John Armour

Financial difficulties at large financial institutions present governments and regulators with an unenviable dilemma. On the one hand, they are afraid to permit such a firm to enter 'ordinary' insolvency proceedings, lest this transmit financial shock to other, connected, institutions. Yet every voter can grasp the moral hazard problems and distributional inequity associated with government handouts for the financial sector. Consequently many jurisdictions have introduced, or are designing, 'special resolution' mechanisms for financial institutions. The first generation of such mechanisms were based on the US FDIC receivership regime. They focus on waiving property rights so as to effect a very rapid transfer of complex assets and short-term liabilities to a purchaser who will be able to stand behind those liabilities and thereby ensure stability. This model works well for small to medium sized domestic banks, but is insufficient to provide a credible alternative to bailouts for large, complex financial institutions. As a result, a series of new measures — which we have termed 'second generation' resolution mechanisms — have been developed. First, there has been a realization that the level of complexity is such that resolution ex post is impossible without careful planning by supervisors ex ante. Second, this planning process can be used not only to understand, but also to modify, the structure of complex financial institutions and their regulatory oversight so as to facilitate resolution should it be necessary. Third, the use of 'bail-in' or mandated debt to equity swaps provides a potentially very useful additional resolution tool when used in conjunction with such forward planning and oversight. Fourth, in the context of international financial institutions, coordination and allocation of responsibility amongst national regulators is an integral part of the planning process. The implications of this shift are clear. For the resolution of large complex financial institutions to be credible, it must be thought of as an integral part of the ongoing oversight of financial institutions by regulators, and not as simply a set of mechanisms that are kept for troubled times. Investment in regulatory capacity — recruitment and training to build human capital in the regulatory sector — is therefore crucial to ensuring the success of resolution.

The global financial crisis of 2007–08 triggered a plethora of regulatory reforms under the auspices of international bodies such as the G20 and Financial Stability Board. Yet the implementation of these reforms remains a task for individual countries. This paper presents a risk-based framework for implementing international financial regulation within national economies, in particular in small states. It shows how these countries can navigate the standard setting processes used by the relevant international bodies. It includes case studies to illustrate how the framework can be integrated with standard setting processes to improve outcomes for small states.

This Article examines the origins of the market for corporate control in the United States. The standard historical narrative is that the market for corporate control took on its modern form in the mid-1950s with the emergence of the cash tender offer. Using handcollected data from newspaper reports, we show that there in fact were numerous instances during the opening decade of the twentieth century where a bidder sought to obtain voting control by purchasing shares on the stock market. Moreover, share-for-share exchange tender offers likely were used to make takeover bids as early as 1901 and cash tender offers can be traced back to at least the mid-1940s. We argue that the way in which cash tender offers came to dominate the market for control after World War II can be explained primarily by changes in the pattern of share ownership and reduced opportunities bidders had for “managing” the stock price of intended targets.

Since 2000, a growing proportion of lawsuits against directors of public companies incorporated in Delaware have been filed outside Delaware. There has also been a large increase in the likelihood of litigation challenging M&A transactions involving Delaware targets, and the likelihood that suits involving the same transaction will be filed both in Delaware and elsewhere. In this Article we explore one potential cause for these trends—intensified competition between plaintiffs’ law firms. We trace the development of the plaintiffs’ bar from the 1970s to the present and identify three changes that plausibly contributed to the out-of-Delaware trend and a higher litigation rate: (1) stronger competition among plaintiffs’ lawyers specializing in securities litigation also affected the corporate law side of the plaintiffs’ bar; (2) changes in how the Delaware courts selected lead counsel encouraged non-Delaware filing by firms who were unlikely to win lead counsel status in Delaware; (3) potential obstacles associated with launching a suit in a jurisdiction other than Delaware become less of a concern to the plaintiffs’ bar. This Article draws upon data and insights developed more fully in a related policy-oriented paper: “Delaware’s Balancing Act”, 87 Indiana Law Review 1345 ( 2012), and a related empirical paper (“Is Delaware Losing its Cases”, Journal of Empirical Legal Studies (forthcoming 2012)).

