By reference to the US debate on corporate regulatory competition, critically examine whether there is regulatory competition in European Corporate law.
Regulatory competition is commonly regarded as the process by which firms choose to incorporate in a jurisdiction where the laws are advantageous to them and correspondingly states enact laws to encourage incorporation within their jurisdiction to obtain some advantage from these incorporations. Such a process in the case of the United States has resulted in Delaware becoming the primary state of incorporation for public companies, but it has been argued that this came about on account of a unique historical situation and so it is doubted whether a similar monopolistic position will be achieved by any European member state. A voluminous academic debate has arisen over whether the effect has been a 'race to the bottom' –increased laxity in regulation in a bid to attract incorporation or a 'race to the top' –efficient selection of rules arising from competition accompanied by predictability and stability arising out a developed case law. The debate has no doubt to some extent shaped the response in Europe to the prospect of regulatory competition, fuelled by concerns that it would result in a degradation of standards and that reincorporation favours managerial interests . Consequently any regulatory competition that takes place will do so, guided by 'procedural harmonization', intended to ensure the race is not one "to the bottom".
Regulatory competition in European corporate law has been primarily hampered by the existence of the 'real seat' doctrine, whereby in many member states the courts regard the applicable law as being that of the state where a company has its operational centre rather than the place in which it was incorporated. This effectively has prevented companies operating in these member states from incorporating abroad as the perceived advantages of doing so are removed. As such, Delaware syndrome has not been replicated in Europe. It is felt that European states have clung to the real seat rule in order to avoid the phenomenon that occurred across the channel, particularly to protect alternative models of company law, such as the German employee codetermination model.
However, following a series of cases in the European Court of Justice that have brought into question the compatibility of the real seat rule with the principle of freedom of establishment , it is now the case that the greatest impediment to regulatory competition has, it would seem, been eliminated. It remains therefore to be seen if there is now regulatory competition in European corporate law.
Subsequent to the cases of Űberseering and Inspire Art an increase in the number of UK companies with the purpose of doing business in Germany and the Netherlands has been reported. A survey conducted by searching the Companies House database for companies with largely German language names reveals that there was a surge in the number of German companies incorporating in the UK. It is widely posited that the UK is the member state which would be favoured by incorporators on account of the lack of a minimum capital requirement for private limited companies and the expertise and adherence to precedent of judges overseeing the court list devoted to corporate matters. The case law of the ECJ supports the perceived appeal of incorporating in the UK. In the Centros case which first cast doubt on the real seat doctrine, the company in question had incorporated in the UK, with no intention of trading in that member state in order to avoid Danish law's minimum capital requirement. So too in Inspire Art, the case concerned a British company regarded by the Dutch Authorities as a 'pseudo foreign' company.
However there are several factors which are likely to prevent the UK taking on the monopolistic position of Delaware. Firstly minimum capital requirements are undergoing reform in several member states and so this is unlikely to remain an incentive for incorporation in the UK. Moreover it has been observed that "the United Kingdom –does not compete for incorporations and is unlikely to begin doing so in the future." This is because, unlike in Delaware where incorporations make up in the region of 20% of the tax revenue , incorporation revenue in the UK is largely insignificant. Smaller states that may benefit more from the revenue are not best placed to compete for incorporation since they lack well-developed corporate case law which is perceived to be a strong factor in Delaware maintaining its dominant position, promoting predictability and stability for incorporators. On the other side of the coin, it is apparent that the UK is aware of protecting its competitive edge. A statement in the British Department of Trade and Industry paper stated "The Government is determined to ensure that the nation's framework of company law does not through increasing obsolescence become a disincentive to establishing businesses in the UK"
On the other hand there are incentives for the UK to compete for incorporation and for companies to incorporate in the UK. The benefit to the bar in Delaware is well documented and it would be similarly advantageous to legal and accountancy professions in the UK. The DTI paper on Modernising Company Law states "we hope to increase business for UK professional advisers, and attract head office functions to these shores, if UK legislation offers foreign businessmen attractive vehicles for business. The Government sees a cost effective and competitive company law framework as an essential part of a successful economy." For smaller companies incorporation in the UK has occurred to combat minimum capital requirements. For the larger incorporators there is the potential of the soft law self-regulatory rules, namely the Listing Rules and the Combined Code on Corporate Governance and the City Code on Takeovers to provide "an extremely attractive set of solutions to the managerial agency problem: hostile takeovers, shareholder control of related party and significant transactions, and pre-emption rights protection" . In the American model it is public companies that have utilised the regulatory competition to their advantage; most private companies continue to incorporate in their home states..
