“While corporations, at least the largest ones, commonly operate on a global scale, the laws governing their internal affairs (in other words, the rights and duties of their owners and managers) are national or sub-national. In the last few decades, considerable scholarship has focused on whether these national and sub-national corporate laws are becoming, like many of the corporations they govern, global – in this case by converging upon commonly accepted approaches. Earlier comparative corporate law scholarship was to a great extent a technical affair, occupied with describing differences in specific rules – e.g., whether a nation's corporate law provided for a one- or two-tier board of directors – and lacked any overarching purpose or direction motivating its inquiry. This changed when scholars began to look at a broader context, which culminated in the convergence predictions.”
(Gevurtz (2011) The Globalization of Corporate Law: the End of History or a Never-Ending Story? 86 Wash. L. Rev. 475
Emergence of globalisation and the success of corporations have mended the way for nations to have corporate legal regimes to advance economics and finances. Emerging markets and nations that became part of this success story had to pave the way for these corporations to operate within their jurisdictions by implementing some sort of corporate legal regimes. There were two simple solutions to this implementation. First is that a new corporate legal regime could be articulated through the socio economic jurisprudence of the given jurisdiction. However obvious problem is that this corporate legal regime may be in perfect harmony with the national legal jurisprudence but not compatible with the way corporate operates or indeed legally managed on international level. Second and perhaps more elegant solution is to take an already successful corporate legal system and make amendments to it to resolve national compatibility issues. There, inevitably, is a view that worldwide legal corporate systems have already achieved this convergence as early as nineteenth century. However it could equally be argued that in the absence of already established corporate legal systems, expansion of it was an inevitable result. Therefore when business enterprises expanded so did the legal corporate systems with it. The core functional features of that convergence were almost identical to jurisdictions across the board and examples included full legal personality, limited liability for owners and managers, shared ownership by investors of capital, delegated managements under board structure and transferable shares.
The purpose of this essay, apart from being part of master’s marking, is to explore and analyse convergence with reference to how legal systems are moving towards common approaches and whether this level of convergence is achievable. In view of the question posed, this essay has three parts. First part shall discuss the historical arguments that explain how convergence, as an idea, has been identified and shall explain the evolution of corporate legal regimes. Second part of the essay shall look into the convergence in corporate legal entity. The third section will present a conclusion along the line of argument that there is a desire of international corporate players as well as political regimes to converge corporate laws and thus harmonisation almost induces the nations to do so.
Historical Background to Convergence
This section will explore the question of how the making of business enterprises evolved into corporations and therefore convergence came naturally with this expansion. Therefore the first analysis is how business enterprises came into being and when it became corporation.
It is mostly agreed that modern corporation roots are in English and continental European companies formations that was called ‘joint stock companies’. The term ‘joint stock’ meant that the firm is owned by the investors who held transferable shares. For example first such enterprise was a Russian Company established in 1553 to find passage to Asia. Thereafter English East India Company was formed in 1600 to trade with the Far East. These companies were born out of an earlier type of companies those were regulated by the Crown and were trading as franchises in foreign land. Investors would buy the trading stock jointly for those regulated companies in order to fund the expedition and later will share the profit upon the completion of the voyages. However and naturally joint stock became a permanent joint stock and investors with shares started to trade their shares for money thus giving birth to the stock markets. With the passage of time these expeditions or trading voyages had global operations and traded with other merchants and not only exchanged goods for trade but also exchanges the ways of operation by way. This is how it seems the global corporation law began.
However it is arguable that if these English stock companies were the pioneers of corporate law, as Guvetz presumes, if so then it only means that the rest of the civilised trading nations had absolutely no meaningful structure to their ventures. This certainly cannot be true and it could been seen that other nations such as Italy, Germany and perhaps Portuguese had already established structures but perhaps were not as versatile as the one proposed by the English joint companies. Nevertheless other nations had business structures but significantly the joint stock companies had a sellable share options that were attractive to a lot of investors thus making it very popular. That is why after the establishment of English East India Company many Dutch Merchants conspired to form the United East India Company upon the English Joint Stock principals. However there is also some evidence exists that the founders of original English and East Indian Companies may have been influenced by the financing structures of Italian banks and merchants who raised and then used common funds with transferable shares. Therefore the notion that English Joint Stock companies have pioneered the corporations is somewhat flawed. In any case it could be argued that the corporate laws converged as early as the corporation came into existence. From seventeenth to the nineteenth century the joint stock companies were created contractually as well as through crown or governmental charters. However at beginning Portuguese, Spanish, and early Latin American joint-stock companies may not have needed a Royal charter to come into existence as opposed to obtaining monopoly privileges. Elsewhere in Europe, limited partnerships sometimes operated on the joint-stock principle. In England, numerous unincorporated associations followed the joint-stock principle by issuing transferable shares in a common capital. These were organized as partnerships, or later as trusts, in which trustees held title to the firm’s property to be used for the benefit of the owners of transferable shares in the trust. These joint-stock associations often attempted to gain self-help limited liability for their shareholders by contracts with their creditors. Thereafter in a wave of international corporate convergence the joint stock company structure was imitated by the national and sub national governments legislations that eventually allowed joint stock companies to come into existence. France, after revolution, developed the concession system and United States followed its earlier general-incorporation approach, established since 1811. England officially passed company laws that allowed incorporation of companies by registration in 1844 without limited liability for the shareholders and in 1855 extended to limited liability for shareholders. In contrast, Spain similar to France conceded to implementing a concession system whereas Germany followed by unification of the country in 1870 and 1871 implemented to incorporation by registration. Carsten noted that the free incorporation, which had previously only been available since 1861 in a few smaller German states, spread with the 1870 formation of the North-German federation, including Prussia, and then spread to the rest of Germany with the establishment of German Empire in 1871. Therefore the argument that convergence was desired seems to be true to some extent. However general incorporation laws also were imitated due to European nation’s colonising activities.
