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

transfer their shares to a long-term trust, voted by the managers, from which shares cannot be withdrawn.79 In developed countries, there are often statutory time limits (ten years, say) on voting trusts and similar arrangements that separate the economic interest in stock from voting power. We considered these limits inadequate for Russia -- both because there is currently no trust law to impose fiduciary duties on managers who establish employee trusts, and because most employees cannot make an informed choice about joining a trust. They are told, and they believe, that they must put their shares into a trust to be managed on behalf of the "labor collective."

For Russia, we did not propose a ban on employee trusts and similar devices for pooling employee shares because this would have foreclosed the possibility of a labor union-controlled trust that might serve as a counterweight to management. Instead, we proposed several less extreme rules. First, managers should not be allowed to control any employee trust. Second, the maximum duration of any such trust should be short (we proposed two years) in order to give employees frequent opportunities to opt out of participation. Third, employees should have the right at any time to sell shares that have been placed in an employee trust. Finally, company managers should not ask an employee how she has voted or whether she has sold or plans to sell her shares, nor retaliate against an employee because of a voting or sale decision.80

These rules are not easy to enforce, but some managers will honor them voluntarily if the law labels efforts to control employee votes as improper. Moreover, once the principle that employees should vote their own shares is established, the press can expose violations. This can help even weak labor unions protect their members against overt retaliation.

The value of shareholder voting as a check on management discretion depends on the shareholders having good information on which to base their voting decisions. Yet many emerging markets are also characterized by limited financial and other corporate disclosure. We have only partial answers to the problem of poor disclosure. Requiring mandatory disclosure to shareholders, including audited financial statements, can help, but only so far. In Russia, many companies will hide their true accounts from their auditors -- and shareholders will not protest too loudly, because profits hidden from the auditor are also hidden from the tax collector and the mafia. Cumulative voting also helps, by improving large outside shareholders' access to information. If a large outside shareholder can be trusted not to self-deal (in Russia, this is sometimes the case and sometimes not), then a proposal that has been approved by the

79 See Blasi & Shleifer, supra note 16, at 101.

80 These employee protection provisions were dropped from our proposed statute early in the Russian legislative process. Our best interpretation of the political dynamics is that company managers opposed the provisions (for obvious reasons), employees were silent (of course), large investors cared more about other provisions of the law that affected them more directly, and Communists (who we hoped would support these "pro-worker" provisions) either did not understand why these fairly technical provisions were important or else were more pro-manager than pro-employee (a not unlikely explanation based on the Communists' votes on other issues).

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director(s) who represent the large outside shareholder carries a badge of quality, on which smaller shareholders can rely. And shareholders can always vote against a management proposal if they distrust the information that management has provided.

IV. Structural Constraints on Particular Corporate Actions

In any corporate law, the basic governance structure and voting rules discussed in Part III are the sole legal backdrop only for routine business transactions. Very large, suspect, or potentially transformative transactions are also subject to specialized regulation designed to protect outside shareholders from correspondingly high risks of abuse.

The self-enforcement approach regulates these transactions through structural constraints rather than prohibitions. The constraints cover four categories of transactions: mergers and similar major transactions, self-interested transactions, control transactions, and issuances and repurchases of shares. For all categories except control transactions, we require approval (often by supermajority vote) by both the board and shareholders. For all categories except self-interested transactions and share repurchases, we also give transactional rights to shareholders who do not support the corporate action.

A. Mergers and Other Major Transactions

Mergers, large sales and acquisitions of assets (whether directly or indirectly through a subsidiary), reorganizations, and liquidations are essential tools for restructuring companies. However, they can also radically alter the nature of a shareholder's investment, and they have historically been a common means by which insiders can loot a company's assets. To respond to this danger, even enabling laws commonly require shareholder approval for selected transformative actions.81 Enabling statutes also often provide a transactional mechanism for shareholder protection: appraisal rights that let shareholders demand payment of the fair value of their shares, as determined by a court, instead of accepting the consequences of a transformative corporate action.82

The list of transactions that require shareholder approval and appraisal rights in developed countries, and the size of the required shareholder vote, should form a floor for the corporate law of an emerging economy. For a self-enforcing statute, the key decisions are: (i) when to require a higher shareholder vote than majority approval; (ii) what additional transactions should require shareholder approval; and (iii) when shareholders should have

81 All of the emerging market jurisdictions in our survey require shareholder approval for mergers, recapitalizations, and dissolutions. See infra Appendix. In most cases, the voting rules specify supermajority quorum and approval thresholds. These approval requirements, however, do not usually extend to major sales or purchases of assets.

