This comment concerns the financing of distressed corporations by shareholder loans. In the United States as well as in Germany, shareholder loans may be subject to subordination or even recharacterization as equity. The comment argues that the risk of an undue exploitation of a shareholder-lender's insider status can effectively be neutralized by the law of fraudulent conveyances and unlawful preferences, supplemented by a general prohibition of securing shareholder loans.

Based on twenty-five semi-structured interviews with company chairmen, we were able to establish that there is resounding support for the split of the positions of chairman and CEO. In addition, chairmen play a key role in making the board a success, partly by establishing the right tone and procedure at the top. The chairmen we interviewed believe that the quality of boards has improved over the last ten years and that directors take their responsibilities more seriously. However, the drive for better corporate governance, though generally welcome, has in some respects become counterproductive.

This article argues that in analysing the efficiency of the German legal capital rules, it is helpful to distinguish carefully between three different aspects: the question of whether the law should impose a minimum legal capital requirement, the relevance of provisions in the articles of incorporation pertaining to the legal capital of the company as a collective offer to the company's creditors, and the role of legal capital rules in limiting distributions prior to the company's insolvency. The existence of a minimum legal capital requirement, while it may not be particularly burdensome to serious-minded entrepreneurs, does not do much to help creditors. The second aspect, namely, the role of provisions in the articles of incorporation pertaining to the legal capital of the company as a collective offer to the company's creditors, is far more important. It explains why the traditional system of capital protection constitutes an efficient contractual instrument facilitating the entrepreneurial activities of companies. Most importantly, however, legal capital rules are the most efficient way of limiting distributions prior to the company's insolvency, providing less room for manipulation than the ad hoc solvency tests used in Anglo-American legal systems.

If a company is harmed by the behaviour of a third party, shareholders may suffer the economic consequences in the form of a reduction in the value of their shares. This article, taking a comparative law perspective, answers the question whether shareholders should be able to claim such a loss that is merely reflective of the company's loss. The basic rule is that a direct claim by the shareholder is not allowed; the company should claim damages. Exceptions to this ‘no reflective loss’ principle in jurisprudence of the UK, the Netherlands and the European Court of Human Rights are analysed. There appear to be two necessary conditions for an exception: (i) the shareholder must have an independent cause of action, and (ii) the reflective loss needs to be certain, i.e., it is certain that the shareholder will not be compensated indirectly through a lawsuit against the wrongdoer by or on behalf of the company. Several specific cases that satisfy these conditions are discussed. It is submitted that awarding damages to the shareholder personally can be justifiable and a derivative suit is usually not a good alternative to protect the injured shareholder in these cases.

We conjecture that venture capitalists and their investors often fall prey to what is known as ‘collective conservatism’. We investigate this conjecture by analysing boilerplate provisions in limited partnership agreements. When investors accept suboptimal boilerplate provisions it is not because they believe that the standardised terms and conditions sufficiently align the interests of investors and fund managers, but merely because they think their peers, including their competitors, prefer to include them in the limited partnership agreement. We find that the financial crisis has facilitated some notable deviations in the boilerplate provisions that are designed to facilitate the return of confidence in the venture capital industry. We argue that a gradual shift may be taking place towards more investor-favourable limited partnership agreements or separate account and pledge fund arrangements. These shifts — which do not lead to significant changes in limited partnership agreements — appear to be particularly effective for bigger funds that increasingly focus on later-stage investments. We show that early-stage funds are more inclined to enter into innovative collaborative agreements. Collaborative agreements differ from traditional limited partnership agreements in that they focus less on curtailing principal-agent problems and more on joint development and value creation.

Foreign direct investment forms an ever more important part of globalised market structures, and international investment law has become one of the most successful and judicialised areas of public international law. In order to attract investment, States commit themselves to treaties that restrict their regulatory sovereignty in ways that are sometimes unpredictable, owing to vague terms in the treaties and the broad use by investment tribunals of their delegated discretion.

