Employee board representation can serve information dissemination purposes. This comment argues that in Germany, which (still) has a bank-oriented financial system, transparency may be better served by using codetermination (under which up to half of the supervisory board is composed of employees) as an information channel, rather than by importing the mandatory disclosure requirements that are typical of Anglo-Saxon jurisdictions. There are two reasons for this. One is that the evidence about the efficiency of mandatory disclosure requirements is mixed. The other is that mandatory disclosure is an intrinsic component of market-oriented financial systems such as the US financial system.

Transplanting a market-oriented component into a bank-oriented financial system brings the risk of inconsistencies, as it affects the complementarities that exist among the intrinsic components of a bank-oriented system. This comment thus concludes that before suggesting ways to transplant further mandatory disclosure requirements into the German financial system, or improve existing ones, one should consider how to use or improve the use of codetermination as an information dissemination channel.

Despite recent developments in ECJ case law, the ability of EU firms to choose among different Member State corporate law regimes is quite limited. At the same time, however, Member States have started to show an interest in providing competitive business forms, and firms seem keen to use them. Against this background, the ongoing review of EU company law and takeover law can be seen as an attempt to complete the set of minimum requirements that establish a limit for the ‘race to the bottom’. This paper suggests that, unfortunately, many of the proposed harmonization measures in the Commission's Action Plan are unlikely to benefit firms and investors and will promote costly bureaucratic uniformity. Indeed, as currently structured, the proposals regarding disclosure, board structure and director liability have limited merits. Moreover, reforms aimed at the establishment of a permanent structure providing advice on future EU regulatory initiatives and requiring Member States to adopt director disqualification mechanisms are likely to result in excessive regulatory intervention. Similarly, many provisions of the proposed Takeover Bids Directive can be expected to hamper rather than enhance the development of a competitive, cross-border market for corporate control. By contrast, the authors recommend regulatory changes that facilitate private litigation, as this may limit regulatory biases and contribute to disciplining managers and gatekeepers. Finally, the authors endorse a default arrangement for takeovers that would allow firms to choose to be governed either by the proposed Takeover Bids Directive or by existing Member State law. The move towards more choice should challenge regulators to provide more cost-effective rules.

This article examines the historical, doctrinal and theoretical bases of shareholder rights in British company law. These rights are, and always have been, essentially the product of private bargains, subjected to regulation of various explicit and implicit forms. This legal framework has significant normative advantages: it facilitates the development of innovative and efficient corporate structures. That is demonstrated through empirical evidence and examples from British corporate practice. One key example is how so-called ‘indirect investors’ in a company – the large and economically significant group of people who invest in a company through intermediaries such as nominees and depositaries – can be accommodated within the governance structure of the company, even though they are not themselves shareholders in the company and so are not directly party to its internal governance mechanisms. With this domestic legal background in mind, the article finally addresses and assesses the impact and effect of the proposed EU Shareholder Rights Directive on British company law and practice.

This essay argues that the 2004 Markets in Financial Instruments Directive, the investment services cornerstone of the Financial Services Action Plan, represents a bold attempt to build a pan-EU retail investor culture, relying on the transformative effects of law. While the institutional markets have attracted most attention under the FSAP, this strategy represents a sharp change in EU policy, is ambitious given the state of the retail markets and provokes important questions as to the role of law in generating retail activity and the role of the retail investor in developing effective and strong EU capital markets. This essay examines how MIFID attempts to build a retail investment culture through law, the market reality behind this policy shift, what the role of law is in this process and what the emerging retail regime suggests as to the characteristics of the emerging ‘EU retail investor’ as a target of regulatory policy and engine of retail market integration. The newly adopted MIFID conduct of business regime lies at the heart of this ambitious retail agenda and is used as a case study in this analysis. The risks and costs of this approach are, however, high given the unproven relationship between law and investor activity, whether domestic or pan-EU. The essay therefore considers whether this new regulatory and policy strategy on the retail investor is sufficiently nuanced and, in particular, whether, given the risks of imposing inappropriate rules on an immature marketplace, it is matched by appropriate retail investor governance.

