!!Экзамен зачет 2023 год / Black and Kraakman - A Self Enforcing Model of Corporate Law-1

under an American-style law that relies heavily on fuzzy fiduciary duties. For example, our proposed remedy for crossing the 30% ownership threshold for the control transaction rules without prior notice, or without offering to buy all remaining shares, was loss of voting power as to all shares held by the 30% shareholder, unless other shareholders vote to restore voting rights or the shareholder acquires at least 90% of the outstanding shares. A severe sanction is appropriate here not only because violations may be difficult to detect (acquirers may hide ownership by buying through undisclosed affiliates), but also because a clear rule means that inadvertent violations should be rare.

By contrast, other factors cut against very severe sanctions in many circumstances. Some of these factors arise from the need to adapt the Russian statute to the sophistication and sensibilities of Russian managers. One cannot assume that corporate managers will always know the rules. Thus, it can seem unacceptably harsh to penalize inadvertent violators heavily, especially for rules that apply importantly to small companies. Moreover, the law must be seen to be fair if it is to induce voluntary obedience and, ideally, the conformity over time of culture to the new law. To meet this need for perceived fairness, sanctions must fall well short of the deterrent ideal, which sets expected penalties (actual penalties if caught multiplied by the probability of detection) equal to the harm caused by misconduct. These considerations explain why, for example, we do not propose double or triple damages for failure to disclose selfinterested transactions -- even though the conventional logic of deterrence might recommend doing so.

Furthermore, intrinsic enforcement limitations make severe sanctions unworkable under some circumstances. For example, the draft Russian statute never imposes liability on directors for decisions taken in good faith and without a conflict of interest. In effect, we close off the narrow American recklessness/gross negligence exception to the business judgment rule because we have no confidence that Russian courts can decide when conduct is sufficiently outrageous to warrant imposing (often ruinous) personal liability on directors. In this context, any liability for good faith decisions creates the problem that the business judgment rule -- which protects directors from liability even for demonstrably stupid decisions -- was designed to solve: the risk of liability can chill risk-taking in a world where managers often need to take gambles, sometimes long-shot gambles, on limited information.

Sometimes, too, there are no effective remedies for the violation of a statutory norm. Suppose that a company fails to use cumulative voting. One cannot invalidate the actions of the improperly elected board without imposing an unrealistic burden of investigation on third parties who deal with the company. The violation is clear enough so that one can imagine imposing personal liability on board members for loss to the company from actions approved by an improperly elected board. Yet the Russian draft stops short of this sanction, partly because even honest directors may not understand how to implement cumulative voting, and because the directors who would resign to avoid this liability may be the best available. We are left with the weak sanction of running a new election -- which will at least allow shareholders to vote again, knowing how their directors have behaved in the past.

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VI. The Path-Dependent Evolution of Developed Country Corporate Law

Our work has important implications for the ongoing debate about the efficiency of corporate law in developed countries. In the United States, the debate is traditionally framed as between race to the bottom proponents -- who see American states as competing to adopt lax corporate laws in order to attract corporate managers, who make the reincorporation decisions131 -- and race to the top proponents -- who believe that (perhaps with an exception for antitakeover rules) states attract corporations by offering efficient rules.132 The principal evidence offered by race to the top proponents is a set of empirical studies showing that reincorporation in Delaware either increases or does not decrease stock price, and thus is either efficiency-enhancing or at least efficiency-neutral.133

We believe that the empirical evidence is ambiguous, and that the evolution in the United States of corporate law for large public companies is more complex than either camp has acknowledged. We propose the following alternative, which fits our anecdotal sense of the history of American corporate law but must remain tentative until we can complete the historical research needed to confirm it.134

American corporate law evolution began in the mid-nineteenth century from a historically contingent starting point of rigid formal rules, which reflected public suspicion of corporations, weak market constraints that called for strong investor protections, poor communications that made impractical some of the shareholder approval procedures embodied in the self-enforcing model, and a misunderstanding of corporate finance that led to an early obsession with charter capital. Corporate law then evolved from this starting point toward today's enabling law on a path conditioned by a mix of efficiency considerations, political considerations, and historical constraints, but not entirely determined by any of these factors.

