Luca Enriques

Do Corporate Law Judges Matter? Some Evidence from Milan

If corporate law matters to corporate governance and finance, then in order to assess its quality in any given country, one must look at corporate law off the books, i.e., the characteristics of corporate law as applied by judges and other relevant public officials. This paper provides an assessment of Italian corporate law based on an analysis of a sample of 106 decisions by the Milan Tribunal, Italy’s most specialized court in corporate law. The judges’ quality is evaluated by looking at: (1) how deferential they are to corporate insiders; (2) how keen they are to understand, and possibly take into account, the real rights and wrongs underlying the case before them; (3) how antiformalistic their legal reasoning is; (4) how concerned they are about the effects of their decisions on the generality of corporate actors.The analysis casts a negative light on Milanese (and by extension, Italian) corporate law judges. It highlights egregious cases of deference to corporate insiders, especially with regard to parent-subsidiary relationships. Furthermore, very few of the court’s opinions have been so drafted as to let the reader understand what the real dispute was and which party had really acted opportunistically. In any case, it appears to be rare for the court to take the substantive reasons for the dispute into any account. Cases are described, in which the court has adduced very formalistic arguments. Finally, there is no sign that the judges care about what signals they send to corporate actors: they appear to be quite unconcerned about whether their decisions provide the right incentives for directors and shareholders.

Corporate Governance Reforms in Italy: What Has Been Done and What Is Left to DO

This essay takes stock of the corporate governance reform efforts in which Italian policy makers have engaged since the beginning of the 1990s. After describing the reform process and its drivers (a concern for Italian equity markets’ attractiveness in an increasingly competitive and global framework, scandals, and EC activism) the essay analyses the main reforms to single out what has worked (i. e., what has had a practical positive impact on Italian listed companies’ corporate governance) and what has not. After concluding that the corporate governance legal framework has greatly improved as a result of reforms, the essay identifies a number of areas where further steps could be taken to protect investors against the risk of expropriation by corporate insiders. It is also argued, however, that the mother of all corporate governance reforms in Italy would be a change in legal and political culture; legal culture should change so as to put substance over form, function over doctrine. That would be a precondition to effective enforcement of corporate and securities laws. Political culture should change from one that deems it to be the norm for politicians to decide on the allocation of corporate control to one more respectful of property rights. Finally, two modest, bottom-up proposals to help change legal culture in the long run are put forth.

The Mandatory Bid Rule in the Takeover Directive: Harmonization Without Foundation?

The following article critically evaluates the mandatory bid rule in the new Takeover Directive. It questions the rationale and the effectiveness of this central feature in light of the wide discretion left to the Member States, in particular regarding the permissibility of defensive measures, and ends with provocative views on “cui bono?”.

Centros and the Cost of Branching

Following the Centros, Uberseering and Inspire Art decisions of the European Court of Justice (ECJ), a thriving market for incorporations has developed in the European Union. Round-trip incorporation is competing with domestic incorporation. Entrepreneurs can set up a shell company in any EU jurisdiction and branch back to their home country to operate a business. The UK Limited Company (UK Limited) is a popular choice in many countries because it is rapidly and cheaply available online with minimum formalities. We have developed a taxonomy for measuring the cost of Limited round-trip incorporation. The cost of setting up a UK Limited is directly observable in the market while the cost of branching is not. We have run field experiments to measure the cost of branching. Our analysis reveals that despite the ECJ rulings, branching remains costly or impractical in many cases. Incorporation agents play an essential role in overcoming the limitations to branching.

The Case for an Unbiased Takeover Law (with an Application to the European Union)

Takeover regulation should neither hamper nor promote takeovers, but instead allow individual companies to decide the contestability of their control. Based on this premise, we advocate a takeover law exclusively made of default and menu rules supporting an effective choice of the takeover regime at the company level. For reasons of political economy bearing on the reform process, we argue that different default rules should apply to newly public companies and companies that are already public when the new regime is introduced. The first group should be governed by default rules crafted against the interest of management and of controlling shareholders, because these are more efficient on average and/or easier to opt out of when they are or become inefficient for the particular company. The second set of companies should instead be governed by default rules matching the status quo even if this favors the incumbents. This regulatory dualism strategy is intended to overcome the resistance of vested interests towards efficient regulatory change. Appropriate menu rules should be available to both groups of companies in order to ease opt-out of unfit defaults. Finally, we argue that European takeover law should be reshaped along these lines. Particularly, the board neutrality rule and the mandatory bid rule should become defaults that only individual companies, rather than member states, can opt out of. The overhauled Takeover Directive should also include menu rules, for instance a poison pill defense and a time-based breakthrough rule. Existing companies would continue to be governed by the status quo until incumbents decide to opt into the new regime.