The story of convergence though started as early as the history of convergence but it could not be considered the end of history, a right criticism of Hansmann by Gevurtz but perhaps is an ongoing change that will never stop. In any case for the purpose of this essay it shows clearly that various corporate legal systems historically had converged desirably towards some sort of unification. However one of the arguments that is not been taken seriously is the social and political change that has accrued within the last two centuries has influenced the way business is now conducted and inevitability gave new meaning to convergence. Hence is perhaps the reason why convergence, as a process, will never be said to be completed but expected to change with times.
Corporate as an ideology had convergence evolution since it began whether it was by imitating or only adopted in piecemeal but there are components of corporate legal frame work that require analysis in order to establish how the convergence is working through these corporate legal systems or indeed was intended. In this regard this section will only be limited to comparing and critically analysing the limited liability and corporate governance structures of different corporate systems. For example, if British and German corporate governance is compared one would realise that although from the outset the corporate legal frame work favours corporate legal entity as a whole but in detail the emphasis is on different philosophical approaches. Germany has acted a corporate legal system where the governance is divided between a supervisory board (Aufischtrat) and a managing board (Vorstand) whereas in British Law there are no mandatory rules for German style board of structure but having said that British corporate law does not prohibit such company Structural Approach and is therefore sufficiently flexible to allow approximation to German position should a company require to do so. Now this flexibility may allow the British Corporate legal system to converge in the future provided the will of companies and the commercial ethos that changes during the passage of time. In the absence of major changes in British corporate legislation it can be argued that the Large British Companies have been moving toward a two ties corporate governance structure.
Furthermore the single most important achievement of the Cadbury Committee was its successful advocacy of the introduction (or, perhaps better, reintroduction) of the monitoring function to the boards of large British companies, and its elevation to equal status with the strategy-setting function. Can it then be argued that what has occurred is the functional convergence of board operations in large British and German companies? Should we now think of the monitoring British board as equivalent functionally as the German supervisory board? Some interesting evidence of functional convergence can be found, as the Company Law Review noted, in the de facto emergence of two-tier structures in the UK. As the legally required board has moved more in the direction of monitoring, there is evidence that that in some companies managerial functions have been hived off to an informal board consisting only of executives of the company. This practice is even more advanced in the United States, where boards often have a clear majority of independent NEDs. The Company Law Review comments that ‘the practice of delegating day to day management and major operational questions to a “management board” is becoming increasingly common in this country.” and it adds ‘It is, of course, perfectly legal and gives many of the advantages of the two-tier board’. This phenomenon of convergence in corporate legal convergence could be explained by various arguments for example the force of competition or force of example, as Hansmann would probably argue. However British, German and USA are all very successful economies and often larger companies have business interests in some or all of these economies. Therefore mere example or competition argument alone explain convergence. It seems other factors such as socio political will and profit enhancement may also need to be considered for overall convergence.