An important degree of freedom in the evolution of corporate law was made possible by the emergence of other institutions that filled gaps in the early corporate laws. For example, corporate law early on permitted deviation from the one common share, one vote principle. But the New York Stock Exchange filled that gap for public companies in 1926. Corporate law permitted such outrages as issuing dividend checks that, when endorsed by the shareholder, gave managers a proxy to vote the shares as they pleased. In response, stock exchange rules and the federal securities laws intervened to provide a better proxy voting system. Corporate law required little financial disclosure by companies to shareholders -- but again, the federal

131 See, e.g., William L. Cary, Federalism and Corporate Law: Reflections upon Delaware, 83 Yale L.J.

663, 663-86 (1974).

132 See, e.g., Romano, supra note 23, at 52-53, 148-51; Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. Legal Stud. 251, 254-58 (1977).

133 See Romano, supra note 23, at 17-18 & nn.7, 20 tbl. 2-1 (reviewing studies).

134 This work is in progress, under the tentative title: Reinier Kraakman & Bernard Black, The PathDependent Evolution of American Corporate Law.

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securities laws intervened to erect a system of mandatory disclosure. In addition, common law judges exercised substantial power under fiduciary doctrines to fill the gaps left by other bodies of law.

Interstate competition for new incorporations also significantly constrained the development of corporate law. The states needed to satisfy two competing constituencies: shareholders, who were interested in efficiency; and managers, who wanted more discretion. Managers initiated incorporation decisions, and were thus a critical constituency. A reincorporation that increased share values but decreased manager autonomy would not interest managers. But managers also had to appease shareholders. It would be too bold and potentially embarrassing for managers to propose a reincorporation in another state, or a change in the law of one's own state, that gave the managers more discretion but visibly harmed shareholders. The path of least resistance was legal reform that both enhanced (or did not decrease) managers' autonomy and increased (or did not decrease) company value.

As we see it, corporate law meandered down this path of least -- or at least low -- resistance. Consider, for example, the rules governing transactions in which directors and managers had a conflict of interest. The early rigid rules against self-dealing could have been replaced by shareholder review, as we propose in the self-enforcing model. Instead they were primarily replaced by the weak constraint of board approval. Here is one plausible story for why corporate law might have evolved in this way, without ever finding the potentially better approach of shareholder review. Corporate managers were acutely aware of the problems with the prohibitive model, and pushed for greater discretion. Over time, courts and legislatures responded. The managers had no incentive to suggest replacing prohibition with shareholder review. Legislators were thus never presented with the self-enforcement option developed here, or anything close to it. It was left to the courts to modestly counteract legislative permissiveness by requiring strict review under a fairness standard of self-interested transactions that are not approved by noninterested directors. In this story, the enabling model could dominate the prohibitive model as a means of regulating self-interested transactions (though even that is debatable135), and yet be sub-optimal relative to self-regulation by shareholder approval -- an approach that was never considered.

Additional examples of corporate law following a path of low resistance are easy to find. As Delaware law became more friendly to mergers, it did not provide effective appraisal rights, and judges had to fill this gap too. Unlimited director liability for violation of the duty of care can cause outside directors to act too timidly -- a threat that became real after the Delaware Supreme Court, in 1985, found a duty of care violation in Smith v. Van Gorkom.136 Managers pressed the Delaware legislature to respond. The legislature might have capped

135See, e.g., Harold Marsh, Jr., Are Directors Trustees? Conflict of Interest and Corporate Morality, 22

Bus. Law. 35, 43-57 (1966).

136488 A.2d 858 (Del. 1985).

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director liability at a multiple of director compensation.137 Instead, it gave companies the option, soon taken by most large firms, to have no director liability at all for duty-of-care violations. When managers' jobs were directly at risk during the takeover wave of the 1980s, they wanted power to resist takeovers strongly enough to support statutes that shareholders frequently opposed and that risked decreasing the value of their own companies' shares. Often, the managers got what they wanted. And so on.

This model -- in which corporate law evolves in a path-dependent fashion down a route of low resistance -- is consistent with both the realpolitik stressed by race to the bottom supporters (that managers make reincorporation decisions) and the empirical evidence cited by race to the top supporters (that reincorporations tend to increase, or at least not decrease, share values). It is also consistent with recent scholarship that emphasizes the importance of path dependence and legal rules in determining the ownership structure of large public companies.138 In effect, we seek to extend the path dependence story beyond stock ownership by financial institutions (a story already told) to the corporate law itself.

