corporate law and economic activity in Europe 66% (a lot of mistakes in English) part1
In what ways have the corporate laws of Central and Eastern European transition economies drawn on the examples of the US and German systems? How successful (or unsuccessful) have these legal “transplants” of existing systems to new surroundings been? What may be the reasons for this success (or lack of it)?
Foreign legal transplants had a crucial influence on the development of corporate law of countries where economies are in transitions. The widespread borrowing from corporate law of the United States and German significantly affected the general shape and the same time particular provisions of corporate law of Central and Eastern European countries (CEEC) and countries in the Commonwealth of Independent States (CIS).
“Adoption of law(s) from abroad has a tradition as old as law and cultural intercourse.” [1] The main aim of comparative law as a discipline is to help to adopt successful foreign legislation, to employ it as a basis for the development of national legislation through using a careful and circumstantial approach. [2] Nowadays the borrowing from another legal system has certainly become “the most common form of legal change”. [3] However, an important question remains: how successful and effective imported provisions will be in new surroundings, in particular economical, social, political circumstances; will they be properly implemented in legislative texts; will they take roots or be rejected and die out; will they be truly and entirely accepted; will there be sanctions for non-compliant behaviour and supervising bodies? [4]
There have been several waves of transplanting of law in different times and different directions. [5] The recent one took place in CEEC and CIS after the cease of the block of socialist countries in Europe. There were several different factors which influenced the formation of structures of corporate sectors in these countries, affected the desire and possibility to adopt transplants of particular foreign jurisdictions into their corporate law as well as the consequences of such transplanting.
First of all, the historical factor undoubtedly played its role. It had been historically established that before the era of socialist ideology and law most countries in Central and Eastern Europe build their legal systems along the Roman-Germanic system of law. Thus after obtaining of independence from dominating of socialist ideology those countries returned to previous sources of law. However, it is not exactly correct to say that so-called “classical continental model” still remained to exist by that time. The influence of Anglo-American principles on continental European law in general and on the corporate law particularly should be noted and will be discussed later. [6]
Secondly, the multiphase privatization deeply affected the corporate sector structures in these countries. They went through the complicated process of transferring government ownership to private hands, every country with their own distinctive features and consequences. Diverse methods of privatization led to different structures of ownership, management, financing sources and stock markets. [7] Privatisation was significantly under influence of foreign patterns but in its turn influenced the choice of adopted foreign transplants later.
Thirdly, the striving to join the European Union of CEEC was also the influential factor to adopt elements of foreign corporate law and remains to be for some countries of CIS (e.g. Ukraine, where joining the EU was one of principal objectives of all governments since 1994, but is still unsuccessful; however the work on the adaptation of Ukrainian legislation to acquis communautaire has been consistently continuing [8]). While being the candidate countries, CEEC had to bring their company law in conformity with European company law, thus they completely reformed it and harmonised with European through intensive adoption of considerable amount of commercial and company law. [9]
In addition, the weighty contribution of the search for international financing, political, cultural, social factors, and features of mentality should be admitted.
Regarding specifically the adopting of foreign legal transplant, the driving force was also simply the shortage of time and experience. “In times of dramatic change, there is no time carefully to craft “organic”, home-made legislation.” [10] Under some circumstances there is no need to reinvent wheel if the best practice is available simply to adopt. However, then the question arises for both providers and recipients concerning which practice is the best, which law to copy.