Further convergence that needs attention is the limited liability spreading throughout the corporate world. As a historical fact Limited liability was never part of the formation of companies. From Nineteenth century limited liability spread in England. Germany pioneered the concept of Limited liability for civil law countries. Gouvertz argues that limited liability spread because the capital markets converged as these markets were created and operated mostly by a certain group of countries. However it could be argued that Limited liability concept spread because share holders or the owners of the corporate who mostly controlled the wealth required to be protected. Secondly the Limited liability on a jurisprudence level fits in with the concept of legal personality. For example when a company is treated as a separate legal entity it makes more sense that liability is attached to the legal personality argument instead of with the investors. Practically it produces two results. Firstly there is no confusion in relation to where primary liability is attached and that is the corporation itself. As a result it is in the beneficial interest of the owners that companies are run seriously and legally in order to be in the best place to discharge such liabilities. Secondly it provides the shareholders or owners a more profit orientated focus and put pressure on the management to perform. However the corporate legal system must be well advanced, to an extent, to protect other stakeholders. It is argued that non-shareholders or stakeholders are protected from the activities of the corporations by implementing regulations and some time by deregulations that generally fall outside the corporate legal systems. For instance the regulations or deregulations involving banks to control lending practices, the rights of workers to organise, the health and safety regulations and most recently recycling and reduction of carbon foot print. Nevertheless there is always a debate that corporate laws must always be created or implemented by keeping in mind that corporate laws will always have an effect on body of those regulatory requirements. In essence, it seems that corporate laws and regulations have conflict of interests and infect this conflict is essential to balance the smooth running of a corporation and is a desired characteristic of a well advanced corporate legal system.
As Gouvertz has explained
“Moreover, global convergence on corporate regulations often involves more than just the prevailing philosophy. It also included imitation and transplant of either particular forms of increased regulation(as in the spread of laws requiring disclosure upon the sale of stock107) or of mechanisms allowing deregulation (as in the spread of the German invention of the limited liability company form with fewer mandatory requirements for corporations not issuing transferable stock108)”.
However in criticism of limited liability it could be argued that shareholders investment into the corporation is only to seek dividend or rent. This notion pushes the company to be efficient and to be competitive in the market place. The argument for this view point purports that corporations are constantly in competition with each other and in globalised world it means competition among countries and their perspective economies. As a result corporations operating with less efficient corporate laws and structure will be at a disadvantage than those operating in efficient corporate laws. This tense competition would mean some companies will not survive thus making the argument for convergence towards more efficient corporate legal system a practical reality. More over it is desirable for nations to have corporate laws that produce new and better companies that can competently compete on global level and contribute towards the wealth of a nation. Therefore convergence toward such an efficient corporate law system is inevitable.
For instance convergence can be observed of the national legal systems within the European Union. There are a few significant developments, purported by the Court de cassation, which have pragmatically steered French contract law in a direction coinciding with that adopted by the Principles of European Contract Law. Significantly interesting, in that respect, are the growing prominence of the principle of good faith, the new approach towards the determination of price, and the recognition of an extra-judicial way of terminating contracts after breach of contract. Since the Principles have not been presented, probably, in the judges' minds, we can refer here to a process of spontaneous, or autonomous, convergence. The Modernization of the Law of Obligations Act in Germany. On the other hand, has been a piece of legislative (as opposed to judicial) law reform, and one in which the European Principles, and the UNIDROIT Principles have played a role.
The new German law of prescription has also been decisively influenced by the Principles of European Contract Law. Similar developments are evident in other countries. Thus, for instance, the English Contracts (Rights of Third Parties) Act 1999 was inspired, inter alia, by a realization that "the legal systems of most of the member states of the European Union recognize and enforce the rights of third party beneficiaries under contracts”. Concerning the influence of comparative law on national courts England also has a number of spectacular examples to offer. Apart from that ithas pointed out that there is the unifying effect of fundamental rights, as laid down in the European Convention for the Protection of Human Rights and Fundamental Freedoms, on the development of private law (including contract law) and there is the important, though usually under-rated, convergence brought about, on the level of legal reasoning, by the identification of common sets of arguments which are used in national legal discourse.
The most dramatic reforms, of course, have taken place in the laws of the Central and Eastern European states. Up to the period of the World Wars of the 20th century, they had belonged to the cultural sphere of the ius commune. In some of them (most notably Hungary and Poland), the continued teaching of Roman law during the days of the rule of socialism maintained a connection with the west and since the end of that rule we see a process of reintegration "by way of a renovation of private law guided by comparative scholarship".
Convergence started at the beginning of the doctrine of corporation itself. As European and non European nations alike adopted the early joint stock company form it seems they simply copied all the features and some time without asking what was really necessary or useful. The force behind such adaptation was colonising or perhaps nations desire to be part of the globalise business. However it is evident that convergence is not something that just sprung up unwontedly but rather a tool for evolution and innovation. Recent globalization not only favours the advancement of corporate laws that produce efficient and better results but also advocating harmonisation various laws including parts of corporate laws. Therefore those different arguments of convergence bow down to commercial realities and efficiencies, financial institutional systems, international political ideals, harmonisation and nation’s desires to be affluent and at least be part of it. Therefore convergence is neither a process that will ever be concluded nor will it be perfect but shall always be changing and adjusting its tunes to popular new music. This suits the corporate commercial world where new markets are exploited, deals are done and focus is always whether company stock values are going up or down. From a corporate point of view it seems that perfect convergence is neither possible nor desirable.
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