Delaware’s courts and well-developed case law are widely seen as integral elements of Delaware’s success in attracting incorporations. However, as we show using empirical evidence involving reported judicial decisions and filed cases concerning large mergers and acquisitions, leveraged buyouts, and options backdating, Delaware’s popularity as a venue for corporate litigation is under threat. Today, a majority of shareholder suits involving Delaware companies are being brought and decided elsewhere. We examine in this Article the implications of this “out-of-Delaware” trend, emphasizing a difficult balancing act that Delaware faces. If Delaware accommodates litigation too readily, companies, fearful of lawsuits, may incorporate elsewhere. But if plaintiffs’ attorneys find the Delaware courts unwelcoming, they can often file cases in other courts. Delaware could risk losing its status as the de facto national corporate law court, as well as the case flow that lets it provide the rich body of precedent that is part of Delaware’s overall corporate law “brand.” We assess how the Delaware courts and legislature, and Delaware companies, might respond to this threat to Delaware’s pre-eminence as the leading forum for corporate cases, as well as incorporations.

Shareholder activism by hedge funds became a major corporate governance phenomenon in the United States in the 2000s. This article puts the trend into context by introducing a heuristic device referred to as “the market for corporate influence” to distinguish the ex ante-oriented “offensive” brand of activism hedge funds engage in from the ex post-oriented “defensive” activism carried out by mutual funds and pension funds. This article traces the rise of hedge fund activism and anticipates future developments, arguing in so doing that despite the blow the 2008 financial crisis dealt to hedge funds, their interventions will remain an important element of U.S. corporate governance going forward.

“Offensive shareholder activism” involves buying up sizeable stakes in underperforming companies and agitating for changes predicted to increase shareholder returns. Though hedge funds are currently highly publicized practitioners of this corporate governance tactic, there has been no analysis of the extent to which managers of U.S. public companies were faced with challenges of this nature during the first half of the 20th century. This paper correspondingly examines instances during this period where investors engaged in offensive shareholder activism, based on a hand collected dataset of proxy contests occurring between 1900 and 1949. Our findings indicate that offensive shareholder activism, while not commonplace, did occur and was considerably more prevalent in the 1930s and 1940s than in earlier decades. We explain our results by reference to a simple model of offensive shareholder activism and argue that the ebb and flow of takeover activity may have been the primary determinant of the trends we observe.

n each of the three largest economies with dispersed ownership of public companies—the United States, the United Kingdom, and Japan—hostile takeovers emerged under a common set of circumstances. Yet the national regulatory responses to these new market developments diverged substantially. In the United States, the Delaware judiciary became the principal source and enforcer of rules on hostile takeovers. These rules give substantial discretion to target company boards in responding to unsolicited bids. In the United Kingdom, by contrast, a private body consisting of market professionals was formed to adopt and enforce the rules on hostile bids and defenses. In contrast to those of the United States, the U.K. rules give the shareholders primary decisionmaking authority in responding to hostile takeover attempts. The hostile takeover regime in Japan, which developed recently and is still evolving, combines substantive rules with elements drawn from both the United States (Delaware) and the United Kingdom, while adding distinctive elements, including an independent enforcement role for Japan’s stock exchange. This Article provides an analytical framework for business law development to explain the diversity in hostile takeover regimes in these three countries. The framework identifies a range of supply and demand dynamics that drives the evolution of business law in response to new market developments. It emphasizes the common role of subordinate lawmakers in filling the vacuum left by legislative inaction, and it highlights the prevalence of “preemptive lawmaking” to avoid legislation that may be contrary to the interests of important corporate governance players. Extrapolating from the analysis of developed economies, the framework also illuminates the current state and plausible future trajectory of hostile takeover regulation in the important emerging markets of China, India, and Brazil. A noteworthy pattern that the analysis reveals is the ostensible adoption—and adaptation—of “best practices” for hostile takeover regulation derived from Delaware and the United Kingdom in ways that protect important interests within each emerging market’s national corporate governance system.

