattato delle Società per Azioni 34–113 (Giovanni Emanuele Colombo & Giuseppe Benedetto
Portale eds., 1993).
2
See generally Gur Aminadav & Elias Papaioannou, Corporate Control around the World (Nat’l
Bur. of Econ. Res., Working Paper No. 23010, 2016), www.nber.org/papers/w23010; Gur Aminadav
control is more frequent in Europe than in the US, so are pyramidal business groups dominated
by a controlling entity,3 or other Control Enhancing Devices (CEDs) such as shareholders’
agreements.4 Nonetheless, US controlled companies still “constitute a sizeable minority of
large, publicly traded firms.”5 Once dominant and declining sharply during the first quarter of
the twentieth century,6 controlled companies have been on the rise in the US in recent years,
partly as a consequence of going public with a dual-class structure.7 They have even become
a target for activist intervention,8 in spite of the fact that gaining influence over the corporation
and the votes at shareholders’ meetings is arguably more challenging due to the controller’s
voting power.9
Against this background, it is not surprising that addressing the well-known agency prob-
lems associated with controlling shareholders has long since been crucial in any jurisdiction.
Different regulatory pathways have developed in the US and Europe as a response to control-
lers’ self-dealing, tunneling and other forms of value diversion or misappropriation to protect
minority interests and, collectively, the interests of the corporation itself. Delaware case law
typically implements an ex-post approach grounded on private litigation for loyalty breaches.
In contrast, European Member States promote an ex-ante approach based on various rules
aimed at preventing the controller from exerting abusive influence detrimental to minorities;
& Elias Papaioannou, Corporate Control across the World, 75 J. Fin. 1191 (2020), https://ssrn.com/
abstract=3404596, at 12.
3
See Eugene Kandel et al., The Great Pyramids of America: A Revised History of U.S. Business
Groups, Corporate Ownership, and Regulation, 1926–1950, 40 Strat. Mgmt. J. 781, 782–83 (2019);
Simon Johnson, Rafael La Porta, Florencio Lopez de Silanes & Andrei Shleifer, Tunnelling (Nat’l Bur.
of Econ. Research Working Paper No. 7523, 2000), www.nber.org/papers/w7523.pdf.
4
See Marco Ventoruzzo, Why Shareholders’ Agreements are Not Used in U.S. Listed Corporations:
A Conundrum in Search of an Explanation, Bocconi Legal Stud. Res. Paper (2013), https://papers
.ssrn.com/sol3/papers.cfm?abstract_id=2246005.
5
Lucian A. Bebchuk & Assaf Hamdani, Independent Directors and Controlling Shareholders, 165
U. Pa. L. Rev. 1271, 1279 (2017). See also Albert H. Choi, Concentrated Ownership and Long-Term
Shareholder Value, 8 Harv. Bus. L. Rev. 53, 54–56 (2018); Ronald J. Gilson & Alan Schwartz,
Corporate control and credible commitment, 43 Int.’l Rev. L. & Econ. 119, 119–20 (2015); Jens
Dammann, The Controlling Shareholder's General Duty of Care: A Dogma that Should Be Abandoned,
2015 U. Ill. L. Rev. 479, 483 (2015).
6
See John C. Coffee Jr., Dispersed Ownership: The Theories, the Evidence, and the Enduring
Tension Between “Lumpers” and “Splitters”, in The Oxford Handbook of Capitalism 463–507
(Dennis C. Mueller ed., 2012).
7
See Clifford G. Holderness, The Myth of Diffuse Ownership in the United States, 22 Rev. Fin.
St. 1377, 1378 (2009); Choi, supra note 5, at 56–57; Ronald J. Gilson, Controlling Shareholders and
Corporate Governance: Complicating the Comparative Taxonomy, 119 Harv. L. Rev. 1641, 1660
(2006); Gilson & Schwartz, supra note 5, at 119–20; María Gutiérrez & Maribel Sáez Lacave, Strong
Shareholders, Weak Outside Investors, 18 J. Corp. L. St. 277, 281 (2018).
8
See Kobi Kastiel, Against All Odds: Hedge Fund Activism in Controlled Companies, 2016 Colum.
Bus. L. Rev. 60, 67–68 (2016); see also Brian R. Cheffins & John Armour, The Past, Present, and Future
of Shareholder Activism by Hedge Funds, 37 J. Corp. L. 51, 69 (2011) (mentioning the right to select
a director in a company that provides for cumulative voting for directors as a means by which to put
pressure on a company’s dominant shareholder and its directors).
9
See, e.g., Wolf-Georg Ringe, Shareholder Activism: A Renaissance, in The Oxford Handbook
of Corporate Law and Governance 393–94 (Jeffrey N. Gordon & Wolf-Georg Ringe eds., 2018).
enforcement rests chiefly with avoidance of conflicted resolutions, whether adopted by the
shareholders’ meeting or the board of directors.10
Antithetical as they may be in regard to the techniques employed, both approaches share
largely the same substantive roots: namely enforcing a controlling stockholder’s loyalty
to minority shareholders and the corporation. The distance between those two approaches
seems, however, to be diminishing due to recent developments on both sides of the Atlantic.
Delaware jurisprudence is showing a willingness to grant relief from more exacting standards
of judicial review provided that the transaction involving the controlling stockholder is unbi-
ased based on the (voluntary) adoption of certain ex-ante procedural safeguards to support the
decision-making process.11 In essence, prior approval of the transaction by unconflicted, fully
informed parties “allows for the cleansing or sanitization of conflicted transactions”12 and for
the business judgment rule to revive in litigation.13 Such safeguards resemble those imposed
in some European jurisdictions for related party transactions, and those that were recently
adopted at the EU-level under the revised Shareholders’ Rights Directive (SRD II).14 To
a certain extent, they also resemble certain requirements that some European Member States
impose on the process by which general meeting resolutions involving a shareholder’s conflict
of interests need to be adopted.
3. A CONTROLLING SHAREHOLDER’S LOYALTY

OBLIGATION
Since a potential for opportunism is inherent in corporate control, both common law and
civil law jurisdictions readily developed standards of conduct applicable to controlling
stockholders. A consideration of the many regulatory implications of corporate control falls
beyond the scope of this chapter, but we comparatively assess the regulatory responses to the
principal-principal agency problem by which corporate control challenges corporate govern-
ance. We focus on related party transactions, i.e. contracts entered into between a controller
and the corporation, “whether directly or, more often, through other entities they control”
or influence.15 In order to assess whether, and to what extent, the regulation of transactions
involving controlling shareholders in different legal systems converges, we will start by con-
sidering US law and then turn to the law applicable in some relevant EU jurisdictions.
10
11
12
Julian Velasco, Fiduciary Principles in Corporate Law, in The Oxford Handbook of Fiduciary
Law 67 (Evan J. Criddle, Paul B. Miller & Robert H. Sitkoff eds., 2019).
13
14
Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017,
Amending Directive 2007/36/EC, 2017 O.J. (L 132) 1 [hereinafter SRD II] (regarding the encourage-
ment of long-term shareholder engagement).
15
Pierre-Henri Conac, Luca Enriques & Martin Gelter, Constraining Dominant Shareholders’
Self-Dealing: The Legal Framework in France, Germany, and Italy, 4 Eur. Company & Fin. L. Rev.
491, 495 (2007).
3.1 The Controller as a Fiduciary under Delaware Common Law: From Entire
Fairness Review to Ex Ante Dual-Approval of Related Party Transactions
In the US, transactions between the corporation and a controlling shareholder are regulated
by the common law duty of loyalty to minority shareholders.16 Taking Delaware law as the
cornerstone for comparative US analysis due to its well-known preeminent role,17 courts
commonly treat the controller as a fiduciary.18 Conflicted related party transactions with
a controlling stockholder are not prohibited ex ante, but undergo equitable review in litiga-
tion.19 Therefore, they are the province of litigation,20 typically – but not exclusively – in the
context of challenges to mergers, particularly freeze-outs.21 In their review, courts apply the
entire fairness standard of review, and not the less stringent business judgment rule – which
applies in the absence of facts indicating self-dealing or improper motive.22 While, depending
on the circumstances, a duty-of-care case may also be made, self-dealing most often concerns
the controller’s duty of loyalty, which “mandates that the best interest of the corporation
and its shareholders takes precedence over any interest possessed by a [director, officer or]
controlling shareholder and not shared by the stockholders generally.”23 An action based on
a breach of loyalty will require an assessment as to whether the terms of the self-interested
transaction were dictated by the controlling shareholder, and whether there is any special
benefit for the controller that minority stockholders do not share.24 Under the entire fairness
standard of review, both procedural fairness (fair dealing) and financial fairness (fair price) are
relevant.25 Fair dealing “embrac[es] questions of when the transaction was timed, how it was
initiated, structured, negotiated, disclosed to directors, and how the approvals of the directors
and the stockholders were obtained.”26 Fair price “relat[es] to the economic and financial
16
See, e.g., Michelle M. Harner, Corporate Control and the Need for Meaningful Board
Accountability, 94 Minn. L. Rev. 541, 545 (2010).
17
See Stephen M. Bainbridge, Introduction to Can Delaware Be Dethroned? Evaluating
Delaware’s Dominance of Corporate Law 4–5 (Stephen M. Bainbridge et al., eds., 2018).
18
See, e.g., Sinclair Oil Corp. v. Levien, 280 A.2d 717, 719 (Del. 1971); Kahn v. Lynch Commc’n
Systems, Inc., 638 A.2d 1110, 1113–14 (Del. 1994).
19
See Velasco, supra note 12, at 66.
20
See Itai Fiegenbaum, The Controlling Shareholder Enforcement Gap, 56 Am. Bus. L.J. 583, 585
(2019).
21
Lawrence A. Hamermesh & Leo E. Strine Jr., Delaware Corporate Fiduciary Law: Searching
for the Optimal Balance, in The Oxford Handbook of Fiduciary Law 876 (Evan J. Criddle, Paul B.
Miller & Robert H. Sitkoff eds., 2019); see also Dammann, supra note 5, at 486 (noticing that “[i]n prac-
tice, it is already the case that any merger or other fundamental transaction between a public corporation
and its controlling shareholder may prompt suits against the controlling shareholder … of the controlled
corporation.”).
22
See Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987); Lynch,
638 A.2d at 1115–16; Kahn v. Tremont, 694 A.2d 422, 428–29 (Del. 1997). See also Corwin v. KKR
Fin. Holdings LLC, 125 A.3d 304, 305 (Del. 2015) (illustrating that the business judgment rule is the
appropriate standard of review for a fiduciary-duty action based on disinterested stockholder approval of
a transaction with a party other than a controlling stockholder) (emphasis added).
23
In re Oracle Corp. Derivative Litig., No. 2017-0337-SG, 2018 Del. Ch. LEXIS 92, at *63 n.283
(Del. Ch. Mar. 19, 2018) (citing Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993)).
24
Sinclair Oil Corp., 280 A.2d at 720–22; Gilbert v. El Paso Co., 575 A.2d 1131, 1146 (Del. 1990).
25
Lynch, 638 A.2d at 1115.
26
Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983).
considerations of the proposed merger, including all relevant factors: assets, market value,
earnings, future prospects, and any other elements that affect the intrinsic or inherent value of
a company’s stock.”27
While it falls to the plaintiff to provide some justification for invoking the fairness obliga-
tion, it is ultimately for the controlling shareholder to prove the entire fairness of the trans-
action.28 However, under the Lynch line of doctrine, where particular protective procedural
devices that mimic arm’s length transactions have been adopted, the burden of demonstrating
that the transaction was unfair to the minority entirely shifts to the plaintiff.29 In particular,
the burden of proof as regards entire fairness will shift from the controlling shareholder to
the plaintiff where the transaction was approved either by a well-functioning committee of
independent directors, or by an informed vote by a majority of the minority shareholders.30
Importantly, an exception as regards the applicable standard of review was recently adopted
in Kahn v. M & F Worldwide Corp (MFW).31 The Delaware Supreme Court held that the
business judgment presumption revives where a dual-approval prerequisite is met.32 In order
to meet MFW’s prerequisites, the transaction must be conditional from the outset on both
independent-director negotiation and approval, and on informed and uncoerced approval of
a majority of shareholders not affiliated with the controlling shareholder.33 Specifically, under
MFW, the business judgment standard applies to controller transactions
if, and only if: (i) the controller conditions the procession of the transaction on the approval of both
a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is
independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no
definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote
of the minority is informed; and (vi) there is no coercion of the minority.34
Where only one of these dual procedural protections is employed, or any or all of the six condi-
tions enumerated above are not met, the controller will only receive burden-shifting within the
framework of the entire fairness standard of review, in line with the Lynch doctrine.35 Courts
have explained that each of the protections required under MFW needs to be effective for the
business judgment standard to apply.36 Thus, the majority-of-the-minority stockholder vote
must be fully informed and uncoerced, and the special committee must “function in a manner
which indicates that the controlling stockholder did not dictate the terms of the transaction and
that the committee exercised real bargaining power ‘at arm’s length.’”37
27
Id.
28
Id. at 710; Cede & Co., 634 A.2d at 361.
29
Weinberger, 457 A.2d at 703.
30
Lynch, 638 A.2d at 1117.
31
88 A.3d 635 (Del. 2014).
32
Id. at 644.
33
Id. at 642; see also In re Pure Res., 808 A.2d 421, 435 n.16 (Del. Ch. 2002); Olenik v. Lodzinski,
No. 2017-0414-JRS, 2018 Del. Ch. LEXIS 246, at *36 (Del. Ch. July 20, 2018).
34
M & F Worldwide, 88 A.3d at 645 (emphasis in original); see also In re Zhongpin, No. 7393-VCN,
2014 Del. Ch. LEXIS 252, at *28 (Del. Ch. Nov. 26, 2014).
35
M & F Worldwide, 88 A.3d at 646.
36
Id. at 645–46 (“If, after discovery, triable issues of fact remain about whether either or both of the
dual procedural protections were established, or if established were effective, the case will proceed to
a trial on which the court will conduct an entire fairness review.”) (emphasis added).
37
Id. (citing Kahn v. Tremont, 694 A.2d 422, 429 (Del. 1997)).
Although it was originally established within the context of squeeze-out mergers, the MFW
dual-approval framework was also applied to non-merger controller transactions, consistent
with the same line along which the Lynch entire-fairness test had previously evolved (expand-
ing “from merger cases to other controlling-shareholder transactions ….”).38 In In re EZCorp,
advisory agreements which involved controller self-dealing were found to trigger entire
fairness review unless MFW's dual protections were in place.39 More broadly, vice Chancellor
Laster identified various types of non-M&A transactions involving controlling stockholders
subject to entire fairness review, including (1) security issuances, purchases, and repurchases;
(2) asset leases and acquisitions; (3) compensation arrangements, consulting agreements,
and service agreements; (4) settlements of derivative actions; and (5) recapitalizations.40 The
rationale warranting heightened judicial scrutiny in all of these transactions is the ability of
the controller to extract “a non-rateable benefit” to the exclusion of the other stockholders.41
Following vice Chancellor Laster’s reasoning that the MFW framework should apply to any
form of conflicted transaction granting the controller a unique benefit, the Delaware Chancery
Court later explicitly endorsed extending such framework to non-freezeout contexts – spe-
cifically, one involving a share reclassification caused by the controller to perpetuate its
voting control over the company.42 Chancellor Bouchard reasoned that there is “no principled
basis on which to conclude that the dual protections in the MFW framework should apply
to squeeze-out mergers but not to other forms of controller transaction,” the “animating
principle” of that framework being the need to replicate an arm’s-length transaction.43 Hence,
he concluded that “the use of these types of protections should be encouraged to protect the
interests of minority stockholders in transactions involving controllers ….”44
3.2 The European Concept of (Controlling) Shareholders’ Loyalty
In Europe, tools substantively equivalent to the US fiduciary duties of a controlling share-

holder developed to address the accountability issue posed by an influential party in the
position of unilaterally affecting other interested parties. Despite policing the very same
fundamental problem, European equivalents to the doctrine of fiduciary duties “have often
38
Jonathan Rosenberg & Alexandra Lewis-Reisen, Controlling-Shareholder Related-Party
Transactions Under Delaware Law, Harv. L. Sch. F. on Corp. Governance 1, 10 (Aug. 30, 2018),
https://corpgov.law.harvard.edu/2017/08/30/controlling-shareholder-related-party-transactions-under
-delaware-law/(further explaining that “[s]ince then, the Lynch entire-fairness standard has been applied
to controlling-shareholders’ management-services agreements, loans, non-competition payments, and
third-party ‘brokering’ payments”).
39
In re Ezcorp. Inc. Consulting Agreement Derivative Litig., No. 9962-VCL, 2016 Del. Ch. LEXIS
14, at *33 (Del. Ch. Jan. 25, 2016).
40
Id. at *36–*47.
41
Id. at *36.
42
Ira Trust FBO Bobbie Ahmed v. Crane, No. 12742-CB, 2017 Del. Ch. LEXIS 843, at *30 (Del.
Ch. Dec. 11, 2017).
43
Id.
44
Id. See also In re Martha Stewart Living Omnimedia, Inc. Stockholder Litig., Cons. No.
11202-VCS, 2017 Del. Ch. LEXIS 151 (Del. Ch. Aug. 18, 2017); Tornetta v. Musk, No. 2018-0408-JRS,
2019 Del. Ch. LEXIS 999, at *9 (Del. Ch. Sept. 20, 2019).
remained unnamed, inchoate and implicit.”45 Even where they are codified to some extent,
loyalty obligations “tend to blend into other types of mandatory provisions.”46 No unified
field of general fiduciary principles permeating different areas of law developed historically
in European civil law.47 In addition, corporate law tools designed to counteract controllers’
opportunism in breach of loyalty are not homogeneous throughout Europe, but noticeably
vary, depending on national laws and how they evolved.48 Thus, the regulatory framework
for corporate governance generally, and particularly that concerned with minority-regarding
duties of controlling stockholders, is fragmented and largely unaffected by the EU harmoni-
zation program, except for a newly introduced, and quite flexible, regime for related party
transactions (RPTs). The same is also true for the issue of business groups – a context typically
subject to increased potential for controller opportunism: the differing views of the Member
States always prevented a directive to be adopted in this respect, let alone a regulation directly
applicable throughout Europe.49
Notwithstanding the persistence of undisputable differences, corporate laws of individual
European jurisdictions evolved along similar lines. In addition, the lack of a harmonized
regulatory framework for corporate groups did not prevent some Member States from auton-
omously adopting special regimes for business groups, the most prominent example being
that of the German Konzernrecht dating back to 1965, whose influence on the corresponding
Italian regime, adopted in 2003, is quite evident.50 Where a coherent body of specific group
law provisions was adopted, the special group-specific rules failed not to adapt the concept
of loyalty imposed by corporate law on the shareholders in the solo-context to the particular
context of group membership.51
Further still, the EU Commission and the Parliament acknowledged that RPTs “may cause
prejudice to companies and their shareholders, as they may give the related party the opportu-
nity to appropriate value belonging to the company.”52 The need for “protection of companies’
and shareholders’ interests”53 thus drove the adoption of a basic common framework for mate-
rial RPTs, including transactions with controlling shareholders, aimed at
ensur[ing] that [such] transactions are submitted to approval by the shareholders or by the administra-
tive or supervisory body according to procedures that prevent the related party from taking advantage
of its position and provide adequate protection for the interests of the company and of the sharehold-
ers who are not a related party, including minority shareholders.54
45
Martin Gelter & Geneviève Helleringer, Fiduciary Principles in European Civil Law Systems, in
The Oxford Handbook of Fiduciary Law 584 (Evan J. Criddle et al. eds., 2019).
46
Id.
47
Id. at 585.
48
See Conac et al., supra note 15, at 492–94.
49
See Klaus J. Hopt, Comparative Company Law, in The Oxford Handbook of Comparative Law
1150–52 (Mathias Reimann & Reinhard Zimmermann eds., 2019).
50
51
See generally Klaus J. Hopt, Groups of Companies. A Comparative Study on the Economics, Law
and Regulation of Corporate Groups (Eur. Corp. Governance Inst. (ECGI) Law Working Paper No.
286/2015, 2015), https://ssrn.com/abstract=2560935.
52
See SRD II, supra note 14, at Recital no. 42.
53
Id.
54
Id.
Despite strong opposition, especially on the German side, an agreement was eventually
reached for introducing a minimum-harmonization regulation in that area.55 Considering that
some European jurisdictions – such as Italy, France, and the UK – had already developed
well-established sets of rules for RPTs while other jurisdictions – such as Germany – had not,56
the SRD II helped, at least to some extent, to bridge a noticeable gap between the Member
States. But, despite the SRD II and its transparency and approval regime for RPTs,57 “the
fundamental division between German-style group law (Konzernrecht) and the regulation of
controlling shareholders and minority protection as evidenced by the rules on related party
transactions has not been levelled out.”58
3.2.1 The sources of shareholders’ loyalty in national corporate law

In the context of corporate law, a loyalty obligation comparable to the US (and UK) fiduciary
duty of loyalty applicable to a controlling stockholder is sometimes drawn from the general
principles codified in the law of obligations, such as that of good faith, or correctness in con-
tract, as is the case for both Germany and Italy.59
In German company law, the concept of shareholders’ duties of loyalty (Treupflichten) first
developed out of unlimited liability in the context of partnerships, as an extension of the prin-
ciples of loyalty and good faith (Treu und Glauben) set out in § 242 BGB (the German Civil
Code) to regulate performance in the general law of obligations.60 Only later did the concept
become a company-law standard applicable irrespective of the type of business organization,
and hence also to corporations, including publicly listed ones. A controller’s loyalty obligation
to fellow shareholders and to the company, as had been conceptualized earlier by legal schol-
ars, was affirmatively articulated by case law no later than in the Federal Supreme Court’s
1988 Linotype decision.61 While still remaining uncodified in the AktG (the German law on
corporations), loyalty obligations are now generally accepted as a consequence of the special
relationship between the corporation and its shareholders and among shareholders themselves,
grounded on the very essence of the corporate collective venture.62 Even more so, in the 1995
55
See Tobias H. Tröger, Germany’s Reluctance to Regulate Related Party Transactions. An
Industrial Organization Perspective, in The Law and Finance of Related Party Transactions 427,
n. 7 (Luca Enriques & Tobias Tröger eds., 2019) (according to the original Commission’s Proposal,
material RPTs would have required a mandatory approval by outside shareholders based on full dis-
closure and independent fairness assessment; the SRD II contented itself with rendering the third-party
fairness assessment and the unconflicted minority approval optional, and with a fairness assessment
and the transaction’s approval by the administrative or supervisory body, provided that the related party
cannot take advantage of its dominant position in the procedure).
56
See Eur. Company Law Experts (ECLE), A Proposal for the Reform of Group Law in Europe, 18
Eur. Bus. Org. L. Rev. 1, 20–27 (2017).
57
58
Hopt, supra note 49, at 1154.
59
Unlike in the US, in civil law jurisdictions contract and fiduciary relationships are not “understood
as distinct modes of interactions.” Gelter & Helleringer, supra note 45, at 587.
60
Bürgerliches Gesetzbuch [BGB] [Civil Code], § 242 (Ger.).
61
Bundesgerichtshof [BGH] [Federal Court of Justice] Feb. 1, 1988, Neue Juristische
Wochenschrift [NJW] 1579 (1582–83), 1988 (Ger.).
62
See Andreas Cahn & Michael Alexander Schild von Spannenberg, AktG § 53a, in Aktiengesetz
No. 39 (Gerald Spindler & Eberhard Stilz eds., 2019); Cornelius Götze, Vorbemerkung AktG § 53a, in
Münchener Kommentar zum Aktiengesetz No. 22 (Wulf Goette, Mathias Habersack & Susanne
Kalss eds., 2019).
Girmes case, the Supreme Court clarified that loyalty is also owed by a minority shareholder to
both majority shareholders and other minority shareholders.63 In essence, loyalty chiefly oper-
ates as a constraint to any shareholder’s voting, requiring that other shareholders’ interests be
considered. Therefore, loyalty operates as a corrective mechanism to shareholders’ entitlement
to vote deriving from corporate membership, and a breach of loyalty can motivate avoidance
of conflicted resolutions of the shareholders’ meeting based on § 243(1) AktG.64
Obviously, loyalty obligations become of paramount importance in the case of influential
shareholders in the position of determining the voting outcomes at shareholders’ general
meetings. This is typically the case of both controlling stockholders and qualified minorities
who factually enjoy veto power over certain resolutions, as happens when supermajority rules
apply for making certain decisions. In the event of an alleged breach of loyalty, a shareholder’s
vote will be subject to judicial scrutiny, and the resolution for which that vote was decisive
will be voided where it is found to unduly impact the interests of the minority shareholders.
That will be the case if no collective interest of the corporation is found to support the decision
or if – upon weighing the interests of the minority against those of the corporation – the latter
are found to be given disproportionate consideration, in which case it falls to the plaintiff
to demonstrate that the decision is not properly and objectively motivated (sachlich gere-
chtfertigt).65 Ultimately, the most relevant circumstances under which a potential breach of
a shareholder’s duty of loyalty may come into play concern shareholders’ meeting resolutions
waiving pre-emptive rights,66 winding up the corporation, making fundamental changes to the
articles of incorporation or taking restructuring decisions.
A breach of loyalty further allows suing the shareholder concerned, either directly or deriva-
tively, to seek monetary relief for the damages suffered. However, where such breach happens
via voting in the general meeting, an “intentional abuse of voting rights,” and not merely
negligence in voting, is required for the shareholder to be held liable.67
Just as § 242 BGB does in German law, in Italy, the principles of good faith and correctness
set the standards to be complied with under the general law of obligations in the context of
contractual performance (Article 1175 Civil Code), negotiations (Article 1337 Civil Code) and
contract execution (Article 1375 Civil Code). These principles apply to any contract, including
63
BGH Mar. 20, 1995 NJW 1739, 1995.
64
Aktiengesetz [AktG] [Stock Corporation Act], § 243, I (Ger.). See also Andreas Cahn, The
Shareholders’ Fiduciary Duty in German Company Law 356 (Nordic & Eur’n Company Law Working
Paper No. 18-13 2016), https://ssrn.com/abstract=3126695 (since a breach of loyalty among shareholders
“also constitutes a breach of the shareholder’s duty to the company, the company … can … invoke the
remedies for its violation. This is particularly relevant with respect to shareholder resolutions if their
outcome has been affected by votes cast in violation of the fiduciary duty.”).
65
See Carsten Schäfer, AktG § 243, in Münchener Kommentar zum Aktiengesetz 57 (Wulf
Goette, Mathias Habersack & Susanne Kalss eds., 2016). Likewise, proportionality as a fairness-based
tool for limiting shareholder autonomy in exercising shareholder rights is a principle applied in Dutch
case law. See Matthijs J. de Jongh, Shareholders’ Duties to the Company and Fellow Shareholders, 9
Eur. Company L. 185, 186 (2012).
66
The need for a shareholder resolution to be properly motivated based on the interests of the
company was first articulated in the Supreme Court’s 1978 Kali & Salz decision, BGH Mar. 13, 1978,
NJW 1316, 1978, which, although referred to the waiving of pre-emptive rights, became however para-
digmatic for reviewing any resolution made by the shareholders’ meeting involving shareholder loyalty.
See Schäfer, supra note 65, at 58–59.
67
Cahn, supra note 64, at 357.
any type of company.68 In corporate law, however, a concept similar, although not identical,
to that of contractual fairness developed to the point of becoming of particular importance:
the so-called doctrine of abuse of the law, whose nearest equivalent is that of the French abus
de majorité.69 The main articulations of the doctrine typically include shareholders’ meeting
resolutions either taken by majority shareholders to exclude, or otherwise harm, minority
shareholders, or unduly or unreasonably vetoed by minority blockholders. The doctrine of
abuse of the majority (or the minority) hence constrains shareholders’ “freedom to vote as they
wish at general meetings” by imposing an obligation very close to a duty of loyalty, requiring
them not to exercise voting rights “in such a way as to pursue their own self-interest (and not
the company's) to the detriment of fellow shareholders.”70 In other words, shareholders can
and do pursue their own self-interest in voting: the limit emerges when this interest conflicts
with the one of the corporation, variously defined. Abusive voting can result in a resolution
of the shareholders’ meeting to be voided under Article 2377(2) Civil Code.71 Therefore, the
concept of loyalty that is clearly inherent to the Italian (and French) doctrine of abuse of the
majority shares with the German fiduciary obligations imposed on the controller the very same
rationale of “prevent[ing] an abuse of rights, in particular voting rights.”72
Beyond a general and uncodified concept of shareholder loyalty either deriving from
open-ended principles encompassed in the law of obligations, or regarded as inherent to corpo-
rate membership, several specific corporate law rules reflect a loyalty standard to be complied
with in the relevant relationships between the corporation and its shareholders, especially
controlling stockholders.
One such example concerns rulings directed at preventing abusive value diversion to the
benefit of the controlling shareholders. Here, the most prominent case is enshrined in the
German § 57 AktG, imposing on the corporation a prohibition against repaying shareholder
contributions to the share capital. The prohibition also covers – as a form of concealed distri-
bution of assets in excess of the net profits – transactions entered into by the corporation and
a shareholder that are characterized by disproportionate obligations imposed on the company
as compared with counter-performance due by the shareholder. In essence, § 57 AktG can be
interpreted as requiring transactions with a controller to comply with arm’s length principles:
hence, arguably, as setting out a standard of fairness that comes close to the concept of loyalty.
Explicit no-conflict rules in the context of shareholder voting also implicate loyalty. One
such example can be found, under Italian law, in Article 2373 Civil Code, which shows some
similarities with the corresponding provision regulating directors’ interests (Article 2391 Civil
Code), providing that a resolution of the shareholders’ meeting can be voided where the votes
of conflicted shareholders are outcome-determinative and the resolution has a potential to
harm the corporation.73 While not preventing the conflicted shareholder from exercising his
voting rights, Article 2373 provides a means by which to sanction shareholder opportunism
and protect minority interests, and those of the corporation, against potentially harmful effects
68
Under Italian law, any company, including corporations, features a common contractual nature.
See Codice civile [CC] [Civil Code] art. 2247 (It.).
69
On the French regime see ECLE, supra note 56, at 28–30.
70
Conac et al., supra note 15, at 501.
71
See CC art. 2377(2) (It.).
72
Cahn, supra note 64, at 348 (emphasis added).
73
See CC art. 2373(1) (It.).
of biased collective decisions. The rule can be read as requiring influential stockholders to
make voting decisions based on the consideration of interests which are shared by all share-
holders: in other words, based on loyalty.
3.2.2 Shareholder loyalty in the context of corporate groups

Where special corporate group regimes apply, most of the loyalty-based rules mentioned
above are modified and in some instances do not apply in light of ad hoc provisions designed
to address the specific situation.74 Under German law, unlike the US, conflicted transactions
taking place within (de facto) corporate groups as a consequence of the power enjoyed by the
controlling entity to direct its subsidiaries’ business operations in a coordinated manner are
subjected to special statutory rules (§§ 311 subseq. AktG) which override the controller’s duty
of loyalty applicable in the solo-context.75 The same is true under Italian law (Articles 2497 to
2497-septies Civil Code). In both cases, the rationale for granting the group regime precedence
over the general loyalty obligation imposed on a controlling shareholder in the solo-context is
the same. The reasoning according to which belonging to a group steered by the controlling
entity can be beneficial for any subsidiary requires that the controlling entity be given the
power to coordinate the subsidiaries’ operations so as to maximize the benefits for the group as
a whole.76 The coordinating function performed by the controlling entity allows the controller
to even direct a subsidiary to engage into a disadvantageous transaction – provided, however,
that such disadvantages be offset by the positive outcomes of further group-motivated trans-
actions, or by specific compensative measures undertaken by the controlling entity, within
a certain period of time.77 In the context of a group, if the controller’s loyalty obligation to
each of its subsidiaries were to be applied, this would prevent the controlling entity to perform
its overall coordination function, in contrast with the economic essence of group formation.78
Based on this rationale, both German and Italian law developed special regimes for corporate
groups intended to give more latitude to the controlling entity to direct the group as a whole
by influencing the operations at the level of the individual subsidiaries; but to do this within
a regulatory framework which sets out a number of protections for the interests of the subsid-
iaries and their minority shareholders (as well as creditors). In particular, where no adequate
compensation is provided in terms of some tangible, effective and “probable” – not merely
74
On the German group regime see Alexander Scheuch, Konzernrecht: An Overview of the German
Regulation of Corporate Groups and Resulting Liability Issues, 13 Eur. Company L.J. 191–98 (2016);
for Italy, see Diego Corapi & Domenico Benincasa, The Law on Groups of Companies in Italy, 16 Eur.
Company L.J. 121–29 (2019).
75
See Mathias Habersack, AktG § 311, in Aktien- und GmbH-Konzernrecht 89 (Volker
Emmerich & Mathias Habersack eds., 2019).
76
That is consistent with the French Rozenblum doctrine originated by the French Court. Cour
de cassation [Cass.] [supreme court for judicial matters] crim., Feb. 4, 1985 (Fr.). See Geneviève
Helleringer, Related Party Transactions in France. A Critical Assessment, in The Law and Finance of
Related Party Transactions 411 (Luca Enriques & Tobias Tröger eds., 2019).
77
AktG, § 311 (Ger.). See generally Jens Dammann, Related Party Transactions and Intragroup
Transactions, in The Law and Finance of Related Party Transactions 232–33 (Luca Enriques
& Tobias Tröger eds., 2019) (illustrating that “requiring individual transactions to satisfy arm’s length
standards without considering overarching benefits and costs created by the corporate group may prove
problematic”; in fact, “a system that focuses on individual transactions may be both too strict in some
cases and too lenient in others.”).
78
See Cahn & von Spannenberg, supra note 62, at 62–65.
hypothetical or generically foreseeable – economic advantages, the subsidiary, or its minority

shareholders, are entitled to sue the controlling entity and its directors to recover the damag-
es.79 In this respect, group regimes may well be regarded as a special legal characterization of
the controller’s loyalty obligation.80 In effect, both in Germany and Italy, the controlling entity
is empowered, in principle, to interfere in the management of its subsidiaries in the interest
of the group as a whole, provided that the coordination function it performs and its overall
outcomes be ultimately fair to any of the subsidiaries (and their minority shareholders).81
Compared to the Delaware framework, rules- and liability-based regimes for corporate
groups seem stricter; whether they actually better protect the interests of minority shareholders
against controllers’ opportunism remains unclear. First, systems in which liability toward
minority shareholders ultimately relies on outweighing the benefits and costs determined by
group membership renders judicial review “exceedingly difficult to undertake in practice,
even with the help of expert witnesses.”82 Second, minority shareholders may lack the infor-
mation to ensure that compensation such as that required under the German regime for de
facto corporate groups actually takes place. Even if the board of directors is required to report
yearly on intragroup transactions and other relationships and their impact on the company,83
these reports (if made public at all) may not be entirely illuminating; additionally, shareholders
may not benefit from pre-trial discovery rules as extensively as in the US, something that can
obviously limit the effectiveness of litigation to enforce these protections.84 Overall, substan-
tive uncertainty inherent to assessing the results of group coordination vis-à-vis individual
subsidiaries, and procedural hurdles, can amount to relevant disincentives to sue.
3.2.3 The harmonized EU regime for related party transactions versus the MFW
framework
Beyond the still highly fragmented, albeit somewhat converging, corporate law framework
for controlling shareholders’ loyalty in different European jurisdictions drawn above, where
EU-wide harmonized law is considered, the most significant regulation aimed at reducing
the principal-principal agency costs associated with a controllers’ potential for self-dealing is
that provided for related party transactions under the 2017 SRD II. EU-level regulatory inter-
vention in the area of RPTs was motivated by divergence in Member State laws, causing “an
uneven level of transparency and protection for investors” and hence requiring adequate levels
of transparency to be ensured for market participants, particularly non-domestic institutional
investors, who now hold about 44 percent of EU listed companies’ shares.85
The EU regime for (material) RPTs ‒ although only applicable to publicly listed corpora-
tions ‒ is meaningful for addressing agency issues raised by controlling shareholders since the
definition of a related party also includes controllers, whether in the corporate group context
79
AktG, § 317, I (Ger.). See also CC art. 2497 (It.).
80
See Götze, supra note 62, at 29.
81
See, e.g., Samira Kousedghi, Protection of Minority Shareholders and Creditors in Italian
Corporate Group Law, 4 Eur. Bus. L. Rev. 217, 225 (2007).
82
Dammann, supra note 77, at 235.
83
See AktG, § 312, I (Ger.); CC art. 2497-bis (5) (It.).
84
See Dammann, supra note 77, at 240.
85
See Proposal for a Directive of the European Parliament and of the Council Amending Directive
2007/36/EC (as regards the encouragement of long-term shareholder engagement); Directive 2013/34/
EU, at 3, 6, COM (2014) 213 final (as regards certain elements of the corporate governance statement).
or outside that setting.86 And, unsurprisingly, the same undertone of loyalty characterizing
the regulatory frameworks considered above is also present in the EU regime for (material)
RPTs87, as can be inferred, e.g., from the transparency obligations set out in SRD II. Indeed,
Article 9(c)(2) requires that material RPTs be publicly announced at the latest at the time the
transaction is concluded in order “to assess whether or not the transaction is fair and reason-
able from the perspective of the company and of the shareholders who are not a related party,
including minority shareholders.”88 Article 9(c)(5) upholds the loyalty-based foundation of the
RPT regime by providing for “transactions entered into in the ordinary course of business and
concluded on normal market terms” to be exempt.89
As regards ex ante procedural safeguards to be adopted in the decision-making process,
Article 9(c)(4) SRD II requires Member States to “ensure that material transactions with
related parties are approved by the general meeting or by the administrative or supervisory
body of the company according to procedures which prevent the related party from taking
advantage of its position and provide adequate protection for the interests of the company
and of the shareholders who are not a related party, including minority shareholders,”90 and
without the participation of the director or the shareholder who is a related party.91 However,
Member States
may allow the shareholder who is a related party to take part in the vote provided that national law
ensures appropriate safeguards which apply before or during the voting process to protect the interests
of the company and of the shareholders who are not a related party, including minority shareholders,
by preventing the related party from approving the transaction despite the opposing opinion of the
majority of the shareholders who are not a related party or despite the opposing opinion of the major-
ity of the independent directors.92
Hence, unless the related party is prevented from voting, the transaction must be approved by
either a shareholder majority of minority, or by a committee of independent directors. As is
apparent, contrary to the MFW framework, the European regime only sets out a simple ex ante
approval requirement (“or”).
More generally, as the very wording of Article 9(c)(4) makes clear, the SRD II adopted
a rather non-prescriptive stance regarding the ex-ante process for dealing with material
RPTs,93 so that the Member States are vested with broad discretion in this respect.
The Italian case is particularly illustrative in respect of RPTs. Italy is among the Member
States94 which actually foreran the Directive by adopting, as early as 2010, wide-ranging
86
See SRD II, at art. 1(2)(h), providing that “‘related party’ has the same meaning as in the interna-
tional accounting standards adopted in accordance with Regulation (EC) No 1606/2002 of the European
Parliament and of the Council” on the application of international accounting standards. Specifically, see
IAS 24.9 on related party (financial) disclosures.
87
For materiality of RPTs, see id., at art. 9(c)(1).
88
See id. at art. 9(c)(2). For further transparency obligations, see art. 9(c)(3) and art. 9(c)(7).
89
See id. at art. 9(c)(5).
90
See id. at art. 9(c)(4)(1).
91
92
93
Where the transaction is not “material,” Article 9(c) SRD II does not apply, and the transaction
only remains subject to the provisions (if any) set by individual Member State law.
94
On the UK and French regimes, see Luca Enriques, Gerard Hertig, Hideki Kanda & Mariana
Pargendler, Related-Party Transactions, in The Anatomy of Corporate Law 157 (R. Kraakman et al.
eds., 2017).
regulations on RPTs which include detailed provisions involving independent directors in

the decision-making process and, in some cases, giving dissenting minority shareholders the
power to prevent the transaction. Thus, in the process of transposing the Directive into Italian
law, only minor adjustments to the prior regulations on RPTs were required.
The general provisions on RPTs are drawn in Articles 2391-bis of the Civil Code, which
vests Consob (the Italian Financial Markets Supervisory Authority) with the authority to lay
down rules aimed at ensuring that RPTs are transparent, are set out in the board’s annual report
to the financial statements, and comply with procedural and substantive fairness requirements.
The contents of such information, as well as the substantive regulation governing RPTs, are
laid down by Consob Regulation No. 17221 of 12 March 2010.95
According to Article 8 of Consob Reg. 17221, the board may approve material RPTs (trans-
actions “of greater importance,” as identified through a set of quantitative parameters) only if
favorable advice has been given previously by a committee of independent directors involved
in the negotiations; however, company-specific related party procedures may stipulate that
the board may approve the transaction despite the negative opinion of the committee if, and
only if, the transaction is approved by a majority of unrelated shareholders at the shareholders’
meeting (the so-called whitewash).96 Transactions “of lesser importance” may be approved by
the board notwithstanding the negative opinion of the committee, which, in addition, is not
required to lead the negotiations, and with no whitewash shareholders’ meeting.97
In the United States, RPTs, including transactions involving a controlling shareholder,98
trigger ex-post monitoring and oversight.99 SEC S-K Item 404(a) requires the disclosure (in
the company’s annual filings and proxy statements) of any transaction that occurred since the
beginning of the company’s last fiscal year, or that is currently proposed between the company
and any 5 percent shareholder where the amount involved exceeds $120,000 and the 5 percent
shareholder has a direct or indirect material interest in the transaction.100 In addition, PCAOB
Auditing Standard 2410, applicable to SEC registrant audits, requires the auditor “to test the
accuracy and completeness” of information relating to RPTs.101 Disclosure of RPTs is required
by the Financial Accounting Standards Board’s Accounting Standards Codification (ASC)
Topic 850.102
95
Following the SRD II, Consob Regulation No. 17221 was last amended in December 2020; the
updated version of Reg. 17221 (www.consob.it/web/consob-and-its-activities/laws-and-regulations/
documenti/english/laws/reg17221e_July_2021.htm?hkeywords=&docid=13&page=0&hits=24&nav=
false) applies from 1 July 2021. The provisions cited hereinafter refer to the updated version of the
Regulation (which did not however undergo significant changes as compared to the previous version).
96
See Regulations Containing Provisions Relating to Transactions with Related Parties, Resolution
no. 17221 (2010), art. 8, amended by Resolutions no. 17389 (2010), no. 19925 (2017), no. 19974 (2017),
no. 21396 (2020), & no. 21624 (2020).
97
See Resolution no. 17221 (2010), art. 7.
98
Controlling shareholders fall under the relevant definition of a related party, which, according to
Instruction 1(b)(i) to Item 404(a) of SEC Regulation S-K, also includes 5% shareholders. See 17 C.F.R.
§ 229.404(a) (2011).
99
See Geeyoung Min, The SEC and the Courts’ Cooperative Policing of Related Party Transactions,
2014 Colum. Bus. L. Rev. 663, 677 (2014).
100
17 C.F.R. § 229.404(a) (2014).
101
Auditing standards, AS 2410: Related Parties, § 14 (Pub. Co. Accounting Oversight Bd. 2017).
102
See Joanne M. Flood, Wiley GAAP 2017: Interpretation and Application of Generally
Accepted Accounting Principles 1200 (2017); Min, supra note 99, at 677.
However, self-dealing oversight is not just a matter of ex post monitoring through disclosure
or ex post judicial scrutiny. Ex ante independent scrutiny of RPTs can greatly contribute to
ensuring that the transaction is fair for the company and all of its shareholders. In this respect,
US regulations do require that certain procedures be put in place for the prior screening of
RPTs.103 At the federal level, SEC S-K Item 404(b) requires public companies to disclose their
policies and procedures for the review, approval or ratification of RPTs.104 In addition, major
stock exchanges require RPTs to be reviewed and evaluated for potential conflicts of interest
by an appropriate body within the company involved, such as the audit committee or another
comparable body.105 However, it is the MFW line of doctrine under Delaware case law106 that
comes nearest to the EU regime for related party transactions.
One relevant, however obvious, difference yet remains. While EU law mandates (some
kind of) independent scrutiny of RPTs, Delaware jurisprudence merely encourages the adop-
tion of ex ante heightened procedural safeguards in order for the business judgment defense
to be applicable ex post within litigation.107 In essence, meeting the MFW dual-approval
procedural devices to avoid the entire fairness review requires the controller to “give up his
voting power by agreeing to a non-waivable majority-of-the-minority condition.”108 Therefore,
the decision as to whether or not to adopt the MFW safeguards is one of the key incentives,
whose efficacy largely depends on the liability risk inherent in litigation, i.e. on the actual
probability of a successful challenge in court. The extension of the MFW framework beyond
the context of mergers and acquisitions is an indication of Delaware courts’ willingness to spur
a controlling stockholders’ prophylactic loyalty wherever potentially conflicted transactions
are to be decided. However, the litigation avenues by which freezeout and non-freezeout
transactions may be challenged in court differ, with freezeout self-dealing transactions giving
rise to a direct shareholder cause of action for fiduciary breach and non-freezeout self-dealing
transactions instead requiring a shareholder to initiate a derivative lawsuit.109 This difference is
not without consequences. The significantly higher procedural hurdles imposed by derivative
litigation on the plaintiff, coupled with the higher information costs implied by the derivative
suit, can discourage the challenging of non-freezeout transactions.110 Therefore, the prospect
of undergoing judicial review based on entire fairness may provide a powerful incentive to
voluntarily comply with the MFW framework in respect to freezeout transactions. But, due to
“formidable barriers” that are absent in freezeout settings,111 the same might not hold true for
non-freezeout transactions. Since non-freezeout self-dealing transactions actually “face a very
103
See Min, supra note 99, at 677.
104
17 C.F.R. § 229.404(b) (2011).
105
See NYSE, Inc., Listed Company Manual § 314.00; NASDAQ, Inc., Rule 5630 (Mar. 12, 2009)
(setting a similar standard).
106
107
See Min, supra note 99, at 667–68.
108
See M & F Worldwide, 88 A.3d at 638, 642 (citing Kahn v. Lynch Commc’n Sys., 638 A.2d 1110,
1117 (Del. 1994)).
109
See Fiegenbaum, supra note 20, at 611 (further comparatively illustrating the different litigation
contexts). See also id. at 612–26.
110
Id. at 635, 643.
111
Id. at 626.
small likelihood of being challenged in court,”112 some scholars contend that the future impact
of the MFW framework “on non-freezeout transactions will remain negligible, at best.”113
We cannot say, without more, whether such potentially reduced effectiveness of Delaware’s
approach to ex ante scrutiny of controllers’ opportunism in the context of non-freezeout
transactions makes the EU approach to RPTs generally preferable. This question is likely best
answered based on the consideration of a broader set of country-specific circumstances, both
regulatory and economic (think, e.g., of the effectiveness of the judiciary). For example, if the
Italian experience with the regime for RPTs seems to be overall positive, this is also because
such regime actually operates in conjunction with further corporate governance mechanisms
that were adopted to strengthen shareholder rights. Specifically, the Italian regime for RPTs
interacts with that providing for the election of directors through the mandatory slate voting
system,114 which must be taken into account in order to fully understand how minority share-
holders’ monitoring can be quite successfully subsidized. Provided that mandatory slate voting
for board elections at listed companies was adopted to secure minority shareholder representa-
tion on the board as a monitoring tool for active shareholders,115 and that ex ante independent
scrutiny of RPTs is required to ensure that the transaction is fair for the company and all of
its shareholders, minority representation ensured by slate voting can also improve self-dealing
oversight. In effect, at Italian listed companies, a positive correlation has been found to exist
between minority-elected directors on the board and the adequacy of internal procedures for
related-party transactions.116 In particular, “the presence of at least one minority director is
indeed associated with adoption of stricter internal codes, not only when minority directors are
members of the committee of independent directors vetting internal codes, but also when they
merely sit in the board.”117 Moreover, non-executive minority-elected directors also seem to
reduce the principal-principal agency costs associated with controllers’ potential self-dealing
and to positively affect the firm value, “even in presence of factors (uncertainty about future
financial results and high information asymmetry) that might exacerbate the risk of hold-up by
minority shareholders.”118
112
Id. at 642.
113
Id. at 643.
114
Shareholders holding a minimum threshold of shares − set by Consob and currently varying
between 0.5% and 4.5% − are entitled to submit lists of director nominees to the vote. The majority of
directors are elected from the slate receiving the largest number of votes at the shareholders’ meeting,
but at least one director must be picked from the slate that obtains the largest number of votes after the
majority slate. Resolution no. 17221 (2010), art. 147-ter.
115
See generally Giovanni Strampelli, How to Enhance Directors' Independence at Controlled
Companies, 44 J. Corp. L. 103, 135–36 (2018).
116
See Marcello Bianchi et al., Regulation and Self-Regulation of Related Party Transactions in Italy
- An Empirical Analysis 25 (Eur. Corp. Gov. Inst. (ECGI), Finance Working Paper No. 415/2014, 2014),
117
Id. at 25.
118
Nicola Moscariello et al., Independent Minority Directors and Firm Value in a Principal–
Principal Agency Setting: Evidence from Italy, 23 J. Mgmt & Governance 18–19 (2019).
4. SALE-OF-CONTROL TRANSACTIONS
One peculiar area in which controlling shareholders’ duties might limit and prescribe, if
not impose, certain behaviors emerges in the context of sales of a controlling stake. This is
a potentially broad issue, and our goal here is simply to illustrate the conceptual framework in
a comparative perspective.
The question we can address first is whether controlling shareholders might be liable as
a consequence of a sale of control that harms the corporation or minority shareholders: do
shareholders’ fiduciary duties, including by way of good faith in the performance of the con-
tract or similar principles, extend to the disposal of their investment? Precedents going down
this road are few and far between and, whenever a court has found a shareholder liable – for
example, for a negligent sale of control to a “looter”119 – the facts of the dispute were generally
quite unique and extreme. Imposing duties of diligence (and to some extent also of loyalty)
limiting the free transferability of the shares is obviously in tension with one of the distinctive
features of the corporation, and not surprisingly judges are reluctant to open that door.
In the US, the discussion on the existence and scope of the legal remedies against the “sale
to a looter” has certainly been more intense in the past, especially in between the 1950s and
early 1990s.120 To summarize a debate that might have received more theoretical attention than
animated the law in action, the conditions of similar actions are very narrow, since they end
up imposing a sort of duty to forecast future actions by the acquirer, and have been limited to
situations in which the seller had specific knowledge of the intentions of the new controlling
shareholder or, at a minimum, acted recklessly. Some authors, based on the limits of this
approach, have in fact argued the need for a specific normative framework to address what
they consider a potential market failure.121
To the best of our knowledge, in civil law jurisdictions, successfully invoking a controller’s
liability for an unwarranted sale of control is equally rare, if not rarer. The theoretically appli-
cable tools are too slippery and uncertain, especially when combined with obvious difficulties
in gathering convincing evidence, to sustain similar causes of action with possibly only the
exceptions of situations that are so extreme and peculiar not to represent relevant precedents.
On the other hand, however, if the sale of control can be rarely considered a breach of
generic shareholder duties, in several continental European countries, specific rules were
introduced to protect minorities vis-à-vis changes of control which might, indirectly, induce
119
See Perlman v. Feldmann, 219 F.2d 172 (2d Cir. 1955), cert. denied, 349 U.S. 952 (1955) (if the
controlling shareholder “knows or has reason to believe that the purchaser intends to exercise to the
detriment of the corporation the power of management acquired by the purchase, such knowledge or
reasonable suspicion will terminate the dominant shareholders’ privilege to sell and will create a duty not
to transfer the power of management to such purchaser. … [W]hatever the nature of the duty, a violation
of it will subject the violator to liability for damages sustained by the corporation”). See also Harris v.
Carter, 582 A.2d 222 (Del. Ch.1990). Contra, Levy v. American Beverage, 38 N.Y.S. 2d 517 (1942)
(requiring actual knowledge of the buyer’s wrongful intentions for liability); Frank H. Easterbrook &
Daniel R. Fischel, Corporate Control Transactions, 91 Yale L.J. 698 (1982) (claiming that placing
a burden on sellers of control to investigate whether a buyer is a looter would inefficiently impede control
transfers).
120
Yedidia Z. Stern, The Private Sale of Corporate Control: A Myth Dethroned, 25 J. Corp. L. 511
(2000).
121
Id.
the selling majority shareholder to choose the buyer carefully and internalize at least some of
the expectations of the minorities or, more generally, require the parties (seller and buyer) to
consider the position of other shareholders.
The obvious example of this policy choice and regulatory technique with respect to listed
corporations are mandatory tender offer rules, triggered by change of control or acquisitions
of significant stakes, especially when they must be launched on all the outstanding shares and
at a minimum fair price, thus granting an exit to all equity investors, especially minorities that
want to disinvest from the corporation (also) in light of its new ownership structure. The EU
Thirteenth Directive – which mandates a tender offer at a minimum fair price in case of change
of control in listed corporations – is a perfect case in point,122 but also some antitakeover stat-
utes in the US follow or allow a similar structure, imposing the acquisition of shares – or other
protections for minorities – in case of acquisition of control.123 Interestingly enough, at least
in some jurisdictions, this approach has partially and indirectly been extended to closely-held
corporations; for example, in the regulation of groups of companies, when an entity starts or
stops exercising “direction and coordination” over a controlled one, minority shareholders
might be granted appraisal rights under certain conditions.124
While it would be a stretch to argue that the effects of a mandatory tender offer regime
overlap with an alleged fiduciary duty of controlling shareholders in selling their stake, these
rules indirectly impose a certain seriousness and commitment of the acquirer, if nothing else
because it must be financially ready to potentially acquire all the outstanding shares; add to
the transparency of the transactions, its conditions, strategic goals and framework; require
the issuer to take a public position on the desirability of the offer; and – finally, through the
so-called board neutrality rule, which gives shareholders the power to authorize any measure
that might hinder the acquisition – allows organized minorities’ voice to influence the adop-
tion of defensive measures in case of an hostile takeover.
Without discussing the effectiveness and desirability of these rules, it is obvious that they are
designed to curb the discretion of (directors and) controlling shareholders in both friendly and
unfriendly acquisitions of control, an outcome that, even if through a very different approach
and inspired also by other purposes, concurs to define the duties of large shareholders and in
some instances has practical effects that might resemble the imposition of fiduciary duties.
122
Council Directive 2004/25, 2004 O.J. (L 142/12) 12-23 (EC). See also Marco Ventoruzzo,
Europe’s Thirteenth Directive and U.S. Takeover Regulation: Regulatory Means and Political Economic
Ends, 41 Tex. Int’l L.J. 171 (2006). For a critical evaluation of the mandatory bid rule, see Luca
Enriques, The Mandatory Bid Rule in the Takeover Directive: Harmonization Without Foundation?,
1 Eur. Company & Fin. L. Rev. 440 (2004). For a positive evaluation, see Edmund-Philipp Schuster,
The Mandatory Bid Rule: Efficient, After All, 76 Modern L. Rev. 529 (2019); for a more negative US
perspective, mainly related to the inefficiency of the rule, see Simone M. Sepe, Private Sale of Corporate
Control: Why the European Mandatory Bid Rule is Inefficient, Ariz. Legal Stud. (2010), https://ssrn
.com/abstract=1086321.
123
Cf. Emiliano Catan & Marcel Kahan, The Law and Finance of Anti-Takeover Statutes, 68 Stan.
L. Rev. 629 (2016); Marco Ventoruzzo, The Role of Comparative Law in Shaping Corporate Statutory
Reforms, 52 Duq. L. Rev. 151, 158, n. 23, 161 (2014); Guhan Subramanian, Steven Herscovici & Brian
Barbetta, Is Delaware’s Antitakeover Statute Unconstitutional? Evidence from 1988-2008, 65 Bus. Law.
685, 692 (2010).
124
For the Netherlands, see Rafael Mariano Manovil, Groups of Companies: A Comparative
Overview 53 (Rafael Mariano Manovil ed., 2020). For Italy, see note 125 and corresponding text.
A somehow similar result is achieved, in non-listed corporations, in the case of “direction

and coordination,” for example under Articles 2497 ff. of the Italian Civil Code. Because
shareholders have an appraisal right, at fair conditions, in case of change of direction and
coordination, and this is defined as the power to influence the management of a corpora-
tion and is presumed in case of control, if the transaction alters the risk associated with the
investment (something relatively easy to occur), it is obvious that the protection has concrete
economic effects not dissimilar – in a way – from mandatory bids.125 Dissenting shareholders
that do not appreciate the change of control (and, therefore, the beginning or end of direction
and coordination) might have their shares bought at a fair price by either other shareholders
or the corporation, or in any case the actual value of their contributions back through a capital
reduction of the corporation. These provisions give to minority shareholders a “seat” on the
“negotiation table” in case of a private sale of control in a closely-held corporation.
5. PRIVILEGED INFORMATION
The access of controlling shareholders to privileged information is another aspect that might
result in unequal treatment of shareholders or, more precisely, might raise both fairness
and efficiency issues concerning parity among different investors depending on their actual
influence on the issuer. In this respect, insider trading and, more generally, market abuse rules
impose specific duties on controlling shareholders, as insiders, and on the issuer, designed
to level the playing field between equity holders. Legal systems that have embraced a more
radical approach to parity of information, such as the Market Abuse Regulation in the EU,126
require public disclosure of virtually all inside information as early as possible (with limited
exceptions),127 prohibit trading exploiting relevant information asymmetries,128 and selec-
tive disclosure of price sensitive information or tips based on unequal access to corporate
decisions, data and facts.129 This is yet another area in which, broadly speaking, ad hoc rules
mitigate the latitude otherwise enjoyed by controlling shareholders through positive (“dos”)
and negative (“don’ts”) duties that shape their ability to extract benefits precluded to other
investors from their entrenchment.
125
See CC art. 2497-quater (1)(c) (It.).
126
Regulation (EU) 596/2014 of the European Parliament and of the Council of 16 April 2014 on
Market Abuse, 2014 O.J. (L 173) 1-61 [hereinafter, MAR].
127
See id. at art. 17. By contrast, in the US, full disclosure of material information is required only
when such information is disclosed to any person enumerated in § 243.100(b)1. See Regulation FD, 17
C.F.R. § 243.100(a) (2017). However, since the SEC requires issuers to disclose “on a rapid and current
basis” material information regarding a wide list of events, “the distinction between US and EU regime
is in practice less significant than might at first seem.” Giovanni Strampelli, Knocking at the Boardroom
Door: A Transatlantic Overview of Director-Institutional Investor Engagement in Law and Practice,
12 Va. L. & Bus. Rev. 187, 211, n. 113 (2018). For a comparative overview see Marco Ventoruzzo,
Comparing Insider Trading in the United States and in the European Union: History and Recent
Developments, 11 Eur. Company & Fin. L. Rev. 554, 571 (2014).
128
See MAR, supra note 126, at art. 8, laying down an absolute prohibition on insider dealing
grounded on the theory of equal access to information. See Strampelli, supra note 127, at 213.
129
See MAR, supra note 126, at art. 10.
Interestingly enough, the very fact that in the US, with Chiarella130 and its progeny, the
repression of insider trading has revolved on the fiduciary-duty-based theory (notwithstanding
other theories such as the ones based on misappropriation, and the numerous secondary rules
that expand the narrow approach that might derive from that position),131 suggests rather effec-
tively that there is a link between loyalty obligations of (also) controlling shareholders and the
exploitation of information asymmetries.
A discussion of market abuse rules would be beyond the scope of this chapter. Referring
to the extensive literature existing, our more modest intention in mentioning this profile is,
once again, to demonstrate how controlling shareholders duties are defined and regulated
through two general approaches, existing in all the jurisdictions considered, which have
however different “mixes.” On the one hand, broad and flexible standards such as fiduciary
duties, obligations of good faith, correct performance of the corporate contract, and so on are
malleable enough to sanction abuses and protect minority shareholders and the corporation
(and, occasionally, other stakeholders), but present all the limits and uncertainties inherently
complicating the application of general clauses to specific facts. On the other hand, we find
specific statutory provisions and rules dealing with relatively well-defined situations and
transactions (examples range from RPTs, conflicts of interests, sales of control and use and
abuse of inside information). The latter regulatory technique, in a way, can be seen as a way to
define, apply and enforce general principles to curb at least the most typical possible breaches
of shareholders’ duties, address market and regulatory failures, and reduce ambiguity.
Not surprisingly, to the extent that these broad generalizations are possible, it is fair to
observe that in common-law systems, particularly the US, there is greater reliance – in case
law especially – on fiduciary duties that are incrementally chiseled through precedents. In
civil-law systems, and especially in continental Europe, there is a proportionally greater reli-
ance on ad hoc, ex ante, statutory provisions.
6. CONCLUSIONS
Controlling shareholders’ duties – in particular duties relating to loyalty – are multifaceted

and can take many forms. Whether explicitly or implicitly, loyalty underpins standards and
rules for controllers’ conduct in varied settings in many jurisdictions. The patterns along which
obligations toward other shareholders are imposed on a controlling stockholder in different
130
Chiarella v. United States, 445 U.S. 222 (1980); United States v. O’Hagan, 521 U.S. 642, 658
(1997). See Richard L. Colbert, Duty of Non-Insider to Disclose Material Nonpublic Information:
Chiarella v. United States, 48 Tenn. L. Rev. 161 (1980); Douglas W. Hawes, A development in insider
trading law in the United States: a case note on Chiarella v. United States, 3 J. Comp. Corp. L. & Sec.
Reg. 193 (1981); David Cowan Bayne, The insider's natural-law duty: Chiarella and the “fiduciary”
fallacy, 19 J. Corp. L. 681 (1994); Jan Deutsch, Chiarella v. United States: a study in legal style, 58 Tex.
L. Rev. 1291 (1980); Donald C. Langevoort, Insider trading and the fiduciary principle: a post-Chiarella
restatement, 70 Cal. L. Rev. 1 (1982); Thomas Lee Hazen, Identifying the duty prohibiting outsider
trading on material nonpublic information, 61 Hastings L.J. 881 (2010). For a comparative overview,
see Marco Ventoruzzo, The Concept of Insider Dealing, in Market Abuse Regulation. Commentary
and Annotated Guide 13, 15–20 (Marco Ventoruzzo & Sebastian Mock eds., 2017).
131
See Donna M. Nagy, Insider Trading and the Gradual Demise of Fiduciary Principles, 94 Iowa
L. Rev. 1315, 1322–36 (2009); Zachary J. Gubler, A Unified Theory of Insider Trading Law, 105 Geo.
L.J. 1225, 1252–55 (2017).
jurisdictions vary, even considerably. However, those patterns evolve along similar lines,
irrespective of the tools employed for the enforcement of such obligations.
The “intensity” of these obligations, meaning the strictness of the standards applied, the
rigor of ad hoc rules, the distribution of the burden of the proof, also vary and evolve geo-
graphically and through time, concurring to define the actual level of investors’ protection
in both closely-held and public companies. The significant role played by courts and ex post
litigation, especially in some common law systems, might make it difficult to define a clear
and unique trend. However, if we take into account the evolution of rules specifying control-
lers’ duties and limiting their actions, the adoption of provisions concerning related parties
transactions, intra-group governance and transactions, mandatory offers and obligations to
purchase minority stakes, together with rules designed to enhance equal access to information,
appear to reinforce, indirectly, general clauses based on fiduciary duties, good faith and similar
concepts.
17. Minority shareholders’ rights, powers and
duties: the market for corporate influence
Umakanth Varottil1
1. INTRODUCTION
Minority shareholder protection constitutes a fundamental pillar of corporate law. Although
corporate democracy operates within the rather pragmatic notion of “majority rule,”2 legal
systems around the world confer express protection on minority shareholders against the
actions of either managers or controlling shareholders. From a comparative perspective, liter-
ature is abound with assertions that the strength of legal protection to minority shareholders
in a given jurisdiction correlates with the ability of companies within that jurisdiction to raise
capital on attractive terms.3
To begin with, a minority shareholder is one who has no controlling interest in a company.4
Such a shareholder holds less than 50 percent of the voting stock, thereby failing to possess de
jure control.5 The concept of control permeates beyond a simple quantitative determination,
and extends to the qualitative realm as well. By this, a minority shareholder is one who does
not also exercise de facto control.6 Ultimately, minority shareholders do not have the power,
whether in law or in fact, to appoint or replace board members—a key indicia of control.7
1
I thank participants at the Research Handbook on Comparative Corporate Governance Conference
held at Fordham Law School in September 2019, including Afra Afsharipour, Christopher Bruner,
Martin Gelter, Carsten Gerner-Beuerle, Assaf Hamdani, Virginia Harper Ho, Klaus Hopt, Vikramaditya
Khanna, María Isabel Sáez Lacave, Martin Petrin, Uriel Procaccia, Darren Rosenblum and Andrew Tuch
for comments on a previous version of this chapter, and my colleagues Christian Hofmann and Ernest
Lim for helpful discussions. I also thank the EW Barker Centre for Law & Business at NUS for financial
assistance and Bhavya Nahar for research assistance. Errors or omissions remain mine alone.
2
Iman Anabtawi, Some Skepticism About Increasing Shareholder Power, 53 UCLA L. Rev. 561,
594 (2006).
3
See, e.g., Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer & Robert Vishny, Law and
Finance, 106 J. Pol. Econ. 1113 (1998).
4
Anupam Chander, Minorities, Shareholder or Otherwise, 128 Yale L.J. 119 (2003).
5
Iman Anabtawi & Lynn A. Stout, Fiduciary Duties for Activist Shareholders, 60 Stan. L. Rev.
1255, 1269 (2008).
6
De facto control may exist if a shareholder who holds a numerical minority of voting rights nev-
ertheless exercises significant influence over the company through its board. For example, in re Tesla
Motors, Inc. S’holder Litig., Consolidated C.A. Mo. 12711-VCS, 2018 Del Ch. LEXIS 102 (Del. Ch.
Mar. 28, 2018), the court found Elon Musk to be a controlling shareholder of Tesla Motors on account
of his “outsized influence” even though he held only 22.1 percent of the common stock. See also Gaia
Balp, Activist Shareholders at De Facto Controlled Companies, 13 Brook. J. Corp. Fin. & Com. L.
371 (2019); Soo Young Hong, Curb Your Enthusiasm: The Rise of Hedge Fund Activist Shareholders
and the Duty of Loyalty, 24 Fordham J. Corp. & Fin. L. 193, 211 (2018). But see In Re Essendent, Inc.
Stockholder Litigation, No. 2018-0789 (Del. Ch. Dec. 30, 2019).
7
Minority shareholders also do not have the power to determine the outcome of corporate decisions
by exercising veto rights, which are an indication of negative control. Anabtawi & Stout, supra note 5, at
1297; Marcel Kahan & Edward Rock, Anti-Activist Poison Pills, 99 B.U. L. Rev. 915, 937 (2019).
346
Minority shareholders’ rights, powers and duties 347
Conventional corporate law scholarship attributes a high degree of homogeneity to minor-

ity shareholders. For example, the agency problems approach identifies conflicts between
shareholders and managers in companies with dispersed shareholding, and conflicts between
minority shareholders and controlling shareholders for companies with concentrated share-
holding.8 However, recent trends establish that minority shareholders come in different hues.
Large institutional investors have generally crowded out retail shareholders from the stock
markets.9 Even within the institutional variety, differences abound. Some focus on long-term
sustainable gains, while others are short-termist. Some adopt a passive (or even apathetic)
attitude towards companies in which they have invested, in contrast with others that adopt
a more activist approach.
The current corporate governance paradigm fails to account for the diversity among
minority shareholders and their interests. It operates on two fundamental assumptions: first,
whatever is good for one minority shareholder is good for the entire body of minority share-
holders; and, second, minority shareholders can generally act in their own interests rather
than for the benefit of the company or other shareholders. In this chapter, I seek to establish
that these assumptions are no longer valid due to market developments that have radically
altered minority shareholder demographics in companies around the world. I argue that the
expanding schism between the identity, outlook, actions and interests of varieties of minority
shareholders creates agency problems among types of minority shareholders. This calls for
a paradigm shift in corporate law’s treatment of minority shareholders. The ability of one
type of minority shareholder to affect the interests of others would call for the imposition of
restraints on minority shareholder behavior, which then logically leads to the question whether
minority shareholders should be subject to duties (fiduciary or otherwise) under corporate law.
To analyze minority shareholders’ rights and duties from a comparative perspective, one
could embark on a detailed examination of the corporate and securities laws in each juris-
diction (or at least some key jurisdictions).10 However, such an approach is unsatisfactory as
it limits itself to law in the books, without considering how the law applies in practice.11 In
this chapter, I adopt a functional approach that enables a greater appreciation of not only the
legal developments in various jurisdictions, but also the market trends that affect minority
shareholders.12
In this light, I examine the role of institutional investors, who now constitute a substantial
proportion of non-controlling shareholders in companies around the world.13 This is not
merely in the United States (US) and the United Kingdom (UK), traditionally the only juris-
8
Armour et al., The Anatomy of Corporate Law 29–30 (2017).
9
10
Andrei Shleifer & Robert Vishny, A Survey of Corporate Governance, 52 J. Fin. 737 (1997);
The World Bank Group, Doing Business 2020: Comparing Business Regulation in 190 Economies,
Open Knowledge Repository, https://openknowledge.worldbank.org/bitstream/handle/10986/32436/
9781464814402.pdf; Simeon Djankov et al., The Law and Economics of Self-Dealing, 88 J. Fin. Econ.
430 (2008).
11
Dan W. Puchniak & Umakanth Varottil, Related Party Transactions in Commonwealth Asia:
Complicating the Comparative Paradigm, 17 Berkeley Bus. L.J. 1 (2020).
12
In dealing with the subject matter of this chapter, I draw references from the law and practice pri-
marily in the United States and the United Kingdom, as well as select jurisdictions in continental Europe
and common law Asia (comprising Hong Kong, Singapore, India and Malaysia).
13
See, e.g., Gur Aminadav & Elias Papaioannou, Corporate Control Around the World (NBER
Working Paper No. w23010, 2017), https://ssrn.com/abstract=2892434; Adriana De La Cruz, Alejandra
dictions with dispersed shareholding, but also in jurisdictions with concentrated shareholding,
including in continental Europe and in Asia.14 If one were to place institutional investors
along a spectrum based on whether they actively exercise their minority rights and remedies,
two types of investors would populate the extremes. At one end are activist investors, such as
hedge funds, which actively engage with investee companies in the shadow of legal rights and
remedies available to them.15 At the other end are passive investors, including index funds and
some mutual funds, which either abstain from the shareholder decision-making process alto-
gether, or simply vote along with management or controlling shareholders.16 Due to the risk
of oversimplification in such a binary approach, it is necessary to recognize that other varying
types of investors populate the spectrum across different points.
Here, I consider the rights and powers, and associated duties, of activist investors on the
one hand and passive ones on the other. Activist shareholders extensively engage with their
investee companies both formally and informally to induce changes in the management and
performance of companies to enhance value.17 The underlying assumption is that activism by
hedge funds can enhance overall value to all shareholders who share from the gains generated
by hedge funds’ actions. In that sense, activist shareholders perform a valuable corporate
governance role. They do so without seeking to wrest control over the company, but by exer-
cising their influence to correct specific managerial inefficiencies.18 In doing so, they generate
a “market for corporate influence,”19 an idea that stands in distinction from the well-known
“market for corporate control.”20
However, the role of activist shareholders has come under some cloud. Critics have attacked
them for their short-termist tendencies and aggressive actions, thereby raising the specter that
their actions may not be beneficial either for the company or for other minority shareholders.21
Moreover, through exercise of their influence with the investee companies on whom they
mount legal actions, they possess the ability to extract private rents and suffer from conflicts
of interest.22 A symptom of minority-minority agency conflicts, this has resulted in a clamor
Medina & Yung Tang, Owners of the World’s Listed Companies, OECD Capital Markets Series
(2019), www.oecd.org/corporate/ca/Owners-of-the-Worlds-Listed-Companies.pdf.
14
15
Kobi Kastiel, Against All Odds: Hedge Fund Activism in Controlled Companies, 2016 Colum.
Bus. L. Rev. 60, 102–03; Dionysia Katelouzou, Worldwide Hedge Fund Activism: Dimensions and Legal
Determinants, 17 U. Pa. J. Bus. L. 789 (2015).
16
Lucian A. Bebchuk, Alma Cohen & Scott Hirst, The Agency Problems of Institutional Investors,
31 J. Econ. Persp. 89 (2017); Dorothy Lund, The Case Against Passive Voting, 43 J. Corp. L. 493
(2018); Sean J. Griffith, Opt-In Stewardship: Toward an Optimal Delegation of Mutual Fund Voting
Authority, 98 Texas L. Rev. 983 (2020).
17
Zohar Goshen & Sharon Hannes, The Death of Corporate Law, 94 NYU L. Rev. 263, 268 (2019);
Kastiel, supra note 15, at 104.
18
Bernard S. Sharfman, The Tension between Hedge Fund Activism and Corporate Law, 12 J.L.
Econ. & Pol’y 251, 260 (2016).
19
See Brian R. Cheffins & John Armour, The Past, Present, and Future of Shareholder Activism by
Hedge Funds, 37 J. Corp. L. 51, 58 (2011) (introducing the expression that has inspired the title to this
chapter).
20
Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965).
21
For a discussion of the critique, see Marcel Kahan & Edward B Rock, Hedge Funds in Corporate
Governance and Corporate Control, 155 U. Pa. L. Rev. 1021, 1026 (2007).
22
Jay Frankl & Steve Balet, The Rise of Settled Proxy Fights, Harv. L. Sch. F. on Corp.
Governance and Fin. Reg. (Mar. 22, 2017), https://corpgov.law.harvard.edu/2017/03/22/the-rise-of
to impose fiduciary duties on such investors to act in the interests of the company and other
shareholders.23
If activists face criticism for engaging excessively, investors at the other end of the spec-
trum endure the diametrically opposite concern. The allegation here is that, regardless of their
growing stock ownership in companies around the world, investors such as index funds are
too passive. Their detractors argue that they do not invest sufficient resources in monitoring
their investments and in exercising their rights and remedies as shareholders.24 Some attribute
this to the lack of appropriate incentives for managers of these funds to engage with investee
companies,25 and others to potential conflicts of interest that encourage them to remain silent
over asserting their participation rights.26 Regulators and scholars have generated a bevy of
solutions to address these problems, including nudges through stewardship responsibilities,27
imposition of fiduciary duties on shareholders and requiring them to disclose voting policies,28
and even disenfranchising passive investors (either fully or partially).29
In this chapter, I analyze the exercise of rights, powers and duties of minority shareholders
through the lens of institutional investors, who have become prominent outside shareholders
in companies around the world. Appendix 1 includes a simple representation of the rights and
duties in the context of institutional investors. This includes not only the rights and duties as
they exist, but also the recommendations made thus far.
Section 2 of this chapter maps out the evolution in the identity of minority shareholders
and the rise of institutional investors. It also critically analyzes the shareholder empowerment
movement. Section 3 examines the role of activist investors, particularly hedge funds, the
benefits of their actions and potential conflicts of interest. Section 4 shifts the focus to passive
investors such as index funds, and examines the reasons for their passivity and identifies actual
or potential conflicts of interest such investors may face. Section 5 discusses some possible
legal tools to address concerns surrounding minority institutional investors, which range from
imposing fiduciary duties on them to encouraging them to adopt stewardship responsibilities.
Section 6 concludes.
-settled-proxy-fights/; John H. Matheson & Vilena Nicolet, Shareholder Democracy and Special Interest
Governance, 103 Minn. L. Rev. 1649, 1650–51 (2019).
23
See, e.g., Anabtawi & Stout, supra note 5.
24
Lucian A. Bebchuk & Scott Hirst, Index Funds and the Future of Corporate Governance
(European Corporate Governance Institute – Law Working Paper No. 433/2018), available at http://ssrn
.com/abstract_id=3282794.
25
Bebchuk et al., supra note 16.
26
Gerald F. Davis & E. Han Kim, Business Ties and Proxy Voting by Mutual Funds, 85 J. Fin. Econ.
552 (2007).
27
Jennifer G. Hill, Good Activist/Bad Activist: The Rise of International Stewardship Codes,
41 Seattle U. L. Rev. 497 (2018); Ernest Lim, A Case for Shareholders’ Fiduciary Duties in
Common Law Asia 274 (2019).
28
Lim, supra note 27, at 307.
29
Lund, supra note 16; Griffith, supra note 16.
2. THE CHANGING IDENTITY OF MINORITY

