Martin Gelter

History of Law and Economics

The roots of law & economics lie in late 19th century continental Europe. However, this early movement did not persist, having been cut off in the 1930s. After World War II, modern law & economics was (re-)invented in the United States and subsequently grew into a major field of research at U.S. law schools. In continental Europe, law & economics was re-imported as a discipline within economics, driven by economists interested in legal issues rather than by legal scholars. Hence, the European discourse was more strongly influenced by formal analysis, using mathematical models. Today, research in the U.S., Europe, and in other countries around the world, including Latin America and Asia, uses formal, empirical, and intuitive methods. New subfields, such as behavioral law & economics and experimental law & economics, have grown in the U.S. and in Europe during the past two decades.

Language, Legal Origins, and Culture Before the Courts: Cross-Citations Between Supreme Courts in Europe

“Legal communication has two principal components: words and citations”1 Should courts consider cases from other jurisdictions? The use of foreign law precedent has sparked considerable debate in the United States, and this question is also controversially discussed in Europe. In this article and within the larger research project from which it has developed, we study the dialogue between different European supreme courts quantitatively. Using legal databases in Austria, Belgium, England and Wales, France, Germany, Ireland, Italy, the Netherlands, Spain, and Switzerland, we have hand-collected a dataset of transnational citations between the highest courts of these countries for the time between 2000 and 2007. In the present article we show that citation of foreign law by supreme courts is not an isolated phenomenon in Europe, but happens on a regular basis. We found 1,430 instances in which these courts have cited the supreme courts of the other nine countries. The majority of these citations have been made for purely comparative reasons. We also undertook regression analysis in order to understand the differences between the cross-citations. Whether such citations take place and in what quantity depends on the particular legal culture and its relationship to others. Austria and Ireland, which stand in an asymmetric relationship with Germany and England respectively, seem to be particularly receptive to foreign influence on their legal systems. But even controlling for these outliers, we have been able to identify that the population of the cited country and a low level of corruption, native languages and language skills, legal origins and families, and cultural and political factors all matter for which courts are likely to be cited. More specifically, knowledge of the language of the cited court appears to be a more important factor driving cross-citations than legal traditions, culture or politics. Thus, to facilitate a transnational market of legal ideas, it can be suggested that courts should strive to make their decisions available in languages that possible readers understand.

Why do Shareholder Derivative Suits Remain Rare in Continental Europe

The objective of this symposium piece is to explore why shareholder derivative suits are rare in Continental Europe, while they are the central mechanisms of corporate governance enforcement in the United States. I focus on Germany, France and Italy, and provide more limited references regarding derivative suits in Austria, Belgium, the Netherlands, Spain, and Switzerland. The two points I seek to make can be summarized under the headings of the “Anna Karenina Principle” and “The Path of Least Resistance.”Jared Diamond popularized the “Anna Karenina Principle” based on the first line of Leo Tolstoy’s classic novel, according to which “all happy families are alike.” Diamond varies the idea to explain that an animal species, to be susceptible to domestication by humans, needs to meet a list of criteria. It fails the test if a single one is not met. An analogous point can be made for derivative suits. Only the US and Japan seem to “get it right” with respect to all necessary criteria to make derivative litigation an attractive model for shareholders. In other words, no single factor suffices to explain the scarcity of derivative litigation in Continental Europe. Each country fails the test with respect to at least one criterion, most fail with respect to several. I survey the available explanations and additional ones, focusing on minimum share ownership requirements, the allocation of litigation risk, access to information, and limitations regarding potential defendants.The small number of derivative suits is often seen as a reason why Continental European corporate law is underenforced. While I do not attempt to disprove this claim, I suggest that that there is a significant degree of corporate law enforcement in Continental Europe. If derivative suits are difficult, disgruntled shareholders will take the “Path of Least Resistance” and resort to other enforcement mechanisms. I therefore address other ways in which shareholders can seek judicial recourse that do not take the shape of derivative litigation, namely rescission suits, which are common in several countries, but subject to a particularly intense debate in Germany; criminal enforcement, on which shareholders are able to “piggyback” e.g. in France; and the Dutch model of judicial “inquiry proceedings.” Each of these provides makes it easier for shareholders to seek redress than derivative suits, who are likely to seek the “path of least resistance” in litigation. While the success of these mechanisms that corporate law is equally strongly enforced as it is in the United States, we can identify some partial functional equivalents.