Issuer Choice in Europe

Unlike the US, the European Union has a tradition of national securities laws significantly differ-ing from each other. Regulatory idiosyncrasies largely remain today despite recent efforts aiming at more comprehensive harmonization. In addition, in important respects, the current conflict of laws rules contained in European Community securities laws bundle the choice of applicable securities laws with the issuers registered office, while leaving some regulatory aspects to the law of the market where the issuers securities are admitted to trading. Hence, to the extent that EU companies can choose their state of incorporation and trading location, they can also choose the applicable securities law among those in place in the 27 EU countries. This article scrutinizes the policy implications of the conflict of laws rules EC securities regula-tion has chosen in two scenarios: the present one, in which obstacles to companies mobility across the EU still make regulatory arbitrage in practice unavailable, and a prospective one in which these obsta-cles are removed. We consider the bundling of securities laws with the issuers law of incorporation for conflict of laws purposes overall detrimental if corporate law arbitrage is unavailable. On the other hand, we argue that the impact of such rules is beneficial if companies can easily engange in company law arbi-trage. Yet, we qualify our optimistic assessment by showing that bundling securities regulation and corporate law for conflict of laws purposes may have a negative impact on the dynamics of the market for corporate charters. For the regulatory aspects that are governed by the law of the affected market (and specifically for securities law aspects of takeover regulation), we argue that already today issuer choice offers a broad variety of options and a separating equilibrium represents the likely outcome.

The Governance of Financial Supervisors: Improving Responsiveness to Market Developments

We offer a menu of mechanisms to improve the governance of ‘normal times’ financial supervisors (as opposed to resolution agencies and systemic risk boards). To enhance supervisory effectiveness, we propose to institutionalize strong CEOs, with boards or commissions being limited to basic policy decision‐making and to monitoring. Moreover, lower level staff would get increased line responsibilities. Market responsiveness, for its part, would be improved by subjecting supervisors to reinforced disclosure requirements. In addition, they would have to ‘act or explain’ when a financial intermediary’s RoE or CDS spreads rise above pre‐set thresholds. Finally, the market for supervisory control would be fostered by reinforcing the contingent powers of resolution agencies. This menu approach facilitates implementation and avoids ‘one size fits all’ effects.

Regulatory Competition in European Company Law and Creditor Protection

The European framework for creditor protection has undergone a remarkable transformation in recent years. While the ECJ’s Centros case and its progeny have introduced free choice with respect to the State of incorporation, and hence the substantive company law regime, the European Insolvency Regulation has implemented uniform conflict of laws rules for insolvencies. However, this regime has opened up some forum shopping opportunities. This article analyzes possible consequences of regulatory competition and forum shopping for creditors and argues that the ‘insolvencification’ of corporate law creditor protection mechanisms will not enable national policymakers to impose their respective ideas about creditor protection on firms in a fully-fledged manner.

Quack Corporate Governance, Round III? Bank Board Regulation Under the New European Capital Requirement Directive

After a crisis, broad and sweeping reforms are enacted to restore trust. Following the 2007-2008 Great Financial Crisis, the European Union has engaged in an ambitious overhaul of banking regulation. One of its centerpieces, the 2013 Fourth Capital Requirements Directive (CRD IV), tackles, amongst other things, the perceived pre-crisis failings in the governance of banks. We focus on the provisions that are aimed at reshaping bank boards’ composition, functioning, and their members’ liabilities, and argue that they are unlikely to improve bank boards’ effectiveness or prevent excessive risk-taking. We criticize some of them for mandating solutions, like board diversity and the separation of chairman and CEO, that may be good for some banks but are bad for others, in the absence of any convincing argument that their overall effect is positive. We also criticize enhanced board liability by showing that it may increase the risk of herd behavior and lead to more serious harm in the event of managerial mistakes. We also highlight that the push towards unfriendly boards will negatively affect board dynamics and make boards as dysfunctional as when the CEO dominates them. We further argue that limits on directorships and diversity requirements will worsen the shortage of bank directors, while requirements for induction and training and board evaluation exercises will more likely lead to tick-the-box exercises than under the current situation in which they are just best practices. We conclude that European policymakers and supervisors should avoid using a heavy hand, respectively, when issuing rules implementing CRD IV provisions with regard to bank boards and when enforcing them.

Improving the Governance of Financial Supervisors

We offer three basic mechanisms to improve the governance of ‘normal times’ financial supervisors (as opposed to resolution agencies and systemic risk boards). To enhance supervisory effectiveness, we propose first to institutionalise strong CEOs, with boards or commissions being limited to basic policy decision-making and to monitoring. Second, lower-level staff would get increased line responsibilities. Finally, subjecting supervisors to reinforced disclosure requirements would improve market responsiveness.