The reform of the enterprise sector in the former socialist countries has been at the core of the economic reform programs, which were launched ten years ago, beginning in Poland and followed by other governments throughout the region. A key element of the enterprise reform package was privatisation. Depending on the country and the specific area of the law in question, this reform measure was preceded, accompanied, or followed by legal reforms. Legal reforms in the region have been comprehensive and affected not only areas immediately relevant for the enterprise sector, but the entire legal system ranging from constitutional, administrative, criminal and civil law to the organization and procedural rules of the court system. This paper focuses on laws that are immediately relevant for the restructuring and financing of enterprises, in particular the rights of shareholders as stipulated in company laws, securities regulations, and the right of creditors as holders of collateral and in bankruptcy. The paper investigates the patterns of legal change in these areas of the law and identifies key determinants of legal change. The method employed is a formalised comparison of legal change based on pre-defined legal indicators. A data base was constructed, which codes the development of shareholder and creditor rights from 1990 through 1998 for 24 transition economies (excluding only Serbia, Tadjikistan and Turkmenistan). The paper joins a growing literature that uses cross-country formalised legal indicators to investigate the interaction between legal and economic change using statistical tools. It introduces the data used and descriptively analyses the patterns of legal change that can be observed. A statistical analysis of the interaction between legal and economic change is addressed in a separate paper.

This article first describes the history of the use of the term ‘new institutional economics’ (NIE) since its introduction by Oliver Williamson. It shows how the term has evolved from a generic term to a standard term on the basis of NIE conference publications and collective volumes that appeared between 1984 and 1997. In 1997, the International Society for New Institutional Economics was founded. Ronald Coase, Douglass North and Oliver Williamson were the driving force behind this development. In the second part of this article, the meaning of the NIE is outlined according to the basic concepts of Williamson and North. The ideas of these two protagonists are compared with each other and their better-known criticisms are described and assessed. The final part of the article deals with possibilities for broadening and deepening the objectives and analytical style of the NIE. It concludes with the observation that the potentialities of the NIE are far from being exhausted.

Good corporate governance of banks is of a vital concern to banks themselves as well as to the banking supervisors. During the past decade, listed banks and even non-listed institutions worldwide started to publicly emphasise that good corporate governance is of vital concern for the company, and even to adopt individualised corporate governance codices. In turn, the Basel Committee on Banking Supervision already published two editions of a guideline entitled ‘Enhancing corporate governance for banking organisations’ which reflects the supervisors' taking on the issue to perfection. Last but not least, two years into the financial crisis, the issue of banks' good corporate governance has started to attract pronounced interest, with the OECD taking a leading role. Against this backdrop, the article, on the one hand, discusses the particularities of banks' corporate governance – due in large part to banking regulation and to deposit insurance – in a principal-agent framework, and, on the other hand, presents the supervisors' financial stability perspective taking the Basel Committee's guidance as a starting point. The article concludes with reflections on some tentative lessons from the current crisis for (banks') good corporate governance: banks' corporate governance differs from that of a generic firm. Deposit insurance and prudential regulation, while aimed at compensating for deficits in the monitoring and control of banks, both act to exacerbate the particular problems that are inherent in banks' corporate governance. From this perspective, banking regulation and banks' corporate governance interact as the driving forces of a vicious circle that produces ever more regulation. Hence, one may doubt whether banks' corporate governance should map the way forward for corporate governance in general. In particular, this holds true for the way forward to regulating bankers' pay.

The purpose of this article, and its companion article, is to examine the implications of the new European Securities and Markets Authority, established in January 2011.

In the wake of the financial crisis, the case for institutional reform and for conferring regulatory and supervisory powers on a central EU authority became compelling. But any design for institutional reform of EU financial market regulation and supervision would have struggled to deliver an optimum model, given the necessity for compromise. The central difficulty is one of nuance. Where on the spectrum from national powers to EU powers, and with respect to regulation and supervision, should any new body's powers be placed if optimum outcomes are to be achieved? The question is further complicated by the different dynamics and risks of centralising rule-making and of centralising supervision/enforcement, even if there is considerable symbiosis between these different activities.

