Wolf-Georg Ringe

Independent Directors: After the Crisis

This paper re-evaluates the corporate governance concept of ‘hoard independence’ against the disappointing experiences during the 2007–08 financial crisis. Independent or outside directors had long been seen as an essential tool to improve the monitoring role of the board. Yet the crisis revealed that they did not prevent firms’ excessive risk taking; further, these directors sometimes showed serious deficits in understanding the business they were supposed to control, and remained passive in addressing structural problems.A closer look reveals that under the surface of seemingly unanimous consensus about board independence in Western jurisdictions, a surprising disharmony prevails about the justification, extent and purpose of independence requirements. These considerations lead me to question the benefits of the current system. Instead, this paper proposes a new, ‘functional’ concept of board independence. It would redefine independence to include those directors that are independent of the firm’s controller, but, at the same time, it would require them to be more accountable to (minority) shareholders.

The European Company Statute in the Context of Freedom of Establishment

One of the key features of the new Europe-wide legal form “European Company” (“Societas Europaea” or “SE”) is the possibility of transferring the companys seat from one Member State to another without having to be wound up or to re-register. As this possibility does not exist for companies formed under national law, the formation of an SE will often present the only possibility for companies to transfer their incorporation and corporate headquarters between Member States. This is a big advantage and a milestone towards the European Internal Market. However, some doubts remain as to the practicability of the system. The mandatory linkage of the head office to the registered office within the same Member State according to Article 7 of the SE Regulation is very problematic and, in light of recent ECJ decisions such as Centros, Überseering and Inspire Art, may violate EC primary legislation. Why should companies that are formed under national law be allowed to have the head office in a Member State different from their registration state, while an SE—as an instrument of Community law and a symbol of the Internal Market—is not? Furthermore, the detailed procedural rules laid down in the Regulation are sometimes overprotective and may significantly reduce the attractiveness of the SEs mobility. It is argued that Article 7 of the SE Regulation is secondary law that itself is inconsistent with the (primary) EC Treaty. Furthermore, the Member States also tend to be overprotective when enacting safeguard measures for the benefit of creditors, minority shareholders and employees. Here again, freedom of establishment does not allow protectionist measures that contravene the gist of the SEs mobility.

Changing Law and Ownership Patterns in Germany: Corporate Governance and the Erosion of Deutschland AG

German corporate governance and corporate law are currently undergoing a major change. The old “Deutschland AG”, a nationwide network of firms, banks, and directors, is eroding, ownership is diffusing and the shareholder body is becoming more international than ever. This paper presents new data to support this development and explores the consequences in governance and in law that have been taken or that need to be drawn from this finding. Consistent with market-based theoretical accounts on corporate law, it finds that the changes currently underway are mainly a response to global market pressure: German banks divested their equity stakes mainly as a consequence of increased international competition.The paper extends the model of market-led change by two important observations: first, market pressure is not the only driver of legal change, but the law itself in this case contributed to facilitating competition. Notably, a taxation law reform enabled and accelerated the competition process already underway. Legal rules and market competition may thus be understood as not operating in isolation, but as forces that can be working in dialog. Secondly, the paper highlights the importance of ownership structure as an important intermediate condition in the logical order between market competition and legal change.

Forum Shopping Under the EU Insolvency Regulation

Cross-border forum shopping for a different insolvency law regime has become popular within the European Union in recent years. Yet legislators, courts and legal scholarship react with suspicion when debtors cross the border only to benefit from a different insolvency law system. The most prominent legal tool, the European Insolvency Regulation, is based on the assumption that forum shopping has a negative impact on the functioning of the European Internal Market.This paper questions the hostile attitude towards the phenomenon of forum shopping. It is argued that forum shopping can have beneficial effects both for the company and for its creditors, and that strong safeguards for creditors who oppose the migration are in place. Furthermore, the validity of the COMI approach of the Regulation under the fundamental freedoms of the Treaty is questioned; it is suggested that the current regime needs to be amended. The proposed new system would enable more corporate mobility within the European Union and create more legal certainty for all constituencies at the same time.

