It has been twenty years since the European Court of Justice issued its decision in Centros Ltd. v. Erhvervs - og Selskabsstyrelsen (Centros). Since that time, Centros has been widely understood as shifting the European Union (EU) from the real seat doctrine, in which a corporation is governed by the corporate law of the country in which it is headquartered, to an era of increased corporate mobility. Specifically Centros, together with subsequent decisions, allowed EU corporations, by incorporating in another jurisdiction, to choose their governing corporate law deliberately.
In our working paper, 'Centros, California’s 'Women on Boards' Statute and the Scope of Regulatory Competition', which is available here, we consider the Centros decision in the context of the current debate, in the United States, over the legitimacy of SB 826, the California statute mandating that public companies whose principal executive offices are located in California have a minimum number of female directors. California has previously attempted to resist the limitations of the internal affairs doctrine by imposing its corporate law on so-called foreign corporations, corporations that are incorporated outside the state but conduct the majority of their business in California. The legitimacy of these attempts has been hotly contested and, indeed rejected by the Delaware courts. SB 826 is different from other aspects of California’s foreign corporation law, however, in that it applies exclusively to public companies and to all such companies that have their principal executive offices located within the state.
SB 826 is somewhat distinctive from most US corporate law, however, in that it addresses a timely and controversial public policy issue – gender quotas for corporate boards. From the US perspective, corporate law is focused primarily on limiting managerial agency costs and maximizing shareholder value. The connection between gender quotas and shareholder value remains unclear. As such, SB 826 highlights the question of the degree to which the internal affairs doctrine is intertwined with the objective of shareholder value maximization and with, more generally, the principle of shareholder primacy. Shareholder primacy has emerged as a dominant organizing principle of U.S. corporate law. This enables the internal affairs doctrine to serve as a tool for economic ordering.
Shareholder primacy reflects, to a large extent, a peculiarly US perspective. Most of the EU does not subscribe to shareholder primacy. The interests of other stakeholders – creditors, employees and communities – play a more compelling role in EU company law. One example is the protection of employee interests, in several EU countries, through codetermination. Another is the proliferation of jurisdictions that have adopted legislation imposing gender quotas on corporate boards. We argue that the commitment by EU member states to these interests raises serious questions about the viable scope of US-style regulatory competition in Europe.
SB 826 highlights the difference in orientation. SB 826, which reflects a concern with broader societal goals such as discrimination and sexual harassment, can be understood as an effort to extend corporate law to issues beyond shareholder value maximization and to consider the type of stakeholder interests that play a greater role in the EU. As such, the application of the internal affairs doctrine to SB 826 is, we argue, uncharted territory. California was the first US state to adopt a mandatory gender quota, although several other states subsequently indicated a willingness to follow California’s lead. This development raises critical questions about the extent to which the US internal affairs doctrine constrains state regulatory power.
In the case of SB 826, we argue that the shareholder primacy norm informs the validity of California’s actions. We argue that because US corporate law focuses on principles of shareholder primacy, these principles offer a basis for limiting the scope of regulatory competition. Specifically, we claim that the internal affairs doctrine can be understood as limited to matters that are subject to internal ordering and relationships among the firm’s officers, directors and shareholders. Under this rubric, pure matters of corporate governance are subject to the internal affairs doctrine while laws governing external interests are not. We argue that SB 826 falls within the latter category.
These principles explain the effect of Centros and perhaps its future course. Centros generated widespread concern that it would introduce US-style regulatory competition into the EU. Although a significant number of corporations responded to the enhanced mobility provided by Centros, the decision primarily had the effect of narrowing the differences in capitalization requirements across Europe. Corporations largely failed to use the freedom of incorporation to avoid other elements of their home county’s corporate law. We argue that this result can be explained by the fact that regulatory competition, and the internal affairs doctrine which makes such competition possible, are focused on principles of economic ordering relating to shareholder value.
The broader range of objectives addressed by EU company law results in a deeper commitment to country-specific differences both at the political level and in the context of specific firm decisions, a commitment that is not readily undercut by freedom of establishment. In this regard, the EU is unlikely to see substantial additional convergence in corporate law. Indeed, as SB 826 portends, this reality may be coming to the United States and its own peculiar form of regulatory competition. In other words, and ironically, while the past history of the internal affairs doctrine in the US partially explains Centro’s effects, the limitations of the Centros decision in the EU may explain the future of the internal affairs doctrine in the United States.
Jill Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Law School.
Steven Davidoff Solomon is Professor of Law at the University of California Berkeley, School of Law.