82 Eleven of the 17 emerging market jurisdictions in our survey provide some form of appraisal rights for shareholders who dissent from mergers. See infra Appendix.

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appraisal rights (and what kind of rights) if the company completes a transaction that they oppose.

1. Shareholder Approval. -- The appropriate shareholder approval threshold depends on the ownership structure of public companies. The typical ownership structure of privatized Russian enterprises (described in Part I) leads us to propose approval of major transactions by two-thirds of the outstanding shares. This threshold is high enough so that managers and employees cannot routinely complete major transactions without support from outside shareholders, yet not so high that companies will often be unable to complete beneficial transactions because the necessary shareholder vote cannot be obtained, nor so high that it gives undue holdup power to outside blockholders (or to employees).83

Deciding which transactions should require a shareholder vote requires lawmakers to balance flexibility against protection of minority shareholders. A shareholder vote to approve a transaction is costly in both time and money -- managers must either call a special shareholder meeting or wait until the next regular meeting to ask for shareholder approval. This will increase the cost of completing beneficial transactions and will deter some transactions entirely. Thus, a shareholder vote should be required only for transactions that transform the nature of the company or involve a substantial risk of abuse. For Russia, the transactions that we believed should require a shareholder vote were:

(i)a merger or other business combination between the company and one or more other companies;

(ii)a liquidation of the company;

(iii)a transformation of the company into another type of legal entity, such as a partnership; and

(iv)a sale or purchase of assets, directly or through subsidiaries, for a price equal to 50% or more of the book value of the company's assets.84

83 For Russia, we proposed an exception for investment funds, which (i) typically have a huge number of tiny shareholders, and (ii) lack the substantial employee ownership that characterizes privatized firms. The first factor makes a two-thirds vote of outstanding shares harder to achieve; the second makes it less important as a protection against management overreaching. For investment funds, we judged that a simple majority of outstanding shares should suffice.

84 There should be a "normal course of business" exception to handle the special case of a trading company that regularly makes large purchases and sales of goods on a thin equity base. In addition, the definition of asset "sales" should exclude a pledge of assets to secure a loan. Such a pledge, followed by intentional default on the loan, can be used as an indirect way to sell assets without a shareholder vote. But most pledges are likely to be legitimate, and often a default under one loan agreement will trigger adverse consequences under other loan agreements due to cross-default provisions. We believe that the flexibility lost by treating a pledge of security for a loan in the same manner as a sale exceeds the gain in additional protection of shareholders against sales

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The first three items on this list need little comment. The requirement of a shareholder vote for mergers, liquidations, and changes of legal form is standard in most company laws. Only the fourth requirement, dealing with sales and purchases of assets, is stricter than the corporate laws of developed countries.85 The rationale for requiring shareholder approval is that self-dealing transactions of this size can destroy a company's value with the stroke of a pen. Disclosed self-dealing transactions are subject to separate voting rules, described below. But self-dealing transactions won't always be disclosed, and the incentive for concealment rises with the size and abusiveness of the transaction. A voting requirement for large asset sales and purchases provides a back-up constraint on hidden self-dealing transactions. When so much of a company is at stake, multiple protections are desirable.

We also propose a shareholder vote on smaller purchases or sales of assets, involving 25-50% of a company's book value, that are not unanimously approved by all directors, including outside directors selected through cumulative voting. In effect, we create a hierarchy of asset sales and purchases, with larger transactions calling for stricter approval requirements:

(i)purchases and sales of less than 25% of the book value of a company's assets are governed by a company's usual internal decisionmaking processes;

(ii)purchases and sales of 25-50% of the book value of a company's assets require unanimous board approval or, if unanimous board approval is not achieved, shareholder approval;

(iii)purchases and sales of 50% or more of the book value of a company's assets require shareholder approval.86

In Russia, book value will understate market value because of inflation and managers' incentives to hide profits (and to a lesser extent, assets) from the tax collector. This understatement makes the 25% and 50% book value thresholds stricter than they appear to be

for less than fair value.

