Discriminating Shareholders through the Exclusion of Pre-emption Rights? - The European Infringement Proceeding against Spain (C-338/06) -

This article addresses a European infringement proceeding against Spain, which was joined by other Member States in 2007, including Finland, the United Kingdom and Poland. The European Commission alleges a violation of the Second Company Law Directive through a discrimination of shareholders. It argues that Spanish companies are allowed to issue shares below the market value and exclude the pre-emption rights of the existing shareholders. Such share issues result in a wealth transfer from old to new shareholders (often referred to as a "dilution” of shareholdings), contrary to the equal treatment clause of the Second Directive. This article shows that the dispute is partly due to a misunderstanding of Spanish law, including legal culture. It also finds that the allegations have merit to some extent but crucially depend on the fact finding of the European Court of Justic

The Transatlantic Divergence in Legal Thought: American Law and Economics vs. German Doctrinalism, The

Law and economics has become an integral part of U.S. legal scholarship and the law school curriculum. Ever since the legal realist movement, scholars mostly view the law from an external perspective. It may be surprising to many in the United States that European legal scholarship has been largely resistant to this development. Law is typically viewed from the inside, that is as an autonomous discipline independent from the other social sciences. Most legal scholarship is doctrinal, meaning that legal scholars employ interpretative methods in order to systematically expose the law and to find out what the law is, frequently even before it is tackled by a court. U.S.-style legal scholarship is often considered very alien, and law and economics in particular often meets outright rejection. In this paper, we attempt to explain this divergence in the academic legal discourse using the reception of law and economics in legal scholarship in German-speaking countries as a case in point. However, we suspect that our approach can be generalized to other parts of Europe because of common roots and similar historical factors that can be identified in many parts of Europe. We propose a two-pronged explanation for why law and economics play an insignificant role in German-speaking countries while the United States has become a stronghold for it. We proceed as follows: Section II describes the rejection of the economic analysis of law in German-speaking countries and gives an overview on explanations that we found in the existing literature. Section III outlines our own hypothesis. Section IV traces the development in the United States, based on the existing literature. It starts with the classical legal thought of the late 19th century and subsequently surveys legal realism and the early development of law and economics since the 1960s. Section V describes the development of legal theory in German-speaking countries. As both legal realism and the Free Law School have pointed out, a doctrinal approach to law is equally prone to exploitation to achieve certain political ends. The current state of the discussion on legal philosophy is relevant to us insofar as it influences the ordinary legal discourse, in particular the predominant forms of legal scholarship. Section VI summarizes the above discussion

No Derivative Shareholder Suits in Europe - A Model of Percentage Limits, Collusion and Residual Owners

We address one of the cardinal puzzles of European corporate law: the lack of derivate shareholder suits. In the vast majority of European jurisdictions, shareholders can bring a derivative action (for damages) against the management for breach of fiduciary duty. In all of these countries, a derivative lawsuit is the only remedy against managerial misconduct. In spite of corporate fraud by managers there are no such lawsuits. We explain this apparent paradox on the basis of percentage limits. The laws of percentage limits require shareholders to hold a minimum amount of typically 5% to 10% in order to bring an action against the management and they are extremely wide-spread in Europe. Since small shareholders are not entitled to sue, there is an incentive for managers to collude with large shareholders. In a four-stage-model, we show that, given the current percentage limits, managers will misappropriate corporate assets and split the proceeds with large shareholders. Contrary to current and past approaches to agency theory, we find that, in this equilibrium, (1) large shareholders do not monitor the management, (2) small shareholders do not free ride and (3) the residual ownership is not held by the shareholders on the whole but by the managers and the large shareholders. This interpretation of the current situation is consistent with empirical studies that find a more concentrated shareholder structure in Europe than in the United States. Also published as: Columbia Law and Economics Working Paper No. 312 (http://www.law.columbia.edu/center_program/law_economics/wp_listing_1/) German Working Papers in Law and Economics: Vol. 2007: Article 2. (http://www.bepress.com/gwp/default/vol2007/iss2/art2) SSRN (http://ssrn.com/abstract=933105)Agency Theorey, Derivative Suits, Shareholder Suits, Percentage Limits, Collusion, Residual Owners, Corporate Fraud, Managerial Misconduct, European Law, European Corporations, Europe, Large Shareholders, Free Rider, Collective Action, Settlements, Monitoring, Rent-Seeking

No Derivative Shareholder Suits in Europe – A Model of Percentage Limits and Collusion

We address one of the cardinal puzzles of European corporate law: the lack of derivate share-holder suits. We explain this phenomenon on the basis of percentage limits which require share-holders to hold a minimum amount of shares in order to bring a lawsuit. We show that, under this legal regime, managers will collude with large shareholders by means of settlements or bribes that impose a negative externality on small shareholders. Contrary to conventional agency models, we find that large shareholders do not monitor the management; as a consequence, there is no free riding opportunity for small shareholders.Collusion, Derivative Shareholder Suits, Percentage Limits, Monitoring, Free Riding

Punishment despite Reasonable Doubt – A Public Goods Experiment with Uncertainty over Contributions

Under a great variety of legally relevant circumstances, people have to decide whether or not to cooperate, when they face an incentive to defect. The law sometimes provides people with sanctioning mechanisms to enforce pro-social behavior. Experimental evidence on voluntary public good provision shows that the option to punish others substantially improves cooperation, even if punishment is costly. However, these studies focus on situations where there is no uncertainty about others' behavior. We investigate punishment in a world with “reasonable doubt” about others' contributions. Interestingly, people reveal a high willingness to punish even if their information about cooperation rates is inaccurate, or noisy. If there is some non-trivial degree of noise, unishment (1) cannot maintain high contributions and (2) reduces welfare even below the level of a setting without punishment. Our findings suggest that sufficient information accuracy about others' behavior is crucial for he efficiency of sanction mechanisms. If a situation is characterized by low information accuracy, precluding sanctions can be optimal.Public Goods, Experimental Law & Economics, Enforcement under Uncertainty

Switching Consumers and Product Liability: On the Optimality of Incomplete Strict Liability

This article shows that it may be socially optimal to grant accident victims less than full compensation. In our framework, firms are liable under product liability but also invest in care to prevent consumers switching to competitors. Affecting the partition of consumers by means of care-taking is not desirable from a social standpoint. Consequently, it may be optimal to reduce liability below full compensation in order to adjust firms’ care incentives.Tort law; product liability, care level, asymmetric information, switching

Law by human intent or evolution? Some remarks on the Austrian school of economics' role in the development of law and economics

In the late nineteenth century, economic analysis of law experienced an outright rejection by the German-speaking legal community. In the second half of the twentieth century, it became a dominant approach in American legal inquiry. We argue that this success was partly due to the insights of Austrian economics which the second wave of law and economics has incorporated. We argue that Austrian legal and economic scholars marked the two cornerstones between which the subsequent discussion oscillated: social planning versus evolution (spontaneous order