This article uses economic contract theory in order to understand whether the commitment problem ex ante and the flexibility problem ex post are optimally solved. It is hypothesised that the participation constraints on States may be overlooked by investment tribunals, thereby leading to an undesired weakening of protection of investors in the long run due to reactions by States. First, States may opt out of the system, for example by exiting treaties or by non-compliance. Second, they may also water down the substantive or procedural protections. Third, whereas investment treaties were seen in the beginning as a restraint on developing countries, investment increasingly flows to equally highly regulated developed countries. As legal protection is reciprocal but the capital flows used to be unilateral, developed countries might also react to their restriction of sovereignty, as the United States has already done, for example. These perils could lead to a backlash in international investment protection of which indications are already visible

This article discusses the plans of the European Commission to harmonise shareholder rights in the European Union. At the same time, it puts forward various reasons why this would not be a significant step forward and argues that it should therefore be reconsidered whether the intended directive on shareholder rights is really needed.

This is a case study of the German securities regulator's (BAFin) decision on the Schaeffler case of 21 August 2008, which concluded that the Schaeffler Group's strategy for building up a controlling stake in Continental AG did not violate German disclosure rules. Moreover, it assesses whether the Schaeffler strategy would have been disclosed if the amendments to the German disclosure rules made by the Risk Limitations Act of 21 August 2008 had been in force at the time Schaeffler built up its swap position in Conti. In contrast to BAFin's decision, I hold that Schaeffler's swap long positions prompted disclosure requirements under the ‘holding on behalf’ provision of Article 10(g) of the European Transparency Directive 2004/109 as implemented in German securities and takeover law. While BAFin's decision was subject to the specifics of the case at hand, inadequate enforcement rules help explain why Schaeffler took the risk of regulatory action in the first place. Rather than relying on ex-post enforcement, I argue in favour of developing a self-regulatory, ex-ante enforcement scheme using the model provided by antitrust leniency programmes.

Securitisation is an important financing technique. Following the financial crisis, reform activities in relation to pitfalls of securitisation have been underway. In particular, following the financial crisis, a significant debate has raged globally about whether risk retention mechanisms before the crisis were effective. The idea is to align the incentives of originators/securitisers and investors in order to prevent the negative impact caused by the originate-to-distribute model. If the effective risk retention and due diligence goals are achieved, securitisation may continue to deliver its benefits to investors, and the full implementation of the reforms in the EU and the USA will act as a deterrent and inject confidence in the markets.

Following the ECJ's recent case law on EC freedom of establishment (the Centros, Überseering and Inspire Art cases), regulatory competition for corporate law within the European Union takes place at an early stage of the incorporation of new companies. In contrast, as regards the ‘moving out’ of companies from the country of incorporation, the ECJ once considered a tax law restriction against the transfer abroad of a company's administrative seat as compatible with EC freedom of establishment (the Daily Mail case). For years, this decision has been regarded as applicable to all restrictions imposed by countries of incorporation, even the forced liquidation of the ‘emigrating’ company. This paper addresses the question whether EC freedom of establishment really allows Member States to place any limit on the ‘emigration’ of nationally registered companies. It argues that EC freedom of establishment covers the transfer of the administrative seat as well as the transfer of the registered office and, therefore, that the country of incorporation cannot liquidate ‘emigrating’ companies. In addition, it addresses the question whether a new Directive is needed to allow the transfer of a company's registered office and identity-preserving company law changes. It argues that such a Directive is necessary to avoid legal uncertainty and to protect the interests of employees, creditors and minority shareholders, among others, who could be detrimentally affected by the ‘emigration’ of national companies.

A reform of the GmbH is underway. The appearance of branches of British private limited companies in Germany in the aftermath of the Inspire Art judgment had a certain impact on the reform discussion. Which strategy should be chosen? The so-called MoMiG reform has decided: Let's face the competition. The reform aims to make the incorporation of a GmbH much quicker, easier and cheaper. It seeks to deregulate some of the complications in German law such as contributions in kind, capital maintenance and cash pooling and rules on shareholder loans that are difficult to understand. It will also reduce minimum capital requirements. Furthermore, the intended strategy is to modernise the company law we have and not to introduce even more and new forms of companies into our law. The MoMiG Act should reach Parliament in spring 2007 and will hopefully enter into force at the beginning of 2008.