The forthright brand of shareholder activism hedge funds deploy emerged by the mid-2000s as a major corporate governance phenomenon. This Article explains the rise of hedge fund activism and offers predictions about future developments. The Article begins by distinguishing the “offensive” form of activism hedge funds engage in from “defensive” interventions “mainstream” institutional investors (e.g. pension funds or mutual funds) undertake. Variables influencing the prevalence of offensive shareholder activism are then identified using a heuristic device, “the market for corporate influence.” The rise of hedge funds as practitioners of offensive shareholder activism is traced by reference to the “supply” and “demand” sides of this market, with the basic chronology being that, while there were direct antecedents of hedge fund activists as far back as the 1980s, hedge funds did not move to the activism forefront until the 2000s. The Article brings matters up-to-date by discussing the impact of the recent financial crisis on hedge fund activism and draws upon the market for corporate influence heuristic to predict that activism by hedge funds is likely to remain an important element of corporate governance going forward.

European corporate law has enjoyed a renaissance in the past decade. Fifteen years ago, this would have seemed most implausible. In the mid–1990s, the early integration strategy of seeking to harmonize substantive company law seemed to have been stalled by the need to reconcile fundamental differences in approaches to corporate governance. Little was happening, and the grand vision of the early pioneers appeared more dream than ambition. Yet since then, a combination of adventurous decisions by the Court of Justice, innovative approaches to legislation by the Commission, and disastrous crises in capital markets has produced a headlong rush of reform activity. The volume and pace of change has been such that few have had time to digest it: not least policymakers, with the consequence that the developments have not always been well coordinated. The recent financial crisis has yet again thrown many – quite fundamental – issues into question. In this article, we offer an overview that puts the most significant developments of this decade into context, alongside each other and the changing patterns of corporate structure in European countries. Such developments cover, for instance, corporate mobility, corporate freedom of establishment, golden shares case law, as well as the Commission’s Company Law Action Plan CLAP and Financial Services Action Plan FSAP. Harmonization of Member States’ company laws on the rules governing listed companies and the facilitation of cross-border restructuring are also examined.

The legal origins hypothesis is one of the most important and influential ideas to emerge in the social sciences in the past decade. However, the empirical base of the legal origins claim has always been contestable, as it largely consists of cross-sectional datasets, which provide evidence on the state of the law only at limited points in time. There is now a growing body of data derived from techniques for coding crossnational legal variation over time. This time-series evidence is reviewed here and is shown to cast new light on some of the central claims of legal origins theory. Legal origins are shown to be of little help in explaining trends in the law relating to shareholder protection, although the classification of legal systems into English-, French-, and German origin “families” has greater explanatory force in the context of creditor rights. The widely-held view that increases in shareholder rights foster financial development is not supported by time-series analyses. More generally, the new evidence casts doubt on the suggestion that legal origins operate as an “exogenous” force, independently shaping both the content of laws and economic outcomes. It is more plausible to see legal systems as evolving in parallel with changes in economic conditions and political structures at national level.

