!!Экзамен зачет 2023 год / Black and Kraakman - A Self Enforcing Model of Corporate Law-1

law that creates corporate decisionmaking processes that allow minority shareholders to protect themselves by their own voting decisions and by exercising transactional rights.

A. The Prohibitive Model

The prohibitive model is familiar from nineteenth-century corporation statutes in the United States and Great Britain and, to some extent, from European corporate codes and emerging market corporate codes today.38 A prohibitive code simply bars many kinds of corporate behavior that are open to abuse, such as self-dealing transactions and cashout mergers. Such prohibitive statutes were adopted in the United States and Britain under market conditions that resemble those of emerging economies today. One plausible approach to corporate law for emerging economies is to return to this restrictive drafting strategy from developed countries' pasts. In Russia, for example, the drafters of the Civil Code provisions that regulate companies consciously borrowed elements of the prohibitive approach from America's and Russia's pasts.39

That developed economies have evolved away from the prohibitive model toward an enabling model -- far away, in the United States and Great Britain, less far in Continental Europe -- does not mean that the prohibitive model is inappropriate for emerging markets. Experience in Great Britain and the United States teaches that an enabling law only weakly protects minority investors from controlling insiders who are determined to exploit them. Both countries have had their share of scandals and scoundrels -- Robert Maxwell in the United Kingdom and Victor Posner in the United States are prototypical examples.

If the gross abuse of power by controlling insiders is not common in either country, this is partly for lack of opportunity (controlled companies are relatively uncommon) but primarily -- as we have already argued -- because multiple markets and institutions constrain insider

38 The prohibitive model, which imposes substantive regulation, and the self-enforcing model, which imposes procedural constraints, are ideal types, as is the enabling model that characterizes American and British company law. As indicated in the Appendix, existing emerging market statutes generally include a mix of all three forms of regulation. Nevertheless, many of these statutes have a distinctive prohibitive or self-enforcing orientation. Only one of the 17 surveyed countries (South Africa) has a statute that is primarily enabling in character. Emerging market statutes with continental roots tend to be prohibitive, while statutes with British Commonwealth roots are more self-enforcing.

39 A key drafter of the Russian Civil Code, Dean Yevgeni Alexeyevich Sukhanov of the Moscow State University Law Faculty, presented to one of us a 1994 reprinting by his students of a 1914 Russian textbook on corporate law. See generally G.F. Shershenevich, Uchebnik Torgovogo Prava [Textbook on Business Law]

(SPARK 1994) (1914) (reprinting the text with an introductory article by Dean Sukhanov). He explained his view that Russia's current problems were much like those described in the book, and required a return to the solutions proposed in this ancient text.

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opportunism. Enabling statutes would fare far worse in emerging economies, where controlled firms are the norm and nonlegal restraints on controlling insiders are weak.40

But these considerations suggest only that the prohibitive model may be a worthy competitor to the enabling model in emerging economies, not that it dominates other possible approaches. Prohibitive statutes have severe drawbacks even in emerging markets. First, they often impose major costs on companies by mechanically limiting the discretion of corporate managers to take legitimate business actions. By most accounts, the driving force behind the rise of enabling statutes in developed markets was the value of transactional flexibility to corporate managers, and ultimately to shareholders.41 The inflexibility of substantive prohibitions can be (and in Continental Europe often is) reduced by creative judicial interpretation, but this requires creative and knowledgeable judges, who are likely to be absent in an emerging market.

Second, we know very little about how effective prohibitive statutes are in thwarting opportunism. Many formal constraints become ineffective as practitioners discover how to avoid them. The classic Anglo-American example is the demise of the protective function of legal capital following the introduction of low-par stock.42 Moreover, over time, severe substantive prohibitions will tend to be relaxed by legislators to meet firms' business needs (or the political demands of corporate managers). Indeed, in Russia, which already had many large manager-controlled companies, it would have been politically naive to expect the legislature to prohibit all self-dealing transactions. Yet, if these prohibitions are absent, the prohibitory model offers nothing to replace them with.

Third, prohibitive statutes require significant judicial or administrative involvement. Transaction planners will look for ways to comply with the letter of the statute but not its spirit. These efforts, in turn, require knowledgeable judges who can resolve the resulting disputes in sensible ways.