The path-dependence argument can be taken further. The evolution of corporate law is intertwined with the evolution of financial institutions. If financial institutions are economically and politically powerful, the evolution of corporate law will reflect their interests as well as those of company managers. And financial institutions, in turn, will evolve in ways influenced by the corporate law. For example, both Britain and the United States have long had active capital markets, including active markets for corporate control. In the United States, financial institutions were weak, in part because political decisions made them so.139 American managers succeeded in obtaining broad discretion to oppose takeovers -- the one clear case of evolution in American corporate law away from efficiency. In Britain, financial institutions, especially insurance companies, were strong, and successfully opposed takeover defenses that would take the change-of-control decision away from shareholders.

In Germany, unlike Britain and the United States, universal banks have long been strong. They run mutual funds and investment banks, and their representatives sit on company boards. Tight restrictions on conflicts-of-interest and insider trading would have limited the banks' freedom to profit from their multiple roles. Is it simply an accident that Germany had little insider-trading regulation until recently, when European unification and the internationalization of capital markets created a constituency for stronger rules, or that Germany still allows conflicts of interest that even the most pro-manager Delaware judges would find intolerable?

137 Such a cap was proposed in Principles of Corporate Governance, supra note 13, § 7.19.

138 See, e.g., Roe, supra note 6, at 26-28; Black & Coffee, supra note 6, at 2082-84; Mark J. Roe, Chaos and Evolution in Law and Economics, 109 Harv. L. Rev. 641, 643-58 (1996).

139See, e.g., Roe, supra note 6, at 26-28; Bernard S. Black, Shareholder Passivity Reexamined, 89 Mich. L. Rev. 520, 564-66 (1990).

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The Russian story also illustrates the importance of politics and powerful players in determining the structure of corporate law. In Russia, as elsewhere, corporate managers are influential. Many want a corporate law that insulates them as much as possible from shareholder oversight. The corporate law that Russia adopted is largely based on our selfenforcing model, but contains elements that can only be understood as pro-manager compromises. For example, our effort to introduce a British-style system of takeover regulation -- with requirements for advance notice of a control transaction, a mandatory takeout offer for minority shares, and a ban on defensive tactics -- lost the ban on defensive tactics along the way.140

Historical accident matters too. For example, the recently adopted Russian Civil Code contains some rigid, dysfunctional charter capital rules.141 From this starting place, we expect, Russian company law will evolve along its own path of low resistance -- with dysfunctional rules falling by the wayside, with managers adding to the discretion that the law already gives them, but with other institutions developing over time to ameliorate the consequences of excessive managerial discretion.

Conclusion: Self-Enforcing Law in Emerging Economies

In this Article, we have argued that the best model for company law for an emerging economy is neither the enabling model that characterizes developed economies today, nor the prohibitive model that characterized corporate law a century ago, but instead a "self-enforcing" model. The core of this model is an effort to harness the incentives of participants in the corporate enterprise, especially large minority shareholders, in order to provide meaningful protection to minority shareholders despite the absence of the multiple private and public enforcement resources of developed economies. Minority shareholders require strong legal protection from insiders in emerging markets because the market controls that provide such protection in developed economies are weak. Yet because public enforcement is also weak, company law in emerging markets cannot simply substitute formal law enforcement for the missing market controls.

To operate effectively in this difficult environment, company law must be self-enforcing in a double sense. First, it must provide procedural mechanisms to replace the largely absent mechanisms for formal enforcement, and allow outside shareholders and outside directors to police the opportunism of managers and controlling shareholders. These constraints should be

140 Also see note 80 above, noting that our proposed protections for employee shareholders were dropped from the Russian company law, as adopted.

141 For example, under articles 99 and 101 of the Russian Civil Code, if losses cause a company's net assets to be less than its charter capital, the company must reduce its charter capital. But doing so requires giving each creditor an option to demand immediate repayment of its loan to the company, which could quickly exhaust the company's liquid assets. See GK RF (Civil Code), supra note 42, pt. I, arts. 99, 101.