This article considers ESMA's rule-making powers; it is accompanied by a companion piece on ESMA's supervisory powers. It examines the considerable powers which ESMA has been granted in the rule-making sphere and argues that ESMA is likely to lead to significant intensification of the EU rule-book for financial markets. While a uniform rule-book carries risks, there are countervailing benefits. There are also promising signs that ESMA may become an effective rule-maker and may prove an effective mechanism for managing the risks of the intensifying rulebook. But the institutional design model is flawed. Treaty restrictions have led to a troublesome compromise in terms of ESMA's design, particularly with respect to Commission control and ESMA independence. Overall, ESMA's design is under-ambitious with respect to rule-making.

By contrast, as the companion piece argues, the extent of ESMA's supervisory powers, real and potential, may have pushed ESMA too high up the spectrum towards EU powers. Local supervision of the EU rule-book represents an important safety valve for the EU financial market, and should not be obstructed by over-centralisation. Once supervision was placed on the reform agenda, however, it was always going to be a challenge to draw the dividing line between ESMA's powers and those of national competent authorities. The line may, however, have been drawn too far on the side of operational centralisation.

This article examines contractual protection of unsecured financial creditors in US credit markets. Borrowers and lenders in the United States contract against a minimal legal background that imposes the burden of protection on the lender. A working, constantly updated, set of contractual protections has emerged in response. But actual use of available contractual technology varies widely, depending on the level of risk and the institutional context. The credit markets sort borrowers according to the degree of the risk of financial distress, imposing substantial constraints only on the borrowers with the most dangerous incentives. At the same time, the contracting practice is sticky and lumpy, never quite managing to conform to the predictions of first generation agency theory. Levels of protection vary with institutional contexts. Exhaustive contracts providing something approaching complete protection against agency costs prove feasible only in relational contexts conducive to ongoing renegotiation over time due to small numbers of lenders operating under reputational constraints. The public bond markets do not hold out such a process context, and accordingly shut out the riskiest borrowers. The larger, less risky firms that do gain access to the bond markets borrow under contracts offering incomplete protection, with the level of protection roughly correlating to the borrower's risk level. This leaves bondholders confronting a residuum of agency costs and relying on secondary protections like monitoring, exit, diversification, and hedging. This has worked reasonably well in practice, subject to an historical exception concerning the risk of high-leverage restructuring. The bond markets searched for two decades for a stable solution to this problem, finally settling on across-the-board contractual protection only in recent years.

If corporate law matters to corporate governance and finance, then in order to assess its quality in any given country, one must look at corporate law off the books, i.e., the characteristics of corporate law as applied by judges and other relevant public officials. This paper provides an assessment of Italian corporate law based on an analysis of a sample of 106 decisions by the Milan Tribunal, Italy's most specialized court in corporate law. The judges' quality is evaluated by looking at: (1) how deferential they are to corporate insiders; (2) how keen they are to understand, and possibly take into account, the real rights and wrongs underlying the case before them; (3) how antiformalistic their legal reasoning is; (4) how concerned they are about the effects of their decisions on the generality of corporate actors.

The analysis casts a negative light on Milanese (and by extension, Italian) corporate law judges. It highlights egregious cases of deference to corporate insiders, especially with regard to parent-subsidiary relationships. Furthermore, very few of the court's opinions have been so drafted as to let the reader understand what the real dispute was and which party had really acted opportunistically. In any case, it appears to be rare for the court to take the substantive reasons for the dispute into any account. Cases are described, in which the court has adduced very formalistic arguments. Finally, there is no sign that the judges care about what signals they send to corporate actors: they appear to be quite unconcerned about whether their decisions provide the right incentives for directors and shareholders.