The Structure of Regulatory Competition in European Corporate Law

In its opinions in the cases Centros, Überseering and Inspire Art, the ECJ has begun to open European corporate law for regulatory competition, as it has been discussed in the US for several decades. This article analyses the structural conditions of competition on the supply and demand sides of the market for corporate law, and the impact of supranational influence. In doing so, it identifies several factors that have received little attention in the incipient European debate. The supply-side analysis shows that a European Delaware is implausible because of the interdependence of competitive advantages and incentives to compete. On the demand side, an analysis of the effects of differences of financial structures indicates that a race to the bottom is more likely in Europe. The comparatively weak threat of supranational intervention in Europe makes actions and decision making an unlikely factor to affect the decisions of national actors.

The Pension System and the Rise of Shareholder Primacy

This article explores the influence of the pension system on corporate governance, which has so far received little attention in the corporate law literature. While the shareholder-centric view of corporate governance is strong today, this is a relatively recent development. “Managerial capitalism” began to give way to shareholder capitalism over the past three decades. I argue that changes in the pension system, specifically the shift from defined-benefit plans to defined-contribution plans that began in the 1970s, have been a major force pushing the corporate governance system toward shareholder primacy. While in traditional pension plans, workers depended primarily on their employer’s ability to fund pensions, in today’s system retirement benefits strongly depend on capital markets. Shareholder wealth thus became more important for larger segments of society, and pro-shareholder policies became more important relative to pro-labor policies strengthening employees’ position vis-a-vis their employer. Consequently, shareholder primacy became the dominant factor in corporate governance debates. Managers today claim to focus on this objective and are less well positioned to take the interests of their firm’s employees or other groups into account. The political economy of corporate governance underwent a seismic shift. While it is not clear whether shareholders truly benefit from most reforms, these have been largely supported by the center-left given their apparent beneficial effects for shareholders and consequently the middle class. For the same reason, unions have been among the most eager proponents of shareholder activism.

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.

Divergente Evolution des Rechtsdenkens - Von amerikanischer Rechtsökonomie und deutscher Dogmatik

German Abstract: Die Arbeiten von Juristen und Wirtschaftswissenschaftlern haben zu allen Zeiten Verbindungslinien zueinander aufgewiesen. Seit den 1960er Jahren ist in den Vereinigten Staaten jedoch eine Law-and-economics-Bewegung entstanden, die breite Bedeutung an amerikanischen Rechtsfakultaten erlangt hat. Auf den nicht rechtsvergleichend arbeitenden deutschsprachigen Beobachter wirken Aufsatze in amerikanischen Rechtszeitschriften mitunter befremdend. Dies beruht nicht allein auf den unterschiedlichen klassischen Rechtstraditionen (common law bzw. civil law), sondern vor allem auf der interdisziplinaren Ausrichtung der Beitrage. Wahrend sich im deutschsprachigen Raum die Rechtsdogmatik in erster Linie mit der systemimmanenten Weiterentwicklung des Rechts befasst, gehen amerikanische Rechtslehrer fast immer von einem externen Blickwinkel aus. Insbesondere wird das geltende Recht auch von Juristen an externen Masstaben, etwa okonomischen Effizienzkriterien, gemessen. In dieser rein funktionalen Betrachtung unterscheidet sich die US-amerikanische Rechtslehre wesentlich von der europaischer Staaten einschlieslich Grosbritanniens. Diese Arbeit versucht eine Erklarung fur diese Divergenz im Rechtsdiskurs und betont zu diesem Zweck in der bisherigen rechtsvergleichenden Diskussion unberucksichtigte bzw. vernachlassigte Faktoren, wobei als die zwei zentralen Faktoren der amerikanische Rechtsrealismus sowie der Utilitarismus identifiziert werden.English Abstract: Law and Economics has become an integral part of U. S. scholarship, while its role remains comparatively limited in the German-speaking legal debate. We propose a two-pronged explanation for this divergence of legal thought which rests on the rise and fall of legal realism and the rejection of utilitarian ethics. Until the late 19th century, the interpretative methodology of the respective legal systems showed remarkable parallels. Both the Langdellian approach as well as German conceptual jurisprudence focused on an internal perspective of the law and excluded external elements from »legal science«. This approach was attacked by both the Free law school and its American counterpart, legal realism, during the early decades of the Twentieth Century. Scholars essentially argued that the law was indeterminate to some extent and that the use of traditional legal methods disguised the true reasons for a particular interpretation of the law, e.g. in the form of a judicial decision. Both schools emphasized that decisions were inevitably based on policy considerations at least to some extent. Legal realism transformed American legal thought into a discourse focusing on policy and the consequences of the law in which extra-legal considerations, including economic analysis, take a predominant position. By contrast, German legal theory focused on the development of interpretative methods and emphasized the internal coherence of the legal system. Policy remained largely excluded from scholarly analysis. Differences in the philosophical roots can explain why law and economics prevailed over other theories that intended to fi ll the void torn open by legal realism and why it today takes such a prominent position in U. S. legal academia. The widespread acceptance of utilitarianism in American academic circles provided a fertile groundwork for welfarist, consequentialist approaches such as law and economics. Insofar as external criteria are accepted in the German legal discourse, they are mostly non-utilitarian. We argue that both legal realism and utilitarianism were necessary for the development of a legal discipline strongly characterized by law and economics scholarship, as we see it in the U. S. today.