Much attention has been devoted in recent literature to the claim that a country’s ‘legal origin’ may make a difference to its pattern of financial development and more generally to its economic growth path. Proponents of this view assert that the ‘family’ within which a country’s legal system originated, be it common law, or one of the varieties of civil law, has a significant impact upon the quality of its legal protection of shareholders, which in turn impacts upon economic growth, through the channel of firms’ access to external finance. Complementary studies of creditors’ rights and labour regulation have buttressed the core claim that different legal families have different dynamic properties. Specifically, common law systems are thought to be better able to respond to the changing needs of a market economy than are civilian systems. This literature has, however, largely been based upon cross-sectional studies of the quality of corporate, insolvency and labour law at particular points in the late 1990s. In this paper, we report findings based on newly constructed indices which track legal change over time in the areas of shareholder, creditor and worker protection. The indices cover five systems for the period 1970-2005: three ‘parent’ systems, the UK, France and Germany; the world’s most developed economy, the US; and its largest democracy, India. The results cast doubt on the legal origin hypothesis in so far as they show that civil law systems have seen substantial increases in shareholder protection over the period in question. The pattern of change differs depending on the area which is being examined, with the law on creditor and worker protection demonstrating more divergence and heterogeneity than that relationg to shareholders. The results for worker protection are more consistent with the legal origin claim than in the other two cases, but this overall result conceals significant diversity within the two ‘legal families,' with different countries relying on different institutional mechanisms to regulate labour. Until the late 1980s the law of the five countries was diverging, but in the last 10-15 years there has been some convergence, particularly in relation to shareholder protection.

Shares in publicly-quoted UK companies are, similarly to those in their US counterparts, dispersed amongst many holders. The central problem of corporate governance for UK listed firms is therefore rendering managers accountable to shareholders. This paper investigates the way in which the mechanisms used to control these managerial agency problems are enforced. It provides a roadmap of the enforcement strategies employed, and a first approximation of their empirical significance. The results suggest three stylised facts about the UK corporate governance system. First, shareholder lawsuits are conspicuous by their absence. Formal private enforcement plays little or no role in controlling managers. Secondly, and contrary to leading accounts in the economic literature, it is public, rather than private, enforcement which dominates in relation to listed companies. However, the lion's share of the interventions by the relevant agencies - the Takeover Panel, the Financial Reporting Review Panel, and the Financial Services Authority - is of an informal character, not resulting in any legal action. Suasion, rather than sanction, is the order of the day. Thirdly, a simple divide between public and private enforcement fails fully to take account of the role played by institutional investors in the UK, who have engaged systematically in informal private enforcement activity. Strong informal private enforcement has historically therefore been the flipside, in the UK, of weak formal private enforcement.

This collection of essays is a festschrift to honour Professor Dan Prentice who retired in 2008 from the Allen & Overy Professorship of Company Law in the University of Oxford. Dan Prentice has been deeply involved in corporate law from all perspectives: as a scholar, teacher, law reformer and practising member of Erskine Chambers. His interests have covered the full range of corporate law, finance and insolvency. The occasion of his retirement from his Professorship has afforded a number of leading corporate law experts from around the world, many of whom are his former students and colleagues, an opportunity to address some of the most important issues in corporate law today, in his honour. Corporate law has always been a fast-moving area, but the present pace of change seems quicker than ever. The Companies Act 2006, by some way the longest piece of legislation ever passed by the UK Parliament, is reshaping the landscape of domestic company law. At the same time, legislative and judicial developments at the European level in corporate and securities law are of unprecedented importance for corporate lawyers based in the UK. This outstanding series of papers addresses a number of the most important issues currently facing the subject, including the impact of the new Companies Act on directors' duties, shareholder litigation and capital maintenance; aspects of insolvency and banking regulation, the Capital Requirements Directive, and a new Convention on Intermediated securities. It will be essential reading for all those interested in the field.

This review paper is a contribution to a symposium on the 'Future of Secured Credit in Europe'. Its theme is the way in which empirical research has shed light on earlier theoretical literature. These findings tend to suggest that the legal institution of secured credit is, on the whole, socially beneficial, and that such benefits are likely to outweigh any associated social costs. Having made this general claim, the paper then turns to consider the effects of four particular dimensions across which systems of secured credit may differ, and which may therefore be of interest to European law-makers. These are: (i) the scope of permissible collateral; (ii) the efficacy of enforcement; (iii) the priority treatment of secured creditors; and (iv) the mechanisms employed to assist third parties in discovering that security has been granted. In each case, consideration is paid first to the theoretical position, and then empirical findings. It is argued that perhaps the most difficult of these issues for European law-makers concerns the appropriate design of publicity mechanisms for third parties.