SHAREHOLDERS
In considering the rights and duties of minority shareholders, it is necessary to determine the
identity of the minority and its changing nature, which are marked by the meteoric rise of
institutional investors. After embarking on this initiative, I then explore the broad nature of
minority shareholder protection, critically analyze the shareholder empowerment movement,
and identify certain deficiencies.
2.1 Evolution of Shareholding Structures Around the World
Conventional discourse adopts the position that the US and UK follow the Berle and Means
model of dispersed shareholding, while the rest of the world is replete with companies that
have concentrated shareholding.30 Accordingly, scholars and regulators have worked towards
structuring corporate governance mechanisms that address the agency problem specific to
the type of shareholding (dispersion versus concentration).31 However, such a dichotomy has
recently come under strain on the ground that such polarization no longer holds well.32
While the debate between dispersed and concentrated shareholdings continues, one incon-
trovertible fact is that institutional investors have acquired significant positions in companies
around of the world.33 The rise of such institutional investors has altered the traditional cor-
porate governance paradigm in a significant manner. For example, in the US, the institutional
shareholding “of publicly-traded corporations increased from 6.1% in 1950 to 70% in 2016.”34
Consequently, retail shareholding has dwindled from around 80 percent in the 1960s.35
Elsewhere in the UK, institutional shareholding is said to be in excess of 80 percent,36 while
individual shareholding fell from 54 percent in 1963 to 10.7 percent in 2012.37
In terms of the type of institutional investors, index funds have lately captured considerable
attention for their phenomenal growth and the size they command in the securities markets.
For example, the “Big Three” index funds—BlackRock, Statestreet Global Advisors (SSGA),
and Vanguard—“collectively vote about 25% of the shares in all S&P 500 companies, and
30
Shleifer & Vishny, supra note 10.
31
Lucian A. Bebchuk & Assaf Hamdani, The Elusive Quest for Global Governance Standards, 157
U. Pa. L. Rev. 1263 (2009).
32
Albert H. Choi, Concentrated Ownership and Long-Term Shareholder Value, 8 Harv. Bus. L.
Rev. 53, 55 (2018); Leon Yehuda Anidjar, Toward Relative Corporate Governance Regimes: Rethinking
Concentrated Ownership Structure around the World, 30 Stan. L. & Pol'y Rev. 197, 215 (2019).
33
Bernard S. Black & John C. Coffee Jr., Hail Britannia?: Institutional Investor Behavior under
Limited Regulation, 92 Mich. L. Rev. 1997, 2007 (1994); Andrew F. Tuch, Proxy Advisor Influence in
a Comparative Light, 99 B.U. L. Rev. 1459, 1473–74 (2019).
34
Matheson & Nicolet, supra note 22, at 1649. See also Assaf Hamdani & Sharon Hannes, The
Future of Shareholder Activism, 99 B.U. L. Rev. 971, 973 (2019).
35
Matheson & Nicolet, supra note 22, at 1649.
36
37
Paul Davies, Shareholders in the United Kingdom, in Research Handbook on Shareholder
Power 358 (Jennifer G. Hill & Randall S. Thomas eds, 2015).
each holds a position of 5% or more in a vast number of companies.”38 Their dominance is only
expected to grow in the near future.39
In such a scenario, the identity of minority shareholders has clearly undergone a metamor-
phosis. No longer can one conjure up an image of hapless individual shareholders who have
invested their lifesavings into equity of companies.40 Instead, institutional investors constitute
minority shareholders in companies primarily because retail shareholders prefer to invest in
the stock market through intermediaries such as institutional investors rather than directly.41
Institutional investors therefore enjoy the benefit of minority shareholders’ rights and reme-
dies granted to them under law.
No doubt, the increase in institutional investor holdings has (re-)introduced concentration
in the capital markets. It is alluring, therefore, to consider major institutional investors such as
the Big Three to “employ mechanisms of supervision and control over the conduct of office
holders in the corporation that are similar to those of controlling shareholders in a concentrated
ownership structure.”42 I, however, argue that the analogy between institutional investors and
controlling shareholders, while true in certain circumstances, is generally inapt for several
reasons. First, while traditional controlling shareholders intentionally seek and obtain control,
institutional investors expressly disclaim control over their investee companies as they remain
focused on the financial returns they obtain from their investments. Second, institutional inves-
tor shareholding collectively appears significant, but the shareholding of individual institu-
tional shareholders is generally not substantial enough to confer control rights. Although there
are instances of institutional investors collaborating to engage with or even aggressively act
against managements or controlling shareholders, both collective action problems as well as
legal restrictions in certain jurisdictions discourage concerted action by institutional investors.
They neither are in the driver’s seat of companies, nor are they puppeteers of management.
Given their characteristics and outlook, it is more appropriate to treat them as non-controlling
minority shareholders,43 albeit with a great deal of corporate influence.
2.2 Minority Shareholder Protection and Empowerment
Based on the framework set forth above, it would be possible to discern some broad trends in
minority shareholder participation in corporate governance around the world. First, laws and
regulations have generally enhanced shareholder participation in voting, and facilitated rem-
edies for victimized minority shareholders. This has enabled minority shareholders to obtain
38
Bebchuk & Hirst, Index Funds and the Future of Corporate Governance, supra note 24.
39
Lucian A. Bebchuk & Scott Hirst, The Specter of the Giant Three, 99 B.U. L. Rev. 721 (2019).
40
At the same time, it would be imprudent to ignore altogether the influence of retail shareholders
in contemporary corporate governance, at least in some jurisdictions. See Jill E. Fisch, Standing Voting
Instructions: Empowering the Excluded Retail Investor, 102 Minn. L. Rev. 11 (2017); Alon Brav,
Matthew Cain & Jonathon Zytnick, Retail Shareholder Participation in the Proxy Process: Monitoring,
Engagement, and Voting (European Corporate Governance Institute – Finance Working Paper No.
637/2019), https://ssrn.com/abstract=3387659.
41
Ronald J. Gilson & Jeffrey N. Gordon, The Agency Costs of Agency Capitalism: Activist Investors
and the Revaluation of Governance Rights, 113 Colum. L. Rev 863, 865 (2013).
42
Anidjar, supra note 32, at 200.
43
See, e.g., Assaf Hamdani & Yishay Yafeh, Institutional Investors as Minority Shareholders, 17
Rev. Fin. 691 (2013).
a greater say in corporate decision-making. Second, minority shareholders such as institutional

shareholders have taken advantage of legal changes and begun to exercise their corporate
franchise and other informal forms of corporate influence as a matter of practice. This has led
to the increasing prevalence of “shareholder-driven corporate governance,” by which minority
shareholders (particularly of the institutional variety) exercise considerable influence over
companies, in contrast to the hitherto prominent Berle and Means framework.44
Beginning with legal and regulatory reforms, a brief comparative analysis of trends in
corporate regulation suggests that greater shareholder empowerment has taken on a univer-
sal status. Although both the UK and the US generally follow the dispersed shareholding
model, the rights of shareholders have considerably diverged between the two jurisdictions.
Historically, shareholders in the UK have enjoyed substantial influence over corporate man-
agements, especially given their ability to vote on a wide range of proposals.45 Moreover, the
regime has permitted non-controlling shareholders to coordinate their actions to enhance their
influence over managements.46
In contrast, shareholders were hitherto less influential in the US because their powers in
corporate decision-making had been limited, and several legal constraints prevented them
from coordinating their actions.47 Directors also enjoyed defensive mechanisms such as poison
pills and staggered boards that effectively entrenched them without being subject to the market
for corporate control.48 However, recent events have moved the needle towards further share-
holder empowerment in the US and, in particular, in Delaware. Moreover, popular defensive
tools such as poison pills and staggered boards are on the decline.49 The Delaware courts too
have played an influential role in empowering shareholders, attributable largely to a handful
of crucial landmark decisions. In the MFW Shareholders’ Litigation,50 the Delaware Chancery
Court was concerned with a controlling stockholder transaction in the form of a freezeout
merger. In his ruling, then-Chancellor Strine stated that the deferential business judgment rule
would apply to the transaction if two conditions are satisfied, i.e., the transaction had “been
subject to (i) negotiation and approval by a special committee of independent directors fully
empowered to say no, and (ii) approval by an uncoerced, fully informed vote of a majority of
the minority investors.”51 Soon thereafter, in Corwin v. KKR Financial Holdings LLC,52 the
Delaware Chancery Court pronounced in the context of a non-controller transaction that the
approval of a merger by a fully informed body of disinterested stockholders is a precondition
to the application of the business judgment rule.
44
Anita Indira Anand, Shareholder-Driven Corporate Governance and Its Necessary Limitations:
An Analysis of Wolf Packs, 99 B.U. L. Rev. 1515, 1518 (2019).
45
46
Davies, supra note 37, at 355–56.
47
See Bernard S. Black, Shareholder Activism and Corporate Governance in the United States, in
The New Palgrave Dictionary of Economics and the Law 459–65 (Peter Newman ed.,1998).
48
Lucian Arye Bebchuk, John C. Coates IV & Guhan Subramanian, The Powerful Antitakeover
Force of Staggered Boards: Theory, Evidence and Policy, 54 Stan. L. Rev. 887 (2002).
49
Goshen & Hannes, supra note 17, at 277–82.
50
In re MFW S’holders Litig., 67 A.3d 496 (Del. Ch. 2013), affirmed in Kahn v. M & F Worldwide
Corp., 88 A.3d 635 (Del. 2013).
51
Id.
52
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015).
The recent trajectory adopted by the Delaware courts seems to grant a great deal of impor-
tance to, and considerable faith in, the decision-making powers of shareholders.53 Goshen
and Hannes correlate this development to the changing nature of shareholders in the US
context and argue, both powerfully and provocatively, that the “transformation of American
equity markets from retail to institutional ownership has relocated control over corpora-
tions from courts to markets and has led to the death of corporate law.”54 The increasing
sophistication of minority shareholders (in the form of institutions) and their greater interest
in shareholder-driven corporate governance has led to the retreat, at least partially, of the
Delaware courts in reviewing directors’ decisions.
Moving elsewhere, minority shareholder empowerment is gaining traction even in markets
where concentrated shareholding is the norm,55 as minority shareholders are being empowered
through “enhanced minority shareholder participation rights and legal protection devices” in
corporate and securities laws.56 For instance, in some jurisdictions such as Italy, the intro-
duction of the mandatory list voting system allows minority shareholders to elect at least one
director and one statutory auditor.57 Indeed, the increased usage of “majority of the minority”
(MoM) voting enables the minority shareholders to influence the outcome of decision-making
in controlled companies. In some jurisdictions such as Hong Kong, Singapore, India and
Malaysia, material related party transactions require the approval of shareholders through
MoM voting.58 Other instances include a binding vote on “say on pay,”59 and the “two-strikes”
rule in Australia.60
Early indications are that legal reforms to enhance shareholder participation have altered
shareholder voting behavior. Some studies indicate that voting participation by institutional
investors around the world is effective. One study encompassing 43 countries suggests that
“country-level laws and regulations regarding shareholder voting … allow for meaningful
votes to be cast,” that institutional investors “choose to engage in activism more often in
cases where they fear expropriation the most” due to inadequate investor protection, and that
“the dissenting votes cast by US institutional investors have governance-related outcomes.”61
Another study suggests that a requirement to place certain acquisition transactions before
shareholders has a deterrent effect on overpayments by company managements.62 Moreover,
53
Jennifer Hill, Images of the Shareholder – Shareholder Power and Shareholder Powerlessness, in
Research Handbook on Shareholder Power 65 (Jennifer G. Hill & Randall S. Thomas eds., 2015).
54
Goshen & Hannes, supra note 17, at 265 (footnotes omitted).
55
Amy Freedman, Michael Fein & Ian Robertson, Fall of the Ivory Tower: Controlled Companies
and Shareholder Activism, Harv. L. Sch. F. on Corp. Governance and Fin. Reg. (Nov. 16,
2019), https://corpgov.law.harvard.edu/2019/11/16/fall-of-the-ivory-tower-controlled-companies-and
-shareholder-activism/(observing that “controlled companies are no longer impenetrable”).
56
Tamar Groswald Ozery, Minority Public Shareholders in China's Concentrated Capital Markets
- A New Paradigm, 30 Colum. J. Asian L. 1, 13–14 (2016).
57
Maria Lucia Passador & Federico Riganti, Shareholders’ Rights in Agency Conflicts: Selected
Issues in the Transatlantic Debate, 42 Del. J. Corp. L. 569 (2018). See also Balp, supra note 6, at 359.
58
Puchniak & Varottil, supra note 11, at 20.
59
For a further discussion on this topic, see Chapter 13 by Li-Wen Lin in this volume.
60
Hill, supra note 27, at 505.
61
Peter Iliev et al, Shareholder Voting and Corporate Governance Around the World, 28 Rev. Fin.
Stud. 2167, 2171 (2015).
62
Marco Becht, Andrea Polo & Stefano Rossi, Does Mandatory Shareholder Voting Prevent Bad
Acquisitions, 29 Rev. Fin. Stud. 3039 (2016).
cross-country differences in shareholder voting rules bring about divergences in the practice
and impact of such participation.63
At the same time, evidence suggests that the mere existence of rules that enable shareholder
voting is insufficient on its own to encourage institutional investors to exercise their franchise.
One study shows that institutional investors vote only when required to do so, and that merely
empowering minority shareholders is inadequate unless accompanied by measures to resolve
potential conflicts of interest.64 In that sense, one may “view increased shareholder power as
a necessary, but not a sufficient condition for improved governance.”65
In addition to legal rights, institutional investors exercise other informal methods of engage-
ment with their investee companies and managements.66 Many disputes are resolved outside
the courtroom, although often done so in the shadow of available legal protections.67 Overall,
there is no dispute that the legal framework governing minority protection across different
jurisdictions enables their greater participation, which then brings me to the impact that signif-
icant minority shareholders (such as institutional investors) have on other shareholders.
2.3 Costs and Conflicts Relating to Minority Shareholders
Given the growth of large institutional investors in the global stock markets, and the extent
of their shareholder participation, the actions of individual institutional investors will likely
impact the company, the controlling shareholders (if any), and other minority shareholders
(whether institutional or retail). This is particularly true if the large institutional investors
exert their influence to effect changes to the management or performance of the company that
are consistent with their personal interests, but militate against the broader interests of the
company and the other shareholders.68
Goshen and Squire theorize this as “principal costs,” which could arise when shareholders
exercise control or even influence.69 According to them, when shareholders act in a manner
that has an impact on the company, they could incur competence costs due to their “lack of
expertise, information or talent” and conflict costs that emanate from “skewed incentives.”70
Hence, where shareholders obtain greater power, they are subject to the same governance risks
that management’s actions or omissions entail. The principal costs intensify due to conflicts
of interest among investors and problems surrounding their coordination.71 Similarly, there
are concerns that the shareholder-focused movement does not consider “the political science
63
Bonnie G Buchanan et al., Shareholder Proposal Rules and Practice: Evidence from a Comparison
of the United States and United Kingdom, 49 Am. Bus. L. J. 739, 745–46 (2012).
64
Hamdani & Yafeh, supra note 43, at 722.
65
Yair Listokin, If You Give Shareholders Power, Do They Use it? An Empirical Analysis, 166 J.
Institutional and Theoretical Econ. 38, 53 (2010).
66
Wolf-Georg Ringe, Shareholder Activism: A Renaissance, in The Oxford Handbook of
Corporate Law and Governance 389 (Jeffrey N. Gordon & Wolf-Georg Ringe eds., 2018); Kastiel,
67
Goshen & Hannes, supra note 17, at 283.
68
Anabtawi & Stout, supra note 5, at 1283.
69
Zohar Goshen & Richard Squire, Principal Costs: A New Theory for Corporate Law and
Governance, 117 Colum. L. Rev. 767, 770 (2017) (juxtaposing against agency costs relatable to the
management).
70
Id.
71
Id., at 771.
of empowerment and the divisions that exist within the institutional investor community” and
that “undifferentiated empowerment of these so-called stockholders may disproportionately
strengthen the hands” of some groups of shareholders such as activists, which may be contrary
to others such as retail shareholders.72
Applying this thinking to current trends, conflicts among minority shareholders stand
exacerbated because of concentration of power in the hands of a few institutional investors73
whose exercise of the minority rights and remedies available under law may likely have an
adverse effect on other shareholders.74 Two scholars take a dim view of the role of institutional
investors: “It is becoming increasingly apparent, however, that minority investors can play the
part of the corporate villain as well as corporate victim.”75
While minority shareholder protection has formed the anvil of corporate law and govern-
ance thus far, the role and growing powers of institutional investors must be viewed through
a different lens altogether. The discourse surrounding rights in favor of minority shareholders
is slowly but surely transitioning towards their stewardship responsibilities and even duties
(whether fiduciary or otherwise). In this background, the remainder of the chapter moves to
discuss two types of institutional minority investors and their roles in corporate governance.
As will be seen, each of these roles raises concerns under corporate law, which call for addi-
tional measures to address them.
3. SHAREHOLDER ACTIVISM
As a variety of minority shareholders, activists engage with company managements and

controlling shareholders, not only extensively but often also aggressively, using formal and
informal means to effect changes to the company. While activism carried out in recent years
largely by hedge funds has received both praise and criticism in equal measure, the extent of
its overall benefits to the company and its shareholders remains unclear. The level of minority
shareholder protection, as well as measures enabling shareholder participation play a role in
determining the extent and effect of shareholder activism around the world. While activism
began in the US in the dispersed shareholding context, it has swiftly spread to other parts of
the world, including in controlled companies. A critique surrounding activism is the potential
conflicts of interest of hedge funds and other activists, resulting in a call for restraining their
behavior through appropriate legal instruments.
3.1 Growth of Hedge Fund Activism
Shareholder activism has existed in the US for several decades, and the growth of hedge funds
has propelled it even further.76 Hedge fund activism now extends far beyond the US shores,
72
Leo E. Strine, Jr., Toward Common Sense and Common Ground? Reflections on the Shared
Interests of Managers and Labor in a More Rational System of Corporate Governance, 33 J. Corp. L. 1,
7 (2007).
73
Anabtawi, supra note 2, at 573.
74
For a discussion of the adverse effects, see infra Section 3.3.
75
76
Stuart L. Gillan & Laura T. Starks, The Evolution of Shareholder Activism in the United States, 19
J. App. Corp. Fin. 55, 57 (2007).
and activist investors deploy a variety of models around the globe, thereby leading to con-
siderable diversity in practice.77 Activism has gained prominence in Europe, where in “2017,
more than 100 European companies were publicly targeted by activists.”78 Asia too has been
at the receiving end of activists. Elliott Management’s intervention in the Samsung group in
Korea to prevent a group merger transaction,79 and in Coal India Limited’s conflicts of interest
in fixing product prices80 are only specific instances that demonstrate the foray of US hedge
fund activism into Asia.
Hedge fund activism attracts both positive and negative narratives.81 On the positive side,
it permits shareholders to take on a more participatory role in investee companies and engage
effectively with managements to cause change.82 On the other hand, critics have highlighted
the risks of hedge fund activism, including that of inducing short-termism.83 The negative
perceptions “suggest that investor engagement in corporate governance and activism is dan-
gerous, both to the corporation and to society as a whole.”84 Given the mixed responses share-
holder activism attracts, it is useful to determine the role that law and legal systems around the
world play in either engendering or hindering shareholder activism.
3.2 Factors Influencing Activism Globally
At a comparative level, several factors explain the higher incidence of shareholder activism in
certain jurisdictions such as the US in contrast with others. Scholars have sought to analyze
the effect of law and legal systems on the rate and success of activism. At the outset, one may
view activism as an assertion of shareholder democracy where investors exercise their right
to vote.85 Hence, voting and shareholding disclosure rules in different jurisdictions bear some
correlation to the prevalence and success of shareholder activism.86 For example, one study
notes a combination of factors that has led to evidence of an aggressive stance from activist
shareholders in the US, to informal activism in the UK, and then a whole range of activist
patterns in continental Europe, all of which are attributable to the laws and regulations in each
jurisdiction.87 Others have itemized different stages in the activism process and found that “the
extent to which legal parameters matter depends on the stage that hedge fund activism has
77
One author demonstrates the diversity in models through a study of activism in the US, South
Korea, Israel, the UK, Brazil, China, Australia, Japan, Italy, Germany and France. Yaron Nili, Missing
the Forest for the Trees: A New Approach to Shareholder Activism, 4 Harv. Bus. L. Rev. 157 (2014).
78
Balp, supra note 6, at 343.
79
80
James Crabtree, TCI turns up the heat in Coal India dispute, The Financial Times (Oct. 12, 2012),
www.ft.com/content/d950b700-145d-11e2-8ef2-00144feabdc0.
81
Hill, supra note 27.
82
Rafel Crespi & Luc Renneboog, Is (Institutional) Shareholder Activism New? Evidence from UK
Shareholder Coalitions in the Pre-Cadbury Era, 18 Corp. Governance: An Int’l Rev. 274 (2010).
83
However, proponents of hedge fund activism strongly resist this claim on the ground that they
“find no evidence that activist interventions … are followed by short-term gains in performance that
come at the expense of long-term performance.” Lucian A Bebchuk, Alon Brav & Wei Jiang, The
Long-Term Effects of Hedge Fund Activism, 115 Colum. L. Rev. 1085, 1090 (2015).
84
85
Dov Solomon, The Voice: The Minority Shareholder’s Perspective, 17 Nev. L.J. 741, 744 (2017).
86
Kastiel, supra note 15, at 78–79.
87
Ringe, supra note 66, at 394.
reached.”88 Varied legal, historical, financial and institutional factors, including the robustness
of law enforcement in each jurisdiction, affect shareholder activism therein.89 It appears that
legal systems around the world that either facilitate or restrain activism are still evolving,
although they have been criticized as being either too specific (focusing on hedge funds) or too
general (as they have evolved through arguably inappropriate legal transplants).90
Shareholding pattern too tends to shape the nature of activism. While conventional wisdom
dictated that activism was prevalent (or even possible) only in companies with dispersed
shareholding, recent trends indicate otherwise as activism has taken root in companies with
concentrated shareholding. Legal developments, such as MoM voting for conflicted transac-
tions and list voting for director appointments, facilitate the influence of minority shareholders
in controlled companies.91 However, activists do face challenges in controlled companies,
as the controlling shareholders often possess significant voting powers for activists to make
inroads.92
Despite some weaknesses, minority shareholder activists have resorted to participation,
engagement, and even litigation in companies with controlling shareholders to exercise
their corporate influence. This is evident not only from instances of shareholder activism in
controlled companies in the US or UK, but also in the rest of the world where concentrated
shareholding is the norm.93
3.3 Concerns Surrounding Activist Minority Shareholders
Several concerns arise in the context of shareholder activism, which have led to calls to impose
duties on activist minority shareholders. One of the significant downsides of shareholder
activism is that an activist shareholder may enjoy private gains because of its engagement,
which it does not share with other shareholders. As noted, when “shareholders have divergent
private interests, it is no longer accurate to think of shareholder action as a collective good.”94
Some commentators caution against too much optimism over shareholder activism, especially
of the hedge fund variety, because the interests of hedge funds could differ from those of other
shareholders.95
On the one hand, hedge funds face limited conflicts of interest, as they are independent
organizations in comparison with conventional institutional investors who are part of a larger
group and may have connections with the target companies or their managements.96 On the
other hand, it is their exertion of minority shareholder powers in individual companies that
88
Katelouzou, supra note 15, at 789.
89
Kastiel, supra note 15, at 78–79.
90
Nili, supra note 77, at 160.
91
See supra Section 2.2.
92
Ringe, supra note 66, at 393–94.
93
See, e.g., supra Section 3.1 (discussing activism in Korea and India that predominantly have com-
panies with concentrated shareholding).
94
Anabtawi, supra note 2, at 575. For a discussion of these issues in the context of Asia, see Lim,
95
Kahan & Rock, Hedge Funds in Corporate Governance and Corporate Control, supra note 21, at
1022.
96
Id.
creates potential conflicts vis-à-vis other shareholders.97 Therefore, the corporate structure
of hedge funds rarely creates the conflicts, their actions (usually aggressive) in dealing with
portfolio companies and their managements do so.
Conflicts tend to arise when activist investors enter into arrangements with portfolio com-
panies with a view to resolving shareholder campaigns. For example, certain activist investors
may obtain specific rights such as the ability to nominate or elect board representatives, or to
veto related party transactions.98 At a fundamental level, it is reasonable to ask why this consti-
tutes a conflict because a successful activist campaign that results in such rights to the investor
enhances monitoring and engagement, which ought to benefit the company and all sharehold-
ers. However, concerns arise because these rights are available to individual successful activist
investors, and not to other minority shareholders, with the result that the activist shareholders
could exercise such rights for their private benefit even if that conflicts with the larger benefit
of the overall shareholder body.
Evidence of such conflicts emanates through bilateral agreements that activist investors
enter into with management teams or controlling shareholders for exercise of board rep-
resentation and veto rights.99 Companies are inclined to enter into settlement agreements with
activist investors to avoid public (and media) scrutiny and to save themselves the distraction
and costs associated with proxy campaigns.100 Such settlement agreements may provide dis-
proportionate control and influence to activist investors compared to their financial investment
in the company.101 These concerns have led to criticism against the actions of activist investors
and a call for imposing robust duties on them to contain their private benefits and resolve
conflicts of interest.102
Before discussing the possible duties imposed (or to be imposed) on activist minority share-
holders, I consider the trends and issues emanating from passive investors. Arising from the
passivity in their approach, their role and impact on corporate governance are at considerable
variance with those of activist shareholders. Nevertheless, the discussion surrounding duties
and responsibilities of minority shareholders is relevant even for passive investors.
4. MINORITY SHAREHOLDER PASSIVITY
While the engagement of active investors tends to be episodic, other institutional investors
such as mutual funds, pension funds and index funds follow a pattern of investment that is
not only more widespread (in that they invest in a larger pool of companies), but they also
97
Nicole Stracar, Applying a New Regulatory Framework to Interested Transactions by Minority
Shareholders, 20 U. Pa. J. Bus. L. 993, 1020 (2018).
98
Kastiel, supra note 15, at 126; Hong, supra note 6, at 200.
99
Jordan Schoenfeld, Shareholder-Manager Contracting in Public Companies, Harv. L. Sch. F.
on Corp. Governance and Fin. Reg. (Oct. 24, 2017), https://corpgov.law.harvard.edu/2017/10/24/
shareholder-manager-contracting-in-public-companies/.
100
Frankl & Balet, supra note 22.
101
Id.
102
However, one study “finds no evidence to support concerns that settlements enable activists
to extract rents at the expense of other investors.” Bebchuk, et al., Dancing with Activists (European
Corporate Governance Institute - Finance Working Paper No. 604/2019), https://ssrn.com/abstract=
2948869.
hold shares for a longer time horizon. Unlike hedge funds and other activist investors, their
investment remains passive, which too raises concerns from a corporate governance perspec-
tive. Despite holding significant voting powers (at least collectively) in companies, they fail
to exercise that power, thereby ceding decision-making to managements or controlling share-
holders and, sometimes, even to activist investors. Apart from their passivity, they suffer from
conflicts of interest that influence their behavior. This Part seeks to ascertain the trends in the
growth of passive investors, to examine the reasons for their passivity and to identify actual or
potential conflicts of interest.
4.1 Recent Evolution of Passive Institutional Investments
As noted earlier,103 institutional investors are now among the largest shareholders of listed
companies, in both the US and the rest of the world. However, “institutional investors that
favor a passive investing strategy are beginning to crowd out the active investors.”104 These
investors either do not vote, or vote in favor of management when they vote. Given the size of
their shareholding, they are capable of exercising significant influence over corporate boards
and controlling shareholders.105
Some scholars have identified a trend by which activist shareholders such as hedge funds
can motivate otherwise passive investors to support them (through a “teaming up” strate-
gy)106 in activist campaigns in which hedge funds may not have the capability to succeed
on their own.107 In doing so, passive institutional investors have the potential to affect the
nature of hedge fund activism, by discerning beneficial moves from others that may be
disadvantageous.108
4.2 Factors Influencing Passivity
Passive investors, in particular index funds, lack the appropriate incentives to be active in
relation to their investments. For instance, the financial incentive structures of fund managers
of index funds do not motivate them to invest sufficiently in monitoring and stewardship
efforts.109 It does not pay for them to be active.
A number of reasons underscore the passive attitude of institutional investors such as index
funds. As the goal of an index fund is “only to match the performance of a market index—not
outperform it—the fund lacks a financial incentive to ensure that the companies in their portfo-
lio are well run.”110 Moreover, “passive funds face an acute collective action problem because
a beneficial governance intervention will improve the performance of all funds tracking the
index.”111 The performance results of one investor’s intervention will likely have knock-on
103
104
Lund, supra note 16, at 496.
105
Bebchuk & Hirst, Index Funds and the Future of Corporate Governance, supra note 24, at 2.
106
Ringe, supra note 66, at 418.
107
Gilson & Gordon, supra note 41, at 861.
108
109
Bebchuk et al., supra note 16, at 107.
110
111
Id.
effects on the results of its competitors. As a result, each fund may be better off remaining
passive, rather than to generate governance effects in portfolio companies.
Critics suggest that this will have adverse effects from the perspective of corporate govern-
ance. For example, “the substantial proportion of equity ownership with incentives towards
deference will depress shareholder intervention overall, and result in insufficient checks on
corporate managers.”112 Hence, there is all-round pessimism regarding the ability to motivate
institutional investors into action.
4.3 Possible Conflicts of Interest
In addition to the lack of incentives to engage with portfolio companies, institutional investors
may suffer from conflicts of interest that motivate them to side with managements or con-
trolling shareholders in contested matters of corporate decision-making. Historically, passive
institutional investors have been reluctant to engage in any form of activism “for fear of
retaliation” due to their “current or potential business relations with the corporation.”113 Such
a conflict of interest exerts pressure on them to support management even if it is against their
investment interests as a shareholder. For example, wider business reasons may compel some
investment managers of funds (that are part of larger financial groups) to take a passive stance
in portfolio companies that may be clients of other entities within the group such as investment
banks.114 Even in case of independent financial entities, the managers may be motivated to
side with management to ensure they retain management of pension plans of such companies,
which is a lucrative source of business.115 The existence of cross-holdings and concentrated
business groups in several parts of the world, in particular in Asia, exacerbate such conflicts
of interest.116
Available empirical evidence supports the view that conflicts of interest influence insti-
tutional investors’ votes. One study found that mutual funds that suffer from conflicts of
interests in relation to certain portfolio companies tend to vote with management across all
firms in which they have invested.117 In that sense, the larger the number of business ties the
institutional investor has, the more passive it is likely to be. Another study from Israel is more
emphatic and provides “consistent evidence linking various proxies for institutional investors’
conflicts of interest with their likelihood of voting against insider-sponsored proposals.”118
The obtrusive focus on shareholder empowerment without addressing the conflicts will likely
not address the institutional passivity problem.119 Hence, there is a need to reorient legal and
regulatory instruments to “reduce the impact of conflicts on voting decisions.”120
112
Bebchuk & Hirst, The Specter of the Giant Three, supra note 39, at 3.
113
Stuart L. Gillan & Laura T. Starks, Corporate Governance, Corporate Ownership, and the Role of
Institutional Investors: A Global Perspective, 13 J. App. Fin. 10 (2003).
114
Kahan & Rock, Hedge Funds in Corporate Governance and Corporate Control, supra note 21, at
1055.
115
Id. at 1055.
116
Ozery, supra note 56, at 27.
117
Davis & Kim, supra note 26, at 569.
118
Hamdani & Yafeh, supra note 43, at 693–94.
119
Id.
120
Bernard S. Black, Shareholder Passivity Reexamined, 89 Mich. L. Rev. 520, 607 (1990).
After identifying the trends pertaining to passive institutional investors (in comparison with
activist investors) and the various concerns surrounding their attitude towards participation
and engagement in investee companies, the chapter now proceeds to consider the available
(and potential) legal tools to address various agency problems emanating from minority
shareholder voting. In particular, these tools relate to the institutional variety of minority
shareholders that has come to dominate the capital markets in recent years.
5. MINORITY SHAREHOLDER: DUTIES AND

RESPONSIBILITIES?
Under corporate law, minority shareholders receive considerable protection from the conduct
of management and controlling shareholders. They enjoy several rights and remedies and are
generally not subject to fiduciary or other duties to act in the interests of the company or other
shareholders, except under very specific circumstances. They are entitled to act in their own
interest. However, given the significant corporate influence that minority shareholders such
as hedge funds and index funds can exercise in the governance of companies, it is necessary
to reconsider the legal principles in several jurisdictions to account for possible governance
concerns that may arise due to minority shareholder conduct. This may range from the actions
of activist hedge funds at one end of the spectrum to the passivity of institutional shareholders
such as index funds. In this Part, I discuss some possible legal tools one can use to address
the concerns raised herein. They include imposing fiduciary duties on minority shareholders
to act in the interests of the company and other shareholders and encouraging them to adopt
stewardship responsibilities.
5.1 Duties and Responsibilities of Activist Investors
The primary tool available thus far is to impose fiduciary duties on activist minority investors
if their actions are likely to have an adverse impact on the company or other shareholders,
especially when the minority shareholders suffer from actual or potential conflicts of interest.
Anabtawi and Stout, the primary proponents of the fiduciary duty approach to rein in activist
investors, “propose that all shareholders, like all directors and officers, be viewed as owing
latent duties to the firm and their fellow shareholders.”121 Such duties will come into play
when a shareholder’s stance is capable of influencing the company’s conduct on any particular
matter.122
This approach recognizes the fact that when it comes to specific engagements and exercise
of shareholder power, activist minority shareholders could compel managements to introduce
significant changes that may affect the interests of the company as a whole. Although activists
do not in fact exercise control over the management of the company, their corporate influence
could be significant. Hence, the argument goes, in such circumstances, the minority sharehold-
ers must be subject to fiduciary duties as much as controlling shareholders are.123
121
122
Id.
123
Stracar, supra note 97, at 1019.
5.2 Minority Shareholder Fiduciary Duties: A Comparative Analysis
While such fiduciary duties are desirable from a normative perspective, a comparative analysis
indicates the lack of uniformity among jurisdictions in their current treatment of minority
shareholder duties. Beginning with the US, courts have already recognized fiduciary duties of
shareholders in certain specific circumstances. First, in controlled transactions such as freeze
out mergers, courts have imposed fiduciary duties on controlling shareholders.124 These duties
are transaction-specific. Second, some courts have imposed fiduciary duties on controllers
in close corporations, with the understanding that these entities are akin to partnerships
where the partners owe duties to each other.125 These duties are company-specific. In these
circumstances, the assumption is that the controlling shareholders are as much in a position as
directors to steer the affairs of a company in a manner that could adversely affect the interests
of shareholders as a whole.126
Interestingly, some US courts have gone as far as to extend these fiduciary duties to minority
shareholders as well. For example, the Appeals Court of Massachusetts found, in the context
of a close corporation, that a shareholder possessing a veto right over certain corporate actions
effectively has an ad hoc controlling interest, and that such a shareholder owes a duty of
“utmost good faith and loyalty to the other shareholders.”127 Although some state courts in the
US have opened the door for imposing fiduciary duties on minority shareholders, the question
of whether those duties extend to minority shareholders of public companies, and in the light
of wider corporate governance considerations involved therein, is yet up for determination.
In comparison, the law in Germany goes much further to recognize the duties of minority
shareholders. Not only is the principle of equality of treatment of shareholders statutorily
enshrined,128 but also aggrieved shareholders may challenge a resolution wherein a share-
holder has exercised its voting rights in such a manner that it confers specific benefits to such
shareholder to the detriment of the company or other shareholders.129 German courts too have
recognized shareholder fiduciary duties. In the Linotype case, the court held that since the
majority shareholders of a stock corporation have the power to influence management, “it is
necessary to impose a duty under stock corporation law to have due regard for the minority’s
interests as a counterbalance to the power of the majority.”130 The Linotype court, however,
clarified that such duties for small (minority) shareholders “will usually not be determined by
fiduciary principles.”131
124
Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983); Kahn v. Lynch Commc’n Sys., Inc., 638
A.2d 1110, 1117 (Del. 1994).
125
Donahue v. Rodd Electrotype Co., 328 N.E.2d 505, 511 (Mass. 1975). See also Roberta S. Karmel,
Should a Duty to the Corporation Be Imposed on Institutional Shareholders?, 60 Bus. Law. 1, 2 (2004).
126
Carsten Gerner-Beuerle & Michael Anderson Schillig, Comparative Company Law
619–20 (2019) (noting that “Delaware law, however, is more hesitant to accept a broad principle of equal
treatment of all shareholders”).
127
Smith v. Atlantic Properties, Inc., 422 N.E.2d 798 (1981).
128
German Stock Corporation Act, s. 53a.
129
German Stock Corporation Act, s. 243.
130
BGH Judgment of 1 February 1988, BGHZ 103, 184 (Linotype), in Gerner-Beuerle & Schillig,
131
Id.
The more precise question of fiduciary duties of minority shareholders came up for con-
sideration soon thereafter in Girmes.132 Here, the court was categorical in imposing fiduciary
constraints on minority shareholders, given that they have the ability to exercise their rights in
a manner that could be detrimental to the company and other shareholders.133 It clarified that
fiduciary duties are owed not only by controlling shareholders, but also by minority sharehold-
ers, to both the controlling shareholder as well as other minority shareholders. Hence, in the
German context, minority shareholders are limited by the extent to which they can exercise
their rights and powers, as the law treats them effectively as fiduciaries in certain circum-
stances, similar to controlling shareholders and directors.
The UK, however, adopts a far more restrictive approach when it comes to recognizing the
fiduciary duties of shareholders.134 UK law rejects the idea that shareholders are, as contrasted
with directors, fiduciaries who must exercise their powers in favor of others’ interests over
their own.135 At the same time, it is not as if shareholders can exercise their powers without
any constraints. For example, when shareholders vote to amend the corporate constitution,
they must act “bona fide for the benefit of the company as a whole” and not in their personal
interest.136 Furthermore, shareholders of UK companies are entitled to exercise the statutory
remedy of “unfair prejudice,”137 which is an important investor protection tool. However, these
remedies against shareholder conduct come with significant limitations. The bona fide test
comes into play only in the limited circumstance of amendment of the corporate constitution.
The unfair prejudice remedy is fact-specific, as it is based on equitable considerations.138
While this remedy is used extensively in closely held companies, its utility in companies with
large shareholding is less clear.
Moving elsewhere, leading jurisdictions in common law Asia such as Hong Kong,
Singapore, India and Malaysia tend to follow the UK position,139 which leads to limited con-
straints imposed on minority shareholders for their actions. Despite such a restrictive approach
taken by the legislatures and courts in common law Asia, Lim has compellingly argued that
minority shareholders such as institutional investors must be subject “to a legally enforceable
duty to act in good faith in the best interests of the investee companies, as well as to avoid
unauthorized conflicts of interest.”140
In all, while jurisdictions such as Germany and the US recognize that minority shareholders
could be fiduciaries, at least in certain limited circumstances, the UK and leading common law
Asian jurisdictions adopt a restricted view on the ground that shareholders exercise proprietary
rights, and can do so in their own interests. Finally, there is some divergence as to who the
132
BGH Judgment of 20 March 1995, BGHZ 129, 136 (Girmes), in Gerner-Beuerle & Schillig,
133
Id.
134
Andreas Cahn & David C. Donald, Comparative Company Law 714 (2d ed. 2018).
135
Paul L. Davies & Sarah Worthington, Gower’s Principles of Modern Company Law 637
(10th ed. 2016); Gerner-Beuerle & Schillig, supra note 126, at 604–05.
136
Allen v. Gold Reefs of West Africa [1900] 1 Ch 656 (CA); Greenhalgh v. Ardene Cinemas Ltd.
[1951] Ch 286.
137
138
139
For a recent and exhaustive study of shareholder duties in common law Asia, see Lim, supra note
27.
140
Id. at 302.
beneficiaries of any shareholder duties are. In the US and German contexts, the duties are
owned to the company and other shareholders, but in the contexts of the UK and common law
Asia, the position varies considerably as fiduciary duties (such as those of directors) are owed
only to the company and not to other shareholders.141
5.2.1 Other measures

Since there is a likelihood that the measures discussed in the preceding sub-part may not
materialize in the immediate future, jurisdictions may consider other interim solutions in the
meanwhile. One route to address concerns arising from shareholder conduct is to modulate
the definition of “control.” Carrying both quantitative (de jure) and qualitative (de facto)
connotations, this might require a broader understanding of control. Under this analysis,
activist investors who obtain powers to influence changes to companies and their boards and
managements without actually exercising control may nevertheless be stated to have control
over the company, if that influence is found to be significant.142 Activists may not obtain
control over the board of the company in the longer term, but may only influence specific
decisions. Such a dispensation has the effect of blurring the distinction between the market for
corporate control and the market for corporate influence. Proponents of this approach harbor
in the expectation that such a loosening of the definition of control will reduce the incentives
of activist investors to act in the manner that satisfies their private interests at the cost of the
long-term outlook of the company and the other shareholders.
From a practical perspective, there could be methods to address the concerns surrounding
the settlement agreements that hedge funds enter into with portfolio companies in the wake
of a proxy fight. For example, the agreements could be subject to a disinterested shareholder
vote.143 Ultimately, all of these tools envisage that when activist investors are able to exert
their shareholder powers to exert significant corporate influence, they must also be subject
to responsibilities akin to that of directors or controlling shareholders, as the exercise of their
rights have wider implications surrounding the company.
5.3 Stewardship Responsibilities of Passive Investors
When it comes to passive investors, the approach is somewhat different. The legal, regulatory,
or market instruments here need to address two issues. The first is to nudge passive investors
to exercise their participation rights in investee companies. Several jurisdictions have intro-
duced stewardship codes by which institutional investors are encouraged to take a more active
approach towards participation in and engagement with companies.144 The UK was the first
country to adopt a stewardship code in 2010, a concept that has since spread to several coun-
tries around the world.145 These codes largely operate as “soft law,” and set out the principles
by which institutional investors can engage with companies. Not only do the stewardship
responsibilities require investors to participate more actively, but they compel investors to be
141
Id. at 381.
142
Anabtawi & Stout, supra note 5, at 1296–97; Hong, supra note 6, at 211.
143
Matheson & Nicolet, supra note 22, at 1689–90.
144
Bebchuk & Hirst, Index Funds and the Future of Corporate Governance, supra note 24, at 12.
145
Hill, supra note 27, at 506–07.
transparent about their voting policies and practices in companies. This places a greater burden
on them to be active.
While stewardship appears at the outset to be an attractive idea, there are problems with
implementation. For instance, in the UK, studies found that a large body of foreign investors
was not even within the purview of the code.146 Others have questioned its general nature and
the lack of bite.147 From a comparative perspective, although several other jurisdictions are
adopting stewardship codes, it remains unclear whether they are likely to be effective given
differing shareholder structures, legal systems, institutional and other considerations. Another
model could be the more robust approach taken in the EU Shareholder Rights Directive II in
2017.148 Scholars have observed that this “introduces a duty to demonstrate engagement on the
part of institutional investors and asset managers, and is, therefore, a tentative step towards
hardening of stewardship/engagement duties.”149
Others have made more far-reaching recommendations, such as the need to disenfranchise
passive investors for fear that this would be a more optimal outcome compared to allowing
them to vote along with management due to the lack of appropriate incentives or due to con-
flicts of interests. Either the proposal to restrict voting may be complete,150 or only in respect
of certain matters of shareholder voting.151 Finally, one may have to address the conflicts of
interests of passive investors in a somewhat similar method, as discussed in the case of activist
investors. The difference, in relation to passive investors, is that they do not exercise influence
directly (except through their voting), and hence their actions may have to be subject to lighter
constraints in comparison with activist investors.
6. CONCLUSION
One of the important goals of corporate law and governance norms is to protect the interest
of minority shareholders. While the concept of corporate democracy has evolved over time,
so have the nature, identity and interests of minority shareholders. They are no longer retail
investors, but institutional investors who have taken on significant shareholding positions in
companies around the world. These include mutual funds, pension funds and hedge funds.
While some of them are activist in nature, others are passive, although these characteristics
could vary by degree.
Legal systems around the world enable minority shareholders to enhance their participation
in companies. Activist investors like hedge funds have utilized these developments to chal-
lenge managements in not only companies and countries with dispersed shareholding, but also
in those with concentrated shareholding. While their actions could be beneficial in enhancing
146
Brian R. Cheffins, The Stewardship Code’s Achilles’ Heel, 73 Mod. L. Rev. 1004 (2010).
147
Arad Reisberg, The UK Stewardship Code: On the Road to Nowhere?, 15 J. Corp. L. Stud. 217
(2015).
148
Directive (EU) 2017/828 [hereinafter SRD II].
149
Iris Chiu & Dionysia Katelouzou, From Shareholder Stewardship to Shareholder Duties: Is the
Time Ripe?, in Hanne S. Birkmose, Shareholders’ Duties 145 (2017). In particular, see SRD II, supra
note 148, arts. 3g (engagement policy) and 3h (investment strategy of institutional investors and arrange-
ments with asset managers).
150
Lund, supra note 16.
151
Griffith, supra note 16.
corporate performance by creating a market for corporate influence, activist investors have the
potential to derive private benefits not shared with other shareholders. They may also suffer
from conflicts of interest. Hence, there is an increasing call to subject activist shareholders
to legal constraints such as the imposition of fiduciary duties, similar to that for controlling
shareholders. When it comes to passive investors, the solutions vary from imposing on them
a stewardship role to disenfranchising them. The question of minority shareholder rights and
duties continues to evolve along with the nature of investors and market practice.
APPENDIX
Table 17A.1 Rights and duties of institutional investors
Attitude of investors Activism Passivity

Types of investors Hedge funds Index funds
Private equity funds Some mutual funds
Exercise of rights Voting None or minimal
Engagement
Exit
Litigation
Possible risk Conflicts of interest Lack of monitoring
Private benefits Conflicts of interest
Possible tools for mitigation of risk Fiduciary duties to act in the interests of Stewardship
company and other shareholders Disclosure of voting
Disenfranchisement
Alteration of incentives
18. Institutional investors, activist funds and
ownership structure
Assaf Hamdani and Sharon Hannes1
1. INTRODUCTION
One of the important developments underlying capital markets is the dramatic increase in the
size and influence of institutional investors. Institutional investors hold 41 percent of global
market capitalization.2 In the United States, for example, institutional investors collectively
own 70–80 percent of the entire U.S. capital market.3 Moreover, a small number of asset man-
agers hold significant stakes at each public company.4 A typical large public corporation has
between three to five large institutional investors as shareholders, each holding approximately
5–10 percent of the corporation’s stock. Other institutional investors (mutual funds, pension
funds, insurance companies, etc.) hold smaller percentages, comprising up to an additional 50
percent of the corporation’s shares.5
These ownership patterns, however, are not uniform across countries. In Europe, institu-
tional investors hold only 38 percent of market capitalization,6 and institutional investors’
share of the market is even smaller in Asia.7 Moreover, U.S.-domiciled investors account for
65 percent of global institutional investor holdings.8
Since its early days, the rise in institutional investors’ ownership has produced academic
studies on the corporate governance role of institutional investors. The literature initially cel-
ebrated these investors’ ability to actively monitor insiders,9 but then focused on institutional
investors’ shortcomings in improving corporate performance. Academics have identified
many reasons—ranging from conflicts of interest to collective action problems and suboptimal
1
We thank Shoval Barazani, Alon Luxenburg, and Noa Zak for their research assistance.
2
See Adriana De La Cruz, Alejandra Medina & Yung Tang, Owners of the World’s Listed
Companies, OECD Capital Market Series (2019), www.oecd.org/corporate/Owners-of-the-Worlds
-Listed-Companies.htm.
3
See Eric A. Posner, Fiona M. Scott Morton & E. Glen Weyl, A Proposal to Limit the
Anti-Competitive Power of Institutional Investors, 81 Aɴᴛɪᴛʀᴜsᴛ L.J. 69, 74 (2017).
4
This chapter refers to those that make investment decisions on behalf of the funds as “asset
managers.”
5
See Bd. of Governors of the Fed. Reserve Sys., Financial Accounts of the United States
98 tbl. L.208 (2014), www.federalreserve.gov/releases/z1/20141211/z1.pdf [http://perma.cc/7A29
-78S7].
6
See Owners of the World’s Listed Companies, supra note 2, at 11. This includes the United
Kingdom, where the average holdings by institutional investors are much higher. See id. at 12.
7
Id. at 11.
8
Id. at 6.
9
See Bernard S. Black, Agents Watching Agents: The Promise of Institutional Investor Voice, 39
UCLA L. Rev. 811 (1992); Edward B. Rock, The Logic and (Uncertain) Significance of Institutional
Shareholder Activism, 79 Geo. L.J. 445 (1991).
368
Institutional investors, activist funds and ownership structure 369
fee structure—that undermine institutional investors’ incentives to monitor management.10

More recently, the literature has addressed the differences between active and passive inves-
tors,11 the antitrust implications of common ownership,12 strategic voting,13 and the passivity
of mutual funds in filing lawsuits against insiders.14
The academic literature, however, tends to focus on U.S. institutional investors. A substan-
tial body of empirical literature, for example, studies the investor-level qualities that might
affect mutual funds’ voting patterns.15 Outside the United States, in contrast, only a limited
number of studies, on countries such as Israel,16 the Netherlands,17 and the United Kingdom,18
offer an empirical account of institutional investors’ voting patterns.
The governance role of institutional investors depends on myriad economic, cultural, and
regulatory factors that vary across countries. The structure of the pension market (private
versus public; defined benefit versus defined contribution) determines the size of the local
asset management industry and its share of domestic capital markets.19 Local regulations
determine institutional investors’ incentive structure and the nature of their duties to their own
clients. Business or ownership ties between asset managers and public companies determine
the extent to which conflicts of interest might affect institutional investors’ stewardship.
Finally, social norms and local culture might dictate the extent to which (domestic) insti-
tutional investors are willing to openly confront management. Indeed, there is evidence that,
in several markets, foreign institutional investors tend to be more confrontational than local
10
See, e.g., Jill E. Fisch, Relationship Investing:Will It Happen?Will It Work?, 55 Oʜɪᴏ Sᴛ. L.J. 1009
(1994).
11
See generally Lucian Bebchuk & Scott Hirst, Index Funds and the Future of Corporate
Governance: Theory, Evidence, and Policy, 119 Colum. L. Rev. 2029 (2019); Jill E. Fisch, Assaf
Hamdani & Steven Davidoff Solomon, The New Titans of Wall Street: A Theoretical Framework
for Passive Investors, 168 U. Pa. L. Rev. 17 (2019); Dorothy S. Lund, The Case Against Passive
Shareholder Voting, 43 J. Corp. L. 493 (2018); Marcel Kahan & Edward Rock, Index Funds and
Corporate Governance: Let Shareholders Be Shareholders (N.Y. Univ. Sch. Law, Working Paper No.
18-39, 2018).
12
See José Azar, Martin C. Schmalz & Isabel Tecu, Anticompetitive Effects of Common Ownership,
73 J. Fin. 1513, 1558 (2018).
13
See Luca Enriques & Alessandro Romano, Institutional Investor Voting Behavior: A Network
Theory Perspective, 2019 U. Ill. L. Rev. 223 (2019).
14
See Sean J. Griffith & Dorothy S. Lund, Toward a Mission Statement for Mutual Funds in
Shareholder Litigation, 87 U. Chi. L. Rev. 1149 (2020).
15
See, e.g., Alon Brav, Wei Jiang, Tao Li, & James Pinnington, Picking Friends Before Picking
(Proxy) Fights: How Mutual Fund Voting Shapes Proxy Contests (Mar. 1, 2018), https://ssrn.com/
abstract=3101473; Ryan Bubb & Emiliano Catan, The Party Structure of Mutual Funds 20 (Feb. 14,
2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=31 24039.
16
See Assaf Hamdani & Yishay Yafeh, Institutional Investors as Minority Shareholders, 17 Rev.
Fin. 691 (2012).
17
See Christoph Van der Elst & Anne Lafarre, Shareholder Stewardship in the Netherlands: The
Role of Institutional Investors in a Stakeholder Oriented Jurisdiction (ECGI – Law Working Paper No.
492, 2020), https://ssrn.com/abstract=3539820.
18
See Suren Gomtsian, Shareholder Engagement by Large Institutional Investors (July 1, 2019),
https://ssrn.com/abstract=3412886l.
19
See Martin Gelter, The Pension System and the Rise of Shareholder Primacy, 43 Seton Hall L.
Rev. 909 (2013).
ones.20 And a recent study about Japan, for example, argues that the objective of Japan’s
stewardship for institutional investors was to “change the attitude of domestic institutional
investors so as to make Japanese corporate governance more oriented towards the interests of
shareholders rather than stakeholders.”21 In other countries, such as Germany, the premise that
institutional investors should actively exercise stewardship is a matter of debate.22
These multi-dimensional differences question the extent to which findings about institu-
tional investors in one country can be generalized to offer a single theory with universal appli-
cation. In this chapter, therefore, we focus on one dimension by which institutional investors’
governance role may vary across countries: the ownership structure of public companies.
Specifically, we analyze the governance implications of the rising influence of institutional
investors against the background of another development, namely, the rise of activist hedge
funds. Using proxy fights and other tools to pressure public companies into making business
and governance changes,23 activist funds have had a dramatic impact on modern capital mar-
kets.24 The success of activist funds crucially depends on the support of institutional investors.
In fact, the role of activist hedge funds in driving change seems to have grown with the rise of
institutional investors’ ownership.25
We advance several arguments in this chapter. First, the rise of institutional investors
reinforces the differences between widely held and controlled companies. In widely held
companies, especially in countries where hedge fund activism is more prevalent and the
asset-management industry is more concentrated, institutional investors have tremendous
influence over companies in their portfolio. At controlled companies, in contrast, the growth
of institutional investors is less likely to have a dramatic effect on the allocation of power
between insiders and public shareholders.26
20
See, for example, Reena Aggarwal, Isil Erel, Miguel Ferreira & Pedro Matos, Does Governace
Travel Around the World? Evidence from Institutional Investors, 100 J. Fin. Econ. 154 (2001).
21
See Gen Goto, The Logic and Limits of Stewardship Codes: The Case of Japan, 15 Berkeley Bus.
L.J. 365, 372 (2019).
22
See Wolf-Georg Ringe, Stewardship and Shareholder Engagement in Germany (ECGI – Law
Working Paper No. 501, 2020), https://ssrn.com/abstract=3549829.
23
For an early review of activist hedge funds, see generally Marcel Kahan & Edward B. Rock,
Hedge Funds in Corporate Governance and Corporate Control, 155 U. Pa. L. Rev. 1021 (2007). For
more recent reviews, see generally Ajay Khorana, Anil Shivdasani & Gustav Sigurdsson, The Evolving
Shareholder Activist Landscape (How Companies Can Prepare for It), 29 J. Applied Corp. Fin. 8
(2017). See also C.N.V. Krishnan, Frank Partnoy & Randall S. Thomas, The Second Wave of Hedge
Fund Activism: The Importance of Reputation, Clout, and Expertise, 40 J. Corp. Fin. 296 (2016).
24
In 2019, for example, 147 activist investors targeted 187 companies and won 122 board seats, while
in 2018 a similar number of 131 activist investors targeted 226 companies and won 161 board seats. See
Lazard S’holder Advisory Grp., 2019 Review of Shareholder Activism 2–6 (2020) [hereinafter
Lazard 2019 Review], www.lazard.com/media/451141/lazards-2019-review-of-shareholder-activism
-vf.pdf; Lazard S’holder Advisory Grp., 2018 Review of Shareholder Activism 1 (2019) [here-
inafter Lazard 2018 Review], www.lazard.com/media/450805/lazards-2018-review-of-shareholder
-activism.pdf [https://perma.cc/Y24P-8PNG].
25
See, e.g., Ronald J. Gilson & Jeffrey N. Gordon, The Agency Costs of Agency Capitalism: Activist
Investors and the Revaluation of Governance Rights, 113 Colum. L. Rev. 863 (2013).
26
Almost by definition, activism is limited when the company has a controlling shareholder. See,
e.g., Kobi Kastiel, Against All Odds: Hedge Fund Activism in Controlled Companies, 2016 Colum. Bus.
L. Rev. 60 (2016).
Second, powerful institutional investors at widely held companies are likely to exert their
influence behind the scenes. This is true even for countries in which behind-the-scene influ-
ence is not necessarily the product of local norms. Large institutional investors’ size and clout
mean that they can influence management without resorting to the aggressive tactics used by
activist hedge funds.
Third, even among countries with widely held public companies, we do not expect
a uniform rise in the influence of institutional investors. Country-specific regulations, political
sentiment, social norms or other factors will determine whether and how institutional investors
wield their power. For example, behind-the-scenes tactics are likely to be especially preva-
lent not only in countries where social norms discourage open confrontation, but also where
political sentiment run against concentration of power in the hands of a few powerful financial
actors.
This is especially true for the United States where, coincidently, the regulatory regime prac-
tically prevents large institutional investors from making activist moves such as nominating of
directors to the board.27 An intriguing case is that of countries that move from concentrated to
dispersed ownership of public companies. As we explain below, institutional investors in these
countries can quickly become quite powerful without regulatory impediments to manifesting
their power as shareholders.
Fourth, we argue that some activist interventions—those that require the appointment of
activist directors to implement complex business changes—cannot be pursued even by pow-
erful and well-motivated institutional investors. This is true even for countries in which the
regulatory framework allows institutional investors to nominate directors. Activist directors,
we argue, need to share nonpublic information with the fund that appointed them. Sharing
such information with institutional investors, however, would create significant insider trading
concerns and would critically threaten institutional investors’ ability to trade securities which
lies at the basis of their business model. Accordingly, this form of intervention could not
be pursued by institutional investors without dramatic changes to their respective business
models and regulatory landscape.
2. INSTITUTIONAL INVESTORS’ SOFT POWER

This section considers the implications of the rise of institutional investors’ power against two
developments: the rise of activist hedge funds and the concentration of power within a rela-
tively small group of asset managers.
The rising power of institutional investors, we argue, has changed and will continue to
change the corporate governance of companies without controlling shareholders. With pow-
erful institutional investors and the omnipresent threat of an intervention by an activist hedge
fund, both institutional investors and corporate managers have an interest in getting results
in a softer way. When a few powerful investors collectively control a substantial fraction of
voting rights, managers have strong incentives to listen to them, even when they speak softly.
Thus, engagement and other forms of institutional investors’ actions are likely to occupy an
increasingly influential role for widely held companies. Moreover, this chapter predicts that
27
See infra notes 90–91.
large asset managers will increasingly focus their engagement efforts on strategic business
issues, in contrast to mere governance and public policy matters. This is the result of the incen-
tives produced by the large stake held by the largest asset managers, as well as management’s
interest to learn about investors’ views about the company’s performance. We consider first
management incentives to engage with institutional investors and then the available evidence
on engagement by these investors.
2.1 Management Incentives
There is widespread evidence of the growing influence of institutional investors on corporate

governance.28 A common critique of these investors is that they are not as proactive as activist
hedge funds in pushing for changes, especially business-related ones, at their portfolio com-
panies.29 Critics specifically target asset managers that specialize in passive investments, who
are often the investors holding the largest stakes of public companies.30 Hedge funds, however,
commonly buy only slivers of equity in the companies they target.31 Hedge fund activism’s
success thus depends on the support of large institutional investors.32 Without these investors’
support, activist hedge funds would be no more than paper tigers, as they would fail to win
proxy fights, and lose their most potent threat against underperforming managers.
In other words, while they do not adopt the same tactics as activist hedge funds, large
institutional investors are those that hold the power to determine whether management would
continue and run the company. These investors can exercise considerable influence without
necessarily resorting to aggressive tactics.
The power held by institutional investors has clear implications for the incentives of
management and boards of directors to engage with these investors. In a market environment
where large institutional investors collectively determine the outcome of shareholder votes,
why would boards go against their largest institutional investors? Moreover, boards have an
incentive to avoid costly and public fights with activists, and boards realize that activists with
a compelling claim for increasing value are likely to get support from influential investors.
In fact, even without outside pressure by institutional investors, boards might initiate
business or operational moves that would make their companies less attractive as targets for
activists.33 Advisors today urge boards to “think like an activist” and take measures that would
mitigate the risk of an activist attack.34 Given an increase in the perceived threat of activist
28
For a review, see Goshen & Hannes, The Death of Corporate Law, 94 N.Y.U. L Rev. 263, 277–83
(2019).
29
See Gilson & Gordon, supra note 25, at 890.
30
See supra note 11.
31
See Martijn Cremers, Saura Masconale & Simone M. Sepe, Activist Hedge Funds and the
Corporation, 94 Wash. U. L. Rev. 261 (2016).
32
See Gordon & Gilson, supra note 25, at 867.
33
See Fried, Frank Harris, Shriver & Jacobson LLP, M&A/Private Equity
Briefing: Shareholder Activism 7 (2018), www.friedfrank.com/siteFiles/Public ations/
FFMAPE1H2018DevelopmentstheImpactandtheFutureofActivism092418.pdf [https://perma.cc/9MH5
-JR5V].
34
Id. (“Companies, together with outside advisors, should ‘think like an activist’ to identify and
(where appropriate) address potential vulnerabilities that may attract activist scrutiny.”).
attacks, even firms that were not targeted by activists might implement changes that are
favored by activists, such as increasing leverage or decreasing capital expenditures.35
More important, boards and management have powerful incentives to initiate communi-
cations with their largest investors.36 First, management has an interest in learning what its
investors, and especially the large ones, think about the company’s performance and its man-
agement strategy.37 After all, managers who lose their investors’ support increase their chances
not only of being targeted by an activist, but also of losing the fight. Good communications
with investors may allow managers to win future battles against activists. The same logic
applies to managers of activist hedge funds. To secure the backing of the institutional inves-
tors, it is wise for hedge funds to engage with them in advance.38 Otherwise, a large investment
by the hedge fund may be in vain.
The DuPont proxy fight illustrates the importance of maintaining relationships with the
largest institutional investors.39 The activist campaign to oust the chairman of the London
Stock Exchange provides a UK example.40 The campaign failed, but only after the two largest
shareholders, BlackRock and Qatar’s sovereign wealth fund, gave prior indications that they
would side with the chairman.41
Finally, whether management or the hedge funds have the upper hand in the battle, the
determinative force of institutional investors tends to moderate the interaction. As phrased
by Gregory Taxin, the co-founder of the proxy advisory firm Glass Lewis, “the brute force of
ownership is not required anymore because the big institutional players listen to both sides and
are willing to back the activist funds if they believe in them.”42
35
See Nickolay Gantchev, Oleg Gredil & Chotibhak Jotikasthira, Governance Under the Gun:
Spillover Effects of Hedge Fund Activism, 23 Rev. Fin. 1031 (2019).
36
See David R. Beatty, How Activist Investors Are Transforming the Role of Public-Company
Boards, McKinsey & Co. (Jan. 2017), www.mckinsey.com/business-functions/strategy-and-corporate
-finance/our-insights/how-activist-investors-are-transforming-the-role-of-public-company-boards
[https://perma.cc/U9GG-MB4U].
37
See id.
38
See Martin Lipton, Wachtell, Lipton, Rosen & Katz, Activism: The State of Play, Harv. L. Sch.
F. on Corp. Governance & Fin. Reg. (Oct. 10, 2018), https://corpgov.law. harvard.edu/2018/10/10/
activism-the-state-of-play-2/ [https://perma.cc/Z8TD-7XEJ].
39
Trian Partners led a proxy fight to replace four DuPont directors. David Benoit & Jacob Bunge,
Nelson Peltz Launches Proxy Fight Against DuPont, Wall Street J. (Jan. 8, 2015, 9:07 PM), www.wsj
.com/chapters/nelson-peltz-launches-proxy-fight-against-dupont-1420761264. However, direct commu-
nication between management and asset managers saved the day for DuPont incumbents. Andrew R.
Brownstein et al., Winning a Proxy Fight—Lessons from the DuPont-Trian Vote, Harv. L. Sch. F. on
Corp. Governance & Fin. Reg. (May 18, 2015), https://corpgov.law.harvard.edu/2015/05/18/winning
-a-proxy-fight-lessons-from-the-dupont-trian-vote/ [https://perma.cc/SU5X-VPWB].
40
See Phillip Stafford, LSE chairman wins battle against activist attempt to oust him, Fin. Times
(Dec. 19, 2017), www.ft.com/content/1c9dd24c-c467-3f4c-9eda-8801892a1b2d.
41
See Huw Jones & Maiya Keidan, TCI fails in bid to oust London Stock Exchange chair-
man, Reuters (Dec. 19, 2017), www.reuters.com/chapter/us-lse-chairman-vote/tci-fails-in-bid-to-oust
-london-stock-exchange-chairman-idUSKBN1ED1I6.
42
See Ernest ‘doc’ Werlin, Activist Investors Prove Good for More than Short-Term Profit,
Herald-Trib. (May 1, 2014), www.heraldtribune.com/chapter/LK/20140501/business/605183887/SH/.
2.2 Engagement Trends
2.2.1 Rise in engagement

When institutional investors know that—at least as a group—they have the power to replace
the board, they have little reason to resort to aggressive tactics to influence companies in their
portfolio. Rather, they can convey whatever concerns they may have directly to management
or the board.
Institutional investors, therefore, are increasingly likely to “engage” with companies in their
portfolio. The term “engagement” describes various types of communications and discussions
with portfolio companies, including meetings, e-mails, and phone conversations. As explained
above, engagement takes place not only because institutional investors wish to be involved,
but also because corporate managers have a strong interest in learning about money managers’
views. 43
These discussions between management and institutional investors are private, thereby
making it difficult to reliably track the number of meetings, the nature of the topics raised
by money managers, and their ultimate influence on management.44 Moreover, institutional
investors may have a clear interest in presenting a picture of substantial investment in engage-
ment, because regulators and the public expect them to do so.45 After all, as recently stated
by the European Parliament: “Effective and sustainable shareholder engagement is one of the
cornerstones of the corporate governance model of listed companies.”46
Management and institutional investors had private discussions in the past.47 The available
sources, however, suggest that the rise in engagement intensity in recent years is notable
both in the US and Europe. While in 2010 merely 6 percent of S&P 500 companies reported
engagement with major investors, the number swelled to 72 percent in 2017.48 The majority
of the large institutional investors currently engage in direct discussions with the management
of their portfolio companies,49 and many of them hold private meetings with board members
43
See Chris Ruggeri, Investor Engagement and Activist Shareholder Strategies, Harv. L. Sch. F. on
Corp. Governance & Fin. Reg. (Feb. 19, 2019), https://corpgov.law.harvard.edu/2019/02/19/investor
-engagement-and-activist-shareholder-strategies/.
44
But see Marco Becht et al., Returns to Shareholder Activism: Evidence From a Clinical Study of
the Hermes UK Focus Fund, 22 Rev. Fin. Stud. 3093 (2009).
45
Direct engagements are therefore complemented by the use of corporate proxy voting guidelines
published by institutional investors, as well as letters drafted by those investors providing insights into
their priorities, views and philosophy. See Asaf Eckstein, The Push Towards Corporate Guidelines
(working paper, 2020) (on file with the authors).
46
See Directive 2017/828 of the European Parliament and of the Council, May 17, 2017. On the
other hand, recent antitrust concerns—arising from the common ownership literature—may encourage
the largest institutional investors to underplay their influence on companies in their portfolio.
47
Willard T. Carleton et al., The Influence of Institutions on Corporate Governance through Private
Negotiations: Evidence from TIAA-CREF, 53 J. Fin. 1335 (1998).
48
Ernst & Young, 2017 Proxy Season Review 4 (2017), www.ey.com/Publication/vwLUAssets/
ey-2017-proxy-season-review/$File/ey-2017-proxy-season-review.pdf [https://perma.cc/FDK8-SDZ4].
49
See, e.g., Matthew J. Mallow & Jasmin Sethi, Engagement: The Missing Middle Approach in the
Bebchuk-Strine Debate, 12 N.Y.U. J.L. & Bus. 385, 395 (2016) (reporting that T. Rowe Price, large asset
manager that concentrates on actively managed mutual funds, “holds hundreds of short, direct conversa-
tions with companies owned in portfolios it manages throughout the year on issues that fall beyond the
normal due diligence meetings with the companies”).
without management’s presence.50 Engagements between institutional investors and managers

of their portfolio companies is becoming more common in Europe as well.51 Such engagements
have become commonplace in the UK, Netherlands, Germany and elsewhere.52 In a global
survey of institutional investors (36 percent of them from Continental Europe, 25 percent from
the US and 15 percent from the UK), 64 percent of respondents report engagements with the
managements of portfolio companies, and 45 percent engaged with board members outside of
the managements’ presence.53
In some countries, cultural norms may lead institutional investors to prefer informal avenues
of influence. In other countries, in contrast, such soft tactics may be a necessity for large insti-
tutional investors. As John Morley explains, different types of regulation practically prevent
large institutional investors in the United States from adopting some activist tactics.54 Such
regulatory restrictions are consistent with the political economy of U.S. financial regulation.
As Mark Roe famously argued, American politics has a long history of preventing financial
institutions from taking a lead position in ownership and governance.55
2.2.2 Change in focus