B. The Self-Enforcing Model

40 From this perspective, it is not surprising that European corporate codes have evolved less far than British and American laws from prohibition to the enabling model. European companies are more likely to be insidercontrolled than British and American companies, and European countries are less likely to have active public stock markets, which implies weaker market controls.

41 See, e.g., Romano, supra note 23, at 87-89.

42 See Robert C. Clark, Corporate Law § 14.3, at 610-16 (1986). For us, there was perverse amusement in watching the Russian Civil Code drafters resolutely relying in 1994 on charter capital as a basic form of investor protection, while Russian company managers, having quickly learned the lessons that American managers learned early in the twentieth century, were routinely selling stock with a market value many times its par value (aided in this effort by high inflation). See Grazhdanskii Kodeks RF, pt. I, arts. 96-102 (1994) [hereinafter GK RF (Civil Code)], translated in Civil Code of the Russian Federation (William E. Butler trans., Interlist Pub. 1994).

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A central claim of this Article is that, in emerging markets, a self-enforcing model of corporate law -- in which mandatory procedural and structural rules empower outside directors and large minority shareholders to protect themselves against opportunism by insiders -- dominates both the prohibitory model and the enabling model. The self-enforcing model minimizes the need to rely on courts and administrative agencies for enforcement. Thus, it is robust even when these resources are weak. And the model combines much, though not all, of the flexibility of the enabling model with a degree of investor protection that the enabling model cannot match, and perhaps the prohibitory model cannot match either. We sketch here the main lines of the self-enforcing model. Details in the Russian context and more extensive justification of particular features of the model are introduced in Parts IV, V, and VI.43

The self-enforcing model is designed to harness the monitoring ability of large, albeit still minority, outside shareholders. Collective action problems preclude effective monitoring by small shareholders. But large shareholders, in defending their own self-interest, will often defend the interests of small shareholders as well. Many companies are likely to have large outside blockholders, in part because sophisticated investors understand all too well the weak position of a small outside shareholder and thus prefer to hold an influential block of a company's stock, if they own its shares at all.44

Corporate law and investor preferences interact: the more influence that the law gives to large outside investors, the more likely investors are to choose to hold large stakes -- and to use the influence that these stakes provide. In terms of Albert Hirschman's dichotomy between exit and voice as monitoring mechanisms,45 thin capital markets eliminate exit as an available option in emerging economies. Investors therefore look to maximize their voice, and the self-enforcing model empowers them to do so.

1. Structural Constraints. -- The structural constraints that define the self-enforcing model operate both at the shareholder level and at the level of the board of directors. At the shareholder level, these constraints typically involve shareholder voting requirements or transactional rights (put and call options) triggered by specific corporate actions.

43 The strategy of shifting legal enforcement from courts and regulators to private parties who are well positioned to thwart misconduct is frequently deployed outside the company law context. One of us has called this strategy, using examples from tort and criminal law, "gatekeeper enforcement." See Reinier H. Kraakman,

Gatekeepers: The Anatomy of a Third-Party Enforcement Strategy, 2 J.L. Econ. & Org. 53, 73 (1986). The gatekeeper strategy in the tort context involves imposing legal liability on one private party to create incentives for that party to control the conduct of another. In contrast, the self-enforcing strategy for company law provides outside shareholders, who already have the incentive to control insider opportunism, with the means to do so.

44 For precisely this reason, investment funds in both Russia and the Czech Republic lobbied successfully for relaxation of legal restrictions (adapted from the Investment Company Act of 1940, 15 U.S.C. §§ 80a-1 to -64 (1994)) on the percentage stake that a fund could hold in a single company.

45 See Albert O. Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States 15-54 (1970).

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With regard to voting rules, a self-enforcing statute can require supermajority shareholder approval for central business decisions such as mergers, rather than the simple majority approval of the enabling approach. It can also require shareholder approval for a broader range of corporate actions than an enabling statute would, such as decisions to issue significant amounts of new equity or to purchase or sell major assets.46 For self-interested transactions between the company and its directors, officers, or large shareholders, a selfenforcing statute replaces the permissiveness of the enabling approach (loosely policed by courts) and the ban of the prohibitory model with approval by independent directors, a majority of noninterested shareholders, or both. The voting decisions of large shareholders, if obtained through fair voting procedures and with adequate disclosure, are a more fine-grained way to distinguish between good and bad transactions than substantive prohibitions could possibly be.