After the global financial crisis, systemic risk regulation has taken centre stage. Many consider hedge funds a potential threat to financial stability. Regulating hedge funds, however, is necessarily a transnational challenge because no national government alone can effectively control the systemic risks affecting its economy. This article takes the example of hedge funds for a case study of emerging transnational regulation. After an introduction to hedge funds and the reasons for regulating them, it considers the possible elements of a transnational regulatory regime for hedge funds: transnational industry self-regulation, including such induced by the government, regulatory competition between government regulators, and harmonisation of government regulation. The main conclusions are: self-regulation cannot substitute fully for government regulation in controlling systemic risks caused by hedge funds. Equally, regulatory competition tends to undercut systemic risk regulation. Effective transnational regulation can only be accomplished through harmonisation of government regulation. Such harmonisation is likely to arise if regulation is needed to control systemic risk in global financial markets.

It is time to consider the lessons to be learned from the recent boom in private equity buyouts, not least in view of its abrupt termination in the wake of tightened credit. In the past, such inquiries have been undertaken in the context of agency theory and have focused on the buyout's implications for solving the problem of separation of ownership and control. This article reverses the pattern of inquiry to consider the buyout's implications for agency theory, pointing to three lessons. The first lesson addresses agency theory's three-way association among control transfers, governance discipline and hostile takeovers, suggesting that this triptych needs to be unbundled and reconsidered. The buyout's recent salience implies that we need no longer assume that hostility is the acquisition mode best suited to post-merger disciplinary governance. The second lesson concerns agency theory's account of buyout motivations. The theory posits a world where agency cost reduction determines control outcomes at the transactional margin. On first inspection, private equity buyouts neatly fit this picture. But a deeper examination shows that buyouts are driven by the economics of leverage, with agency cost reduction taking only a secondary motivational role. The third lesson follows from financial returns. Even as buyouts ameliorate the agency costs of separated ownership and control, buyout structures implicate their own agency costs in the form of fees paid to buyout firms. Studies show that buyout firms take so much of the gain that the institutions investing in buyout funds would be better off investing in market indices. There result questions for the line of agency theory that looks to institutional investors as agency cost-reducing monitors. There also result questions respecting buyouts' incentive compatibility, questions raising doubts as to whether buyout governance structures hold out a template for improving corporate governance generally, even as a matter of agency theory.

Takeover has been widely accepted as a necessary method to improve the performance of certain inefficient firms. However, strict enforcement of the Mandatory Bid Rule (MBR) would make takeovers impossible in China. As a result, its operative effect has been diluted through a series of measures. First, the China Securities Regulatory Commission has always granted exemptions from mandatory bid obligations to avoid the detrimental effects of strict enforcement. Second, in practice, certain firms that do not apply for exemptions or fail in their applications are able to circumvent their mandatory bid obligations by launching takeovers within an appropriate time period when the market is booming. Third, this circumvention is facilitated by rules allowing for the adjustment of the bid consideration. Fourth, the proportional partial takeover bid rule was introduced in 2006, further weakening the regime. These realities make the MBR exist in name only in China, yet it can still create obstacles to takeovers. Therefore, it should be abolished.

Commission Regulation (EC) No 2273/2003 regulates price stabilisation activities for equity initial public offerings (IPOs) in Europe as a form of permitted market manipulation. To test the actual practices and effects of stabilisation we empirically analyse the support provided by underwriters of 141 Italian IPOs from 2000 through to 2008. We find that underwriters support the share prices not only by short covering, but also by posting pure stabilisation bids. Pure short covering is mostly used by more reputable underwriters for IPOs with higher institutional participation and more secondary shares in the offer, whereas the opposite is true for pure stabilization IPOs. We try to identify some patterns in underwriters' aftermarket activities and analyse the extent to which the stabilisation activity, permitted for four weeks after trading begins, produces temporary or permanent effects on share prices.

In recent years, many countries have introduced special regimes to facilitate the organisation of social enterprises. Many of these include company law rules which may either provide for a special corporate form for social enterprises, or are part of a certification scheme for such enterprises. This article analyses how these company law issues have been addressed. It focuses on the US benefit corporation, the UK Community Interest Company and the recently proposed Danish certification regime for social enterprises. An analysis is made of how the different systems aim to find the right balance between flexible rules that are sufficiently attractive to entrepreneurs and (social) investors, and rules which ensure that the designation of ‘social enterprise’ is credible. It is pointed out that the three systems balance these requirements quite differently, and the advantages and disadvantages of each are discussed. One of the key elements in the governing of social enterprises is the regulation of how assets can be transferred from these enterprises. It is concluded that a certification scheme seems preferable to a new corporate form, and several recommendations are made as to how to find a system that is more credible than the US solution and more flexible than the UK and Danish solutions.