Currently, institutional investors seem to concentrate their interventions on governance,
sustainability and market wide policy matters.56 Institutional investors’ focus on governance
makes sense as they enjoy economies of scale when dealing with issues they repeatedly
encounter in many companies in which they invest.57
We believe, however, that these investors will increasingly focus their engagements on
business matters. Engagement creates an important channel of communication between
institutional investors and corporate insiders. This channel may be used to discuss not only
governance concerns, but also company performance and the need for strategic changes. As
explained above, management has an incentive to learn about institutional investors’ view of
the company’s strategy. Thus, management might use this channel to initiate discussions about
the company’s business plan. Second, institutional investors, and especially the largest ones,
50
See Joseph A. McCahery, Zacharias Sautner & Laura T. Starks, Behind the Scenes: The Corporate
Governance Preferences of Institutional Investors, 71 J. Fin. 2905, 2906 (2016).
51
See Giovanni Strampelli, Knocking at the Boardroom Door: A Transatlantic Overview of
Director-Institutional Investor Engagement in Law and Practice, 12 Va. L. & Bus. Rev. 187 (2017).
52
See Wolf-Georg Ringe, Shareholder Activism: A Renaissance, in The Oxford Handbook of
Corporate Law And Governance 3, 17 (Jeffrey Gordon & Wolf-Georg Ringe eds., 2015); Klaus
J. Hopt, The Dialogue Between the Chairman of the Board and Investors: The Practice in the UK, the
Netherlands and Germany and the Future of the German Coporate Governance Code Under the New
Chairman (EGCI - Law Working Paper No. 365, 2017), https://ssrn.com/abstract=303693.
53
See Joseph A. McCahery et al., Behind the Scenes: The Corporate Governance Preferences of
Institutional Investors, 71 J. Fin. 2905 (2016).
54
See John Morley, Too Big to Be Activist, 92 S. Cal. L. Rev. 1407, 1423–37 (2019).
55
Mark J. Roe, A Political Theory of American Corporate Finance, 91 Colum. L. Rev. 10, 40–41
(1991) (“popular opinion made it easy for politicians to fragment financial institutions”).
56
As BlackRock’s managers explain, “for the most part, the focus of investment stewardship
activities is governance-related (e.g., board composition, the board’s oversight role).” Barbara Novick,
Michelle Edkins & Tom Clark, The Investment Stewardship Ecosystem, Harv. L. Sch. F. on Corp.
Governance & Fin. Reg. (July 24, 2018), https://corpgov.law.harvard.edu/2018/07/24/the-investment
-stewardship-ecosystem/ [https://perma.cc/7UFK-XM58].
57
For passive investors, the focus on governance can also be explained by the competition with
active funds. See Fisch, Hamdani & Solomon, supra note 11, at 20.
have an interest in improving the performance of companies in their portfolio, and engagement
provides them with a relatively cheap way of doing so.
To be sure, unlike hedge funds, institutional investors might lack sufficiently strong incen-
tives to formulate complicated business plans for portfolio companies,58 and their staff devoted
to engagements are perhaps not savvy in strategic business planning.59 But institutional
investors have the expertise to sense problems in company performance and are the ones who,
once an activist arises, analyze solutions offered by the portfolio companies’ managers. In
fact, the matters that may cause an activist hedge fund to enter the arena and launch an activist
campaign are the same matters that may be discussed in these engagements.60 When necessary
then, institutional investors may display concern or dissatisfaction and urge corporate manag-
ers to offer an alternative strategic plan for their review.
Indeed, there are hints for a broader focus of money managers’ engagements. A recent study
of engagement by a large UK investor found that engagement is not limited to governance
concerns.61 One of the reasons for engagement that BlackRock mentions is “an event at the
company that has impacted its performance or may impact long-term company value,” and it
continues to explain that “[w]here [BlackRock’s managers] believe a company’s business or
governance practices fall short, [they] explain [their] concerns and expectations.”62 Moreover,
in his annual letter for 2019 to the CEOs of public companies, Larry Fink, BlackRock’s CEO,
noted that the second engagement priority for 2019 is “corporate strategy and capital alloca-
tion.” 63
If corporate managers do not respond to institutional investors’ concerns, institutional
investors’ dissatisfaction could become louder, thereby reaching the ears of activist hedge
funds. Large institutional investors’ dissatisfaction may serve as a fertile ground for the oper-
ation of hedge funds. Even today, institutional investors do not always take the back seat in
initiating activism, and in some cases they even issue an informal “Request for Activism.”64
58
Gilson and Gordon believe that institutional investors’ business models prevent them from crafting
any business plan for portfolio companies. See Gilson & Gordon, supra note 25, at 893.
59
See Bebchuk & Hirst, supra note 11, at 5 (“[T]he Big Three devote an economically negligible
fraction of their fee income to stewardship, and … their stewardship staffing enables only limited and
cursory stewardship for the vast majority of their portfolio companies.”).
60
Some funds act mainly through private engamanets. Hermes, the fund manager of the British
Telecom Pension Scheme, frequently seeks and achieves significant changes in portfolio’s company
strategy through private interventions that are unobservable from the outside. See Becht et al., supra note
44.
61
Marco Becht, Julian R. Franks, & Hannes F. Wagner, Corporate Governance Through Voice and
Exit (ECGI – Finance Working Paper No. 633, 2019), https://ssrn.com/abstract=3456626.
62
Novick, Edkins & Clark, supra note 56 (listing BlackRock’s main reasons for engagement with
companies).
63
Letter from Larry Fink, CEO, Blackrock Inc., to CEOs, https://www.blackrock.com/corporate/
investor-relations/larry-fink-ceo-letter [https://perma.cc/JP5U-4JB2].
64
Merritt Moran, Ten Strategic Building Blocks for Shareholder Activism Preparedness, Harv. L.
Sch. F. on Corp. Governance & Fin. Reg. (Dec. 20, 2016), https://corpgov.law. harvard.edu/2016/
12/20/ten-strategic-building-blocks-for-shareholder-activism-preparedness/ [https://perma.cc/ZM9W
-CNFP] (“Today, major institutions have frequently sided with shareholder activists, and in some cases
privately issued a ‘Request for Activism’, or ‘RFA’ for a portfolio company, as it has become known in
the industry.”).
Although large institutional investors are hesitant to admit this practice, some activist hedge
funds are quite open about it.65
Bill Ackman, the founder of the hedge fund Pershing Square, has stated, “Periodically, we
are approached by large institutions who are disappointed with the performance of companies
they are invested in to see if we would be interested in playing an active role in effectuating
change.”66 And Jeff Smith, the CEO of the activist hedge fund Starboard, explained that this
is an evolving practice: “Mutual funds and passive investors have come not only to appreciate
what we do but encourage us. It used to be they would wait and hope. Over the past five years
they have added another choice: they call us and want us to get involved.”67
To summarize, the description of institutional investors as “arbiters” between activist hedge
funds and corporate managers is somewhat misleading.68 It may imply that institutional inves-
tors are passive actors, like judges, who wait until an activism campaign starts and then decide
its fate. This chapter prefers to describe their role, and especially the largest asset managers,
as “kingmakers.” Kingmakers need not be passive or reactive and have much leeway to decide
how active they wish to be. They will never take the throne themselves, but they may play
a dramatic role. Depending on whether asset managers are satisfied with management efforts
or results, they can prevent or facilitate a successful hedge fund activism campaign.
We therefore expect that engagements will displace some forms of activism. Indeed,
when more managers become responsive to institutional investors’ wishes, the need for an
activist hedge fund’s intervention becomes smaller. Institutional investors today are careful in
exerting their power, and large-scope engagement is a relatively new phenomenon. But both
institutional investors and corporate managers have the incentive to develop the capabilities
to work out mechanisms that ensure institutional investors’ satisfaction with management’s
performance and strategy without the need for aggressive forms of activism.
The extent to which this process will apply to other countries with widely held companies
depends on two important factors. First, the relative size and market concentration of (domes-
tic) institutional investors. The fact that several large asset managers control a significant share
of the votes makes it easier for management to communicate with investors and increases man-
agement’s responsiveness to these investors’ views. Second, our analysis assumes that insti-
tutional investors would support activist funds that deploy aggressive tactics against poorly
performing management. Local norms in some countries (such as Japan) discourage certain
types of activism. The lack of a credible threat of successful activist intervention reduces the
65
See David Gelles & Michael J. De La Merced, New Alliances in Battle for Corporate Control, N.Y.
Times: DealBook (Mar. 18, 2014, 9:40 PM), https://dealbook.nytimes.com/2014/03/18/new-alliances-i
n-battle-for-corporate-control/ [https://perma.cc/96TT-2RCR] (“In certain circles, T. Rowe Price … has
gained a reputation for pursuing hedge funds and encouraging them to take up an activist campaign. The
firm denies it suggests certain targets for activists but acknowledges it is in regular dialogue with other
investors about the companies in its portfolio ….”).
66
See Simi Kedia, Laura Starks & Xianjue Wang, Institutional Investors and Hedge Fund Activism
11 (Sept. 2017) (unpublished manuscript), www .aeaweb
.org/
conference/2018/preliminary/paper/
bFre7SK7.
67
Chris Dieterich, Activist Hedge Funds Now Fielding Calls from Fund Companies, Barron’s
(May 7, 2015, 10:07 AM), www.barrons.com/chapters/activist-hedge-funds-now-fielding-calls-from
-fund-companies-1431007632.
68
See Gilson & Gordon, supra note 25, at 917.
likelihood that institutional investors would be able to affect corporate management to change
its ways.
2.3 Implications
Our analysis about the increasing importance of informal communications between manage-
ment and institutional investors has several implications for academics and policymakers.
First, the increasing reliance by institutional investors on informal channels of influence
presents a challenge for researchers of institutional investors and corporate governance.
Studies of institutional investors’ stewardship typically focus on these investors’ public
actions—whether they openly confront management by submitting shareholder proposals,
voting against management or filing shareholder lawsuits.69 But, powerful institutional
investors are more likely to exercise behind-the-scenes influence.70 The more influential is an
institutional investor, the less likely it is to undertake confrontational measures to ensure that
its view counts. By their nature, informal avenues of influence are much harder to observe.71
Thus, studies that focus only on public expressions of stewardship, such as voting,
might offer an incomplete account of institutional investors’ governance role. In fact, one
important—but difficult to identify—outcome of institutional investors’ potency is that man-
agement would not even attempt to submit proposals to a shareholders’ vote when it knows
that the largest institutional investors are likely to object.72
Second, for both academics and lawmakers, the growing importance of engagement
with institutional investors raises questions about transparency.73 Institutional investors are
required in some jurisdictions to make their voting record public. Yet, at least for the largest
institutional investors, behind-the-scenes engagement increasingly becomes more important
than voting. To the extent that the “real action” takes place through informal communications
between corporate insiders and large investors, policymakers should consider the need for
transparency at either the investor, the public company level or both.74
69
See, e.g., Bebchuk & Scott, supra note 11; Griffith & Lund, supra note 14.
70
See, e.g., Mallow & Sethi, supra note 49, at 395 (“Among the S&P 500 companies that disclosed
engagement, almost half (forty-six percent) disclosed changes in practices or disclosure as a result of
such engagement in 2015.”).
71
See Lucian A. Bebchuk & Michael S. Weisbach, The State of Corporate Governance Research, 23
Rev. Fin. Stud. 939, 942 (2010).
72
See Rob Bauer, Frank Moers & Michael Viehs, Who Withdraws Shareholder Proposals and Does
it Matter? An Analysis of Sponsor Identity and Pay Practices, 23 Corp. Governance: Int’l Rev. 472
(2015).
73
Others have raised concerns about the transparency of institutional investors’ communications
with management. See Sarah Haan, Shareholder Proposal Settlements and the Private Ordering of
Public Elections, 126 Yale L.J. 262, 310 (2016) (“All forty-two of the shareholder proposal settlements
reviewed for this study were initiated by institutional investors, who dominate the process to the exclu-
sion of others … [T]hese other stakeholders do not participate in settlements, and if they learn of the
settlements at all, it is after the process is completed.”).
74
To the best of our knowledge, most countries do not require institutional investors to disclose
information about company-specific engagements. There is, however, some voluntary disclosure.
PWC’s 2016 analysis of a sample of 100 proxy statements of US S&P 500 companies found that 64%
of those companies voluntarily disclosed the existance of engagments. See Strampelli, supra note 51, at
238.
For example, policymakers can impose disclosure requirements designed to provide infor-
mation to investors who are not part of the dialogue with management. Another objective may
be providing information to institutional investors’ own clients about the nature of engagement
activities undertaken by money managers. In both cases, disclosure requirement can cover not
only the existence of engagements,75 but also their content.
Third, as one of us has argued elsewhere,76 the increasing power of institutional investors
means that they are less likely to rely on the legal system to address managerial agency costs.
Corporate law therefore loses some of its power as a source of binding norms for managers.
At the same time, with institutional investors becoming more powerful, lawmakers might need
to consider measures to ensure that institutional investors, especially the largest ones, do not
opportunistically use their power.77
3. DIRECTOR APPOINTMENTS
A notable feature of hedge fund activism is the appointment of so-called activist directors.
Critics have pointed to institutional investors’ failure to nominate directors as yet another
evidence these investors’ conflicts and suboptimal stewardship incentives.78 In this section,
however, we explain that even powerful and well-motivated institutional investors cannot
displace hedge funds when activism requires the appointment of directors to drive complex
business changes.
To be sure, institutional investors’ involvement in director appointments—and even nomi-
nating directors—can improve the market for directors by making directors more accountable
to public investors. Yet, institutional investors cannot nominate directors that would perform
the same function as activist directors. Activist directors, we argue, rely on their ability
to share nonpublic company information with the fund that appointed them. Institutional
investors, however, are extremely limited in their ability to continuously receive nonpublic
information from these directors.
3.1 Board Appointments: Activists versus Institutional Investors
Activist campaigns often include the appointment of directors to the target’s board.79 Most of
these directors are appointed as the result of a settlement between the board and the activist,
and only a minority of these directors are appointed by a shareholder vote after a proxy fight.
75
Others have raised concerns about the Reg FD and selective disclosure issues. See Martin
Bengtzen, Private Investor Meetings in Public Firms: The Case for Increasing Transparency, 22
Fordham J. Corp. & Fin. L. 33, 75 (2017); Joseph W. Yockey, On the Role and Regulation of Private
Negotiations in Governance, 61 S.C. L. Rev. 171 (2009).
76
See Goshen & Hannes, supra note 28.
77
See Zohar Goshen & Richard Squire, Principal Costs: A New Theory for Corporate Law and
Governance, 117 Colum. L. Rev. 767 (2017).
78
See Bebchuk & Hirst, supra note 11, at 2098.
79
In 2019, for example, activists appointed 122 directors to the boards of 65 public companies,while
in 2018 they appointed 161 directors to the boards of 67 public companies. See Lazard 2019 Review,
supra note 24, at 15; see also Lazard 2018 Review, supra note 24, at 8. These Lazard studies focus only
on companies whose market capitalization exceeds $500 billion.
In 2018, for example, only 35 out of 161 board seats won by activist funds in publicly traded
companies around the world (mostly U.S. and European) were the outcome of a proxy fight
(22 percent percent), while the other 126 seats were obtained via settlements.80Activist direc-
tors normally compose less than a majority of board members.81 Moreover, while some activist
directors are partners or employees of the activist fund, most of them are not fund employees.82
Recall that hedge funds do not hold sufficient votes to appoint their representatives to the
board. Rather, they rely on the express or implicit support of institutional investors. Given
the rising power of institutional investors, one might expect them to nominate their own
candidates to the board without the need to rely on activists. 83 Yet, institutional investors
in the United States and the United Kingdom generally refrain from nominating directors to
company boards.84
We are aware of three countries where institutional investors are active in the process of
nominating directors to public company boards. Yet, these countries seem to be an exception
to the universal norm.
Italy. In Italy, institutional investors—acting collectively through an association of institu-
tional investors—nominate directors at some of the largest companies. This practice relies on
Italy’s unique slate voting regime for directors—a legal regime that aims at ensuring minority
representation at companies with controlling shareholders.85 This practice differs from activist
directors appointed by hedge funds in several respects. First, these directors are not nominated
by a single institutional investor or asset manager, but by an entity that represents the largest
institutional investors together. Second, these directors are not employees of institutional
investors. Finally, as explained above, these directors are appointed by institutional investors
that are minority shareholders at controlled companies.
Israel. In Israel, as more companies became widely-owned, institutional investors (mostly
pension funds) began nominating their own candidates to the board. The Israeli regime for
nominating directors is shareholder-friendly: a 1 percent shareholder can nominate a candi-
date, and there are no burdensome proxy rules. Unlike in Italy, these candidates are nominated
by specific asset managers (and not by an association of institutional investors). Indeed, in
some cases, several institutional investors nominated candidates that competed for a single
80
See Lazard 2018 Review, supra note 24, at 8. In 2017, only 14 percent of board seats were won
through a proxy fight, and in 2019 the rate was 16 percent. Lazard 2019 Review, supra note 24, at 15.
81
See id. at 14.
82
In 2019, for example, 28 of the 122 activist directors appointed in 2019 were activist fund employ-
ees, and in 2018 36 of the 161 activist directors appointed were activist fund employees. Lazard 2018
Review, supra note 24, at 8; see also Lazard 2019 Review, supra note 24, at 15.
83
In the past, banks used to appoint their representatives to public company boards. This is still the
case in some jurisdications. See e.g., Miguel A. Ferreira & Pedro Matos, Universal Banks and Corporate
Control: Evidence from the Global Syndicated Loan Market, 25 Rev. Fin. Stud. 2703 (2012).
84
Large institutional investors explicitly state such policy. See, e.g., What we do. How we do it.
Why it matters, Vanguard Investment Stewardship Commentary (April 2019) available at https://about
.vanguard.com/investment-stewardship/perspectives-and-commentary/what_how_why.pdf (“We don’t:
Nominate directors or seek board seats …”).
85
See Giovanni Strampelli, How to Enhance Directors’ Independence at Controlled Companies,
44 J. Corp. L. 103, 136 (2018); Massimo Belcredi & Luca Enriques, Institutional Investor Activism in
a Context of Concentrated Ownership and High Private Benefits of Control: The Case of Italy (ECGI –
Law Working Paper No. 225/2013, 2014), https://ssrn.com/abstract=2325421.
seat on the board. Yet, in Israel like in Italy, institutional investors do not nominate their own
employees to the board.
Sweden. Sweden has a unique regime for nominating directors. The nominating committee
of each company is “external”: not all its members are directors. The Swedish Corporate
Governance Code requires that at least one member of the committee must be independent of
the largest shareholder. A typical nominating committee will comprise representatives of the
controlling shareholder, the chair, and two or three (local) institutional investors.86 More so,
the institutional investors who are members of the nominating committee are especially active
in recruting directors for widely held companies.87
At first sight, and especially at widely held companies, the failure of institutional investors
(other than in Israel, Italy and Sweden) to nominate directors seems puzzling. Indeed, in the
early 1990s, when institutional investors started to become more powerful, Professors Ron
Gilson and Reinier Kraakman envisioned them in such a role.88 They expected institutional
investors to use their clout to appoint professional outside directors to company boards. These
directors, they argued, would develop a reputation for leading change at companies and would
therefore be appointed by institutional investors whenever the need arises. The rise of institu-
tional investors’ influence, however, has led to activist directors nominated by activist hedge
funds, and not by mutual funds and other institutional investors.
More recently, Professor Jack Coffee, Jr. proposed that institutional investors form a steer-
ing committee and assemble a team of outside directors (i.e., not their employees) they could
then place on corporate boards.89 Under his view, such an initiative would be superior to the
current regime under which activists and companies privately decide to appoint activist direc-
tors without a shareholder vote.
None of these initiatives materialized. Legal scholars in the U.S. have highlighted the
regulatory obstacles that a large asset manager would face if it were to nominate a director.90
One major obstacle arises under section 13(d) of the Securities and Exchange Act, which in
practice means that an institutional investor nominating directors to a public company’s board
will be subject to extensive and costly filing requirements in connection with its trading of the
company’s stock.91
This argument, however, cannot explain the reluctance of investors—outside the U.S.—to
nominate directors. While section 13(d) applies only in the United States, activist hedge
funds—and not money managers—take the lead in nominating directors in Europe and other
86
See Sophie Nachemson-Ekwall & Colin Mayer, Nomination Committees and Corporate
Governance: Lessons from Sweden and the UK, Saïd Business School WP 2018-12, at 15 (2018),
https://ssrn.com/abstract=3170397 (reporting that nearly all public companies in Sweden have domestic
institutional investors on their nominating committee, and often two).
87
See Sophie Nachemson-Ekwall, Leveraging on Home Bias: Large Stakes and Long-Termism by
Swedish Institutional Investors, 66(3) Nordic J. Bus.128, 145–46 (2017).
88
See generally Ronald J. Gilson & Reinier Kraakman, Reinventing the Outside Director: An
Agenda for Institutional Investors, 43 Stan. L. Rev. 863 (1991).
89
See John C. Coffee, Jr., The Agency Costs of Activism: Information Leakage, Thwarted Majorities,
and the Public Morality (ECGI – Law Working Paper No. 373, 2017), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3058319.
90
See Morley, supra note 54.
91
See 15 U.S.C. § 80a-8 (2012).
countries as well. The next section takes a closer look at the role that activist directors play on
the board and their interactions with the shareholders that appoint them.
3.2 Activist Directors and Information Sharing
While activist directors are increasingly present on public company boards, few academic
studies explain why activists seek to appoint directors and the role that activist directors play
on boards. These questions are especially puzzling, since activists appoint only a minority of
board members and therefore rely on the cooperation of incumbents to implement their plan.92
Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch explain that “incomplete
contracting” prevents activists and boards from specifying in the settlement agreement all
future actions that management should take.93 Thus, activist directors are appointed to ensure
that management complies with the activist’s demands that cannot be specified in contract.
Kobi Kastiel and Yaron Nili focus on the need to improve the board’s competence to challenge
management.94 As they explain, directors appointed by activist hedge funds continuously rely
on the fund’s resources and expertise to collect information and analyze it independent of man-
agement. Thus, activist directors overcome the “informational capture” that often undermines
independent directors’ ability to monitor management.95
Our account focuses on the role of activist directors in implementing strategy or operational
changes. Implementation of these activist agendas, we argue, requires directors that not only
monitor management, but also play an active role in making strategic business decisions for
the company and refining the fund’s vision for the company. This in turn requires directors
with access to the company’s nonpublic information. Most importantly, this task requires
directors to share this nonpublic information with the activist fund for deeper analysis and
consultation.
As explained above, in most companies, management is likely to have addressed preemp-
tively all the “low-hanging fruit” for successful activist interventions. Thus, activist engage-
ments are increasingly likely to focus on sophisticated changes to the company’s strategy.
Changes of this type require an ongoing process of implementing the activist’s vision for the
company’s future direction.96
92
See Lucian A. Bebchuk et al., Dancing with Activists (ECGI – Finance Working Paper No.
604/2019, 2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2948869.
93
See id. Coffee, Robert Jackson, Jr., Joshua Mitts, and Robert Bishop criticize this reasoning. See
John C. Coffee, Jr. et al., Activist Directors and Agency Costs: What Happens When an Activist Director
Goes on the Board?, 104 Cornell L. Rev. 381 (2018).
94
Kobi Kastiel & Yaron Nili, “Captured Boards”: The Rise of “Super Directors” and the Case for
a Board Suite, 2017 Wis. L. Rev. 19.
95
Id. at 23 (arguing that independent directors do not have enough time, resources, or industry-specific
knowledge to understand complexities modern board members are tasked with evaluating). Jack Coffee,
Jr., in contrast, focuses on the private benefits that activist funds capture from appointing their represent-
atives to the board. See Coffee, Jr., supra note 89.
96
This is consistent with evidence that time horizons of activists have become longer. See, e.g.,
Sullivan & Cromwell LLP, Review and Analysis of 2017 U.S. Shareholder Activism 22
(2018), www.sullcrom.com/siteFiles/Publications/SC_Publication_Review_and_Analysis_of_2017_US
_Shareholder_Activism.pdf [https://perma.cc/ZEE3-M2S9] (“Activist funds are now holding invest-
ments longer, regularly up to five years.”).
Activists may need board representation not only to exercise oversight over management,
but also to further refine their plan for the company. Activists may need to work with man-
agement, through their trusted board representatives, to shape the company’s strategy and
execute it. This ongoing process requires access to the company’s nonpublic information. It
is difficult to make the many specific business or operational decisions required to implement
a new vision for the company based solely on the information available to outside investors.
The directors appointed by activists gain access to management and the company’s nonpublic
information.
Moreover, to be effective, activist directors may need to share the company’s nonpublic
information with the fund itself in a back and forth process. As Professors Kastiel and Nili
explain, activist directors often rely on the fund’s analysts, expertise, infrastructure, and
resources to make business decisions. Activist funds offer their directors a “back office” of
analysts and experts that help these directors to become more effective.97 Sharing nonpublic
information with the fund helps the fund itself to refine its vision for the company. After all,
activists form their initial proposals for the company without having formal access to nonpub-
lic information.
Finally, funds’ access to nonpublic company information significantly improves their
ability to monitor the directors they nominate to public company boards. Such monitoring
is required not only to prevent these directors from being captured by management, but also
to ensure these directors are sufficiently qualified. Without access to nonpublic information,
including information about board dynamics, shareholders are left to evaluate directors based
only on proxies such as stock performance. Activist funds, in contrast, have superior access
to information that significantly improves their ability to evaluate director performance.
Unsurprisingly, therefore, activist hedge funds that appoint directors to public company boards
often secure the right of their designated directors to share information with the fund.98
3.3 Institutional Investors and Activist Directors
Our analysis shows that some forms of activist intervention depend on directors with the
ability to share nonpublic company information with the party that nominated them to the
board. This understanding, in turn, sheds a new light on institutional investors’ limited ability
to displace some forms of shareholder activism. If activist directors’ ability to share nonpublic
information with the fund is indeed critical to their success, then institutional investors might
be significantly constrained in their ability to appoint activist directors. Moreover, unlike the
U.S.-specific 13(d) obstacle, the challenge of sharing information with institutional investors
post-appointment applies even outside the United States and is harder to overcome without
dramatic changes the institutional investors’ business model and regulatory infrastructure.
First, directors’ sharing of nonpublic information with institutional investors would subject
these investors to prohibitive insider trading concerns. Funds that receive inside information
might be prohibited from trading the company’s shares. While it may not be a significant
obstacle for an activist hedge fund with concentrated holdings, this constraint could create
significant compliance risk for a large fund family with numerous mutual funds and other
97
See Kastiel & Nili, supra note 94.
98
See Gregory H. Shill, The Golden Leash and the Fiduciary Duty of Loyalty, 64 UCLA L. Rev.
1246, 1286 (2017).
investment products. Appointing directors who are not employees of the asset manager cannot
overcome this constraint. As long as activist directors rely on sharing information with the
fund that appointed them, such funds would be subject to the risk of insider-trading liability.
Second, a regime under which directors appointed by large institutional investors share
information with these investors and rely on their advice in performing their duties would be
a radical departure from institutional investors’ traditionally passive role in company affairs.
Consider, for example, the recent debate over the antitrust concerns raised by the increasing
influence of large asset managers that own a significant stake of virtually any large public
company in the United States.99 Skeptics of these antitrust concerns point to the limited influ-
ence that institutional investors have on their portfolio companies.100 A regime in which large
institutional investors with significant holdings in all large public companies not only appoint
directors but also regularly communicate with them regarding companies’ operations and
strategy might raise significant concerns about anticompetitive effect of common ownership
and subject the large institutional investors to strict regulatory scrutiny and perhaps even
political backlash.
Such a regime would also create second-order problems for large institutional investors.
Large fund families, for example, are complex organizations with numerous funds. Some
functions are centralized at the fund family level; others are executed at the fund level. If large
institutional investors were to appoint activist directors, they would be required to create the
infrastructure to support these directors.
This chapter’s analysis, therefore, explains why even well incentivized institutional inves-
tors cannot displace activist hedge funds in driving complex business changes that require
activist directors. To be effective, activist directors need to share the company’s nonpublic
information with the funds that appointed them. For institutional investors, however, access to
such nonpublic information would be prohibitively costly.
Our analysis sheds new light on a recent proposal by Ronald Gilson and Jeffrey Gordon for
a new model of boards of directors that would improve directors’ ability to review the compa-
ny’s business strategy. Under their Board 3.0 model, “empowered” directors would be charged
with monitoring strategy and management’s operational performance. In their engagement
with management, those directors would be supported by an internal “strategic analysis
office.”101 Under this proposal, the new type of directors would enjoy superior access to
nonpublic information, but would not share such information with shareholders. Accordingly,
these directors would be unable to rely on the expertise of shareholders to refine their vision,
and institutional investors would need to rely on stock prices to evaluate the quality of these
directors.102 Those directors, therefore, cannot fully displace activist directors of the type
nominated by hedge funds.
99
See generally Einer Elhauge, Horizontal Shareholding, 129 Harv. L. Rev. 1267 (2016).
100
For thoughtful analyses of the antitrust implications of common ownership, see Edward B. Rock &
Daniel L. Rubinfeld, Antitrust for Institutional Investors, 82 Antitrust L.J. 221 (2018); Marcel Kahan
& C. Scott Hemphil, The Strategies of Anticompetitive Common Ownership, 129 Yale L.J. 1392 (2020).
101
See Ronald J. Gilson & Jeffrey N. Gordon, Board 3.0: An Inroduction, 74 Bus. Law. 351, 361
(2019).
102
Gilson & Gordon argue that institutional investors will be able to “observe the performance of the
firm over time.” Id. at 363. In other words, they believe that stock performance would be the measure by
which institutional investors would evaluate the quality of directors.
4. CONTROLLED COMPANIES AND COUNTRIES IN

TRANSITION
The central premise underlying our analysis has been that, given the rise in their holdings
of public company shares, institutional investors as a group can determine the outcome of
director elections and other important shareholder votes. Management, therefore, has a clear
interest in communicating with institutional investors, and especially the largest ones. This
premise, however, applies only to widely held companies. In this section, we discuss the role
of institutional investors in controlled companies and consider the special case of markets in
transition from controlled to dispersed ownership structure.
4.1 Concentrated Ownership
The rise of powerful institutional investors at widely held companies means that these investors
need not adopt aggressive tactics or other formal measures to influence management. Rather,
they can deploy soft power and rely on informal means of communications with management.
These developments, however, depend on the premise that large institutional investors have
the collective power to displace underperforming managers. Thus, they are unlikely to take
place at companies with controlling shareholders.
The existing literature on institutional investors tends to focus on the United States and
occasionally the United Kingdom. In both countries, the majority of large public companies
are widely held. Concentrated ownership, however, is prevalent around and world, especially
in emerging markets.103 Even the United States has a significant fraction of public companies
with controlling shareholders.104 Technology companies, for example, are increasingly going
public with a dual-class share structure that allows founders to control the company without
holding a majority of cash flow rights.
Concentrated ownership alters the role of institutional investors along two dimensions.
First, like other public investors, institutional investors in controlled companies are minority
shareholders. This means that institutional investors have limited power to affect corporate
decisions. As the controlling shareholder dictates the outcome of shareholder votes, even
well-incentivized institutional investors have little ability to influence companies in their
portfolio, especially if these companies do not tap capital markets on a frequent basis. Even
independent directors need the controller support—not that of institutional investors—to
secure continued service on the board.105
Second, the main conflict between insiders and investors in controlled companies is the
potential diversion of resources by controlling shareholders through self-dealing and other
forms of “tunneling.” Moreover, business groups are prevalent in many countries around
the world, especially in emerging markets. The presence of business groups can create new
103
See John K.S. Ho, Bringing Responsible Ownership to the Financial Market of Hong Kong: How
Effective Could It Be?, 16 J. Corp. L. Stud. 437 (2016).
104
See Clifford G. Holderness, The Myth of Diffuse Ownership in the United States, 22 Rev. Fin.
Stud. 1377 (2009).
105
See María Gutiérrez Urtiaga & Maribel Sáez, Deconstructing Independent Directors, 13 J. Corp.
L. Stud. 63 (2013); Lucian A. Bebchuk & Assaf Hamdani, Independent Directors and Controlling
Shareholders, 165 U. Pa. L. Rev. 1271 (2017).
sources of conflicts for institutional investors, for example, when dominant groups control
institutional investors that make intra-group investments.
The rising power of institutional investors will increase further the differences in corporate
governance between widely-held and controlled companies. As discussed earlier, the increase
in institutional investors’ size means that they are quite influential at widely-held companies,
and that much of their influence is likely to take place through engagement and other types of
behind-the-scenes activity. This is especially the case for the largest asset managers, such as
BlackRock or Vanguard.
In controlled companies, in contrast, even large institutional investors would presumably
have little formal or informal influence. Insiders do not rely on support by institutional inves-
tors and thus do not have strong incentives to communicate with these investors or take their
views into account. Thus, the recent emergence of stewardship codes and other regulatory
measures to facilitate institutional investors’ activism are unlikely to have a meaningful effect
in jurisdictions in which controllers hold the voting power that allows them to disregard the
views of minority investors.106
Indeed, there is anecdotal evidence that controllers—even in the United States—openly
disregard the views of institutional investors. In 2014, for example, Google decided to issue
a new class of nonvoting stock with the purpose of allowing its controlling shareholders to
maintain their control over the company even as it continues to grow and raise capital. This
change required the company to amend its charter and subject the amendment to a shareholder
vote. A majority of disinterested shareholders voted against the proposal to amend the charter.
Yet, the company controllers had enough voting power to force the charter amendment against
the collective will of a majority of public investors.107 In other markets—where concentrated
ownership is prevalent, institutional investors are smaller in size, and social norms discourage
open confrontation with corporate insiders—institutional investors are less likely to become
collectively influential.
Not surprisingly, empirical studies of hedge fund activism—especially outside the United
States—find that activist funds seem to prefer targets without controlling shareholders,108
including companies that have relatively large (but noncontrolling) blockholders.109 Both in
the United States and in other markets, activists occasionally target controlled companies.110
Institutional investors may have greater influence in controlled companies to the extent
that corporate law adopts measures to empower minority shareholders. For example, in some
jurisdictions corporate law subjects self-dealing transactions to majority-of-minority voting
requirements.111 Corporate law also may empower minority shareholders to appoint some rep-
106
See Luh Luh Lan & Umakanth Varottil, Shareholder Empowerment in Controlled Companies:
The Case of Singapore, in Research Handbook Of Shareholder Power 573, 575–78 (Jennifer G. Hill
& Randall S. Thomas eds., 2015).
107
See Zohar Goshen & Assaf Hamdani, Corporate Control, Dual Class, and the Limits of Judicial
Review, 120 Colum. L. Rev. 941 (2020).
108
Becht at al., supra note 44, at 2968.
109
Gaia Balp, Activist Shareholders at De Facto Controlled Companies, 13 Brook. J. Corp. Fin. &
Com. L. 341, 394 (2019).
110
See Kastiel, supra note 26.
111
See Bebchuk & Hamdani, supra note 105.
resentatives to the board of directors.112 Indeed, empirical studies find that hedge fund activists
that target controlled companies are more likely to succeed when they leverage legal arrange-
ments that empower minority shareholders. A study on hedge fund activism in Hong Kong, for
example, found that activists who target controlled companies rarely succeed in nominating
directors, as minority shareholders lack the power to influence director nomination. Activists
are more successful, however, when they focus on self-dealing, where the law requires
a majority-of-minority vote.113 In Italy, in contrast, activists have taken advantage of the slate
voting regime designed to provide minority shareholders’ with at least one board seat.114
4.2 Countries in Transition
Countries in transition from concentrated to dispersed ownership of public companies present

an especially intriguing case. As Section 1 explained, institutional investors in widely held
companies might prefer engagement and other behind-the-scenes avenues of influence given
regulatory constraints enacted to prevent them from becoming too powerful. Countries
without experience with dispersed ownership, however, may lack the regulatory restrictions
that prevent institutional investors from manifesting their power as owners. Therefore, once
institutional investors grow into power, they may step into the vacuum left by the sudden
absence of a controlling shareholder, and collectively exert direct and open influence compa-
nies in their portfolio.
Consider the case of Israel. In 2013, new legislation resulted in gradual transition of major
companies from concentrated to diffused ownership.115 Consequently, Israeli institutional
investors became the collective owners of a majority of shares of several large public com-
panies. Moreover, they faced little regulatory restrictions on their ability to become active by
nominating directors, for example.
This new reality led to a dramatic increase in activism by institutional investors. In 2018,
for example, each of the four largest institutional investors of Paz, a large energy company,
112
See Luca Enriques & Tobias H. Trӧger, The Law and (Some) Finance of Related Party
Transactions: An Introduction, in The Law and Finance of Related Party Transactions 1 (Luca
Enriques & Tobias H. Trӧger eds., 2019).
113
Yu-Hsin Lin, When Activists Meet Controlling Shareholders in the Shadow of the Law: A Case
Study of Hong Kong, 14 Asian J. Comp. L. 1, (2019) (analyzing activist campaigns in Hong Kong and
finding that “among the various legal tools available, minority veto rights are the most commonly used
and the most effective tool for activists to leverage their position in controlled firms”).
114
See Matteo Erede, Governing Corporations with Concentrated Ownership Structure: An Empirical
Analysis of Hedge Fund Activism in Italy and Germany, and Its Evolution, 10 Eur. Company & Fin. L.
Rev. 328 (2013). One critique is that empowering shareholders in companies with controlling sharehold-
ers creates a problem of “strong shareholders weak outside investors.” See María Gutiérrez & Maribel
Sáez Lacave, Strong Shareholders,Weak Outside Investors, 18 J. Corp. L. Stud. 277 (2018).
115
The Law For Promotion of Competition and Reduction of Concentration, 5774–2013. This
major piece of legislation limited stock pyramid structures to two public layers, and required separation
of ownership between financial and non-financial companies. For the logic behind the legislation,
see Israeli Dept. of Treasury Competitiveness Committee's Final Report (Mar. 18, 2012), www
.gov.il/BlobFolder/unit/competitiveness-committee/he/Vaadot_ahchud_CompetitivenessCommittee
_FinalReport_FinalRec.pdf. See also Assaf Hamdani, Yishay Yafeh & Kostantin Kosenko, Using
Regulation to Dismantle Powerful Corporate Pyramids, ProMarket (May 5, 2020), https://promarket
.org/using-regulation-to-dismantle-powerful-corporate-pyramids.
nominated a director to the board.116 After a proxy fight vis-a-vis the candidates nominated
by the company, all the candidates nominated by the institutional investors were elected
to the board.117 Moreover, in the same company institutional investors were successful in
their demand to modify the corporate charter in order to add another board position, which
in turn was filled by another candidate nominated by an institutional investor.118 The board
changes ultimately led to the removal of the company’s CEO.119 Note that all the elected board
members were unaffiliated with the institutional investors. Nevertheless, the institutional
investors’ activism was swift, aggressive and effective. A similar course of action took place
in other Israeli companies, with varying degrees of success.120
The Israeli case illustrates the dynamic that might take place once ownership structure
changes in markets where institutional investors’ holdings are substantial. On the one hand,
institutional investors may become (collectively) the owners of a majority of public company
shares. As a group, they have a power to determine vote outcomes and decide who will serve
on the board. On the other hand, as long as concentrated ownership was prevalent, lawmakers
did not face pressure to adopt measures to limit the influence of institutional investors. In the
absence of regulatory restrictions, institutional investors might openly adopt some activist
tactics. The question, however, is whether increased activism by institutional investors will
produce a regulatory backlash.
5. CONCLUSION
This chapter analyzed the governance implications of the rising influence of institutional
investors against the background of the rise of activist hedge funds. The rising power of
institutional investors will further enhance the difference between controlled and widely held
companies. Powerful institutional investors at widely held companies are increasingly likely
to exert their influence behind the scenes and without the need to use aggressive tactics. Yet,
some activist interventions—those that require the appointment of activist directors to imple-
ment complex business changes—cannot be pursued even by powerful and well-motivated
institutional investors without dramatic changes to their respective business models and
regulatory landscape.
116
See the company’s immediate reports (Hebrew) from Oct. 16, 2018 & Mar. 11, 2019, https://maya
.tase.co.il/reports/details/1189546; https://maya.tase.co.il/reports/details/1217364.
117
Rachel Bindman & Yaniv Rahimi, The Institutional Investors Wish to Revolutionize Paz's Board
of Directors, Calcalist (Sept. 25, 2018), www.calcalist.co.il/markets/articles/0,7340,L-3746420,00
.html.
118
Rachel Bindman, Paz’s Shareholders Approve Charter Amendment – Avraham Biger’s Path to
the Board is Paved, Calcalist (Dec. 3, 2018), www.calcalist.co.il/markets/articles/0,7340,L-3751212
,00.html.
119
Golan Hazani, Now it’s Official – Paz CEO Yona Fogel is Retiring, Calcalist (Sept. 19, 2019),
www.calcalist.co.il/markets/articles/0,7340,L-3770671,00.html
120
Omri Cohen, Entropy Supports the Institutional Investor’s Nominees to Mivne's Board of
Directors, Globes (Aug. 8, 2019), www.globes.co.il/news/article.aspx?did=1001296534; Amitay Ziv,
An Unusual Incident – Institutional Investors Wish to Replace Bezeq’s Board of Directors, The Marker
(Jan. 26, 2018), www.themarker.com/technation/1.5767349.
PART IV
ENFORCEMENT
19. Diversified enterprises with controlling
shareholders: a theoretical analysis of
risk-sharing, control/voting leverage and
tunneling
Sang Yop Kang1
1. INTRODUCTION
Some business entities run a single business (e.g., shoes), while others are “diversified enter-
prises” with a variety of businesses (e.g., shoes and clothes). For example, Dyson, a manu-
facturer of vacuum cleaners, tried to expand into the electric automobile industry.2 BYD, an
electric automobile company, produces face masks and disinfectants.3 Disney covers various
businesses such as cable and broadcast television networks, films, theme parks, resorts, cruise
lines, games, books, magazines, and retailing.4
A diversified enterprise can be established as a single corporation with multiple “business
lines.” In this chapter, these companies are referred to as “companies operating various
businesses” (COVBs). For instance, a COVB may consist of automobile frame, furniture,
(home and car) audio system, and airbag business lines. Diversified enterprises can also be
established as a corporate group,5 comprised of multiple “affiliated companies,” each of
1
The author presented an earlier draft in Research Handbook on Comparative Corporate Governance
Workshop held at Fordham Law School (September 27-28, 2019). The author thanks, Afra Afsharipour
and Martin Gelter, for organizing the project and their comments. The author also thanks, Joon Hyug
Chung, Nicholas Howson, Douglas Levene, Tong Ling, Martin Petrin, Tian Xie, and the participants
of the workshop at Fordham Law School, for their comments and discussions. In addition, the author
thanks, Qianru Guo, Zihan Xie, and Jing Xu, for their assistance.
2
Theo Leggett, Dyson Has Scrapped Its Electric Car Project, BBC News (Oct. 11, 2019), available
at www.bbc.com/news/business-50004184.
3
BYD Opens World’s Largest Face Mask Manufacturing Plant, BYD (Mar. 13, 2020), https://en
.byd.com/news-posts/byd-opens-worlds-largest-face-mask-manufacturing-plant/.
4
Walt Disney Co Profile, CNN Business, available at https://money.cnn.com/quote/profile/ profile.
html?symb=DIS (last visited May 11, 2020).
5
As for corporate groups, see, e.g., John Armour et al., Transactions with Creditors, in The
Anatomy of Corporate Law: A Comparative and Functional Approach 115 (Reinier Kraakman
et al. eds., 3d ed. 2017). Examples of corporate groups are found in many jurisdictions, including the
U.S., Europe, Latin America, and Asia. For the further explanation of the state-owned corporate groups
in China, see Li-Wen Lin & Curtis Milhaupt, We Are the (National) Champions: Understanding the
Mechanisms of State Capitalism in China, 65 Stan. L. Rev. 697 (2013). For the more explanation of
corporate-group issues in Europe, see David Sugarman, Corporate Groups in Europe: Governance,
Industrial Organization, and Efficiency in a Post-Modern World, in Regulating Corporate Groups
in Europe 13, 67 (David Sugarman & Gunther Teubner eds., 1990); Klaus J. Hopt, Legal Elements
and Policy Decisions in Regulating Groups of Companies, in Groups of Companies 81, 95 (Clive M.
389
which is a separate legal person.6 For example, a corporate group may have automobile frame,
furniture, (home and car) audio system, and airbag affiliated companies. Unlike an affiliated
company in a corporate group, a business line in a COVB, without its own legal personhood,
acts as a part of a legal person, a corporation.
Although many studies have examined diversified enterprises, studies which theoretically
analyze the differences between COVBs and corporate groups are rare. In terms of business
operations, a business line of a COVB functionally corresponds to an affiliated company
within a corporate group. This chapter addresses how, despite the functional similarities of
COVBs and corporate groups, the selection between a COVB form and a corporate-group
form makes differences in terms of the following issues: (1) risk-sharing (cash-flow stabiliza-
tion), (2) control/voting leverage, and (3) tunneling. In most countries, controlling sharehold-
ers (“controllers”) are often dominant players of large businesses,7 and this chapter emphasizes
the analysis of controllers’ behavior and incentives when they manage diversified enterprises.
In short, issue (1) relates to controllers’ efforts to manage business organizations safely. Issue
(2) concerns controllers’ drive to dominate larger corporate empires. Issue (3) is associated
with controllers’ schemes to gain private benefits from the corporate entities they direct.
Section 2 expounds issues regarding risk-sharing (cash-flow stabilization) in diversified
enterprises. In a COVB, there is no “legal-personhood partition”8 between business lines.
Thus, unless boundaries are built between business lines due to corporations’ internal practices
or rules in specific jurisdictions, in principle cash flows from these business lines naturally mix
within a COVB. On the other hand, in a corporate group, there are legal-personhood partitions
among affiliated companies, and thus, in general cash flows from affiliated companies do not
naturally commingle.9 If a controller decides to shift cash flows from one affiliated company
to another, for example, for the purpose of subsidizing a failing company, that is a deliberate
wealth-transfer. The intentional transfer of cash flows can result in legal problems, such as
a breach of the duty of loyalty, since constituencies of the affiliated company, whose cash
flows are transferred, can suffer financial injury.10 Nonetheless, if jurisdictions adopt, explic-
Schmitthoff & Frank Wooldridge eds., 1991); Corporate Group Law for Europe: Forum Europaeum
Corporate Group Law, 1 Eur. Bus. Org. L. Rev. 165 (2000).
6
See, e.g., Virginia Harper Ho, Of Enterprise Principles and Corporate Groups: Does Corporate
Law Reach Human Rights?, 52 Colum. J. Trans. L. 113, 133 (2013); James D. Cox & Thomas Lee
Hazen, Cox and Hazen’s Treatise on the Law of Corporations § 1:3 (3d ed. 2019).
7
See, e.g., Leon Yehuda Anidjar, Toward Relative Corporate Governance Regimes: Rethinking
Concentrated Ownership Structure Around the World, 30 Stan. L. & Pol’y Rev. 197, 202 (2019);
Ronald J. Gilson, Controlling Shareholders and Corporate Governance: Complicating the Comparative
Taxonomy, 119 Harv. L. Rev. 1641, 1643 (2006).
8
For the further discussion of legal-personhood partition, see infra Section 2.2.
9
10
Regarding the duty of loyalty, see, e.g., E. Norman Veasey, Duty of Loyalty: The Criticality of
the Counselor’s Role, 45 Bus. Law. 2065, 2065–66 (1989) (“Duty of loyalty issues may arise in the
context of a variety of transactions, including: ….”). As to the effects of wealth-transfers, see, e.g., Henk
Berkman et al., Expropriation Through Loan Guarantees to Related Parties: Evidence from China, 33
J. Banking & Fin. 141, 151 (2009) (“Firms issuing loan guarantees to one of their block holders have
significantly lower returns on assets, significantly lower dividend yields, significantly higher leverage,
and significantly lower values of Tobin’s Q.”).
Diversified enterprises with controlling shareholders 391
itly or implicitly, policies or practices similar to the Rozenblum doctrine,11 corporate insiders’
concerns about the duty-of-loyalty problem could be diminished.
Section 3 analyzes differences between COVBs and corporate groups concerning control-
lers’ equity investment and inflated voting power. Controllers can take advantage of “control
leverage,” by which they invest a small amount of equity in diversified enterprises but effec-
tively control them by means of other people’s (e.g., non-controlling shareholders’) capital.12
As will be discussed, control leverage is more apparent in corporate groups since controllers
can use “control chains” connecting affiliated companies with separate legal personhood.13 By
contrast, in COVBs, the scheme of control chains is unavailable since COVBs do not have
affiliated companies. Thus, control leverage is less effective in COVBs.
Section 4 examines how the organizational difference between COVBs and corporate
groups affects the patterns of controllers’ tunneling and a liability-shield effect. In a corporate
group, a controller can tunnel14 corporate value by using “transactions between two affiliated
companies” (“internal transactions”).15 The parties who directly engage in internal transactions
are two affiliated companies with independent legal personhood; thus, a controller is not offi-
cially a direct party. In this respect, regarding liability for tunneling, the controller may attempt
to hide herself behind the boards of the two affiliated companies. Even if the controller is
eventually found liable, the presence of the affiliated companies and their boards can delay the
investigation into the tunneling and lower the chance of the controller’s liability.16 A COVB,
by contrast, cannot engage in internal transactions since there is no affiliated company. Hence,
controllers of COVBs do not enjoy an effective protection mechanism concerning their chance
of being found liable. Also, internal transactions in corporate groups can provide controllers
with opportunities to tunnel corporate value in an ongoing, repeated manner. Additionally—
based on the larger amount of capital that controllers direct in corporate groups, as compared
to in COVBs—controllers can tunnel corporate value more efficiently in corporate groups.17
Section 5 summarizes and concludes the chapter.
This short chapter purposely minimizes the introduction and analysis of cases, statutes, legal
doctrines, and the market systems and practices of specific jurisdictions. Instead, this chapter,
through a theoretical prism, puts forward an analytical framework on the characteristics and
corporate governance issues of diversified enterprises. This chapter explains that controllers
are generally inclined to establish corporate groups rather than to maintain COVBs. For
instance, due to the high control leverage of the corporate-group form, controllers can manage
much larger business empires. The larger size of capital enables controllers to tunnel corpo-
rate value more efficiently. In addition, controllers of corporate groups can exploit internal
transactions. This chapter, however, does not suggest an “equilibrium” that controllers always
choose the corporate-group form over the COVB form. Controllers may select a combined
11
12
13
See id.
14
“Tunneling” is the term referred to as expropriation of corporate value. See, e.g., Simon Johnson
et al., Tunneling, 90 Am. Econ. Rev. 22, 22 (2000).
15
For the further discussion of internal transactions, see generally Sang Yop Kang, Rethinking
Self-Dealing and the Fairness Standard: A Law and Economics Framework for Internal Transactions in
Corporate Groups, 11 Va. L. & Bus. Rev. 95 (2016).
16
17
form by directing corporate groups with affiliated companies that are COVBs. Alternatively,
controllers may choose the COVB form after considering their cost-benefit analyses or due
to applicable restrictions. Although the corporate-group form ordinarily offers “comparative
advantages” to controllers over the COVB form, controllers’ selection of an organizational
form is also affected by unique aspects of individual jurisdictions, such as market institutions,
regulations, tax issues, business-government relationship, and efficiency of enforcement.
2. RISK-SHARING THROUGH CASH FLOW STABILIZATION
This section discusses issues related to risk-sharing18 (cash-flow stabilization) in diversified

enterprises.19 Among the many issues covered, this section explains that in a COVB, cash
flows generated by various business lines naturally commingle and, thus, shareholders of
a COVB can utilize stabilized, diversified cash flows without deliberate transfers of wealth.
A corporate group, in contrast, can achieve cash-flow stabilization among affiliated companies
by the deliberate transfer of wealth among the affiliated companies.20 As a result, shareholders
(and other constituencies such as creditors) of the affiliated companies participating in the
wealth-transfer are beneficially or adversely affected, which may engender legal problems
such as a breach of the duty of loyalty.21
2.1 Cash-Flow Stabilization: COVBs v. Corporations with a Single Business
In a COVB, unless the financial performance of all business lines correlates perfectly (put
differently, the correlation coefficient of the financial performance of business lines is +1), the
presence of multiple business lines reduces the financial risk arising from cash-flow fluctua-
tion.22 In cases where the nature of business lines is “unrelated,” in general cash-flow stabili-
zation would be more effective at the corporate level since the correlation coefficient of cash
18
See, e.g., Kathryn L. Dewenter, The Risk-Sharing Role of Japanese Keiretsu Business Groups:
Evidence from Restructuring in the 1990s, 15 Japan & World Econ. 261 (2003) (explaining risk-sharing
in Japanese corporate groups).
19
As for the costs and benefits of diversification, see, e.g., Jose Manuel Campa & Simi Kedia,
Explaining the Diversification Discount, 57 J. Fin. 1731, 1734–35 (2002).
20
With respect to cash-flow stabilization, another related topic is “internal capital markets.”
For further discussion of this concept, see, e.g., Jeremy C. Stein, Internal Capital Markets and the
Competition for Corporate Resources, 52 J. Fin. 111, 111 (1997) (analyzing “the role of corporate head-
quarters in allocating scarce resources to competing projects in an internal capital market”).
21
Regarding the comparison between corporate groups and COVBs, other relevant issues include
limited liability (of affiliated companies) and piercing the corporate veil. For the more explanation
of limited liability, see, e.g., Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the
Corporation, 52 U. Chi. L. Rev. 89 (1985). Piercing the corporate veil is a useful mechanism to protect
creditors, including involuntary creditors such as tort victims. As for a famous veil-piercing case in the
U.S., see Walkovszky v. Carlton, 223 N.E.2d 6, 7 (N.Y. 1966). For the further discussion of piercing
the corporate veil, see, e.g., Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76
Cornell L. Rev. 1036 (1991); Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J. Corp. L. 479,
526–27 (2001) (explaining “enterprise liability” in corporate groups).
22
Also, one may argue that “the cost of capital is lower when the correlation of cash flows among
the diversified firm’s segments is lower.” Rebecca N. Hann et al., Corporate Diversification and Cost of
Capital, 68 J. Fin. 1961, 1961 (2013).
flows that unrelated business lines engender is likely to be smaller. In this respect, in terms
of risk management, corporate insiders prefer using the form of a COVB to that of a business
organization with a single business line that is unable to diversify cash flows.23
However, from the standpoint of shareholders (or, more generally, investors in the capital
market), the presence of diversified cash flows, by establishing COVBs, has little to do with
creating corporate value. If shareholders wish to lessen cash-flow fluctuations and the level
of risks that adversely affect them, they do not need corporate insiders to set up COVBs with
a variety of business lines. Instead, in a capital market, (retail) investors can diversify their
investment across numerous companies. For example, investments via index funds allow for
significant cash-flow diversification for investors at low costs in terms of fees.24
Stabilized cash flows are especially valuable to controllers. Controllers usually invest most
of their wealth in the business organizations they control, since control over business organ-
izations usually requires a substantial amount of capital. Hence, controllers’ wealth could be
insufficiently diversified. In this respect, controllers consider the establishment of a COVB,
rather than a corporation focusing on a single business, as a useful risk-management measure
to stabilize cash flows.25 Such a measure is, however, not in the interest of investors, who have
better alternatives in the capital market at a lower cost and higher efficiency in regard to diver-
sification of their investment. In this light, an agency problem may occur. Also, it is frequently
argued that “highly diversified firms are consistently valued less than specialized firms.”26
Under certain circumstances, however, cash-flow stabilization at the corporate level may
bring a positive outcome to investors. For instance, in a specific jurisdiction’s capital market,
if institutional investors, such as mutual funds, are neither well developed nor trusted, it is
difficult for (retail) investors to rely on these funds to diversify their investment portfolios at
a capital market level. In this case, due to the imperfect capital market situation (i.e., the lack
of sophisticated institutional investors and the capital market integrity), diversification at the
corporation level might be one of a few diversification tools available to investors.
2.2 Cash-Flow Stabilization: COVBs v. Corporate Groups
Section 2.1 examined cash-flow stabilization by comparing COVBs and corporations with
a single business. Section 2.2 analyzes cash-flow stabilization based on the comparison
between COVBs and corporate groups.
23
Regarding diversified firms’ advantages, see, e.g., Ran Duchin, Cash Holdings and Corporate
Diversification, 65 J. Fin. 955, 956 (2010) (“[D]iversified firms are well positioned to smooth investment
opportunities and cash flows because both the opportunities and the outcomes of their divisions are not
perfectly correlated.”).
24
See, e.g., Richard A. Brealey et al., Principles of Corporate Finance, at 327–28 (2013)
(“[Investors] simply ‘buy the index,’ which maximizes diversification and cuts costs to the bone.
Individual investors can buy index funds, which are mutual funds that track stock market indexes. There
is no active management, so costs are very low.”).
25
Regarding other “potential benefits of operating different lines of business within one firm,” see,
e.g., Philip G. Berger & Eli Ofek, Diversification’s Effect on Firm Value, 37 J. Fin. Econ. 39, 40 (1995).
26
Larry H. P. Lang & René M. Stulz, Tobin’s q, Corporate Diversification, and Firm Performance,
102 J. Pol. Econ. 1248, 1278 (1994). “Our evidence is supportive of the view that diversification is not
a successful path to higher performance, but it is less definitive on the question of the extent to which
diversification hurts performance.” Id.
2.2.1 Case 1: COVBs

Suppose a COVB has two business lines: Weak (W) and Strong (S) Lines. Suppose the finan-
cial performance of W Line becomes weak, producing a negative cash flow of 200 million
dollars, while that of S Line becomes strong, generating a positive cash flow of 400 million
dollars.
Figure 19.1 No legal personhood partition between two business lines
As opposed to the case of a corporate group, in a COVB there is no legal-personhood parti-

tion between the two business lines. Since S and W Lines are not independent legal persons,
they do not have separate accounting profit systems. Thus, the two business lines’ cash flows
naturally commingle within the COVB, unless a regulation or the corporation’s own policy
prohibits the internal movement of cash flows. Ultimately, the COVB as a whole holds a net
positive cash flow of 200 million dollars, and cash flows are stabilized within the corporation
without intentional redistribution of cash flows between S and W Lines. Functionally speak-
ing, however, S Line subsidizes W Line, although there is no official subsidy. Figure 19.1
describes the situation.
2.2.2 Case 2: corporate groups

Let us now turn to the case of a corporate group, which is comprised of two affiliated compa-
nies, Weak (W) and Strong (S) Companies. Suppose the financial performance of W Company
becomes weak, generating a negative cash flow of 200 million dollars, and that of S Company
becomes strong, producing a positive cash flow of 400 million dollars.
These affiliated companies are independent legal persons, and they generally maintain
separate accounting profit systems: the cash flow of each company marks as each company’s
own cash flow. Since a legal-personhood partition divides these two legally separate affiliated
companies, cash flows from them are not naturally commingled. Put differently, unlike the
case of the COVB, spontaneous cash-flow stabilization (without intentional redistribution of
cash flows between S and W Companies) does not occur. Figure 19.2 delineates the situation.
Against this backdrop, suppose the controller in the corporate group holds 75 percent and
50 percent shares of W and S Companies, respectively. By holding two different stocks, the
controller can diversify her investment and lower her level of risk, as compared to the case
where she invests in a corporation with a single business. In this respect, the controller can
enjoy the risk-reduction benefits from investment diversification similar to that of a COVB.
Figure 19.2 Legal personhood partition between two affiliated companies
Let us now analyze the issue of cash-flow stabilization between the two legally separate
affiliated companies. One may argue that the corporate-group setting can provide “insurance”
(risk-sharing) to affiliated companies in poor condition. Suppose W Company, with the
negative cash flow of 200 million dollars, has already been financially at stake. To save W
Company, suppose the controller urges S Company’s board of directors to transfer surplus
cash flows to W Company, and the board follows the controller’s order or advice. For instance,
S Company may lend W Company money with a lower interest rate than the commercially
available rate.27 Alternatively, if the two companies are within the same supply chain of the
vertical integration, S Company can shift its surplus cash flow to W Company by supplying
W Company with intermediate products cheaper than the fair market price.28 In any case, S
Company subsidizes W Company, and cash flows are stabilized between the two companies.
The intent of S Company’s board might be disinterested, and its decision might be made
solely for the genuine purpose of rescuing a part of the corporate group. Nonetheless, in this
case, the deliberate transfer of wealth (or cash flows) financially benefits the controller. This
is because the wealth-transfer arises from one affiliated company, where the controller has
a lower stake (holding 50 percent shares in S Company), to another affiliated company, where
the controller has a higher stake (holding 75 percent shares in W Company). Also, given the
clear legal-person partition between the two companies, the deliberate wealth-transfer from
S Company to W Company injures the financial interests of the non-controlling shareholders
27
See, e.g., Radhakrishnan Gopalan et al., Affiliated Firms and Financial Support: Evidence from
Indian Business Groups, 86 J. Fin. Econ. 759, 761 (2007) (showing that “the loans are made on terms
more favorable than those of comparable market loans, consistent with the loans being used to provide
subsidized support.”). “[Corporate] groups extend loans to financially weaker firms and significantly
increase the extent of loans when member firms are hit with a negative earnings shock.” Id.
28
See, e.g., Tarun Khanna & Yishay Yafeh. Business Groups and Risk Sharing Around the World,
78 J. Bus. 301, 319 (2005) (“Perhaps, vertically integrated groups can adjust prices and volumes of
intragroup transactions more easily to assist member firms.”).
(and other constituencies such as creditors) of S Company. In this light, a breach of the duty of
loyalty29 or tunneling may arise.30
By contrast, in the case of the COVB discussed above, recall that S Line functionally subsi-
dizes W Line. This functional subsidy arises without the artificial redistribution of cash flows
between separate legal persons. Hence, in relation to wealth-transfer between legal persons,
a loyalty or tunneling problem does not generally occur. In corporate groups, if a subsidy is
a pre-arranged guarantee between affiliated companies and such information is disclosed to
investors, the duty-of-loyalty problem could be mitigated.
Regarding wealth-transfer within a corporate group, related legal issues have been exten-
sively discussed in Europe. For instance, the Rozenblum doctrine, developed in France,
“allows directors to consider, under some circumstances, the interest of the [corporate] group
as a whole rather than just the company and the shareholders of the company in which they are
a member.”31 In other words, concerning the abuse of corporate assets, the doctrine acknowl-
edges a “group defense,”32 if the following conditions are satisfied:
First, there must be a group characterized by capital links between the companies. Second, there must
be strong, effective business integration among the companies within the group. Third, the financial
support from one company to another company must have an economic quid pro quo and may not
break the balance of mutual commitments between the concerned companies. Fourth, the support
from the company must not exceed its possibilities. In other words, it should not create a risk of
bankruptcy for the company.33
If jurisdictions explicitly or implicitly adopt the Rozenblum doctrine, implement policies

that are lenient to the risk-sharing in corporate groups, or maintain inefficient enforcement
29
For the theoretical analysis of tunneling, see generally Sang Yop Kang, “Generous Thieves”:
The Puzzle of Controlling Shareholder Arrangements in Bad-Law Jurisdictions, 21 Stan. J. L. Bus. &
Fin. 57 (2015); Vladimir Atanasov et al., Unbundling and Measuring Tunneling, 2014 U. Ill. L. Rev.
1697 (2014); Vladimir Atanasov et al., Law and Tunneling, 37 J. Corp. L. 1 (2011). Tunneling arises in
a variety of forms, including related party transactions. See generally The Law and Finance of Related
Party Transactions (Luca Enriques & Tobias H. Tröger eds., 2019). For the law-and-economics
analysis of unfair self-dealing, see generally Kang, supra note 15; Simeon Djankov et al., The Law and
Economics of Self-Dealing, 88 J. Fin. Econ. 430 (2008).
30
In a wealth-transfer from a subsidizing company to a subsidized company, it is possible that the
subsidizing company’s directors are not insulated from, at least theoretically, duty-of-loyalty claims even
if the controller of a corporate group does not gain financial benefits from such transfer. For instance,
when the controller holds the same economic interest in the subsidizing company and the subsidized
company, in general she does not receive financial profits from the wealth-transfer. Also, when the
controller holds a greater economic interest in the subsidizing company, she normally loses financially.
In these two cases, nonetheless, the non-controlling shareholders of the subsidizing company may claim
that their financial interest has been harmed as a result of the wealth-transfer, and thus, may rely on
duty-of-loyalty claims.
31
OECD, Related Party Transactions and Minority Shareholder Rights, at 53 (2012). As
for the Rozenblum doctrine, see also Pierre-Henri Conac, Director’s Duties in Groups of Companies –
Legalizing the Interest of the Group at the European Level, 2 Eur. Company & Fin. L. Rev. 194, 200–01
(2013).
32
Pierre-Henri Conac et al., Constraining Dominant Shareholders’ Self-dealing: The Legal
Framework in France, Germany, and Italy, 4 Eur. Company & Fin. L. Rev. 491, 519 (2007).
33
Id. at 519–20 (citation omitted).
Table 19.1 Cash-flow stabilization in COVBs and corporate groups
COVB Corporate Group

Legal-Personhood Partition No Yes
Reallocation of Cash Flows (or Naturally Deliberately
Wealth-Transfer)
Legal Effect The reallocation of cash flows may create
a duty-of-loyalty problem. However, a safe
harbor can be provided by the Rozenblum
doctrine or other lenient doctrines and
practices.
systems, a safe harbor for corporate insiders would be available. Table 19.1 above summarizes
the discussion about cash-flow stabilization in COVBs and corporate groups.
3. CONTROL LEVERAGE AND VOTING LEVERAGE
This section explains how a controller generally utilizes control leverage and voting leverage
more efficiently in a corporate group than in a COVB. In other words, a corporate-group form
better enables controllers to build corporate empires. Before the author elaborates, three points
are noteworthy.
First, to control a corporation, a shareholder does not always need to hold a majority of
shares. For instance, in Kahn v. Lynch Commc’n Sys., Inc., the Delaware court found that
a shareholder holding 43.3 percent of a corporation’s stock exercised control.34 In China,
a shareholder with more than 30 percent of voting rights is considered to be a controller.35 This
chapter, however, for the sake of simplicity, uses only examples where holding at least 50
percent shares is necessary to control a corporation.
Second, a controller’s “economic interest” in a corporation is defined as her financial stake
in a corporation, even if she does not own any shares in the corporation. Suppose a share-
holder holds 50 percent of the shares in X Company, which holds 50 percent of the shares in
Y Company. The shareholder owns no shares of Y Company, but her economic interest in it
is 25 percent.36 Also, the shareholder controls both X and Y Companies through the control
chains from her to X Company and X Company to Y Company. Regarding Y Company, the
shareholder utilizes the “controlling minority structure” (CMS), whereby she is a controller
but holds less than a majority of shares (or an economic interest).37
34
638 A.2d 1110 (Del. 1994).
35
See上市公司收购管理办法 [Measures for the Administration of the Takeover of Listed
Companies] art. 84 (promulgated by China Sec. Reg Comm’n., Feb. 28, 2002, effective Dec. 1, 2002,
rev’d Mar. 20, 2020, effective Mar. 20, 2020).
36
50% × 50% = 25%.
37
For the further analysis of the CMS, see generally Lucian A. Bebchuk et al., Stock Pyramids,
Cross-Ownership, and Dual Class Equity: The Mechanisms and Agency Costs of Separating Control
from Cash-Flow Rights, in Concentrated Corporate Ownership (Randall K. Morck ed., 2000). For
a recent analysis of the CMS, see, e.g., Yu-Hsin Lin, Controlling Controlling-Minority Shareholders:
Corporate Governance and Leveraged Corporate Control, 2017 Colum. Bus. L. Rev. 453 (2017). See
also Stijn Claessens et al., Disentangling the Incentive and Entrenchment Effects of Large Shareholdings,
Third, since affiliated companies in a corporate group are separate legal entities, one
affiliated company can own another affiliated company: for instance, based on circular
shareholding—the simplest structure is that Company A holds shares of Company B, which
holds shares of Company C, which in turn holds shares of Company A38—a corporate group
is formed by “mutual ownership” among affiliated companies; based on stock pyramiding, in
contrast, a corporate group is formed by “hierarchical ownership” among affiliated companies.
It is also possible that a corporate group combines both mutual and hierarchical ownership
structures. In contrast, since business lines in a COVB are not separate legal persons, a busi-
ness line is unable to mutually or hierarchically own another business line.
3.1 Controllers’ Equity Investment and Control Leverage
3.1.1 Scenario (1): COVB

Suppose a controller establishes a COVB, “H Company,” with four business lines producing
automobile frames, furniture, (home and car) audio systems, and airbags. Each business line
needs equity of one billion dollars. Hence, H Company needs four billion dollars in total
equity. Given this, to become the majority shareholder of H Company, in a simple example,
the controller must invest at least two billion dollars under the one-share-one-vote (OSOV)
rule.39 Figure 19.3 shows the ownership structure of the COVB described in Scenario (1).
Figure 19.3 Company operating various businesses (COVB)
3.1.2 Scenario (2): corporate group