To safeguard the voting mechanism, the self-enforcing statute can include a one share, one vote rule to prevent insiders from acquiring voting power disproportionate to their economic interest in the company, as well as procedures to ensure honest voting, such as use of an independent registrar to record share transfers, confidential voting, and independent vote tabulation. Outside shareholders' influence can be increased through use of a universal ballot that lets them cheaply place director nominations and other proposals on the voting agenda. Good voting decisions require good information, but the quality of shareholders' information can be improved by mandatory disclosure rules and by cumulative voting, which enhances large blockholders' access to information about the company.

Voting mechanisms, which by their nature must be exercised collectively, can be supplemented with transactional rights that individual shareholders can exercise. A selfenforcing law can convey appraisal rights (put options) to unhappy shareholders for a broader range of corporate actions than a typical enabling statute would.47 Exercise of appraisal rights can be made simpler, and low-ball repurchase offers chilled, by requiring a company, when it solicits shareholder approval for an action that will trigger appraisal rights, to publish an offer price that will be binding on the company if the appraisal rights are exercised. The law can convey mandatory preemptive rights (call options) to acquire shares in proportion to one's ownership stake, as protection against underpriced stock issues. It can give shareholders takeout rights (put options) to sell their shares to a new controlling shareholder, as protection against transfer of control from known (and presumably trusted) hands to less trusted ones.

46To the extent that an enabling statute contains any mandates for shareholder votes on particular types of transactions, it partakes of the self-enforcing approach. The differences between the self-enforcing model and an enabling model (with self-enforcement features) are ones of degree. The self-enforcing approach contains more and stricter voting mandates because it places greater weight on the goal of protecting outside investors against insider opportunism and lesser weight on maximizing business flexibility.

47The existence in an enabling law of any mandatory appraisal rights can be seen as reflecting elements of the self-enforcing approach. A pure enabling law would let individual firms grant or withhold appraisal rights in their charters.

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The voting rights and transactional rights approaches can be combined, with voting used to define the extent of the transactional rights. For example, preemptive rights can be made waivable ex ante by shareholder vote, and takeout rights can be made waivable by a majority vote of shareholders other than the new controlling shareholder.

A self-enforcing statute also introduces structural constraints at the level of the board of directors. For example, it can require that a certain proportion of a company's board of directors be independent, and then vest these independent directors with authority over key corporate decisions -- such as approval of self-interested transactions. It can mandate board structures, such as an audit committee, that amplify the power of independent directors but are optional under enabling statutes.

A critical feature of the self-enforcing model, linking shareholder level and board level constraints, is a cumulative voting rule for election of directors, buttressed by a mandatory minimum board size and a ban on staggered terms of office. Cumulative voting allows large outside shareholders to elect representatives to the board. As long as outside shareholders hold stakes large enough to elect their own representatives, cumulative voting enhances information flow and ensures that at least some directors will be true shareholder representatives. An insider majority will still control non-related-party transactions under this rule, but outside representation makes it harder for insiders to ignore or deceive minority shareholders. Although other voting rules, such as class voting, can also ensure minority representation on the board of directors, a cumulative voting rule is flexible enough to encompass a wide variety of ownership structures.

2. Simple, Bright-Line Rules and Strong Remedies. -- The self-enforcing model compensates for the weakness of formal enforcement through a combination of relatively simple, bright-line rules governing when its structural constraints apply, rules that insiders will often comply with voluntarily, and strong sanctions for violating the rules. The self-enforcing model might, for example, require a shareholder vote for a purchase or sale of assets that equals 50% or more of the book value of the firm's assets. To be sure, book value is an imperfect measure of a transaction's importance Moreover, a percentage threshold will be overinclusive in some cases (hindering transactions by requiring a shareholder vote without sufficient reason) and underinclusive in others (failing to reach transactions that could seriously affect shareholder value). But this rule is far clearer in application than the familiarenabling law requirement of shareholder approval for a sale of "substantially all" assets.48

When a pure bright-line rule is unavailable, the self-enforcing approach uses more concrete standards than are often found in developed markets. Compare, for example, the following alternative instructions to directors who must decide whether to approve a transaction between a company and one of its directors:

