Corporate Opportunities

A Law and Economics Analysis

Marco Claudio Corradi

• Publisher: Hart Publishing
• Year: 2021
• ISBN:
  9781509917471
• Edition: 1
• Topic: Droit
• Subtopic: Droit des compagnies

This monograph provides a comprehensive analysis of corporate opportunities doctrines from a comparative perspective. It looks at both common law and civil law rules and relies to a large extent on a law and economics approach. This book broadens the conventional view on corporate opportunities, a vital step in light of the adoption of corporate opportunities rules in civil law jurisdictions and in light of investors' ever-changing strategies. This approach considers institutional complementarities and especially industrial complementarities. The book thus explores several jurisdictions and their economic and industrial environments, whilst also assessing the impact of globalisation onto legal reform. Furthermore, it analyses the problems related to the application of corporate opportunities rules to cross-border venture capital. In normative terms, the book advances one main stance, articulated in three points: first, it proposes different sanctions for undisclosed and disclosed misappropriations, supporting the core idea that sanctions should be set against disclosure and not authorisation. Secondly, it advances the idea that sanctions against undisclosed misappropriations should be more severe than the ones presently applied. Thirdly, it considers the possibility of a more flexible treatment of disclosed misappropriations. This study is positioned at the intersection of several fields, providing a lens into a much broader range of dynamics that will be of interest to a varied international readership, and offering a window into the broader institutional dynamics at work in centres of innovation (eg Silicon Valley and industrial districts in other jurisdictions). It is rooted in law and economics, but the emphasis is placed on how corporate opportunities rules fit within a broader set of institutional dynamics that affect innovation, industrial efficiency, and economic competitiveness.

1

Corporate Opportunity Legal Paradigms and Industrial Development: From Localised Business to Trade and Financial Globalisation

I.INTRODUCTION

Corporate opportunity rules prevent directors (and in certain jurisdictions, controlling shareholders and senior executives too) from appropriating business opportunities that are deemed to belong to the corporation. Before the 1970s, corporate opportunity rules were peculiar to common law jurisdictions.¹ They were introduced in Germany at the end of the 1970s,² but it was only around the year 2000 that they became part of many other continental European legal systems, including France,³ Italy⁴ and Spain.⁵ By contrast, in some very economically advanced European countries, such as Sweden, the introduction of corporate opportunity rules has been suggested by academics with no effect on law-making.⁶

The widespread introduction of corporate opportunity rules in continental Europe has created debate about their legal interpretation.⁷ By contrast, research on their economic function is surprisingly sparse in Europe.⁸ Continental European case law on corporate opportunities is not particularly copious either.⁹ This contrasts with the fact that overseas corporate opportunity doctrines are well developed in theory and in practice. In the United States of America (US), there is a significant debate on the economic role of such rules for business activity¹⁰ and on their importance for the venture capital (VC) industry.¹¹ Nowadays, technological innovation has increased the availability of business information, which multiplies the probability of new takings of corporate opportunities. Technological innovation itself is also an increasing source of myriad business opportunities.¹² Given the steadily more globalised and cross-border dimension of business and of innovation, more than ever a comparative analysis of corporate opportunity rules and of their economic function can offer interesting insights on the relationships between corporate law and economic growth.

New corporate opportunity rules appeared in Europe within the historical context of a significant number of reforms to EU Member States’ corporate laws,¹³ some of which were under the aegis of the European Community and later the European Union.¹⁴ The debate about ‘convergence versus divergence’,¹⁵ ‘form and function’,¹⁶ institutional and political complementarities¹⁷ and varieties of capitalism (VOC)¹⁸ has become more and more intense – and has also been enriched by substantial development of empirical research.¹⁹

Corporate opportunity rules should try to contain agency costs,²⁰ transaction costs and hold-up costs, thus promoting productive and dynamic efficiency.²¹ In other words, measures directed to protect financial investors, as well as rules for the defence of specific investments and of industrial complementarities, all appear to coexist within the scope of corporate opportunity doctrines.²² Also, the promotion of technological innovation can be a core objective pursued by corporate opportunity rules, especially when such innovation is produced by corporate founders who sit on the board of directors.²³ The overall set of economic incentives surrounding corporate opportunity rules is extremely complex in theory. Such complexity is enriched by further variables if we consider the diversity of the industrial, political and social contexts to which it is applied. Only by keeping in mind such complexity can the debate about corporate convergence and divergence be fully understood.