In Europe, several models for financial supervision have developed over time: from the traditional three-pillar or institutional model (banking insurance and securities), via the intermediate ‘twin peaks’ model, which is closer to a functional approach, to the single or integrated model. Many elements, including market structure, historical and political factors, have determined each State's choice in favour of one of the models. Several States have recently tried to find more efficient and less costly supervisory schemes. A comparative analysis of the features of these models gives indications about the drivers for choosing one of them and the pros and cons that have been advanced. The actual situation in each of the EU States is described. Some conclusions are drawn as to the regulatory structure at EU level.

Why has the cycle of product mis-selling, widespread consumer detriment, complaints and (eventually) the imposition of penalties and the securing of redress from the finance industry proved to be so hard to break? This paper examines the payment protection insurance (PPI) mis-selling scandal in the UK with a view to identifying whether the Financial Services Authority's experience in that matter is bringing the UK any closer to finding regulatory solutions that are likely to produce a meaningful advance in curbing mis-selling problems. The FSA has said that its actions taken in the PPI market illustrate the type of intervention that its successor, the Financial Conduct Authority, can be expected to make.

After a slow start, the European Company (Societas Europaea – SE) has become increasingly popular. Besides documenting the growth of this new company type, we examine whether firms choose to incorporate in the SE corporate form because they engage in ‘legal arbitrage’ by exploiting differences in legal rules between jurisdictions. We specify a number of hypotheses on particular legal arbitrage motives. To validate our hypotheses, we use a broad telephone survey among SE users in Germany as well as a simple country-level regression model based on a unique, hand-collected dataset on SE incorporations. We find strong evidence that firms use the SE to mitigate the effect of mandatory codetermination rules. Establishing a one-tier board structure (in jurisdictions that impose a two-tier structure on their national public companies) and taking advantage of the SE's mobility for tax purposes also seem to be driving SE formations. By contrast, our analysis fails to support the suggestion that firms use the SE to shop for the most favourable national company law to fill the gaps in the SE Regulation.

The purpose of this article, and of its earlier companion article (Part (1) Rule-making, 12 European Business Organization Law Review (2011) p. 41), is to examine the implications of the new European Securities and Markets Authority which was established in January 2011.

In the wake of the financial crisis, the case for institutional reform and for conferring regulatory and supervisory powers on a central EU authority became compelling. But any institutional design would have struggled given the necessity for compromise. The central difficulty is one of nuance. Where on the spectrum from national powers to EU powers, and with respect to regulation and supervision, should any new body's powers be placed if optimum outcomes are to be achieved? The question is further complicated by the different dynamics and risks of centralising rule-making and of centralising supervision, even if there is considerable symbiosis between these activities.

This article considers ESMA's supervisory powers. It argues that, by contrast with its rule-making powers, the current and potential extent of ESMA's supervisory powers has pushed ESMA too high up the spectrum towards EU intervention. Local supervision of the EU rule-book represents an important safety valve for the EU financial market but this safety valve may be obstructed by ESMA's undue standardisation of supervisory practices. ESMA's extensive direct supervisory powers are also troubling given concerns as to their effectiveness. It was always going to be a challenge to draw the dividing line between ESMA's supervisory powers and those of national competent authorities. But the line may have been drawn too far on the side of operational centralisation.

The financial crisis has impacted enormously on two features that are critical for investors' decisions: their beliefs and their preferences. It has brought to light diffuse opportunistic behaviour and some serious frauds. Because of this, trust in banks, bankers and brokers and the stock market has collapsed to unprecedented levels. The fear following the crisis, and the symptoms of panic that went with it, have led investors to become much more risk averse than they used to be in the past. We argue that failing trust and risk tolerance have a major effect on the working of financial markets and the economy. We show evidence that suggests that the drop in trust and the increase in risk aversion are likely to be enduring and very slow to recover. This is one reason, perhaps among others, why the consequences of the financial crisis will probably be lasting.