48 See, e.g., Del. Code Ann. tit. 8, § 271 (1991).

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(i)a self-interested transaction must be either ratified by shareholders or approved by the noninterested directors acting in the best interests of the company, or else is subject to "entire fairness" review by the courts;

(ii)a transaction between the company and a director or top manager must be approved by noninterested directors, who should grant approval only if the transaction is fair to the company;

(iii)a transaction between the company and a director must be approved by noninterested directors, who should grant approval only if the company receives consideration, in exchange for property or services delivered by the company, that is worth no less than the market value of the property or services, and the company pays consideration, in exchange for property or services, that does not exceed the market value of the property or services.

The first approach, with some judicial gloss, is essentially the legal rule today in the United States and Great Britain.49 In an emerging economy, it offers meager guidance to directors. The second approach borrows from current best practice in the United States by vesting the decision in noninterested directors who are instructed to review the "fairness" of the transaction.50 In the United States, this best practice rests on a cultural understanding that "fairness" turns largely on price, relative to market price. But in an emerging economy, directors and judges may not know what it means for a transaction to be "fair."

We favor the third approach in an emerging economy. Enforcement is still scarcely automatic, but even an unsophisticated judge can understand that the company's sale of property to a manager, who promptly resells it for thrice the price that he paid, was not at market value. A corrupt judge who nonetheless blesses such a transaction advertises his corruption to all. Sunshine is an imperfect disinfectant, but an important one nonetheless.

The third approach also tells directors how they ought to behave. Over time, the norms that a company's transactions with insiders should be at market prices and should be reviewed by noninterested directors may become part of corporate culture. The cost of this more precise approach is that it fails to reach situations where a transaction, although at a "market" price, is nonetheless unfair to the company -- perhaps because the price was toward the low end of a broad range of plausible "market" prices.

49 Most contemporary American corporation statutes encourage review of conflict-of-interest transactions by noninterested directors without specifying what standard of review these directors should employ. See id. § 144(a)(1) (stating that corporate transactions in which some directors are interested are not automatically voidable if approved by a majority of noninterested directors); Principles of Corporate Governance, supra note 13, § 5.02 reporter's note, at 235-45 (canvassing state statutes).

50 See, e.g., Principles of Corporate Governance, supra note 13, § 5.02(a)(2)(B) (stating that disinterested directors may authorize an interested transaction only if they "could reasonably have concluded that the transaction was fair to the corporation").

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The prohibitive model also lends itself to bright-line rules, but transaction planners will exert constant pressure on these rules. Over time, this pressure will lead to fuzziness at the margin, as judges bend the substantive rules to allow beneficial transactions to proceed. The structural rules of the self-enforcing model will experience less pressure at the margin because they do not flatly bar transactions. Rather, the self-enforcing model merely imposes procedural hurdles that can usually be surmounted for beneficial transactions.

The self-enforcing approach further encourages managers to comply with its rules through relatively severe sanctions for noncompliance, which compensate in part for the low probability of enforcement. For example, the remedy for failure to obtain advance approval of a self-interested transaction can be automatic forfeit to the company of the self-interested person's profit from the transaction. This contrasts with the enabling approach, in which an interested party generally can defend a transaction on the grounds that it was substantively fair.51

A statute can rely heavily on rules (rather than standards) and still be so complex that managers and judges can't understand it, and managers soon give up in disgust and stop trying. Every additional rule and nuance adds to the law's overall complexity and detracts from its overall effectiveness. This is a kind of externality -- the direct benefits from tailoring the law more closely to fit discrete situations must be balanced against the indirect costs of complexity.52 To combat this problem, a bias in favor of simplicity must overlay every discrete decision embedded in a self-enforcing law.

C. The Limits to the Self-Enforcement Approach

The self-enforcing model introduces three types of costs, compared to the enabling model. First, shareholder votes and transactional remedies add costs and delays. Thus, while these shareholder rights should be more common under the self-enforcement model than under the enabling model, deciding how much more common requires balancing, at the margin, the expected costs and benefits of expanding a particular protection. The cost-benefit balance, in turn, will depend on the strength of other institutions that are available in a particular country

51 See, e.g., Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, 1152-54 (Del. Ch. 1994), aff'd, 663 A.2d 1156 (Del. 1995).