This paper is designed to analyse the effectiveness of tag-along and drag-along arrangements. These are of widespread use in corporate reality, in particular among private companies. And yet, despite their recurrence in normal practice, they have not to date attracted the interest of the legal literature. The paper intends to confirm the validity of three essential intuitions about these arrangements that redefine the ordinary understanding of them. The first is that they constitute ‘anti-opportunism’ mechanisms inasmuch as they are arrangements in principle designed to respond to ex post conflicts of interest between liquidity and stability. They are, then, contractual tools that aim to protect one shareholder from opportunistic behaviour on the part of another in companies where both have made heavy specific investments. These clauses are particularly pertinent in settings such as joint ventures or venture capital companies, which tend to involve such investments. The second intuition is that these arrangements constitute self-defence tools that are, additionally, relatively self-enforceable. Specifically, self-defence adopts the form of a put option in tag-along arrangements or a call option in drag-along arrangements, to the benefit of shareholders exposed to expropriation risk. These tools are relatively self-enforceable because their implementation entails no third-party involvement. The third intuition is that their typical location is that of shareholders' agreements and not by laws, since they define inter-shareholder relations (involving all or some of them) rather than corporate structure or machinery.

It has generally been maintained that UK companies embrace a shareholder value approach. But some commentators have challenged that view. This article documents an attempt to ascertain the actual position in UK companies by an analysis of the position taken concerning corporate objective by 50 of the largest companies in the UK. The research consists of an examination of the public documents of these companies, namely those that could be accessed from the companies' websites, and the primary document considered was the company's most recent Annual Report. The study found that companies could be divided into three groups with one group consisting of 36% of the companies considered, stating that they have shareholder value as their ultimate goal. But, critically, it also found that most of these companies indicated that non-shareholding stakeholders were important to them.

Innovation and R&D are important to economic growth. One argued way to encourage innovation is through government support for venture funds. This might be especially important in countries that lack a developed venture capital (VC) sector. However, some papers have suggested that this government backing might ‘crowd out’ purely private sector funds and might undermine innovation creation. Thus, I examine the use of a scheme in Australia (the Innovation Investment Fund (IIF) scheme). I focus on Australia because unlike many low innovation countries, it has strong legal foundations, enabling a cleaner look at the impact of government backing. I argue that Australia's scheme is well structured. I then show that while Australia has relatively low levels of VC and innovation compared with other countries, its VC activity scaled by GDP has grown following the inception of the IIF scheme, particularly increasing after 2001. The policy implication is that properly structured government support for VC funds can stimulate innovation and VC activity.

In this article, the authors fill a gap in the legal literature surrounding post-Enron corporate governance reform by focusing on the need for enhanced shareholder voice in the auditing process. The authors expand on Anand's analysis in ‘Shareholder Isolation and the Regulation of Auditors’ with transatlantic perspectives on reform of the audit process. Specifically, they examine the role of the auditor, shareholder powerlessness and the post-Enron reform process in Canada and the UK, contrasting the reform movement in these countries with that in the US. Finally, the authors examine the developing auditor governance regime in the EU. In their analysis, the authors reach several important conclusions: the auditor-shareholder relationship and the duties of auditors to shareholders need to be clearly defined; shareholder isolation from the audit process severely endangers investor confidence; the independence of audit committees and auditors is not enough to protect shareholders; and, most importantly, shareholder voice should be recognised as an essential tool for promoting not only auditor independence, but also, ultimately, investor confidence. In short, the authors conclude that shareholder voice must be a part of the post-Enron reform of the audit process.

German corporate group law (or rather, to be more precise, the German Recht der verbundenen Unternehmen, i.e., the law of affiliated companies, §§ 15 ff., 291 ff. Marketable Share Company Act [Aktiengesetz, abbreviated AktG]) owes its existence to special concerns of the German legislature at the end of the 1950s and the beginning of the 1960s regarding the ability to protect the interests of outsiders in group-dependent marketable share companies (Aktiengesellschaften). The interests of shareholders and creditors were considered to be so intensive, so inscrutable and so continuously endangered, that the legislature believed that the existing company law was incapable of satisfactorily providing the requisite protection.

The ability of the UNCITRAL Model Law on Cross-Border Insolvency to enhance unity in bankruptcy (i.e., universalism) has been doubted. Unlike the EC Regulation on Insolvency Proceedings, it does not provide rules on international jurisdiction and automatic recognition. Thus, both recognition of foreign proceedings and relief should be sought. The Model Law (like the EC Regulation) also lacks rules for corporate groups. For these reasons, commentators have predicted that countries implementing the Model Law will exploit the discretion and flexibility enshrined in this regime to protect local interest and will avoid maximum cooperation and deference to foreign jurisdictions. Nonetheless, this paper suggests that the Model Law has the potential of facilitating unified and centralised proceedings both for single and group companies. Moreover, the paper reports the results of a comparative empirical study (which investigated Model Law decisions) demonstrating that the Model Law is in fact on the road to universalism. Recognition under the Model Law has become something of a routine, group centralisations are being facilitated and a wide range of relief is being granted. The paper nevertheless points to the current shortcomings in the application of the Model Law and where it can be improved.