Within the European Union, firms are now free under Articles 43 and 48 EC to choose a corporate form of their liking, regardless of the actual head office (real seat) of the company. However, they are not free to choose the applicable bankruptcy regime. Under Article 3(1), first sentence, of the European Insolvency Regulation (EIR), jurisdiction for main insolvency proceedings lies with the courts of the Member State in which the debtor has the centre of its main interests (COMI). The COMI standard is fuzzy and allows last-minute forum shopping by the management/shareholders of a distressed debtor, to the detriment, especially, of creditors who cannot (easily) adapt. Given the poor performance of the COMI standard, it seems worthwhile to explore the merits of an alternative approach that gives more room to freedom of choice in international company insolvency law in Europe. Various models of free choice are discussed: free choice of the applicable insolvency law, free choice of the applicable insolvency law insofar as it contains substantive – as opposed to procedural – provisions, free choice of the bankruptcy forum (‘unconstrained forum choice’) and free choice of the bank–ruptcy forum in combination with the company law applicable to a company (‘constrained forum choice’). This article shows that, on efficiency grounds, the last model is to be preferred. It would improve matters compared to the status quo, and it would also be easy to implement in practice by changing the wording of Article 3 EIR. Even though this solution is preferable as a policy option, it is not mandated by Articles 43 and 48 EC. However, these treaty provisions do not mandate the COMI standard either. European legislation is thus free to effect the desirable changes to the EIR.

This article examines the recent development of EU regulatory policy with respect to the alternative investment industry up to and including the adoption of a major new Directive. This Directive is just one part of a much larger package of new EU measures relating to the financial markets but its emergence merits being singled out for three reasons. First, the account of how it came about and what it sets out to do touches upon two overarching concerns that are frequently expressed about laws that are made in the immediate aftermath of a crisis: opportunistic use of crisis situations to achieve unrelated goals, and crisis-induced regulatory overreaction. Second, with the regulation of alternative investments being addressed internationally as well as in Europe, close examination of this area provides revealing glimpses of ways in which key players in the EU policy formation process have simultaneously used the financial crisis to exert influence internationally and used international developments to further an internal agenda. Finally, out of the exceptional level of controversy that surrounded the legislative process for the Directive come some important insights on relations between the EU Institutions and, in particular, on the European Parliament's increasing deftness in putting its mark on EU financial market regulation.

This essay takes stock of the corporate governance reform efforts in which Italian policy makers have engaged since the beginning of the 1990s. After describing the reform process and its drivers (a concern for Italian equity markets' attractiveness in an increasingly competitive and global framework, scandals, and EC activism) the essay analyses the main reforms to single out what has worked (i.e., what has had a practical positive impact on Italian listed companies' corporate governance) and what has not. After concluding that the corporate governance legal framework has greatly improved as a result of reforms, the essay identifies a number of areas where further steps could be taken to protect investors against the risk of expropriation by corporate insiders. It is also argued, however, that the mother of all corporate governance reforms in Italy would be a change in legal and political culture; legal culture should change so as to put substance over form, function over doctrine. That would be a precondition to effective enforcement of corporate and securities laws. Political culture should change from one that deems it to be the norm for politicians to decide on the allocation of corporate control to one more respectful of property rights. Finally, two modest, bottom-up proposals to help change legal culture in the long run are put forth.

Legislators have been using audit and financial crises as excuses to introduce additional regulation into an industry that is already over-regulated. This practice is questioned here because of the ability of the free market to punish audit failures, the dynamism shown by participants in relation to the voluntary adoption of new self-regulatory policies and the high costs and dubious effectiveness of the new regulations adopted. A more prudent approach that would give the market time to discover the efficient mix of services, quality safeguards and firm structures is advised. Current regulatory tendencies, the main element of which is mandatory auditing, risk condemning financial auditing to triviality and increasingly ineffective regulation.

This paper reviews the case for and against mandatory legal capital rules. It is argued that legal capital is no longer an appropriate means of safeguarding creditors' interests. This is most clearly the case as regards mandatory rules. Moreover, it is suggested that even an ‘opt in’ (or default) legal capital regime is unlikely to be a useful mechanism. However, the advent of regulatory arbitrage in European corporate law will provide a way of gathering information regarding investors' preferences in relation to such rules. Those creditor protection rules that do not further the interests of adjusting creditors will become subject to competitive pressures. Legislatures will be faced with the task of designing mandatory rules to deal with the issues raised by ‘non-adjusting’ creditors in a proportionate and effective manner, consistent with the Gebhard formula.