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primarily procedural (rather than substantive, as in the prohibitive model) to preserve flexibility in corporate decisionmaking.

Second, because self-enforcement in this first sense is uncertain, the company law must elicit a substantial measure of voluntary compliance from managers and controlling shareholders. Toward this end, the statute must articulate bright-line and easily understood rules, provide terms that corporate actors recognize as appropriate to their business circumstances, and strongly sanction departure from these norms (in the rare cases in which formal sanctions are imposed). Thus, the model does more than substitute private enforcement for formal judicial enforcement; it also relies on "self" enforcement of a different kind: the inherent organizing force of clear and legitimate law in an otherwise chaotic business environment.

The drafting strategy implicit in the self-enforcing model reaches almost every aspect of company law. At the most basic level, our model statute structures the company's voting system to increase the influence of minority blockholders. It mandates a single class of voting common stock; a one share, one vote rule; and a cumulative voting rule for the election of directors. In addition, it provides for a universal ballot, on which large shareholders can nominate board candidates.

The model statute relies on a combination of voting constraints and transactional rights to regulate especially important or suspect transactions. Significant self-dealing transactions must be authorized by majority vote of both noninterested directors and noninterested shareholders. Mergers, liquidations, and large purchases and sales of assets require approval by a supermajority of outstanding shares (we suggest two-thirds as the appropriate threshold in Russia), with appraisal rights for shareholders who do not vote to approve the transaction. In addition, new issues of shares are subject to preemption rights. These rights can be waived by a shareholder vote, but shareholders who do not approve the waiver receive ex post participation rights, much as shareholders who do not approve a merger receive appraisal rights. Finally, the acquisition of control stakes carries an obligation to offer to buy minority shares, and defensive measures that might prevent shareholders from selling to would-be acquirers are prohibited.

These and other features of the self-enforcing approach produce a company law that is novel in the aggregate, even though many of its individual provisions are familiar. The model flatly prohibits almost nothing except efforts to opt out of its process requirements. Nonetheless, it significantly constrains insiders by allocating to large-block minority shareholders -- those shareholders with sufficient holdings or support to win board representation under a cumulative voting rule -- considerable power to influence corporate decisionmaking.

If, as we have argued, optimal corporate law depends on institutional context, then a country's corporate law should evolve as its economy and legal system evolve. As compared with the enabling model, the self-enforcing model gives greater power to outside investors, but at the cost of less flexibility in the basic structure of corporate governance. As market constraints and a sophisticated judiciary develop to limit opportunism by managers and large

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shareholders, the comparative merit of the enabling model will increase. In a decade or two, mandatory cumulative voting, or a mandatory one share, one vote rule, may have outlived its usefulness and can be relaxed. Perhaps, too, as market liquidity increases, institutional shareholders will choose to make the "exit" alternative to voice more viable by reducing their percentage stakes in companies.142 If large investors choose exit over voice, the voiceenhancing benefits of the self-enforcing model will shrink, while the costs of our voicepromoting rules will remain. Corporate law then should, and probably will, evolve toward fewer voice-promoting rules.

But evolution toward the enabling model is not a foregone conclusion. Given the mutual interaction between the law and the evolution of companies and financial institutions, in which strong protections for large outside investors encourage them to hold large percentage stakes, the self-enforcing statute may prove substantially stable. These large shareholders could also provide the political constituency to preserve the self-enforcing model against the attacks of managers seeking greater autonomy. The result would be a new model of mature company law: one that relies much more on internal decisionmaking processes and shareholder authorization -- and much less on ex post litigation -- than is currently the practice in the United States.

142 For development of the argument that financial institutions will often choose exit over voice, if both options are available, see John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor as Corporate Monitor, 91 Colum. L. Rev. 1277, 1318-28 (1991), and Black & Coffee, supra note 6, at 2007-77.

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APPENDIX: Survey of Company Law in Emerging Markets

The table below surveys selected aspects of the company laws of seventeen emerging market countries (plus the new Russian self-enforcing law, for comparison). All but a couple of the countries have fairly recently adopted or updated their company laws.143 The table tallies seven possible substantive restrictions and eleven possible procedural rules.