It is apparent that since the demise of the real seat rule in Europe there has been some impetus towards foreign incorporation, particularly in the UK, but it is also clear that this has been much weaker and slower than commentators had predicted. The divergence in member state laws was felt to provide the perfect platform for such a competition to arise, and yet it has on the whole failed to do so. No state is set to establish itself as a Delaware monopolist, but this does not mean that regulatory competition is not occurring at all. One theory is that the divergence in corporate models and member state regulation will facilitate jurisdictional specialisation whereby companies are able to select the jurisdiction which has the legal framework most favourable to their particular type of business. This reflects a crucial distinction that is drawn between the US and Europe, namely the obstacles in the latter for reincorporation. European and member state law is seeking to address this, but at present the market for regulatory competition or for regulatory specialisation is very much focused on attracting start-ups.
Rather, it would seem, that the type of regulatory competition that has occurred in the member states is the competition for foreign investment. This has arisen on account of the pressure on governments to instil trust in their securities market. Corporate law reforms in the member states have sought to address the concern over corporate scandals that have the potential to taint the whole economy and to strengthen shareholder protection creating a favourable business environment for international capital so as to stimulate economic growth. Thus, as would have been expected in regulatory competition for incorporation the member states have reformed their laws and imitated each other, resulting in gradual legal convergence. The real seat doctrine has played a role in this competition for investment. Kamar writes "Ironically, precisely because firms cannot incorporate elsewhere, member state legislatures have needed to ensure that local corporate law meets the expectations of the international investor community."
Thus it is apparent that the US debate on corporate regulatory competition has shaped and influenced legal reform in Europe, causing member states to protect the real seat doctrine, tentative to open up the European market to regulatory competition. Now that this doctrine, the prime impediment to regulatory competition, has been removed, supranational procedural harmonisation ensures that minimum standards are maintained across the board with the option for member states to exceed these, preventing any so-called 'race to the bottom'. The suspicion surrounding US style regulatory competition has meant that Europe has remained reluctant to embrace it. Consequently a different type of competition has emerged whereby member states regulate to compete for foreign investment to fuel the growth of their economies. Thus there is a form of regulatory competition but the term has undergone redefinition.
Bibliography
Armour J. "Who should make corporate law? EC legislation versus regulatory competition." ESRC Centre for Business Research, University of Cambridge Working Paper No 307 June 2005.
Barnard C. and Deakin S. "Market Access and Regulatory Competition" Jean Monnet Working Paper 9/01
Davies P. Gower and Davies' Principles of Modern Company Law (2003) Thompson.
Drury R. "A European Look at the American Experience of the Delaware Syndrome" Journal of Corporate Law Studies (2005) 5(1) pp1-35.
Drury R. "The Delaware Syndrome:European fears and reactions" Journal of Business Law (2005) Nov. 709-744.
Esty D, and Geradin D. Regulatory Competition and Economic Integration: Comparative Perspectives (2001) OUP.
Gelter M. "The Structure of Regulatory Competition in European Corporate Law" Journal of Corporate Law Studies (2005) 5(2) pp247-294.
Kamar E. "Beyond Competition for Incorporations" European Corporate Governance Institute Working Paper No 42/2005.
Kirchner, Painter and Kaal "Regulatory Competition in EU Corporate Law After Inspire Art: Unbundling Delaware's Product for Europe." Law and Economic Working Papers, University of Illinois College of Law Paper 17 2004.
Miller G. "Political Structure and Corporate Governance: Some points of contrast between the United States and England." Columbia Business Law Review (1998) 51.
Roe M. "Regulatory Competition in Making Corporate Law in the United States –and its Limits." Oxford Review of Economic Policy 21(2) pp 232-242.
Romano R. "Is Regulatory Competition a Problem or Irrelevant for Corporate Governance" Oxford Review of Economic Policy 21(2) pp212-231.
Sandrock O. and du Plessis J. "The German Corporate Governance Model in the Wake of Company Law Harmonisation in the European Union" Company Lawyer 26(3) 88-95.
Please note: The above essays and dissertations were written by students and then submitted to us to display and help others. Thanks to all the students who have submitted their work to us.
This essay has been written by a student and kindly submitted in order to help you with your studies.
If you would like your own custom written law essay then you can find out more here...
Was this useful to you?
Did you find this article useful? Was the content up-to-date or do you have something to add? Give us your feedback and we'll make this site even better for you to use!