52 In Russia, for example, privatized companies with more than 500 shareholders have been required to elect directors using cumulative voting since January 1994. See Decree of the President of the Russian Federation No. 2284, § 9.10 (Dec. 24, 1994), implementing The State Programme of Privatization of State-Owned and Municipal Enterprises in the Russian Federation, translation available in LEXIS, Intlaw Library, Rflaw File. Many companies haven't complied with this decree, we understand, because their managers don't understand how cumulative voting works. This confusion reduces their respect for the law as a whole. In response to this problem, our proposed Russian law mandated cumulative voting only for companies with 1000 or more shareholders -- the companies most likely to have outside blockholders who can make use of cumulative voting.

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to channel the behavior of corporate participants. There are no clear lines, only informed judgments, about where to strike that balance in a particular country.

Shareholder-level protections are often more effective, but also more costly, than board-level protections. But the more effective the board is in serving shareholders' interests, the fewer the decisions that should require shareholder action. Thus, one goal of the selfenforcing model is to create a board that is more responsive to outside shareholders' interests, which in turn lets the law vest more decisions exclusively in the board.

A second cost of giving a veto over corporate decisions to outside shareholders or outside directors, or requiring supermajority votes to approve certain decisions, arises from the usual hazards of departing from a majority vote rule.53 A large outside shareholder will have holdup power and may be able to obtain personal benefits by threatening to block a valueincreasing transaction. Moreover, the rational apathy of small shareholders may make it hard for the company to obtain the votes needed for approval of a value-increasing transaction. The two concerns interact: the rational apathy of some shareholders increases the holdup power of other shareholders.

To take a Russian example, suppose that a company's managers wish to merge with another company -- a transaction that will enhance the firm's value for investors but cost jobs today. A high shareholder approval requirement may let employee-shareholders block this transaction. Given the majority manager-employee ownership and relatively concentrated outside ownership of most Russian firms, we believe that approval of key corporate actions such as mergers by two-thirds of the outstanding shares offers a sensible balance between providing meaningful shareholder protection and limiting the holdup power of employees or outsiders. By contrast, a simple majority of outstanding shares should suffice to approve large share issues, because preemptive rights also protect shareholders against below-market pricing. But a different ownership structure would lead to a different judgment.

A third cost of self-enforcement protections is a subtle loss of flexibility in designing the business enterprise. The self-enforcement model controls the structure within which corporate decisions are made. But a single decisionmaking structure will not fit all companies. To some extent, the law can allow for this by providing different rules for companies of different sizes and by dictating structure only when there seems strong need to do so. But we cannot anticipate in advance all the ways in which companies might want, for good reason, to depart from the prescribed structure. In theoretical terms, we cannot fully escape the usual expanded choice argument for an enabling law.

Deciding which procedures are appropriate for which firms, and how finely to subdivide the universe of firms using an imperfect measure like number of shareholders, is an exercise in balancing. For Russia, we would apply the full "large company" procedures, such as cumulative voting, to firms with 1000 or more shareholders. This choice, however, depends

53 See Ronald J. Gilson & Bernard S. Black, The Law and Finance of Corporate Acquisitions 64152 (2d ed. 1995).

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on a background fact: the Russian privatization process, in which almost all employees and many individual citizens became shareholders, means that even a relatively small company can have hundreds of shareholders.

Venture capitalists (active equity investors -- domestic or foreign -- who demand influence or even control in exchange for large infusions of capital) are likely to be important sources of equity capital in emerging economies, where rapidly changing economic circumstances make almost all companies highly risky. Venture capitalists in developed economies exploit the enabling model's flexibility to tailor elaborate control arrangements for their own protection. A good measure of the flexibility costs of the self-enforcing model is how often its mandatory procedures prevent arrangements that these investors might otherwise prefer.54

Two features of our proposal may seem especially likely to interfere with venture capital investments: (i) the takeout offer requirement that a purchaser of over 30% of a company's common stock offer to buy all remaining shares; and (ii) the requirement that each company have a single class of voting common stock. In fact, these provisions are unlikely to block the control arrangements that venture capitalists often demand. Suppose, for example, that a venture capitalist wants to buy a 40% interest in a company directly from the company. Our control transaction rules permit shareholders to waive their takeout rights by majority vote. A waiver imposes virtually no added cost on the company, because the shareholders must vote to authorize a 40% share issuance in any event. If the venture capitalist wishes to buy a 40% stake from existing shareholders, rather than from the company, then a waiver vote would entail the extra transaction costs of a shareholder meeting. In our judgment, these costs are justified by the protection that the takeout rule accords to minority shareholders.