Therefore in countries with economies in transition the adoption of the legal base for the creation of corporate governance in market economy conditions, particularly the formal choice of the specific model to be copied, became the essential aspect of creation of corporate law. [11]
Traditionally two basic models of corporate governance in countries with developed economies are distinguished by modern comparative corporate law scholars. [12] They mainly concentrate on the differences in the composition of companies’ ownership and on the manner of their governance. Under the composition of the ownership the tendencies in concentration or dispersion of ownership in public companies are considered. Regarding the differences in governance they focus on the distribution of power among different stakeholders: shareholders, managers, employees, customers, creditors etc. Thereby, the first model is pertinent to public companies with dispersed share ownership, which mainly originate in the United Kingdom and the United States (Anglo-Saxon model). The second model of corporate governance covers companies with comparatively concentrated ownership in other developed economies, which typically can be found in Western Europe (Continental model), especially in Germany. [13] In the United Kingdom and the United States shareholders of public companies usually have minor stake and corporate law serves to protect their interests. German corporate law can be characterised as protecting not only shareholders, but all interested stakeholders. [14]
Thus there seemed to be two basic alternatives to choose: Anglo-American model versus Continental model. Nevertheless many scholars doubt the possibility to categorize corporate governance systems clearly. Notwithstanding they admit the existence of different dominant concepts of corporate governance in continental Europe and the US, they however point out that these concepts are not clearly distinctive, are continuously changing, and “different corporate governance systems may co-exist in any given country so that most systems should be classified as hybrids to some extent.” [15]
As regard the concept of “legal transplants” as a common phenomenon in the context of reforms in the field of economic regulation there are also debates concerning the relevance of this concept for analysis of the processes of law reforms. Some scholars doubt the effectiveness of employing this concept to analysis of current company law reform because legal transplants are very spread across all jurisdictions. Others emphasise their importance for analysis due to exactly the same reason of their spread occurrence. Additionally they also raise an important question about “whether legal transplants make legal systems more alike or whether they function differently in different legal environments.” [16]
So the general approach of putting the corporate law of some country of CIS or CEEC into one or another category without examining of more specific details would be too generalizing. So it is worth coming through the analysis of their common and distinctive features using the concept of “legal transplants” of current most distinctive systems of corporate law which are the US and Germany systems.
Since the very beginning the formation of effective corporate law issue became of great importance in countries with economies in transition, since they had not had established traditions and culture in this sphere, developed markets, relevant legal and governmental institutions. [17] Thus they could not just copy and paste the corporate law of some developed country where all those factors had played an important role in addition to well developed corporate law. [18] Many scholars agreed that it was “likely that there will not be a wholesale adoption of one particular country-wide model of economic policy, but a case-by-case adoption of specific models from several countries.” [19]
Additionally, the aim which newly introduced corporate law was intended to serve was not only to meet business needs, but also to support the process of the economy transition in general. The corporate governance model had to fit in with emerging politic and economic models, with changing social environment. Consequently, these factors had to be obligatory taken into consideration as well. Therefore, among other interests, the interest of population had to be protected. Firstly, they took part in mass privatization, and on the one hand, for the purpose of their protection the Anglo-Saxon model with its main idea of shareholder value suited better. However, on the other hand, they remained to be as average employees and thus the Continental model, where employees are more engaged in management and making of important decisions, seemed to fit better. Therefore, once again, the question about which model to prefer to follow - the Anglo-Saxon or the Continental - was not so easy to answer. [20]
Indeed nowadays most countries of CIS and CEEC have adopted a hybrid of corporate governance model, so-called “modified” stakeholder model. [21] As was mentioned before, mainly under the influence of historical traditions, but also due to geographical, cultural and economical closeness initially most of these countries built their models of corporate governance on the basis of the German model, especially concerning the formation of two-tier board system. In some countries corporate law was significantly influenced by the US corporate law model with its characteristic focus on the dispersed ownership, protection of minority shareholders, disclosure and transparency standards. This desire to implement transplants of the US law took mainly place because of the needs to attract foreign investments thus it was necessary to comply with the governance regime of investing countries. [22] The role of foreign investment which it played in tendencies of transformation in corporate governance systems is broadly acknowledged. [23] However sometimes it was as attempt to follow the fashion, especially in the CIS when the real role of minor shareholders in companies and their current and future interest in governing these companies was not properly assessed. [24]
The recent trend in countries with the economies in transition is introducing the principle-based approach through adopting codes of best practices on corporate governance. This approach came from Anglo-Saxon jurisdictions, primarily was inspired by the original Cadbury Code [25] and nowadays also based on OECD Principles of Corporate Governance. [26] During the period 2000-2005 most countries with economies in transition adopted codes of best practice, some of them continue to revise them and adopt Stock Exchange Corporate Governance Codes. [27] However, it is worth mentioning that while most countries in CEE adopted classical “comply or explain” approach, according to which listed companies have to comply with principles of codes or provide reasons why they do not comply, in most countries of the CIS codes on corporate governance are only advisory in nature and there is no procedure and practice concerning the monitoring of companies’ compliance with these codes. So it is too early to say that through adopting of codes of best practice all countries with economies in transition brought their systems of corporate governance closer to the level of Anglo-American principles.