Employee Participation in Corporate Governance and Corporate Social Responsibility

The chapter investigates the impact of employee participation on the board of directors or supervisory board (particularly codetermination) on corporate social responsibility (CSR). Conceptually, it is important to distinguish between “internal” and “external” CSR. Internal CSR relates to practices of the firm regarding groups with which it is in a long-term contractual relationship such as employees. Employee participation systems serve to protect employees from shareholder opportunism and shift the balance in the distribution of corporate rents in favor of employees, which is why they clearly have an impact on internal CSR. The situation is much less clear for external CSR, which is concerned with effects of corporate activities that are externalities, for example pollution. I argue that there may sometimes be a tradeoff between internal and external CSR: If a firm is more profitable because it scores badly in terms of external CSR (e.g. because it habitually pollutes), employees may benefit similarly as shareholders. In fact, the interests of shareholders and employees may be largely aligned in this respect, with both either benefiting or being harmed concurrently.

British home stores collapse: the case for an employee derivative claim

ABSTRACT British Home Stores collapsed led 11,000 employees to lose their jobs and faced substantial cuts to their pension with a £571 million pension deficit. In light of the BHS scandal, the UK Government has proposed a set of corporate governance reforms to strengthen the employee voice. Although the government’s approach towards strengthening the employees’ protection is well intentioned, we argue that without providing a derivative claim right for employees, these measures will likely have little impact in practice. Hence we suggest that to safeguard the employees’ interest in the company and to enhance the overall protection of the company, in addition to the current proposed reforms, the standing for bringing derivative claims should be broadened to the employee’s representative.

EU Company Law Harmonization Between Convergence and Varieties of Capitalism

This chapter sketches the history of EU Company Law, from its beginnings in the 1960s until today. Throughout all periods, EU company law harmonization was largely a top-down, technocratic project that was considered imperative to realize the common market. In other words, it was promoted mainly by the European Commission and experts advising it without any particular business or investment interest group pushing for harmonization. Scholars are divided about the success of the project, with opinions ranging from it being a great success story to the claim that EU company law harmonization is largely trivial. This chapter suggests that that the development of EU company law can be understood as reflecting two distinct periods of convergence in corporate law, even if that convergence has often been limited to specific issues and sometimes remained restricted to the formal level. Company law harmonization efforts mirror prevailing fashions about what is considered good corporate law. Each of these periods is roughly linked to the success of a particular model of capitalism that seemed to be on the ascendancy at the respective time. This first period was characterized by a dominance of the German model, and a vision of corporate law that one could characterize as belonging to a “coordinated” variety of capitalism, when shareholder value maximization was not yet the prime directive of corporate law. The second period began in the late 1990s and partly coincides with the “convergence in corporate governance” debate. Harmonization efforts focused on enabling choice for shareholders based on transparency and information. This period was dominated by liberal capitalism oriented toward shareholders and increasingly the stock markets. Germany’s position as the model jurisdiction was increasingly taken over by the UK. EU Company law harmonization has always been in the balance between top-down proposals coming from the center and national resistance. In the early period, when company law harmonization was influenced mainly by Continental models, the UK stepped on the brakes after joining the EEC in 1973 whereas since the 2000s Germany and other Continental jurisdictions have been the main source of resistance. Because of Member State options and the ability to avoid company rules, convergence has remained formal and superficial, but not entirely irrelevant.