85For example, American corporate law imposes no restrictions on the purchase of assets and requires a shareholder vote only for the sale of "substantially all" assets. See, e.g., Del. Code Ann. tit. 8, § 271 (1991). A sale of more than 75% of assets, based on balance sheet value, generally requires a shareholder vote under this provision, while sales of between 26% and 75% of assets, based on balance sheet value, may trigger a vote. See Leo Herzel, Timothy C. Sherck & Dale E. Colling, Sales and Acquisitions of Divisions, 5 Corp. L. Rev. 3, 25 (1982).

86To enhance enforceability, we use book rather than market values to trigger the shareholder approval requirements. A market value test is not administrable in a country like Russia, which has neither an efficient stock market nor reliable professional appraisers. On the administrative difficulties with a market value threshold for shareholder voting on a sale of assets, even in a developed economy, see Gilson & Black, cited above in note 53, at 653-65.

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on the surface, as well as less accurate measures of transaction importance. But we still much prefer book value to market value as a measure of transaction importance.87

2. Appraisal Rights. -- Even enabling corporate laws typically give to shareholders who vote against a major transaction requiring shareholder approval the right to collect the fair market value of their shares, as determined by a court. This "appraisal" remedy is far from perfect. On the one hand, appraisal has been criticized as a possible drain on a company's liquidity that may deter value-enhancing transactions.88 On the other hand, the appraisal remedy has limited power as a check on managers' breaches of fiduciary duty, because only large minority shareholders are likely to incur the legal expense required to exercise appraisal rights.89

The appraisal remedy will surely work even worse in emerging markets than it does in developed markets. Yet there is no obvious alternative. Policing fairness through judicial or regulatory approval of major transactions is neither practicable nor desirable. Hence, one can only try to ameliorate the worst problems associated with appraisal rights. For example, in developed economies, a shareholder must actively oppose a transaction to qualify for appraisal rights. In an emerging market, this condition weakens an already weak right. Given poor mail systems, shareholders may not learn of a transaction in time to vote against it, or may find that their votes did not reach the company in time or were conveniently lost. Therefore, we propose that shareholders who do not vote for a major transaction should be able, promptly after the transaction is completed, to obtain payment of the fair value of their shares, measured just before the transaction took place and excluding any effect of the transaction on the value of the shares.

Typically, too, a shareholder seeking appraisal must go to court (an expensive process), without knowing in advance what the appraised value will be. This problem is especially severe in an illiquid market because published market prices, which provide an effective floor on the

87Our proposed 25% and 50% thresholds reflect, albeit crudely, the likely understatement of asset values due to inflation. An alternate approach would be to use lower thresholds but to allow the board of directors to adjust book values for inflation. For Russia, we did not propose this approach -- either here or in the other places where we used a book value threshold to trigger procedural protections -- because there is no reliable inflation index and because an inflation adjustment would have made the statute more complex. But we view the question of whether the law should allow inflation adjustments as a close one. If managers were already accustomed to using inflation adjustments for other purposes (such as computing income tax or paying interest on bank loans), then the complexity cost of allowing inflation adjustments for purposes of the book value thresholds contained in the company law would be smaller and would be outweighed by the accuracy gains from inflation adjustments. The accuracy gains from an inflation adjustment would also outweigh complexity cost for a country that was experiencing hyperinflation -- which Russia, in 1995, was not.

88See, e.g., Bayless Manning, The Shareholder's Appraisal Remedy: An Essay for Frank Coker, 72 Yale L.J. 223, 234-36 (1962).

89 See, e.g., Victor Brudney & Marvin Chirelstein, Fair Shares in Mergers and Take-Overs, 88 Harv. L. Rev. 297, 304-07 (1974).