One of the areas of the financial industry that appears to be the least harmed by the current market turmoil is the Islamic finance industry. Generally, it is accepted that the history of Islamic finance started in the early 1960s, but is that really where it all began? This article shows that Islamic finance has a much longer history than expected and is applying similar principles as debated by the Greek philosophers as well as early theologians. In addition, the main product types such as partnership contracts, predictable return products, leasing and investment certificates are explained.

Because of a failure to harmonize the regime of takeover defenses, the European Directive on Takeover Bids (DTB) has created broad dissatisfaction. In fact, two key features of the DTB, the board neutrality rule and the break-through rule (BTR), are not mandatory, but can be opted out by Member States. Since both rules were considered chief devices for increasing takeover activity, as they aim to neutralize the most significant anti-takeover defenses, the fact that their adoption will rely upon local choices by national legislatures puts into serious question whether the ultimate outcome of the DTB will be that of promoting a vibrant and efficient pan-European market for corporate control. Optionality is not alone in thwarting harmonization in the field of takeover defenses, as the European legislature has also introduced a reciprocity feature, according to which Member States can decide whether to relax the prohibitions and restrictions arising out of the board neutrality rule and/or the BTR in the event a bid is made by a company which is not subject to the same prohibitions and restrictions.

Although the DTB failed the goal of promoting a strong takeover market by limiting the availability of defensive tactics, both the optionality and the reciprocity features will represent an intriguing test of how Member States will address the underlying policy choices and, where they chose to opt out of the board neutrality rule and/or the BTR, of how companies will react to the possibility of deciding to opt into the pro-takeover EC default regime. The paper argues that optionality: (i) may very well be a sound approach with regard to the BTR, as its beneficial impact is still highly debated, and (ii) represents an acceptable compromise for the gradual implementation of the board neutrality rule. Quite plausibly, at this stage, an abrupt introduction of a mandatory board neutrality rule would have generated, at least in some Member States, a backlash in both national politics and corporate practice. The paper also stresses that reciprocity does not represent a sound policy to govern the regime of takeover defenses.

European public company law restricts most distributions by requiring maintenance of a net asset reserve (‘cushion’) of at least the aggregate nominal value of issued shares. This cushion is determined absolutely (without assessment of true values or ongoing solvency by directors, as is permitted in most other jurisdictions) by the latest annual statutory accounts (balance sheet test). An alternative solvency test would require directors to certify sufficiency of assets on an ongoing basis. The amount of the ‘cushion’ is arbitrary (with wide variations between comparable companies and Member States), unrelated to the mischief addressed and thus contrary to general European law principles. EU law establishes four possible balance sheet tests: two (with many variations) under the Fourth Directive (an historic cost and stricter revaluation based test), one (with many variations) under the modernised Fourth Directive, which allows or requires fair value accounting, including the distribution of certain unrealised profits, and one under the International Accounting Standards (IAS) Regulation regime. These tests produce widely divergent results for distributable profits. The Fourth Directive departs markedly from reality and in practice conforms imperfectly with true and fair view principles, the implementation of which varies markedly between Member States. The modernised Fourth Directive and the IAS regimes vary widely according to the options used, confer considerable discretion on company boards and are often very volatile, failing to provide a stable basis for prudential decisions. Prudential regulators have accordingly overridden some of these standards. The results of these tests are diverse, complex, costly, subject to regulatory arbitrage and irrational. Statements designed for financial reporting purposes are inappropriate for setting prudential decisions. The proposed solvency assurance is designed to address the mischief by a proportionate, focused assurance of solvency, with director certification before distributions of liquidity for a year and availability of sufficient assets to meet all liabilities for the foreseeable future – a stricter version of the test currently imposed in the United Kingdom for capital distributions in company reconstructions. Such a test should be adopted as an option throughout the European Union with issues of sanctions and controls being a matter for Member State discretion.