The controversial and long-awaited Commission Proposals to revise the cornerstone Markets in Financial Instruments Directive 2004 (MiFID I) were presented in October 2011. The Proposals are currently going through the Council and Parliament negotiation process, and final agreement is expected sometime in 2013. This article places these important reforms (together, MiFID II) in context by examining the impact of MiFID I since its application to EU financial markets in November 2007, and by considering what MiFID I's impact suggests for the design of MiFID II. It considers how MiFID I reshaped the EU share trading marketplace and how the dominant interests which shaped MiFID I's regulatory design fared. It also examines how those interest groups are seeking to shape MiFID II, and the implications. It suggests that the influence of interest groups may have led to overly ambitious MiFID II Proposals which are excessively concerned with investment firm and trading platform interests, and not sufficiently focused on the overall efficiency and effectiveness of EU share trading markets. It calls for a more modest approach to reform, based on fine-tuning MiFID I.

The paper focuses on financial transactions, addressing over-the-counter (OTC) trading of derivatives, which many analyses of the recent financial crisis argue produced significant problems. This area of financial activity grew massively from the 1990s, facilitated by legal developments in both the US and the UK that ruled out any state regulation of the market whilst at the same time affirming that the contracts made in the area were fully legally enforceable in US and UK law. At the same time, the private association, the International Swaps and Derivatives Association (ISDA), developed the Model Contract and international private soft law agreements that were generally respected by national legal systems and provided an agreed framework for OTC contracts. The paper explores how this lack of public regulation was legitimated, and the interests which lay behind this legitimation process. It then considers how the financial crisis and the role of OTC derivatives forced a re-opening of the issue of how these markets should be regulated. The paper explores the interplay between what may be described as technical fixes to regulatory problems, on the one hand, and the efforts of private and public actors to defend their interests by shaping the new markets in particular ways, on the other.

This article provides a critical overview of the latest spate of European Commission proposals on the reform of corporate governance in the EU. The authors suggest that most of the proposed measures are simply reactions to recent corporate governance fallouts and new legislation in the US. This article supplies evidence that the EC's measures are in fundamental disequilibrium with the core and supporting institutions of corporate governance in the EU. The authors conclude that the EU should, rather than embark on a complex exercise in harmonisation, build on the strength of its diversity and imitate the US where it is warranted.

Over-the-counter (OTC) derivatives have emerged as a global behemoth – the ‘800 pound gorilla’ of modern financial markets. In the wake of both their precipitous growth and prominence in the thick of the current global financial crisis, financial market regulators have found themselves under pressure to enhance their regulation of OTC derivatives markets. This paper explores both the private and social costs and benefits of OTC derivatives and the respective strengths and weaknesses of public and private systems of ordering in pursuit of the optimal mode of regulating OTC derivatives markets. On the basis of this exploration, this paper advocates employing modes of regulation which abandon the largely artificial distinction between public and private ordering, align the incentives of public and private actors and facilitate the long-term transfer of information and expertise between these actors in order to generate more nuanced and responsive regulation and thereby enhance social welfare.

We offer three basic mechanisms to improve the governance of ‘normal times’ financial supervisors (as opposed to resolution agencies and systemic risk boards). To enhance supervisory effectiveness, we propose first to institutionalise strong CEOs, with boards or commissions being limited to basic policy decision-making and to monitoring. Second, lower-level staff would get increased line responsibilities. Finally, subjecting supervisors to reinforced disclosure requirements would improve market responsiveness.

The enterprise group form presents special risks of mismanagement when entities in the group are in financial trouble. At the same time, pursuing a group interest might assist in resolving the financial difficulties. In any event, delineating rules for this situation is challenging, given the variety of group structures and the potential erosion of the benefit of limited liability when the regulation targets the whole group. The conflict is between ‘entity law’ (which addresses each group entity separately) and ‘enterprise principles’ (addressing the group as a whole). There is scope for crafting the ‘wrongful trading’ provision, now being adopted as an international standard, to accommodate the group scenario. In this context, enterprise principles should function only to help ascertain the commercial reality, rather than to override entity law.

When Council Regulation (EC) No 2157/2001 on the Statute for a European Company (Societas Europaea – SE) became effective on 8 October 2004, it offered existing publicly traded companies, for the first time, a choice between competing company laws, namely the national law of the company's home state and the law of the supranational SE. Using an event study methodology, we analyse a unique dataset of publicly traded firms that have announced to re-incorporate under the SE Regulation.