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appraisal price in developed economies, are often unavailable or far below true value. The selfenforcing model responds to these problems by requiring the company to announce an offer price for shares in the materials sent to shareholders to solicit approval for the underlying transaction, and to pay that price promptly on shareholder demand. The need to announce publicly management's estimate of the firm's value makes it more likely that the offer price will be plausibly related to true value. And easy access to an (often) reasonable price opens up the appraisal remedy to small shareholders, for whom the cost of a formal appraisal proceeding is prohibitive. We address the separate problem of ill-informed or corrupt judges by giving shareholders a choice: they can seek appraisal either in court or through arbitration.90

Company law must also be alert to potential misuse of the appraisal remedy. For example, minority shareholders might sabotage a beneficial transaction by demanding that the company buy back their shares at a time when it is strapped for cash. Moreover, shareholders will be tempted not to vote for a transaction because the right to sell one's shares back to the company is a valuable put option that can be exercised if the company's shares decline in value after the transaction, even if the decline is unrelated to the transaction itself. To balance the need for shareholder protection against the risk of misuse of the appraisal remedy, we give shareholders only a short period after a transaction is completed to demand that the company buy back their shares. For Russia, we proposed thirty days -- a period dictated by the slowness of the mail system.91

3. Determining Market Value. -- A problem that arises with special force in emerging markets is how to determine the fair market value of a company's shares and other property. Determining fair market value is important not only for appraisal, but also for other procedural protections discussed below, including those accompanying share issuances, self-interested transactions, and repurchases by the company of its own shares.

Even developed countries have trouble defining market value. In an emerging market, a simple statement that shareholders should be paid the market value of their shares in an appraisal proceeding, or that a company should not issue shares for less than market value, may

90 Because the arbitration proceeding is not based on explicit contract, a mechanism is needed to identify neutral and reasonably skilled arbitrators. For Russia, we assigned to the Securities Commission the task of identifying suitable arbitration fora. A shareholder could elect any forum on the Securities Commission's list or a forum (if any) specified in the company charter.

91 A put option is inherent in any system of appraisal rights. This creates a collective-action problem -- a shareholder who seeks appraisal rights for a merger can, at modest cost, obtain a significant time window in which to decide whether to pursue the appraisal rights or to abandon them and receive the merger consideration. A shareholder then has an incentive to oppose a beneficial transaction, as long as her opposition is unlikely to affect the voting outcome. If mails and vote-counting procedures are reliable, it is appropriate to limit this free option by requiring that a shareholder vote against the merger, not simply (as in our proposal) that she fail to vote, and by imposing tight time limits for exercising the appraisal right (which reduce the option's value). The option value problem must also inform one's judgment about which corporate actions should give rise to appraisal rights.

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fail of its intended effect without further definition of this intrinsically difficult concept. We adopt the following definition, which is still vague but better than nothing:

The market value of property shall mean a price at which a seller who is fully informed about the value of the property and is not obliged to sell the property would be willing to sell, and at which a buyer who is fully informed about the value of the property and is not obliged to buy the property would be willing to buy.

If the property to be valued is a publicly traded security, the person making the valuation shall consider the market price of the security over a period of time of at least two weeks prior to the date as of which market value is measured. If the property to be valued is a company's own common stock, the "value" of a share shall be understood as a pro rata claim on the value of the entire company, as presently organized and managed. In determining this value, the person making the valuation may consider the shareholder capital of the company, the price that a fully-informed buyer would be willing to pay for all of the company's common shares, and other factors that he considers important.

This definition can guide those, especially directors, whom the law charges with determining the market value of shares or deciding whether a transaction is at market value. Of course, in an illiquid market, market value is not a single point, but a sometimes wide range. If the directors act in good faith and reach a reasonable valuation, the self-enforcing model instructs courts not to second-guess that valuation.

B. Self-Interested Transactions

Transactions by a company that personally benefit directors, managers, or large shareholders (all of whom we call insiders, recognizing that the description may not be accurate for large shareholders92) are inherently suspect because the insider has both the incentive and the ability to cause the company to enter into the transaction on unfair terms. Yet sometimes these transactions are advantageous to the company. Outright prohibition, in our judgment, is justified only when experience discloses both little business justification for a transaction type and a particularly high risk of abuse.93 We identify two such cases: loans by the company to

92 Our threshold for treating a large shareholder as an insider is ownership of 20% of the outstanding shares.

93 Prohibition has the apparent virtues of simplicity and clarity. For example, one might prohibit all transactions between public companies and their directors and managers (except purchases and sales of the company's shares at market value), while employing procedural protections for self-dealing involving large shareholders (to permit parent-subsidiary and corporate group structures). For Russia, we rejected this approach for several reasons. One was political: Russian managers would probably have succeeded in introducing