On the other hand, suppose a controller sets up “H Corporate Group” with four affiliated
companies, such as an automobile frame company (“A1 Company”), a furniture company
(“A2 Company”), a (home and car) audio system company (“A3 Company”), and an airbag
57 J. Fin. 2741, 2741 (2002) (“[F]irm value increases with the cash-flow ownership of the largest share-
holder, consistent with a positive incentive effect.”).
38
Nansulhun Choi & Sang Yop Kang, Competition Law Meets Corporate Governance: Ownership
Structure, Voting Leverage, and Investor Protection of Large Family Corporate Groups in Korea, 2
Peking U. Transnat’l L. Rev. 411, 420 (2014) (citing Oh Seung Kwon, Economic Law 249–50 (11th
ed. 2014)); Chan-Kyoo Park et al., An Optimization Approach to Resolving Circular Shareholding in
Large Business Groups, 66 J. Operational Res. Soc’y 1454, 1454 (2015).
39
Regarding the OSOV rule, see, e.g., Grant M. Hayden & Matthew T. Bodie, One Share, One Vote
and the False Promise of Shareholder Homogeneity, 30 Cardozo L. Rev. 445, 448 (2008).
company (“A4 Company”). In addition to the four affiliated companies, “M Company” acts as
a holding company. Also, the OSOV applies to all of the affiliated companies (including the
holding company). In reality, the relationships among affiliated companies can be extremely
complex, while holding companies of some corporate groups manage wholly-owned subsidi-
aries.40 To show leverage effects, however, the author uses an example with a 50 percent stake
between the adjacent affiliated companies.
Although corporate groups can be formed by other ownership structures, Scenario (2) is
based on a stock pyramiding structure, where M Company (which is controlled by a controller)
is the corporation in the first level. In this simplified example, suppose the equity size of M
Company and the other four affiliated companies—A1, A2, A3, and A4 Companies—is the
same, four billion dollars.41 In the pyramid structure, the equity of an upper-level company
is invested in a lower-level company. If M Company’s two billion dollars is invested in A1
Company (the second level), M Company controls A1 Company since M Company has 50
percent of equity invested in A1 Company. Also, if A1 Company invests two billion dollars in
A2 Company (the third level), A1 Company can control A2 Company based on its 50 percent
equity investment. Subsequently, suppose A2 Company invests two billion dollars, 50 percent
equity investment, in A3 Company (the fourth level), which then invests two billion dollars,
50 percent equity investment, in A4 Company (the fifth level).
Since the equity size of M Company is four billion dollars, the controller can control M
Company by investing two billion dollars (which is the same as Scenario (1)).42 As long as the
controller invests two billion dollars for M Company’s equity, due to the control chains that
penetrate the entire corporate group, she can control not only M Company but also the other
four affiliated companies—from A1 to A4 Companies—indirectly. The controller’s control
over the entire corporate group is possible even though she does not directly hold any share in
A1, A2, A3, and A4 Companies. Figure 19.4 shows the ownership structure of the corporate
group described in Scenario (2).
3.1.3 Comparison between Scenarios (1) and (2)

When Scenarios (1) and (2) are compared, from the standpoint of controllers, the advantage of
managing corporate groups, rather than COVBs, is that controllers’ control leverage is higher.
More specifically, in Scenario (1), to control H Company, which contains four business lines
whose total equity value is four billion dollars, the controller needs to invest at least two billion
dollars. In terms of investment-control efficiency, therefore, the controller takes two-time
control leverage.43 In Scenario (2), to control H Corporate Group with one holding company
and its four affiliated companies, the controller’s minimum investment is also two billion
40
In this case, for example, there is no tunneling issue in relation to non-controlling shareholders.
41
Note that the controller’s equity investment in Scenarios (1) and (2) is the same (i.e., two billion
dollars). See infra note 42 and accompanying text. The two scenarios intend to demonstrate, based on the
same amount of the controller’s equity investment, how control leverage in the corporate group (i.e., six
times) can be enhanced further than that in the COVB (i.e., two times). See infra Table 19.2. A byproduct
of setting the same amount of the controller’s equity investment in the two scenarios is that the amount of
equity in each affiliated company (i.e., four billion dollars) in Scenario (2) is different from that in each
business line (i.e., one billion dollars) in Scenario (1). For the further comparative analysis of Scenarios
(1) and (2), see infra Section 3.1.3.
42
See also infra Table 19.2.
43
4 billion dollars ÷ 2 billion dollars = 2.
Figure 19.4 Corporate group
dollars.44 Since the total equity size of H Corporate Group is 20 billion dollars,45 it seems that
the controller takes ten-time control leverage.46
M Company’s two billion-dollar equity investment in A1 Company, however, does not
relate to any specific business operations since these two billion dollars is invested entirely for
the purpose of obtaining control over A1 Company. For the same reason, two billion dollars
each from A1, A2, and A3 Companies is invested in A2, A3, and A4 Companies respectively,
for the purpose of obtaining control over those companies. If the affiliated companies’ invest-
ments to control the company in the next level are excluded from the 20 billion dollars (in
other words, if affiliated companies’ equity for business operations is taken into account), the
controller in Scenario (2), by investing two billion dollars, manages a total equity of 12 billion
44
See supra note 41.
45
The amount of 20 billion dollars is the sum of four billion dollars for five companies (M Company
and the other four affiliated companies).
46
Table 19.2 Comparison between COVB and Corporate Group
Scenario (1): COVB Scenario (2): Corporate Group

Controller’s Equity Investment $2 billion $2 billion
Amount of Equity Under Control $4 billion $12 billion
Control Chains No Yes
Control Leverage 2 times 6 times
dollars.47 By this standard, the controller in Scenario (2) utilizes six-time control leverage,48
as compared to the controller in Scenario (1) who uses two-time control leverage. Hence, the
controller in Scenario (2) can manage three times the equity that the controller in Scenario (1)
can.49 Put differently, other things being equal, controllers prefer a corporate-group form to
a COVB (or other corporation) form in the sense that they can dictate larger corporate empires.
Table 19.2 summarizes the discussion in Section 3.1.
Concerning H Corporate Group, four additional points are worth discussing. First, from the
perspective of the controller, in terms of control leverage, increasing her shareholding in M
Company would reduce her efficiency. For instance, if the controller increases her stake in M
Company to 75 percent, her equity investment would be three billion dollars (rather than two
billion dollars),50 which would reduce her control leverage to four times,51 compared to six
times under the original scenario. A similar situation arises when M Corporation’s sharehold-
ing in A1 Company (or A1 Company’s shareholding in A2 Company) increases. Depending
on the jurisdiction, a high level of shareholding can be imposed by regulation.
Second, under certain circumstances, enhancing control leverage in corporate groups may
be hindered. For instance, a regulation limiting the number of levels for affiliated companies
in a pyramidal structure (e.g., maintaining up to three levels including a holding company
is allowed) weakens the control-leverage effect in corporate groups. This case curtails con-
trollers’ power to (ab)use other people’s money. In addition, in a corporate-group setting, in
some instances, voting rights can be limited or deprived by regulation, which could discon-
nect or weaken control chains in a pyramid structure.52 Also, taxes can destabilize or, in the
worst case, dismantle a pyramid structure. For example, according to Randall Morck, the
introduction of an inter-corporate dividend tax resulted in breaking up large U.S. pyramidal
groups directed by controllers.53 Based on Morck’s explanation, the Bank of Israel suggested
that “[t]o contend with the acute concentration and the pyramid structure of ownership in the
47
12 billion dollars = 20 billion dollars – (2 billion dollars × 4).
48
49
12 billion dollars ÷ 4 billion dollars = 3. It does not say that the control leverage of corporate
groups is always three times that of COVBs. For instance, if the number of levels in the pyramiding struc-
ture (which is currently five) increases, or if M Company, which has four billion-dollar equity, invests
two billion dollars each in two affiliated companies in the second level, the control leverage in Scenario
(2) can be greater than three times.
50
4 billion dollars × 0.75 = 3 billion dollars.
51
52
As to the regulation of voting rights in corporate groups, see, e.g., Monopoly Regulation and Fair
Trade Act, Act No. 3320, Dec. 31, 1980, amended by Act No. 15784, Sept. 18, 2018, art. 11 (S. Kor.).
53
See generally Randall Morck, How to Eliminate Pyramidal Business Groups: The Double
Taxation of Intercorporate Dividends and Other Incisive Uses of Tax Policy, 19 Tax Pol’y & Econ. 135,
135–79 (2005).
Israeli economy, one may consider imposing a dividend tax on capital transfers between firms
(as was done in the U.S. in the 1930s).”54 It is noteworthy, however, that some commentators
criticize Morck’s view.55
Third, under the high control leverage in the corporate group, the economic incentive of
the controller is less aligned with that of the corporate group (note that in the examples above,
the controller has a 50 percent economic interest in the COVB, which is far greater than the
controller’s economic interest in the corporate group). Investors may therefore be concerned
that the controller might pursue corporate policies and business strategies that are less related
to improving the shareholder value (e.g., by pursuing a pet project).56 In other words, inves-
tors are reluctant to purchase shares of affiliated companies (particularly in those where the
controller has a small economic interest). In this case, it would be difficult for the controller to
establish a large corporate group in the first place. Alternatively, affiliated companies and the
controller attempt to attract investors, for example, by discounting the share price of affiliated
companies when investors consider purchasing such shares.
Fourth, for the sake of simplicity, in H Corporate Group above, it was assumed that an
affiliated company (or a holding company) at an upper level used its equity to invest in another
affiliated company in the next level. If there is no specific regulation, however, an affiliated
company can use not only its equity but also debt to invest in another affiliated company.57
By using debt as well as equity, the controller can set up more affiliated companies under her
control. Suppose M Company has raised eight billion dollars through debt, in addition to its
four billion-dollar equity (thus, it has total assets of 12 billion dollars).58 Recall that under the
original case, only A1 Company exists in the second level of the pyramidal structure. Now,
due to the larger amount of assets (the total of 12 billion dollars) that can be invested to control
corporations in the next level, M Company could use, for example, 8 billion dollars to set
up and control, in addition to A1 Company, three more affiliate companies (such as B1, C1,
54
Bank of Israel, Annual Report (2009), at 174.
55
See, e.g., Steven A. Bank & Brian R. Cheffins, The Corporate Pyramid Fable, 84 Bus. Hist. Rev.
435, 438 (2010) (“the introduction of intercorporate taxation of dividends did little to prompt the collapse
of those corporate pyramids that did exist.”).
56
Despite these concerns, the corporate-group setting may provide investors with additional bene-
fits. Due to the high control leverage, corporate groups tend to manage a larger amount of assets (the
sum of equity and debt) than COVBs. Based on the larger size of assets, corporate groups can foster the
economies of scale, which bring investors a cost advantage. Also, due to the larger size, corporate groups
can utilize monopolistic (or oligopolistic) power in relevant markets. As the market power of a corporate
group grows, investors can profit more from the higher price of goods and services that the corporate
group deals with, while consumers are financially injured. This tendency is reinforced in jurisdictions
where competition law does not effectively regulate monopolists (or oligopolists). Besides, large cor-
porate groups may have a better reputation with brand power, which benefits their investors. See, e.g.,
Thomas K. Cheng, Sherman vs. Goliath?: Tackling the Conglomerate Dominance Problem in Emerging
and Small Economies—Hong Kong as a Case Study, 37 Nw. J. Int’l L. & Bus. 35, 45 (2016) (“[C]orpo-
rate groups are economically motivated to cultivate their reputation and protect their goodwill.”); Tarun
Khanna & Krishna Palepu, The Right Way to Restructure Conglomerates in Emerging Markets, Harv.
Bus. Rev. 125, 129 (1999) (explaining brand names of corporate groups).
57
A COVB can also have debt. By definition, however, a COVB cannot use its debt to invest in
another affiliated company.
58
In this case, the debt-to-equity ratio is 200%, which is not extraordinary. Of course, depending on
the jurisdiction, it is possible that holding companies of corporate groups are regulated when they raise
debt or use debt to invest in corporations in the lower levels.
and D1 Companies), each of which needs two billion dollars in equity.59 Similarly, these four
companies in the second level could rely on debt as well as equity when investing their capital
to control corporations in the third level. Under these circumstances, the controller, without
increasing her equity investment in M Company (i.e., maintaining it at two billion dollars), can
control a larger corporate group. Thus, the controller can enjoy much higher control leverage,
as compared to the case where only equity of an upper-level affiliated company is assumed to
be invested in a lower-level.
3.2 Voting Leverage: Dual-Class Equity Structures, Stock Pyramiding, and

Circular Shareholding
3.2.1 Voting leverage in COVBs and corporate groups

In the example discussed above, the controller’s equity investment, when she sets up a corpo-
rate group rather than a COVB, is three times more efficient (six time- versus two time-control
leverage), if only a corporation’s equity is used for the investment in the next level in the
pyramid structure. Put differently, for the same investment, the controller can effectively
exercise voting rights three times more in the corporate group than in the COVB. In COVBs,
however, controllers’ voting leverage is not always limited. Although the OSOV is usual,
controllers may use dual-class equity structures60 to augment their voting power. For instance,
if a controller of a COVB holds Class A shares with ten votes, while the non-controlling share-
holders hold Class B shares with one vote,61 the controller can utilize further voting leverage,
compared to the case under the OSOV.
Regarding voting leverage, an implication of setting up corporate groups is that controllers
can obtain voting leverage even under regimes that prohibit dual-class equity structures. When
dual-class equity structures are unavailable, one legal person is insufficient for a controller to
inflate her voting leverage. Instead, at least two legal persons (i.e., two affiliated companies)
are necessary for a controller to amplify her voting rights through ownership structures such as
stock pyramiding and circular shareholding.
3.2.2 Trade-off between stock pyramiding and circular shareholding

Corporate groups can be formed by ownership structures such as stock pyramiding and circular
shareholding among affiliated companies. As discussed below, investors (or non-controlling
shareholders) face a trade-off when they invest in corporate groups based on stock pyramiding
or circular shareholding.
First, in corporate groups, in appearance stock pyramiding is more straightforward and
cleaner than circular shareholding, which appears complicated and even disordered62 (imagine
59
2 billion dollars × 4 = 8 billion dollars. In this example, M Company, which holds 12 billion
dollars in assets, does not use four billion dollars for the investments in corporations in the second level.
60
For a further explanation of the dual-class equity structures, see generally Ronald J. Gilson,
Evaluating Dual Class Common Stock: The Relevance of Substitutes, 73 Va. L. Rev. 807 (1987); Lucian
A. Bebchuk & Kobi Kastiel, The Untenable Case for Perpetual Dual-Class Stock, 103 Va. L. Rev.
585 (2017); Zohar Goshen & Richard Squire, Principal Costs: A New Theory for Corporate Law and
Governance, 117 Colum. L. Rev. 767, 806–07, 815–16 (2017).
61
See, e.g., Brealey et al., supra note 24, at 871.
62
For an explanation of circular shareholding, see Hwa-Jin Kim, Concentrated Ownership and
Corporate Control: Wallenberg Sphere and Samsung Group, 14 J. Korean L. 39, 45 (2014) (explaining
a corporate group with 100 affiliated companies that are mutually interconnected via circular
shareholding). Accordingly, in terms of ownership structures, stock pyramiding is more
transparent than circular shareholding.63 For instance, outsiders, such as non-controlling share-
holders and government agencies, can more easily detect suspicious transactions in favor of
controllers in stock pyramid groups than in groups with circular shareholding.64 In corporate
governance, investors often value transparency of business organizations, since it can mitigate
the asymmetric information problem65 (and thus, agency problems and costs). In this respect,
rational investors would, in theory, discount the value of corporate groups based on stock
pyramiding less than those based on circular shareholding.
Second, a counterweight is that controllers of stock pyramid groups can entrench their
control more conveniently than in circular shareholding. In stock pyramiding, even if a con-
troller loses control over an affiliated company in a lower level, that loss of control would not
adversely affect the controller’s control over the affiliated companies in higher levels (i.e.,
no contagion effect ascending up the stock pyramid).66 On the other hand, in circular share-
holding, due to the complex ownership connections among affiliated companies that uphold
a controller’s control, the loss of control over merely one affiliated company could bring a con-
siderable ripple effect, including, in the worst scenario, loss of control over the entire corporate
group.67 In terms of the entrenchment effect of controllers, accordingly, stock pyramiding is
more robust than circular shareholding. In this respect, as opposed to the first point, rational
investors would discount the value of corporate groups based on stock pyramiding more than
those based on circular shareholding.
Thus, in terms of investors’ discount on corporate groups, the two opposite effects coexist in
a trade-off relation. In theory, hence, by the standard of shareholder wealth maximization,68 it
is difficult to generalize whether stock pyramiding is better than circular shareholding or vice
versa. Depending on the specific case, the influence of one aspect can be greater or less than
that of the other.
Samsung Group’s circular shareholding). Circular shareholding is also found in Japan. See Gen Goto,
Legally Strong Shareholders of Japan, 3 Mich. J. Private Equity & Venture Cap. L. 125, 128 n.12
(2014).
63
For the further explanation, see Choi & Kang, supra note 38, at 434–37.
64
Regarding tunneling, in a pyramidal structure, due to the hierarchical relationship among affil-
iated companies, outsiders are aware that the controller has a greater economic interest in an affiliated
company in a higher level (e.g., X Company) than in an affiliated company in a lower level (e.g., Y
Company). Under these circumstances, if a wealth-transfer arises from Y Company to X Company,
outsiders can detect that the wealth-transfer favors the controller. In a circular-shareholding structure, in
contrast, there is no clear hierarchy among affiliated companies; even if there is, it can be difficult for
outsiders to know the hierarchical relationship among affiliated companies. Also, given the complexity
of interconnected relationships among affiliated companies, it is often challenging for outsiders to under-
stand wealth-transfers and their characteristics.
65
For the explanation of the asymmetric information problem, see generally George A. Akerlof, The
Market for “Lemons”: Quality Uncertainty and the Market Mechanism, 84 Q. J. Econ. 488 (1970).
66
For the further explanation, see Choi & Kang, supra note 38.
67
See id. at 439–40 (explaining the crisis of SK Group in 2003 and the potential instability of circular
shareholding).
68
For the recent discussion of shareholder wealth maximization, see, e.g., Joan MacLeod Heminway,
Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents,
74 Wash. & Lee L. Rev. 939 (2017).
4. TUNNELING: PATTERNS, LEGAL BUFFER, AND

EFFICIENCY
This section explains the different patterns of tunneling between COVBs and corporate
groups. In a COVB, a controller usually engages in conflicts-of-interest transactions directly
with a corporation. In a corporate group, by contrast, a controller can indirectly gain private
benefits from unfair transactions between two affiliated companies. Since the two affiliated
companies are the direct parties to these transactions, the controller of the corporate group can
attempt to hide herself from legal issues generated from these transactions. Also, this section
shows that corporate groups generally provide controllers with better opportunities to siphon
off corporate value.
4.1 Patterns of Tunneling in COVBs and Corporate Groups
4.1.1 Tunneling in a COVB: direct tunneling

In a COVB, a controller can siphon off corporate value by taking cash, an asset, or a prop-
erty of the COVB (i.e., outright theft). Another way a controller can tunnel in a COVB is by
making the company pay an exorbitant amount of executive compensation to the controller if
she works as an executive of the company.69 A COVB may also sell an asset to a controller at
a price lower than its fair market value (i.e., wealth-transfer to a controller via underpricing)
or buy an asset from the controller at an unfairly high price (i.e., wealth-transfer to a controller
via overpricing). In this asset-transaction tunneling case, a controller directly engages in tun-
neling with a COVB.70 Figure 19.5 depicts this “direct tunneling” in COVBs.
Figure 19.5 Direct tunneling in a COVB
69
For a further explanation of executive compensation as a means of tunneling, see, e.g., Yan-Leung
Cheung et al., Ownership Concentration and Executive Compensation in Closely Held Firms: Evidence
from Hong Kong, 12 J. Empirical Fin. 511, 511 (2005).
70
Tunneling can also arise if a controller purchases shares from the corporation via underpricing.
Tunneling may occur even when non-controlling shareholders can take advantage of preemptive rights.
See generally Jesse M. Fried & Holger Spamann, Cheap-stock Tunneling Around Preemptive Rights, 137
J. Fin. Econ. 353 (2020).
4.1.2 Tunneling in a corporate group:71 indirect tunneling (based on internal

transactions)
In corporate groups, although controllers can still engage in outright theft or direct tunneling,
they have an alternative method of tunneling, which is ordinarily unavailable to the controllers
of COVBs: tunneling based on “internal transactions between affiliated companies.”72
To explain this type of tunneling, let us take Section 3’s example of H Corporate Group.
Recall that the controller has a 25 percent economic interest in A1 Company (automobile
frame company), the second level in the pyramidal structure,73 while she has a 3.125 percent
economic interest in A4 Company (airbag company), the fifth level.74 Suppose A4 Company
sells a parcel of land to A1 Company. A1 and A4 Companies, but not the controller, are
directly involved in this “internal asset transaction.” Alternatively, A4 Company may period-
ically sell its products, airbags, to A1 Company. These “internal product transactions” arise
between affiliated companies, especially when they are vertically integrated.75 While internal
asset transactions sparsely take place (e.g., a sale of a parcel of land once a year), internal
product transactions routinely occur, for example, on a daily basis within a corporate group’s
supply chain (e.g., sales of 20,000 airbags a day).
In internal asset or product transactions, via either underpricing or overpricing, a controller
can generally take benefits based on transfers of wealth from an affiliated company where she
has a lesser economic interest to another affiliated company where she has a greater economic
interest. In H Corporate Group, the controller can extract corporate value from A4 Company
through the underpricing (which is beneficial to a buyer) since she has a greater economic
interest in A1 Company (i.e., the buyer) than in A4 Company (i.e., the seller).76 Figure 19.6
depicts a corporate group’s tunneling based on internal transactions. Also, Table 19.3 summa-
rizes the discussion about patterns of tunneling in COVBs and corporate groups.
Figure 19.6 Tunneling based on internal transactions in a corporate group
Five additional points are worth explaining. First, independent directors may constrain tunne-
ling in corporate groups (or COVBs).77 In many developing countries, however, independent
71
As for tunneling in corporate groups, see, e.g., Marianne Bertrand et al., Ferreting out Tunneling:
An Application to Indian Business Groups, Q. J. Econ. 117, 121–48 (2002).
72
For the further analysis of tunneling based on internal transactions between affiliated companies,
see generally Kang, supra note 15.
73
50% × 50% = 25%.
74
50% × 50% × 50% × 50% × 50% = 3.125%.
75
See Kang, supra note 15, at 99.
76
In internal transactions between A1 and A4 Companies, if A1 Company is a seller, a controller can
extract corporate value from A4 Company through overpricing (which is beneficial to a seller).
77
See, e.g., Yu Liu et al., Board Independence and Firm Performance in China, 30 J. Corp. Fin. 223,
224 (“We find that board independence reduces tunneling through intercorporate loans and improves
investment efficiency, especially in government-controlled firms.”).
Table 19.3 Patterns of tunneling in COVBs and corporate groups
COVBs Corporate Groups

Outright Theft Available Available
Direct Tunneling Available Available
Indirect Tunneling (Based on Internal Transactions Not Available Available
Between Affiliated Companies)
director systems have limits, including a lack of “independence.”78 Second, tunneling based on
internal transactions—delineated in Figure 19.6—is “indirect tunneling” since the controller
is not directly involved in these internal transactions. Instead, the controller indirectly uses
a transfer-price mechanism between the two affiliated companies to work in her favor.79 Third,
due to their high frequency and regularity (e.g., sales of 20,000 airbags a day), internal product
transactions are a useful tool for controllers in corporate groups who seek to tunnel in an
ongoing, repeated manner. Put differently, controllers can collect considerable private benefits
from numerous internal product transactions even if the unfairness per unit of product is small.
Fourth, indirect tunneling is functionally similar to direct tunneling in the sense that con-
trollers are primary beneficiaries of tunneling. In indirect tunneling, however, controllers are
not the only beneficiaries. In the simplified example of an internal transaction between A1 and
A4 Companies, transfers of wealth from A4 Company to A1 Company favor not only the con-
troller but also the non-controlling shareholders (and other constituencies such as creditors) of
A1 Company. On the other hand, the non-controlling shareholders (and other constituencies)
of A4 Company are financially injured. In this respect, the non-controlling shareholders (and
other constituencies) in A1 Company gain a windfall. By contrast, in the direct tunneling that
occurs in a COVB, in general the controller is the only beneficiary; all non-controlling share-
holders (and other constituencies) are victims of the controller’s direct tunneling.
Fifth, concerned about tunneling, rational investors, particularly in capital markets with
insufficient investor-protection institutions, are reluctant to invest in corporations (both
COVBs and affiliated companies of corporate groups).80 Then, in the first place, corpora-
tions and controllers might not have enough non-controlling shareholders to utilize control/
voting leverage or to tunnel corporate value. To make investors purchase shares, therefore,
corporations and controllers compromise with wary investors by allowing discounts on the
share price.81 These discounts can reduce the amount of the investors’ (i.e., non-controlling
78
Even in the U.S., many commentators criticize independent directors for their lack of “independ-
ence.” See, e.g., Sanjai Bhagat & Bernard Black, The Non-Correlation Between Board Independence and
Long-Term Firm Performance, 27 J. Corp. L. 231, 266 (2002). Although independent director systems
in many countries lack “independence,” these systems may improve the quality of corporate governance
in relation to conflicts-of-interest transactions. See, e.g., Sang Yop Kang, The Independent Director
System in China: Weaknesses, Dilemmas, and Potential Silver Linings, 9 Tsinghua China L. Rev. 151
(2017).
79
See Johnson et al., supra note 14, at 23.
80
See, e.g., Protecting Minority Investors, The World Bank, available at www.doingbusiness.org/
en/data/exploretopics/protecting-minority-investors/why-matters (last visited July 19, 2020) (relying on
Jay Dahya et al., Dominant Shareholders, Corporate Boards, and Corporate Value: A Cross-Country
Analysis, 87 J. Fin. Econ. 73 (2008)).
81
As for this type of discount, see Kang, supra note 15, at 144–45.
shareholders’) losses from tunneling. Thus, the non-controlling shareholders of A4 Company

might be financially less injured than we may have thought.82
4.2 Legal Buffer in Corporate Groups
In a corporate group, it initially appears that those who are responsible for indirect tunneling
are the directors of the two affiliated companies engaging in internal transactions. Hence,
a controller can attempt to hide herself behind the directors of the affiliated companies,
utilizing these directors as a “legal buffer” to minimize the controller’s liability.83 Criminal
penalties generally require a higher legal standard of proof—for example, “beyond the rea-
sonable doubt”84—than is needed to establish civil liability. In this light, a legal buffer can be
useful to controllers, who would like to minimize the chance of a criminal penalty (notably
imprisonment), even if they are found civilly liable.
Three additional points are worth mentioning. First, in COVBs, by contrast, there is no affil-
iated company, and indirect tunneling based on internal transactions is not commonly avail-
able to controllers. As a direct party to an unfair transaction, a controller in a COVB is less
able to shield herself from liability. In this respect, regarding the legal buffer effect, controllers
who would like to manage diversified enterprises may prefer corporate groups to COVBs.
Second, even in the corporate group setting, controllers might also be legally responsible for
indirect tunneling based on internal transactions. For instance, “shadow directors”85 who give
instructions to directors or officers may be liable for a breach of fiduciary duty. In this light,
the protective effect of a legal buffer for controllers of corporate groups can be weakened,
although a legal buffer can still provide controllers with “better” liability shielding.
Third, although corporate groups can use a legal buffer, they may also induce more strin-
gent regulations since an additional set of regulations in corporate law, administrative law,
and criminal law may be targeted at large, powerful corporate groups and their controllers.
Also, if government agencies or prosecutors are interested in catching “big fish,” namely large
corporate groups and their controllers, more strict enforcement may apply to them. Of course,
in many jurisdictions, large corporate groups and their controllers tend to collude with the
82
More counterintuitively, if the extent of the discount of share price exceeds the level of tunneling,
in theory it is possible that non-controlling shareholders can end up, other things being equal, with
a positive payoff from their investment, even after taking into account the adverse effect of tunneling.
For a similar analysis, see Sang Yop Kang, Re-envisioning the Controlling Shareholder Regime: Why
Controlling Shareholders and Minority Shareholders Often Embrace, 16 U. Pa. J. Bus. L. 843, 868
(2014) (showing the possibility that “[a controller] takes less private benefits of control than the equity
financing cost (net value to a controller is negative).”).
83
For a similar, short explanation, see Kang, supra note 15, at 127 (“[in an unfair internal trans-
action,] it would be more difficult, if not impossible, for outsiders (non-controlling shareholders or law
enforcement agencies) to detect wrongdoing and attribute such wrongdoing to the controlling share-
holder.”) (footnotes omitted). When a controller uses directors as a legal buffer, these directors may
demand pecuniary and non-pecuniary benefits as compensation for their “sacrifice.”
84
For the further explanation of beyond a reasonable doubt, see generally Jon O. Newman, Taking
Beyond a Reasonable Doubt Seriously, 103 Judicature 32 (2019).
85
For the definition of a shadow director, see, e.g., Stephen Griffin, Problems in the Identification
of a Company Director, 54 N. Ir. Legal Q. 43 (2003) (“A shadow director is defined … as a person in
accordance with whose directions or instructions the directors of a company are accustomed to act.”)
(citation omitted).
governments and/or the judiciaries. In such cases, these “big fish” can escape (or reduce the
level of) liability or punishment. My point is that, as with the analyses of many issues covered
in this chapter, the analysis of the legal buffer effect needs to examine complex and dynamic
aspects, and there is no single equilibrium.
4.3 Controllers’ More Efficient Tunneling in Corporate Groups
As seen in the discussion of control leverage,86 due to the higher control leverage,
a corporate-group form enables controllers to direct a larger amount of capital than
a COVB form. In Table 19.2, for instance, the controller of the corporate group manages 12
billion-dollar equity, while the controller of the COVB manages four billion-dollar equity.87
Recall that the amount of these two controllers’ equity investment is the same (i.e., two billion
dollars).88 Based on a larger amount of capital, corporate groups can provide controllers
with better opportunities to tunnel corporate value. This tendency could be more apparent
particularly in jurisdictions where investor protection is insufficient. Put differently, from
the standpoint of controllers, tunneling in corporate groups is generally more efficient than
tunneling in COVBs. This attribute also highlights controllers’ general inclination to choose
a corporate-group form over a COVB form.
5. CONCLUSION
In corporate groups, stabilizing cash flows among affiliated companies requires deliberate
wealth transfers among independent legal persons, which could generate duty-of-loyalty
problems. However, if jurisdictions adopt, explicitly or implicitly, policies similar to the
Rozenblum doctrine or permit lenient enforcement, the duty-of-loyalty problem does not
severely threaten corporate groups. In COVBs, the spontaneous stabilization of cash flows
among business lines does not lead to a duty-of-loyalty problem. In addition, this chapter
shows that control leverage and voting leverage are more robust in corporate groups than in
COVBs. Thus, with the same amount of investment, controllers can direct a larger amount of
capital in corporate groups than in COVBs. Also, based on internal transactions, controllers
of corporate groups can engage indirectly in tunneling. Hence, a controller can take advantage
of a legal buffer, insulating herself behind the boards of directors of the affiliated companies
that are directly involved in internal transactions. In a COVB, by contrast, controllers directly
engage in tunneling, and thus, this legal buffer is unavailable to them. Moreover, due to the
size of capital that controllers direct, controllers in corporate groups can tunnel corporate value
more efficiently than in COVBs.
Through a theoretical prism, this chapter elucidates, at least partially, the reasons that
controllers, if they can, are usually inclined to choose corporate groups over COVBs. The full
explanations for this inclination should be fulfilled by examining the idiosyncratic aspects of
individual jurisdictions, such as market institutions, regulations (including tax systems), and
efficiency of enforcement. The author hopes that this short, theory-oriented chapter functions
86
87
See supra Table 19.2.
88
See id.
as a foundation work for the subsequent studies analyzing idiosyncratic aspects of individual
jurisdictions.
20. Public versus private enforcement in corporate
governance
Pierre-Henri Conac
1. INTRODUCTION
Corporate governance is as old as listed companies. It was already an issue as soon as the
Dutch East Indies Company (Vereenigde Oostindische Compagnie or VOC) was established
in 1602.1 In the 1970s, the Securities and Exchange Commission (SEC) pushed for stronger
corporate governance, especially through the requirement of an independent audit committee
by the New York Stock Exchange (NYSE)2 and supporting adoption by Congress of the
Foreign Corrupt Practices Act (FCPA).3 After the fall of communism and with the rise of
institutional investors in the early 1990s, corporate governance has become again a very
important topic for listed companies in Europe and around the world. This followed especially
the publication of the path-breaking “Cadbury report” in the United Kingdom in 1992.4 The
report was adopted as a consequence of the Maxwell, BCCI and Polly Peck management
frauds. According to the UK Corporate Governance Code, “Corporate governance is the
system by which companies are directed and controlled. Boards of directors are responsible
for the governance of their companies.”5 Corporate governance results from rules which are to
be found not just in company law, listing standards and articles of association, but also in cor-
porate governance codes. Those codes have become quite important for listed companies. The
rise of institutional investors since the 1990s, as well as two financial crises (2001 and 2008),
have led corporate governance codes to become almost universal and much more detailed and
extensive than the first codes.
Corporate governance codes are typically drafted by expert groups representing listed com-
panies and other stakeholders rather than by public authorities. However, they often benefit
from the support of, or are subject to pressure from, public authorities to amend the codes.
Therefore, the development of corporate governance codes results also from a dialogue.
However, rules are not worth much if they are not implemented and applied. Therefore,
enforcement is key and can take two forms: private enforcement, which implies an action by
a private party, and public enforcement, which implies an action by a state official. Public
enforcement has always been used in Companies Acts, especially in cases of criminal viola-
tion. The issue of the enforcement of corporate governance codes also had to be addressed. In
1
VOC 1602-2002, 400 Years of Company Law, at 459 (Ella Gepken-Jager, Gerard van Solinge,
& Levinus Timmerman eds., 2005).
2
In the Matter of New York Stock Exchange, Inc., Exchange Act Release No. 34-13346, 11 SEC
Docket. 1945 (Mar. 9, 1977).
3
Securities Exchange Act of 1934, 15 U.S.C. § 13(b)(2) (1934) (modified by the Foreign Corrupt
Practices Act of 1977).
4
Committee on the Financial Aspects of Corporate Governance, Cadbury Report (1992).
5
The UK Corporate Governance Code, Fin. Rep. Council 10 (2018).
412
Public versus private enforcement in corporate governance 413
1992, it was clear for the drafters of the “Cadbury report” that, companies being private bodies,
enforcement of corporate governance codes should be ensured by shareholders, especially
institutional investors. These are pension funds, mutual and investments funds, and private and
public financial institutions. However, in corporate governance, as in corporate law, private
enforcement has not always been very effective. Therefore, public enforcement is also used in
some countries to complement private enforcement of corporate governance codes.
As stated, corporate governance provisions are included in corporate governance codes, in
company law legislation, and often in securities law legislation. Reference to a corporate gov-
ernance code is now compulsory in most jurisdictions. However, compliance with provisions
of the code depends on their nature. Sometimes, parts of the code cannot be derogated. This is
the exception as most provisions are subject to the “comply or explain” principle. Under this
approach, listed companies may disregard provisions of the code but should disclose this fact
and their reasons for doing so. Some provisions of the codes are “Suggestions”, Guidelines”,
or “Comments”, which are not subject to the “comply or explain” principle. Therefore, corpo-
rate governance codes are essentially soft-law. Corporate governance rules are also found in
corporate and securities law legislation, although sometimes they can also be derogated. For
such hard-law rules, private enforcement by shareholders voting or filing a complaint in court
are typical enforcement methods.
Corporate governance provisions are hybrid since their legal status can vary considerably.
Another complexity is that corporate governance provisions can include either formalistic or
substantive requirements. The ability to monitor and enforce any violation of those principles
and rules depends on whether the violation requires a simple fact check or a subjective analysis
of complex facts and interpretation of law.
Therefore, the issue of whether public or private enforcement is preferable depends also to
a large extent on the nature of the rule or of the principle violated. Although private enforce-
ment is the norm, the degree and intensity of public enforcement varies considerably, reflect-
ing different market structures and legal traditions.
Private enforcement of corporate governance hard- and soft-law rules is the normal
approach because company law and codes organize private relationships among shareholders
(Section 2). However, because of serious limitations facing shareholders and private enforcers
wishing to enforce corporate governance rules on directors and managers, there is also some
degree of public enforcement of corporate governance rules and principles (Section 3).
2. PRIVATE ENFORCEMENT MECHANISMS
Since corporate governance hard- and soft-law rules are designed to benefit and protect share-
holders, they are the ones who should enforce those rules (Section 2.1). However, because of
limitations on shareholders’ capacity to enforce corporate governance soft law rules, private
bodies have often been established to monitor or enforce them (Section 2.2).
2.1 The Enforcement of Corporate Governance Rules and Principles by

Shareholders
The enforcement of corporate governance hard-law (Section 2.1.1) and soft-law rules (Section
2.1.2) by shareholders is the normal approach but faces often serious challenges.
2.1.1 The enforcement of corporate governance hard-law rules by shareholders

Corporate governance rules are included in Companies Acts and securities legislation and are
designed to protect shareholders. The typical way for shareholders to enforce those rules is by
exercising political rights (voting rights) or by filing a complaint in court (judicial control).
In both cases, shareholders face serious challenges. Shareholders might find it difficult to
enforce corporate governance rules, allowing abuses to take place, because of the existence
of a controlling shareholder, of difficulties to access information, or of rational apathy.
Institutional investors have been incentivized to become more active in the voting process,
but they can still face strong opposition from an entrenched management. However, the
influence of institutional investors on the enforcement of corporate governance has been very
strong, at least in the United States (US), the United Kingdom (UK) and many Continental
European countries as well as in many emerging markets. With the rise of institutional inves-
tors’ involvement, proxy advisors have become more important. The fact that there have been
regular calls for them to be regulated is a clear indication that they have an influential and
useful role. However, shareholders are not always in a position to enforce corporate govern-
ance rules through voting rights.
In such cases, shareholders might consider filing a civil suit. They are mostly interested if
the violation can be compensated by damages, which is not always the case. Such suits also
present various challenges, depending on the jurisdiction, such as access to information, cost
of paying a lawyer and loser pays rules. In the US, the legal environment, such as pre-trial
discovery, allows plaintiffs to file suits more easily. There is a high level of private litigation in
the US, especially for violation of securities law, which is not the case in many other jurisdic-
tions. However, institutional investors are reluctant to engage into civil actions for violation of
corporate governance rules. This leaves minority shareholder with the option to file a criminal
suit, but this is not possible in all jurisdictions.
Another issue is that plaintiffs can file a complaint arguing for two types of breaches of cor-
porate governance rules. Some are formalistic violations, such as the violation of a deadline.
They are easy for courts to enforce and sanction, but such violations are rare and would not
probably lead to the allocation of damages because of their formalistic nature. More usual and
problematic are substantive violations, but they require sometimes a complex analysis. This
is the case for instances of abusive related party transactions where the defendant can make
a business case for the transaction. Courts are usually reluctant to engage in a deep analysis
of business decisions and transactions under some form of business judgement rule, which
is applicable in the US and usually in Europe. Therefore, private enforcement of corporate
governance hard-law rules in court faces serious challenges.
2.1.2 The enforcement of corporate governance soft-law rules by shareholders

Corporate governance codes include general principles and more precise rules. They are
generally subject to the “comply or explain” principle. They are soft-law. This implies that the
enforcement of those recommendations should lie mostly with the shareholders. This was the
approach adopted by the Cadbury report in 1992:
We look to the institutions in particular, with the backing of the Institutional Shareholders’
Committee, to use their influence as owners to ensure that the companies in which they have invested
comply with the Code. The widespread adoption of our recommendations will turn in large measure
on the support which all shareholders give to them. The obligation on companies to state how far they
comply with the Code provides institutional and individual shareholders with a ready-made agenda
for their representations to boards. It is up to them to put it to good use.6
This call has been followed by institutional investors and by legislators. Most recently, in the
European Union (EU), the 2017/828 Directive of 17 May 2017 as regards the encouragement
of long-term shareholder engagement requires institutional investors to develop an engage-
ment policy.7
In order to facilitate private, and also public enforcement, legislators often require compa-
nies to report on the application of the code in their annual report and possible deviations. In
2006,8 for example, the EU legislature required that all listed companies should produce a cor-
porate governance statement in their annual report to shareholders.9 In France, the securities
supervisor, the Autorité des Marchés Financiers (AMF), requested as soon as 2003 that com-
panies disclose in their annual report whether they complied with the code and the reason for
non-compliance.10 Since 2017, the report has to be prepared by the board of directors and not
by the chairman of the board as before.11 In the UK, the requirement to publish the statement
is included in the listing rules.12
This transparency requirement is not limited to Europe but is universal and growing.13 For
instance, in Brazil, the Comissão de Valores Mobiliários (CVM) has requested, since 2017,
that listed companies disclose and report, on an annual basis their compliance, or not, with the
Corporate Governance Code.14
However, shareholders face challenges in trying to force compliance with a code. Companies
might seem to abide to the letter of the code but not to its spirit. Another challenge is that, in
case of deviation from a principle or a rule, companies need to provide explanations. In such
case, they can depart from the rule, but those explanations can be lacking or not convincing.
It is very difficult for shareholders to enforce the “explain” principle if the management is
uncooperative. The only solution is the removal of directors which might be impossible or
excessive.
6
Cadbury Report, supra note 4, at ¶ 6.16.
7
Directive (EU) 2017/828, of the European Parliament and of the Council of 17 May 2017
Amending Directive 2007/36/EC as regards the Encouragement of Long-Term Shareholder Engagement,
O.J. (L132/1).
8
Directive 2006/46/EC, art. 46a, of the European Parliament and of the Council of 14 June 2006
amending Council Directives 78/660/EEC on the Annual Accounts of Certain Types of Companies,
83/349/EEC on Consolidated Accounts, 86/635/EEC on the Annual Accounts and Consolidated
Accounts of Banks and Other Financial Institutions and 91/674/EEC on the Annual Accounts and
Consolidated Accounts of Insurance Undertakings, O.J. (L 224/1).
9
Directive 2013/34/EU, art. 20, of the European Parliament and of the Council of 26 June 2013
on the Annual Financial Statements, Consolidated Financial Statements and Related Reports of Certain
Types of Undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council
and repealing Council Directives 78/660/EEC and 83/349/EEC, O.J. (L 182/19).
10
Commission des operations de bourse, Bulletin mensuel (2003).
11
Code de Commerce [C. Com] [Commercial Code] art. L. 225–37 (Fr.).
12
UK Listing Rules (2020), LR 9.8.6(5)–(6).
13
OECD, Corporate Governance Factbook of 2019 47 (2019).
14
Comissão de Valores Mobiliários, Instruction 586/17, Annex 29 (Braz.). The content of the
Code was produced by a private institution called Brazilian Corporate Governance Institute (Instituto
Brasileiro de Governança Corporativa – IBGC).
This is why, for instance, the European Commission, following a suggestion of the
Reflection Group on the Future of EU Company Law, published in 2014 a Recommendation
on the quality of corporate governance reporting (“comply or explain”).15 The recommenda-
tion requires corporate governance statements to be made available on the company website
in order to be more easily accessible and it focuses essentially on the quality of explanations
in cases of departure from a code. According to the Recommendation, companies should
clearly state which specific recommendations they have departed from and, for each depar-
ture, explain (a) in what manner the company has departed from the recommendation, (b)
the reasons for the departure, (c) how the decision to depart was taken within the company,
(d) where the departure is limited in time, (e) when the company envisages complying with the
recommendation and, where applicable, (f) the measure taken instead of compliance and how
that measure achieves the underlying objective of the specific recommendation or of the code
as a whole, or how it contributes to good corporate governance of the company.
Some codes try to empower the shareholders to deal with this situation. For instance, the
Dutch Corporate Governance Code of 2004 (Tabaksblat Code) held that, if a recommendation
is not followed without explanation, the shareholders can put a resolution to the agenda of the
general meeting. However, the efficiency of this approach depends again on the activism of
investors.
Voting to enforce the code is only part of the picture. Informal private enforcement between
companies and institutional investors, proxy advisors and activist investors is very important
and has a significant impact.16 Investors, including activist investors, often engage informally
with the management before the shareholders’ meeting to request changes in corporate gov-
ernance. In the United States, the likelihood that an activist intervention will end with a set-
tlement has increased significantly from 2000 to 2012.17 Companies also engage in advance
with proxy advisors in order to limit the risk of not having a majority or a low majority to pass
a resolution. Because this activity takes place behind the scenes, except in the case of activist
investors, it is difficult to assess its true impact. In addition, many resolutions are not brought
to the shareholders’ meeting so that institutional investors’ engagement also has a prophylactic
effect.
However, the importance of informal private enforcement seems particularly strong in
the UK,18 where private formal enforcement is traditionally low. In France, where foreign
institutional investors hold a very large percentage of the largest listed companies, they have
had a real impact. A 2015 study shows that votes on “Say on pay” passed with a 92 percent
majority when Institutional Shareholder Services (ISS), the largest proxy advisor, endorsed
the proposal, whereas they only passed with 73 percent majority when ISS advised against
15
European Commission Recommendation O.J. (L 109/43), on the Quality of Corporate Governance
Reporting (Dec. 4, 2014).
16
Sarah Haan, Shareholder Proposal Settlements and the Private Ordering of Public Elections, 126
Yale L.J. 262 (2016).
17
Lucian A. Bebchuk, Alon Brav, Wei Jiang & Thomas Keusch, Dancing with Activists, J. FIN.
ECON. (forthcoming 2020), https://doi.org/10.1016/j.jfineco.2020.01.001.
18
See John Armour, Enforcement Strategies in UK Corporate Governance: A Roadmap and
Empirical Assessment (ECGI, Working Paper No.106/2008).
the resolution.19 Low majorities are still harmful to the company’s reputation, bringing bad
publicity and forcing the management to be more cautious.
As to shareholder litigation, it is even more challenging since corporate governance princi-
ples are soft-law. Therefore, unless a Court holds that they represent a new standard of behav-
ior under general company law rules, the probability of enforcing them on a reluctant company
is very limited. For instance, it would be difficult to enforce a requirement included in a code
to have a shareholders’ vote on the sale of the majority assets if it is not requested by law. In
addition, plaintiffs would have to prove a damage and a causal link with the fault. Often, it
will be difficult to find a damage in case of violation of a corporate governance code, such as
a lack of independence of a director. The damage will actually be the consequence of the lack
of independence, such as tunneling, and it will probably be hard to show causation in this case.
In some countries, shareholders might not even be entitled to sue because the provision in the
code has not been designed to protect them, but the company in general. Finally, if the viola-
tion relates to a lack of disclosure, or a false disclosure as to the real application of the code
(misrepresentation), civil liability will be difficult to engage because courts should recognize
this type of liability and because there might be also not even a damage to complain about.
However, there has been some limited exceptions. For instance, in Belgium, a court held
that the sale of the majority of the assets had to be submitted to a vote of the extraordinary
shareholders’ meeting. This was not required under Belgium company law. During the finan-
cial crisis of 2008, as part of a state-engineered rescue plan, Fortis assets were sold to BNP
Paribas without a vote of the shareholders. The corporate governance code prevailed because
the articles of associations of Fortis made a reference to them.20 In Germany, the Federal
Supreme Court has held in some cases that conclusions taken by the shareholders meeting
can be void or voided if the management did not comply with the Code. However, case law is
very restrictive.21 Therefore, apart from special situations, it seems difficult for shareholders to
enforce effectively a corporate governance code in a civil complaint.
These limitations, although not insurmountable, have led several jurisdictions to use or
establish specialized private bodies to enforce their corporate governance code.
2.2 The Enforcement of Corporate Governance Rules and Principles by Private

Bodies
Several jurisdictions entrusted existing private bodies (Section 2.2.1), especially stock
exchanges, or established specialized bodies (Section 2.2.2) to monitor and enforce their
corporate governance code.
19
See Viviane de Beaufort, L'engagement actionnarial en France, vecteur de gouvernance pérenne?,
Revue des Sociétés 382 (2019).
20
See Pierre-Henri Conac, Victoire à la Pyrrhus pour l'Etat Belge dans l'Affaire Fortis, Revue
Pratique des Sociétés 366 (2009/2010).
21
Bundesgerichthof [BGH] [Federal Court of Justice] Oct. 9, 2018, 78/17 Urteil des II. Zivilsenats
[II ZR] 1 (Ger.)
2.2.1 The enforcement of corporate governance rules by stock exchanges

Some countries have relied on stock exchanges to enforce corporate governance codes. This
is the case, for instance, of Luxembourg, whose 10 principles of corporate governance were
adopted and are enforced by the Luxembourg Stock Exchange.
The United States has a similar approach. Especially, the Securities & Exchange Commission
(SEC) has forced national securities exchanges to adopt corporate governance rules in their
listing requirements and enforce their application. This is because corporate law is a matter
for the states in the US. Originally, because of this constitutional constraint, the SEC has
been forced to often act indirectly in order to improve corporate governance. For instance, the
SEC requested in 1977 the New York Stock Exchange (NYSE) to require listed companies
to introduce an audit committee.22 In 1998, in order to fight earnings manipulation, the SEC
requested securities exchanges to establish a Blue-Ribbon committee, which recommended in
1999 that audit committees be composed of at least three solely independent directors, all of
whom are financially literate, and with one of them having a specific expertise in accounting
and finance.23 This was turned into law by the Sarbanes-Oxley Act in 2002.
However, the effectiveness of stock exchanges in enforcing corporate governance rules
and principles is not very strong. First, exchanges usually limit themselves to enforce formal
violations, such as whether information has been disclosed. It is difficult for them to evaluate
if, for instance, a director is really independent. In addition, stock exchanges are subject
to a conflict of interest since they are being required to enforce rules on their clients. This
places the exchanges in an uneasy situation and if the stock exchange proves too stringent, the
company might decide to list on another stock exchange. For instance, the NYSE introduced
the rule “One Share/One Vote” in 1926. However, it did not enforce it against General Motors
and a few other companies who started in 1984 to list non-voting shares in order to protect
themselves from hostile takeovers. In 1988, the NYSE removed the rule in the face of compe-
tition from the American Stock Exchange which allowed multiple voting shares. Arthur Levitt,
a former chair of the SEC (1993–2001), considers very correctly that exchanges in general are
weak enforcers of corporate governance rules as they have the “ultimate conflict of interest”.24
For instance, listing standards allowed companies in 1999 to have one non-independent audit
committee member “under exceptional and limited circumstances, provided that the board
determines to be in the best interests of the corporation and its shareholders”. Exchanges do
not challenge their clients even if the explanations are not satisfactory.
Luxembourg is another example of weak enforcement by a stock exchange. The Luxembourg
Stock Exchange has drafted the “X Principles of Corporate Governance of the Luxembourg
Stock Exchange”, first established in 2007, and is in charge of enforcing those principles.
The Luxembourg securities supervisor does not enforce the code. The Luxembourg Stock
Exchange publishes an annual report on its application. This report usually analyses the
22
Exchange Act Release No˚. 34-13346, supra note 2.
23
Press Release, Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit
Committees, NYSE Chair Richard Grasso, NASD Chair Frank Zarb, and Blue Ribbon Panel Co-Chairs
Ira Millstein and John Whitehead Account “Ten Point Plan” to Improve Oversight of Financial Reporting
Process Feb. 8, 1999), www.sec.gov/news/press/pressarchive/1999/99-14.txt#:~:text=The%20%22blue
%20ribbon%22%20panel%2C,the%20corporate%20financial%20reporting%20process. See Ira M.
Millstein, Introduction to the Report and Recommendations of the Blue Ribbon Committee on Improving
the Effectiveness of Corporate Audit Committees, 54 Bus. Law. 1057, at 1057–66 (1999).
24
Arthur Levitt, Take on the street 233 (2002).
disclosures made by companies without further analysis in an aggregate and anonymous

form. For instance, in its 2017 report, the Luxembourg Stock Exchange notes that the level of
transparency of some companies on conflicts of interest and business ethics rules is insuffi-
cient.25 Later, the report notes that “Two more Recommendations that are rarely followed by
the Luxembourgish companies concern introduction training for directors (Chart 9) and the
transfer of necessary information to them (Chart 10)”.26 No corrective action is considered.
Previous reports are similar.
Weak enforcement by stock exchanges exists in many other countries. This is the case of
Sweden where the Corporate Governance Board is responsible for drafting the code but has no
supervisory or adjudicative role regarding individual companies’ application of the Code. The
duty of supervising the application of the Code rests instead with the two regulated markets:
Nasdaq OMX Stockholm and NGM Equity. The Swiss Code of Best Practice for Corporate
Governance has been prepared by the Swiss Exchange, which is also in charge of its enforce-
ment. Enforcement is weak and, in addition, the Code is also not very stringent in comparison
with other countries. It includes only non-binding recommendations that are generally unspe-
cific in nature.
This is not surprising. A 2009 OECD article noted that
Recent cases demonstrate the reluctance of stock exchanges to take punitive measures in cases
dealing with corporate governance concerns, but which are not related to breaches of law or fraud.
An example … is the fact that Deutsche Börse has decided not to de-list Porsche, despite the latter’s
refusal to comply with the applicable disclosure requirements for over seven years.27
In a recent book (2019) dealing with 29 jurisdictions worldwide, Martin Gelter noted that,
even if there is an attempt at enforcement “often it is easier for stock exchanges to limit their
supervisory role to narrow issues that can be detected automatically and not to target serious
wrongdoing”.28
Because of these shortcomings, which can only be somewhat mitigated by public body
oversight, some jurisdictions prefer to establish a specific body in charge of drafting and mon-
itoring and also possibly enforcing corporate governance codes.
2.2.2 The monitoring and enforcement of corporate governance rules by specialized

bodies
Many countries have a specialized body, which is not the stock exchange, in charge of
monitoring the corporate governance code. There has been a clear trend towards establishing
specialized private monitoring bodies or request existing bodies to monitor the application of
the code. However, approaches vary considerably and monitoring is different from enforcing.
Monitoring essentially implies to report on the application of the code while enforcing implies
25
Luxembourg Stock Exchange, Application of the X Principles of Corporate Governance, 2017
Report 17 (July 2018).
26
Id. at 11.
27
Hans Christiansen & Alissa Koldertsova, The Role of Stock Exchanges in Corporate Governance,
2009 OECD J. Fin. Mkt. Trends 16 (2009).
28
Martin Gelter, Global Securities Litigation and Enforcement, in Global Securities Litigation
and Enforcement 46 (Pierre-Henri Conac & Martin Gelter eds., 2019).
an attempt to force respect of the code, especially when the explanation does not justify the
departure from the code.
In Germany, since 2002 monitoring has been undertaken by the Berlin Centre of Corporate
Governance, an academic research center (Technische Universität Berlin). However, its
reports are descriptive. Data provided are anonymous and concise. In Sweden, the Corporate
Governance Board was established in 2005 and is responsible for drafting the code but has
no supervisory role regarding individual companies’ application of the Code. It assesses the
functioning of the code on a macro level and not individual compliance. In the Netherlands,
a Corporate Governance Code Monitoring Committee was installed in 2013. The Monitoring
Committee is charged with monitoring compliance by Dutch listed companies and insti-
tutional investors. The Monitoring Committee reports annually on compliance with the
Code. The Committee contacts individually companies whose compliance with the Code is
sub-standard.29 The situation has improved since 2006, when the committee simply reported
commonly given explanations and did not even deal with the quality of explanations.30
However, this is far from enforcing the code.
In Italy, Assonime, an association of the Italian listed companies, publishes a report on
the application of the Corporate Governance Code since 2001 and the adoption of the Italian
Code. However, Assonime has also no enforcement powers and its reports are descriptive. In
2011, a Corporate Governance Committee was established with the specific goal of monitor-
ing the code. Although, the annual report was usually descriptive, the committee since 2018
examines the issuers’ considerations with the purpose of ensuring the timely and comprehen-
sive monitoring of the evolution of the Code’s application, with particular regard to the issues
covered by specific recommendations. It is too early to tell if this Committee will become an
enforcer of the Code rather than a monitor.
The UK’s Corporate Governance Code has been regularly amended and updated since the
Cadbury report of 1992. The Code is drafted by the Financial Reporting Council (FRC), which
was established as a quasi-public regulator in 1988. The FRC is not in charge of monitoring
the application of the code since it does not have powers to challenge and secure changes to
these parts of the annual report.
The 2018 Kingman review states that for instance, companies remain reluctant to fully
explain non-compliance with the provisions of the Code.31 The new 2018 Code, which came
into effect on January 1, 2019, places emphasis on the value of good corporate governance and
signals a move away from tick-box compliance with the provisions and towards companies
explaining how they have applied the Principles. As a consequence of the Kingman review,
the FRC has decided since 2018 to also include in its annual report information on compliance
with, and the quality of reporting against, the Code.32
The 2018 Kingman review also proposes replacing the FRC with a new body named the
Audit, Reporting and Governance Authority.33 This new body would have power to monitor
29
Monitoring Committee Corporate Governance Code, Dutch Monitoring Corporate Governance
Code, Unofficial Translation at 16, 39 (2016).
30
Joseph A. Mc Cahery & Erik P. M. Vermeulen, Role of corporate governance reform and enforce-
ment in the Netherlands, in Perspectives in Company Law and Financial Regulation 330 (M. Tison,
H. de Wulf, C. van der Elst, R. Steenot eds., 2009).
31
Sir Kingman, Independent Review of the Financial Reporting Council 33 (2018).
32
FRC, Annual Review of Corporate Governance and Reporting, 2017/2018, at 5 (2018).
33
Kingman, supra note 31.
and enforce the Corporate Governance Code. It should promote the Corporate Governance
Code reporting annually on compliance with the Code.34 The review also holds that the new,
stronger corporate reporting review should be extended to cover the entire annual report,
including corporate governance reporting.35 The Government issued a consultation on the
report but has not provided a feedback yet.
France is one of the few countries in which the monitoring body attempts to enforce the cor-
porate governance code. France was one of the first countries to adopt a corporate governance
code in continental Europe after the publication of the Cadbury report. The Viénot report36 was
adopted in 1995 and had been prepared by the two main French businesses associations, the
Afep and the MEDEF.37 The business community drafted the code, which is a unique situation
in Europe. The Viénot report has been regularly updated and is now called the Corporate
Governance Code of Listed Corporations. Another code exists, the Middlenext Code for small
and medium sized enterprises, but is not as widely used as the Afep-MEDEF code.
No enforcement mechanism was put in place in 1995 except that the French securities
supervisor, the Autorité des Marchés Financiers (AMF) exercised an oversight function. The
Paris Stock Exchange, Euronext Paris, did not draft the code and is not empowered to take
enforcement actions given that the relevant governance recommendations are not part of its
listing rules. However, the MEDEF tried sometimes to enforce the code when it feared there
would be instead a legislative intervention. For instance, in 2009, among a public outcry and
huge political pressure, the MEDEF requested the departing Chief Executive Officer (CEO)
of Valeo, who was facing difficulties and had received state funds, to forfeit his golden para-
chute. He did so in 2011 as part of a deal with his former employer.
Because of a fear of legislative intervention in the area of compensation if the code was
not really enforced, the Afep and the MEDEF established in 2013 a private body, the Haut
Comité de Gouvernement d’Entreprise (HCGE) to monitor and enforce the Code. The HCGE
is responsible for monitoring the application of the principles contained in the code. It does so
either by being requested by the board of directors of a company facing an issue, or by acting
at its own initiative if it establishes that a company has failed to implement one of the code's
recommendations without sufficient explanations. In case of investigation, the company must
reply to the HCGE's letter within a maximum period of two months. If it does not, it runs the
“risk” of the investigation being made public and “name and shame”. The HCGE implemented
this option for the first time in its 2017 Report by naming six companies for lack of answer.38
If a company decides not to follow the HCGE's recommendations, it must indicate the latter's
opinion in its report on corporate governance, together with the reasons why it decided not to
comply with these recommendations. The High Committee publishes an annual activity report.
The HCGE considers itself to be efficient. It notes a regular improvement in compliance
by large French companies with the code and, beyond the formal aspects of this compliance,
34
Id. at 21.
35
Id. at 37.
36
Conseil National du Patronat Francais, The Board of Directors of Listed Companies in
France (1995).
37
AFEP stands for Association Française des Entreprises Privées and is an association of French
private sector companies. The AFEP acts as a pro- business lobbying group. MEDEF stands for
Mouvement des Entreprises de France and is French oldest and most important French business confed-
eration. The MEDEF succeeded in 1998 to the CNPF (Conseil National du Patronat Français).
38
HCGE, Rapport du Haut Comité de gouvernement d’enterprise 12 (2017).
in governance practices. Its recommendations have been largely followed. However, there
are significant weaknesses, too, and a qualitative analysis is necessary. A recent study on the
effectiveness of the French Code underlines the lack of independence of the High Committee
and considers that it necessarily affects its effectiveness, but without providing much exam-
ples.39 In reality, the effectiveness of the HCGE varies considerably according to the issue. For
instance, the HCGE has been struggling with the 12-year maximum rule for directors' inde-
pendence, which many companies disregard without providing valid reasons. The HCGE has
not been very effective in case of opposition by a company, which is not surprising because the
most problematic situations are usually already public, whereas the HCGE’s only “real” power
is to disclose its opinion. The most difficult issue has been compensation, especially severance
packages, and to a lesser extent the existence of significant business relationships. In practice,
political pressure, usually by the ministry of economics and finance, has worked much better.
Because private enforcement of corporate governance hard- and soft-law norms suffers
from shortcomings, jurisdictions complement it with some degree of public enforcement.
3. PUBLIC ENFORCEMENT MECHANISMS
Public involvement in corporate governance has grown in importance. Originally, when cor-
porate governance codes appeared in the 1990s, public authorities were often involved in their
adoption but left monitoring and enforcement to market forces and sometimes private bodies.
Currently, with corporate governance issues, such as compensation, having entered the public,
and sometimes even the political debate, although wealth inequality has now taken the fore,
the level of involvement of public authorities and sometimes politicians has increased in many
jurisdictions (Section 3.1).
As to corporate governance rules, the most significant change is that some provisions of
corporate governance codes have been included into the Companies Act. In such cases, the
securities supervisor has been sometimes asked to enforce those new provisions (Section 3.2).
3.1 Public Enforcement of Corporate Governance Codes
Public involvement in monitoring and enforcement of corporate governance codes has been
rising since the 2001 Internet crisis and even more since the 2008 financial crisis. There has
been political support for this evolution. The OECD Corporate Governance Factbook of 2019
notes that “A growing percentage of jurisdictions – 67% – now issue national reports on
company implementation of corporate governance codes, up from 58% in 2015. In 29% of
the jurisdictions it is the national authorities that serve as custodians of the national corporate
governance code”.40 The report adds that “Securities regulators, financial regulators or a com-
bination of the two play the key role in 82% of all jurisdictions, while the Central Bank plays
the key role in 12%”.41 The reason is that Central Banks are sometimes securities supervisors
(e.g. Russia, Ireland).
39
Emmanuelle Mazuyer, Les codes de gouvernance d’entreprise. Quelle effectivité pour le système
français?, Revue des Sociétés (forthcoming 2021).
40
OECD, Corporate Governance Factbook of 2019 12 (2019).
41
Id.
Public enforcement of corporate governance codes is difficult. If the violation relates to

a lack of disclosure, securities supervisors can sanction the company and/or the directors,
depending on the jurisdiction, for false disclosure. However, companies rarely violate the duty
to disclose their conformity with the code. If a recommendation is not followed, no enforce-
ment is possible since if, as usual, the company is entitled to depart from recommendations of
the code. If the securities supervisor complains that the disclosure is misleading or incomplete
or that the “explain” justification for deviation is boilerplate, it could issue a sanction but
the amount will probably be small. In addition, what would be the benefit for investors? In
practice, securities supervisors cannot easily use their sanction power in the area of corporate
governance codes. Therefore, public enforcement is more about inducing or forcing listed
companies to comply with the letter and spirit of the code, rather than just sanctioning them.
However, there are significant differences among jurisdictions. In many jurisdictions, the
securities supervisor, or the public authority, simply monitors the application of the code
without trying to enforce it (Section 3.1.1). In other jurisdictions, which are less numerous,
the securities supervisor takes a more active role and tries to enforce the code (Section 3.1.2).
3.1.1 Public monitoring of corporate governance codes

In many jurisdictions, the public authority leaves it to market forces to enforce the code. This
is the case where the Code is monitored by a Ministry as this means that public enforcement
will be weak. For instance, in Germany, the Corporate Governance Code (Kodex) of 2002, pre-
pared by a Commission chaired by Professor Theodor Baums,42 is monitored by the Ministry
of Justice since the Commission was established by this Ministry.43 The Ministry of Justice is
by nature not an enforcer of corporate governance codes. This weak monitoring is exacerbated
by the fact that German corporate governance principles are less prescriptive than in many
other countries.
In the UK, the Financial Services Authority (FSA) and, since 2013, the Financial Conduct
Authority (FCA) which replaced the FSA, could and can sanction listed companies since they
were and are the listing authority. However, both authorities have been very reluctant to use
their sanction powers against listed companies, at least for substantive violations.44 The FSA
once declared that
as listing authority (it) makes no judgement about the accuracy or adequacy of the compliance
statement: it is up to the board of the company and for the shareholders to make such evaluation. If
a company fails to include a statement in the required form, the FSA has announced that it may make
use of its powers, including its fining powers against that company.45
42
Bericht der Regierungskommission Corporate Governance at n. 9, 54 (Theodor Baums ed.,
2001).
43
OECD, supra note 40, at 51.
44
Marc Moore & Martin Petrin, Corporate Governance: Law, Regulation and Theory 63
(2017).
45
Eddy Wymeersch, The Enforcement of Corporate Governance Codes, 6 J. Corp. L. Stud. 113,
131.
The FCA has not changed this approach. Public authorities in the UK prefer to use informal
enforcement.46
This is also the case in the Netherlands where the securities supervisor, the Autoriteit
Financiële Markten (AFM), is supposed to check whether there has been a reference to the
implementation of the code and whether it is consistent with the remainder of the annual
report.47 However, the latest annual reports of the AFM do not include references to the cor-
porate governance code.
This soft approach seems to be preferred by economically liberal jurisdictions which rely
predominantly on market mechanisms rather than on public enforcement and might even
view such involvement as a sign of failure. They will rather prefer to strengthen private or
quasi-public bodies, like currently in the UK, to monitor corporate governance codes rather
than rely more on public enforcement. Some other jurisdictions, like Germany, have a pref-
erence for hard-law rules, so the idea of soft-law rules and public enforcement of those rules
might seem at odds with the legal system.
3.1.2 Public enforcement of corporate governance codes

In other jurisdictions, with a more state interventionist approach, public authorities monitor
and might even try to enforce themselves corporate governance codes. However, there are
differences among jurisdictions as to the intensity of this control.
In Spain, the monitoring and enforcement of the corporate governance code is made by the
securities supervisor, the Comisión Nacional del Mercado de Valores (CNMV). This is logical
because the CNMV drafted the code through an ad hoc commission composed of members
of the public and private sectors. The CNMV publishes, since 2003, an annual report summa-
rizing the main results of the monitoring carried out on the basis of the corporate government
reports published by the issuers. To a certain extent, the CNMV uses “name and shame”
because its annual report also provides in its annexes individual data on compliance by listed
companies.48 In addition, the CNMV regularly sends notices to companies requesting infor-
mation, additional clarifications or correct information with regard to compliance with certain
recommendations set out in the Code. Most letters included guidelines on how to improve the
quality of the explanations given when not following the recommendations.
The Portuguese Securities supervisor, the Comissão do Mercado de Valores Mobiliários
(CMVM), also verifies compliance with the recommendations of the code and the quality
of the explanations provided by the issuers, although monitoring is done by the Commission
for the Accompaniment and Monitoring of the Corporate Governance Code. The CMVM
can also directly talk with the company’s management in order to clarify aspects which are
not clear. In case of deficiencies in the communication on compliance, or in the explanation
provided in case of non-compliance, the CMVM can also apply administrative sanctions. The
CMVM reports the results of its analysis in a public conference and publishes an annual report
containing brief statistical information on compliance with the Code and the assessment of
the quality of the explanations provided in the case of non-compliance. Like in Spain, more
46
John Armour, Enforcement Strategies in UK Corporate Governance: A Roadmap and Empirical
Assessment (ECGI, Working Paper No.106/2008).
47
Wymeersch, supra note 45, at 134.
48
See CNMV, Annual Corporate Governance Reports of issuers of securities admitted to
trading on regulated markets, Financial Year 2018 (2018).
detailed information, relating to individual companies that have been surveyed, are provided
in the tables annexed to the report.
Some other securities supervisors take an even more active approach to enforcing the code.
France is an example. The securities supervisor, the AMF, cannot set principles of corporate
law, because it has no official jurisdiction in this area. However, the AMF and its predecessor,
the Commission des Opérations de Bourse (COB), have always been very active in trying to
influence company law through soft powers.49 This includes also corporate governance codes.
Actually, the COB requested the elaboration of the 1995 Viénot I report.
Since 2004, the AMF must issue an annual analysis of the reports on corporate governance
and internal controls by listed corporations.50 It shows that the legislature considers the AMF
as a gatekeeper in the area of corporate governance. The purpose of the report is to inform the
French Parliament of the effective implementation of corporate governance principles. In case
they are not implemented correctly, there is an implicit threat that a legislative intervention
could come on the agenda. In its report, the AMF sometimes uses “name and shame”. This is
rather an exception in Europe.51
In addition, because France is a centralized country used to state interventionism, the AMF
is much more active in corporate governance than its powers imply. It uses soft tools and
behind-the-scenes contacts in order to enforce the corporate governance code. The AMF has
also sometimes acted openly. For instance, in 2015, it published on its website a letter criticiz-
ing the severance package granted to the CEO of Alcatel-Lucent because it did not fulfil the
criteria of the Code. The HCGE also intervened. As a consequence of this peer pressure and
public pressure, the package was later divided by half.52
Turkey is another example of an activist securities supervisor. The Capital Markets Board
(CMB) is empowered to enforce the mandatory parts of the corporate governance code.
The “Corporate Governance Principles” of the CMB are partly mandatory and partly of a
“comply-or-explain” nature. As to the latter, for example, each listed company should have
a profit distribution policy which should be approved by the general shareholders’ meeting
and disclosed on the company’s web page.53 If a company does not comply with this prin-
ciple, it must disclose this in its corporate governance compliance report. With regard to the
comply-or-explain provisions, the CMB’s powers are limited to enforcing the disclosure of
the corporate governance compliance report. In this mission, the CMB has been quite active. It
communicates with companies in case of insufficient explanations of non-compliance and has
even issued sanctions when disclosure about non-compliance was misleading.54
49
For the COB, see Yves Guyon, Le rôle de la Commission des opérations de bourse dans l’évolu-
tion du droit des sociétés commerciales, Rev. trim. dr. com. 447 (1975); Pierre Bézard, La Commission
des Opérations de Bourses (COB) et le droit des sociétés, R.J. com. 41, 41, 81 (1982).
50
Code de commerce [C. com.] [Commercial Code] art. L. 621-18-3 (Fr.).
51
See AMF, Etude comparée: les codes de gouvernement d’entreprise dans 10 pays
européens, Etude du 30 mars 2016 24 (2016).
52
See Pierre-Henri Conac, L’efficacité de l’auto-régulation en matière de rémunération semble
avérée dès lors que l’implication de l’AMF et du Haut Comité de gouvernement d’entreprise est forte,
Rev. Sociétés 615 (2015).
53
Corporate Governance Principles, 28871 T.C. Resmi Gazete No.1.6.1 (2014) (Turk.).
54
See OECD, Corporate Governance: Supervision and Enforcement in Corporate
Governance 77 (2013).
The intensity of the public monitoring and enforcement of corporate governance codes
varies considerably among jurisdictions depending on different attitudes towards state inter-
vention. This is also true of public enforcement of corporate governance rules.
3.2 Public Enforcement of Corporate Governance Hard-Law Rules
Public enforcement of corporate governance hard-law rules can be informal (Section 3.2.1)
and even official sometimes, when the securities supervisor has authority in company law
(Section 3.2.2).
3.2.1 Informal enforcement of corporate governance rule