Capital Markets Union for Europe: a commitment to the Single Market of 28

The merits of the “Capital Markets Union” project lie with its political importance, rather than its legal coherence or significance. Despite a number of substantial flaws, the initiation of this project comes at the right time. The Commission first and foremost sends a political message to the UK and other non-Euro Member States, as well as a commitment to the Single Market.

The Deconstruction of Equity: Activist Shareholders, Decoupled Risk, and Corporate Governance

New investment techniques and new types of shareholder activists are shaking up the traditional ways of equity investment that informs much of our present-day corporate law and governance. Savvy investors such as hedge funds are using financial derivatives, securities lending transactions, and related concepts to decouple the financial risk from shares. This leads to a distortion of incentives and has potentially severe consequences for the functioning of corporate governance and of capital markets overall. Taking stock of the different decoupling strategies that have become known over the past several years, this book then provides an evaluation of each from a legal and an economic perspective. Based on several analytical frameworks, the author identifies the elements of equity deconstruction and demonstrates the consequences for shareholders, outside investors, and capital markets. On this basis, the book makes the case for regulatory intervention, based on three different pillars and comprising disclosure, voting right suspension, and ex-post litigation. The book concludes by developing a concrete, comprehensive proposal on how to address the regulatory problem. Overall, this book contributes to the debate about activist investment and the role of shareholders in corporate governance. At the same time it raises a number of important considerations about the role of equity investment more generally.

Regulatory Competition in Global Financial Markets – The Case for a Special Resolution Regime

Regulatory arbitrage in financial markets refers to a number of strategies that market participants use to avoid the reach of regulation, in particular by virtue of moving trading abroad or relocating activities or operations of financial institutions to other jurisdictions. Where this happens, such arbitrage can trigger regulatory competition between jurisdictions that may respond to the relocation of financial services (or threats to relocate) by moderating their regulatory standards.

Capital Markets Union for Europe - A Political Message to the UK

The economic case for the recent proposal on a European ‘Capital Markets Union’ is obvious. However, the name is more symbolic than real, and the substance falls short of proposing a fully unified capital market across the EU. This short paper identifies several shortcomings of the project. In particular, the unclear methodological approach of the CMU project, and the lack of a clear commitment to a European enforcement or institutional mechanism weaken the benefits of the overall concept. Instead, the merits of the proposal lie in its political importance: above all, the CMU project is an attempt to repair the relationship with the UK and to win back support from the City of London for the European Single Market. As such, the project as a whole is certainly laudable, and it might turn out to be the right step at the right time.

The European Company, Volume II. Edited by Dirk van Gerven and Paul Storm

The European Company has had mixed success so far. Whilst in some countries, such as the UK, relatively few European Company Statutes (SEs) have been registered, other countries, such as Germany and the Netherlands, have witnessed a great interest in the new legal form. One of the main problems facing the SE statute is its fragmentary character: as with most of the legislative output from Brussels, the SE Regulation is a compromise. This implies that many issues are resolved in an obscure and complicated way, while other fields, such as tax law or the treatment of groups of companies, have been entirely eliminated from the SE statute. Hence, the legal framework for the SE entails significant lacunae, which—as a general rule—are left to be filled by the law of the Member State of the SE’s registered office.1 This situation has led some commentators to state that we are indeed confronted with 30 different SE statutes, one for each EU and EEA Member State, rather than one common European legal form.2 The merit of the two-volume book edited the Dirk van Gerven and Paul Storm is that it addresses the “information problem” associated with the described situation. If the new legal form is still governed to a large extent by national law, legal practitioners feel unsure about the concrete set of rules that apply, say, to a Slovenian SE. To this end, the book provides a detailed report on the specific law enacted by each Member State for the SE, both in filling gaps that were left by the Regulation and by transposing the Directive on the employees’ rights. Volume I, which was published in 2006, provided an introduction to the legal form and 14 national reports about countries that had already adopted legislation introducing the SE statute in their respective domestic legal system at the time. Volume II has now followed suit in 2008, dealing with the remaining 16 countries. This includes important countries like France, Italy and Spain, who legislated relatively late on the SE and thus could not be considered in volume I. The editors are two well-respected practising lawyers from Brussels with extensive experience in the field, and the contributors of the country reports are equally well-suited practitioners from law firms all over Europe. This book will April 2009 Journal of Corporate Law Studies 257