Some substantive restrictions are extremely common. For example, twelve of the company laws include a general ban (often with limited exceptions) on company share repurchases.144 Almost as many laws include limits on a company's power to issue bonds and/or preferred stock (ten jurisdictions), a ban on ownership of parent company shares by subsidiaries (ten jurisdictions), and minimum capitalization requirements (ten jurisdictions). Only three jurisdictions ban authorized but unissued shares (though limitations on the amount or period of valid authorization are more common); and only two ban transactions between companies and insiders. Finally, no jurisdiction sets the nominal (or par) value of shares equal to their issue price, as did an early draft of the Russian Civil Code and a competing company law draft in Russia.

On the procedural side, the most common restriction on insider discretion is a shareholder vote on fundamental transactions such as mergers, liquidations, or recapitalizations. Such approval requirements exist in all seventeen statutes, although transactional coverage and quorum and vote thresholds vary greatly. Most jurisdictions also permit shareholders to remove directors between regular board elections (fifteen jurisdictions), mandate appraisal rights for dissenters in mergers or sales of assets (eleven jurisdictions), require preemptive rights for new issues of stock (eleven jurisdictions), and mandate a one share, one vote rule for common stock (nine jurisdictions).

Less common are requirements for shareholder approval of large share issuances (five jurisdictions, including those that bar authorized but unissued shares) and self-interested transactions between companies and their officers or directors (five jurisdictions). Two prominent features of the Russian draft statute we proposed -- proportional board representation and put rights for minority shareholders in control transactions -- are found in only two and four jurisdictions respectively. Some protections in the draft Russian statute, such as a secret ballot in corporate elections, are not mandated by any existing statute.

These summary checklists of substantive and procedural restrictions provide snapshots of the drafting styles and levels of regulation that characterize the company laws of emerging markets. Only one comparatively developed jurisdiction -- South Africa -- has an enabling statute, and even this law is more restrictive than the Delaware statute. Four jurisdictions rely heavily on substantive restrictions (Poland, the Czech Republic, Hungary, and Turkey). A group of four Asian and Latin American statutes are appropriately characterized as "mixed,"

143The table is based on the most recent versions available to us.

144The data in the textual portion of the Appendix exclude the Russian company law.

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with fair numbers of both procedural and substantive restrictions. And a group of eight countries (half of which are Commonwealth jurisdictions) have statutes that offer many procedural protections for shareholders but impose few substantive restrictions. These company laws exhibit aspects of the drafting strategy that characterizes the self-enforcing model. No company law in our sample, however, contains as few substantive prohibitions or as many procedural protections as we recommend.

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		1. SELF-ENFORCING	2. ENABLING
		STATUTE:	STATUTE:
		Russia (1995)	South Africa (1973)
I. Substantive Protections
1.	Bans authorized but unissued shares.	O	O
2.	Requires shares to be issued at par or nominal	O	O
value.
3.	Requires minimum capitalization.	Xa	O
4.	Limits debt and preferred stock.	O	O
5.	Bans share repurchases.	O	X
6.	Bans self-dealing with directors or officers.	O	O
7.	Bans subsidiary ownership of parent shares.	O	X
	TOTAL	1	2
II. Procedural Protections
1.	Mandates one share/one vote rule.	X	O
2.	Mandates proportional board representation.	X	O
3.	Permits shareholder removal of directors	X	X
without cause.
4.	Requires shareholder approval of director/officer	X	O
self-dealing.
5.	Requires meaningful vote on fundamental	X	X
transactions.
6.	Mandates appraisal rights in mergers or sales of	X	X
all assets.
7.	Requires shareholder vote on large acquisitions.	X	O
8.	Requires shareholder vote on large new stock	X	O
issues.
9.	Mandates preemptive rights.	O	O
10. Mandates minority put rights upon changes of		X	O
control.
11.	Requires confidential voting.	X	O
	TOTAL	10	3

a A pure self-enforcing law would not contain minimum capitalization requirements (or only de minimus ones). The Russian company law establishes minimum capitalization rules (as required by the Russian Civil Code), but the amounts are fairly small -- around $2,500 in charter capital for a "closed" company (with restrictions on share transfer) and $25,000 for an "open", typically public company (without restrictions on share transfer).

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