France is again an example of active informal enforcement of company law. As mentioned,
the AMF has no official jurisdiction over company law, which includes corporate governance
rules. However, it has a strong influence on listed companies. The AMF plays an important
role in interpreting statutory provisions, for instance on internal control, and in promoting
rules protecting the shareholders. The AMF also regularly establishes Blue-Ribbon commit-
tees to deal with specific issues in order to influence the legislature or listed companies. For
instance, in 2005, the Mansion committee was charged with improving the exercise of voting
rights in the shareholders’ meeting.55 As a consequence, the AMF adopted several recommen-
dations on the matter. Although being officially soft-law, those recommendations are treated
in practice by listed issuers as hard-law. The AMF is careful to adopt a consensual approach
to its recommendations so that they have more chances to be accepted. Also, issuers know that
if they do not apply the recommendations, they might alienate the supervisor. Also, in cases
of conflict with shareholders, courts might consider that not applying the recommendation
was a violation of the duty of care of the board. Finally, the AMF may request a change of the
commercial code. Therefore, the AMF plays a strong role in developing de facto corporate
governance rules. The weakness of this approach is that in cases of non-application, a court
might not support the position of the AMF.
The importance of the AMF in corporate governance has increased because, as the French
Parliament was inspired by the US Sarbanes-Oxley Act of 2002, several recommendations
included in the corporate governance code, such as audit committees and internal controls,
were turned into law.56 The AMF became more influential because the legislature created
a link by requesting the AMF to draft an annual specific report on corporate governance
reports.
This migration from soft-law corporate governance principles towards corporate govern-
ance rules in the Companies Acts or securities law has grown in importance after the 2001
crisis since this was in large part a governance crisis. Some jurisdictions have even given
a legal basis to the securities supervisor to intervene in corporate governance.
55
Groupe de travail présidé par Yves Mansion, Pour l’amélioration de l’exercice des droits de
vote des actionnaires en France (2005) available at: www.amf-france.org/fr/actualites-publications/
publications/rapports-etudes-et-analyses/rapport-du-groupe-de-travail-preside-par-m-yves-mansion
-pour-lamelioration-de-lexercice-des-droits.
56
Pierre-Henri Conac, L’influence de la loi Sarbanes-Oxley en France, Revue des Sociétés 835
(2003).
3.2.2 Formal enforcement of company law

Providing a securities supervisor with the duty to enforce corporate governance rules is the
exception, but this approach can prove useful in some areas and jurisdictions. In countries with
concentrated ownership, the supervisor might substitute itself for the shareholders, while in
countries with dispersed ownership it empowers them.
The Italian legislator has granted powers to the securities supervisor, the Commissione
nazionale per le società e la Borsa (Consob), in the area of related party transactions (RPTs).
Private enforcement by shareholders as well as self-regulation have failed to prevent tunneling
in Italy, a country characterized by concentrated ownership. Therefore, as a consequence of
various scandals, especially in Cirio and Parmalat, a major reform was introduced in 2004
and 2005. Consob was entrusted with powers to establish rules regarding the transparency
and procedural and substantive fairness of RPTs and to monitor their application. Those rules
were published in 2010. Professor Luca Enriques, at the time commissioner at Consob, was
instrumental in developing those excellent rules which could serve as a model for France and
other countries.57
In two cases, Lactalis/Parmalat and the Fonsai-Unipol merger, which occurred shortly after
Consob issued its new regulation, Consob took a very active stance by using its formal and
informal intervention powers.58 In the first case, it challenged successfully the true independ-
ence of the independent directors deciding on the transaction and of the advisors supporting
them. A civil action by private plaintiffs was also successful. In the second case, Consob chal-
lenged the independence of the Chairman of the Committee in charge of issuing an opinion
on the transaction, a lawyer with strong links to a bank which was a major creditor of the
company to be absorbed. As a consequence, the chairman of the Committee was removed from
his position. In both cases, Consob was courageous as it challenged the Italian establishment
(Mediobanca and Unicredit).
The Italian example shows that public enforcement of corporate governance rules is useful,
and may be necessary, in areas where private enforcement has proven to be woefully insuf-
ficient. Unfortunately, Consob seems to have reduced considerably its enforcement effort
against tunneling since the departure of Luca Enriques.59
Brazilian company law does not provide specific rules for RPTs, just a general conflict of
interests rule. But the Comissão de Valores Mobiliários (CVM) has authority not just for secu-
rities regulation, but also for corporate law matters. It can, at its own initiative or at the petition
of minority shareholders, extend (no more than 30 days) the notice period of a shareholders’
meeting, in the case of complex transactions that require additional time for shareholder
consideration, or to suspend (no more than 15 days) the calling of a shareholders’ meeting for
a limited period in order to permit the submission by shareholders of their reasons for consid-
ering the transaction as improper. The CVM is also empowered to impose fines, suspensions
and disqualifications against those it finds in violation of the legal regime for RPTs. In 2008,
the CVM issued Guideline 35 to provide guidance as to how directors can fulfill their fiduciary
duties in cases of mergers involving parent companies and their subsidiaries, or companies
57
OECD, Related Party Transactions and Minority Shareholder Rights 466 (2012).
58
Marcello Bianchi, Luca Enriques & Mateja Milič, Enforcing Rules on Related Party Transactions
in Italy: One Securities Regulator’s Challenge, in The Law and Finance of Related Party
Transactions (Luca Enriques & Tobias Tröger eds., 2019).
59
See Bianchi et al., id.
under common control. The CVM enforces the Guideline in a substantive way, with special
focus, like in Italy, on the effective independence of the committee members in the subsidiary.
The activism of the CVM has improved the situation in Brazil.60 The CVM has to compensate
for weak private enforcement so that complaints to the CVM have replaced to a certain extent
civil actions in courts regarding invalidation of shareholders meeting decision, but not for
reimbursement of investors’ losses.
Turkey also has concentrated ownership and in 2001 granted its securities market supervisor
wide powers regarding corporate governance. A stated, the CMB is empowered to enforce the
mandatory parts of the corporate governance code. For instance, having a minimum number
of independent directors on the board of listed companies is a mandatory rule. Like in Brazil
and Italy, the CMB compensates for the fact that individual investors and courts are not very
experienced in handling investors’ complaints. The CMB has been very active in the area of
RPTs. The CMB has even a veto power over the appointment of independent directors.61
The United States is another example of granting powers to a securities supervisor to
enforce corporate governance rules. The SEC has been involved since its creation with
corporate governance rules and “it has aspired to regulate corporate governance since its
inception”.62 However, this involvement was traditionally limited because company law in
the US is a matter for state law, so Congress did not want to intervene, except in limited areas
such a proxy voting.63 In the 1970s, the SEC became more active in corporate governance
issues following a series of scandals. As stated, it succeeded, following a report to Congress,64
in convincing it to pass the Foreign Corrupt Practices Act (FCPA) of 1977.65 As part of the
FCPA, section 13(b) of the Securities Exchange Act requires issuers to make and keep books,
records and accounts that accurately and fairly reflect the transactions and dispositions of the
assets of the issuer.
Following the 2001 crisis, Congress passed the Sarbanes-Oxley Act of 2002 which federal-
ized some parts of corporate law with respect to matters of board composition and structure,
barred loans to corporate to officers, and granted the SEC enforcement powers in these areas.66
Following the 2008 financial crisis, Congress reacted with the Dodd-Frank Act of 2010,67
which federalized more parts of corporate law, especially “say on pay” and proxy access.68
These changes are significant. The “say on pay” provision mandates an advisory vote on
executive compensation in public companies. The proxy access provision allows shareholders
to nominate candidates through the company’s proxy material sent to all shareholders.
60
See OECD, supra note 54, at 51.
61
See id. at 79.
62
Roberta Karmel, Realizing the Dream of William O. Douglas – The Securities and Exchange
Commission Takes Charge of Corporate Governance, 30 Del. J. Corp. L. 80 (2005).
63
15 U.S.C. § 14(a).
64
S.E.C., 94th Cong., Rep. on Questionable and Illegal Corporate Payments and Practices
(Comm. Print 1976).
65
15 U.S.C. §§ 78mb 78dd-1, 78dd-2. 15 U.S.C. §§ 13(b)(2)–(7), 30(a).
66
Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002) (codified in scattered
sections of 11, 15 18, 28 & 29 U.S.C.).
67
Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L.No. 111-203, 121 Stat.
1376 (2010).
68
For a critical analysis, see Jill E. Fisch, Leave it to Delaware: Why Congress Should Stay out of
Corporate Governance, 37 Del. J. Corp. L. 731 (2013).
The SEC introduced Rule 14a-11 of the Securities Exchange Act but it was vacated in 2011
by the US Court of Appeals for the District of Columbia Circuit on the grounds that the SEC
had acted “arbitrarily and capriciously” by failing to adequately assess its economic impact.69
The rule, under certain circumstances, required companies to include in their proxy materials
security holder nominees for election as a director. However, the SEC also amended Rule
14a-8 of the Securities Exchange Act to allow shareholder proposals relating to proxy access
and certain other director election mechanisms. Therefore, the proxy access provision has
become effective in the US. Because of strong support by institutional investors, among them
BlackRock, CalPERS, Fidelity and Vanguard, proxy access is now mainstream at S&P 500
companies. As of the end of January 2018, 65 percent of S&P 500 companies had adopted
proxy access70 and 71 percent in 2019.71 The conditions are usually for the investor to have
held 3 percent of the shares for three years and nomination is limited to a maximum limit of
20 percent of directors.
Securities supervisors have sometimes received the right to develop and enforce corporate
governance hard-law rules. These powers vary according to jurisdictions and aim at defending
shareholders and, in all cases, empowering them to exercise their rights.
4. CONCLUSION
The debate between public versus private enforcement should be more about complementarity
and interaction. Both approaches are necessary.
Private enforcement by shareholders, either through vote or private litigation, should be the
main enforcement tool because corporate governance is a private matter and listed companies
are private entities. This approach is even more justified in the case of violation of corporate
governance codes because they are subject to a “comply or explain” approach. Therefore, it is
for the shareholders to decide which recommendation to apply.
However, since shareholder enforcement has serious shortcomings, it is justified that some
type of public enforcement takes place, especially in countries with concentrated ownership
and little private litigation. Regarding corporate governance codes, the role of securities
supervisors seems especially useful to enforce the “explain” principle when companies do not
provide valid reasons for deviating from a recommendation of the code. In such cases, they
should apply the recommendation. Their role is also especially useful in cases where a quali-
tative assessment is necessary to understand if a principle has not been complied with, such as
whether a director is really independent or if a transaction complies with a substantive fairness
requirement. However, their sanction powers are usually limited to naming and shaming
which is not always a deterrent. Therefore, the real threat for companies is that supervisors can
request legislation.
69
Bus. Roundtable v. S.E.C., 647 F.3d (D.C. Cir. 2011).
70
Proxy Access – Now a Mainstream Government Practice, Sidley Austin LLP (Feb. 1, 2018),
www.sidley.com/en/insights/newsupdates/2018/02/proxy-access.
71
Holly J. Gregory, Rebecca Grapsas, & Claire Holland, The Latest on Proxy Access, Harv. L.
Sch. F. on Corp. Governance (2019), https://corpgov.law.harvard.edu/2019/02/01/the-latest-on-proxy
-access/.
This has led to a migration of some provisions from soft-law towards hard-law in areas
where there have been serious difficulties enforcing the code. The best example is compensa-
tion, where abuses have been difficult to curb and which has led to a development of “say on
pay” in several major jurisdictions. True independence of directors has also been an issue with
damaging effect on RPTs. The situation regarding enforcement of corporate governance codes
looks similar to the one put in place in the US when Congress established the SEC in 1934 but
also organized self-regulation. To quote William O. Douglas on self-regulation, “government
would keep the shotgun, so to speak, behind the door, loaded, well-oiled, cleaned, ready for
use but with the hope it will never have to be used”.72 The difference is that in the case of
failure of private or public enforcement of corporate governance codes, the public “shotgun”
is “legislation”.
However, such migration is a sign of failure of self-regulation and private enforcement. It is
not positive. This explains why more jurisdictions are moving towards stronger monitoring by
independent private bodies or by securities supervisors. Stronger enforcement will reduce the
tendency towards “legalization”, protecting the benefits of flexibility of corporate governance
rules. However, private litigation is complex in many jurisdictions. Therefore, some countries
have given monitoring and enforcement powers on corporate governance rules to securities
supervisors. This approach is justified, especially for hard-law rules, in jurisdictions and for
topics, such as RPTs, where private enforcement would prove very difficult so that compliance
with the rule would not be achieved in practice. The US SEC, Italian Consob and Brazilian
CVM have exercised powers and the results have been rather satisfactory. This is the way
forward.
72
William O. Douglas, Protecting the Investor, 23 Yale Rev. 521, 523–24 (1934).
21. Direct and derivative shareholder suits:
towards a functional and practical taxonomy
Alan K. Koh and Samantha S. Tang1
1. INTRODUCTION
Shareholder litigation is an indispensable part of corporate law and governance. There is
no shortage of excellent legal scholarship on various aspects of shareholder litigation from
a comparative and functional perspective.2 Well-executed scholarly writing on comparative
shareholder litigation can be informative and even enlightening for students and scholars of
comparative corporate law. The goal of this chapter is to offer a taxonomy of shareholder
litigation mechanisms informed by considerations relevant to a minority shareholder’s deci-
sion whether and how to proceed with a lawsuit. The central questions guiding the exposition
below are these: What substantive outcomes are possible for a minority shareholder litigant,
and which of these can each mechanism be used to achieve?
This has implications on scope. First, this chapter focuses exclusively on mechanisms
of “private” enforcement/civil litigation by shareholder litigants; we exclude substantive
discussion of contract law or regimes rooted purely in securities law3 but make occasional
references to indicate where they would fit within this taxonomy. Second, we do not discuss
enforcement of corporate law or securities law duties or rights by regulatory agencies,4
non-profit public investor protection bodies,5 or the like. Finally, we also do not discuss corpo-
rate law mechanisms insofar as they lead to dissolution of the company as the legal outcome.6
For the avoidance of doubt, we generally use jurisdictionally-neutral terminology in construct-
1
We are grateful to Christian Hofmann and Dan Puchniak for feedback on an earlier draft, and to
Martin Gelter and Afra Afsharipour for additional comments. This research is supported by the Ministry
of Education, Singapore, under its Academic Research Fund Tier 1 (04MNP001989C300).
2
Most notably, Martin Gelter, Mapping Types of Shareholder Lawsuits Across Jurisdictions, in
Research Handbook on Representative Shareholder Litigation 459 (Sean Griffith et al. eds.,
2018).
3
See, e.g., id. at 461 (excluding securities law actions from his taxonomy).
4
While enforcement of securities law by securities regulators is a well-established field, regulatory
enforcement of core corporate law (such as directors’ duties of care) is a relatively uncommon phenome-
non. For examples, see Cassimatis v Australian Securities and Investments Commission [2020) FCAFC
52 (Austl.); Lim Weng Kee v Public Prosecutor [2002] SGHC 193, [2002] 2 SLR(R) 848 (Sing.).
5
We do not discuss hybrid or quasi-public systems of enforcement such as that by Taiwan’s
Investors Protection Center (IPC). See Andrew Jen-Guang Lin, The Assessment of Taiwan’s Shareholder
Stewardship Codes: From International Stewardship Principle to Alternative Good Stewardship,
in Global Shareholder Stewardship: Complexities, Challenges and Possibilities (Dionysia
Katelouzou & Dan W. Puchniak eds., forthcoming 2021/2022); Wen-Yeu Wang, The IPC Model for
Securities Law Enforcement in Taiwan, in Enforcement of Corporate and Securities Law (Robin
Hui Huang & Nicholas Calcina Howson eds., 2017).
6
Dissolution is destructive of otherwise viable going concerns, deleterious to other stakeholders,
and a last resort. Where a shareholder is committed to exercising the nuclear option, the considerations
431
ing our framework. For example, we use “shareholder” as a generic term for equity holders of
any kind regardless of their proper name in original or translation.
This chapter proceeds as follows. Section 2 sets out four key considerations relevant to
litigators that shape our discussion in subsequent parts. Section 3 classifies direct shareholder
litigation mechanisms functionally according to whether the desired outcome is a monetary or
non-monetary one. Section 4 addresses derivative litigation. Section 5 concludes.
2. KEY CONSIDERATIONS IN SHAREHOLDER LITIGATION
In this part, we identify four factors that affect shareholder litigation mechanisms, and the
factual scenarios in which they are used. Partly legal and partly factual in nature, these consid-
erations are essential to any litigation strategy.
2.1 Type of Company
The fundamental distinction is between widely-held—often traded or listed on a securities

exchange—and closely-held companies. In the widely-held company, an internal govern-
ance structure restricting management powers and responsibility to directors, and excluding
shareholders from day-to-day decision-making is essential.7 Private enforcement of director
duties is considered crucial for investor protection,8 yet individual shareholders in widely-held
companies have few economic incentives to engage in costly litigation when they can simply
do the “Wall Street Walk”.9 Free-rider and collective action problems further complicate any
effort to organize dispersed shareholders to take action against misbehaving managers.10 In
this context, derivative litigation11 and class actions12 are useful legal mechanisms for private
enforcement in widely-held companies, with the usual defendant(s) being the company’s
director(s).
By contrast, in closely-held companies there is no real separation between ownership and
control, because shareholders are often directly involved in management by wearing concur-
rent hats as directors, employees, or both. Such informal management arrangements align the
interests of directors and shareholders, and put shareholders in a strong position to monitor and
assert their rights against directors.13 Thus, the “Achilles heel” of the closely-held company is
not conflict between managers and shareholders, but rather conflict between the majority and
we explore (in Section 2) may act differently, or even be potentially irrelevant. The most notable out-
comes in lieu of dissolution—withdrawal—will be discussed below at Section 3.2.1.
7
John Armour et al., What is Corporate Law?, in The Anatomy of Corporate Law: A Comparative
and Functional Approach 11–14 (Reinier Kraakman et al., 3d ed. 2017) [hereinafter Anatomy].
8
See, e.g. Rafael La Porta et al., What Works in Securities Laws?, 61 J. Fin. 1, 27–28 (2006).
9
Cf. Samantha S. Tang, The Anatomy of Singapore’s Statutory Derivative Action: Why Do
Shareholders Sue – Or Not?, 20 J. Corp. L. Stud. 327, 331 (2020).
10
See, e.g., Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs’ Attorney’s Role in Class Action
and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. Chi. L. Rev. 1,
8–11 (1991).
11
See Section 4 below.
12
See Section 3.2.2 below.
13
Alan K. Koh, Shareholder Protection in Close Corporations: Theory, Operation
and Application of Shareholder Withdrawal at ch. II.B (pp. 24–25) (forthcoming 2021/2022)
Direct and derivative shareholder suits 433
minority shareholders.14 Majority shareholders can use their directorial or shareholder powers
to extract personal benefits for themselves at the expense of minority shareholders. Unlike
shareholders in listed companies, minority shareholders cannot simply sell their shares and
exit the company when faced with majority shareholder opportunism.15 Aggrieved minority
shareholders are likely to resort to direct suits, such as oppression petitions, or damage/com-
pensation claims, against the majority.16
The distinction has legal implications. For example, depending on jurisdiction, unfair prej-
udice or oppression regimes17 make access extremely difficult or near-legally impossible for
shareholders of widely-held companies.18 Shareholders in widely-held or traded companies
in the US have their appraisal rights limited by circumstances or denied outright whereas
closely-held company shareholders are not so affected.19
2.2 Length and Cost of Litigation
The length and cost of legal proceedings are crucial considerations in litigation practice. All
other things being equal (e.g. type and quantum, if applicable, of relief), a litigant motivated by
the legal outcome would prefer proceedings that can be resolved more quickly, and for a lower
cost.20 The exact duration of the proceedings depends at least in part on the parties’ willingness
to settle (or pursue a court decision), the overall efficiency of the court system,21 and applicable
civil procedure rules.
As a matter of civil procedure, some forms of shareholder litigation may be classified
as pre-fact-finding22 (“pre-trial” or “interlocutory”) proceedings, which can be resolved in
a matter of days or weeks, and may not require a full-length court proceeding with fact-finding
[hereinafter cited to unpublished manuscript draft]; Frank H. Easterbrook & Daniel R. Fischel, Close
Corporations and Agency Costs, 38 Stan. L. Rev. 271, 274 (1986).
14
Mette Neville, A Statutory Buy-out Right in SMEs – An Important Corporate Governance
Mechanism and Minority Protection?, in Company Law and SMEs 279 (Mette Neville & Karsten
Engsig Sørensen eds., 2010).
15
Koh, supra note 13, at ch. II.B (pp. 23–24).
16
For discussion on direct suits, see Section 3 below.
17
Oppression remedies are unique in that they straddle many of the subcategories of shareholder
litigation. See Sections 3 and 4 below.
18
Cf. Re Astec (BSR) plc [1998] 2 B.C.L.C. 556, 588–89 (Eng.) with Catalyst Fund General Partner
I Inc. v. Hollinger Inc. (2006) 79 O.R. (3d) 288, 266 D.L.R (4th) 228 [94] (Can. Ont. C.A.); Luck
Continent Ltd v Cheng Chee Tock Theodore [2013] 5 H.K.C 442 [55], [12], [98] (C.A.); and Latimer
Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328 at [111] (CA). Canada may be a partial
exception; see further infra note 72 and sources cited therein.
19
20
This does not include litigants whose objective is other than the substantive legal outcome (e.g.
harassment, publicity and other collateral benefit).
21
See, e.g., Enforcing Contracts, World Bank – Doing Business (May 2019), www.doingbusiness
.org/en/data/exploretopics/enforcing-contracts/score.
22
In non-common law jurisdictions, the distinction between “trial” and “pretrial” may not be quite
as rigid or as meaningful, but the distinction between “fact-finding” and “non-fact-finding” phases of
litigation at first instance may still be meaningful. For Japan, benron junbi tetsuduki (lit. “preparatory
proceedings for [oral] argument”) are open only to parties or persons deemed appropriate by the court.
Minji soshōhō [Minsohō] [C. Civ. Pro.] 1996, art. 169(2). Contrast id., art. 312(2)(v) (non-compliance
with the rule that oral argument shall be open to the public is grounds for final appeal (jōkoku)). This
chapter avoids using “trial” except in a purely common law context.
held in open court.23 This is the case for “Anglo-Commonwealth model” leave applications
for statutory derivative actions, which do not involve fact-finding (trial).24 Jurisdictions may
also provide for abbreviated or special procedures; this can be the case for appraisal remedies
which focus on valuation.25 On the other hand, other forms of shareholder litigation are notori-
ous for their length—oppression petitions may take years to proceed to trial and first instance
judgment26—and accordingly, higher costs.
The overall cost of litigation—and the allocation of costs between the parties—has a signif-
icant impact on a shareholder’s financial incentives to litigate. In the US, the starting point is
that each party bears its own attorneys’ fees regardless of the result.27 Ordinarily, shareholders
do not have strong incentives to litigate; rather, it is their entrepreneurial attorneys who are
financially incentivized to engage in litigation by virtue of contingency fee arrangements.28 By
contrast, the general position for the apportionment of costs across the Anglo-Commonwealth
is “costs follow the event”: the loser not only pays for their own expenses, but also the win-
ner’s.29 The “loser pays” rule also applies to civil law jurisdictions, including many European
countries.30 However, some jurisdictions have complex cost allocation regimes that are diffi-
cult to characterize as being purely “loser pays”, or “each party bears its own costs”, as is the
case for Japan.31 The “loser pays” rule has arguably had a chilling effect on shareholder litiga-
tion,32 and has motivated courts and policymakers to devise funding arrangements that reduce
the financial burden on shareholders. We discuss funding arrangements in Section 2.4 below.
23
Interlocutory proceedings in the Anglo-Commonwealth are usually heard in the judge’s chambers,
and not in open court; in other words, proceedings are neither transparent nor accountable to the public
except by way of the rare written judgment. There is usually no examination of witnesses unless the
parties successfully obtain the court’s permission to do so, meaning that no firm findings of fact are
possible.
24
See Section 4.2 below. See also Tang, supra note 9, at 355. We do not claim that derivative action
leave applications are always faster or cheaper than alternatives.
25
In Japan, appraisal is not treated as a “contentious” proceeding, but more as a “non-contentious”
proceeding that vests greater discretionary power in the judge and which is not subject to the usual
constitutional rule that court proceedings shall be conducted in open court. See Alan K. Koh, Appraising
Japan’s Appraisal Remedy, 62 Am. J. Comp. L. 417, 427–31 (2014). Another example is New Zealand,
where the Companies Act explicitly provides that shareholder objections to share valuation in minority
buy-out proceedings are to be resolved through arbitration instead of court litigation: Companies Act
1993, s 112A (N.Z.).
26
27
Fee-shifting statutes will not be discussed.
28
See discussion at Section 2.4 below.
29
The loser is ordinarily liable for “party-and-party” costs, being a portion of the legal fees paid by
the winner to their lawyers (called “solicitor-and-party” costs). The Anglo-Commonwealth position is
therefore that the “loser pays”, but it is rarely “loser pays all”.
30
See Martin Gelter, Why Do Shareholder Derivative Suits Remain Rare in Continental Europe?, 37
Brook. J. Int’l L. 843, 862–64 (2012).
31
Koh, supra note 25, at 446 (describing Japan’s cost allocation system for civil litigation and
appraisal); Mark D. West, The Pricing of Shareholder Derivative Actions in Japan and the United States,
88 Nw. U. L. Rev. 1436, 1456–66 (1994); Gelter, supra note 30, at 863–64 (for France).
32
See, e.g., Arad Reisberg, Access to Justice or Justice Not Accessed: Is There A Case for Public
Funding of Derivative Claims, 37 Brook. J. Int’l L. 1022, 1025–26 (2012); but see Gelter, supra note
30, at 863–64 (doubting the extent to which the “loser pays” approach affects derivative actions in
Europe generally).
2.3 Outcome (Legal Relief)
Different legal mechanisms offer different types of relief for successful shareholders. The
most straightforward form of relief is monetary. Relief for the plaintiff’s loss suffered may be
in the form of damages payable by the defendant. Alternatively, the court may order a party’s
shares (often the plaintiff-shareholder’s) to be purchased by another party, typically the
company or the other shareholders. In both situations, valuation—either the plaintiff’s loss or
their shares—is crucial, and often contested by the parties. Depending on the legal mechanism
involved, the court may rely on a statutory procedure, a third-party valuation mechanism, and/
or the parties’ prior agreement on valuation matters. Monetary relief has obvious financial
advantages, and is useful for shareholder seeking to sever all ties with the company through
exit. For the purposes of this chapter, “property” claims such as declaration of constructive
trust and order of transfer of property held thereunder shall be classified as monetary.
Non-monetary relief may take several forms, including invalidation of shareholder resolu-
tions and injunctions as to ongoing or future conduct.33 The advantages of non-monetary relief
are less obvious, given that the shareholder will almost certainly be out of pocket even if they
win. Nonetheless, there are at least two possible reasons why a shareholder might persist in
seeking non-monetary relief. First, the shareholder might be attempting to exercise voice in
the conduct of the company’s affairs. Second, a proceeding offering non-monetary relief may
have a competitive advantage if it is cheaper and quicker than options leading to monetary
relief. While the non-monetary relief sought by the shareholder may not directly address the
substantive issues that are at the core of the plaintiff’s complaint, the proceedings may none-
theless enable the shareholder to obtain more detailed information about the company or the
underlying dispute, or acquire some other form of leverage over other corporate participants.
Derivative actions complicate the monetary/non-monetary dichotomy for shareholder out-
comes. As will be discussed below,34 derivative litigation usually comprises two conceptual
parts: (1) proceedings in which the shareholder obtains or resists a challenge to their authority
to conduct litigation in place of the company (also known as a “leave application” in the
Anglo-Commonwealth); and (2) proceedings in which the shareholder conducts litigation in
place of the company. In one sense, the proximate legal relief (or immediate outcome) of a
“successful” derivative proceeding in part 1 is the mere authorization of the shareholder to
conduct litigation; this is not a final, substantive outcome in the sense of the outcome of part 2.
Even if the shareholder subsequently pursues the derivative action to a “successful”
outcome with legal relief, the connection between that outcome and the shareholder’s personal
outcome is tenuous. If the outcome is non-monetary relief for the company, the outcome
is non-monetary for the shareholder as well. If the outcome is monetary recovery for the
company, the shareholder does not necessarily obtain monetary recovery. Where corporate
recovery pursuant to a derivative action augments the company’s asset base, the value of its
shares should—at least theoretically—rise. The corporate recovery resulting from the deriva-
tive action thus “compensates” each shareholder for their “reflective loss”, being the decrease
in share value corresponding to the wrong inflicted on the company. Such “compensation”
is only monetary in an indirect sense at best, given that the valuation and compensation of
33
See Section 3.3 below.
34
At Section 4.2.
reflective loss is fraught with uncertainty.35 It is therefore unmeaningful to characterize the

shareholder’s outcome in derivative litigation as monetary, and we do not subject derivative
actions to the monetary/non-monetary dichotomy.36
2.4 Funding
It is unrealistic to expect an impecunious shareholder to litigate, even if the suit is meritori-

ous. There are four arrangements that enable the shareholder to shift the cost (and potentially
reward) of litigation in whole or in part to another party, namely: (1) the attorney; (2) the
company; and (3) a third-party funder.
The attorney. Attorney fee-shifting arrangements generally shift the financial risks and
rewards of litigation from shareholder-plaintiffs to their attorneys.37 For contingency fee
arrangements in the US, the attorney agrees to bear the full cost of the proceedings for a per-
centage of the monies acquired from a successful action or settlement, or the equivalent value
where non-monetary resolution was the result. Per US jurisprudence, the attorney would only
be paid where the suit resulted in a settlement or judgment in the company’s favor, such that
a “common fund” was created from the monies recovered by the company, or the company
otherwise obtained a “substantial or common benefit” to the company (e.g. settlement received
by the company).38 In Japan, the starting position in civil litigation that the loser bears “litiga-
tion costs”—this only consists of court filing fees, and excludes the fees paid or payable to the
winner’s attorney.39 In the derivative litigation context, a successful shareholder litigant may
claim reasonable attorney’s fees and other expenses arising from the litigation (but not court
fees) from the company,40 but a losing one is otherwise subject to the usual rule that each party
bears their own attorney’s fees.
Conditional fee agreements in the UK are broadly similar: the client does not pay the
lawyer’s fees if they lose, but the lawyer is entitled to charge a success fee if they win. The
success fee is often calculated as a percentage of the lawyer’s normal costs. The agreement is
often bundled with an insurance policy to pay the other party’s costs and the client’s expenses
35
See, e.g., Marex Financial v Sevilleja [2020] UKSC 31, [2020] 3 WLR 255, [145]–[147] (Eng.);
Alan K. Koh, Reconstructing the Reflective Loss Principle, 16 J. Corp. L. Stud. 371, 376, 395–96
(2016).
36
Some derivative action regimes empower the court to order that recovered sums be paid to
individual shareholders. See further below at Section 3.2.2. However, as provisions permitting “direct”
recovery are in the minority and not applied as such with any degree of frequency, we do not discuss
them separately.
37
Mathias M. Siems, Private Enforcement of Directors’ Duties: Derivative Actions as a Global
Phenomenon, in Collective Actions: Enhancing Access to Justice and Reconciling Multilayer
Interests? 97 (Stefan Wrbka et al. eds., 2012); Arad Reisberg, Funding Derivative Actions:
A Re-Examination of Costs and Fees as Incentives to Commence Litigation, 4 J. Corp. L. Stud. 345,
350–51 (2004) (discussing US contingency fee arrangements).
38
Reisberg, supra note 37, at 349–50; Macey & Miller, supra note 10, at 22–27; Mark J.
Loewenstein, Shareholder Derivative Litigation and Corporate Governance, 24 Del. J. Corp. L. 1.
39
See generally, Manabu Wagatsuma, Recent Issues of Cost and Fee Allocation in Japanese Civil
Procedure, in Cost and Fee Allocation in Civil Procedure: A Comparative Study (Mathias
Reimann ed., 2012).
40
Kaisha-hō [Companies Act], Law No. 86 of 2005, art. 852(1) (Jap.); Kenjirō Egashira,
Kabushiki Kaisha-hō [Laws of Stock Corporations] 502 (Yūhikaku 7th ed. 2017).
(save lawyer fees) if the client loses.41 As of 2020, not every jurisdiction permits attorney
fee-shifting arrangements.42 Such arrangements have been criticized for incentivizing oppor-
tunistic attorneys to act in their self-interest to the detriment of the shareholder-plaintiff and
the company by bringing unmeritorious suits,43 charging excessive fees, or settling lawsuits
for sums or other arrangements inadequate or disproportionate to fees they stand to charge.44
The company. Indemnity orders are an Anglo-Commonwealth mechanism that shifts the
costs of a derivative suit from the shareholder to the company. Where an impecunious share-
holder brings a derivative action, the court may exercise its discretion to order the company
to indemnify the shareholder for all expenses incurred on its behalf. Indemnity orders are
recognized in virtually every major jurisdiction in the common law world, including Canada,
New Zealand, Singapore, Australia, and Hong Kong.45 German law also provides for indem-
nification of the AG shareholder under specific circumstances.46 The precise requirements
for such orders vary across jurisdictions, but relevant factors for the court’s consideration
generally include the plaintiff’s financial position, the potential benefits to the plaintiff from
the proceedings, the need to encourage the litigant to conduct the action in a prudent manner,47
and the relative merits of the action.48 However, courts in many Anglo-Commonwealth juris-
dictions often prefer to defer any decision on costs to a later stage in the proceedings, or the
trial itself.49 Indemnity orders are thus rarely granted in practice.50
Third party funding. A third-party funding arrangement enables a commercial funder to
“invest” in litigation by agreeing to provide financial support for the plaintiff by paying for the
plaintiff’s legal expenses, and any adverse cost orders if the suit fails.51 If the suit succeeds,
the funder takes a share of the recovered amount.52 Third-party funding for litigation generally
41
See Courts and Legal Services Act 1990, §§ 58, 58A, 58AA, 58B, 58C (Eng.); Reisberg, supra
note 37, at 379.
42
For example, Singapore does not permit conditional fee arrangements, but see Ministry of Law,
Public Consultation on Conditional Fee Agreements in Singapore (2019), www.mlaw.gov.sg/news/
public-consultations/public-consultation-on-conditional-fee-agreements-in-singapore.
43
See Roberta Romano, The Shareholder Suit: Litigation without Foundation?, 7 J. L. Econ. &
Org. 55, 84 (1991). Recent studies suggest that “strike suits” now pose less of problem; see Robert B.
Thompson & Randall S. Thomas, The Public and Private Faces of Derivative Lawsuits, 57 Vand. L.
Rev. 1747, 1749 (2004).
44
Macey & Miller, supra note 10, at 22–27.
45
First invoked in Wallersteiner v. Moir (No 2) [1975] 1 QB 373 (Can.). Indemnity orders are
available for both common law derivative actions (if retained) and statutory derivative actions. See, e.g.,
Canada Business Corporations Act, R.S.C. 1985, § 240; Companies Act (c. 50, 2006 rev. ed.), § 216B
(Sing.); Companies Act 1993, s 166 (N.Z.).
46
Aktiengesetz [AktG] [Stock Corporation Act], Sept. 6, 1965, BGBl I at 1089, last amended by
Gesetz, July 17, 2017, § 148 Abs 6 S 2, 4, 5 (Ger.).
47
See, e.g., Intercont’l Precious Metals Inc. v. Cooke (1994) 10 B.L.R. (2d) 203 (Can.); Airtrust
(Singapore) Pte Ltd. v. Kao Chai-Chau Linda [2014] 2 SLR 693 (Sing.).
48
Companies Ordinance, § 738(3) (expressly requiring the plaintiff to prove to the court’s satisfac-
tion that they were acting in good faith, and had reasonable grounds for making the application for costs).
49
Tang, supra note 9, at 348.
50
See, e.g., id. at 348–49.
51
Victoria Shannon Sahani, Judging Third-Party Funding, 63 UCLA L. Rev. 1, 5 (2016).
52
John Walker, Funding Criteria for Class Actions, 32 U. New South Wales L. J. 1036, 1036–37
(2009); David Capper, Third Party Litigation Funding in Ireland: Time for Change?, 37 Civ. Just. Q.
193, 193 (2018).
is permitted in some jurisdictions, including the UK53 and Australia,54 and is especially useful
for class actions where the cost of launching the action can be high.55 Commercial funders
are generally reluctant to fund vexatious suits, and claims are screened carefully. The risk of
paying for adverse cost orders from a failed suit is usually sufficient to discourage funders
from supporting speculative litigation.56
3. DIRECT LITIGATION
3.1 Definition and Scope
A direct shareholder litigation mechanism is defined as “a mechanism that a shareholder or

equivalent may, by virtue of or in connection with status as a shareholder, litigate to obtain
a legal outcome”. This definition is broad enough to encompass litigation targeted at the
company itself; directors, other officers, and other connected persons; and other shareholders.
More precise sub-definitions will be provided below.
3.2 Monetary
3.2.1 Withdrawal (oppression, unfair prejudice, etc.)

Withdrawal is the “voluntary exit from a close corporation by a shareholder desirous of exit
resulting in a monetary claim payable to the withdrawing shareholder in exchange for the lat-
ter’s loss of status, rights, duties, and other interests in the close corporation”.57 Accordingly,
withdrawal is an example of a monetary direct suit par excellence. It should be noted that
“withdrawal” is used here as an umbrella term borne out of functional comparison; it is rarely
used as the proper legal name of any direct litigation mechanism whether in original or trans-
lation.58 It should be carefully distinguished from related concepts such as “appraisal”,59 and
“expulsion”.60
Withdrawal mechanisms may be triggered under different types of situations.61 At one
extreme is withdrawal “at will”, which is a rule that a shareholder may withdraw without the
53
See, e.g., Rachael Mulheron, England’s Unique Approach to the Self Regulation of Third Party
Funding: A Critical Analysis of Recent Developments, 73 Cambridge L.J. 570 (2014).
54
See, e.g., Walker, supra note 52 (offering an account of commercial third-party funding from
a funder’s perspective).
55
Bernard Murphy & Camille Cameron, Access to Justice and the Evolution of Class Action
Litigation in Australia, 30 Melbourne U. L. Rev. 399, 438–39 (2006).
56
Capper, supra note 52, at 206.
57
Koh, supra note 13, at ch. II.C (p. 29) (emphasis added).
58
See e.g., Koh, supra note 13, at ch. II.C (pp. 28–29).
59
On the distinction between withdrawal and appraisal see Section 3.2.3 below.
60
Koh, supra note 13, at ch. II.D.2.i (pp. 37–38); Alan K. Koh, Shareholder Protection in Close
Corporations and the Curious Case of Japan: The Enigmatic Past and Present of Withdrawal in
a Leading Economy, 53 Vand. J. Transnat’l L. 1207, 1217 (2020).
61
Withdrawal on clearly verifiable grounds such as death or bankruptcy of shareholder are not dis-
cussed in this Chapter.
need to establish any legal basis or prove any fact. A few examples exist and include Japan (as
a default for the Gōdō Kaisha (GK)),62 and a few states in the US (as a default for the LLC).63
Withdrawal liability based on “fault”64 is relatively common. The classic example of this is
the oppression remedy in the Anglo-Commonwealth. The remedy takes the form of a statutory
regime that gives the court broad discretion to grant relief to shareholders65 from “oppression”,
“disregard [of interests]”, “unfair discrimination” or “unfair prejudice” arising from act(s) or
omission(s) of the company or its controllers.66 The remedy can offer relief even where the
unfairness suffered by the shareholder resulted from act(s) or omission(s) by the other entities
in the group to which the company belonged.67 The usual form of relief is a court order that
the defendant (usually a controller of the company rather than the company itself) purchase
the shareholder plaintiff’s shares (known as a “share purchase order” or “buyout order”).68 The
buyout order—which satisfies the definition of withdrawal—can compensate the shareholder
for reflective loss.69 The oppression remedy is generally more popular in private, closely-held
companies where voluntary exit is difficult.70 Among other factors, the inability to do the
“Wall Street Walk” in closely-held companies means that minority shareholders are more
vulnerable to abuse and opportunism by the majority. By contrast, courts are generally more
reluctant to grant relief for shareholders of listed companies,71 with the notable exception of
Canada.72 Although offering considerable benefits to shareholder plaintiffs, oppression actions
are often long-drawn and costly.73
62
Companies Act 2005, art. 606(1) (Jap.); see generally Koh, supra note 60.
63
See, e.g. Haw. Rev. Stat. Ann. §§ 428-601 (1996), 428-602 (1996), 428-603 (1999), 428-701
(1999) (West); S.C. Code Ann. §§ 33-44-601 (1996), 33-44-602 (1996), 33-44-603 (1998), 33-44-701
(1998). See generally Koh, supra note 13, at ch VI.E.2 (pp. 254–58).
64
See Koh, supra note 13, at ch III.C.1 (pp. 80–81).
65
Canada expressly permits other corporate participants to seek relief under the oppression remedy.
See, e.g., Canada Business Corporations Act, § 238.
66
See, e.g., Canada Business Corporations Act, § 241(2); Companies Act 1993, s 174(1) (N.Z.);
Companies Act, § 216(1) (Sing.); Corporations Act 2001, s 232 (Austl.); Companies Act 2006, §§
994(1)–(1A) (U.K.); Companies Ordinance, § 724 (H.K.). For a concise yet reasonably comprehensive
treatment of the UK regime, see Koh, supra note 13, at ch V (pp. 153–211).
67
See, e.g., Canada Business Corporations Act, § 241(2) (“a corporation or any of its affiliates”) read
with s 2(2) (definition of affiliate); Alan K. Koh, (Non-) Enforcement of Director Duties in Corporate
Groups, 81 Mod. L. Rev. 673, 684–85 (2018) Samantha S. Tang, National Report on Singapore, in
Groups of Companies 528 (Rafael Mariano Manóvil ed., 2020). See also Zhong Xing Tan, Unfair
Prejudice from Beyond, Beyond Unfair Prejudice: Amplifying Minority Protection in Corporate Group
Structures, 14 J. Corp. L. Stud. 367 (2014).
68
See, e.g., Koh, supra note 13, at ch V.C.2 (p. 166).
69
Koh, supra note 35, at 387–89.
70
See, e.g., Stephanie Ben-Ishai & Poonam Puri, The Canadian Oppression Remedy Judicially
Considered: 1995–2001, 30 Queens L. J. 79, 92 (2005); Lynne Taylor, The Derivative Action in the
Companies Act 1993: An Empirical Study, 22 New Zealand U. L. Rev. 333, 356 (2006); Hans Tjio,
An Empirical Look at the Consequences of Oppression Actions in Singapore, 17 J. Corp. L. Stud. 405
(2017).
71
See, e.g., Re Astec (BSR) plc [1998] 2 BCLC, at 570; Latimer Holdings Ltd. [2005] 2 NZLR 328
at [98]–[111]; see also discussion above at Section 2.1.
72
See e.g., BCE Inc v 1976 Debentureholders 2008 SCC 69, [2008] 3 SCR 560. Oppression claims
have been brought in listed companies in the context of takeover bids; see Ben-Ishai & Puri, supra note
70, at 92–97.
73
Tang, supra note 9, at 355–56 (Singapore); Koh, supra note 13, at ch V.C.1.ii (p. 163) (UK).
In the US, withdrawal for close corporations74 may be available under what has been col-
lectively termed “oppression” remedies. A few states offer withdrawal either as a matter of
express statute or case law.75 However, the most distinctive feature of withdrawal in the US
is what has been termed “indirect remedies” or “election statutes”, which (1) permit a share-
holder to apply to court to have the corporation dissolved on fault grounds, and (2) other
shareholders or the corporation to voluntarily choose (“elect”) to purchase the shareholder
plaintiff’s shares at fair value to avoid dissolution.76 Fault grounds recognized for oppression
purposes may be doctrinally divided into “burdensome, harsh and wrongful” acts or conduct,
breach of fiduciary duties, and breach of reasonable expectations.77 Comparable withdrawal
remedies are also potentially available for limited liability companies (LLCs).78
Germany’s limited liability corporation (Gesellschaft mit beschränkter Haftung) (GmbH)
offers its shareholders a completely uncodified regime of Austritt aus wichtigem Grund
(withdrawal for good cause).79 Fault-type situations recognized as good cause include abuses
of majority power and breaches of the duty of loyalty (Treuepflicht) by other shareholders.80
The Japanese companies statute offers shareholders of the membership company (Mochibun
Kaisha)81 with limited liability for all members, GK (sometimes translated “limited liability
company”), withdrawal on “unavoidable” grounds (yamu wo enai jiyū),82 which may include
exclusion of the minority shareholder, in whole or in part, from financial returns (e.g. through
dividends).83
74
Including but not limited to “statutory close corporations” to which different statutory provisions
expressly apply.
75
See, e.g., 805 Ill. Comp. Stat. Ann. 5/12.56(b)(11) (2007); Minn. Stat. Ann. § 302A.751 subdiv.
2 (West 2011); Boland v. Boland, 423 Md. 296, 371–72, 31 A.3d 529, 574 (2011); Matter of Wiedy’s
Furniture Clearance Ctr. Co., Inc., 108 A.D.2d 81, 84–85, 487 N.Y.S.2d 901, 904 (1985); Donahue v.
Rodd Electrotype Co., 367 Mass. 578, 603–04, 328 N.E.2d 505, 520–21 (1975). See generally Koh,
supra note 13, at ch VI.C.2.i–ii (pp. 224–29).
76
Model Bus. Corp. Act (2016), § 14.34; N.Y. Bus. Corp. Law § 1118 (McKinney 1990); Koh,
supra note 13, at ch VI.C.2.iii (pp. 229–31).
77
See, e.g., Robert B. Thompson, The Shareholder’s Cause of Action for Oppression, 48 Bus. Law.
699, 711–12 (1993); Koh, supra note 13, at ch VI.E.3.i–ii (pp. 235–37).
78
See, e.g., Douglas K. Moll, Judicial Dissolution of the Limited Liability Company: A Statutory
Analysis, 19 Trans.: Tenn. J. Bus. L. 81, 100, 100 n.56, 107, app. 1 (2017); Koh, supra note 13, at ch
VI.C.2.i (pp. 258–61).
79
See generally, Koh, supra note 13, at ch. IV (pp. 107–52); Lutz Strohn, § 34 Einziehung von
Geschäftsanteilen [Section 34 Redemption of Membership Interests], in Münchener Kommentar
zum Gesetz betreffend die Gesellschaften mit beschränkter Haftung – GmbHG [Munich
Commentary on the Law on Limited Liability Corporations], Rn 101–09, 178–220 (Holger
Fleischer & Wulf Goette eds., 3d ed. 2018); Maximilian Goette, Der Exit der Minderheit aus der
GmbH [Exit of the Minority from the GmbH] 97–143 (2014).
80
Koh, supra note 13, at ch IV.C.2.iii (pp. 126–29).
81
In contradistinction with the more famous stock corporation Kabushiki Kaisha.
82
Companies Act 2005, art. 606(3) (Jap.). See Koh, supra note 60, at 1243–45; Koh, supra note 13,
at ch VII.D.3 (pp. 299–307). The full scope of “unavoidable” grounds is not well-established in Japanese
jurisprudence.
83
Koh, supra note 13, at ch. VII.D.3.iii (p. 303) (noting that “severe conflict over corporate
management resulting in deadlock and improper squeeze-out of members must be recognized as ‘una-
voidable grounds’”). “Squeeze-out” (shimedashi) in this context refers not to squeeze-out transactions
which can trigger appraisal (see Section 3.2.3 below), but rather exclusion from financial returns. See,
By contrast with fault grounds, withdrawal on “non-fault” grounds is a less common

feature.84 This should be carefully distinguished from withdrawal “at will”; “non-fault” with-
drawal “is only available in specific situations verifiable by a third-party adjudicator such as
a court”.85 In the Anglo-Commonwealth, non-fault withdrawal may be available under the
“just and equitable”86 ground in Singapore,87 Canada,88 and the Cayman Islands.89 In the US,
withdrawal on non-fault grounds mostly feature shareholder deadlocks and buyouts pursuant
to election statutes.90 The German GmbH’s withdrawal for good cause also covers non-fault
scenarios connected with the circumstances of the company, and arguably (if controversially)
the personal circumstances of the shareholder as well.91 The Japanese GK’s withdrawal on
unavoidable grounds covers non-fault scenarios such as deadlock and possibly others involv-
ing personal circumstances of the shareholder.92
Withdrawal in any form is not a feature of the “public” company forms of Japan (Kabushiki
Kaisha (KK)),93 and (arguably) Germany (Aktiengesellschaft (AG)).94
Note that the US oppression95 and Anglo-Commonwealth oppression regimes96 mentioned
above are not limited to withdrawal outcomes. In the Anglo-Commonwealth, there is general
consensus that withdrawal is the most commonly sought and ordered legal outcome under
oppression remedies. Oppression regimes also play the role of other direct litigation mecha-
e.g., Masafumi Nakahigashi, Heisa-Gaisha ni okeru Shōsū Kabunushi no Shimedashi to Jomei, 30(4)
Chūkyō Hōgaku 39, 42 (1995) (on the different meanings of “squeeze-out” [shimedashi]).
84
On non-fault see Koh, supra note 13, at ch III.C.3 (p. 82).
85
Id. at ch II.C (p. 30).
86
On the “just and equitable” ground, see generally Derek French, Applications to Wind Up
Companies [8.260]–[8.292] (3d ed. 2015).
87
Insolvency, Restructuring and Dissolution Act 2018 (Singapore), s. 125(1)(i) read with 125(3)
(entered force 30 July 2020), formerly Companies Act, s. 254(1)(i) read with s 254(2A) (Sing.)). See
Alan K. Koh & Samantha S. Tang, Towards a “Just and Equitable Remedy” for Companies, 133 L.Q.
Rev. 372 (2017).
88
See e.g. Canada Business Corporations Act, RSC 1985 c C-44 (Canada), s. 214(2) read with s.
241(3)(f).
89
Companies Law (2020 Revision) (Cayman Islands), s. 92(e) read with s. 95(3)(d).
90
Koh, supra note 13, at ch VI.C.3.iii (pp. 239–40) (close corporation only). For LLCs, see Moll,
supra note 78, at 84, app. 2 (2017).
91
See, e.g., Peter Ulmer & Mathias Habersack, Anhang § 34 Ausschließung und Austritt von
Gesellschaftern [Appendix to Section 34: Expulsion and Withdrawal of Members], in 2 Gesetz betr-
effend die Gesellschaften mit beschränkter Haftung (GmbHG): Grosskommentar [Law on
Limited Liability Corporations: Grand Commentary], Rn 56 (Peter Ulmer, Matthias Habersack &
Marc Löbbe eds., 2d ed., 2014) (breakdown of relationship between shareholders threatening GmbH as
going concern); Strohn, supra note 79, at Rn 181 (severe prolonged illness of shareholder); Koh, supra
note 13, at ch IV.C.2.iv–v (pp. 129–32).
92
See, e.g., Atsushi Koide, § 606, in 14 Kaisha-hō Konmentāru – Mochibun Kaisha (1) [14
Commentary on the Companies Act – Membership Companies (1)] 222–23 (Hideki Kanda ed., 2014)
(discussing two early cases featuring relationship breakdown between shareholders and change of share-
holder’s residence); Koh, supra note 13, at ch III.C.3 (p. 82), ch VII.D.3.ii–iii (pp. 301–06).
93
Koh, supra note 60, at 1223–27, 1263.
94
See Christian Hofmann, Der Minderheitsschutz im Gesellschaftsrecht [Minority
Protection in Corporate Law] 486 (2011) (noting the absence of literature).
95
Koh, supra note 13, at ch. VI.C.1 (pp. 223–24) (on the complicated relationship between “oppres-
sion” and “withdrawal” in the US).
96
Id. at ch. V.C.2 (pp. 166–67).
nisms leading to other monetary and non-monetary outcomes; this will be discussed below as
appropriate.
3.2.2 Direct monetary claims: damages/compensation under corporate,

extra-contractual obligations, or securities law
Our definition for a “direct monetary claim” is “a claim that a shareholder or equivalent may,
by virtue of or in connection with status as a shareholder, assert to obtain personal monetary
recovery”. For listed companies, this category includes claims for breach of fiduciary duties,
negligent misstatements, insider trading, etc. It is in this context that collective redress mech-
anisms, including “entrepreneurial litigation”,97 class actions,98 representative actions,99 and
model case procedures,100 are endlessly debated. Monetary claims for fraudulent or negligent
misstatements, for example, may be available under corporate, securities, or extracontractual
obligations law, or some combination of the above.101
In Delaware, most direct monetary litigation takes place as class actions for breach
of fiduciary duties in connection with merger transactions.102 What has been dubbed the
“quasi-appraisal” remedy103—which should not be confused with “appraisal” proper104—is
essentially a method of quantifying damages that may be ordered when a director “breaches
[their] duty of disclosure in connection with a transaction that requires a stockholder vote”.105
For Japan, any person, including but not limited to shareholders, harmed as a result of an
intentional or grossly negligent breach of duty by directors and officers of the KK may sue
the wrongdoing directors and officers for compensation.106 An equivalent arguably exists for
the GK.107 However, serious issues as to the recoverability of reflective (or “indirect”) loss108
remain unresolved.109
97
See generally, John C. Coffee Jr., The Globalization of Entrepreneurial Litigation: Law, Culture,
and Incentives, 165 U. Pa. L. Rev. 1895 (2017).
98
See, e.g., Research Handbook on Representative Shareholder Litigation, supra note 2.
99
Id.
100
See, e.g., Brigitte Haar, Investor Protection Through Model Case Procedures – Implementing
Collective Goals and Individual Rights Under the 2012 Amendment to the German Capital Markets
Model Case Act (KapMuG), 15 Eur. Bus. Org. L. Rev. 83 (2014).
101
See, e.g., Robert B. Thompson & Hillary A. Sale, Securities Fraud as Corporate Governance:
Reflections upon Federalism, 56 Vand. L. Rev. 859 (2003); Gen Goto, Growing Securities Litigation
against Issuers in Japan: Its Background and Reality, in Enforcement of Corporate and Securities
Law, supra note 5.
102
Including the watershed case of Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).
103
Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983).
104
105
In re Orchard Enterprises, Inc., 88 A.3d 1, 42 (Del. Ch. 2014).
106
Companies Act 2005, art. 429(1). There is also provision for liability for false statements or dis-
closures subject to a due diligence defense. Companies Act 2005, art. 429(2). On article 429 generally,
see Kazushi Yoshihara, §429, in 9 Kaisha-hō Konmentāru – Kikan (3) [9 Commentary on the
Companies Act – Organs (3)] 337 (Shinsaku Iwahara ed., 2014).
107
Companies Act 2005, art. 597; Yukimi Ozeki, § 597, in 14 Kaisha-hō Konmentāru – Mochibun
Kaisha (1) [14 Commentary on the Companies Act – Membership Companies (1)] 173 (Hideki Kanda
ed., 2014) (observing that it is arguable that GK members fall within the scope of “third party” for the
purposes of art 597).
108
The concept of reflective loss is discussed above at Section 2.3.
109
For summaries of scholarly opinions and relevant cases, see Yoshihara, supra note 106, at 382–84.
In Germany, despite the possibility of bringing monetary claims against the company or
other shareholders for breach of the duty of loyalty in the GmbH,110 the procedure required
(actio pro socio) resembles derivative litigation more than direct litigation.111 There is also
a complex mechanism for direct monetary claims via shareholder challenges against share-
holder resolutions; this will be discussed below.112
Turning to the Anglo-Commonwealth, Canada’s oppression remedies, which provide that
relief may be in the form of direct monetary relief to the plaintiff,113 has been applied albeit less
frequently than withdrawal in the context of shareholder plaintiffs.114 In the UK, there have
been recent cases in which monetary compensation to the plaintiff shareholder was judicially
ordered under unfair prejudice.115 An outlier, Hong Kong expressly prohibits by legislation
recovery of reflective loss as a direct monetary claim by shareholders under unfair prejudice.116
There is overlap with derivative litigation mechanisms here.117 It has been suggested in the
US that the court should order monetary recovery directly to the shareholder litigant when it
would be “equitable in the circumstances and adequate provision has been made for creditors
of the corporation”.118 Although relatively rare, there have been US examples in which direct
monetary outcomes were achieved by the shareholder litigant.119 Canada’s statutory deriva-
tive action regime also provides for a similar discretion of the court to order payment by the
defendant directly in whole or part to shareholders of the company or its subsidiary.120
3.2.3 Appraisal/dissenter’s rights

Appraisal rights121 (or dissenter’s rights122) may be divided into two major functional cate-
gories. “Category 1 appraisal” (or “appraisal as valuation only”) is defined as “the right of
a shareholder, in connection with the prospect of involuntary loss of their shares and status as
shareholder in exchange for compensation, to have the compensation quantum determined or
reviewed by the court”. Such appraisal rights are available typically for minority shareholders
subject to “squeeze-out” mechanisms such as cash-out mergers or compulsory acquisition
by a supermajority shareholder, and may be connected with tender offers and takeovers. The
110
This duty of loyalty is owed by shareholders inter se, by shareholders to the company, and by the
company to the shareholders. See e.g. Hanno Merkt, § 13 Juristische Person; Handelsgesellschaft, in
Münchener Kommentar zum Gesetz betreffend die Gesellschaften mit beschränkter Haftung
– GmbHG [Munich Commentary on the Law on Limited Liability Corporations], Rn 98 (Holger
Fleischer & Wulf Goette eds., 3d ed. 2018).
111
To be discussed below at Section 4.2.
112
113
Canada Business Corporations Act, § 241(3)(j). Provincial statutes are largely similar.
114
Ben-Ishai & Puri, supra note 70, at 106.
115
Rembert v. Daniel [2018] EWHC 388 (Ch), [2018] 2 BCLC 156 [39], [41] (trial court ordered
defendant to pay equitable compensation to the plaintiff shareholder personally); Re Sprintroom Ltd.,
Prescott v. Potamianos [2019] EWCA (Civ) 932; [2019] 2 BCLC 617 [5], [105].
116
Companies Ordinance, § 726(5) (H.K.).
117
Principles of Corp. Governance § 7.01.
118
Principles of Corp. Governance § 7.18(e).
119
For two examples, see Perlman v. Feldmann, 154 F. Supp. 436, 446–47 (D. Conn. 1957); Lynch
v. Patterson, 701 P.2d 1126, 1130–31 (Wyo. 1985). See also Principles of Corp. Governance § 7.18.
120
Canada Business Corporations Act, § 240(c).
121
See also Gelter, supra note 2, at 466–67.
122
This is a term observed more commonly in Anglo-Commonwealth jurisdictions such as Canada.
“Appraisal” in this chapter is used in the broad, non-jurisdictionally-specific sense.
essence of the Category 1 appraisal right is the right to a court valuation of the monetary sum
to be received by the shareholder.
“Category 2 appraisal” (or “appraisal as claim”) is defined as “the right of a shareholder
not consenting to specified fundamental changes to the company to compel the company to
purchase their shares at a price to be determined or reviewed by the court”.123 The fundamental
changes triggering such appraisal rights include proposed or completed mergers, consoli-
dations, amendments to the corporate constitution, and sale of substantially all or all of the
assets of the company. When triggered, Category 2 appraisal grants the shareholder the right
to choose to cease their involvement in the company in exchange for a monetary sum, and the
right to have the valuation conducted by a judicial authority. The key distinguishing factor
between Category 2 and Category 1 is the element of voluntariness and lack of structural
coercion that exists in Category 2 but not in Category 1.
In comprising a monetary claim in exchange for loss of shares, Category 2 appraisal
superficially resembles withdrawal; both are variants of “exit” remedies. However, appraisal
is to be distinguished from withdrawal in two respects.124 First, the nature of the grounds:
appraisal is a rule versus withdrawal as a standard. This distinction is crucial as the nature of
withdrawal as a standard is what enables it to respond to a wide range of controller misconduct
or inter-shareholder conflict, whereas appraisal is much narrower in scope. Second, appraisal
requires compliance with formal procedures as a condition of exercise of rights, whereas
withdrawal is not quite so rigid.
Category 1 and Category 2 appraisal are not exclusive of each other and can co-exist in
a jurisdiction. Delaware is a rare example of a jurisdiction offering only Category 1 appraisal
rights, which are available only for mergers in which the consideration is cash or securities that
are closely-held or not traded on a market.125 If the merger consideration comprises marketable
securities—such as listed shares of the surviving corporation—the “market out” exception
applies and the shareholder has no appraisal right. Although Delaware appraisal is not strictly
speaking a class action within the US sense of the term (i.e. with the results binding all
members of a class unless they opt out), appraisal has quasi-class action effects. For example,
all dissenting stockholder claims are consolidated into a single proceeding126 and the results
bind all dissenting stockholders,127 although freeriding by dissenting stockholders who do not
participate in the appraisal proceedings may occur.128 Other jurisdictions that offer Category 1
appraisal include Japan, and Germany.129
In the UK, Category 2 appraisal rights are restricted also to demerger-type reorganizations
and the price is to be determined by arbitration, not the court.130 By contrast, broader Category
123
Cf. Hideki Kanda & Saul Levmore, The Appraisal Remedy and the Goals of Corporate Law, 32
UCLA L. Rev. 429, 429 (1985).
124
Drawn from Koh, supra note 13, at ch II.D.1.iii (pp. 36–37).
125
Del. Code Ann., tit. 8, § 262(b).
126
Minor Myers, Appraisal as Representative Litigation, in Research Handbook on Representative
Shareholder Litigation, supra note 2, at 257.
127
Id.
128
See id. at 265–67.
129
Companies Act 2005, art. 179-8 (Japan); AktG, § 327f (Ger.). See Eiji Takahashi, Squeeze-out of
Minority Shareholders: The Constitutionality Question, 41 J. Japanese L. 77 (Alan K. Koh trans., 2016)
(discussing the regimes of Germany and Japan).
130
Insolvency Act 1986, §§110–11 (U.K.).
2 appraisal rights are a feature of the corporate laws of other Anglo-Commonwealth juris-
dictions such as Canada,131 and New Zealand,132 as well as non-Commonwealth jurisdictions
such as Japan,133 Germany,134 as well as the US Model Business Corporation Act, albeit with
a stricter market out than Delaware that denies appraisal rights to shareholders receiving
merger consideration in cash.135
3.3 Non-Monetary
3.3.1 Challenges against shareholder resolutions

In the Anglo-Commonwealth, shareholder resolutions can be invalidated in two situations:
(1) constitutional alterations; and (2) pursuant to irregularities in the proceedings in which the
resolution was passed. First, a shareholder may apply to court to invalidate a shareholder res-
olution altering the corporate constitution if the alteration is not made bona fide for the benefit
of the company as a whole. The mere fact that the alteration adversely affects (or benefits)
some shareholder(s) but not others is not sufficient to invalidate the alteration; shareholders
are permitted to vote in their own self-interest provided it does not amount to minority share-
holder oppression and is within the scope of their power to do so.136 In practice, shareholders
may eschew invalidation of constitutional alterations in favor of an oppression action, given
that the grounds for the latter claim are broader and may result in monetary relief, especially
withdrawal.137 Nevertheless, this mechanism remains relevant for shareholders who do not
wish to exit the company.138
Second, a shareholder may apply to court to invalidate a proceeding for a procedural irreg-
ularity resulting in substantial injustice to them. The procedural irregularity may arise in the
conduct of the general meeting, or other such proceedings, during which the resolution was
passed. Examples of such irregularities include failure to give proper notice, lack of quorum,
or lack of reasonable opportunity to participate in the meeting.139 The subject-matter of the
resolution may involve the appointment of directors and officers, or their removal, especially
if the director/officer removed the shareholder themself.140 Some Anglo-Commonwealth
131
Canada Business Corporations Act, §§ 190, 206(5).
132
Companies Act 1993, s 110–15 (N.Z.). Note that the board may arrange for a third party to pur-
chase the shares in lieu of the company. Id. at s 111(2)(b).
133
Companies Act 2005, arts. 116, 182–84, 469, 785, 797, 806 (Jap.) (all for Kabushiki Kaisha stock
corporations only). See generally, Koh, supra note 25.
134
Spruchverfahrensgesetz [SpruchG] [Appraisal Proceedings Law], Jun. 12, 2003, BGBl I at 838,
last amended by Gesetz [G], July 2013, § 1 (Ger.). See also Gelter, supra note 2, at 467.
135
Model Bus. Corp. Act (2016), §§ 13.02(a) & 13.02(b).
136
See, e.g., Allen v. Gold Reefs of West Africa [1990] 1 Ch 656, 681–82; Peters’ Am. Delicacy
Co. v. Heath (1939) 61 CLR 457; Re Charterhouse Capital Ltd. [2015] EWCA (Civ) 536, [2015] BCC
574, 594–95. See generally David Chivers et al., The Law of Majority Shareholder Power:
Use and Abuse [6-22] (Oxford University Press 2d ed. 2017); see also Wolf-Georg Ringe, Das
Beschlussmängelrecht in Großbritannien, 81 Rabels Zeitschrift für ausländisches und interna-
tionales Privatrecht 249, 273–74 (2017) (summarizing the English bona fide doctrine in German).
137
On oppression and withdrawal, see Section 3.2.1 above.
138
Chivers et al., supra note 136, at [23–24].
139
See, e.g., Robert Austin & Ian Ramsay, Ford, Austin & Ramsay’s Principles of Corporations
Law [7.581.3], [7.581.6], [7.581.9] (17th ed. 2018).
140
See, e.g., Thio Keng Poon v. Thio Syn Pyn [2010] SGCA 16, [2010] 3 SLR 143; Lam Hon Keung
Keith v. Dalny Estates Ltd. [2017] HKCA 639, [2018] 1 HKLRD 409.
jurisdictions have statutory provision to the effect that a procedural irregularity is insufficient
to invalidate a resolution unless the irregularity has resulted in substantive injustice to the
applicant;141 others achieve the same result through common law rules.142 Substantial injustice
may be found where the applicant can prove that a different result may have happened if the
procedural irregularity had not occurred.143
Challenges against shareholder resolutions (“rescission suits”) are significant legal regimes
in European jurisdictions.144 In Germany, shareholder resolutions in the AG and GmbH145 may
be challenged.146 Rescission suits are probably the most popular form of shareholder litigation
in Germany.147 A rescission suit may be brought where (1) the resolution violates either the
law or the corporate constitution (Satzung); or (2) a shareholder has, through the exercise of
their voting rights, attempted to obtain special benefits for themselves or another person to the
detriment of the company or other shareholders through the resolution, unless the resolution
compensates the other shareholders for their losses.148 The suit must be brought within 1 month
after the resolution is passed.149 Once a rescission suit is commenced, the resolution is effec-
tively suspended until the suit is resolved.150 However, this suspensory effect can be removed
by the court through a “clearance procedure” (Freigabeverfahren) in three circumstances.151
Where the shareholder ultimately succeeds in their challenge against the resolution, the
company must compensate the shareholder for any loss suffered due to the resolution taking
effect.152 The clearance procedure thus renders the rescission suit effectively an equivalent to
a direct monetary claim for compensation.153
Japanese KK shareholders have a general right to challenge defective shareholder reso-
lutions.154 Grounds for setting aside a resolution include (1) a shareholder meeting that was
called or the resolution that was passed in a manner that was in contravention of law or the
141
The statutory regime may extend to all forms of meetings, including general meeting and board
meetings. See, e.g., Corporations Act 2001, s 1322 (Austl.); Companies Act, § 392(1) (Sing.). Cf.
Companies Act 2006, § 313 (U.K.), Musselwhite v. Musselwhite & Son Ltd. [1962] Ch 964, 977–981.
142
See, e.g., Lam Hon Keung Keith [2018] 1 HKLRD 409 [18]–[33].
143
In some jurisdictions, it is possible that a substantive irregularity per se would have been sufficient
to invalidate proceedings. Thio Keng Poon [2010] 3 SLR 143 at [65]–[73].
144
Gelter, supra note 30, at 881–84; Holger Fleischer, Shareholder Conflicts in Closed Corporations,
in Regulating the Closed Corporation 63–64 (Gregor Bachmann et. al. eds. 2014).
145
See Johannes Wertenbruch, § 47 Anhang: Nichtigkeit und Anfechtung von Gesellschafterbeschlüssen
[Appendix to Section 47 Nullity and Rescission of Members’ Resolutions], in 2 Münchener Kommentar
zum Gesetz betreffend die Gesellschaften mit beschränkter Haftung – GmbHG [Munich
Commentary on the Law on Limited Liability Corporations] Rdn 120 (Holger Fleischer & Wulf
Goette eds., 2d ed., 2016) (a member may, by analogical application of Section 243 Paragraph 1 of the
Aktiengesetz, file suit to set aside a shareholder resolution).
146
See Rainer Kulms, Enforcement of Company and Securities Laws in Germany: An Exercise in
Diversity, in Enforcement of Corporate and Securities Law, supra note 5, at 378.
147
Andreas Cahn & David C. Donald, Comparative Company Law: Text and Cases on the
Laws Governing Corporations in Germany, the UK and the USA 750–51 (2d ed. 2018).
148
AktG, § 243 Abs 1, 2.
149
Id. at § 246 Abs 1.
150
Gelter, supra note 30, at 885–86.
151
AktG, § 246a Abs 2.
152
Id. at § 246a Abs 4.
153
Gelter, supra note 2, at 477.
154
Companies Act 2005, art. 831 (Jap.) (for rescission of resolution), art. 830 (declaration of nullity
or non-existence of resolution).
corporate constitution, or otherwise extremely unfair; (2) the content of the resolution was in
contravention of the corporate constitution; (3) the resolution was a significantly improper one
that was passed with the vote of a person with a special interest in the resolution.155 The court
has discretion to refuse to set aside the resolution on the ground that the contravention of law
or the corporate constitution arising from the way the meeting was called or the resolution
passed were not serious and did not have impact on the resolution.156 If the resolution’s content
was in contravention of the law, it may be declared null and void or non-existent at any time.157
Turning to the US, Delaware statute provides for a very specific right of the shareholder to
apply to court to have the validity of a resolution on to the election or removal of a director
determined.158
3.3.2 Injunctions relating to ongoing or future actions or conduct