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insiders,94 and payments (kickbacks) by another person to an insider in connection with a transaction between the company and the other person. For other self-interested transactions, the self-enforcement model relies on a rigorous set of procedural protections, which apply in addition to any other board or shareholder approval requirements for particular transactions, such as mergers.95

The principal procedural protections are (i) approval by noninterested directors (directors who don't have a financial interest in the transaction); and (ii) for sizeable transactions (our threshold for Russia was 2% of the book value of the company's assets or 2% of annual revenues), approval by noninterested shareholders.96 Even noninterested directors will often not act independently. Nevertheless, directors who are elected by minority shareholders through cumulative voting are likely to be genuinely independent. Thus, the cumulative voting rules interact importantly with the rules on self-interested transactions. The size threshold balances the risk that the cost and delay of a shareholder vote will block good transactions against the need to block large bad transactions. Noninterested directors can cheaply review all self-interested transactions; only large transactions should require the costly additional step of shareholder approval.97

loopholes in the legislative process, if not killing the ban entirely. Second, we judged that managers intent on self-dealing are less likely to evade the law -- and more likely to consider shareholder interests -- when they can self-deal legally with shareholder or board authorization. But the most important reason was efficiency-related. Many managerial conflicts of interest are likely to involve indirect transactions between the company and other firms with which the company's managers or directors are affiliated as shareholders, directors, or managers. A ban on all indirect conflicts would reach structures that might be efficiency-enhancing (such as interlocking directors), while selective bans on indirect conflicts would generate severe line-drawing problems and sacrifice the simplicity and clarity of a general norm.

94 Cf. Code des sociétés [Companies Law] art. 106, translation available in French Law on Commercial Companies 65 (Commerce Clearing House, Inc. 1988) (prohibiting loans or guarantees provided by a company to its directors or general managers).

95 Only 2 of the 17 jurisdictions in our survey retained some form of outright prohibition on contracts between the company and its directors or officers. Five statutes required shareholder approval of some selfdealing transactions, while most of the remaining statutes required approval by noninterested directors. See infra Appendix.

96 Our self-interested transaction rules are similar to French company law, which (in broad outline) requires that a self-interested transaction between a company and one or more of its directors or general managers be approved by the noninterested members of the board of directors, reviewed by the company's auditors, who prepare a report to the shareholders, and then approved by the noninterested shareholders. French law does not reach transactions with large shareholders. See Code des sociétés [Companies Law] arts. 101-03, translation available in French Law on Commercial Companies, supra note 114, at 64; André Tunc, A French Lawyer Looks at American Corporation Law and Securities Regulation, 130 U. Pa. L. Rev. 757, 766 (1982).

97 For very large companies, it can be feasible to require approval by noninterested independent directors. For Russia, we proposed such a requirement for companies with 10,000 or more shareholders.

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The self-enforcement model instructs the noninterested directors to approve a selfinterested transaction only if they conclude that the company will receive value, in property or services, at least equal to the market value of the property or services the company gives up. This required finding informs the directors as to how to exercise their review power, gives directors who want to reject a transaction a basis for doing so, and provides a norm around which actual review practices may gradually coalesce. This standard may also provide a basis for a court challenge to especially egregious transactions, where the required finding was manifestly not made in good faith.

Sometimes, of course, insiders will hide their interest in a transaction. But in some transactions, the insiders' interests cannot be concealed; in others the insiders will obtain an honest vote to protect the transaction against later attack in the courts; and managers who think of themselves as honest will voluntarily follow the rules. When self-interested transactions are disclosed, shareholders or noninterested directors can vote down some of the worst transactions, while the "sunshine" requirement that transactions be disclosed to shareholders will deter others.

C. Control Transactions

In a control transaction, a new shareholder or group of shareholders purchases or aggregates a controlling block of stock in the company. This acquisition of control can assume a wide variety of forms, including open market purchases and tender offers, and large share issues by companies in the course of financings or mergers. Whatever form it takes, an acquisition of control merits regulation in its own right -- even though many control transactions will also be regulated by rules governing particular transactional forms, such as reorganizations, major transactions, or self-interested transactions. Control transactions uniquely implicate both the efficiency goals of corporate law and its core problems, ranging from minority abuse to management entrenchment.