With effect from September 15, 2003, the Enterprise Act made significant changes to the governance of corporate rescue procedures in the United Kingdom which involved a shift away from a "concentrated creditor" model of governance towards a "dispersed creditor" model of governance which vests greater control rights in unsecured creditors collectively. These changes were motivated by fairness and efficiency concerns, notably the concern that the UK's administrative receivership procedure was not conducive to rescue outcomes and operated to the detriment of unsecured creditors. This article discusses the Enterprise Act reforms in the context of wider theoretical debates about the desirability (or otherwise) of secured creditor control of corporate rescue procedures. It then presents in summary form the findings of an empirical study carried out by the authors that sought to evaluate the impact of the Act by comparing the gross realizations, costs and net returns to creditors in a sample of 284 corporate insolvencies commenced before and after the law changed. Whilst we find that gross realizations have increased under the streamlined administration procedure, we also find that costs have increased. These findings imply that secured creditor control of the insolvency procedure (as in receivership) may be no worse for unsecured creditors than control by dispersed unsecured creditors (as in administrations) at least as regards returns.

Private equity, characterized by firms operating as privately held partnerships organizing the acquisition and "taking private" of public companies, has recently dominated the business news due to deals unprecedented in number and size. If this buyout boom continues unabated, the 1989 prediction by economist Michael Jensen of The Eclipse of the Public Corporation could be proved accurate. This article argues matters will work out much differently, with the current version of private equity being eclipsed. One possibility is that a set of market and legal conditions highly congenial to "public-to-private" transactions could be disrupted. A "credit crunch" commencing in the summer of 2007 stands out as the most immediate threat. The article draws on history to put matters into context, discussing how the spectacular rise of conglomerates in the 1960s was reversed in subsequent decades and how the 1980s buyout boom led by leveraged buyout associations - the private equity firms of the day - collapsed. If legal and market conditions remain favorable for private equity, its eclipse is likely to occur in a different way. Privacy has been a hallmark of private equity, with industry leaders operating as secretive partnerships that negotiate buyouts behind closed doors and restructure portfolio companies outside the public gaze. However, the private equity boom created momentum among market leaders to carry out public offerings and diversify their operations. If this trend proves sustainable, then even if the taking private of publicly quoted companies remains a mainstream pursuit, the exercise will be carried out in the main by broadly based financial groups under the umbrella of public markets.

Hostile takeovers are commonly thought to play a key role in rendering managers accountable to dispersed shareholders in the "Anglo-American” system of corporate governance. Yet surprisingly little attention has been paid to the very significant differences in takeover regulation between the two most prominent jurisdictions. In the United Kingdom, defensive tactics by target managers are prohibited, whereas Delaware law gives U.S. managers a good deal of room to maneuver. Existing accounts of this difference focus on alleged pathologies in competitive federalism in the United States. In contrast, we focus on the “supply-side” of rule production by examining the evolution of the two regimes from a public choice perspective. We suggest that the content of the rules has been crucially influenced by differences in the mode of regulation. In the United Kingdom, self-regulation of takeovers has led to a regime largely driven by the interests of institutional investors, whereas the dynamics of judicial law-making in the United States have benefited managers by making it relatively difficult for shareholders to influence the rules. Moreover, it was never possible for Wall Street to “privatize” takeovers in the same way as the City of London, because U.S. federal regulation in the 1930s both pre-empted selfregulation and restricted the ability of institutional investors to coordinate.