In some jurisdictions, shareholders may apply to court for injunctive relief with respect
to ongoing or future acts via direct litigation. This is separate from and in addition to any
injunctive relief they may obtain via derivative litigation mechanisms.159 An injunction may
be directed at a director, officer, or the company itself.
In Delaware, shareholder litigation seeking injunctions usually takes place in the context of
merger transactions.160 The objective for seeking an injunction may include (1) restraining the
company from completing the transaction; (2) delaying the transaction until further actions
(disclosures etc.) may be taken; or (3) compelling the directors to take further actions (solicit-
ing additional acquirers etc.).
There are also mechanisms leading to injunctive relief that not restricted to merger or
similar types of transactions. Some Anglo-Commonwealth jurisdictions have statutory pro-
visions permitting a shareholder161 to apply to court for an injunction to restrain the company
or its director from conduct that would contravene the corporate constitution or companies
legislation.162
For Japanese KK, the statute provides for an elaborate system of injunctions specific
to mergers and acquisitions.163 KK shareholders may also demand that a director cease an
ongoing act, or desist from a likely future act that would likely cause significant harm to the
company and which is either beyond the purpose of the company, or in breach of law or the
corporate constitution.164 In companies structured with either three (nomination, audit, and
remuneration) committees or a single audit-plus committee, the threshold is elevated from
155
Id. at art. 831(1).
156
Id. at art. 831(2).
157
Id. at art. 830(2); Egashira, supra note 40, at 376.
158
Del. Code Ann., tit. 8, § 225.
159
Which will not be discussed due to lack of space.
160
See, e.g., Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003) (the Delaware Supreme
Court (by a majority) reversed the Court of Chancery’s refusal to issue a preliminary injunction).
161
The statutory provisions may also permit the company, directors, or a regulator to apply for an
injunction.
162
See, e.g., Companies Act 2006, § 40(4) (U.K.); Companies Act, § 25(2)(a)–(b), 25(3); § 409A
(Sing.); Companies Act 1993, s 164 (N.Z.); Corporations Act 2001, s 1324 (Austl.); Companies
Ordinance, §§ 728–30 (H.K.).
163
See, e.g., Companies Act 2005, arts. 782(1), 784-2(1), 796-2, 803(1), 804(4), 805-2 (Jap.); see
Egashira, supra note 40, at 892.
164
Companies Act 2005, art. 360(1) (Jap.).
“significant harm” to “irreparable harm”.165 In KK with three committees and therefore exec-
utive officers (shikkō-yaku),166 the threshold is irreparable harm.167
4. DERIVATIVE LITIGATION
4.1 Definition and Scope
A derivative litigation mechanism is “a mechanism that a shareholder or equivalent may,

by virtue of or in connection with status as shareholder, takes the place of the company in
litigating to obtain a legal outcome binding the company in circumstances where the company
does not litigate directly”.168 As the company is functionally—and often regarded as—the
“plaintiff” for the purposes of derivative litigation,169 it will be referred to in this section as
“company-plaintiff” regardless of whether it is technically the plaintiff for civil procedure
purposes, and the shareholder will be referred to as “litigant” instead of “plaintiff”.
A distinction may be drawn between “single” and “multiple” derivative actions. A “single”
derivative action is where the shareholder-litigant seeks to bring an action on behalf of
the company-plaintiff that they directly hold shares in. In a “multiple” derivative action,
the shareholder-litigant does not directly hold shares in the company-plaintiff; rather, the
company-plaintiff is the parent or subsidiary of the company in which the shareholder-litigant
holds shares. Due to the complexity of multiple derivative action regimes, we discuss only
single derivative action mechanisms in this Chapter.
A typical “single” derivative action scenario involves directors, officers, or other
persons in control of or closely connected to the company causing actionable harm to the
company-plaintiff, but the company does not take legal action against the wrongdoers,
whether because the wrongdoers are in control of the company and do not take action against
themselves, or for other reasons.170 The loss incurred is legally the company’s; shareholders
may have also suffered detriment from decrease in the value of their shares, but the doctrinal
165
Id. at art. 360(3).
166
At least one shikkō-yaku must be appointed by the board of directors in such companies. Id. at art.
402(1)–(2).
167
Id. at art. 422(1).
168
Cf. Samantha S. Tang, Corporate Avengers Need Not Be Angels: Rethinking Good Faith in
the Derivative Action, 16 J. Corp. L. Stud. 471, 471 (2016); Harald Baum & Dan W. Puchniak, The
Derivative Action: An Economic, Historical and Practice-Oriented Approach, in The Derivative
Action in Asia: A Comparative and Functional Approach 7 (Dan W. Puchniak, Harald Baum &
Michael Ewing-Chow eds., 2012).
169
This is because the company is usually regarded as the proper plaintiff of the claim between the
company and the wrongdoer. For the Anglo-Commonwealth tradition, the locus classicus is Foss v
Harbottle (1843) 2 Hare 461 (Ch). See also Baum & Puchniak, supra note 168, at 43 (noting the exist-
ence of “the ‘two plaintiffs’: the plaintiff actually pursuing the claim (i.e., the plaintiff shareholder) and
the plaintiff that possesses the legal right to the claim (i.e., the company)”). To complicate things further,
the company may also play other roles. Cf. Baum & Puchniak, supra note 168, at 9, 47 (depending on
the jurisdiction the company is also a “nominal defendant” or a “mandatory non-party”); Companies
Act 2005, art. 849(1), (3) (Jap.) (KK may intervene in the proceedings in support of the defendant as
“supporting intervener”).
170
See, e.g., Tang, supra note 168, at 471; Arad Reisberg, Derivative Actions and Corporate
Governance 18–24 (2007).
“rule against reflective loss” often hinders shareholders from attempting to recover their losses
via direct litigation.171
The derivative action enables the shareholder to seek vindication for the company-plaintiff,
obtain compensation for the wrongs committed against it, and deter misconduct by corporate
controllers.172 Some derivative mechanisms are narrowly scoped and may be deployed only
against directors and closely connected persons.173 Others are broader, and theoretically or
in practice also permit the shareholder litigant to initiate or take over litigation directed at
corporate “outsiders”.174 Jurisdictions also differ on the range of permissible legal reliefs and
outcomes (monetary claims, injunctions etc.) that are achievable under their derivative litiga-
tion mechanisms.175
4.2 Legal Mechanisms
Conceptually, derivative litigation comprises two parts. First, proceedings, usually pre-fact
finding (pre-trial), in which the shareholder’s authority (“standing”) to conduct litigation
in respect of a proposed claim in place of the company-plaintiff is, by satisfying certain
standards, a) obtained from the court or b) defended by the shareholder against a challenge in
court (“derivative action” in the narrow sense or “pretrial proceeding”). Second, proceedings,
including fact-finding (trial), in which the shareholder litigates the proposed claim in place
of the company-plaintiff (“substantive action” or “derivative action proper”). Note that by
“standards” here we refer to “constraints … which leave the precise determination of compli-
ance to adjudicators after the fact”.176 They are accordingly separate and distinct from “rules”
“which require or prohibit specific behaviors”177 such as continuous/contemporaneous/ per-
centage shareholding requirements or a waiting period between notification (whether “notice”
or “demand”) to the proper recipient before the shareholder litigant may commence litigation.
The “Canadian” or “Anglo-Commonwealth” model of derivative action exemplifies the
dual-stage category of derivative litigation. Four elements comprise the Anglo-Commonwealth
model for statutory derivative actions:178 (1) no minimum shareholding requirement for stand-
ing; (2) no distinction is drawn between listed, non-listed public, private, or closely held
companies; (3) after initial filing, the shareholder litigant is required to apply to court for
affirmative permission to continue the derivative litigation in a pretrial proceeding (usually
called “leave application”); (4) the court has discretion to order the company to reimburse the
shareholder litigant for reasonable expenses. To succeed in the leave application, the plaintiff
171
This is explored in Koh, supra note 35.
172
See Harald Baum & Puchniak, supra note 168, at 12–26; Reisberg, supra note 170, at 54–74.
173
Paul Davies & Sarah Worthington, Gower’s Principles of Modern Company Law (10th ed.
2016), at [17-14], [16-134]–[16-137]; Companies Act 2005, art. 847(1) (Jap.); Gelter, supra note 30, at
877 (on Germany).
174
Gelter, supra note 30, at 875–76 (citing the US as an example); Re Lucky Money Ltd [2006]
H.K.C.F.I. 850, H.C.M.P. 505/2006.
175
Gelter, supra note 30, at 876; but see Model Bus. Corp. Act (2016), § 8.09.
176
Anatomy, supra note 7, at 32 (defining “standard”).
177
Id. (defining “rule”).
178
Drawn, with modifications, from Tang, supra note 9, at 333–34. The common law derivative
action precedes the statutory regime but is regarded as being complex and impractical. Given that
shareholder claims were rarely successful, it should not surprise that it is only invoked in exceptional
situations that do not fall within the ambit of the statutory regime. Id. at 332–33.
will usually be required to satisfy various statutory requirements, including (1) the plaintiff has
given the company’s directors notice of their intention to bring the leave application;179 (2) the
proposed claim appears to be in the company’s best interests; and (3) the plaintiff is acting in
good faith.180 The precise requirements differ among Anglo-Commonwealth jurisdictions.181
No trial of the facts of the substantive action takes place during the leave proceeding.182
Another Anglo-Commonwealth derivative litigation mechanism variant is contained in
oppression provisions. The statutory text expressly authorizes the court to order that the share-
holder litigant to litigate on behalf of the company in respect of a specified matter in England
and Wales and Northern Ireland,183 Australia,184 and Singapore.185 There is little to suggest that
oppression provisions are extensively used to execute derivative litigation exclusively without
simultaneous use of dedicated Anglo-Commonwealth model statutory derivative actions.
Various derivative litigation regimes co-exist in the US.186 Across the different types, much
has been made of the notorious requirement that the shareholder litigant must make “demand”
on the corporation’s board of directors to bring the claim themselves before commencing the
action.187 In Delaware, where the plurality of the US’s largest listed business corporations are
incorporated, unless the shareholder litigant is able to show that (1) demand was made by the
shareholder but refused and improperly so,188 or (2) no demand was made because making
demand would have been futile,189 the motion to dismiss would be granted as of right.190
Motions to dismiss are routinely made and the shareholder is invariably compelled before
a trial of the facts to convince the court to allow their action to continue. An empirical study
using Delaware data showed that derivative suits involving listed corporations vastly outnum-
ber those involving closely held corporations.191
179
See Alan K. Koh, Excusing Notice under Singapore’s Statutory Derivative Action, 14(2) Austl. J.
Asian L. art. no. 3 (2013).
180
See Tang, supra note 168; Alan K. Koh, Searching for Good Faith in Singapore’s Statutory
Derivative Action: Much Ado About Something?, 36 Co. Law. 207 (2015); Lang Thai, Reconsideration
of the “Good Faith” Requirement in Statutory Derivative Actions in Australia, 37 Co. & Sec. L.J. 403
(2020).
181
See, e.g., Canada Business Corporations Act, s. 239(2); Companies Act, § 216A(3) (Sing.);
Companies Act 1993, s. 165(2) (N.Z.); Corporations Act 2001, s. 237 (Austl.); Companies Ordinance, §
733 (H.K.).
182
Tang, supra note 9, at 342.
183
Companies Act 2006, §§ 260(2)(b), 996(2)(c) (U.K.) (applying to England and Wales, and
Northern Ireland only).
184
Corporations Act 2001, s 233(1)(g) (Austl.)
185
Companies Act, § 216(2)(c) (Sing.).
186
See, e.g., Fed. R. Civ. Proc. 23.1 (federal court); Del. R. Ch. Ct. 23.1 (Delaware); Model Bus.
Corp. Act (2016), §§7.40–7.47 (adopted in full or part in several states).
187
Del. R. Ch. Ct. 23.1(a).
188
In which case the plaintiff would be faced with the near-insurmountable challenge of overcoming
business judgment protection for the decision of the board. Spiegel v. Buntrock, 571 A.2d 767,775–76
(Del. 1990).
189
For canonical statements of law on demand futility, see Aronson v. Lewis, 473 A.2d 805, 814 (Del.
1984) ; Marx v. Akers, 88 N.Y.2d 189, 198–201 (1996).
190
Spiegel, 571 A.2d at 777.
191
Thompson & Thomas, supra note 43, at 1762, 1767.
In the Japanese KK, a derivative suit may be brought against directors and other officers
(yakuin-tō)192 for breach of their statutory duties of care, loyalty, and compliance193 to the
company,194 as well as other shareholders for the recovery of benefits received from the
company-plaintiff in connection with exercise of shareholder rights.195 A shareholder litigant
is required to make demand in writing on the company-plaintiff to commence the substantive
action;196 the shareholder litigant is permitted to commence the substantive action only after
the company-plaintiff fails to commence its own action within 60 days of date of demand,197
but may do so immediately as an exception if the company-plaintiff is likely to suffer irrep-
arable harm during the waiting period.198 Shareholder litigants who seek improper benefits
for themselves or third parties, or aim to cause loss to the company-plaintiff are disabled
from commencing derivative litigation.199 Insofar as the KK is concerned, listed companies
account for a much larger share of derivative litigation for which records could be obtained
than unlisted companies.200 There is a separate derivative litigation mechanism for the GK.201
Turning to Germany, there are different mechanisms for public (Aktiengesellschaft
(AG)) and private (GmbH) companies. For the AG, the shareholder must seek permission
from the court (Klagezulassungsverfahren, or “admission procedure”)202 to litigate on the
company-plaintiff’s behalf. The shareholder must satisfy a minimum shareholding require-
ment.203 The court may grant permission for the shareholder to litigate where (1) the shareholder
has made an unsuccessful demand on the company to take action within a reasonable period
of time; (2) there are facts giving rise to a reasonable suspicion that harm was suffered by the
company-plaintiff due to improprieties, or gross breaches of law or the corporate constitution;
and (3) the action would not run counter to the company-plaintiff’s overriding interests.204
Even when the admission procedure ends successfully for the shareholder litigant, the share-
holder litigant is required to make a second unsuccessful demand on the company-plaintiff to
bring the action within a reasonable time before the shareholder litigant would be permitted to
192
Companies Act 2005, art. 423(1) (Jap.) (defining officers (yakuin-tō) as directors (torishimari-
yaku), accounting advisor (kaikei sanyo), statutory auditor (kansayaku), executive officer (shikkōyaku),
financial auditor (kaikei kansa-nin)).
193
Id. at arts. 330, 355; Minpō [Minpō] [Civ. C.] art. 644 Japan. See Eriko Taoka, Shaping and
Re-shaping the Duty of Loyalty in Japanese Law, 14 Asian J. Comp. L. 119 (2019).
194
Companies Act 2005, art. 847(1), art. 423(1) (Jap.). The same provision also applies to liability of
liquidators (seisan-nin) and promoters (hokki-nin).
195
Id. at art. 847(1), art. 120(3) (Jap.).
196
Companies Act 2005, art. 847(1) (Jap.); see also Egashira, supra note 40, at 497 n.4.
197
Companies Act 2005, art. 847(3) (Jap.).
198
Id. at art. 847(5).
199
Id. at art. 847(1) proviso.
200
Dan W. Puchniak & Masafumi Nakahigashi, Japan’s Love for Derivative Actions: Irrational
Behavior and Non-Economic Motives and Rational Explanations for Shareholder Litigation, 45 Vand. J.
Transnat’l L. 1, 69–70 (2012).
201
Companies Act 2005, art. 602 (Jap.).
202
Cf. Gelter, supra note 30, at 866 (“admission procedure”); Gelter, supra note 2, at 472 (“lawsuit
admission procedure”).
203
The shareholder must hold at least 1%, or EUR 100,000 of the company’s share capital: AktG, §
148 Abs 1.
204
AktG, § 148 Abs 1 S 2–4.
commence the substantive action by themselves.205 Given the onerous structure of the German
derivative litigation regime,206 its lack of practical utility should not surprise.207
For the GmbH, monetary claims may be brought by a GmbH shareholder (or the company)
against another shareholder who has breached their duty of loyalty (Treuepflicht), although
reflective loss is not recoverable.208 In principle, the commencement of litigation must be
authorized by the collective decision of the shareholders and the litigation must be conducted
either by the managing director (Geschäftsführer), or by non-defendant shareholders via the
actio pro socio mechanism.209 However, prevailing opinion recognizes exceptions to the
requirement of a collective shareholders’ decision, including when the shareholder meeting in
breach of its duties fail to act at all, and where a decision of the shareholders is unlikely due
to the nature of the majority in control.210 The prevailing opinion is that the actio pro socio
is a mechanism by which the GmbH shareholder enforces in their own name a claim of the
GmbH, usually against majority shareholders.211 The GmbH actio pro socio is thus difficult to
characterize as derivative litigation in any meaningful sense of the word.
5. CONCLUSION
We conclude with two observations on opportunities for further research. The first concerns
the construction of comparatively informed rankings or indices on aspects of corporate law.
Shareholder litigation features in most influential comparative corporate law indices.212
Although they may capture elements of the substantive law of selected shareholder litigation
mechanisms, practical considerations specific to shareholder litigation which are crucial to
the minority shareholder litigant’s decision whether and how to sue—or not—are not the
focus.213 The taxonomy and considerations presented in this Chapter comprise an intermediate
step between the law in books (partly captured in indices) and the law in action (that may be
possible to capture in large-scale empirical studies, but seldom so).
Second, in building a taxonomy of shareholder lawsuits in a way as to accommodate the
laws of both civil and common law jurisdictions, this Chapter is an interim step towards the
construction of a comparative framework that transcends—but without effacing—doctrinal
distinctions. Our broad-strokes overview of the key practical considerations involved in
a minority shareholder’s decision to litigate is not exhaustive, and there may be idiosyncratic
or jurisdiction-specific considerations essential to a fuller understanding. This chapter, in
205
Id. at § 148 Abs 4.
206
Id. at §§ 147–49.
207
See Gerhard Wagner, Officers’ and Directors’ Liability Under German Law — A Potemkin
Village, 15 Theo. Inq. L. 69, 84–89 (2015).
208
Merkt, supra note 110, Rn 200, 203–04.
209
Id. Rn 210.
210
Id. Rn 330.
211
Id. Rn 318–24.
212
See, e.g., Brian R. Cheffins, Steven A. Bank, & Harwell Wells, Shareholder Protection Across
Time, 68 Fla. L. Rev. 691 (2016).
213
Dan W. Puchniak & Umakanth Varrotil, Related Party Transactions in Commonwealth Asia:
Complicating the Comparative Paradigm, 17 Berkeley Bus. L.J. 1, 38–39 (2020).
providing a taxonomy of shareholder lawsuits, represents a step towards an evaluation of the

utility of each mechanism within their proper context.
PART V
MERGERS AND ACQUISITIONS

22. Corporate governance in negotiated takeovers:
the changing comparative landscape
Afra Afsharipour1
1. INTRODUCTION
Takeover transactions—i.e. the transfer of control and ownership of an entire corporate entity—
raise significant corporate governance questions about the allocation of decision-making
power among firm participants, whether and to what extent participants are constrained in their
exercise of decision-making power, and whether and to what extent participants can be held
accountable for their decisions. This chapter considers how corporate governance concerns are
reflected in the law’s approach to regulating friendly takeover transactions, i.e. acquisitions by
third party bidders that are negotiated and supported by the management of the target compa-
ny.2 Two countries with similar capital markets and institutional frameworks, the United States
(U.S.) and the United Kingdom (U.K.), approach these corporate governance concerns and the
balance of power between the board of directors and shareholders in increasingly divergent
ways.3
Both the U.S. and the U.K. are characterized by dispersed shareholdings and liquid capital
markets,4 and have similar financial systems, institutions and legal cultures.5 Yet, there are
significant differences in shareholder power in these two jurisdictions, particularly with
respect to shareholder power in takeovers.6 Much of the existing literature evaluating the
1
For helpful comments, I thank attendees of the Research Handbook conference held at Fordham
Law School in September 2019, in particular Martin Gelter, Assaf Hamdani, Martin Petrin, Andrew
Tuch, and Umakanth Varottil. Danielle Mckenna and Ishika Desai provided excellent research assistance.
2
This chapter focuses on negotiated friendly transactions—i.e. where the target board recommends
the deal with the bidder to its shareholders—rather than hostile takeovers where a central corporate
governance issue is managers’ resistance to a transaction that shareholders may support. See Edward
Rock et al., Fundamental Changes, in Reinier Kraakman et al., The Anatomy of Corporate Law:
A Comparative and Functional Approach 171, 185 (3d ed. 2017). There are important similarities
between friendly and hostile transactions, and many hostile transactions eventually turn friendly and
some friendly transactions start out with considerable hostility. See G. William Schwert, Hostility in
Takeovers: In the Eye of the Beholder?, 55 J. Fin. 2599 (2000).
3
This chapter focuses on Delaware, the leading state for U.S. corporate law, and the national leader
for new and existing companies. See Roberta Romano, The Genius of American Corporate Law 6–8
(1993).
4
See Marc Moore & Martin Petrin, Corporate Governance: Law, Regulation and Theory
12 (2017).
5
See Bernard S. Black & John C. Coffee, Jr., Hail Britannia?: Institutional Investor Behavior
Under Limited Regulation, 92 Mich. L. Rev. 1997, 2001–02 (1994); Andrew F. Tuch, Proxy Advisor
Influence in a Comparative Light, 99 B.U. L. Rev. 1459, 1470–71 (2019).
6
See, e.g., Christopher M. Bruner, Corporate Governance in the Common-Law World:
The Political Foundations of Shareholder Power 32–33, 40–42 (2013); John Armour, Jack Jacobs
& Curtis Milhaupt, The Evolution of Hostile Takeover Regimes in Developed and Emerging Markets:
455
differences in the U.S. and U.K. approaches to regulating takeovers has focused on how these
two jurisdictions balance shareholder versus managerial power in hostile takeovers. However,
a comparative analysis of each jurisdiction’s approach to friendly third-party takeovers has
been more limited. This analysis is particularly timely given that over the past decade both
jurisdictions have undertaken important changes in their approach to addressing governance
in friendly takeovers.7
The U.K. is noted for takeover rules that constrain managerial power and favor shareholder
voice, whether deals are done via a takeover or some other structure such as a scheme of
arrangement.8 Under both structures, U.K. rules provide a significant voice, through voting
rights or otherwise, for target shareholders. Significantly for friendly deals, in 2011 the U.K.
revised its takeover rules to dramatically constrain the power of directors to negotiate deal
protection mechanisms.9 A key principle in the U.K.’s new approach to deal protection is “the
rejection of the idea of the board of directors as negotiators of deal protection.”10 Furthermore,
in a departure from the U.S. model of takeovers, in acquisitions of a significant size sharehold-
ers of U.K. bidder firms also have voting rights that constrain the board.11
In balancing corporate governance concerns in friendly takeovers, the U.S. has histori-
cally emphasized the interplay between ex ante protections (i.e. disclosure and shareholder
voice) and ex post policing (i.e. litigation) in ways that reflect a director-centric approach.
Shareholder voice is more constrained than in the U.K. Not only is the voting threshold lower
for shareholder voting in M&A deals, but bidder shareholders are often deprived of voting
rights even in significant transactions. Furthermore, directors have wide latitude to design
deal protection measures in friendly deals. In fact, over the past decade, deal protection mech-
anisms have become stronger in the U.S. with a proliferation and expansion of a variety of
mechanisms that provide management with tools to protect its preferred deal.12
An Analytical Framework, 52 Harv. Int’l L.J. 219 (2011); John Armour & David Skeel, Who Writes
the Rules for Hostile Takeovers, and Why? – The Peculiar Divergence of U.S. and U.K. Takeover
Regulation, 95 Geo. L.J. 1727, 1794 (2007).
7
For an earlier study of these differences, see Wai Yee Wan, The Validity of Deal Protection
Devices in Negotiated Acquisition or Merger Transactions under Anglo-American Law, 10 J. Corp. L.
Stud. 179 (2010).
8
See generally Paul Davies et al., Control Transactions, in Reinier Kraakman et al., The
Anatomy of Corporate Law: A Comparative and Functional Approach 211–30 (3d ed. 2017);
Jennifer Payne, Schemes Of Arrangement, Takeovers And Minority Shareholder Protection, 11 J. Corp.
L. Stud. 67, 67–68 (2011).
9
See Fernan Restrepo & Guhan Subramanian, The Effect of Prohibiting Deal Protection in Mergers
and Acquisitions: Evidence from the United Kingdom, 60 J.L. Econ. 75, 75, 80–84 (2017) [hereinafter
Restrepo & Subramanian, Prohibiting]; Albert O. “Chip” Saulsbury IV, The Availability Of Takeover
Defenses And Deal Protection Devices For Anglo-American Target Companies, 37 Del. J. Corp. L. 115,
154–56 (2012). Deal protection provisions are provisions in the acquisition agreement that are aimed at
deterring third-party bidders from jumping the deal prior to closing of the transaction between the target
and the initial bidder.
10
Richard Hall, Recent Developments in Deal Protection in U.S. and U.K. Markets, in The
International Comparative Legal Guide to: Mergers & Acquisitions 15 (2012).
11
See Afra Afsharipour & J. Travis Laster, Enhanced Scrutiny on the Buy-Side, Ga. L. Rev. 443, 491
(2019); U.K. Fin. Conduct Auth., Financial Conduct Authority Handbook Listing r. 10 (2018),
www.handbook.fca.org.uk/handbook/LR/10.pdf.
12
See Steven M. Davidoff & Christina M. Sautter, Lock-Up Creep, 38 J. Corp. L. 681, 685–92
(2013); Fernan Restrepo & Guhan Subramanian, The New Look of Deal Protection, 69 Stan. L. Rev.
Corporate governance in negotiated takeovers 457
While directors have wide latitude in designing a deal, historically, U.S. shareholders have
been able to check these powers through both fiduciary duty litigation and appraisal litigation.
Since the mid-2010s, however, the Delaware courts have moved away from ex post policing
through litigation.13 Instead, Delaware jurisprudence now emphasizes the value of ex ante
methods—such as deal process or deal-requirements like shareholder voting—to address
corporate governance concerns. The shifts in Delaware have been depicted as elevating
governance and procedure over costly and uncertain litigation.14 Some commentators have
even argued that these moves recognize increased shareholder power in the U.S. and bring
Delaware closer to the U.K. model where “the primary legal responsibility of the target board
is to ensure” a stockholder vote.15
This chapter argues that once we take into account the power and leeway that boards have
in designing a deal and putting into place a wide variety of deal protection mechanisms, the
move toward expanding the value of ex ante shareholder voice and devaluing ex post litigation
in reality maintains the centrality of management power. The primacy of directors becomes
even more pronounced when one compares the U.S. regime with the U.K.’s which places
significant constraints on the board’s ability to negotiate deal protection devices. The question
remains open, however, as to which system is better for the corporation, its shareholders, and
its stakeholders.16
This chapter proceeds as follows. Section 2 begins with describing a prototypical friendly
takeover transaction, and the governance concerns that can arise over the timeline of the deal
from the pre-signing period to closing of the transactions. Section 3 chronicles Delaware’s
approach to deal protection and its recent shifts away from ex post policing in friendly takeo-
vers. Section 4 then explores the regulation of the balance of power between boards and share-
holders in takeovers in the closest market analogue to the U.S., the U.K. Section 5 compares
the trajectory of the two regimes.
1013, 1043–50 (2017) [hereinafter Restrepo & Subramanian, New Look]; Guhan Subramanian & Annie
Zhao, Go-Shops Revisited, 133 Harv. L. Rev. 1215, 1233–51, 1258–71 (2020).
13
See, e.g., Iman Anabtawi, The Twilight of Enhanced Scrutiny in Delaware M&A Jurisprudence,
43 Del. J. Corp. L. 161 (2019); Ann M. Lipton, Shareholder Divorce Court, 44 Iowa J. Corp. L. 297
(2018) [hereinafter Lipton, Divorce Court].
14
The shift is viewed positively by some scholars. See, for example Zohar Goshen & Sharon Hannes,
The Death of Corporate Law, 94 N.Y.U. L. Rev. 263 (2019). However, it is viewed less positively by
other scholars. See, for example Charles R. Korsmo, Delaware’s Retreat from Judicial Scrutiny of
Mergers, 10 U.C. Irvine L. Rev. 55 (2019); James D. Cox, Tomas Mondino, & Randall S. Thomas,
Understanding the (Ir)Relevance of Shareholder Votes on M&A Deals (Vanderbilt Law Research Paper
No. 19-06, 2020), https://ssrn.com/abstract=3333241.
15
Richard Hall, The Hot Topic in United States M&A - Corwin, Cravath, Swaine, and Moore
LLP, www.cravath.com/files/Uploads/Documents/Publications/3850784_1.pdf; see also John Armour,
Shareholder Rights, 36 Oxford Rev. Econ. Pol’y 314, 328 (2020).
16
See generally Leo E. Strine, Jr., The Soviet Constitution Problem in Comparative Corporate Law:
Testing the Proposition that European Corporate Law is More Stockholder Focused than US Corporate
Law, 89 S. Cal. L. Rev. 1239 (2016).
2. THE M&A TIMELINE AND CORPORATE GOVERNANCE

CONCERNS
Public company M&A deals involve complex steps and contracts, and are transactions that
unfold over time.17 This complex timeline involves a variety of decisions for the board of each
company, and the ultimate decisions made by the board can be subject to shareholder voting
or acceptance. The rules designed to address corporate governance in takeovers often reflect
the ownership structure prevalent in a particular jurisdiction, but they also reflect the political
power of interest groups that influence the law.18 The result is thus a mishmash of rules that
attempt to balance both concerns about ownership structure and the desires of powerful inter-
est groups.
2.1 Pre-Signing Period
The pre-signing period involves the sale process and negotiation between the buyer and seller.
The negotiated sale of a company takes many forms—auction, market canvas or negotiation
with a single bidder—or a combination of these forms. No matter the form, the board and
managers are heavily involved in the negotiation process. The board’s involvement arises
from its fiduciary role in managing the corporation. Directors exercise this fiduciary respon-
sibility because of statutory requirements that mandate a board vote on the merger agreement
or because corporate norms dictate that directors manage the business and affairs of the
corporation.19
In jurisdictions with dispersed ownership structures, the principal management-shareholder
agency conflict arising during the pre-signing period is self-interested motivations that drive
the decision-making process. Takeovers are quintessential examples of deals with a final period
problem, where managers face few market constraints and are more likely to favor their own
interests.20 Thus, target boards and managers may be incentivized to behave opportunistically
when faced with an acquisition transaction. “The sale of a corporation has enormous implica-
tions for corporate managers and advisors, and a range of human motivations, including but by
no means limited to greed, can inspire fiduciaries and their advisers to be less than faithful.”21
Thus, there is “a concern that the board might harbor personal motivations in the sale context
17
See Franklin A. Gevurtz & Christina M. Sautter, Mergers and Acquisitions Law 15–16
(2019).
18
See, e.g., Armour, Jacobs & Milhaupt, supra note 6, at 224–25; Armour & Skeel, supra note 6, at
1767–76; Umakanth Varottil, The Nature of the Market for Corporate Control in India, in Comparative
Takeover Regulation: Global and Asian Perspectives 377-79 (Umakanth Varottil & Wai Yee Wan
eds., 2018).
19
See Afra Afsharipour, A Shareholders’ Put Option: Counteracting the Acquirer Overpayment
Problem, 96 Minn. L. Rev. 1018, 1050 (2012) [hereinafter, Afsharipour, Put Option].
20
See Afsharipour & Laster, supra note 11, at 483–85; see also Ronald J. Gilson & Bernard S.
Black, The Law and Finance of Corporate Acquisitions 720 (2d ed. 1995).
21
In re El Paso Corp. S’holder Litig., 41 A.3d 432, 439 (Del. Ch. 2012); see also In re Lear Corp.
S’holder Litig., 926 A.2d 94, 114–15 (Del. Ch. 2007) (concluding that there is a reasonable probability
that a CEO nearing retirement was motivated to sell by his desire to secure his nest egg); In re Netsmart
Techs., Inc. S’holders Litig., 924 A.2d 171, 194 (Del. Ch. 2007) (noting that executives may have “an
incentive to favor a particular bidder (or type of bidder),” especially if “some bidders might desire to
retain existing management or to provide them with future incentives while others might not”).
that differ from what is best for the corporation and its stockholders.”22 For example, managers
of the seller may wish to curry favor with the buyer in exchange for a post-closing position or
may push a deal because they expect a large bonus upon closing of the transaction.23
Bidder management may also be motivated by self-interest to pursue an acquisition at the
expense of shareholders. “Numerous studies provide evidence that acquisitions offer signif-
icant benefits to bidder management—particularly bidder CEOs—in the form of increased
compensation, power, and prestige.”24 CEOs are compensated handsomely for major acquisi-
tions, whether in the form of additional bonuses or stock compensation.25
Jurisdictions around the world have devised a myriad of ways to address managerial
self-interest in negotiated transactions. Unlike most other corporate transactions, M&A deals
often require shareholder approval of the transaction, thus allowing for shareholders to check
managerial self-interest.26 For publicly traded companies, the requirement for shareholder
voting may be in corporate law or through listing requirements. For example, U.K. listing
rules require prior approval from bidder shareholders in transactions that are large relative to
the acquirer, using several tests to measure relative size.27 Nevertheless, despite the general
norm of shareholder voting, in some jurisdictions, such as the U.S., it is common for bidder
shareholders to be deprived of voting rights even in large fundamental transactions.28
Some countries, including the U.S., provide remedies such as appraisal rights which allow
shareholders an “exit strategy” from the terms of the merger, i.e. to refuse acceptance of the
consideration offered in the deal and instead turn to the courts to determine the “fair value”
of their shares.29 Furthermore, shareholders may also be provided with ex post litigation
rights to hold managers accountable for decision-making in the M&A context. More so than
in any other jurisdiction, U.S. shareholders have attempted to use fiduciary duty litigation
to curb management self-interest in M&A.30 These attempts have met varying success, with
target shareholders having many more opportunities to bring fiduciary duty suits than bidder
shareholders.31
22
In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 597 (Del. Ch. 2010).
23
See J. Travis Laster, Revlon is a Standard of Review: Why It’s True and What It Means, 19
Fordham J. Corp. Fin. L. 5, 11–17 (2013).
24
Afsharipour & Laster, supra note 11, at 453.
25
For an overview of studies on CEO compensation and acquisitions, see Afsharipour & Laster,
26
See Rock et al., supra note 2, at 184, 186.
27
See U.K. Fin. Conduct Auth., Financial Conduct Authority Handbook Listing r. 10
(2018), www.handbook.fca.org.uk/handbook/LR/10.pdf.
28
See Afra Afsharipour, Reevaluating Shareholder Voting Rights in M&A Transactions, 70 Okla.
L. Rev. 127, 139–42 (2017) [hereinafter, Afsharipour, Reevaluating].
29
See Rock et al., supra note 2, at 186–87. For details of the appraisal remedy in the U.S., see Afra
Afsharipour, Deal Structure and Minority Shareholders, in Comparative Takeover Regulation:
Global and Asian Perspectives 49–51 (Umakanth Varottil & Wan Wai Yee eds., 2018). In the U.K.,
following a takeover offer, a minority shareholder has the right to require the bidder to buy its shares
at the offer price if the bidder has obtained 90% of both the issued shares and the voting rights in the
company. Part 28 of the Companies Act 2006, s. 979.
30
See John Armour et al., Private Enforcement of Corporate Law: An Empirical Comparison of the
United Kingdom and the United States, 6 J. Empirical Legal Stud. 687 (2009).
31
See Afsharipour, Put Option, supra note 19, at 1051–56.
2.2 The Pre-Closing Period
Due to shareholder voting and other regulatory requirements, acquisitions of publicly traded
companies involve a significant lag of time between the period that the board approves the
definitive agreement and when the transaction closes. To manage risks that may arise during
this pre-closing period, parties to an acquisition agreement design a complex contract that
addresses a package of rights and obligations with respect to closing of the transaction.32
Importantly from a corporate governance perspective, the acquisition agreement may
include a host of deal protection provisions—termination fees, match rights, voting agree-
ments, stock or asset lockups and the like—aimed at deterring third party bids from emerging
during the pre-closing period.33 Deal protection provisions are sought by bidders to “provide
value to the bidder in the event that the transaction is not consummated due to specific condi-
tions.”34 Deal protections can provide value to target shareholders in inducing the initial bid
“by compensating that bidder for, among other things, opportunity costs, reputational costs,
and out-of-pocket expenses.”35 Deal protection provisions, however, can also raise corporate
governance concerns. For example, target boards may use deal protection provisions to deter
other bidders in order to protect their favored bidder or to “reduce the prospects for negative
shareholder votes.”36 Corporate governance concerns are particularly acute if target manage-
ment is to receive substantial private benefits or even direct pecuniary benefits from consum-
mating the deal with the initial bidder.37
The U.S. and the U.K. have long approached deal protection differently, with the U.K.
focusing much more on shareholder voice and rights vis a vis deal protection provisions. As
discussed below, these differences have become more pronounced over the past decade. While
the U.K. now bans most deal protection devices, the U.S. M&A market has experienced a pro-
liferation in the types and strength of deal protection provisions and tolerance from the courts
regarding director flexibility to negotiate these devices.38
32
See Afra Afsharipour, Transforming the Allocation of Deal Risk Through Reverse Termination
Fees, 63 Vand. L. Rev. 1163, 1170–79 (2010).
33
See Restrepo & Subramanian, New Look, supra note 12, at 1022–50; Subramanian & Zhao, supra
note 12, at 1235.
34
John C. Coates IV & Guhan Subramanian, A Buy-Side Model of M&A Lockups: Theory and
Evidence, 53 Stan. L. Rev. 307, 310 (2000).
35
Restrepo & Subramanian, New Look, supra note 12, at 1018.
36
Gevurtz & Sautter, supra note 17, at 275.
37
See Albert H. Choi, Deal Protection Devices, __ U. Chi. L. Rev. (forthcoming) (manuscript at 42),
38
See Restrepo & Subramanian, New Look, supra note 12, at 1016, 1036–50.
3. CORPORATE GOVERNANCE AND DEAL PROTECTION IN

THE U.S.—A SHIFTING LANDSCAPE
3.1 The U.S. Approach to Takeover Regulation—A Baseline
In the U.S., friendly takeovers are often accomplished through one of two structures—a one-step
triangular merger, or a two-step transaction with a tender offer followed by a merger.39 In
mergers, target shareholders generally have voting rights under state law, and in tender offers
they have the opportunity to decide whether they want to tender their shares.40 However, under
corporate law rules, bidder shareholders are often deprived of voting rights in negotiated deals
based on the deal structure and consideration used.41
While shareholders may have a voice, the transaction is run by the board of directors.42
Management controls the timing and negotiation of the deal, as well as the information upon
which shareholders rely in deciding whether to approve the matter or to tender their shares.
The shareholders’ vote on a deal hinges on the structure of the deal as designed by directors,
including the deal protection provisions of the transaction. As commentators have noted,
“[f]undamentally a merger vote is typically a Hobson’s choice—approve the merger as is or
reject it altogether—rather than anything resembling a traditional ratification.”43
Similar to its director centric approach to the pre-signing stage, Delaware law provides
directors with much leeway in designing deal protection provisions.44 Studies find that, over
the past two decades, deal protection provisions in U.S. deals have morphed considerably.
While termination fees have stabilized at around 3–4 percent of deal value due to guidance
by the Delaware courts,45 other types of provisions have become much more prevalent. For
example, Restrepo and Subramanian find that match rights—provisions that provide the initial
bidder an opportunity to match a competing bid that arises between signing and closing—have
become universally used.46 They also find that asset lockups—an option given to the initial
bidder to buy a key asset of the target in the event of nonconsummation of the deal—have
reemerged in new forms, such as licensing of the target’s key technology to the bidder, thus
39
See generally John C. Coates, Mergers, Acquisitions, and Restructuring: Types, Regulation, And
Patterns Of Practice, in Oxford Handbook on Corporate Law and Governance (Jeffrey N. Gordon
& Wolf-Georg Ringe eds., 2015).
40
Del. Code. Ann. tit. 8, § 251 (2018). Since 2013, section 251(h) of the DGCL allows a tender
offer followed by a second-step merger transaction without the vote of the remaining shareholders if,
following a tender offer, the buyer owns a sufficient percentage of target shares (usually a majority of
the outstanding shares) as would be necessary to approve the merger agreement under Delaware law
and the target’s charter. The Section 251(h) mechanism is commonly used in deals involving Delaware
public company targets. See Piotr Korzynski, “Forcing the Offer”: Considerations for Deal Certainty
and Support Agreements in Delaware Two-Step Mergers, Harv. L. Sch. F. on Corp. Governance and
Fin. Reg. (Apr. 2, 2018), https://corpgov.law.harvard.edu/2018/04/02/forcing-the-offer-considerations
-for-deal-certainty-and-support-agreements-in-delaware-two-step-mergers/.
41
See Afsharipour, Reevaluating, supra note 28, at 139–42.
42
See Lipton, Divorce Court, supra note 13, at 299.
43
Korsmo, supra note 14, at 61.
44
See Choi, supra note 37, at 9–12.
45
See Restrepo & Subramanian, New Look, supra note 12, at 1023.
46
See id. at 1031.
allowing for parties to argue that a business purpose exists for the lockup.47 Furthermore,
stock option lockups—an option to the initial bidder to buy a specified number of shares at
a pre-determined price in the event of nonconsummation—have reappeared in side financing
arrangements.48
Cognizant of management control and their conflicting incentives in negotiating takeovers,
in addition to shareholder voice, Delaware law has historically provided target shareholders
two avenues to hold directors accountable through the courts—fiduciary duty litigation and
appraisal rights.49 Bidder shareholders, however, have neither appraisal rights nor a meaning-
ful opportunity to bring fiduciary duty suits. Nevertheless, over the past decade both types of
litigation protections have been significantly eroded. Commentators argue that under recent
Delaware jurisprudence, “the default litigation landscape for a variety of transaction structures
is judicial consideration of defendant-drafted public filings at the pleading stage, no discovery,
dismissal in the event of an affirmative stockholder vote, and a worse outcome if pursuing
appraisal.”50
3.2 Fiduciary Duty Litigation
M&A transactions are especially susceptible to management misconduct or agency conflicts.

Under corporate law, directors and officers who confront these conflicts are fiduciaries who
owe duties of loyalty and care to the corporation and its stockholders.51 As the beneficiaries
of those duties, stockholders can bring litigation challenging whether directors have complied
with their fiduciary obligations.
Since the 1980s, Delaware law has developed a nuanced framework for reviewing the deci-
sions of target management—an intermediate standard of review that stands in between the
deferential business judgment rule and the intrusive entire fairness test.52 To address the con-
textual realities concerning the motives of directors, the Delaware courts developed a two-part
test. In the first step, the court “evaluates the directors’ motives to determine whether they had
acted for a legitimate corporate purpose after conducting a reasonable investigation.” In the
second step, the court requires directors to show that “their actions were reasonable in relation
to their legitimate objective.”53
In friendly third-party takeovers, the Delaware courts have applied enhanced scrutiny to
sales of control and to entering into deal protection devices, as potential conflicts of interests
are inherent in both instances.54 The enhanced scrutiny framework thus became a means of
47
See id. at 1035–41.
48
See id. at 1042–43.
49
See Franklin A. Gevurtz, The Shareholder Approval Conundrum, 60 B.C. L. Rev. 1831, 1841
(2019).
50
Joel Friedlander, Confronting the Problem of Fraud on the Board, 75 Bus. Law. 1441, 1442
(2019–20) [hereinafter Friedlander, Fraud].
51
See Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006).
52
See Ronald J. Gilson, Unocal Fifteen Years Later (And What We Can Do About It), 26 Del. J.
Corp. L. 491, 496 (2001).
53
Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 810 (Del. Ch. 2007).
54
See Afsharipour & Laster, supra note 11, at 471–72.
screening for improperly motivated actions “when the realities of the decision-making context
can subtly undermine the decisions of even independent and disinterested directors.”55
Over the past decade, the application of enhanced scrutiny to friendly takeovers has come
under significant attack in response to the accelerating pace of stockholder-led M&A litiga-
tion.56 By the first decade of the twenty-first century, the courts experienced sell-side chal-
lenges to over 90 percent of all takeovers in excess of $100 million.57 The high rate of litigation
raised concerns that many of these claims were meritless and abusive; raising costs for compa-
nies, stockholders and courts with little benefit.
3.2.1 Limiting fiduciary-duty based injunction cases

Shareholders seeking to pursue a claim for breach of fiduciary duties in a friendly takeover can
file a suit for a preliminary injunction seeking to bring forth additional disclosure or to modify
the merger agreement, in particular deal protection measures.58 However, since the mid-2010s,
the Delaware courts have tightened the standard for preliminary injunctions in merger related
cases, limiting the ability of plaintiffs to pursue fiduciary-based claims.59 Two important cases,
C&J Energy60 and Trulia,61 have significantly reduced the incentives for shareholders, and
plaintiff-side counsel, to seek injunctions in friendly third-party M&A transactions.62
In In re Trulia, the Delaware Chancery Court stated that it would no longer approve
disclosure-based settlement agreements “when the additional information is not material.”63
The court stated that in order for disclosure settlements to be approved
the supplemental disclosures [must] address a plainly material misrepresentation or omission, and the
subject matter of the proposed release [must be] narrowly circumscribed to encompass nothing more
than the disclosure claims and fiduciary duty claims concerning the sale process, if the record shows
that such claims have been investigated sufficiently.64
Trulia’s impact on disclosure-only cases has been significant, reducing the number of cases
brought in Delaware.65
55
Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011).
56
See Matthew D. Cain & Steven Davidoff Solomon, A Great Game: The Dynamics of State
Competition and Litigation, 100 Iowa L. Rev. 465, 475 tbl. I, 476 tbl. II (2015).
57
Olga Koumrian, Shareholder Litigation Involving Acquisitions of Public Companies: Review of
2014 M&A Litigation, Cornerstone Res. 1, 1 fig. 1 (2015).
58
See Joel E. Friedlander, Vindicating the Duty of Loyalty: Using Data Points of Successful
Stockholder Litigation As a Tool for Reform, 72 Bus. Law. 623, 643 (2017).
59
See C&J Energy Servs., Inc. v. City of Miami Gen. Emps' & Sanitation Emps.' Ret. Trust, 107
A.3d 1049, 1072–73 (Del. 2014).
60
C& J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Trust, 107 A.3d
1049 (Del. 2014) [hereinafter C&J].
61
In re Trulia, Inc. S’holder Litig., 129 A.3d 884 (Del. Ch. 2016) [hereinafter Trulia].
62
See Friedlander, Fraud, supra note 50, at 1444.
63
Trulia, 129 A.3d at 893.
64
Trulia, 129 A.3d at 898.
65
See Matthew D. Cain et al., The Shifting Tides of Merger Litigation, 71 Vand. L. Rev. 603, 608
(2017). Some of these cases have shifted to courts outside of Delaware, including the federal courts. See
Ravi Sinha & Per Axelson, Acquisitions of Public Companies – 2018 Shareholder Litigation, Harv. L.
Sch. F. on Corp. Governance and Fin. Reg. (Sept. 30, 2019), https://corpgov.law.harvard.edu/2019/
09/30/acquisitions-of-public-companies-2018-shareholder-litigation/.
The C&J decision, in particular, has impacted the incentives to seek a preliminary injunc-
tion in M&A deals to cabin deal protection provisions. In C&J the Delaware Supreme Court
indicated (and the Court of Chancery has generally construed the decision to hold) that an
injunction should not be issued where there is no alternative bidder and stockholders therefore
risk losing the current deal if enjoined.66 The decision establishes that, outside of the con-
trolling shareholder context, courts cannot “interfere with a pending shareholder vote; thus, so
long as appropriate disclosures are made, even agreements reached in violation of directors’
fiduciary duties will be presented to stockholders.”67
3.2.2 Limiting ex post judicial review in fiduciary duty cases

The most significant shift in Delaware jurisprudence with respect to ex post judicial review of
board decisions in third-party takeovers has been the Delaware Supreme Court’s 2015 deci-
sion in Corwin.68 The Corwin decision was a systematic move by the Delaware Courts to limit
merger litigation in the face of the wave of merger litigation sweeping its courts.69 Corwin and
its progeny make it much harder for stockholders to challenge a transaction post-closing.
In Corwin, the Delaware Supreme Court held that the business judgment rule is “the appro-
priate standard of review for a post-closing damages action when a merger that is not subject to
entire fairness has been approved by a fully informed, uncoerced majority of the disinterested
stockholders.”70 The Court explained that the “long-standing policy of our law has been to
avoid the uncertainties and costs of judicial second-guessing when the disinterested stockhold-
ers have had a free and informed chance to decide on the economic merits of the transaction.”71
Additionally, the Court reasoned that stockholders could protect themselves by “simply voting
no” on the deal and that “the utility of a litigation-intrusive standard of review promises more
costs to stockholders in the form of litigation rents and inhibitions on risk-taking than it prom-
ises in terms of benefits to them.”72 The Court observed that “where the stockholders have had
the voluntary choice to accept or reject a transaction, the business judgment rule standard of
review … best facilitates wealth creation through the corporate form.”73
The holding in Corwin essentially means that an “informed uncoerced stockholder vote
will cleanse any breaches of fiduciary duty.”74 The business judgment rule “insulates the
transaction from all attacks other than on the grounds of waste, even if a majority of the board
approving the transaction was not disinterested or independent.”75
66
C&J, 107 A.3d 1049, 1072–73 (Del. 2014).
67
Ann M. Lipton, After Corwin: Down the Controlling Shareholder Rabbit Hole, 72 Vand. L. Rev.
1977, 1980 (2019) [hereinafter Lipton, After Corwin].
68
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015).
69
See Cain et al., supra note 65, at 604–05.
70
Corwin, 125 A.3d at 305–06.
71
Id. at 313.
72
Id. at 313.
73
Id. at 314.
74
Hon. Joseph R. Slights III, Lecture: The Eighteenth Annual Albert A. Destefano Lecture On
Corporate, Securities, & Financial Law At The Fordham Corporate Law Center: Corwin V. KKR
Financial Holdings LLC – An “After-Action Report”, 24 Fordham J. Corp. Fin. L. 6, 9 (2018).
75
In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 1001 (Del. Ch. 2014).
Subsequent cases have applied Corwin to dismiss merger litigation and have expanded
the Corwin doctrine further.76 The Delaware courts have extended Corwin to takeovers using
either type of transaction structure available under Delaware Law—i.e. a statutory merger
or a tender offer with a back-end merger.77 The Delaware Supreme Court’s 2016 decision in
Singh v. Attenborough78 held that the Corwin doctrine applies even when the vote is statutorily
required and the transaction would otherwise be subject to the Revlon standard of review.79 The
Court in Singh additionally explained that the Corwin doctrine effectively renders transactions
unreviewable because the waste doctrine is not well suited for transactions where stockholders
receive consideration they voted to accept.80 Furthermore, the Delaware Chancery Court held
in 2017 that even where plaintiffs allege breach of the duty of loyalty but full disclosures
are made, “if stockholders approved the conflict of interest after full disclosure, the business
judgment rule applies.”81
The emphasis is now for plaintiffs to avoid the application of Corwin. Plaintiffs can avoid
Corwin by: (1) bringing a claim about inadequate disclosures that would render the stockholder
vote not fully informed or claiming coercion or (2) showing there is a conflicted controlling
stockholder.82 Outside of the controller context, plaintiffs have thus grappled with what must
be disclosed for a vote to be fully informed and what qualifies as a coercive transaction.83 To
satisfy the fully informed requirement, a board must disclose all material information within
its control.84 This has led plaintiffs post-Corwin to seek access to corporate records to craft
viable inadequate disclosure claims in order to avoid the application of Corwin.85 Plaintiffs
have used inspection rights under DGCL Section 220 to show discrepancies between the
records and the provided disclosures.86
76
See, e.g., In re Solera Holdings, Inc. S’holder Litig., 2017 Del. Ch. LEXIS 1, at *2–3 (Del. Ch.
2017.
77
See In re Volcano Corp. S’holder Litig., 143 A.3d 727, 738-39 (Del. Ch. 2016) (extending the
Corwin doctrine to apply to “stockholder approval of a merger under [Delaware General Corp. Law]
Section 251(h) by accepting a tender offer.”), affirmed by Lax v. Goldman, Sachs & Co. (In re Volcano
Corp. Stockholder Litig.), 2017 Del. LEXIS 56, at *1 (Del. Feb. 9, 2017).
78
Singh v. Attenborough, 137 A.3d 151 (Del. 2016).
79
Volcano, 143 A.3d at 741 (citing Singh v. Attenborough, 137 A.3d 151 (2016)).
80
Singh, 137 A.3d at 151–52.
81
In re Columbia Pipeline Group Inc., 2017 Del. Ch. LEXIS 123, at *5 (Del. Ch. Mar. 7, 2017).
82
See Larkin v. Shah, 2016 Del. Ch. LEXIS 134, at *34 (Del. Ch. 2016).
83
See, e.g., In re Merge Healthcare Inc., S’holders Litig., 2017 Del. Ch. LEXIS 17, at *2, *26–27
(Del. Ch. Jan. 30, 2017) (holding that a majority vote of disinterested shares in favor of the merger has
a cleansing effect only if it is uncoerced and fully informed).
84
In re Solera Holdings, Inc. S’holder Litig., 2017 Del. Ch. LEXIS 1, at *22 (Del. Ch. Jan. 5, 2017);
In re Merge Healthcare Inc., S’holders Litig., 2017 Del. Ch. LEXIS 17, at *2, *26–27 (Del. Ch. Jan. 30,
2017).
85
See Friedlander, Fraud, supra note 50, at 1444; Matteo Gatti, Reconsidering the Merger Process:
Approval Patterns, Timeline, and Shareholders’ Role, 69 Hastings L.J. 835, 904 (2018).
86
See Lavin v. West Corp., 2017 Del. Ch. LEXIS 866, at *3–4 (Del. Ch. Dec. 29, 2017); Friedlander,
Fraud, supra note 50, at 1472. Defendants cannot use the Corwin doctrine to block plaintiffs from
inspecting a corporation’s books and records. See Robert S. Reder & Dylan M. Keegan, Chancery Court
Declines to Apply Corwin to Foreclose a Books and Records Inspection Under DGCL § 220, 71 Vand.
L. Rev. 101, 109 (2018).
Several cases post-Corwin have focused on the adequacy of disclosures to stockholders

prior to the vote or tender.87 For example, the Chancery Court found in In re Saba Software
that the stockholder vote was not fully informed due to material omissions in the proxy mate-
rials.88 Furthermore, several cases have focused on the inadequacy of disclosures regarding
management incentives or behavior in the deal.89 For example, the application of Corwin was
precluded when the role of the CEO in the sale process, who had personal motivations for
pursuing the transaction, was not disclosed.90 The Chancery Court has also rejected the appli-
cation of Corwin in a case where an activist investor was allowed to effectively control and
manipulate the sale process, which was not disclosed to stockholders.91
Only a few cases have addressed coercion. The Chancery Court has explained that coercion
occurs when stockholders are induced to vote in favor of the proposed transaction for reasons
other than the economic merits.92 Such an analysis focuses on “whether the stockholders have
been permitted to exercise their franchise free of undue external pressure created by the fidu-
ciary that distracts them from the merits of the decision under consideration.”93
3.2.3 Risks of the new Delaware model

C&J and Corwin reflect an important shift in Delaware corporate law, making it much harder
for stockholder plaintiffs to bring a pre-closing injunction or to challenge a transaction
post-closing. Together with other doctrinal shifts in Delaware, both cases have raised concern
about the future of plaintiff stockholder litigation.94 One concern is that plaintiff stockholders
will not be able to meet the heightened pleading standard under Corwin.95 And data supports
the proposition that “successful prosecution of merger litigation cases [has become] more
difficult.”96
If left unchecked, Delaware’s recent jurisprudence is likely to result in a less robust sale
process.97 Managers may be incentivized to elevate their personal interests knowing that they
will likely avoid any judicial scrutiny of their conduct once a deal is completed. Scholars
have argued that Corwin reduces directors’ duties down to simply full disclosure and “mere
formalities.”98 Thus, directors whose conduct would otherwise be subject to enhanced scrutiny
are more likely to trade off stockholder value for private benefit and more likely to incorporate
deal protections into M&A contracts in the deal that provides them with such benefits.99 This
impact of Corwin is particularly significant given the level of lock-ups, termination fees,
87
See, e.g. City of Miami Gen. Emps.’ v. Comstock, 2017 Del. LEXIS 129, at *1–2 (Del. Mar. 23,
2017); Appel v. Berkman, 180 A.3d 1055, 1057–58 (Del. 2018).
88
In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108, at *1 (Del. Ch. Mar. 31, 2017); see
also In re Tangoe, Inc., 2018 Del. Ch. LEXIS 534, at *27, 29–30 (Del. Ch. Nov. 20, 2018).
89
See, e.g. Morrison v. Berry, 191 A.3d 268, 274–75 (Del. 2018).
90
In re Xura, Inc. S’holder Litig., 2018 Del, Ch. LEXIS 563 at *30–31 (Del. Ch. Dec. 10, 2018).
91
In re PLX Tech. Inc. S’holder Litig., 2018 WL 5018535 at *32–38 (Del. Ch. Oct. 16, 2018).
92
In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108, at *14 (Del. Ch. Mar. 31, 2017).
93
In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108, at *15 (Del. Ch. Mar. 31, 2017); see
also Sciabacucchi v. Liberty Broadband Corp., 2018 Del. Ch. LEXIS 252, at *2 (Del. Ch. July 26, 2018).
94
See Friedlander, Fraud, supra note 50, at 1442–43.
95
Slights III, supra note 74, at 11.
96
Cain et al., supra note 65, at 606.
97
Anabtawi, supra note 13, at 199–205.
98
Lipton, Divorce Court, supra note 13, at 318.
99
See Anabtawi, supra note 13, at 200–01; Lipton, Divorce Court, supra note 13 at 319–20.
match rights and other deal protection devices that are commonly, and more frequently, used
in M&A transactions over the past two decades.100 Moreover, Delaware courts have not yet
resolved whether under Corwin, stockholder approval of a transaction would “cleanse” an
unreasonable deal protection device—i.e. one that would fail enhanced scrutiny.101 If the court
ultimately decides that it would, then the only route to successful post-closing challenge of
a termination fee would be to show that the stockholder vote was not fully informed or was
coerced.102
While a stockholder vote is valuable, placing stockholders “in the shoes of the court” is not
a perfect substitute for “carefully reasoned judicial opinions” and “enhanced judicial scruti-
ny.”103 Stockholders may feel pressured to support a deal, especially if the jilted buyer has
been provided a large termination fee or access to significant lockups that diminish the seller’s
value. Both information asymmetries and divergent shareholder interests reduce the ability of
shareholders to monitor boards.104 There is considerable doubt about whether a shareholder
vote “can meaningfully check managerial disloyalty … because shareholders as a group are
not positioned to investigate wrongdoing or bargain for better options; they are stuck with the
transaction that is presented to them.”105 And from the perspective of stockholders “sometimes
an unfair deal is better than no deal at all.”106 Even with the rise of sophisticated institutional
investors, information asymmetry between managers and stockholders is still a barrier, espe-
cially in merger contexts where “management has powerful incentive to dissemble and little
fear of future repercussions.”107
Overall, the combination of C&J Energy and Corwin significantly reduces the ability of
shareholders to use fiduciary duty litigation outside of the context of a controlling shareholder
situation for the target. For many transactions, the ability of shareholder to hold managers
accountable through fiduciary duty litigation has been transformed into a right with little bite.
Instead, deals “can be fully cleansed by a shareholder vote, even in the face of director conflict
and breach of fiduciary duty, permitting the resolution of stockholder challenges on the plead-
ings and without discovery.”108 As leading practitioners have noted, C&J “eliminates a basis
for seeking expediting discovery” and together with Corwin and its progeny there is little
ability to “challenge the integrity of a stockholder vote,” and potentially meritorious claims by
shareholders against managers with conflicts “will be dismissed or will not be filed.”109
100
101
See In re Paramount Gold and Silver Corp. S’holders Litig., Consol. C.A. No. 10499-CB, 2017
WL 1372659, at *6 (Del. Ch. Apr. 13, 2017).
102
See Gevurtz, supra note 49, at 1864–68.
103
Anabtawi, supra note 13, at 200–01, 204.
104
Id. at 201.
105
Lipton, After Corwin, supra note 67, at 2003.
106
Korsmo, supra note 14, at 100–01.
107
Id. at 98. There are also questions about the conflicting interests of institutional shareholders
and whether these incentives lessen their willingness to check management self-interest in the merger
context. See Lipton, Divorce Court, supra note 13, at 311–13.
108
See Lipton, After Corwin, supra note 67, at 1987.
109
Friedlander, supra note 58, at 643, 645.
3.3 Appraisal Rights: Whither Appraisal?
Under Delaware law, in certain takeovers, stockholders are entitled to an appraisal right; that is
to refuse to accept the consideration offered and instead turn to the courts to determine the “fair
value” of their shares.110 The Chancery Court may determine fair value by considering all rele-
vant factors, excluding “any element of value arising from the accomplishment or expectation
of the merger or consolidation.”111 Appraisal was long seen as a limited remedy, especially for
ordinary investors, given the complexities of the appraisal process, significant costs and delays
connected with appraisal litigation, and the uncertainties of the valuation process.112
In the last decade, appraisal actions gained some steam due to certain sophisticated investors,
particularly hedge funds, acting as dissenting shareholders.113 Because even stockholders who
acquire stock after a transaction announcement have appraisal rights, investors, commonly
sophisticated hedge funds, purchased shares of stock after a merger announcement and then
filed an appraisal action for fair value of the shares.114 The rise of “appraisal arbitrage” actions
by sophisticated shareholders led to a swift response from the deal community.115 Leading deal
lawyers, who generally represent management and management interests in M&A transac-
tions, as well as management friendly entities, such as the U.S. Chamber of Commerce, played
a large role in raising concern over the use and “abuse” of appraisal.116
The rise of appraisal actions led to a trio of important decisions, DFC Global, Dell
and Aruba, by the Delaware Supreme Court. These decisions place great emphasis on the
agreed-to deal price as the “fair value,” substantially weakening appraisal as a remedy.117 In
DFC Global, the Delaware Supreme Court indicated that greater reliance should be given to
the deal price to determine fair value because “economic principles suggest that the best evi-
dence of fair value was the deal price, as it resulted from an open process, informed by robust
public information, and easy access to deeper, non-public information, in which many parties
with an incentive to make a profit had a chance to bid.”118
The decisions in DFC Global, Dell and Aruba emphasize the importance of considering
the deal price and market price in a fair value analysis when there is an efficient trading
market and a robust sale process.119 Thus, stockholder petitioners seeking appraisal will be
110
Del. Code. Ann. tit. 8, § 262(a) (2018). Appraisal is not available in every type of deal structure.
For example, in a deal where the target is listed on a national exchange and its shareholders receive only
public company stock of the bidder as consideration, appraisal rights are not available.
111
Del. Code. Ann. tit. 8, § 262(h) (2018); see Dell Inc. v. Magnetar Glob. Event Driven Master
Fund Ltd., 177 A.3d 1, 5 (Del. 2017).
112
See Charles R. Korsmo & Minor Myers, Appraisal Arbitrage and the Future of Public Company
M&A, 92 Wash. U. L. Rev. 1551, 1558–66 (2015) [hereinafter Korsmo & Myers, Appraisal Arbitrage].
113
Id. at 1572–76.
114
Charles Korsmo & Minor Myers, The Flawed Corporate Finance of Dell and DFC Global, 68
Emory L.J. 221, 230 (2018) [hereinafter Korsmo & Myers, Corporate Finance].
115
Lawrence A. Hamermesh & Michael L. Wachter, Finding the Right Balance in Appraisal
Litigation: Deal Price, Deal Process, and Synergies, 73 Bus. Law. 961, 961 (2018).
116
See Korsmo & Myers, Corporate Finance, supra note 114, at 234–35, 243–44.
117
See id. at 230.
118
DFC Glob. Corp. v. Muirfield Value Partners, 172 A.3d 346, 349 (2017).
119
See Gregory V. Gooding et al., Delaware M&A Appraisal After DFC, Dell and Aruba, Harv. L.
Sch. F. on Corp. Governance and Fin. Reg. (May 6, 2019), https://corpgov.law.harvard.edu/2019/05/
06/delaware-ma-appraisal-after-dcf-dell-and-aruba.
incentivized to find flaws in the sale process to avoid deference to the deal price.120 Professors
Korsmo and Myers argue that this could turn every appraisal action into a “mini-fiduciary duty
proceeding.”121 Examples of flaws in the sale process that may cause the Court to question the
deal price include conflicts of interests, and defective sale processes, including the strength of
deal protection measures.122
Nevertheless, if a merger is an arm’s length transaction with no serious flaws in the sale
process, and includes what the Delaware courts have deemed “customary” deal protection
devices, the fair value will likely fall at or below the deal price, thus discouraging appraisal
petitions.123 In fact, after Dell and DFC Global, the number of appraisal petitions significantly
decreased in Delaware.124 This is likely because Dell and DFC Global have led to fewer
appraisal awards above the deal price and more awards below the deal price with increased
emphasis and reliance on the deal and market price.125
Scholars have argued that the decisions providing a type of deference to deal price are
driven by “many of the same considerations that have caused the court to grant business
judgment rule deference” in the fiduciary suit context.126 And with incentives to seek appraisal
weakened, the ability of stockholders to hold directors accountable in M&A transactions
remains tenuous.
4. CORPORATE GOVERNANCE AND DEAL PROTECTION IN

THE U.K.
4.1 The U.K. Approach to Takeovers—A Baseline
The Companies Act 2006, the City Code on Takeovers & Mergers (the “Takeover Code”)
and the Panel on Takeovers and Mergers (the “Takeover Panel”) govern M&A in the U.K.127
The Takeover Code applies to public companies incorporated in the U.K. that are listed on
the Main Market of the London Stock Exchange or have their central place of management
in the U.K.128 Institutional investors were meaningfully involved in the drafting and design of
the Takeover Code.129 Accordingly, the U.K. M&A market is characterized by ex ante rules
that provide significant voice to shareholders and limit the discretion of directors. This is in
line with shareholder rights in the U.K. more generally as “the UK has traditionally accorded
shareholders a broader package of rights than shareholders in Delaware corporations have
120
See Daniel E. Wolf & Gilad Zohari, Post-Dell Appraisal — Still Work to be Done, Harv. L. Sch.
F. on Corp. Governance and Fin. Reg. (June 5, 2018), https://corpgov.law.harvard.edu/2018/06/05/
post-dell-appraisal-still-work-to-be-done.
121
Korsmo & Myers, Corporate Finance, supra note 114, at 278.
122
Choi, supra note 37, at 13–14.
123
See id. at 14.
124
See Gooding et al., supra note 119.
125
Id.
126
Korsmo, supra note 14, at 103.
127
General Guide to the UK Takeover Regime, Skadden, Arps, Slate, Meagher & Flom LLP (July
2018), www.skadden.com/insights/publications/2018/07/the-general-guide-to-the-uk-takeover-regime.
128
The Panel on Takeovers and Mergers, The Takeover Code, A.3 (2016).
129
See Armour & Skeel, supra note 6, 1771.
enjoyed.”130 And over the past decade, “the Takeover Panel has rejected the role of the board
of directors as negotiator of deal protection.”131
4.1.1 Shareholder voice in schemes and offers

There are two main ways to conduct a takeover in the U.K., by a contractual offer or scheme
of arrangement. The U.K. is noted for providing a say to shareholders in the takeover context,
whether deals are done via a takeover or a scheme of arrangement.132
With respect to offers, in practice, the acceptance condition is usually set by the bidder at 90
percent of the shares for which the offer is made (because this is the level at which the power
to acquire shares which have not yet been assented to the offer may be exercised under the
Companies Act 2006).133 This condition must be satisfied or waived, that is, the offer must
become or be declared “unconditional as to acceptances,” by no later than the 60th day after
the formal offer document is posted to target shareholders.
In the U.K., “the structure of choice for recommended bids” is the scheme of arrange-
ment.134 The U.K. scheme structure, like the U.S. merger structure, provides shareholders
voting rights but has significantly higher shareholder approval requirements. Unlike the U.S.
where only a majority of the outstanding shares need to vote in favor of a merger, the scheme
must receive approval of a majority in number, representing 75 percent in value of each
class, of shareholders present and voting at the relevant shareholders meeting.135 If approved,
a scheme is binding on all shareholders. Following shareholder approval, the target must seek
court approval of the scheme and the court must be satisfied with “the procedural fairness of
the class representation and voting.”136
In friendly takeovers, there is much flexibility regarding transaction form. With the consent
of the Takeover Panel, a bidder may switch from a scheme of arrangement to a contractual
offer or vice versa. In a takeover offer, a bidder must acquire 90 percent of the securities to
which the offer applies before it can exercise compulsory acquisition rights in respect of the
remaining shares (assuming the target is a U.K. company). Accordingly, a bidder that has
made a contractual offer—and considers that it will reach the 75 percent threshold but may not
reach the 90 percent level—may consider switching to a scheme of arrangement in order to
ensure that it acquires the whole of the target.
Not only does the U.K. provide a voice to target shareholders, but bidder shareholders also
have more voice than typically found in U.S. deals. Unlike in the U.S., shareholder voting
for large acquisitions in the U.K. is both mandatory and binding.137 Listing Rule 10 of the
United Kingdom Financial Conduct Authority requires prior approval from shareholders of the
130
Armour, Shareholder Rights, supra note 15.
131
Hall, supra note 10, at 15.
132
See generally Davies et al., supra note 8, at 211–30; Payne, supra note 8, at 67-68. Schemes of
arrangement are permitted and codified in Part 26 of the Companies Act 2006, ss. 895–99.
133
Part 28 of the Companies Act 2006, s. 979.
134
Payne, supra note 8, at 67–68.
135
136
137
Marco Becht et al., Does Mandatory Shareholder Voting Prevent Bad Acquisitions?, 29 Rev. Fin.
Stud. 3035, 3037 (2016).
acquirer for transactions that are large relative to the acquirer, using several tests to measure
relative size (Class 1 transactions).138
4.1.2 Limitations on the board

Directors in the U.S. and U.K. generally owe similar fiduciary duties to the corporation.139
Yet, unlike the U.S., litigation concerning director fiduciary duties in the U.K. has been rare.140
Thus case law that analyzes director decision-making, for example with respect to deal protec-
tion measures, in the context of M&A transactions is scant.141 Instead, much of the limits on
director decision-making with respect to third party friendly M&A deals arise under the rules
of the Takeover Code. A significant difference between the U.S. and U.K. models is the limit
placed on boards negotiating M&A deals.
4.1.2.1 The Takeover Code’s no frustration approach

Delaware takes a board-centric approach to director power in placing and maintaining takeover
barriers, such as poison pills, including prior to a hostile bid even emerging.142 The Takeover
Code, however, limits the ability of directors to diminish or “frustrate” shareholder power
through takeover defenses.143 Under the Code, target directors may not take “any action that
might tend to interfere with the conduct of an actual or anticipated takeover bid.”144 Scholars
describe these provisions of the Code as playing “a central role in entrenching shareholder
sovereignty as the foremost position of U.K. law with regard to takeovers.”145 Scholars have
also argued that the prohibition on takeover defenses reflect the political power of institutional
shareholders who helped design rules that constrain manager behavior in takeovers.146
Whether the limitations of the Takeover Code, however, enhance shareholder wealth is
subject to intense debate.147 For example, takeover defenses can “give the board greater bar-
gaining power which may, depending on the particular circumstances, enable them to obtain
a price that exceeds the board’s reservation price and to extract a greater share of any deal
synergies.”148
4.1.2.2 Deal protection under the Takeover Code