The treatment of control transactions varies widely in both developed countries and emerging market jurisdictions. Friendly transactions are regulated in the most important United States jurisdictions only if they take the form of a merger or sale of substantially all assets, whereas hostile takeovers are regulated principally with a view toward discouraging them. Elsewhere, including (as we discuss below) in Great Britain, both friendly and hostile control transactions are often regulated regardless of their form.98 Beneath this divergent treatment lies a familiar policy dilemma. On one hand, control transactions are often engines for efficient restructuring. An investor often buys a control block because he expects to improve the company's efficiency in ways that will benefit all shareholders. Moreover, an outside investor's ability to acquire a controlling block of a company's stock without the managers' consent is an

98 Four of the 17 emerging markets in our survey give minority shareholders put rights in the event of a transfer of control. As this is the basic English rule (described below), it is not surprising that three of these four jurisdictions are Commonwealth countries (Malaysia, Singapore, and Nigeria). See infra Appendix.

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important constraint on bad management. Thus, there are powerful efficiency reasons not to overregulate control transactions, whether friendly or hostile. On the other hand, a new controlling shareholder may loot the company or use control to manipulate share prices and acquire minority shares at a price far below their true value.99

The risk of looting is far higher in emerging than in developed markets. For example, there is little harm or gain to minority shareholders in the United States, on average, when a control transaction takes place. Apparently, the efficiency gains from good transactions roughly balance the losses from self-dealing.100 In contrast, in the Czech Republic, share prices in many companies collapse after a change of control, indicating severe harm to outside shareholders.101 Thus, emerging markets require regulation focused on reducing the risk of looting.

The self-enforcing model protects minority shareholders by giving them takeout rights after a change of control (we use 30% ownership as a proxy for control). Under this approach, which we adapt from the British City Code on Takeovers and Mergers and the proposed European Community 13th Directive on Company Law,102 a shareholder who acquires a 30% interest in a company must offer to buy all remaining shares at the highest price he paid for any of the company's shares within a specified period of time (we propose six months). This put option is a powerful deterrent to inefficient control transactions, for which we are willing to accept the cost of deterring some efficient control transactions.103

99 For development of these points, see Lucian Bebchuk, Efficient and Inefficient Sales of Corporate Control, 109 Q.J. Econ. 957, 964-84 (1994), and Marcel Kahan, Sales of Corporate Control, 9 J.L. Econ. & Org. 368, 377-78 (1993).

100 See sources cited supra note 19; Robert Comment & Gregg A. Jarrell, Two-Tier and Negotiated Tender Offers: The Imprisonment of the Free-Riding Shareholder, 19 J. Fin. Econ. 283, 300 (1987) (reporting that, in a study of 27 partial tender offers, the price of nonpurchased shares increased, on average, by 15%).

101 Interview with Dusan Triska, Project Director of the RM-S Securities Exchange of the Czech Republic, in New York, N.Y. (Nov. 18, 1995).

102 See City Code on Takeovers and Mergers, supra note 9; Commission Proposal for a Thirteenth Directive on Company Law Concerning Takeover and Other General Bids, 1990 O.J. (C 38) 41, 44. An alternative rule for protecting minority investors, first proposed by William Andrews, would require purchasers of control to offer to purchase shares pro rata from all shareholders. See William Andrews, The Stockholder's Right to Equal Opportunity in the Sale of Shares, 78 Harv. L. Rev. 505, 506 (1965). Unlike the City Code rule, the Andrews rule permits partial tender offers, which reduce the cost of acquiring control. In our view, this advantage is more than offset by the costs and likely inequities of channelling control transactions through the vehicle of a public tender offer in the undeveloped and largely unregulated Russian market. Because we permit noninterested shareholders to waive their takeout rights by majority vote, they can vote to authorize friendly partial offers for control, pro rata or otherwise.

103 If a controlling shareholder already extracts large private returns from a company, a more efficient wouldbe acquirer may not be able to afford the controller's demand for a premium price for its shares if the acquirer must pay the same price to minority shareholders. Moreover, in an underdeveloped capital market, an acquirer

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