In addition while some scholars consider this trend to adopt codes as an attempt to improve corporate governance by means of serving as an instruction about correct behaviour and through making moral pressure on companies [28], others note that it “looks just like an effort of pleasing the international community”. [29] However, even in Germany, which itself borrowed this principle, the German Corporate Governance Code is sometimes regarded as “a marketing tool for German securities rather than valuable piece of external rulemaking.” [30] Therefore it can be argued that through the adopting of primarily Anglo-American principles, in some case countries de facto have followed the German footsteps.
For the purpose to thoroughly examine adopted corporate law in CEEC and SIC it is necessary to look at the ownership structures of their companies. It is commonly asserted that in countries with developed economies the ownership structures of their companies are defined by the extent to which investors are protected from the abuse of their rights by insiders by the law. Thus, it is also reckoned, that minority shareholders are better protected in countries with the Anglo-American model than in countries with the Continental model. [31] This protection led to the development of the dispersed ownership.
However, in countries with economies in transition the dispersed ownership occurred as a result of mass privatization and not on the basis of protective company law. Taking this into account, as was previously mentioned, the Anglo-American model was implemented with the purpose to protect this newly formed class of minority investors through granting them some preferences and limiting possibilities of others, especially large external investors, to buy shares. However, it is difficult to say that the copying from the Anglo-American model this time was sufficiently grounded, because if the real economic conditions of the former socialist countries had been examined more carefully, it could have been clearly seen that minority owners did not form a large and really interested in perspective category of investors. Furthermore, lately in some countries these protected uninterested minority shareholders were deliberately used by groups of interested entities as a means of hostile take-overs of companies. [32]
On the other hand, in countries with economies in transition the state frequently is an active player in the market through its state-owned companies. [33] The state often remains to be a large shareholder or even a sole owner of so-called “public companies” in some key areas such as telecommunications, defence, water supply, energy, railways, postal etc. [34] Moreover, taking into account that in many countries, especially in CIS, positions of large private financial-industrial groups are very strong and thus these groups can have a high influence on governments, states tend to monitor their business activities very closely. [35] This model of corporate governance where a state is an important stockholder was mainly copied from the European model, however in its nature it is “modified stakeholder model”.
Considering the distribution of power in companies, the systems of companies’ management should be examined. One of the brightest “legal transplants” from German corporate law into law of countries with economies in transitions is a two-tier system of board of directors. [36] Almost all countries of CIS and CEEC have implemented it into their corporate law. If a number of shareholders or employees, or a size of a company exceeds particular threshold, a supervisory board must be created in joint-stock and limited liability companies. If a company does not exceed that threshold, the creation of the supervisory board is left to the discretion of the company. However, not all countries followed the German model of two-tier system of board of directors; some countries implemented a mixed system. [37]
[1] Gunderson, J.L. and Waelde, T.W. (1994) “Legislative reform in transition economies: western transplants - a short-cut to social market economy status?”, 43(2) International & Comparative Law Quarterly 347-378.
[2] Watson, A. (1974) Legal Transplants: An Approach to Comparative Law, Scottish Academic Press, Edinburgh.
[3] Fedtke, J. (2006) “Legal Transplants”, Smits, J.M. (ed) Elgar Encyclopedia of Comparative Law, Edward Elgar, Cheltenham, UK, Northampton, MA; Watson, A. (1991) Legal Origins and Legal Change, Hambledon, London.
[4] Gunderson, J.L. and Waelde, T.W. (1994), supra note 1.
[5] Fedtke, J. (2006), supra note 3; Watson, A. (1974), supra note 2.
[6] Ajani, G. (1995) “By Chance and Prestige: Legal Transplants in Russia and Eastern Europe”, 43 American Journal of Comparative Law 93-117.
[7] Leban, R. and Pasechyk, T. (2008) “The transition economies systems of corporate governance”, Naciri, A. Corporate Governance Around the World, Routledge, London.
[8] Information about Ukraine is available at http://en.wikipedia.org/wiki/Ukraine_and_the_European_Union and http://www.kmu.gov.ua/kmu/control/en/publish/article?showHidden=1&art_id=97072355&cat_id=56561510&ctime=1194877284451, visited 17 April 2010.
[9] Arlt, M.A., Bervoets, C., Grechenig, K. and Kalss, S. (2003) “The Status of the Law on Stock Companies in Central and Eastern-Europe: Facing the Challenge to Enter the European Union and Implement European Company Law”, 4 European Business Organization Law Review, 245-272.