In addition to the no-frustration principle of the Takeover code, in contrast to the U.S. where
deal protection mechanisms are commonly used, the U.K. has taken an entirely different
approach to deal protection. In 2011, the Takeover Code was amended to prohibit the use of
138
See U.K. Fin. Conduct Auth., Financial Conduct Authority Handbook Listing r. 10
(2018), www.handbook.fca.org.uk/handbook/LR/10.pdf.
139
See Chapter 23 by Andrew Tuch in this volume; Armour, supra note 15, at 13–14.
140
See Armour et al., supra note 30, at 721.
141
See Wan, supra note 7, at 192.
142
See Moran v. Household International, Inc., 500 A.2d 1346 (Del. 1985). For a detailed overview
of Delaware case law addressing takeover jurisprudence, see Gevurtz & Sautter, supra note 17, at
220–70.
143
144
Armour, supra note 15, at 15.
145
146
See, e.g., Armour & Skeel, supra note 6, at 1767–76.
147
See Moore & Petrin, supra note 4, at 290.
148
David Kershaw, The Illusion of Importance: Reconsidering the UK’s Takeover Defence
Prohibition, 56 Int’l Comp. L.Q. 267, 270 (2007); see Strine, supra note 16, at 1300.
deal protection mechanisms, with only a few limited exceptions.149 These restrictions were in
addition to then-existing restrictions that limited the ability of directors in the U.K. to erect
takeover defenses.150
For the decade prior to the 2011 amendments, implementation agreements were typical in
schemes of arrangements.151 These agreements would contain multiple deal protection provi-
sions such as matching rights and topping rights.152 Other common deal protection mechanisms
included restrictions on the target’s ability to agree to another implementation agreement with
another bidder, information rights that required the target company to inform the original
bidder of competing bids, limitations on the target board’s ability to change its recommenda-
tion for an allotted amount of time after the original bidder had been notified of a competing
bid, “provisions that limit the information that the target board can give to a competing bidder
or that require that any new information given to the competing bidder be also given to the
first bidder,” irrevocable undertakings, stakebuilding, and conduct of business restrictions on
the target during the offer process.153 In addition, prior to 2011, break fee arrangements, also
referred to as inducement fee arrangements, were common deal protection mechanisms in the
U.K., although break fees were limited to 1 percent of the deal value.154
Furthermore, typical deal protection devices in schemes of arrangement also included
“force the vote” provisions that “force the target board to call a shareholder meeting to con-
sider the original buyer’s proposal, even if the target board withdrew its recommendation or
recommended a competing bid,” shareholder direction resolutions that “force the target board
to submit for consideration a special resolution in the shareholder meeting, which, if approved,
would require the board to disregard any competing offer made after the meeting and prior to
the effective date of the scheme,” and “provisions that prevent the target board from amending
the original bidder’s scheme of arrangement, particularly if the amendment allows a compet-
ing bidder to use the original bidder’s court timetable and process.”155
The U.K’s “general ban” on deal protection mechanisms in 2011 was a significant change
for public M&A deals in the U.K.156 Rule 21.2 came into effect with a sweeping reform of the
Takeover Code on September 19, 2011.157 The 2011 changes to the Takeover Code were pre-
cipitated by vigorous political debate in the U.K. regarding the takeover of venerated British
149
See Restrepo & Subramanian, Prohibiting, supra note 9, at 80–84; Saulsbury, supra note 9, at
154–56.
150
See Saulsbury, supra note 9, at 117. For a discussion of the U.K. takeover regime, see Andrew
Johnston, Takeover Regulation: Historical and Theoretical Perspectives on the City Code, 66
Cambridge L.J. 422, 444 (2007).
151
See Chris Pearson, Break Fees and Other Deal Protection Measures, Practical Law, https://
uk.practicallaw.thomsonreuters.com/5-107-4610?transitionType=Default&contextData=(sc.Default)&
firstPage=true&bhcp=1.
152
See Restrepo & Subramanian, Prohibiting, supra note 9, at 78–79; Pearson, supra note 151.
153
Restrepo & Subramanian, Prohibiting, supra note 9, at 80–84; Kobi Kastiel, To-may-to
To-mah-to: 10 Surprises for a US Bidder on a UK Takeover, Harv. L. Sch. F. on Corp. Governance
(Apr. 4, 2014), https://corpgov.law.harvard.edu/2014/04/04/to-may-to-to-mah-to-10-surprises-for-a-us
-bidder-on-a-uk-takeover.
154
Restrepo & Subramanian, Prohibiting, supra note 9, at 78.
155
Id. at 81–82.
156
Richard Hough & Jaya Gupta, Evolution, Not Revolution: Changes to the Code Have Been
Finalised – Here’s How They’ll Affect the M&A Process, 30 Int’l Fin. L. Rev. 58 (2011).
157
Id.
brand Cadbury PLC by Kraft Foods in 2010, a deal which many in the U.K. felt reflected
the ability of bidders to acquire British companies unfairly.158 In a 2010 report, the Code
Committee of the Takeover Panel stated that some had expressed concern that with respect to
deal protection measures, “the balance of negotiating power has shifted away from the boards
of offeree companies in favour of offerors, to the extent that the board of an offeree company
may consider itself unable to resist the package of “market standard” deal protection measures
demanded by the offeror.”159
The ban, codified in Rule 21.2, prohibits most deal protection devices and has very few
exceptions. The rule prohibits, except with the consent of the Takeover Panel, the offeree
company or any person acting in concert with it to enter into an offer-related arrangement
with the offeror or any person acting in concert with it during an offer period or when an
offer is being contemplated.160 An “offer-related arrangement” is “any agreement, arrange-
ment or commitment in connection with an offer.”161 Deal protection mechanisms that fall
under “offer-related arrangement” and thus are prohibited include break fee or inducement
fee agreements, including no-shop and go-shop provisions, exclusivity and non-solicitation
agreements, matching rights, provisions that prevent a board from changing its recommen-
dation, implementation agreements and any similar protections.162 The Takeover Panel has
also given further clarity on what deal protection provisions it deems prohibited by Rule 21.2
in practice notes.163 Additional provisions that are prohibited include “[a]n obligation on the
target company to co-operate with the bidder in implementing the offer or to assist with the
preparation of the offer documentation,” any restriction on the “target company’s ability to
make announcements or to communicate with shareholders or others in relation to the offer,”
and a “restriction on the payment of dividends by a target company.”164
Although Rule 21.2 prohibits a wide-range of deal protection mechanisms, there are certain
deal protection mechanisms that do not fall under an “offer-related arrangement,” such as
irrevocable commitments and letters of intent.165 Other permitted deal protection devices
include confidentiality agreements, non-solicitation of employee, suppliers or customers
agreements, agreements to provide certain information for official or regulatory approval,
158
See David Jones & Brad Dorfman, Kraft Snares Cadbury for $19.6 Billion, Reuters (Jan. 19,
2010), www.reuters.com/article/2010/01/19/us-cadburyidUSTRE60H1N020100119; Steven Davidoff
Solomon, British Takeover Rules May Mean Quicker Pace but Fewer Bids, N.Y. Times (Sept. 19, 2011),
https://dealbook.nytimes.com/2011/09/19/new-british-rules-will-speed-up-the-pace-of-takeovers/.
159
The Takeover Panel, Review of Certain Aspects of the Regulation of Takeover Bids (June 1, 2010),
www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/PCP201002.pdf.
160
The Takeover Panel, Practice Statement No. 29 (Aug. 10, 2015), www.thetakeoverpanel.org.uk/
wp-content/uploads/2008/11/PS-29-New.pdf; Will Pearce et al., UK Takeover Code – Offer-related
Agreements and Equality of Information to Competing Offerors, Davis Polk (Oct. 13, 2015),
www.davispolk.com/files/2015_10_13_UK_Takeover_Code_Offer_Related_Arrangements_Equality
_Information_Competing_Offerors.pdf.
161
The Takeover Panel, supra note 160.
162
Saulsbury, supra note 9, at 154–56; Sam Bagot et al., Public M&A: England and Wales, Getting
the Deal Through (June 2019), https://gettingthedealthrough.com/area/112/jurisdiction/65/public-m-a
-england-wales/.
163
See Pearson, supra note 151.
164
See id.
165
See id.
and agreements regarding employee incentive or pension plans.166 The Panel has clarified
that although confidentiality agreements are not prohibited, they may not prohibit the target
board from making an announcement relating to the offer or from identifying the offeror.167
Additionally, any agreement to provide information or assistance for official or regulatory
approval must only be for authorizations and clearances “upon which the offer is conditional”
and the offeree cannot agree to pay the costs of obtaining the relevant authorizations and
clearances.168 Agreements regarding employee incentive plans cannot prohibit the offeree
from issuing new options under its existing plan.169 Lastly, the prohibition on deal protection
devices only applies to the target company and a buyer can offer deal protection measures such
as a reverse break fee.170 Reverse break fees can be conditional as long as the conditions do not
deter any potential competing offers.171
There are also a limited number of exceptions that allow the use of an inducement fee. First,
inducement fees are allowed in formal sale processes that are initiated by the target.172 Second,
inducement fees are allowed for “white knights” scenarios where a hostile offer has been
made and the target company wants to bring in a “white knight.”173 Third, inducement fees are
allowed when a company is in serious financial distress.174 In the circumstances where one of
these exceptions applies, the target board must conclude that the fee is in the best interests of
the shareholders.175 The fees in all of these circumstances should be “de minimis” and “must be
capable of becoming payable only if an offer becomes or is declared wholly unconditional.”176
There has been much debate about the value of the limitations placed on U.K. boards and the
U.K.’s board neutrality approach.177 Proponents of the U.K. model argue that board neutrality
avoids the potential management conflicts that can arise in takeovers, while those advocating
for a board primacy model argue that the U.S. approach allows the board to more effectively
negotiate on behalf of shareholders.178
With respect to deal protections more specifically, commentators cast doubt on the 2011
U.K. reforms. Former Delaware chief Justice Strine noted that the lack of deal protection
mechanisms in the U.K. might “deter bidders from making a bid, because the bidder is not only
limited from raising its bid, the bidder knows that it will not be reimbursed for the high costs of
pursuing the transaction if the bid is not successful.”179 Moreover, in a study examining target
166
Adam Bogdanor, Jon Lyman, & Christopher Wall, Takeover Regimes: A Comparison between the
UK and the U.S., Practical Law, https://uk.practicallaw.thomsonreuters.com/Cosi/SignOn?redirectTo
=%2f8-585-4706%3ftransitionType%3dDefault%26contextData%3d(sc.Default)%26firstPage%3dtrue
(last visited Jan. 21, 2020); see also The Takeover Panel, supra note 160.
167
Pearce et al., supra note 160; The Takeover Panel, supra note 160.
168
169
170
See Restrepo & Subramanian, Prohibiting, supra note 9, at 82–83; Pearson, supra note 151.
171
172
Restrepo & Subramanian, Prohibiting, supra note 9, at 82-83; Skadden, supra note 127.
173
Skadden, supra note 127.
174
See Bagot et al., supra note 162.
175
See id.
176
The Takeover Panel, Practice Statement No. 31 (July 7, 2017), www.thetakeoverpanel.org.uk/wp
-content/uploads/2008/11/PDF-of-Practice-Statement-No.31.pdf; The Takeover Panel, supra note 160.
177
178
See id.
179
Strine, supra note 16, at 1294–95.
break fees, Restrepo and Subramanian found that after the 2011 reform M&A deal volume in
the U.K. “declined significantly” and had no benefit to target shareholders.180 What has yet
to be studied, however, is how the U.K. scheme sizes up to the current U.S. deal protection
scheme which has moved to even more forceful protections in favor of the target manage-
ments’ favored initial bidder.
5. COMPARING THE U.S. AND U.K. REGIMES
Despite scholarly pronouncements that convergence to an efficient shareholder primacy model

would emerge,181 even the U.S. and U.K. continue to differ significantly in how they approach
the primacy of shareholders and how much power is given to directors in fundamental trans-
actions.182 As scholars have argued with respect to hostile takeovers, the trajectory of U.S. and
U.K. approaches to managing corporate governance concerns reflects interest group politics
and the political economy of governance in each of these jurisdictions.183 Furthermore, the
trajectory of U.S. and U.K. experiences with addressing corporate governance in friendly
takeovers demonstrates the important pull of path dependence in the design of corporate
governance rules.184
The U.S. approach to managing takeovers, with courts as the arbiter of corporate governance
disputes, has long been concerned with maintaining the centrality of board decision-making.185
When that centrality came under attack with the rise in fiduciary duty and appraisal litigation,
the courts responded to the backlash to these rising trends by reverting to the “pro-manager
approach” of Delaware jurisprudence.186 The limits placed on fiduciary duty litigation
maintain the significant deference given to board decisions and continue to insulate director
decisions on deal protection from second-guessing by shareholders or courts. Similarly, the
turn in appraisal jurisprudence reflects judicial faith in deal process as designed by boards and
management. Thus, while the U.S. litigation regime now elevates the value of a shareholder
vote in friendly deals, this vote is in the context of deals that have been designed through
a plethora of deal protection mechanisms to tie the hands of shareholders and leave them stuck
with the deal as presented by management.
The U.K.’s approach to managing friendly takeovers and the changes to the Takeover Code
that further limit the discretion of directors in designing a deal exhibit the continuing centrality
of shareholder choice.187 As with hostile takeovers, “shareholders control the fate of takeover
180
Restrepo & Subramanian, Prohibiting, supra note 9, at 106. Studies of the pre-2011 regime also
found that bid incidences in the U.K. were below those in the U.S. Id. at 79.
181
See Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 Geo. L. J.
440, 450–53 (2001).
182
See Bruner, supra note 6, at 32–33, 40–42.
183
See Armour & Skeel, supra note 6, at 1781.
184
See Lucian Arye Bebchuk & Mark J. Roe, A Theory of Path Dependence in Corporate Ownership
and Governance, 52 Stan. L. Rev. 127, 129 (1999); Jeffrey N. Gordon & Mark J. Roe, Introduction, in
Convergence and Persistence in Corporate Governance 1, 11 (Jeffrey N. Gordon & Mark J. Roe
eds., 2004); see also Chapter 14 by Martin Gelter in this volume.
185
See Armour & Skeel, supra note 6, at 1730.
186
See id. at 1780–82.
187
See Wan, supra note 7, at 189–90.
bids.”188 Furthermore, the U.K.’s continued constraints on board decision-making in friendly

deals, such as the board’s ability to negotiate deal protection devices, demonstrate the power
of institutional investors who significantly influence the design of the U.K. regime.189 As
various deal protection mechanisms began to emerge in the U.K., the response was to revert to
the central approach of the U.K. regime—i.e. to limit board discretion and decision-making.
And the U.K.’s approach persists, despite academic findings that place doubt on whether such
limits benefit shareholders.190
6. CONCLUSION
Takeover transactions are often the most significant activity affecting corporations and their
shareholders. And takeovers, perhaps more than any other transaction, highlight the tensions
between board and shareholder control in publicly traded companies. In balancing power
between shareholders and directors in takeovers, the U.S. and the U.K. have long diverged,
especially with respect to rules that govern hostile takeovers. This chapter argues that for
friendly third-party takeovers as well, the U.S. and the U.K. continue to diverge in meaningful
ways, despite recent moves in Delaware jurisprudence to limit litigation in the face of share-
holder voting.
188
Bruner, supra note 6, at 33.
189
See Armour & Skeel, supra note 6, at 1771–72; Wan, supra note 7, at 197–200.
190
See Restrepo & Subramanian, Prohibiting, supra note 9, at 79, 106.
23. Managing management buyouts: a US-UK
comparative analysis
Andrew F. Tuch1
1. INTRODUCTION
While often grouped together when compared with other systems,2 the U.S. and U.K. regu-
latory frameworks diverge in important ways—especially concerning their fiduciary duties.
Scholars have therefore found it useful to compare how the two frameworks govern both
merger and acquisition (M&A) transactions and self-dealing (or related party) transactions.3
But scholars have yet to comparatively assess U.S. and U.K. regulations for the M&A transac-
tion that may pose the greatest risk of self-dealing: the management buyout (MBO).
This chapter comparatively assesses U.S. and U.K. law governing MBOs, focusing on the
duties of directors and officers in these systems.4 The analysis casts doubt on persistent but
mistaken perceptions about U.S. and U.K. corporate fiduciary duties for self-dealing. The
1
For helpful comments, I thank Afra Afsharipour, Martin Gelter, Carsten Gerner-Beuerle, Suren
Gomtsian, Assaf Hamdani, Brent Horton, Vik Khanna, Katja Langenbucher, Patrick Leyens, William
Magnuson, Steven Davidoff Solomon, Holger Spamann, Umakanth Varottil, Wai Yee Wan and audi-
ences at Berkeley and Fordham law schools. For helpful discussions on market practices, I thank Harry
Coghill, Philip A. Gelston, Chris Hale, Richard Hall, David Higgins, and Scott V. Simpson. For excellent
research assistance I thank Kelly King, Mingqian Li, Lizaveta Miadzvedskaya, and Tyler Nullmeyer. All
errors are my own.
2
U.S. and U.K. regulatory frameworks tend to be grouped together in comparative analyses because
they share many similarities. Their capital markets are deep and liquid. Their public companies trade on
major exchanges. Corporate shareholdings are broadly dispersed among retail and institutional investors.
Their institutional investor landscapes are dominated by mutual funds (or their equivalent), pension
funds and insurance companies. See Andrew F. Tuch, Proxy Advisor Influence in a Comparative Light,
99 B.U. L. Rev. 1459, 1470–72 (2019). As to engagement by institutional shareholders in these jurisdic-
tions, see Suren Gomtsian, Shareholder Engagement by Large Institutional Investors, 45 J. Corp. L. 659
(2020).
3
As to merger and acquisition transactions, see e.g., Afra Afsharipour, Corporate governance in
negotiated takeovers: the changing comparative landscape, chapter 22 of this volume; John Armour &
David A. Skeel, Jr., Who Writes the Rules for Hostile Takeovers, and Why?—The Peculiar Divergence
of U.S. and U.K. Takeover Regulation, 95 Geo. L.J. 1727, 1767–70 (2007); John Armour, Jack B. Jacobs
& Curtis J. Milhaupt, The Evolution of Hostile Takeover Regimes in Developed and Emerging Markets:
An Analytical Framework, 52 Harv. Int’l L.J. 219, 265 (2011); Afra Afsharipour, Deal Structure and
Minority Shareholders, in Comparative Takeover Regulation: Global and Asian Perspectives 35,
37–47 (U. Varottil & W.W. Yee eds., 2017); Dan Awrey, Sean J. Griffith & Blanaid Clarke, Resolving
the Crisis in U.S. Merger Regulation: A Transatlantic Alternative to the Perpetual Litigation Machine,
35 Yale J. on Reg. 1 (2018). As to self-dealing transactions, see e.g., David Kershaw, The Path of
Corporate Fiduciary Law, 8 N.Y.U. J.L. & Bus. 395 (2012); Andrew F. Tuch, Reassessing Self-Dealing:
Between No Conflict and Fairness, 88 Fordham L. Rev. 939 (2019). See also infra note 5.
4
Specifically, I consider Delaware law and English law as representative of U.S. and U.K. law,
respectively.
477
U.K. no-conflict rule is seen as strict, the U.S. fairness rule as flexible and pragmatic.5 As the
analysis for MBOs demonstrates, these fiduciary rules operate similarly, tasking neutral or dis-
interested directors with policing self-dealing, enabling commercially sensitive responses to
conflicts of interest. The analysis also reveals stronger formal private enforcement of corporate
law and more robust disclosure rules in the United States. But because the available empirical
evidence fails to justify broad claims that corporate fiduciaries’ misconduct is more severe
under either regime, the analysis identifies U.K. law-related measures that may serve similar
functions to formal enforcement and mandated disclosure in constraining misconduct by cor-
porate fiduciaries. These include informal enforcement by the U.K. Takeover Panel, stronger
shareholder rights, and potentially greater monitoring by institutional investors.
In an MBO, managers of a firm—who are corporate officers and often also directors—
participate in buying the firm. Managers participate in the sense of having ongoing roles in the
surviving firm, usually as owners and managers. An MBO therefore puts participating manag-
ers on both the buy- and sell-sides of a transaction, a position that pits managers’ self-interest
against their fiduciary duties of loyalty, creating conflicts of interest. Potentially exacerbating
these conflicts, the private equity firms that sponsor these deals (by partnering with managers)
usually enlist support from managers early in the deal process, a practice that may undermine
arm’s-length bargaining over the terms of sale and deter competing bids.
To better understand the roles of corporate fiduciaries—directors and officers—in MBOs,
I evaluate the buyout process in two stages. At the front end, corporate fiduciaries initiate
contact or respond to overtures from a potential bidder, usually a private equity firm. On the
back end, when a change of control has become inevitable, corporate fiduciaries must consider
what objective to pursue and with what measures. These stages may overlap.
At the front end, most conspicuously, United Kingdom governs self-dealing with
a no-conflict rule, which bans self-dealing by directors with “no-further inquiry” into the
merits of the transaction. By contrast, the United States adopts a fairness rule, which allows
self-dealing transactions if they are fair. In operation, duties of loyalty in both regimes task
neutral directors with policing self-dealing and the exploitation of corporate information by
participating managers.6 Neither regime clearly articulates limits on fiduciaries’ early contact
with possible bidders—contact that may weaken commitments to arm’s-length dealing and
deter competing bids. Instead, key insiders may have room to maneuver. On the back end
of transactions, U.S. and U.K. directors must generally seek the transaction offering the best
value reasonably available, although the measures used differ somewhat across regimes.7
The comparison also reveals significant divergence between the two systems—in modes
of enforcement and in disclosure requirements for deal-related practices. The U.S. regime
allows shareholders and competing bidders greater scope to challenge MBOs. It also requires
companies to disclose “the background of the merger” in their proxy statements.8 This
5
As to the no-conflict rule, see, e.g., Evan Criddle, Liberty in Loyalty: A Republican Theory of
Fiduciary Law, 94 Tex. L. Rev. 993, 999 (2017); Amir N. Licht, Farewell to Fairness: Towards Retiring
Delaware’s Entire Fairness Review, 44 Del. J. Corp. L. 1 (2020); Harold Marsh Jr., Are Directors
Trustees? 22 Bus. Law. 35, 35–48 (1966–67). As to the fairness rule, see, e.g., John H. Langbein,
Questioning the Trust-Law Duty of Loyalty: Sole Interest or Best Interest, 114 Yale L. J. 929, 958–62
(2005).
6
See Section 3.
7
See Section 4.
8
See Section 5.
Managing management buyouts 479
disclosure—often dozens of pages in length—describes corporate fiduciaries’ conduct in

a meeting-by-meeting account of negotiations and discussions among transaction participants.
The required narrative includes details of managers’ early dealings with bidders. U.K. law
does not require similar disclosure, and companies do not voluntarily provide it. These disclo-
sure requirements, applicable to mergers generally, are probably unique to the United States.
The information they provide allows shareholders and courts to intensively scrutinize direc-
tors’ and officers’ conduct in MBOs. But these differences may be more a matter of method
than outcome since corporate fiduciaries’ misconduct does not appear to be more severe under
either regime.
2. MBOS
2.1 Definitional Issues
No generally agreed definitions exist for leveraged buyouts (LBOs) or MBOs, but by many
accounts MBOs are a subset of LBOs,9 and the majority of LBOs are MBOs.10 In industry
parlance, an LBO occurs when a firm, usually a private equity firm, makes heavy use of bor-
rowed funds to buy a standalone firm (the target). These funds may be borrowed by the target
company; they may also be guaranteed by or secured against, respectively, the target company
or its assets.11 In the United States, the acquirer will typically merge with the target, buying all
of the target’s shares, and be absorbed into the target, which will survive the transaction.12 In
the United Kingdom, the acquirer will proceed by way of either a conventional takeover offer
or—more commonly—a court-approved scheme of arrangement.13 These transactions are akin
to a U.S. tender offer or merger, respectively.14
MBOs, as opposed to LBOs, are characterized by management participation. This means
that managers of the target participate in the acquisition by retaining ownership stakes and
managerial roles in the company after its ownership changes. In many transactions, managers
will formalize their participation after the transaction closes, although beforehand they will
have a loose understanding or non-binding arrangement with the buyer concerning their
9
Joseph A. Grundfest, Management Buyouts and Leveraged Buyouts: Are the Critics Right?, in
Leveraged Management Buyouts 241, 255 n.1 (Yakov Amihud ed., 1989).
10
See Luc Renneboog & Cara Vansteenkiste, Leveraged Buyouts: A Survey of the Literature 3
(ECGI Working Paper No. 492/2017); David P. Stowell, Investment Banks, Hedge Funds, and
Private Equity 328 (2d ed. 2013); Graham Gibb & Charles Martin, Public-to-privates, in Private
Equity: A Transactional Analysis 221, 232 (Chris Hale ed., 3d ed. 2015); In re Netsmart Techs., Inc.
S’holders Litig., 924 A.2d 171, 175 (Del. Ch. 2007).
11
See Luc Renneboog & Cara Vansteenkiste, supra note 10, at 1; Edward B. Rock, Adapting to the
New Shareholder-Centric Reality, 161 Pa. L. Rev. 1907, 1949–50 (2013). As to the various transactional
structures available, see David Gray Carlson, Leveraged Buyouts in Bankruptcy, 20 Ga. L. Rev. 73,
80–83 (1985).
12
Rock, supra note 11, at 1949. An alternative deal structure is the tender offer.
13
Gibb & Martin, supra note 10, at 221. For a comparative analysis of U.S. and U.K. acquisitions
structures, see Afsharipour, supra note 3, at 37–47.
14
See John C. Coates Jr., Mergers, Acquisitions, and Restructuring: Types, Regulation, and Patterns
of Practice, in The Oxford Handbook of Corporate Law and Governance 570, 573 (J.N. Gordon
& W. Ringe eds., 2018).
ongoing roles post-acquisition. The form and extent of managers’ participation may vary.
Some scholars define MBOs narrowly, requiring participating managers to initiate contact
with the buyer and take the leading role in the acquisition.15 This chapter understands MBOs
more broadly as LBOs in which managers participate, whether their participation is formalized
before or after the transaction closes.16 The focus is on MBOs of publicly listed companies,
transactions referred to in the United Kingdom as “public to privates,” or “P2Ps.”
2.2 The Role of Private Equity
MBOs tend to be structured by private equity firms,17 the largest of which engage in a broad
mix of asset management and investment banking activities.18 Such firms “sponsor” these
deals by forming the acquisition vehicle—a shell company—through which the target is
acquired, partnering with key target managers in doing so.19 Private equity firms advise and
act as general partners for private equity funds.20 Structured as limited partnerships and, in the
United States, designed to avoid regulation under the Investment Company Act of 1940, these
funds receive most of their capital from limited partners—institutional investors and wealthy
individuals.21 To fund MBOs, private equity funds and lenders contribute capital, as may
incumbent managers of target firms.22 After the transaction, the target will become a portfolio
company (otherwise known as an investee company) of the relevant funds. Private equity
firms receive fees based on a percentage of the capital committed to each of their funds as well
as a share of the net returns their funds generate.23 They may also earn fees for structuring an
MBO and afterward for monitoring the portfolio company.24
Private equity firms have strong incentives to partner with key target managers in LBOs.25
Managers have experience, industry insight, and firm-specific knowledge that can help
acquirers decide whether to make an offer and if so on what terms. This information can
give acquirers an inside track in negotiations. The information that insiders share need not be
15
See Stowell, supra note 10, at 331.
16
Still, transactions initiated by managers appear to pose increased risk of managerial misconduct.
See Matthew D. Cain & Steven M. Davidoff, Form Over Substance: The Value of Corporate Process and
Management Buy-Outs, 36 Del. J. Corp. L. 849, 895–97 (2011).
17
See Ronald W. Masulis & Randall S. Thomas, Does Private Equity Create Wealth? The Effects
of Private Equity and Derivatives on Corporate Governance, 76 U. Chi. L. Rev. 219, 223 (2009);
Renneboog & Vansteenkiste, supra note 10, at 3.
18
See Andrew F. Tuch, The Remaking of Wall Street, 7 Harv. Bus. L. Rev. 315, 338–50 (2017).
19
See Lillian Lardy et al., Private Equity Deals in the United States: Separated From the United
Kingdom by a Common Language, in Private Equity: A Transactional Analysis 375, 386 (Chris
Hale ed., 3d ed. 2015).
20
For more detail distinguishing between sponsors, advisors, and general partners, see Sung Eun
Kim, Typology of Public-Private Equity, 44 Fla. St. U. L. Rev. 1435, 1452–66 (2017).
21
Andrew Metrick & Ayako Yasuda, The Economics of Private Equity Funds, 233 Rev. Fin. Stud.
2303, 2304 (2010).
22
Masulis & Thomas, supra note 17, at 223; Brian Cheffins & John Armour, The Eclipse of Private
Equity, 33 Del. J. Corp. L. 1, 11–13 (2008).
23
Metrick & Yasuda, supra note 21, at 2309–13.
24
Id. at 2313–14.
25
See, e.g., In re Appraisal of Dell Inc., No. CV 9322-VCL, 2016 WL 3186538 (Del. Ch. May 31,
2016).
the sort that would provide a basis for an insider-trading claim.26 But with the benefit of this
information, private equity firms (and participating managers) can time their transactions to
maximum advantage—for example, by buying the company when its market price does not
fully incorporate its future prospects. A potential buyer with management on its side may
therefore have a considerable lead over competing bidders. In fact, so valuable is management
cooperation that private equity firms virtually never make “hostile” bids.27
2.3 The Benefits and Risks of MBOs
Like LBOs generally, MBOs promise to create value. For instance, they may do so by effect-
ing governance improvements in target companies. In buyouts of public companies, dispersed
shareholders are replaced with a small number of close-knit owners, enabling better monitor-
ing of managers.28 MBOs can also create value by giving managers higher-powered incentives
than usual, better aligning managers’ incentives with those of owners.29 And by saddling
companies with high debt loads, MBOs impose greater discipline on managers, reducing the
likelihood that they will invest in uneconomic projects.30 MBOs also promise operational
improvements because many private equity firms have access to deep pools of management
and consulting expertise beyond that available to target firms.31 Finally, MBOs may benefit
from a lower cost of debt, since private equity firms sponsoring MBOs have repeated inter-
actions with banks, reducing asymmetric information about firms’ quality.32 Of course, not
every MBO creates value. Whether MBOs systematically create value, an empirical matter,
will change over time.33
MBOs are unlikely to fully realize their promise. Some of the gains they create may come
from tax subsidies. Some gains may be the result of shifting wealth from non-shareholder
stakeholders to the buyout group.34 The structure of private equity funds is believed to create
agency costs of its own.35 And private equity’s compensation model protects firms from down-
26
See Robert C. Clark, Corporate Law 508 (1986).
27
See Gibb & Martin, supra note 10, at 229. Fund documents may prohibit general partners making
hostile bids.
28
See Josh Lerner, Felda Hardymon & Ann Leamon, Venture Capital and Private Equity:
A Case Book 4–5 (3d ed. 2005).
29
See Steve N. Kaplan & Per Stromberg, Leveraged Buyouts and Private Equity, 23 J. Econ.
Persp. 121, 130–31 (2009).
30
Michael C. Jensen, Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, 76 Am.
Econ. Rev, 323, 324 (1986).
31
See Kaplan & Stromberg, supra note 29, at 132.
32
Victoria Ivashina & Anna Kovner, The Private Equity Advantage: Leveraged Buyout Firms
and Relationship Banking, 24 Rev. Fin. Stud. 2462, 2466–67, 2480–83 (2011); see also Elisabeth de
Fontenay, Private Equity Firms as Gatekeepers, 33 Rev. Banking & Fin. L. 115, 148–61 (2013).
33
See, e.g., Renneboog & Vansteenkiste, supra note 10; see also Elisabeth de Fontenay, Private
Equity’s Governance Advantage: A Requiem, 99 B.U. L. Rev. 1095, 1098 (2019) (“Tellingly, the major
studies showing that LBOs have a positive impact on firms’ governance and operations tend to draw data
from earlier decades or from abroad, with rare exceptions.”).
34
Masulis & Thomas, supra note 17, at 227, 233–36.
35
William W. Bratton, Private Equity’s Three Lessons for Agency Theory, 3 Brook. J. Corp. Fin. &
Com. L. 1, 3 (2008).
side risk, creating moral hazard, while their governance structure may inhibit investors—the
limited partners—from monitoring firm behavior.36
Policymakers rightly worry about the conflicts of interest that MBOs create for corporate
fiduciaries. Incumbent managers participate in MBOs, having an interest in both the buy-side
and sell-side, which undermines their incentives to act in shareholders’ interests and impedes
arm’s-length bargaining over sale.37 Managers may cooperate with private equity firms as
they formulate bids—they may favor a deal with a private equity firm over other strategies;
they may choose to transact when no sale is the better option; and, when faced with com-
peting private equity bids, managers may favor the bid offering them the most personally
advantageous terms. Moreover, with their informational advantage over outsiders, including
shareholders, managers may ensure that an MBO occurs when the target’s price is depressed
or even take steps to reduce the target’s stock price by strategically releasing information or
manipulating reported earnings.38 Systematic empirical evidence in the United Kingdom and
United States is broadly inconclusive as to whether target managers engage in misconduct.39
But the evidence does provide limited support for the hypothesis that buyout groups acquire
target companies for less than their true value.40
3. FRONT-END DUTIES
Fiduciary and other duties govern directors’ and officers’ conduct at the front end of transac-
tions. During this period, target managers have initial dealings with a potential bidder. When
that bidder is a private equity firm, such informal dealings will be friendly, since such a bidder
will benefit from relationships with managers, hoping to “get a jump” on other potential
suitors.41 A private equity firm will often “build a rapport” with key insiders before the com-
pany’s board becomes actively involved.42 During the front end of a transaction, these firms
will often negotiate or at least reach informal understandings with target managers on special
arrangements for management to go into effect after the buyout.43 Table 23.1 summarizes the
duties of corporate fiduciaries.
36
William Magnuson, The Public Cost of Private Equity, 102 Minn. L. Rev. 1847, 1874 (2017).
These agency costs may persist despite apparently robust bargaining by private equity fund investors.
See id. at 1889–903; William W. Clayton, The Private Equity Negotiation Myth, 37 Yale J. on Reg. 67
(2020).
37
See Louis Lowenstein, Management Buyouts, 85 Colum. L. Rev. 730, 739–42 (1985).
38
See Masulis & Thomas, supra note 17, at 236; Renneboog & Vansteenkiste, supra note 10, at 27.
39
Eilis Ferran, Regulation of Private Equity - Backed Leveraged Buyout Activity in Europe 7–8
(ECGI - Law Working Paper No. 84/2007) (examining misuse of non-public information). But see In re
Dole Food Co. Stockholder Litig., No. CV 8703-VCL, 2015 WL 5052214, at *26 n.13 (Del. Ch. Aug.
27, 2015) (citing evidence of misconduct by managers).
40
See Renneboog & Vansteenkiste, supra note 10, at 26, 29, 40.
41
Philip Richter et al., Going Private Transactions, Harv. L. Sch. Forum on Corp. Governance
(Apr.18, 2020), https://corpgov.law.harvard.edu/2020/04/18/going-private-transactions/.
42
See id.
43
Margaret A. Davenport & Stefan P. Stauder, Dangerous Liaisons: Teaming Up with Management
and Significant Stockholders in Going-Private Transactions, in The Private Equity Primer: The
Best of the Debevoise & Plimpton Private Equity Report 72–73 (F.J. Blassberg, ed., 2006)
(“[G]oing-private transactions in which management participates often involve the negotiation, at an
3.1 U.S. Law
The fiduciary duty of loyalty imposes harsh remedial consequences on self-dealing by fiduci-
aries unless cleansing devices operate.44 Most scholars treat MBOs (those not involving con-
trolling shareholders) as “ordinary” conflict-of interest transactions subject to analysis under
self-dealing statutes and related case law.45 Under Section 144(a) of the Delaware General
Corporation Law, interested directors have three cleansing devices available to them.46 The
signature cleansing device requires fiduciaries to prove the fairness of the relevant self-dealing
transaction. Courts insist on “entire fairness,” a concept requiring that both the price and
process of dealing be fair. Fairness roughly equates with what parties would negotiate in
arm’s-length dealings. The other cleansing devices require approval in good faith by a major-
ity of the company’s disinterested directors, a committee of such directors, or the disinterested
shareholders entitled to vote on the transaction.47 Any one of these cleansing devices will
protect a self-dealing transaction from invalidity.48 In theory, the devices have somewhat dif-
ferent effects: proof of fairness directly immunizes a self-dealing transaction from invalidity,
while the other cleansing devices (approval by either directors or shareholders) give business
judgment protection, leaving a transaction vulnerable to attack on the limited grounds of “gift
or waste with the burden of proof upon the party attacking the transaction.”49 In practice,
plaintiffs are unlikely to overcome business judgment protection, so all three cleansing devices
provide powerful shields against liability.50 Still, proof of fairness is a less desirable safeguard
for defendants because the other safeguards will cleanse a transaction at the motion-to-dismiss
stage; as soon as business judgment justification is established, the complaint is dismissed. By
contrast, applying fairness review normally precludes granting a motion to dismiss because
the defendants carry the burden to prove fairness.51 (For transactions involving controlling
shareholders, the cleansing devices are less generous, in recognition of the special risks for
process manipulation that these transactions pose.52)
Legal practitioners offer less definitive guidance, suggesting that the cleansing devices must
adapt to the type of deal at hand. One law firm suggests that only disinterested directors negoti-
ate the transaction and that participating fiduciaries “refrain from negotiating post-transaction
early stage, of special arrangements with management (such as new employment agreements, rollover
equity or post-closing option grants).”).
44
See Tuch, supra note 3, at 951–62.
45
See Iman Anabtawi, Predatory Management Buyouts, 49 U.C. Davis L. Rev. 1285, 1308 (2016)
(citing In re Shoe-Town, Inc. S’holders Litig., No. 9483, 1990 WL 13475, at * 4 (Del. Ch. Feb. 12,
1990)); Cain & Davidoff, supra note 16, at 874-76 (citing In re Wheelabrator Techs., Inc., S’holders
Litig., 663 A.2d 1194 (Del. Ch. 1995)). See also Guhan Subramanian, Deal Process Design in
Management Buyouts, 130 Harv. L. Rev. 590, 650 (2016) (referring to the approach of other scholars,
without disputing it, while acknowledging that the “the case law on MBOs is remarkably thin”).
46
Del. Code Ann. Tit. 8, § 144(a) (2020).
47
Id. § 144(a) (1)–(2); Fliegler v. Lawrence, 361 A.2d 218 (Del. 1976).
48
See, e.g., In re Wheelabrator Techs., Inc., S’holders Litig., 663 A.2d 1194 (Del. Ch. 1995).
49
Id. at 1203 (quoting Marciano v. Nakash, 535 A.2d 400, 405 n.3 (Del. 1987)). See also Stephen
M. Bainbridge, Corporate Law 162–65 (3d ed. 2015).
50
See Tuch, supra note 3, at 957.
51
Cumming v. Edens, No. CV 13007-VCS, 2018 WL 992877, at *23 (Del. Ch. Feb. 20, 2018). See
also Tuch, note 3, at 968–76.
52
See Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014).
employment arrangements … until the terms of the acquisition are finalized.”53 Another law
firm advises boards to “seriously consider forming a special committee even if a majority of
the board is nominally independent and disinterested.”54
The case law on MBOs is sparse relative to guidance for other conflicted transactions, as
scholars acknowledge.55 However, what case law exists suggests that more may be required to
cleanse self-dealing in MBOs than satisfying the terms of Section 144(a). Specifically, good
faith approval by a majority of the disinterested directors may not have cleansing effect, espe-
cially for severe conflicts. Consider In re PNB Holding Co. Stockholders Litig., a transaction
creating divided loyalties for directors. Vice Chancellor Strine opined that business judgment
protection would apply to going private mergers “so long as the transaction was approved by
a board majority consisting of directors who would be cashed-out or a special committee of
such directors negotiated and approved the transaction.”56 More recently, in Salladay v. Lev,
Vice Chancellor Sam Glasscock went further, ruling that the approval of a disinterested and
independent special committee can cleanse a conflicted (but non-controller) transaction only if
the committee is fully constituted and empowered “ab initio … prior to substantive economic
negotiations.”57 Before cleansing self-dealing in an MBO based on the approval of disinter-
ested directors, courts are likely to have regard to how the deal terms were arrived at, including
whether managerial self-interest undermined arm’s-length bargaining or deterred competing
bids. As for shareholder approval, under Corwin v. KKR Holdings LLC, a fully informed and
uncoerced vote of disinterested stockholders also cleanses a conflicted (but non-controller)
transaction.58
Of course, disinterested directors must comply with their fiduciary obligations in determin-
ing how to respond to an MBO when it is proposed and, if requested, whether to approve the
transaction.
Finally, officers are agents, a category of fiduciary. While uncertainty exists as to officers’
fiduciary duties—whether their nature and scope differ from those of directors59—it is well
accepted that officers owe duties of loyalty consistent with those under agency law.60 Under
the Restatement (Third) of Agency, agents owe an overarching duty of loyalty, requiring them
53
Nancy L. Sanborn et al., Going Private Transactions: Overview, Practical L. Company 8
(2010), www.davispolk.com/files/uploads/davis.polk.going.private.pdf.
54
Special Negotiating Committees: If, When, Who and How – a Guide for the General Counsel,
Latham & Watkins 16 (Aug. 2007), www.lw.com/upload/pubcontent/_pdf/pub1962_1.pdf. See also
Richter, supra note 41.
55
Cain & Davidoff, supra note 16, at 874; Subramanian, supra note 45, at 650.
56
In re PNB Holding Co. Stockholders Litig., No. CIV.A 28-N, 2006 WL 2403999, at *14 n.69 (Del.
Ch. Aug. 18, 2006). See also id. at *14 (referring to the cleansing device of “approval … by disinterested
directors, preferably constituting a board majority or as a special committee”). See also Sanborn, supra
note 53, at 9.
57
Salladay v. Lev, et al., No. CV 2019-0048-SG, 2020 WL 954032, at *23–26 (Del. Ch. Feb. 27,
2020). A majority of the board members were conflicted.
58
125 A.3d 304 (Del. 2015).
59
For important contributions on the status of officers, see, e.g., A. Gilchrist Sparks, III & Lawrence
A. Hamermesh, Common Law Duties of Non-Director Corporate Officers, 48 Bus. Law. 215 (1992);
Lyman P.Q. Johnson & David K. Millon, Recalling Why Corporate Officers Are Fiduciaries, 46 Wm. &
Mary L. Rev. 1597 (2005); Megan Wischmeier Shaner, Restoring the Balance of Power in Corporate
Management: Enforcing an Officer’s Duty of Obedience, 66 Bus. Law. 27, 44–45 (2010).
60
See, e.g., Sparks & Hamermesh, supra note 59, at 220–22. But these duties may be “more rigidly
[applied] to officers than to mere agents.” Id. at 222.
“to act loyally for the principal’s benefit.”61 Agents also owe more specific duties that, among
other things, prohibit them from acquiring a material benefit from a third party through use of
their position62 and from using principals’ property for their own purposes or those of a third
party.63 However, shareholder suits more frequently target the conduct of directors than that of
officers. Even suits targeting executive directors, like chief executives, usually challenge their
conduct as directors rather than as officers.64
***
Under Delaware corporate law, directors and officers also owe a duty to protect the non-public
information of their companies, an incident of their fiduciary duty of loyalty. Under one for-
mulation, “the disclosure of confidential information [by a director] to a potential investor (an
adverse party at that particular moment), especially when the director knows (and hopes) that
the disclosure would benefit the potential investor to the substantial detriment of the Company,
is conduct which, in and of itself, is a breach of the duty of loyalty.”65 Similarly, agency
law bans agents from using or communicating a principal’s confidential information for
self-interested or third-party purposes.66 However, plaintiffs rarely allege breach of the duty
of confidence in MBOs, probably because it is difficult to identify and prove actual misuse of
confidential information. Rather, cases overwhelmingly focus on directors’ conduct, alleging
either self-dealing or, regarding back-end conduct, breach of Revlon duties.
***
A basic question remains: What dealings may corporate fiduciaries have when approached by
private equity firms considering formulating a bid? According to one law firm,
Practitioners debate the stage in a transaction at which to advise the board of private equity interest,
ranging from the early stage at which initial contact is made, prior to execution of a confidentiality
agreement, prior to engaging in substantive discussions, or at the point that the company has received
a written indication of interest.67
The firm advises that “there is no absolute rule in this area, and failure to advise the board at
the earliest stages is not likely to be fatal from a Delaware process perspective.”68
Nevertheless, in an attempt to minimize the risk of fiduciary breach, target companies often
respond to proposed MBOs by adopting certain protocols.69 In particular, a target’s board
typically forms a special committee of disinterested directors or its functional equivalent.70
61
Restatement (Third) of Agency, § 8.01, cmt. a (2006).
62
Id., § 8.02.
63
Id., § 8.05(1).
64
See Megan W. Shaner, Officers Accountability, 32 Ga. St. U. L. Rev. 355, 396 (2016).
65
Shocking Technologies v. Michael, No. 7164-VCN, 2012 WL 4482838, at *10 (Del. Ch., October
1, 2012).
66
Restatement (Third) of Agency, § 8.05(2) (2006).
67
See Latham & Watkins, supra note 54.
68
See id. The memorandum nevertheless asserts that “the best practice and clearly preferred
approach is to advise the board of private equity buyer interest when initial contact is made.” Id.
69
See Andrew F. Tuch, Private Equity and Corporate Control: The State of Corporate Enterprise,
in Private Equity and Corporate Control Transactions 8, 12–16 (R.P. Austin & A.F. Tuch, eds.,
2007).
70
Scott V. Simpson, The Emerging Role of the Special Committee—Ensuring Business Judgment
Rule Protection in the Context of Management Leveraged Buyouts and Other Corporate Transactions
Involving Conflicts of Interest, 43 Bus. Law. 665, 678 (1988); Subramanian, supra note 45, at 641. But
The committee runs the sale process, negotiating on behalf of the company and monitoring
the conduct of participating fiduciaries, attempting to mitigate the influence of participating
managers’ on the process and thereby to promote arm’s-length bargaining.71 But there is still
considerable divergence in practices.72 Some committees appoint their own legal and financial
advisors. Some contractually require managers to cooperate with competing bidders. Some
condition transactions on the approval of a majority of disinterested shareholders.73 The range
of measures taken by target firms perhaps reflects the flexibility of Delaware courts’ guid-
ance. When asked to review deals, courts often evaluate them as instructive stories that allow
“explicitly judgmental conclusions” about the desirability of directors’ conduct.74 This does
not necessarily require the courts to apply clearly articulated legal rules.
In summary, U.S. fiduciary law limits the ability of corporate fiduciaries to self-deal and
exploit confidential corporate information. Plaintiffs are more likely to allege self-dealing
than the exploitation of confidential information, which may be explained by the difficulty of
proving the latter. Corporate fiduciaries routinely attempt to cleanse self-dealing by getting the
approval of an independent special committee acting to ensure arm’s-length bargaining over
sale. Where cleansing occurs, judicial scrutiny is limited. Common practices have emerged for
committee conduct, but variation still exists. The legal limits on corporate fiduciaries’ initial
dealings with and support for private equity bidders are unsettled. Nothing prevents fiduciaries
initiating transactions themselves.
3.2 U.K. Law
U.K. directors also face limits on self-dealing and the exploitation of corporate information.
They owe a broad fiduciary duty of loyalty requiring them to “act in the way [they] consider[],
in good faith, would be most likely to promote the success of the company for the benefit of
its members as a whole.”75 They face a ban on self-dealing under a rule formulated to prevent
a director from “enter[ing] into engagements in which he has, or can have, a personal interest
conflicting, or which may possibly conflict, with the interests of those whom he is bound
to protect.”76 Although strictly formulated, this no-conflict rule operated flexibly under the
common law since it was subject to alteration by companies’ articles of incorporation (or
charters); it became common for companies to adopt articles relieving directors of liability for
breach if they disclosed “interested” transactions to their fellow directors.77
the practice of forming special committees in MBOs is not universal. See Cain & Davidoff, supra note
16, at 883.
71
See Dale Arthur Oesterle & Jon R. Norberg, Management Buyouts: Creating Wealth or
Appropriating Shareholder Wealth?, 41 Vand. L. Rev. 207, 241–42 (1988).
72
For more detailed analysis of front-end dealings, see Tuch, supra note 69, at 8, 12–16.
73
In a recent sample, only 21% of MBOs were conditioned on such shareholder approval. See
Subramanian, supra note 45, at 642.
74
Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work?, 44 UCLA L.
Rev. 1008, 1016 (1991).
75
Companies Act 2006, § 172(1).
76
Aberdeen Railway Co. v. Blaikie Bros, (1854) 1 Macq. 461, 471 (appeal taken from Scot.).
77
For a detailed discussion, see Tuch, supra note 3, at 962–68. See also Paul L. Davies & Sarah
Worthington, Gower and Davies’ Principles of Modern Company Law 561–63 (9th ed. 2012)
[hereinafter Davies & Worthington II].
When Parliament embedded corporate fiduciary duties in legislation in 2006, it reproduced

the practical effect of the common law no-conflict rule.78 Section 177 of the Companies Act
2006 requires directors that are “in any way, directly or indirectly, interested in a proposed
transaction or arrangement with the company” to disclose “the nature and extent of that
interest to the other directors.”79 Compliance with Section 177 saves a self-dealing transaction
from the remedial consequences of breaching the no-conflict rule, most notably rescission.80
According to one practitioner, “The relevant directors are likely to want to tell their fellow
directors (or at least the chairman) about such an approach relatively quickly after such an
approach.”81
As in the United States, the U.K. approach requires distinct analysis of the conduct of
disinterested directors. When they learn of their fellow directors’ proposed participation in
an MBO, they must comply with their duties of care, skill, and diligence as well as their duty
to promote the success of the company.82 Recognizing these duties of disinterested directors,
interested directors frequently not only disclose proposed transactions but also “get board
approval for anything beyond a very early stage exploratory discussion” about a proposed
transaction.83 Practitioners report that disinterested directors, in complying with their fiduciary
duties, may “establish[] a method for the conduct of the buyout” in a written transaction pro-
tocol letter to interested directors.84
While shareholder approval is not required to cleanse director conflicts, both conventional
takeover offers and schemes of arrangements require shareholder approval. In determining
acceptance, the votes of participating directors count for conventional offers but not for
schemes of arrangements.85
***
Directors must also protect corporate information. The Companies Act forbids a director from
exploiting corporate information, etc., if, generally speaking, that would pit the director’s
interests against those of the company.86 Target directors that provide non-public information
to bidders, without authorization to do so, risk breaching their duty of confidence. Again,
however, proof of breach will be difficult.
***
Once a bid is imminent, provisions of the City Code on Takeovers and Mergers (the City
Code) become “the dominant source of obligation,”87 although directors must continue to
78
See Palmer’s Company Law ¶ 8.3104 (Geoffrey Morse ed., 2017).
79
Companies Act 2006, § 177(1). The requirement is subject to alteration in companies’ articles. See
§ 180(4)(b). For other exceptions, see §§ 180(4)(a), 239(4).
80
The statute provides that, if § 177 is observed, the transaction or arrangement “is not liable to be
set aside by virtue of any common law or equitable principle requiring the consent or approval of [share-
holders].” Companies Act 2006, § 180(1).
81
E-mail from legal advisor to Andrew F. Tuch (Feb. 14, 2017, 3:05 A.M.) (on file with author). As
to the interviews conducted, see infra note 103.
82
Davies & Worthington II, supra note 77 at 566–67.
83
E-mail from legal advisor to Andrew F. Tuch (Apr. 15, 2020, 1:53 P.M.) (on file with author). As
to the interviews conducted, see infra note 103.
84
Baker McKenzie, Global LBO Guide 430 (2017).
85
Gibb & Martin, supra note 10, at 225.
86
Companies Act 2006, § 175(1)–(2).
87
Paul L. Davies & Sarah Worthington, Gower and Davies’ Principles of Modern Company
Law 976 (10th ed., 2016) [hereinafter Davies & Worthington I].
comply with their fiduciary duties.88 The City Code, administered by the Panel on Takeovers
and Mergers, applies to MBOs whether they are structured as conventional offers or schemes
of arrangement. Heightened requirements apply to MBOs, although, curiously, these are inter-
preted not to apply if, at closing, the bidder has not entered into or had discussions to enter into
incentive arrangements for participating managers, whether or not the bidder intends to enter
into such arrangements post-closing.89 The City Code requires the target’s board to distance
itself from conflicted directors, which in MBOs will lead a target to form an independent com-
mittee of directors.90 The City Code imposes an equality-of-information requirement under
which information given to any bidder “must, on request, be given equally and promptly” to
another bona fide competing bidder, “even if that other [bidder] is less welcome.”91 In MBOs,
this requirement applies to information generated by participating directors and passed on
to potential financiers of the proposed buyout.92 Participating directors are “expect[ed] … to
co-operate with the independent directors … in the assembly of this information.”93 The City
Code requires the target company to “obtain competent independent advice” as to the fairness
and reasonableness of any offer made.94 This requirement is “of particular importance” for
MBOs; indeed, “the board of the offeree … should appoint an independent adviser as soon as
possible after it becomes aware of the possibility [of an MBO].”95
Officers or senior managers risk breaching provisions of their employment contracts in their
front-end dealings with potential acquirers. Relevant terms require officers and managers to
protect the company’s confidential information, hold no competing business interests, and
devote all of their business time and attention to running the business.96 Employees “exercis-
ing a high-level management function” are also likely to owe fiduciary duties arising from
their employment contracts,97 although if they are also directors, they will owe the duties of
88
See Gibb & Martin, supra note 10, at 233; Baker McKenzie, supra note 84, at 430; Richard
Burrows & Robert Ogilvy Watson, Public-to-Privates, at 10 (Mar. 6, 2020) (manuscript on file with the
author).
89
Interview with legal advisor (Mar. 25, 2020). As to the interviews conducted, see infra note 103.
See also Robert Ogilvy Watson, Despite Brexit P2P transactions surge, Macfarlanes.com Blog,
July 11, 2010, https://blog.macfarlanes.com/post/102fno3/despite-brexit-p2p-transactions-surge. (“By
deferring management incentive arrangements, “private equity bidders can largely avoid the Code rules
around MBO bids.”). By deferring management incentives arrangements, bidders may also avoid Rule
16 of the City Code on Takeovers and Mergers (UK) [hereinafter City Code], which limits special deals
with favorable conditions being offered to selected shareholders. See Burrows & Ogilvy Watson, supra
note 88, at 13.
90
City Code, Rule 25.2 n.4-5; Gibb & Martin, supra note 10, at 232.
91
City Code, Rule 21.3.
92
Id. Rule 21.3 n.3.
93
See id. Moreover, the bidder must, on request, promptly give independent directors any informa-
tion generated by the participating directors and passed on to potential financiers of the proposed buyout.
Id. Rule 21.4.
94
Id. Rule 3.1.
95
Id. Rule 3.1 n.1.
96
See David Baylis & Jason Moss, Management Buyouts: Risks and Rewards for Management
12, Practical Law U.K. Practice (2019).
97
See, e.g., University of Nottingham v. Fishel [2000] ICR. 1462; see also Andrew Stafford &
Stuart Ritchie, Fiduciary Duties: Directors and Employees 15 (2d ed. 2015).
directors even when they act as officers/senior managers.98 Separately, they will owe a duty of
confidence by virtue of their receipt of confidential information from the company.
In response to these duties, basic practices have developed among target companies. “One
of the first steps in any management buy-out is for the target board to constitute an independent
committee of directors, comprising those directors who have no conflict of interest.”99 The
use of such a committee is considered a “best practice” but is not required.100 The committee
negotiates on the company’s behalf with the bidder; monitors the conduct of the participating
managers to ensure, among other things, that they treat potential bidders equally and do not
disclose the company’s non-public information without consent; instructs the committee’s
legal and financial advisors; and controls bidders’ access to due diligence materials.101
***
As in the United States, little guidance exists on the conduct required of fiduciaries at the
outset of transactions. At what point is an MBO “proposed,” such that interested directors
must disclose the transaction and their interests in it to their colleagues?102 Some legal advisors
interpret this rule as requiring disclosure before the transaction has been entered into but not
necessarily as soon as it is “proposed.” In off-the-record interviews with U.K. legal advisors,
I was informed of the difficulty they face in determining when early discussions between
private equity firms and managers have proceeded to the point of requiring disclosure to the
board.103 One frequent advisor on P2Ps explained, “Was the conversation with the PE [private
equity] firm an ‘approach’? Was it just a chat about the sector? Was it simply ‘coffee’?
These discussions are obviously very different to executives receiving a formal letter from
a buyout group, which they would likely have to disclose to their board.”104 According to
another experienced advisor, “Ordinarily managers are not obliged to obtain Board approval
before having what are inevitably tentative and exploratory conversations with a party which
may back a bid for the managers' company. Nor is there ordinarily anything in a manager's
employment agreement that would prevent such a conversation.”105 As in the United States,
some cooperation from participating managers may be desirable, since without it some private
equity firms will be unwilling to bid.106 Nothing prevents managers from initiating contact
with bidders themselves.
98
Davies & Worthington I, supra note 87, at 475.
99
Gibb & Martin, supra note 10, at 232. See also Wan Wai Yee & Umakanth Varottil, Mergers
and Acquisitions in Singapore: Law and Practice 698–99 (2013).
100
See Scott V. Simpson & Katherine Brody, The Evolving Role of Special Committees in
M&A Transactions, 69 Bus. Law. 1117, 1141 (2014); see also Ass’n of British Insurers, Improving
Corporate Governance and Shareholder Engagement 4 (2013). Special committees are not man-
datory. Yee & Varottil, id. at 698.
101
See Gibb & Martin, supra note 10, at 232.
102
See Companies Act 2006, § 177(1).
103
Telephone interviews (2017, 2019, 2020). I undertook not to attribute specific comments to
sources. Some sources expressed no views on particular questions. Some chose not to be identified.
Some of the individuals identified in this chapter did not participate in interviews but instead provided
background information.
104
Interview with legal advisor (Feb. 3, 2017).
105
E-mail from legal advisor to Andrew F. Tuch (Apr. 16, 2020, 12:18 P.M.) (on file with author).
The advisor qualified these remarks, stressing the need for managers to protect confidential corporate
information and comply with their employment contracts.
106
Subramanian, supra note 45, at 631–32.
Table 23.1 Front-end duties of directors and officers in MBOs
U.S. Law U.K. Law

Front-end duties Front-end duties
Directors Directors
(1) Duty of loyalty/“fairness rule,” under which self-dealing (1) Duty of loyalty/“no-conflict rule,” under which self-dealing
transactions are void/voidable or interested directors are transactions are void/voidable or interested directors are
otherwise subject to liability. otherwise subject to liability—unless interested directors inform
fellow directors of their interest in the self-dealing transaction.
The duty is subject to cleansing devices operating as alternatives: In addition to the cleansing device above, other cleanses may
(a) approval by disinterested directors, preferably by a special exist in company’s articles/charter.
committee fully constituted and empowered;
(b) approval by disinterested shareholders entitled to vote; or
(c) proof of entire fairness.
Disinterested directors’ conduct will be evaluated under fiduciary Disinterested directors’ conduct will be evaluated under the
duties of care and loyalty. fiduciary duty requiring directors to promote the success of the
company
(2) Duty to protect confidential information. (2) Duty not to exploit corporate information.
Officers/Senior Managers Officers/Senior Managers
Subject to same duties as directors, whether or not they are Subject to duties of directors if they are directors. As officers,
directors, and to fiduciary duties under agency law. they are subject to contractual restrictions and may also owe
fiduciary duties.
In sum, like U.S. law, U.K. law imposes limits on directors’ self-dealing and their ability to
exploit corporate information in MBOs. While U.S. law provides multiple cleansing devices
for self-dealing, including disinterested director approval, U.K. fiduciary law requires partic-
ipating directors to disclose their conflicts to their fellow directors, a requirement implicitly
requiring the approval of disinterested directors. The primary constraints on senior managers
arise under contract, although the limits are consistent with those imposed on officers under
U.S. law. As in the United States, targets under U.K. law will form independent committees,
a result of provisions of the City Code. The City Code also requires target boards to engage
independent financial advisors and imposes an equality-of-information requirement, among
other requirements, to achieve arm’s-length bargaining over sale. The upshot is that, despite
differing formulations of their fiduciary duties, both regimes task neutral directors with polic-
ing potential self-dealing and the exploitation of corporate information in MBOs.
4. BACK-END DUTIES
In selling their corporations, directors are guided by duties specifying what objectives they
must pursue and by what measures. Section 4 examines these duties, summarizing them in
Table 23.2.
4.1 U.S. Law
Courts apply enhanced scrutiny to MBOs that do not involve a controlling shareholder.107
Enhanced scrutiny arises from directors’ Revlon duties, which are triggered in MBOs because
the primary acquisition currency is cash.108 The resulting judicial scrutiny falls between the
business judgment and entire fairness standards of review. The duties require directors to
establish that they “sought to secure the transaction offering the best value reasonably availa-
ble for the stockholders.”109 Revlon duties do not require directors to achieve that stated result;
rather, they require directors to “try in good faith … to get the best available transaction for the
shareholders”110 and to use “reasonable measures” to do so.111 Put otherwise, directors must
seek to maximize value for stockholders but “are generally free to select the path” to achieve
that end,112 provided they act reasonably in doing so.
In reviewing directors’ conduct for reasonableness, courts adopt a balancing approach.
Courts weigh all relevant facts and circumstances, some pointing one way, others pointing
the other way, to conclude whether directors’ conduct “was, on balance, within a range of
reasonableness.”113 Courts pay particular attention to the conduct’s effects on outcomes for
shareholders.
Revlon duties are salient in MBOs because of managers’ incentives to skew the sale process
in favor of the bid in which they are planning to participate. According to Vice Chancellor
Strine, “When directors bias the [sale] process against one bidder and toward another not
in a reasoned effort to maximize advantage for stockholders, but to tilt the process toward
the bidder more likely to continue current management, they commit a breach of fiduciary
duty.”114
In re The Topps Company Shareholders Litig.115 offers an example of enhanced judicial
scrutiny. In this instance, a target company’s board agreed to an MBO, after which sharehold-
ers brought a claim against the board under Revlon. The court was asked to grant a preliminary
injunction. The court assessed directors’ conduct prior to the signing of the merger agreement
with a private equity firm, and concluded that directors had acted reasonably and thus were
unlikely to be found to have violated their Revlon duties.116 But the directors’ subsequent
conduct—especially toward a competing bidder offering more than the agreed price—fell
107
See, e.g., Barkan v. Amsted Industries, Inc., 567 A.2d 1279 (1989); In re The Topps Co. S’holders
Litig., 926 A.2d 58, 64 (2007); In re Netsmart Techs,., Inc. S’holders Litig., 924 A.2d 171 (Del. Ch.
2007); In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813 (Del. Ch. 2011); In re Lear Corp.
S’holder Litig., 926 A.2d 94 (Del. Ch. 2007).
108
In re The Topps Co. S’holders Litig., 926 A.2d 58, 64 (2007); In re Appraisal of Dell, Inc, 2016
WL 3186538, at *55. For a more detailed discussion, see Afra Afsharipour & J. Travis Laster, Enhanced
Scrutiny on the Buy-Side, 53 Ga. L. Rev. 443, 458–79 (2019).
109
In re Appraisal of Dell, Inc, C.A. 2016 WL 3186538, at *55, (citing Paramount Commc’ns Inc., v.
QVC Network Inc., 637 A.2d 34, 44 (Del. 1994)).
110
Citron v. Fairchild Camera & Instrument Corp., No. CIV.A 6085 1988 WL 53322, at *16 n.17
(Del. Ch. May 19, 1988).
111
See In re The Topps Co. S’holders Litig., 926 A.2d 58, 64 (2007).
112
See In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 595–96 (Del. Ch. 2010).
113
Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 45 (Del. 1994).
114
In re The Topps Co. S’holders Litig., 926 A.2d 58, 64 (Del. Ch. 2007).
115
926 A.2d 58, 64 (Del. Ch. 2007).
116
Id. at 82–87.
the other way. The court determined that this conduct likely would be found to have violated
the Revlon standard.117 Rather than seek to maximize value for shareholders, the directors
had refused to negotiate seriously with the competing bidder118 and thus “did not pursue the
potential for higher value with the diligence and genuineness expected of directors” per Revlon
duties.119 The court also found that the board had made misleading and deceptive disclosures
in the company’s proxy statement about the proposed private equity deal and alternative
transactions. The board’s negotiating approach and disclosure errors were “more redolent of
pretext[] than of a sincere desire to comply with their Revlon duties.”120 Separately, directors
had acted improperly by refusing to release a competing bidder from a standstill agreement,
thereby denying shareholders the chance to receive a higher offer.121
Transaction participants adopt practices to help ensure that target boards satisfy their
Revlon duties. Merger agreements routinely include “go-shop” provisions,122 which permit
target companies to solicit interest from competing bidders after a deal has been struck and to
terminate the merger if a superior offer arises. Buyers also limit the use of lock-ups that may
have the effect of reducing competition for targets,123 another practice intended to help target
directors satisfy their duties.
Corwin v. KKR Fin. Holdings LLC124 also diminishes the prospect that directors will violate
their Revlon duties in post-closing suits for monetary damages. The decision provides business
judgment review for directors in third-party mergers such as MBOs (not involving controlling
shareholders) approved by a fully informed, uncoerced vote of disinterested shareholders.125
Testing directors’ conduct under the deferential business judgment rule typically results in
dismissal of a claim for fiduciary breach and so can cure deficiencies in a sale process.126
4.2 U.K. Law
When a sale has become inevitable, what objectives must U.K. directors pursue, and by
what measures? U.K. case law on fiduciary duties in change-of-control transactions remains
thin—a product of the Takeover Panel’s role and the reluctance of courts to intervene. But
there is at least a starting legal position, enumerated in Section 172 of the Companies Act:
directors are required to “act in the way [they] consider[], in good faith, would be most likely
to promote the success of the company for the benefit of the members as a whole.”127 As they
act in that way, directors must regard to various matters, including the long-term consequences
of any decision, the interests of employees, the company’s relationships with suppliers and
117
Id. at 87–93.
118
Id. at 89–90.
119
Id. at 90–91.
120
Id. at 91.
121
Id. at 91–92.
122
See Lardy et al., supra note 19, at 380–81.
123
Cain & Davidoff, supra note 16, at 877.
124
125 A.3d 304, 309 (Del. 2015).
125
The reference to third-party mergers excludes mergers involving controlling shareholders. See
Joseph R. Slights III, Corwin v. KKR Financial Holdings LLC—An After-Action Report, 24 Fordham J.
Corp. & Fin. L. 1, 11 (2018).
126
Singh v. Attenborough, 137 A.3d 141, 151–52 (Del. 2016).
127
Companies Act 2006, § 172.
customers, and the impact on the community and environment.128 Little judicial guidance
exists on how this provision applies to target directors in change-of-control transactions.129
Scholars offer nuanced views,130 while practitioners observe more simply that U.K. target
directors owe duties “similar to a U.S. board’s Revlon duties” and that U.K. directors’ duties
“are not significantly different” from those of their U.S. counterparts, even though U.K. law
is less developed on this front.131 In any case, fiduciary constraints on directors’ back-end
decision-making would seem less relevant in the United Kingdom, given diverging regulatory
approaches. Although U.K. boards make recommendations on bids to their shareholders,
seeking to influence how they vote, the City Code prevents boards taking action resulting in
the frustration of a bid and instead requires them to allow shareholders to decide on any bid.132
In marked contrast, U.S. boards frequently erect defensive measures, within limits, denying
shareholders the chance to consider some bids—an approach giving real force to Revlon duties.
Still, U.S. and U.K. boards seek the transaction offering the best value, adopting practices to
achieve this objective. While a U.K. board will not use go-shops in an MBO, as its U.S. coun-
terpart frequently will,133 it will gain “comfort” that it has satisfied its Revlon-like duties by
getting advice from an independent financial advisor and by leaving announced offers exposed
to the possibility of competing bids.134 A U.K. board will avoid taking frustrating action. The
City Code also requires boards to give competing bidders equal rights to information, an
attempt to prevent participating managers from privileging their favored bidder.135
In sum, under both systems, target boards owe similar duties at the back end of transactions—
duties requiring them to maximize shareholder value. The measures they employ differ some-
what, reflecting differences in the regulatory frameworks applied to transactions in which
corporate control changes hands.
5. DISCLOSURE OF FIDUCIARIES’ CONDUCT
U.K. and U.S. laws and practices differ significantly in the extent to which they require target
companies to disclose directors’ conduct in MBOs.
128
Companies Act 2006, § 172(1); see also David Kershaw, Principles of Takeover Regulation
300 (2016).
129
Kershaw, supra note 128 at 304.
130
See, e.g., id. at 304; Davies & Worthington I, supra note 87, at 953.
131
Lardy et al., supra note 19, at 381. See also Scott Davis & Kate Ball-Dodd, Deal Protection
Mechanisms in the US and UK, Mergers and Acquisitions 2008/09 20 (2008), www.mayerbrown
.com/-/media/files/perspectives-events/publications/2008/05/deal-protection-mechanisms-in-the-us-and
-the-uk/files/artdealprotectionmay08pdf/fileattachment/art_dealprotection_may08.pdf.
132
City Code, Rule 21. In 2011, the City Code banned all deal protections with narrow exceptions,
a change found to have reduced deal volumes without producing offsetting benefits. Fernán Restrepo
& Guhan Subramanian, The Effect of Prohibiting Deal Protection in M&A: Evidence from the United
Kingdom, 60 J.L. & Econ. 75 (2017).
133
Lardy et al., supra note 19, at 380–81.
134
See id.
135
City Code, Rule 21.3. See also supra note 91.
Table 23.2 Back-end duties of directors and officers in MBOs
U.S. Law U.K. Law