At the end of the twentieth century, it was thought by many that the Anglo-American system of corporate governance was performing effectively. Some observers claimed to see an international trend towards convergence around this model, in which firms raise finance on capital markets from dispersed investors, and corporate governance seeks to keep managers accountable to shareholders. There can be no denying that the recent corporate governance crisis in the US - Enron and related scandals - has caused many to question their faith in this view. This collection of essays provide a comprehensive attempt to answer the following questions: firstly, what went wrong - when and why do markets misprice the value of firms, and what was wrong with the incentives set by Enron? Secondly, what has been done in response, and how well will it work - including essays on the Sarbanes-Oxley Act in the US, UK company law reform and European company law and auditor liability reform, along with a consideration of corporate governance reforms in historical perspective. Three approaches emerge. The first two share the premise that the system is fundamentally sound, but part ways over whether a regulatory response is required. The first view argues that the events of the 'fall' have indicated a need for greater regulation to curb the excesses of the market. The second view suggests that Enron was merely an aberration, which 'self-corrected' anyway, and consequently the regulatory response has been unnecessarily restrictive. The third view, in contrast, argues that the various scandals demonstrate fundamental weaknesses in the Anglo-American system itself, which cannot hope to be repaired by the sort of reforms that have taken place. It is for the reader, and ultimately history, to decide which view is correct.

This paper makes a case for the future development of European corporate law through regulatory competition rather than EC legislation. It is for the first time becoming legally possible for firms within the EU to select the national company law that they wish to govern their activities. A significant number of firms can be expected to exercise this freedom, and national legislatures can be expected to respond by seeking to make their company laws more attractive to firms. Whilst the UK is likely to be the single most successful jurisdiction in attracting firms, the presence of different models of corporate governance within Europe make it quite possible that competition will result in specialisation rather than convergence, and that no Member State will come to dominate as Delaware has done in the US. Procedural safeguards in the legal framework will direct the selection of laws which increase social welfare, as opposed simply to the welfare of those making the choice. Given that European legislators cannot be sure of the 'optimal' model for company law, the future of European company law-making would better be left with Member States than take the form of harmonized legislation.

English corporate insolvency law has been reshaped by the Enterprise Act 2002. The Act was intended to 'to facilitate company rescue and to produce better returns for creditors as a whole'. Administrative receivership, which placed control of insolvency proceedings in the hands of banks, is for most purposes being abolished. It is being replaced by a 'streamlined' administration procedure. Whilst it will still be possible for banks to control the appointment process, the administrator once in office owes duties to all creditors and must act in accordance with a statutory hierarchy of objectives. In this article, we seek to describe, and to evaluate, this new world of corporate rescue.

This chapter reviews evidence about the extent to which law and lawyers ‘matter’ for venture capital investment. As such, it relates both to the policy debate about financing innovative firms and more generally to the comparative finance literature that has investigated the extent to which law may be one of the determinants of differing patterns of corporate finance across various countries. The review is organised around the idea that law may ‘matter’ in a variety of ways for corporate finance. The starting point is a model of what venture capital investment involves, derived from empirical studies in the US. The venture capitalist is a financial intermediary, who raises funds from end-investors which are then used to finance small entrepreneurial firms. The contracts between the venture capitalist and the investee firms have complex terms which can be understood as responses to agency problems inherent in the financing relationship. The first way in which laws may ‘matter’ is by affecting the way in which the practice of venture capital investment is structured—most obviously, in the terms of the contracts used. Empirical studies of the contracting practices of venture capitalists show clear differences between national practices, and it is plausible that some at least of these may be driven by differences in the legal regimes. Most obviously, these might arise due to mandatory legal rules—for example, local tax laws—which distort choices of inframarginal investors in favour of a particular type of financial contract.

In recent years law and economics scholarship has expanded its frame of reference to incorporate the role of social norms in shaping the incentives of actors. This shift in perspective has yet to filter through to the literature on bankruptcy, which has to date concentrated on the role of legal rules in resolving financial distress. This paper presents qualitative findings on how financial distress is resolved amongst creditors of large UK firms. Such restructurings proceed according to an informal set of market norms known collectively as the "London Approach." The paper suggests that regulatory pressure applied by the Bank of England may have been critical in "seeding" the market norms. It also examines the prospects for the London Approach's future in light of changes in the financial environment brought about by globalisation. The paper points the way towards an incorporation into bankruptcy scholarship of the role played by social norms.