Using a 1977 article by Robert Clark as the starting point, this article attempts to shed new light on the question of whether and when shareholder loans to her company should be either equitably subordinated or, as courts have done in a few recent cases, recharacterized as equity. In its emphasis on the particular issue of shareholder loans, the article has a narrower compass than Clark’s article, which uses a four-part typology to explore the relationship among fraudulent conveyance law, equitable subordination, veil piercing and dividend restrictions. But the article also expands Clark's analysis in several respects. The most important adjustment involves the general Nonhindrance ideal, which we use to identify a crucially important form of interference with the rights of creditors that Clark does not himself consider directly.

Part 1 of the article very briefly describes the 1939 Supreme Court case that served as a well-spring for equitable subordination doctrine in general, and for subordination of shareholder loans in particular. Part 2 then focuses on a series of recent decisions that have wrestled with the question whether shareholder loans should be recharacterized as equity contributions. Recharacterization doctrine is closely related to equitable subordination, but most courts view it as a separate development. Part 2 suggests that much of the confusion in the cases could be eliminated by disentangling two issues, whether the status of a loan is ambiguous (which raises issues of Truth, in terms of Clark's typology) and whether it was likely to destroy value that would otherwise go to creditors (the Nonhindrance concern); and by distinguishing bankruptcy recharacterization from the tax characterization cases that seem to have spawned the new doctrine. Part 3 then concludes by briefly considering the German and Austrian approaches to these same issues, which focus on capitalization and creditworthiness.

The most important, and initially counterintuitive, implication comes in Part 2: whereas US courts have treated security interests as a badge of legitimacy in assessing shareholder loans, secured loans are actually the most worrisome form of shareholder investment. These security interests, we argue, should be disallowed.

It has frequently been claimed that over-the-counter (OTC) derivatives were, by and large, not directly regulated in the largest markets immediately prior to the global financial crisis (GFC). While there is an element of truth in this contention, it betrays the more complex interactions between public legislators and influential transnational private trade associations, most notably the International Swaps and Derivatives Association (ISDA), both prior to the GFC and in the wake of it. ISDA, its members and national governments interact on the basis of legal and policy tradeoffs which are ostensibly related to OTC derivatives' regulatory treatment but which, in reality, extend beyond this. The fact of these interactions between ISDA and nation states may raise less regulatory legitimacy challenges than some of the norms which are communicated. A prime example is the public transposition of ‘safe harbours’ which insulate OTC derivatives, including ‘purely speculative’ contracts, from the full force of gambling law. It is thus suggested that while the regulatory role and expertise of ISDA should be formally recognised and appropriately harnessed by public actors in the creation of a new public-private regulatory détente in the OTC derivatives markets, a review of the appropriateness of the current legal treatment of purely speculative derivatives should be a priority for any such regulatory regime.

Certain insolvency law rules, like creditors' priorities and set-off rights, have a distributive impact on creditors. Distributional rules reflect the hierarchies of values and interests in each jurisdiction and, as a result, have high political relevance and pose an obstacle to reforming the EU Insolvency Regulation. This paper will show the difficulty of reform by addressing two alternative options to regulate cross-border insolvencies in the European Union. The first one is the ‘choice model’, under which companies can select the insolvency law they prefer. Although such a model would allow distressed firms to select the most efficient insolvency law, it would also displace Member States’ power to protect local constituencies. The choice model therefore produces negative externalities and raises legitimacy concerns. The opposite solution is full harmonisation of insolvency law at EU level, including distributional rules. Full harmonisation would have the advantage of internalising all externalities produced by cross-border insolvencies. However, the EU legislative process, which is still based on negotiations between states, is not apt to decide on distributive insolvency rules; additionally, if harmonisation includes such rules, it will indirectly modify national social security strategies and equilibria. This debate shows that the choice regarding power allocation over bankruptcies in the EU depends on the progress of European integration and is mainly a matter of political legitimacy, not only of efficiency.

This article puts forward the idea that the creation of an online review facility where all market participants are able to review and rate all companies listed in a particular market would solve a number of problems that currently prevent shareholders, in particular institutional investors and the ultimate beneficiaries of investment vehicles such as pension funds, from engaging with companies. It would also allow shareholders and stakeholders with a long-term focus to engage with companies. It is suggested that all listed companies should be required to have a link to this review and rating facility on their website. Listed companies should have the ability to respond to the reviews and ratings on the site. Furthermore, the review facility should be regulated. The arrangement currently used for appointing and overseeing the operator of the UK securities settlement system could serve as a model.