A more difficult but still soluble problem arises if the venture capitalist wishes to make a minority investment while retaining veto rights over critical transactions. In the enabling model, such a transaction is often structured by creating a second class of voting stock that gives the investor both general voting rights and the particular veto rights that are desired. Under the self-enforcing model, the same control structure can be created by combining partial ownership of a firm's common stock with ownership of a class of preferred stock equipped with the desired veto rights. Virtually the only rights that a venture capitalist could not demand under our proposed statute are voting rights for directors disproportionate to the venture

54 For Russia, we considered a "dual" corporate law, with one set of rules for privatized firms and another, more flexible set of rules for newly created firms, including firms financed by venture capitalists. We concluded that such a dual law was not feasible, because privatized firms would be able to use the tools of corporate restructuring (mergers, sales of substantially all assets, spin-offs, and the like) to qualify as "new" firms. We did not think a workable line could be drawn between "genuine" restructurings and "sham" restructurings designed to qualify for the more liberal corporate law rules. The American tax rules on net operating losses, through which Congress tried for decades in increasingly complex ways to limit the use of net operating loss carryforwards to the firm that generated the losses, offer a case study where regulators tried to draw a similar line and failed. See Boris I. Bittker & James S. Eustice, Federal Income Taxation of Corporations and Shareholders § 16.02 (5th ed. 1987) (reviewing the history of the net operating loss rules).

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capitalist's total equity investment. And even this restraint can sometimes be finessed through a voting agreement with other large shareholders.

D. Can Law Function Without Official Enforcement?

The self-enforcement model is designed to minimize reliance on official enforcement. But how effective can the law be if judicial enforcement is as weak, corruption as widespread, and organized crime as strong as is currently the case in Russia? Are all efforts to control private behavior within the corporate form doomed to failure without some minimum level of enforcement capability?

To explore these questions, let us imagine, counterfactually, a world with no official enforcement -- no government organ that can enforce the official corporate rules. If the selfenforcing approach can elicit partial compliance in this hypothetical world, then it can only work better -- though still imperfectly -- in the more realistic case where official enforcement is weak but not wholly absent.

The concept of rules without official enforcement is not new. Robert Ellickson has explored situations in which norms of conduct emerge without official enforcement, including conflict between whaling vessels in international waters, and situations where official rules are so out of touch with practical needs that a public consensus develops around informal norms.55 Here, we consider the potential for rules to function without official enforcement in the specific context of corporate law. For example, suppose that company directors can ignore all shareholder voting rules without fear of official intervention. What recourse is open to a 20% shareholder who loses a board seat because the company erases him from the shareholder register, refuses to provide cumulative voting, or conveniently loses his ballot?

One answer is that the question is posed too starkly. Even without official sanctions, many companies will not resort to such tactics. Some managers will comply with the written law simply because it is both written and reasonable; some will comply because their peers do; others will comply so as not to risk embarrassing news stories. Companies that need capital will comply with the rules to build a reputation for honest behavior, and companies that plan to enter long-term contractual relations must safeguard their reputation for honesty and fair dealing.56

Without official enforcement, the entire corporate law (including its nominally "mandatory" terms) becomes a set of default rules from which the participants in the corporate

55 See Robert C. Ellickson, Order Without Law 40-64, 184-206 (1991).

56 Clear legal rules can enhance reputational sanctions by increasing the visibility of misconduct. Behavior that might otherwise blend into routine, hard-nosed business practice is easier to identify as illicit against the backdrop of a legal rule that prohibits the behavior. Thus, corporate law in emerging markets can help to seed the development of the nonlegal controls that are so critical to the functioning of developed markets. See David Charny, Nonlegal Sanctions in Commercial Relationships, 104 Harv. L. Rev. 375, 408-25 (1990) (describing the prerequisites for reputational enforcement).

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