[10] Gunderson, J.L. and Waelde, T.W. (1994) , supra note 1.
[11] Kozarzewski, P. (2009) “Corporate Governance Formation in Poland, Kyrgyzstan, Russia, and Ukraine”, McGee, R.W. (ed.) Corporate Governance in Transition Economies, Springer, US, available at http://0-www.springerlink.com.pugwash.lib.warwick.ac.uk/content/v52482/ visited 17 April 2010.
[12] Micheler, E. (2007) “English and German securities law: a thesis in doctrinal path dependence”, 123 Law Quarterly Review, 251-285.
Table 25.1 Basic characteristics Kozarzewski, P. (2009), supra note 11.
[13] Bebchuk, L.A. and Roe, M.J. (1999) “A Theory of Path Dependence in Corporate Ownership and Governance”, 52 Stanford Law Review, 127-170.
[14] Clarke, T. (2007) International corporate governance: a comparative approach, Routledge, New York.
[15] Schweitzer, H. and Kumpan C. (2005) “Change of Governance in Europe, Japan, and the EU: Discussion Report”, Hopt, K.J. (ed) Corporate Governance in Context: Corporations, States, and Markets in Europe, Japan, and the U.S., Oxford University Press, New York.
[16] Schweitzer, H. and Kumpan C. (2005), supra note 16.
[17] McGee, R.W. (2009) “Corporate Governance in Transition Economies”, McGee, R.W. (ed.) Corporate Governance in Transition Economies, Springer, US, available at http://0-www.springerlink.com.pugwash.lib.warwick.ac.uk/content/v52482/ visited 17 April 2010;
Black, B., Kraakman, R.H. and Hay, J. (1996) “Corporate law from scratch”, Frydman, R. (ed) Corporate Governance in Eastern Europe and Russia, Central European University Press, Budapest, London.
[18] Black, B., Kraakman, R.H. and Hay, J. (1996), supra note 18.
[19] Gunderson, J.L. and Waelde, T.W. (1994), supra note 1.
[20] Kozarzewski, P. (2009), supra note 11.
[21] Leban, R. and Pasechyk, T. (2008), supra note 7.
Yeoh, P. (2007) “Corporate governance models: Is there a right one for transition economies in Central and Eastern Europe?”, 49 (3) Managerial Law, 57 - 75.
Vliegenthart, A. and Horn, L. (2007) “The Role of the EU in the (Trans-) Formation of Corporate Governance Regulation in Eastern Central Europe - the Case of the Czech Republic”, 11(2) Competition and Change, 137-154.
[22] Yeoh, P. (2007), supra note 22.
[23] Gilson, R.J. (2004) “Globalizing corporate governance: convergence of form or function”, Gordon, J.N. (ed) Convergence and Persistence in Corporate Governance, Cambridge University Press, Cambridge.
[24] Kozarzewski, P. (2009), supra note 11.
[25] Clarke, T. (2007), supra note 14.
[26] OECD (2004), Principles of Corporate Governance, OECD, Paris, available at http://www.oecd.org/dataoecd/32/18/31557724.pdf, visited 17 April 2010.
[27] European Corporate Governance Institute, Index of Codes available at http://www.ecgi.org/codes/all_codes.php, visited 17 April 2010.
[28] Kozarzewski, P. (2009), supra note 11.
[29] Leban, R. and Pasechyk, T. (2008), supra note 7.
[30] Mantysaari, P. (2005) Comparative Corporate Governance: Shareholders ss A Rule-Maker, Springer, Berlin.
[31] La Porta, R. (ed) (1998) “Law and Finance”, 106 (6) Journal of Political Economy, 1113-1155.
[32] Kozarzewski, P. (2009), supra note 11.
[33] Black, B., Kraakman, R.H. and Hay, J. (1996), supra note 18.
[34] Schweitzer, H. and Kumpan C. (2005), supra note 16.
[35] Leban, R. and Pasechyk, T. (2008), supra note 7.
[36] Clarke, T. (2007), supra note 14.
[37] Leban, R. and Pasechyk, T. (2008), supra note 7.
Arlt, M.A., Bervoets, C., Grechenig, K. and Kalss, S. (2003), supra note 9.