Back-end duties Back-end duties
Directors Directors
Under Revlon, seek transaction offering best value reasonably Law less developed but regarded as “similar” to U.S. law.
available.
The duty is subject to cleansing by disinterested-shareholder
approval under Corwin.
Officers/Senior Managers Officers/Senior Managers
No distinct duties. No distinct duties.
5.1 U.S. Law
Federal securities laws impose onerous disclosure requirements on companies and other
participants undertaking MBOs. In 1979, in response to concerns about corporate fiduciaries’
conduct in MBOs, the SEC adopted Rule 13e-3, compelling an issuer and affiliates engaged
in a going-private transaction to file with the SEC and to publicly disseminate a Schedule
13E-3.136 This schedule requires disclosure of the purposes of the transaction and the reasons
for its structure. The target company and its affiliates must attest that they reasonably believe
the transaction is fair to shareholders and must explain why this is so.137 Although Rule 13e-3
generally applies to MBOs, it may sometimes be avoided, for example “where management
was not, or will not be, in a position to exert control on either side of the transaction.”138
Schedule 13E-3 additionally requires the disclosure of pre-contractual dealings, namely
“Past Contacts, Transactions, Negotiations and Agreements.” The schedule requires, among
other things, information regarding “any negotiations, transactions or material contacts during
the past two years between” the parties, where such information concerns a merger or similar
transaction, and the “[i]dentity of the person who initiated the contacts or negotiations.” 139
Since these pre-contractual dealings must also be disclosed in target companies’ proxy state-
ments, Schedule 13E-3 often incorporates by reference from proxy statements. The result is
the disclosure of granular detail about the “background of the merger,” front- and back-end
discussions involving target companies and their corporate fiduciaries, the bidder, and compet-
ing bidders up to the time when a merger agreement is signed and during any go-shop period.
Delaware law imposes similar disclosure requirements.140
By way of example, the “background of the merger” for the MBO of Dell Inc. spends some
30 pages (23,000 words) describing dealings among the various deal participants.141 The
document describes all meetings relevant to the deal, including those between participating
managers and possible bidders, on an almost daily basis. It begins with a private equity firm’s
136
See 17 C.F.R. § 240.13e-3(d) (2019).
137
17 C.F.R. § 240.13e-100.
138
Davenport & Stauder, supra note 43, at 72.
139
17 C.F.R. § 240.13e-100.
140
See Matador Capital Mgmt. Corp. v. BRC Holdings, Inc., 729 A.2d 280, 295 (Del. Ch.
1998) (“Delaware law requires directors who disclose such a recommendation also disclose such infor-
mation about the background of the transaction, the process followed by them to maximize value in the
sale, and their reason for approving the transaction so as to be materially accurate and complete.”).
141
See Dell Inc., Definitive Proxy Statement on Schedule 14A (Form DEFM 14A) (May 30, 2013).
initial approach to Dell’s CEO, Michael Dell, and continues through the signing of the merger
agreement and the go-shop period. From this disclosure we learn important information about
how the deal was conducted, including that a special committee was formed with
full and exclusive authority to (i) consider any proposal to acquire the Company involving Mr. Dell
and to consider any alternative proposals from any other parties, (ii) engage independent legal and
financial advisors to the Special Committee, (iii) make a recommendation to the Board with respect
to any such proposed transaction and (iv) evaluate, review and consider other potential strategic
alternatives that may be available to the Company.142
The special committee took advantage of this latitude and in fact did appoint its own legal
and financial advisors. Mr. Dell and private equity firm representatives signed confidentiality
agreements in which they committed, among other things, not to propose a buyout unless the
special committee invited it to do so. This required Mr. Dell to work in good faith with com-
peting private equity bidders if requested to do so by the special committee and prohibited him
“from sharing any confidential information with any other party, including the sponsors.”143
In extensive detail, the proxy statement outlines the special committee’s numerous meetings,
its negotiations to increase the merger price, its attempt to attract interest from other potential
bidders, its consideration of competing bids and alternative transactions, and its conduct of
the go-shop period.144 The statement gives particular attention to the initial dealings and steps
taken by participating managers and independent directors to cabin the effect of self-dealing.
Dell’s statement is a representative case. It speaks to the thorough revelations that can
be expected thanks to U.S. disclosure rules. The conduct of managers, special committees,
bidders, and their advisors in MBOs is exposed to scrutiny under these rules, facilitating
market discipline.
5.2 U.K. Law
The City Code governs the content of offer documents used to communicate takeover offers to
shareholders, while both the City Code and the Companies Act govern the content of circulars
used for schemes of arrangement.145 There is no close equivalent of the U.S. “background of
the merger” statement in U.K. disclosure documents or indeed any requirement that targets
disclose otherwise non-public negotiations among transaction participants, with minor excep-
tions. If management incentives will only be put in place after the deal, the relevant details of
discussions must be disclosed.146 Relatedly, the City Code requires the target’s independent
financial advisor to opine on the fairness and reasonableness of any management incentive
arrangements included in an offer.147 These requirements as well as the front-end duties dis-
cussed above reduce the likelihood of untoward dealings between managers and private equity
142
Id. at 21.
143
Id. at 22.
144
Id. at 22–49.
145
As to offer documents, see City Code, Rule 24; as to Scheme circulars, see City Code, Rule 24;
Companies Act 2006, § 897.
146
City Code, Rule 16.2.
147
Id.
firms, although one would expect that requiring public disclosure of their dealings would
further diminish the temptations of disloyalty.
6. EVALUATION AND COMPARISON OF REGULATION
This part evaluates and compares the effectiveness of the U.S. and U.K. regimes.
6.1 Similarities
Broadly speaking, directors in both regimes owe similar fiduciary duties. Their front-end
dealings are governed by duties of loyalty that restrict both self-dealing and the disclosure of
confidential corporate information. As to self-dealing, interested directors and transactions are
protected from liability when directors disclose their conflicts to their disinterested colleagues
(under U.K. law) or get the good-faith approval of disinterested directors, preferably a special
committee of such directors fully constituted and empowered before substantive economic
negotiations have begun (under U.S. law). Although the U.K. regime applies the so-called
no-conflict rule, it does not operate significantly differently from U.S. fiduciary rules.148
Under U.S. law, directors may also avoid liability by proving the fairness of a transaction,
but this cleansing device rarely operates, so strict are its requirements. In short, both systems
give significant power to neutral decision-makers, enabling nuanced, commercially sensitive
responses to mitigate the negative effects of self-dealing.
At the back end of transactions, directors owe Revlon duties under U.S. law and similar
duties under U.K. law. The City Code on Takeovers and Mergers heightens director responsi-
bilities in the United Kingdom, requiring target companies to avoid “frustrating” action, and
to share corporate information equally with competing bidders. Informed by these background
rules and influenced by private equity firms and their advisers (and perhaps also by U.S.
practices), target companies have adopted similar practices in response to the possibility of an
MBO. They form special committees of disinterested directors. Assisted and overseen by inde-
pendent legal and financial advisors, these committees conduct a deal process that attempts
to protect shareholder interests by mitigating managers’ conflicts, promoting arm’s-length
bargaining over sale and leveling the playing field for bona fide bidders.
6.2 Differences
Perhaps the most prominent difference between the U.S. and U.K. systems is that Delaware
corporate law and U.S. federal securities laws require targets and their affiliates to make
extensive disclosures of pre-deal conduct, including directors’ dealings.149 These disclosures
148
See Tuch, supra note 3.
149
The U.K. regime also restricts a public company from giving financial assistance to a person
buying shares in the company. Companies Act 2006, § 678 (1), (3). These restrictions do not apply to
private companies. In practice, therefore, a bidder cannot extract cash in a public company target until
“after the offer has completed and the company has been re-registered as a private company.” See Gibb
& Martin, supra note 10, at 225. The U.S. and U.K. regimes also differ in the process by which relevant
rules are made, but these differences are not considered here. For helpful discussion, see Armour &
are more detailed than those required in other systems. The U.S. requirements subject cor-
porate fiduciaries and other deal participants to public scrutiny and thus conceivably help
constrain misconduct. For instance, bankers may be less tempted to overstate the bargaining
positions of competing bidders, a practice alleged to have occurred in private equity firm
Terra Firma’s ill-fated acquisition of U.K. music company EMI.150 But if no such requirement
holds in the United Kingdom, bidders there nonetheless tend to publicly disclose their offers
early, limiting conduct that may deter competing bids. Other U.K. law-related mechanisms for
constraining fiduciary misconduct may also be at work. Compared with U.S. law, “U.K. law
generally affords shareholders stronger rights, giving them greater ability to hold managers
accountable.”151 U.K. institutional investors and their investor associations monitor corporate
affairs, imposing discipline on managers. These monitors have been regarded as stronger than
their U.S. counterparts, although whether this is still true is uncertain given rising levels of
U.S. institutional ownership and greater geographic dispersion of U.K. holdings.152 The extent
to which required U.S. disclosures in fact constrain misconduct by participating managers is
not clear. To my knowledge, systematic empirical evidence collected from MBOs does not
address the effect of America’s enhanced disclosure requirements on corporate fiduciaries’
conduct. Moreover, such evidence does not justify broad claims that corporate fiduciaries’
misconduct is more severe in either system.153
The frequency and type of enforcement actions also differ across regimes. As John Armour
and his coauthors have shown, U.S. public company directors are more likely to face claims
of fiduciary breach than are their U.K. counterparts.154 Leading U.S. plaintiff law firms tend to
target MBOs and other transactions with a high risk of self-dealing.155 While routinely brought,
merger lawsuits in the United States usually settle on terms offering little benefit to sharehold-
ers and having questionable deterrent effect on managerial misconduct;156 at the same time,
even with the recent migration of merger cases out of Delaware, MBOs specifically appear
to face meaningful challenge and judicial scrutiny in Delaware.157 However, as Armour et al.
Skeel, supra note 3, at 1751–64; William Magnuson, Takeover Regulation in the United States and
Europe: An Institutional Approach, 21 Pace Int'l L. Rev. 205, 224–34 (2009).
150
See Anne-Sylvaine Chassany, Terra Firma Sues Citi over EMI Takeover, Bloomberg, Dec. 18,
2009, www.bloomberg.com/news/articles/2009-12-18/terra-firma-sues-citi-over-emi-takeover; Terra
Firma Invs. (GP) 2 Ltd. v. Citigroup Inc., 716 F.3d 296 (2d Cir. 2013).
151
Tuch, supra note 2, at 1496. For a more detailed comparison of shareholder rights, see
Christopher M. Bruner, Corporate Governance in the Common-Law World 28–64 (2013).
152
See Tuch, supra note 2, at 1502-03. As to the effects of increasing fragmentation of share owner-
ship in the United Kingdom, see Brian R. Cheffins, The Stewardship Code’s Achilles’ Heel, 73 Mod. L.
Rev. 1004, 1017–24 (2010).
153
For survey evidence, see Renneboog & Vansteenkiste, supra note 10. See also supra note 40 and
accompanying text.
154
John Armour et al., Private Enforcement of Corporate Law: An Empirical Comparison of the UK
and US, 6 J. Empirical Legal Stud. 687, 721 (2009).
155
C.N.V. Krishnan et al., Who are the Top Law Firms? Assessing the Value of Plaintiffs’ Law Firms
in Merger Litigation, 18 Am. L. & Econ. Rev. 122, 124 (2016); Adam B. Badawi & David H. Webber,
Does the Quality of the Plaintiffs’ Law Firm Matter in Deal Litigation?, 41 J. Corp. L. 359, 372 (2015).
156
See Awrey et al., supra note 3, at 12–15; see also Robert M. Daines & Olga Koumrian,
Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions: March 2012
Update, Cornerstone Res. 9–11 (Mar. 2012), www.cornerstone.com/Publications/Reports/Recent
-Developments-in-Shareholder-Litigation-Invo.pdf.
157
See Matthew D. Cain et al., Mootness Fees, 72 Vand. L. Rev. 1777, 1814–15 (2019).
also note, the difference in enforcement between jurisdictions may be more a matter of method
than outcome. Because the Takeover Panel adjudicates participants’ deal-related conduct on
a real-time basis, the conduct of U.K. directors is scrutinized even where no breach is alleged.
So the relative lack of fiduciary claims does not necessarily indicate lesser enforcement. The
mechanics of the enforcement regimes differ, but the evidence does not show that the results
differ as well.158
6.3 Uncertainty
Neither regime clearly articulates directors’ duties at the front end of transactions, with the
result that managers may have room to maneuver. In the United States, practitioners continue
to debate when participating managers need to inform their boards of a private equity firm’s
interest.159 What dealings may corporate fiduciaries have when approached by private equity
firms? What information may they share, and who decides? Rather than evaluating MBOs
under front-end self-dealing rules, Delaware courts usually assess directors’ conduct under the
enhanced-scrutiny standard, applying an intermediate standard of review that leads transaction
participants to focus on deal process.
In the United Kingdom, uncertainty also surrounds managers’ permissible dealings at the
front end of deals. U.K. caselaw applying fiduciary duties to MBOs is thin, a product of the
limited recourse that market participants have to courts in takeovers and schemes. U.K. practi-
tioners report difficulties in determining when early discussions between private equity firms
and managers have proceeded to the point of requiring disclosure to the board.160 Directors
must disclose their interests in transactions or arrangements that are “proposed,” and what
exactly counts as “proposed” is uncertain. Boards also lack firm guidance on the extent they
must chaperone participating managers meeting with potential bidders.
6.4 Suggested Reforms
The U.S. regime attracts suggestions for reform. Deborah DeMott has explored the idea
of permitting structures to give public stockholders a continued, though reduced, stake in
a management-led transaction so that the eventual benefits of the deal—typically the resale of
the company to the public—can be shared more broadly.161 Matthew Cain and Steven Davidoff
Solomon suggest that courts undertake a more searching review under Revlon than they do.162
Iman Anabtawi would require participating fiduciaries to disclose “all soft information” to
the special committee or would forbid these fiduciaries from “participating in the acquisition
process on behalf of the MBO group.”163 Guhan Subramanian would subject MBOs to the
same analysis as freezeouts, requiring the approval of both a special committee and a major-
158
Armour, supra note 154, at 721. As to enforcement by the Takeover Panel, see also Awrey et al.,
159
See supra note 67 and accompanying text.
160
161
Deborah A. DeMott, Directors’ Duties in Management Buyouts and Leveraged Recapitalizations,
49 Ohio St. L. J. 517, 555–56 (1988).
162
Cain & Davidoff, supra note 16, at 898–99.
163
Anabtawi, supra note 45, at 1331–32.
ity of the disinterested shareholders.164 No comparable reform debate appears to exist in the
United Kingdom.
Given that courts usually assess MBOs and LBOs under enhanced scrutiny, rather than
under traditional self-dealing rules, Revlon duties are a well-suited doctrinal device for height-
ening judicial inquiry if that were needed. Courts might more closely scrutinize managers’
early dealings with possible bidders, a practice that would lead boards to adopt tougher “rules
of engagement” and reduce the leeway key insiders enjoy at the outset of deals.
7. CONCLUSION
MBOs promise to create value, but they pose challenges to directors’ and officers’ fiduciary
and other duties. This chapter has considered the duties these actors owe, at the front and back
ends of transactions. It finds that the U.S. and U.K. regimes have much in common when it
comes to MBOs: they task neutral directors with policing self-dealing, enabling nuanced, com-
mercially sensitive responses to this kind of conflict of interest. The analysis thus casts doubt
on the persistent but mistaken perception that U.K. self-dealing law is stricter than its U.S.
counterpart, with respect to the duties of directors and officers. Basic differences between the
regimes lie in the mechanics of enforcement and disclosure: the U.S. regime allows sharehold-
ers and competing bidders greater scope to challenge MBOs and requires target companies
to disclose pre-deal negotiations that otherwise may well remain non-public. But available
empirical evidence does not justify broad claims that corporate fiduciaries’ misconduct is
more severe under either regime, which suggests the presence in the United Kingdom of func-
tional substitutes for formal enforcement and mandated disclosure. Still, neither regime may
effectively prevent fiduciary misconduct early in the deal process that weakens arm’s-length
bargaining and deters competing bids.
164
Subramanian, supra note 45, at 652.
Index
Aberdeen Railway v. Blaikie 205–6 Baskin, J. 103

accounting standards Bath, V. 157–9
accounting firms, influences of 283, 288, Bebchuck, L. 71–2, 135, 382
296, 298 Becht, M. 70
convergence and divergence 282–3, Becker, G. 192
290–300 behavioural economics 29–30
domestic standards 283, 295, 298 Belgium 310–311, 417
EU law 287, 289, 291–6 Berle, A. 62, 64
France, in 289–90 Bhagat, S. 48
Germany, in 289, 294 Black, B. 48, 50, 52
IASC/ IASB, role of 293, 296–7 board diversity
institutional investors, and 298 Australia, in 193
international cooperation, benefits of 288, California state quotas 184–5, 189–91,
291–2, 296 196, 199
investor litigation impacts on 299–300 Canada, in 184–5, 193
IOSCO, role of 296 compliance mandates and penalties 184–92
path dependence impacts 283, 287–8, 296, 298 comply or explain policies 184–5, 192–3
purpose of 282 experience, role of 197, 199
related party transactions, and 203–4 France, in 179–80, 183–4, 187–8, 199
rules-based vs. principles-based, debate gender classification, and 196–8
298–300 Germany, in 184
UK law 282–3, 288, 292–4 golden skirts 186, 199
US GAAP vs. IFRS, conflicts between identity quotas 196–8
282–3, 288, 292–300 India, in 184, 191–2
US law 282–3, 292, 296–300 Italy, in 184, 188–9, 196
Ackman, B. 377 Norway, in 179–87, 199
Aguilera, R. 105–6, 112–13 policy challenges and limitations 181,
Air Products and Chems., Inc. v. Airgas 119–20 186, 195–9
Allen, F. 42 policy trends 179–84
American Law Institute Principles of Corporate policy impacts 186–9, 193–6, 199
Governance 80 quotas 180–88, 193–8
Anatomy of Corporate Law, The 3–4, 28–9, 70 racial quotas 197–8
appraisal rights 459, 462, 468–9 recruitment trends 186–9
Armour, J. 46, 70–71, 497 reform directions 195–9
arm's length finance jurisdictions 8 self-regulation 187
Aronson v. Lewis 229–30 South Africa, in 191
Aruba case 468–9 stakeholder orientation, and 187
Auclert, H. 180 stereotyping, and 187
Australia sunset provisions 188–9, 196
board diversity 193 UK, in 184–5, 192–3
board structure 147–8 US, in 184–5, 189–91, 199
comply or explain policy 193 board of directors
CSR 112 board structure see board structure
derivative litigation 450 corporate governance strategies
minority shareholders empowerment 353 agency problems 119, 122, 125, 143
Austria 140 control shift rules 119–22
director empowerment 118–21
Bainbridge, S. 259 director independence 124–8
Banerjee, A. 46–7 employee decision rights 133–43
500
Index 501
enlightened shareholder value 137–9, 250 US model 125–8

EU Shareholder Rights Directive 125, remuneration see executive compensation
131–2, 141 supervisory boards 112–14, 116, 130–31,
EU Takeovers Directive 122–3 139–42, 246
MOM approval 126–7, 129–30, 132, 353 takeover defences see takeover defences
no frustration rule 120–21, 123 UK, in 144–5, 148–51
shareholder decision-making 120–22, employee decision rights 139
129–30 enlightened shareholder value 137–9, 250
shareholder value approach 134–7 MOM approval 129
supervisory boards 122–4, 130–33, related party transactions 129–30, 143
139–42 shareholder decision-making 120–22,
takeover defences 117–24 129–30
trusteeship strategy 117, 119–20, takeover defences 120–22
124–33 US, in
diversity see board diversity director empowerment 118–21
duties and responsibilities see directors director independence 125–8
duties and responsibilities employee co-determination 135–6
employee co-determination fairness test 126, 206
Austria 140 MOM approval 126–7
Covid-19 pandemic implications for related party transactions 125–8, 143
176–7 shareholder value approach 134–7
EU law 140, 169–71 takeover defences 118–20
German model 135, 139–42, 144, trusteeship strategies 126–8
152–6, 168 board structure
Netherlands 161–4, 168 accountability, and
UK law 139, 171–7 agency problems, management of 119, 122,
US model 135–6 125, 143
variations 177 Australia, in 147–8
European Stock Corporation model 116 board of auditors model 165–6
Germany, in Canada, in 144, 167
employee co-determination 135, China, in 144, 152, 156–9, 166
139–42, 144, 152–6, 168 close corporations 147, 151
minority shareholders/ related party development trends 146–9
transactions 130–33, 143 differences 12
MOM approval 132 director empowerment, and 118–20, 125–8
supervisory boards 112–14, 116, employee co-determination 144, 152–6,
130–31, 139–42 161–4, 168–77
takeover defences 122–4 EU law 116, 144, 166–71
independent directors 148–51 European Stock Corporation model 116
China, in 158–9 flexibility in 116–17
definition 149–50 gender equality 134–5
Germany, in 131 see also board diversity
incentives for 124–5 Germany, in 144, 147, 152–6, 166, 168
monitoring role 149 independent directors 124–8, 148–9, 158–9
nomination of 71–2 influences on 147
UK, in 129, 149–51 Japan, in 165–6
US, in 124–8, 149 minority shareholder protection, and 124–33
management boards 116 models, limitations of 117, 122
powers, overview of 12 Netherlands, in 144, 160–64, 166, 168
related party transactions 143 New Zealand, in 144
German model 130–33 non-executive directors 148–51
identification 125 non-shareholder appointed directors 167
regulatory challenges 125 one-tier boards 116, 132, 142, 145, 160, 174
trusteeship strategies 124–33 overview 116, 142
UK model 129–30 related party transactions 124–33, 143
South Africa, in 147, 151 Communist Party role 263, 278

supervisory boards 112–14, 116, 130–31, decision-making powers 263, 276–8, 280
139–42, 147, 152–6, 161–2, 246 regulatory approach 277
takeover defences, and 117–24 shareholder role 276
two-tier boards 116, 132, 140–44, 144, state-owned enterprises 157–8
146–64, 177–8 Christensen, H. 71
types of 145–8 Cioffi, J. 29
UK, in 120–22, 129–30, 139, 143–5, 148–51 Citigroup Inc. Shareholder Derivative Litigation,
US, in 118–21, 125–8, 134–7, 143 In re 234–7
variations, implications of 177 City Equitable case 225
Brazil 4, 415, 427–8 Clarke, D. 27
Bullock Report (1977) (UK) 139, 144–5, 171–4 climate change 97, 101–2
Business Roundtable 91, 94–5, 135–6 close corporations 147, 151
Coffee, J. 41–2, 259
Cadbury Committee Report (1992) (UK) 1, 30, common law vs. civil law regimes
148–9, 412, 414–15 causation, economic development influences
Cahn, A. 23–4 debate 3, 5–8, 33, 41, 43, 66–9
Canada directors duties and responsibilities
board diversity 184–5, 193 business judgment rule 231–3, 233–7
board structure 144 duty of care 222–5
comply or explain policies 184–5, 193, 252 loyalty 200–201, 212–13, 215–18
Corporate Governance Guidelines (2018) 193 legal origins debate 3, 5–6, 33, 43, 66–9
CSR 105–6 companies operating various businesses (COVB)
Dickerson Report (1971) 144, 167 characteristics 389–90
non-shareholder appointed directors 167 corporate groups, comparison with 390–91
shareholder litigation agency problems 392, 396–7, 409
derivative litigation 449–50 cash-flow stabilization 393–7
monetary claims 441, 443, 445 circular shareholding 403–4
C&J Energy v. City of Miami Gen 463–4, 466–7 control leverage 391, 398–403
capitalism 8–9 legal-personhood partitions 390–91,
Caremark case 230–31, 234–5 394–5
Cayman Islands 441 ownership structures 398–9
Chiarella v. United States 344 risk-sharing 393–7
Chief Technology Officers 254–5 Rozenblum doctrine 396–7
China 4 stock pyramiding 399–404
board of directors tunneling practices 391, 405–9
board committees 159 voting leverage 391, 403–4
fiduciary duties 247 wealth transfer 396–7, 405–9
independent directors 158–9 single business corporations, comparison
monitoring and oversight 247 with 389–90
state-owned enterprises 157–8 risk sharing 392–3
structure 144, 152, 156–9, 166 comparative law, generally
supervisory boards 157, 159 content and scope of 20–21
corporate enterprise types 156–8 divergence and convergence 8, 30–32, 63–4
corporate governance doctrinal analysis approach 56
board committees 159 law and economics approach 26–31, 56,
bodies 156–7 60–61, 69–72
Code of Corporate Governance (2018) legal origins debate 3, 5–8, 33, 43, 66–9
157–9 criticism of 6–8, 33, 67, 69
monitoring and oversight 247, 249 methodology of
reform 158 approaches 20–26, 31–7, 56–7
corporate law 42, 156–8 challenges 20, 24, 32–4, 36–7
CSR 112 contextualism 24–6, 29–30, 32, 35–6
economic growth 42 empirical methods 70–71
executive compensation functionalism 22–4, 27–9, 32, 35–6
Index 503
principles of 20–21 EU, in 331–2, 336–40

qualitative vs. quantitative analysis 32–5 Germany, in 331–6
rebranding 56–7 Italy, in 334–8
shifting trends 29–31, 56–7, 62–3 US, in 328–40
similarities vs. differences 22–6, 35–7 convergence, generally
posture vs. perspective 20–26, 31–6 developments in 284–5
research design 31–6 economic efficiency theories, and 285–6
comply or explain policies formal convergence 63–4
board diversity quotas 184–5, 192–3 functional convergence 63
board of directors quotas 184–5, 192–3 interest groups, influences of 286–7
Canada, in 184–5, 193 interpretation 284, 324
enforcement mechanism, role as 414–16 legal transplant effect 285
EU, in 416 path dependence theory, and 8, 63–4, 285–7
Germany, in 131, 155–6 accounting regulation, and 287–8
monitoring and oversight 252 economic vs. doctrinal path
Netherlands, in 416 dependence 286–7
UK, in 30, 129, 184–5, 192–3 corporate governance, generally
Conac, P.-H. 61 comparative approaches 62–3
confidential information, duty to protect 485, 487–8 convergence trends 8, 63–4, 284–5
construct validity 50, 52 CSR, influences on 104–7
contextualism 24–6, 32, 35–6 definition 62, 412
law and economic approach, and 29–30 development 412
Control Enhancing Devices (CEDs) 326 enforcement see enforcement of corporate
controlling shareholders governance
agency problems, regulatory approaches sociological perspective 112–13
326–7 system types 117–18
Control Enhancing Devices (CEDs) 326 corporate governance indices 50, 52, 66–8
corporate ownership concentration trends corporate law, generally
325–6 see also corporate purpose
diversified enterprises, role in see companies agency theory 239
operating various businesses (COVB) common features of 3–4
duties, generally 324–5 comparative approaches
directors duties, differences from 324 challenges of 57, 60–61, 68
duties to minority shareholders 324, 344–5 characteristics of 60–61
abuse of rights 333–5 development of 59–61
business judgment rule 329–30, 339–40 doctrinal approach, limitations of 58–9
corporate groups, and 335–6 empirical methods 70–71
EU, in 330–32, 336–40, 343 functions of 60–61
fairness 328–30, 336–40 generally 56–7
France, in 334 law and economics approach 60–61,
Germany, in 331–6 69–72
Italy, in 334–8, 343 limitations of 65
loyalty 327–40 minority shareholder expropriation, of
privileged information 343–4 58–9, 61, 64–5, 68–9
related party transactions 331–40 need for 59–60
sale of control transactions 341–3 doctrinal analysis approach 57–61
US, in 328–40, 344 conflicts of interest, treatment of 58
economic interest, interpretation 397 limitations of 58–9
institutional investors, and minority shareholder expropriation,
concentrated ownership 385–7 of 58–9
conflicts of interest 71–2, 386 principles of 57–8
majority share, need for 397 shareholder status 58–9
powers, historical influences of 303–6 economic development, influences on see
related party transactions 331–40 economic development
corporate groups 335–6 historical development of 73–6
challenges of 75 institutional investors, influences of

charters 73–4 106–7, 113
financial crisis impacts on 75 institutional support for 93–5, 97–100
private status, development of 74–5 climate change focus 97, 101, 111–13
public attitudes 75–6 financial value of ESG data 97–9, 114
public good/societal functions 73–4 global investment trends 97, 99–100
shareholder value model 74–6 law influences on
nexus of contracts theory 76–7 capital market regulation 107–10
purpose of 52–3 corporate governance regime 104–7
corporate purpose development variations, reasons for
Business Roundtable policy developments 111–12
91, 94–5, 114, 135–6 global developments 109–10
contract nexus theory, and 77 non-financial reporting obligations
CSR, conflicts with 94–6, 114 107–11
duties to non-shareholder interests, and shareholder-oriented systems, in 106–7
79–80, 89–90 social welfare structure 103–4
enlightened shareholder value principle modern slavery disclosure 109, 111–12
78–80, 104–5, 108–9, 137–9 New Paradigm 95–6
financial crisis influences on 75, 78 Paris Agreement (2015) 101
historical background 73–6 policy development, reasons for 111–14
nexus of contracts theory 76–7 Principles for Purposeful Business (2019) 96
overview 52–3, 73–6, 134 productivity benefits of 114
pluralist theories 77–8 Protect, Respect, and Remedy initiative
profit maximization obligations 77 (UN) 101
purpose of corporate law, and 52–3 public awareness and expectations 92–3
rebalanced structures for 89–91 shareholder activism conflicts with 92–3,
shareholder value model 74–6 106–7, 113
shareholder wealth maximization 76–7, shareholder-stakeholder accountability
80–82, 88–9 conflicts 94–5
short-termism, and 73, 82–8, 91 state-corporation relationships 92
dangers of 83–6 sustainable asset trends 97
definition 83 Sustainable Development Goals 101, 113
financial reporting obligations 86–7, Task-Force on Climate-related Financial
90–91 Disclosures (TCFD) 101–2
restriction incentives 90–91 transnational initiatives 100
types of 86–8 limitations 102–3
stakeholder theory 53–4, 96 multilateral agreements 100–102
UK law developments 78–80 voluntary codes 100
US law developments 80–82 UK law developments 104–5, 108–9
corporate social responsibility (CSR) US law developments 105, 110, 113
analysis, challenges of 103 Corwin v. KKR Financial Holdings 352, 464–7,
capital market regulation, and 107–10 484, 492
climate change focus 97, 101, 111–13 COSO ERM Integrated Framework 246–7, 250
concept development 92 Council on Institutional Investors (CII) 94–5
corporate purpose, and 94–6, 114 Covid-19 pandemic
Covid-19 pandemic, implications of 93, CSR investment, influences on 93, 99–100
99–100 employee co-determination implications
definition 92 of 176–7
demographic influences on 99 cultural difference, influences of 31
ESG data, role of 97–9, 114 Cunningham, L. 299
EU law and policy developments 107–8, 113 custom or commercial practice 23
Guiding Principles on Business and Human
Rights (2011) 101–2 Daines, R. 48
hybridization developments 104–6 Dallas, L. 83
index funds 106–7 Davos Manifesto (2020) 96
Index 505
definitions France, in 223–5

comparative corporate governance 62 Germany, in 223–4, 226, 239–41,
corporate governance 1, 29 249–50
Dell Inc. v. Magnetar Global 468–9 judicial interpretation, limitations of
DFC Global v. Muirfield 468–9 220–21
Dickerson Report (1971)(Canada) 144, 167 monitoring and oversight 242, 247–55
Diem, H.-J. 146 overview 220–21
directors duties and responsibilities standard of care 225–6
business judgment rule UK law 223
behavioural expectations 227–8, 231 US law 223, 226, 249
burden of proof 229 duty of loyalty 200–219, 249
civil law regimes, in 231–3, 236–7 civil law regimes 200–201, 207–11,
Delaware approach 229–38 215–18
development 226–8 common law regimes 200–201, 203–7,
divergence and convergence 231–2, 211–15
238–9, 241 convergence and divergence 249–50
economic narrative interpretation corporate opportunity rules 211–15,
237–41 217–18
financial crisis investment decisions, duty not to compete 211–12, 215–18
liability for 233–7 EU law 204, 208–11
France, in 231 fairness test 206, 478
Germany, in 232–3, 236–7, 239 interpretation challenges 200–201
good faith requirement 227–31 monitoring and oversight 242, 247–55
oversight liability 230–31, 233–7 no conflict rule 206, 477–8
overview 220–21 related party transactions 201–11, 218
precautionary actions, and 228 UK law 203–7
purpose of 237–8 US law 203, 206–7, 212
standard of care 227–33 fiduciary duties see duty of care; loyalty
UK law 227–8, 231 institutional investor requirements 200
US law 228–37 MBOs, in see management buyouts
common law vs. civil law regimes monitoring and oversight see monitoring and
business judgment rule 231–3, 233–7 oversight
duty of care 222–5 no conflict rule 205–6, 477–8
loyalty 200–201, 212–13, 215–18 non-shareholder interests, and 79–80, 89–90
confidential information, duty to protect related party transactions, in see related party
485, 487–8 transactions
corporate opportunity rules 211–15, 217–18 self-dealing see related party transactions
duty not compete, comparison 212–13 tunneling practices 203–4
line of business test 213–14 diversified enterprises see companies operating
remedies for breach 216–17 various businesses
UK law 212–15 diversity
US law 213–15, 217 board of directors, in see board diversity
venture capital investments, and regulatory comparisons, challenges of
217–18 179–80
CSR, and 104–5 doctrinal analysis approach 57–61
duty not to compete 211–12, 215–18 Dodge v. Ford Motor Co 81
challenges of 216 dogmatic approach 57–61
corporate opportunity rules, comparison Donald, D. 23–4
212–13 Du Plessis, J. 152–3, 168
development 215 duty of care see directors duties and
remedies for breach 216 responsibilities
duty of care 220–21 duty of loyalty see directors duties and
civil law development 223–4 responsibilities
common law development 222–5
convergence and divergence 249–50 earnings-based investments 86
Easterbrook, F. 27–8, 239 private bodies, by 417–22

eBay Domestic Holdings v. Newmark 81 private shareholder litigation 414, 417
economic development 40 shareholders, by 413–17
assumptions of 39 soft law rules 414–17
causation specialized bodies, by 419–22, 429
common vs. civil law regimes 3, 5–8, stock exchanges, by 412, 418–19, 429
33, 41, 43, 66–9 UK, in 414–15, 420–21
direction of 39–41 US, in 414, 416, 418
growth to law 41–4 public mechanisms
indogeneity problem 66 Brazil, in 427–8
investment increase, and 44–7 Central Banks, by 422
law to growth 3, 5–8, 33, 41, 43–4, France, in 425–6
52–4, 66–9 generally 412–13, 422–3
non-law influences 42–3 Germany, in 423
relationship variations 40–41 hard law rules 426–30
rolling interactions 41, 44 informal enforcement 426
stock market development 41–2, 46 Italy, in 427
concept overview 38–40 limitations of 423
corporate law characteristics, importance of name and shame policies 424–5
board independence 48 Netherlands, in 424
Delaware incorporation 48–9 Portugal, in 424–5
disclosure and shareholder rights 51–2 public authorities, by 423–6
enforcement 52 Spain, in 424
non-US jurisdictions, in 51–2 Turkey, in 425, 428
US, in 48–50 UK, in 423–4
corporate law reforms US, in 428–30
informal capital, access to 46–7 public-private debate 429–30
investment increase, and 44–7 shareholder litigation 414, 417, 438
corporate purpose, and see corporate purpose costs, fees and funding 434, 436–8
investor protection 38–40 derivative litigation 432, 435–7, 448–52
excessive protection, implications of 44–6 length of 433–4
foreign investor choices, and 45–6 monetary claims 438–45
investment, influences on 44–6 non-monetary claims 445–8
variations in law, impacts of 39 remedies 435–6
limitations of 54–5 type of company, influences of 432–3
efficient capital market hypothesis 84–6 types of suit 432–3
Eisenberg, M. 12 US, in 414, 417
enforcement of corporate governance sources of 412–13
codes of conduct 412–13 stock exchanges role in 412, 418–19, 429
comply or explain policies UK, in
board diversity quotas 184–5, 192–3 Cadbury Report (1992) 412, 414–15
Canada, in 184–5, 193 Corporate Governance Code (2018)
Germany, in 131, 155–6 420–21
monitoring and oversight 252 enforcement, public authorities for 423–4
UK, in 30, 129, 184–5, 192–3 Financial Reporting Council, role of
litigation trends 16–17 420–21
nature of 412–13 informal private enforcement 416
private mechanisms 412–17 specialized bodies, monitoring by 420
comply or explain policies 414–16 US, in
engagement policies 415 entrepreneurial plaintiff bar 16
France, in 421–2 Foreign Corrupt Practices Act 412, 428
Germany, in 420 public enforcement mechanisms
hard law rules 414 428–30
Italy, in 420 Sarbanes-Oxley Act 418, 428
limitations of 413–18, 429 shareholder litigation 414, 416
Index 507
stock exchanges, by 418 directors duties and responsibilities

enlightened shareholder value principle 78–80, 204, 208–11
104–5, 108–9, 137–9, 250 executive compensation 317
Enterprise Risk Management (ERM) 246–8, 250 minority shareholders duties 365
ESG data (environmental, social and governance) monitoring and oversight 257
97–9, 114 related party transactions 204, 208–11,
EU law 336–40
Accounting Directives 262, 289 rights limitations 308–9
board of directors shareholder proposals 308–9
employee co-determination 140, shareholders, generally
169–71 directors, election and removal of
Employee Participation Directive 316–17
169–71 executive compensation
EU Fifth Directive on Company Law decision-making 270, 317
144, 167–9 power trends 302, 306–7
European Company model (SE) 144, rights limitations 308–9
166–71 shareholder proposals 308–9, 311,
structure 168–9 316–17, 322–3
capital market regulation Shareholder Rights Directive 308–9, 317
Action Plans 284 stock ownership structures 319–20
CSR, and 107–8 Takeovers Directive 319
non-financial reporting obligations 107–8 executive compensation
controlling shareholders decision-making powers
duties to minority shareholders 330–32 China, in 263, 276–8, 280
mandatory tenders offers 342 common approaches 264
Market Abuse Regulation 343 conflicts of interest 264
privileged information 343 consultants, role of 266
sale of control transactions 342 convergence and divergence 263,
shareholder loyalty 330–32 265–70, 279–81
Shareholders Rights Directive 336–40 directors, arm's length bargaining
corporate governance 264, 266
convergence trends 284–5 disclosure rules 267
shareholder engagement policies 415 EU, in 270, 317
Shareholder Rights Directive 125, Germany, in 263, 269–70, 280
131–2, 141, 257, 284 independent compensation committees
Takeovers Directive 123, 284 263, 265–7
CSR 107–8, 113 India, in 263, 274–6, 279–80
directors duties and responsibilities Japan, in 263, 271–4, 279–80
domestic law conflicts 210–211 managerial power theory 266
loyalty 204, 208–11 OECD Principles of Corporate
monitoring and oversight 257, 262 Governance 264
Shareholder Rights Directive 204, optimal contracting theory 266
208–11 salary caps 274–5, 277
executive compensation 270, 317 shareholder role 263–4, 266–7, 270–73,
financial disclosure rules 287, 289, 291–6 276, 278–80
Accounting Directives 262, 289, 293 UK, in 263, 268–9, 278–9
IFRS adoption 292–6 US, in 263, 265–7
Market Abuse Regulation 71, 343 EZ Corp, In re 330
related party transactions
Shareholders Rights Directive 204, fiduciary duties see directors duties and
208–11, 336–40 responsibilities
US regime, comparison 339–40 financial disclosure rules
Shareholder Rights Directive 204, 208–11 accounting standards, convergence and
corporate governance 125, 131–2, 141 divergence 282–3, 290–300
CSR, and 107–9
directors liabilities, and 299–300 historical development 152–3

EU law 287, 289, 291–2 independent directors 131
financial scandals, and 299–300 MOM approval 132
Germany, in 289 related party transactions 130–33, 143
path dependence influences on 283, 287–8, structure 144, 147, 152–6, 166
296, 298 supervisory boards 112–14, 116, 122–4,
regulatory approaches 282–3, 290–91 130–31, 130–33, 139–42, 152–6,
rules-based vs. principles-based, debate 263, 269–70
298–300 takeover defences 122–4
short-termism, and 86–7, 90–91 controlling shareholders
UK law 282–3, 288, 292–4 corporate groups, in 335–6
US GAAP vs. IFRS, conflicts between duties to minority shareholders 331–6
282–3, 288, 292–300 related party transactions 331–4
US law 282–3, 288, 296–300 corporate governance
Fink, L. 95, 113 comply or explain policies 131, 155–6
Fischel, D. 27–8, 239 Corporate Governance Code 131–2,
France 155–6
accounting rules 289–90 CSR, and 106
board of directors development 122, 285
diversity 179–80, 183–4, 187–8, 199 enforcement bodies 420
MOM approval 129–30 insider control mechanisms 122–3
shareholder value approach 136–7 public enforcement authorities 423
structure 116 related party transactions 130–33, 143
controlling shareholders duties 334 shareholder enforcement 417
corporate governance supervisory boards 116, 122–4, 130–33
enforcement bodies 421–2 takeover defences 122–4
private enforcement 416–17 corporate law reforms 239–40
public enforcement 425–6 cross-shareholdings 122–3
shareholder enforcement 416–17 CSR 106
shareholder engagement 415 directors duties and responsibilities
CSR 108 business judgment rule 232–3, 236–7,
directors duties and responsibilities 239–40
business judgment rule 231 corporate opportunity rules 215
duty not to compete 215 duty not to compete 215–16
duty of care 223–5 duty of care 223–4, 226, 239–41,
loyalty 204–5, 207, 211, 215 249–50
related party transactions 204–5, 207, 211 loyalty 205, 210, 215–16, 249–50
shareholder activism 416–17 monitoring and oversight 249–50,
shareholder proposals 304, 310–311, 318 252, 257
stock market development 42 related party transactions 205, 210
takeover defences 318 executive compensation 263, 269–70
Fried, J. 72 decision-making powers 269–70, 280
Friedman, M. 134 employee co-determination 269
functionalism 22–4, 32, 35–6 reasonableness requirement 269
law and economics approach, and 27–9 regulatory approaches 270
limitations of 29 supervisory board role 263, 269–70
institutional investors 122, 370
Gaberhüel, T. 146 minority shareholders
Gelter, M. 419 duties and responsibilities 353
Germany expropriation 59, 65
board of directors fiduciary duties 362
diversity 184 protection 130–33
employee co-determination 135, shareholder litigation
139–42, 144, 152–6, 168, 269 derivative litigation 451–2
financial disclosure rules 289, 294 monetary claims 440–41, 443, 445
Index 509
non-monetary claims 446 activist investors 348–9, 353–4, 367, 370–71

shareholder proposals 304–5, 310–311, activist directors 379–84
318–19 controlled companies, in 386–7
stock market development 42 corporate governance enforcement role
supervisory boards 112–14, 116, 130–31, 416–17
139–42, 263, 269–70 engagement trends 374–9
takeover defences 122–4, 318–19 influences of 372–3
Gilson, R. 29, 381 proxy fights 373, 379–80, 387–8
globalization 63–4, 104 controlled companies, in 385
Goldman Sachs Group, Inc. Shareholder concentrated ownership 385–7
Litigation, In re 235–7 countries in transition, in 387–8
Gordon, J. 31 controlling shareholders, conflicts of interest
Goshen, Z. 353 71–2, 386
Gourevitch, A. 7 corporate governance role
Greenbury Report (1995) (UK) 268 controlled companies, in 385–7
Greening, D. 106 director appointments 379–84
Guth v. Loft doctrine 213–14 focus of interventions 375–9
management influences of 372–3
Hage, J. 32 social and cultural influences on
Hamdari, A. 71–2 369–70
Hannes, S. 353 costs and conflicts of 348–9, 354–5
Hansmann, H. 8–9, 28, 282 criticism of 348–9
hedge funds 348–9, 355–8, 364 CSR, influences of 106–7, 113
Henderson, T. 259 director appointments, role in 379––384
Higgs Report (2003) (UK) 150–51 directors duties and responsibilities, and 200
Hong Kong 353, 443 dispersed ownership structures, and 371,
Hopt, K. 2, 214–15 387–8
duties and responsibilities of 361–5, 367
ICGN Guidance on Corporate Risk Oversight 257 effectiveness of participation 353–4
IKB case 236–7 engagement trends 374–9
independent directors 148–51 growth trends 368, 371
China, in 158–9 influences of 368, 370–71
definition 149–50 corporate governance, on 375–8
Germany, in 131 management incentives 372–3
incentives for 124–5 information sharing, and 382–4
monitoring role 149 legal/ management approaches 361–5
nomination of 71–2 minority-minority agency conflicts 348–9
UK, in 129, 149–51 monitoring and oversight role 256–7
US, in 124–8, 149 passive investors 348–9, 358–61, 367
index funds 348–9, 348–51, 359–61 regulatory approaches 371
India 4 short-termism, and 348–9, 356
board diversity 184, 191–2 stewardship responsibilities, and 364–5
CSR 54, 111 trends 347–8, 350–51
economic growth 42, 45–6 International Accounting Standards Board (IASB)
executive compensation 293, 296–7
decision-making powers 263, 274–6, International Accounting Standards Committee
279–80 (IASC) 293, 296–7
regulatory approach 274–5 International Corporate Governance Network
salary caps 274–5 (ICGN) 245–6
shareholder role 275–6, 280 International Organization of Securities
minority shareholders 353 Commissions (IOSCO) 296–7
informal capital sources 46–7 investment sources 86
institutional investors corporate law influences on 44–7
accounting standards, influences on 298 excessive investor protection, implications
activist directors 379–84 of 44–6
informal sources 46–7 Kraakman, R. 3–4, 8–9, 28–9, 70, 282, 381
investor protection
legal origins debate, and 3, 5–8, 33, 43, 66–9 law and economics approach
ISO 31000 guidelines on risk management 246 behavioural economics, and 29–30
Israel 380–81, 387–8 contextualism, and 29–30
Italy corporate law and governance, to
benefit corporations 136 applicability to 26–31, 69–70
board diversity 184, 188–9, 196 comparative law, and 60–61, 69–72
board structure 116 research trends 70–72
controlling shareholders definition 69
corporate groups, and 335–6 functionalism, and 27–9
duties to minority shareholders 334–8 generally 26, 31, 56, 60–61, 69
related party transactions 334–8 institutions, sociological perspectives on
sale of control transactions 343 30–31
corporate governance enforcement 420, 427 legal origins debate 3, 5–8, 33, 43, 66–9
directors duties and responsibilities criticism of 6–8, 33, 67, 69
duty not to compete 215 wider influences of 67
loyalty 204, 207, 211, 215 Legrand, P. 25, 37
related party transactions 204, 207, 211 leveraged buyouts 479
institutional investors 380 see also management buyouts
minority directors 128 Liang, H. 106–7
minority shareholder empowerment 353 Licht, A. 31
Lim, E. 363
Jackson, G. 105–6, 112–13 Linotype case 362
Japan Lipton, M. 95
board of directors Luxembourg 418–19
board of auditors model 165–6 Lynch Communications 329
fiduciary duties 249, 252
monitoring and oversight 249, 252 Macey, J. 1
structure 165–6 Malaysia 353
corporate governance regulations 165–6 management buyouts
executive compensation characteristics of 479–80
decision-making powers 263, 271–4, definition 479
279–80 directors duties and responsibilities
Nissan scandal 273–4, 280 agents' duties 484–5
regulatory approach 271–3 back-end duties 490–93
institutional investors 370 challenge opportunities 478–9
keiretsu cross-shareholding, influences of 271 cleansing devices 483–6
minority shareholder expropriation 59, 65 confidential information, duty to protect
shareholder litigation 485, 487–8
derivative litigation 451 disclosure of conduct rules 478–9,
monetary claims 441–2, 445 488, 493–7
non-monetary claims 446–8 fairness test 206, 478, 483
statutory auditors 165–6 front-end duties 482–90, 496
Johnson, R. 106 law reform needs 498–9
legal uncertainty, and 498
Kahn v. Lynch Commc’n Sys 397 no-conflict rule 477–8, 486–7, 496
Kahn v. MFW 329–30, 336–40, 352 reasonableness 491–2
Kaplan, S. 85 self-interest conflicts 477–8, 486–7
Katelouzou, D. 102 UK, in 477–8, 486–90, 492–3, 496–8
Kavame Eroglu, Z. 297 UK vs. US law, comparison 477–9,
Kim, E. & Lu, Y. 45 490, 493–4, 496–8
Klausner, M. 50 US, in 478–9, 483–6, 491–2, 496–8
Kötz, H. 22–3, 35 leveraged buyouts 479
Kozuka, S. 165 private equity, role of 480–82
Index 511
risks and limitations of 481–2 corporate groups, and 335–6

self-interest conflicts 478 EU, in 330–32, 331–2, 336–40, 343
types of 479–80 fairness 328–30, 336–40
value creation function 481 France, in 334
market competition Germany, in 331–6
corporate law convergence, and 63–4 Italy, in 334–6, 334–8, 343
Matten, D. 103–4 loyalty 327–40
Mayer, C. 36, 95–6 privileged information 343–4
Means, G. 62, 64 related party transactions 331–40
mergers and acquisitions sale of control transactions 341–3
corporate governance, and US, in 328–30, 328–40, 336, 344
appraisal rights 459, 462, 468–9 corporate governance regimes, and
deal protection provisions 460–62, 471–4 limitations of 347, 361
exit strategies 459 shareholder-driven governance 351–3
pre-closing period, during 460 definition and interpretation 346, 365
pre-signing period, during 458–9 diversified enterprises, role in see companies
self-interest, management of 458–9 operating various businesses (COVB)
shareholder litigation, and 459 duties and responsibilities 347, 361–5
UK, in 120–21, 455–7, 459–60, 469–76 activist investors, and 361
US, in 118–21, 455–6, 459–62, 475–6 control restrictions 364
deal protection provisions fiduciary duties 361–4
UK, in 460, 471–4 regulatory approaches 363–4
US, in 460–62 stewardship role 364–5
director powers unfair prejudice remedy 363
restrictions on 471–5, 475–6 expropriation
UK vs. US approaches 455–7, 471, 475–6 comparative perspectives 61, 64–5,
hostile takeover defences see takeover 68–9, 71–2
defences doctrinal analysis approach 58–9
management buyouts see management hedge funds 348–9, 355–8
buyouts index funds 348–51, 359–61, 364
overview 17–18 institutional investors see institutional
shareholder litigation 459 investors
ex post judicial review 464–6 minority-minority conflicts 348–9, 354–5
fiduciary duty litigation 462–7, 471, 475 nature and development of 350–51, 365
injunctions 463–4 powers of
UK, in 471 development 352–4
US, in 462–7 MOM approval 126–7, 129–30, 132, 353
shareholder powers 470–71 voting 353, 360–61
restrictions on 455–7, 462, 475 protection of 346, 351–2, 361
UK vs. US approaches 455–7, 471, 475–6 rights of 347
trends 17–18 shareholder activism 353–4, 355, 367
Michaels, R. 22 concerns and conflicts 357–8
Micheler, E. 286 control restrictions 364
microfinance 46–7 corporate governance enforcement role
Milhaupt, C. 2, 44 416–17
Miller, M. 36 duties and responsibilities, and 361–5
Miller, R. 26 hedge funds 348–9, 355–8, 364
minority of the majority approval (MOM) 126–7, influences on 356–7
129–30, 132, 353 shareholder passivity 348–51, 358–61, 367
minority shareholders concerns and conflicts 360–61
agency conflicts 348–9, 354–5 index funds 348–51, 359–60
comparative law homogeneity 347 influences on 359–60
controlling shareholder duties to 324, 344–5 stewardship responsibilities, and 364–5
abuse of rights 333–5 Minow, N. 94–5
business judgment rule 329–30, 339–40 modern slavery 109, 111–12
Modigliani, F. 36 Netherlands
monitoring and oversight board of directors
business judgment rule, and 230–31, 233–7 directors, definition 163
challenges 242, 253–4 employee co-determination 161–4, 168
Chief Technology Officers 254–5 non-executive managers 161
China, in 247 structure 144, 160–64, 166
common features 245–6 supervisory boards 161–2
compliance risk 243 works councils 152, 161–4
controlling shareholders, duties of 338–40 corporate governance
corporate compliance 247–8 comply or explain policies 416
corporate officer roles 255–6 development 162
creditors, role of 258–9 enforcement 424
direct shareholder monitoring 246 oversight mechanisms 160–161
divergence and convergence 249–50 corporate law 160, 162
employee role 258 Peters Report (1997) 162
enforcement approaches 254–62 shareholder proposals 305, 309–11, 318–19
Enterprise risk management (ERM) takeover defences 318–19
246–8, 250 Neubaum, D. 106–7
EU law 257, 262 New Zealand
fiduciary duties 242, 247–55 board of directors
gatekeepers 259 structure 144
Germany, in 249–50, 252, 257 shareholder litigation
global influences on 242, 245 monetary claims 445
importance of 242 nexus of contracts theory 76–7
internal monitoring 255–6 non-executive directors 148–50
international influences on 245–7, 261–2 monitoring role 149
mandatory disclosure 261–2 UK, in 149–50
meta-regulation 261 Norway
monitoring boards 244–6 board diversity 179–87, 199
networked governance 254 gender equality 179–87, 182, 199
operational/ business risk 243 Nottage, L. 165
outsourcing 259
public authorities, by 423–6 OECD
regulatory approaches 242, 245, 248, Principles of Corporate Governance 245,
260–62 261–2, 264
related party transactions, and 338–40 Overend & Gurney v Gibb 227–9
remedies for breach of duty 252–3
risk, definition and interpretation 243–4 Paris Agreement (2015) 101
risk oversight and risk management path dependence theory
243–6, 253–5 convergence, and 8, 63–4
self-regulation 259–60 economic vs. doctrinal path dependence 286–7
shareholder monitoring 256–7 financial disclosure rules, and 283, 287–8,
soft law standards 259–60 296, 298
sources of risk oversight 255 Peters Report (1997) (Netherlands) 162
specialized bodies, role of 419–22, 429 Petrin, M. 29, 252
stakeholder monitoring 258 Pistor, K. 2, 44
stock exchanges, by 412, 418–19, 429 PNB Holding Co. Stockholders Litigation, In re 484
supervisory boards 246 poison pills see takeover defences
UK, in 250, 252, 256–8 political theories of comparative corporate
US, in 245, 247, 251, 261 governance 6–8
variations, reasons for 242 Portugal 424–5
Moon, J. 103–4 Principles for Purposeful Business (2019) 96
Moore, M. 29, 252
Morck, R. 401–2
qualitative vs. quantitative analysis 32–5
Index 513
Re Walt Disney Co. Derivative Litigation 226 policy development 243

related party transactions purpose of 244
accounting standards, and 203–4 regulatory approaches 245, 248
board of directors 143 risk, interpretation 243–4
Germany, in 130–33 sources of risk oversight 255–6
identification 125 US law 245, 247
regulatory challenges 125 risk, types of 243–4
trusteeship strategies 124–33 Roe, M. 6–7, 62–3, 85
UK, in 129–30
US, in 125–8 Saba Software, In re 466
controlling shareholders, and 331–40 Salladay v. Lev 484
corporate groups, and 335–6 self-dealing see related party transactions
EU, in 331–2, 336–40 Seligman, J. 251, 261
Germany, in 331–6 shareholder litigation 414, 417, 438
Italy, in 334–8 appraisal/ dissenter rights 443–5
monitoring and oversight 338–40 Canada, in 441, 443
US, in 328–30, 336, 338 class actions 432, 442
directors duties and responsibilities compensation claims 442–3
201–11, 218 costs, fees and funding 434, 436–8
accounting standards 203–4 derivative litigation 432, 435–7, 448–52
civil law regimes 207–11 Germany, in 440–41, 443, 445–6, 451–2
common law regimes 205–7 incentives for 434
EU law 204, 208–11 indemnity orders 437
France 204–5, 207, 211 injunctions 447–8
Germany 205, 210 Japan, in 441–2, 445–8, 451
Italy 204, 207, 211 length of 433–4
justifications for 203 mergers and acquisitions, and 459
loyalty, and 201–11 ex post judicial review 464–6
overview 202–3 fiduciary duty litigation 462–7, 471, 475
regulatory approaches 203–4 injunctions 463–4
tunneling practices 203–4 UK, in 471
UK law 203–8 US, in 462–7
US law 203, 206–7 monetary claims 438–45
Renneboog, L. 106–7 no-fault grounds 441
research trends 1, 3–4, 9 non-monetary claims 445–8
convergence in 8–9 oppression/ unfair prejudice actions 439–42
legal origins debate 3, 5–8, 33, 43, 66–9 pre-trial proceedings 433–4
political theories 6–8 quasi-appraisal remedy 442
Restrepo, F. 461 remedies 435–6, 439, 442–3, 447–8
Riles, A. 24 shareholder resolutions, challenges to 445–7
risk management and monitoring type of company, influences of 432–3
challenges 253–5 types of suit 432–3
Chief Technology officers, role of 254–5 UK, in 443–5, 450
common features 245–6 US, in 414, 417, 440–42, 444–5, 447, 450
compliance risk 243 withdrawal mechanisms 438–42
direct shareholder monitoring 246 shareholder proposals
enforcement approaches 254–62 amendment of governing documents 312–13
Enterprise risk management (ERM) 246–7 Belgium, in 310–311
fiduciary duties 242, 247–55 comparison challenges 319–22
institutional investors role 256–7 convened meetings, at 307–11
international standards 246 development of 302–7
monitoring boards 244–6 directors, election and removal 313–17
OECD Principles of Corporate Governance EU, in 302, 306–9, 311, 316–17
245 executive compensation decision-making 317
operational/ business risk 243 France, in 304, 310–311, 318
Germany, in 304–5, 310–311, 318–19 shareholder wealth maximization, and

institutional view, impacts of 305–6 82–3, 88–9
Netherlands, in 305, 309–11, 318–19 Siems, M. 35
non-binding proposals 310–312 Singapore 4, 353, 441, 450
reimbursements for 309 Singh v. Attenborough 465
special meetings, at 307–8, 311–12 Smith v Van Gorkom 230
stock ownership structure influences on South Africa 4
319–20 board diversity 191
takeover defences 317–19 board structure 147, 151
trends 302, 322–3 close corporations 147
US, in 302, 307, 309–10, 312–19 CSR 111–12
uses for 312–19 South Korea 4
shareholder value model 74–80 Spain 424
shareholder wealth maximization 76–80, 80–82 Spamann, H. 6, 33–4, 72
alternative views to 77–8, 96 speculative trading 86
enlightened shareholder value principle, and stakeholder models 7, 53–4, 96
78–80, 104–5, 108–9, 137–9, 250 stock exchanges
short-termism, and 82–3, 88–9 corporate governance enforcement by 412,
shareholders, generally 418–19, 429
controlling shareholders see controlling stock markets
shareholders development 41–2, 46, 70–71
institutional investors see institutional financial reporting obligations 86–7, 90–91
investors self-regulation 42
minority shareholders see minority Subramanian, G. 461
shareholders Summers, L. 84–5
powers of supervisory boards
annual meeting resolutions 307–11 corporate governance strategies 122–4,
comparison challenges 319–22 130–33, 139–42
executive compensation monitoring and oversight 246
decision-making 263–4, 266–7, structure 112–14, 116, 130–31, 139–42, 246
270–73, 276, 278–80 takeover defences 122–4
historical development 303–7, 322–3 Sustainable Development Goals 101
purpose 307–8 Sweden 381, 419
shareholder proposals see shareholder Switzerland 146, 249, 419
proposals
special meeting resolutions 307–8, takeover defences 117–24
311–12 Belgium, in 318
stock ownership structure influences director empowerment 118–20
319–20 EU, in 318
shareholder proposals see shareholder France, in 318
proposals Germany, in 122–4, 318
Shinn, J. 7 Netherlands, in 318–19
Shleifer, A. 1, 3–6, 33, 43, 66–9 shareholder decision-making 120–22
short-termism shareholder proposals 317–19
benefits of 84–5 supervisory board approval 122–4
corporate purpose, and 73, 82–8, 91 UK, in 120–22
dangers of 83–6 US, in 118–20, 317–18
definition 83 takeovers
financial reporting obligations, and 86–7, EU Takeovers Directive 122–3
90–91 friendly takeovers see mergers and
institutional investors, and 348–9, 356 acquisitions
investor short-termism 86–7 hostile takeovers see takeover defences
managerial short-termism 87–8 Tallarita, R. 135
policy developments 91 Task-Force on Climate-related Financial
restriction incentives 90–91 Disclosures (TCFD) 101–2
Index 515
Topps Company Shareholders Litigation, In re 491 Financial Reporting Council, role of

Tricker, R. 146, 148–9 420–21
Trulia, In re 463 related party transactions, of 129–30, 143
Tuch, A. 206 self-regulation 23
tunneling practices 203–4 shareholder decision-making 70,
see also related party transactions 120–22, 129–30
COVB vs. corporate groups, comparison specialized bodies, monitoring by 420
391, 405–9 US law, differences between 23–4, 70–71
direct tunneling 405 corporate law, development of 73–4
indirect/ internal transaction tunneling 406–9 corporate purpose
legal buffers 408–9 enlightened shareholder value principle
Turkey 425, 428 78–80, 104–5, 108–9, 137–9, 250
historical development 73–5
UK law reforms 78–80
board monitoring and oversight 250, 252, 262 CSR
shareholder monitoring 256–7 corporate governance reform, and 104–5
stakeholder monitoring 258 modern slavery, and 109, 111
board of directors non-financial reporting obligations
Brexit, implications of 176 108–9, 111
Bullock Report (1977) 139, 144–5, 171–4 directors duties and responsibilities
comply or explain policies 184–5, accounting standards 203
192–3, 252, 414–15 business judgment rule 227–8, 231
Corporate Governance Code 2018 corporate opportunity rules 212–15
151, 175–6 disclosure of conduct rules 479, 488,
Covid-19 pandemic implications for 492–3, 496–7
176–7 duty of care 223
diversity 184–5, 192–3 fiduciary duties 205–6, 250
employee decision rights 139, 171–7 loyalty 203–6, 208, 212–15
enlightened shareholder value 137–9, 250 MBOs, in 477–8, 486–90, 492–3, 496–8
fairness opinions 120–21 monitoring and oversight 250, 252,
Hampel Committee 1998 149–50 256–8, 262
Higgs Report (2003) 150–51 no conflict rule 205–6, 477–8, 486–7, 496
independent directors 149–51 related party transactions 203–6, 208
law reform 148, 171–7 enforcement of corporate governance
MOM approval 129–30 Cadbury Report (1992) 412, 414–15
no frustration rule 120–21 Corporate Governance Code (2018)
non-executive directors 129, 149–51 420–21
related party transactions 129–30, 143 enforcement, public authorities for 423–4
related party transactions 129–30, 143 Financial Reporting Council, role of
shareholder decision-making 120–22, 420–21
129–30 shareholder litigation 436–7
structure 120–22, 129–30, 139 specialized bodies, monitoring by 420
takeover defences 120–22 executive compensation
Cadbury Report (1992) 148–9, 412, 414–15 Corporate Governance Code (2018) 268
corporate governance decision-making powers 263, 268–9,
City Code on Takeovers 120–21, 278–9
487–90, 492–3, 495–6 Greenbury Report (1995) 268
comply or explain policies 30, 129, regulatory framework 268–9
184–5, 192–3, 414–15 shareholder role 263, 279
Corporate Governance Code (2018) 80, financial disclosure rules
129, 139, 192–3, 420–21 US GAAP vs. IFRS, conflicts 282–3,
diversity quotas 192–3 288, 290–92
enforcement, public authorities for 423–4 institutional investors 350, 375
enlightened shareholder value principle M&A
78–80, 104–5, 108–9, 137–9, 250 deal protection provisions 460, 471–4
deal structures 470 Revlon doctrine 118–19

director power restrictions 455–7, 471–6 shareholder value approach 134–7
inducement fees 474 takeover defences 118–20, 118–21
law reforms 472–5 trusteeship strategies 126–8
no frustration principle 471 controlling shareholders
regulatory approach 120–21, 455–7, business judgment rule 329–30, 339–40
459, 469–70 corporate groups, and 336
shareholder litigation 471 corporate ownership concentration
shareholder powers 70, 470–71, 475–6 trends 326
Takeover Code 469, 471–3 entire fairness standard 328–30,
Takeover Panel 469–70 339–40, 483
US corporate governance approaches, fiduciary duty to minority shareholders
comparison 455–7, 471–2, 475–6 328–30
MBOs privileged information 344
characteristics of 479–80 regulatory approach 326–7
City Code, role of 487–90, 492–3, 495–6 related party transactions 328–30,
confidential information, duty to 338–40
protect 487–8 sale of control transactions 341
directors duties and responsibilities corporate governance regulation
477–8, 486–90, 492–3, 496–7 fiduciary doctrines, role of 23
disclosure of conduct rules 479, 488, generally 23
495–7 Principles of Corporate Governance
disinterested directors' conduct 487 (ALI) 80
legal uncertainty, and 498 related party transactions 125–8, 143
no conflict rule 477–8, 486–7, 496 shareholder value approach 134–7
protocols 487–9 takeover defences 118–21
US law, comparison 477–9, 490, UK law, differences between 23–4,
493–4, 496–8 70–71
minority shareholders corporate law, development of 74–5
duties and responsibilities 362 corporate purpose
shareholder activism 356–7 benefit corporations 80–81, 136
shareholder empowerment 352 historical development 74–5
shareholder litigation law reforms 80–82
derivative litigation 450 statutory definitions 80–81
monetary claims 443–5 CSR
stock market development 41–2, 70–71 ESG data, consideration of 110, 113
UN law developments 105, 110, 113
Guiding Principles on Business and Human voluntary reporting rates 110, 113
Rights (2011) 101–2 directors duties and responsibilities
Protect, Respect, and Remedy initiative accounting standards 203
(UN) 101 business judgment rule 228–37
Sustainable Development Goals 101, 113 corporate opportunity rules 212–15, 217
US Delaware approach 229–38
board of directors disclosure of conduct rules 478–9, 494–7
California diversity quotas 184–6, duty of care 223, 226, 249
189–91, 199 fairness test 126, 206, 478, 483
corporate purpose debate, and 134–6 fiduciary duties 206, 249, 251
director empowerment 118–21 financial crisis investment decisions,
director independence 125–8 liability for 234–5
diversity 184–6, 189–91, 199 line of business test 213–14
employee co-determination 135–6 loyalty 203, 206–7, 212–15, 217, 249
fairness test 126, 206, 478 MBOs, in 478–9, 483–6, 491–2, 496–8
independent directors 149 monitoring and oversight 245, 247–8,
MOM approval 126–7 251, 257, 261
related party transactions 125–8, 143 related party transactions 203, 206–7
Index 517
Revlon standards 465, 485, 491, 496, fairness test 206, 478, 483
498–9 legal uncertainty, and 498
UK law, comparison 477–9, 490, protocols 485–6
493–4, 496–8 reasonableness 491–2
Dodd-Frank Act 266–7, 317, 428 Revlon standard 485, 491, 496, 498–9
enforcement of corporate governance UK law, comparison 477–9, 490,
Foreign Corrupt Practices Act 412, 428 493–4, 496–8
public enforcement mechanisms 418, minority shareholders
428–30 see also institutional investors
Sarbanes-Oxley Act 418, 428 duties and responsibilities 362
shareholder litigation 414, 416 shareholder activism 356–7
executive compensation shareholder empowerment 352–3
decision-making powers 263, 265–7 monitoring and oversight 247–8, 251, 257, 261
disclosure rules 267 corporate compliance 247–8
independent compensation committees enforcement mechanisms 257
263, 265–7 fiduciary duties 247, 251
shareholders, role of 266–7 related party transactions 338–9
financial disclosure rules Sarbanes-Oxley Act 245, 247, 261,
GAAP vs IFRS, conflicts 282–3, 288, 418, 428
296–300 related party transactions
investor litigation trends 299–300 controlling shareholders duties
institutional investors 350 328–30, 338
activism restrictions 371 disclosure 338
controlled companies, in 386 EU regime, comparison 339–40
director appointments 381–2 monitoring and oversight 338–9
engagement trends 374–5 Sarbanes-Oxley Act 245, 247, 261, 418, 428
growth trends 368, 371 shareholder litigation 414, 417, 440
M&A appraisal/ dissenter rights 444–5
appraisal rights 459, 462, 468–9 derivative litigation 450
asset lockups 461–2 ex post judicial review 464–6
deal protection provisions 460–62 fiduciary duty litigation 462–7, 475
deal structures 461 injunctions 447, 463–4
enhanced scrutiny framework 462–3 limitations on 466–7
ex post judicial review 464–6 mergers and acquisitions, and 462–7, 475
exit strategies 459 monetary claims 440–42, 444–5
fiduciary duty litigation 462–7, 475 non-monetary claims 447
injunctions 463–4 shareholder resolutions, challenges to 447
match rights 461 withdrawal actions 440–42
regulatory approach 118–21, 455–6, shareholder proposals 302, 307, 309–12
459, 461–2 comparison challenges 321–2
shareholder approval rules 70 convened meetings, at 309–10
shareholder litigation 462–7, 475 Delaware General Corporation Law,
shareholder power restrictions 455–7, role of 307, 311–15
462, 471, 475–6 director election and removal 313–16
UK corporate governance approaches, executive compensation 317
comparison 455–7, 471–2, 475–6 overview 321–2
MBOs precatory proposals 310, 312
characteristics of 479–80 proxies, role of 309–10, 313–14
cleansing devices 483–6 reimbursements for 309
confidential information, duty to special meetings, at 311–12
protect 485 takeover defences 317–18
directors duties and responsibilities thresholds 309–10
478–9, 483–6, 491–2, 496–8 uses for 312–19
disclosure of conduct rules 478–9, 494–7 shareholders, generally
disinterested directors' conduct 484–6 power, historical development 304–7
stock ownership structures 319–20 Watson, A. 21

stock market development 41–2, 70–71 White, J. 36
takeover defences 118–21, 317–18 World Economic Forum 96
Viénot report (1995) 421 Zapata Corp v. Maldonado 229

Vig, V. 45 Zeff, S. 299
Vishny, R. 1, 3–6, 33, 43, 66–9 Zumbansen, P. 102
von Kirchmann, J. 287 Zweigert, K. 22–3, 35

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COMPARATIVE CORPORATE GOVERNANCE

RESEARCH HANDBOOKS IN COMPARATIVE LAW

RESEARCH HANDBOOKS IN COMPARATIVE LAW

Cheltenham, UK • Northampton, MA, USA

Edward Elgar Publishing, Inc.

A catalogue record for this book

Library of Congress Control Number: 2021935861

This book is available electronically in the

ISBN 978 1 78897 532 2 (cased)

1 Introduction to comparative corporate governance 1

PART I PERENNIAL DEBATES IN COMPARATIVE CORPORATE

2 Methods of comparative corporate governance 20

3 Corporate law and economic development 38

4 The law and economics of comparative corporate law 56

5 Corporate purpose and short-termism 73

6 Comparative and transnational developments in corporate social responsibility 92

PART II THE BOARD: ITS DUTIES AND ITS FUNCTIONS

7 The structure of the board of directors: boards and governance

8 Board composition: between independent directors, minority

9 Diversity and the board of directors: a comparative perspective 179

10 Board duties: the duty of loyalty and self-dealing 200

12 Board duties: monitoring, risk management and compliance 242

13 Who decides executive pay? A comparative perspective 263

14 Accounting and convergence in corporate governance: doctrinal or

PART III SHAREHOLDERS

15 Shareholder proposals shaking up shareholder say: a critical comparison

16 Controlling shareholders and their duties 324

17 Minority shareholders’ rights, powers and duties: the market for

18 Institutional investors, activist funds and ownership structure 368

19 Diversified enterprises with controlling shareholders: a theoretical

20 Public versus private enforcement in corporate governance 412

21 Direct and derivative shareholder suits: towards a functional and

PART V MERGERS AND ACQUISITIONS

22 Corporate governance in negotiated takeovers: the changing

23 Managing management buyouts: a US-UK comparative analysis 477

8.1 The board and management differentiated 145

8.2 All-executive board 146

8.3 Majority executive board 147

8.4 Majority outside board 149

8.5 Two-tier board 150

8.6 The South African close corporation 151

9.1 Corporate diversity remedies 185

19.1 No legal personhood partition between two business lines 394

19.2 Legal personhood partition between two affiliated companies 395

19.3 Company operating various businesses (COVB) 398

19.4 Corporate group 400

19.5 Direct tunneling in a COVB 405

19.6 Tunneling based on internal transactions in a corporate group 406

17A.1 Rights and duties of institutional investors 367

19.1 Cash-flow stabilization in COVBs and corporate groups 397

19.2 Comparison between COVB and Corporate Group 401

19.3 Patterns of tunneling in COVBs and corporate groups 407

23.1 Front-end duties of directors and officers in MBOs 490

23.2 Back-end duties of directors and officers in MBOs 494

Christopher M. Bruner, Stembler Family Distinguished Professor in Business Law,

Barnali Choudhury, Professor of Law, University College London, UK

Pierre-Henri Conac, Professor of Law, University of Luxembourg, Luxembourg; Max

Sofie Cools, Professor of Corporate Law, KU Leuven, Belgium

Martin Gelter, Professor of Law, Fordham University School of Law, USA

Carsten Gerner-Beuerle, Professor of Commercial Law, University College London, UK

1 Introduction to comparative corporate governance 1

2 Methods of comparative corporate governance 20

3 Corporate law and economic development 38

4 The law and economics of comparative corporate law 56

5 Corporate purpose and short-termism 73

6 Comparative and transnational developments in corporate social responsibility 92

9 Diversity and the board of directors: a comparative perspective 179

10 Board duties: the duty of loyalty and self-dealing 200

12 Board duties: monitoring, risk management and compliance 242

13 Who decides executive pay? A comparative perspective 263

16 Controlling shareholders and their duties 324

18 Institutional investors, activist funds and ownership structure 368

20 Public versus private enforcement in corporate governance 412

23 Managing management buyouts: a US-UK comparative analysis 477

8.1 The board and management differentiated 145

8.2 All-executive board 146

8.3 Majority executive board 147

8.4 Majority outside board 149

8.5 Two-tier board 150

8.6 The South African close corporation 151

9.1 Corporate diversity remedies 185

19.1 No legal personhood partition between two business lines 394

19.2 Legal personhood partition between two affiliated companies 395

19.3 Company operating various businesses (COVB) 398

19.4 Corporate group 400

19.5 Direct tunneling in a COVB 405

19.6 Tunneling based on internal transactions in a corporate group 406

17A.1 Rights and duties of institutional investors 367

19.1 Cash-flow stabilization in COVBs and corporate groups 397

19.2 Comparison between COVB and Corporate Group 401

19.3 Patterns of tunneling in COVBs and corporate groups 407

23.1 Front-end duties of directors and officers in MBOs 490

23.2 Back-end duties of directors and officers in MBOs 494

2018/04/11/the-purpose-of-the-corporation/; Lucian A. Bebchuk & Roberto Tallarita, The Illusory

Institute – Finance Working Paper No. 190, 2007), https://papers.ssrn.com/sol3/papers.cfm?abstract_id