II.A CONCISE OVERVIEW OF THE DEBATE ON CORPORATE LAW CONVERGENCE AND DIVERGENCE

Since the beginning of the twenty-first century, the debate on corporate law convergence has been particularly lively. A provocative article by Hansmann and Kraakman solemnly announced the ‘end of the history of corporate law’.²⁴ According to its authors, the process of convergence of different national corporate laws was already remarkably advanced by the end of the twentieth century.²⁵ Despite a general convergence in relation to some core corporate law functions, the extreme diversification of corporate legal rules was a reality throughout different jurisdictions up until the past decade. Diversification has manifested itself in several ways, among which is the different weight granted to various stakeholders’ interests.²⁶ Nonetheless, faced with the asserted failure of most of the stakeholder-oriented models, competitive pressure towards a long-term shareholder-oriented model would be inevitable.²⁷ According to the authors, such pressure would stem from scholars’ persuasive arguments (‘force of logic’),²⁸ from the allegedly superior results achieved by the US economy (‘force of example’)²⁹ and, finally, from the asserted competitive advantages in terms of access to capital and industrial organisation displayed by the US model (‘force of competition’).³⁰ Hansmann and Kraakman also acknowledge the presence of potential obstacles to such convergence, especially within those jurisdictions that adopt a model that is radically different from the Anglo-American one. Those obstacles would basically be the extraction of private benefits of control by controlling shareholders³¹ and empire-building by families and other block-holders. In fact, block-holders are viewed as maintaining quasi-feudal relationships with their local communities.³² Despite the presence of such obstacles, the authors strongly believe that the low profitability of the non-shareholder models and changes in social values (ie the decline of a quasi-feudal mentality) will bring about the erosion of old models and the triumph of the shareholder-oriented model.³³

Despite the plausibility of some of the arguments advanced by Hansmann and Kraakman, the phenomenon that they predicted has not yet taken place. Maybe, as the reality is more complex than previously thought, additional or different variables will emerge than those suggested by the authors. Without any doubt, the global challenges that we are now facing, such as that of sustainability, have contributed to shifting the focus of the corporate debate towards stakeholder-oriented theories.³⁴ Therefore, the convergence of corporate laws towards the model depicted by Hansmann and Kraakman appears to be at least questionable.

Regardless of the accuracy of their predictions, Hansmann and Kraakman’s article has enriched and stimulated a debate that already existed in relation to these topics. As already noted, their thesis is largely based upon the idea that the transition of all the corporate law models of developed countries towards the shareholder-oriented model is driven by at least two forces: first, changes in social values; and second, market mechanisms. Market mechanisms would be the primary and prevalent propulsive force and would be triggered by the low profitability of non-Anglo-American models of corporate law (hence this theory can be defined as ‘market-based’).

Corporate lawyers and economists have provided analyses of the present divergence of corporate laws that offer alternatives to the market-based theory. Not all are founded on such an optimistic view of the efficiency of a single corporate law system (ie the Anglo-American one) as that of Hansmann and Kraakman. Although several nuances are likely to be noticed within each single doctrinal contribution, one may distinguish at least two main streams of alternative theories: one based on a legal origins argument and the other mostly relying on explanations based on political determinants. These theories, especially the latter, are connected to the cited area of institutional economics literature known as varieties of capitalism (VOC) theory.³⁵

As will be seen, it might be difficult to understand the situation existing before the recent evolution of corporate opportunity rules without reverting to the variables highlighted by VOC theory. In fact, the theory is based upon the idea of ‘institutional complementarity’; that is, on the idea that legal rules complement extra-legal variables found in the same economic system. In turn, the idea of institutional complementarity is extremely complex and often difficult to manage from a theoretical perspective. One might say that the concept of institutional complementarity has been introduced to explain the results of the social and political embeddedness that exists within each economic system and which creates path dependencies in its evolution. Social and political embeddedness also explains the large variety of solutions that may be adopted when facing the same economic problem.³⁶ In fact, each different solution would correspond to a different complex set of social, political and economic equilibria that become deeply intertwined throughout time.³⁷

The concept of institutional complementarity may encompass a diversified set of explanations. First, literature has identified different kinds of institutional complementarities: natural complementarity (ie deriving from scientific laws of nature and at times observable in industry); technical complementarity and complementarity by design (ie when the source of efficiency is produced by a man-made conjunction of two inputs); ex post discovered complementarity (ie understood through a process of trial and error); and functional complementarity (ie the relationship between duties and rights of individuals).³⁸ When analysing corporate law as applied to different social, industrial and economic realities, several institutional complementarities occur.

Second, the causality link between the sets of variables highlighted by the concept of complementarity looks particularly important. There might be attempts to provide a clear law of causation when a given variable (social, economic, political) has influenced another. However, it is sometimes necessary to refer to the concept of co-evolution: ‘the joint occurrence of two institutions or organizations might be the unintended outcome of a selection process mechanism, operating via the succession of stochastic shocks and possibly major events such as crises’.³⁹ From a practical perspective, this also means that it is extremely difficult to introduce successfully a given complementarity into an existing system. This depends on the difficulties inherent in calculating the impact of an innovation and the trajectory that such an innovation will follow within that economic system, given that every economic system is characterised by an extremely complex set of variables. This is why institutional complementarities are usually found ex post instead of being introduced ex ante.⁴⁰ The idea of institutional complementarity is probably a better tool for carrying out positive analysis.⁴¹ Corporate lawyers have chosen to employ this concept from a positive perspective. This is clear in both the legal origins theory and the political theory.

According to the legal origins theory, the divergences observed nowadays within national corporate laws are because of cultural differences determined by various historical events in different areas of the world. The correlation is between history, the development of institutions and the law, and economic growth.⁴² The extremely rich and sophisticated set of arguments found at the heart of the legal origins theory has been rationalised in a very popular article by La Porta, Lopez-de-Silanes and Shleifer.⁴³ The authors do not point to the superiority of common law over civil law or vice versa; they simply try to highlight ...