The existence of Corporate Groups – several independent incorporated companies connected mostly by a chain of participations to form what is practically one commercial unit – has long been a reality throughout the world. In Europe the Corporate Group has a special importance because if the acquisition or founding of subsidiaries were not legally possible, companies would not, in practice, be able to avail themselves of their right of free establishment under Articles 43 and 48 EC [ex Art. 52 and 58 ECT]. The connection between the right of establishment on the one hand, and the nationality of the companies on the other, leads precisely to the establishment of small and large corporate groups. Furthermore, the acquisition of a majority in another company and the integration of the acquisition into the commercial aims of the group is one of the most important means by which ownership of companies becomes concentrated. Finally, the significance of the effects of taxation and tax laws on the creation and centralisation of company groups should not be underestimated. This is an undisputed fact, and equally a legal reality. Groups which operate on a worldwide scale such as General Motors, Shell, Bayer and Siemens are obvious examples of this reality, a reality already recognised by the EU in 1983 in the Seventh Directive on Company Law dealing with consolidated group annual accounts. In the real world of management and of the capital and financial markets, only the consolidated accounts are of significance; the annual accounts of individual components of the group have become practically meaningless, while those of the parent company have, at least, a significance as a basis for the allocation of profit. Naturally, the EU rules on control of concentrations apply precisely to the formation and expansion of company groups.

Since the publication of the Cadbury Code (1992), there has been a rapid international diffusion of corporate governance codes containing recommendations on boards, executive pay, disclosure and investor relations. But there has been little or no scientific evidence to support the recommendations, so it is questionable whether they can be explained by market failures. Instead, based on public choice theory, I propose the alternative hypothesis that the codes reflect rent seeking by institutional investors in a bargaining game with other stakeholders, including investment banks, auditing firms, incumbent owners, managers and employees. I argue that this hypothesis can explain a number of puzzling features about codes, including their remarkable similarity, the ‘one size fits all’ approach and their pattern of diffusion. A study of fifty-two corporate governance codes and a qualitative review of their core contents provide empirical support for the institutional investor hypothesis. The key focus is on empowering boards and making them accountable to minority investors, i.e., capturing the overall control of listed companies. Since it is not clear that these initiatives contribute to overall value creation, an evaluation of the costs of governance is called for.

This paper analyses the new architecture for the prudential supervision of banks in the euro area. It is primarily concerned with the likely effectiveness of the Single Supervisory Mechanism (SSM) as a regime that intends to bolster financial stability in the steady state.

By using insights from the political economy of bureaucracy it finds that the SSM is overly focused on sharp tools to discipline captured national supervisors and thus under-incentivises their top-level personnel to voluntarily contribute to rigid supervision. The success of the SSM in this regard will hinge on establishing a common supervisory culture that provides positive incentives for national supervisors. To this end, the internal decision-making structure of the European Central Bank (ECB) in supervisory matters provides some integrative elements. Yet, the complex procedures also impede swift decision making and do not adequately solve the problem. Ultimately, a careful design and animation of the ECB-defined supervisory framework and the development of inter-agency career opportunities will be critical.

The ECB will become a de facto standard setter that competes with the European Banking Authority (EBA). A likely stand-off in the EBA's Board of Supervisors will lead to a growing gap in regulatory integration between SSM participants and other EU Member States.

Joining the SSM as a non-euro area Member State is unattractive because the current legal framework grants no voting rights in the ECB's ultimate decision-making body. Nor does it supply a credible commitment opportunity for Member States that seek to bond to high-quality supervision.

Legal capital rules have traditionally been among the cornerstones of European Union Company Law. This led to the early promulgation of the Second (“Capital”) Directive concerning the formation and maintenance of a legal capital. The unanimity of the basic decision in favor of legal capital rules became apparent once again as recently as last year in the EU regulation on the European Corporation (SE), that requires a minimum capital of € 120,000 and contains rules governing the raising and maintenance of this capital.