3.1.1.3 The decision-making structure of the board

Jurisdictional differences in the decision-making characteristics of the board are potentially more significant than differences in removal powers. There is a growing consensus among commentators that good corporate governance depends on numerous 'best practices.' Chief among these are the size of the board (small boards are better23), the committee structure of the board (independent audit, compensation, and nominating committees are good), the frequency of board meetings (more meetings are better), and the ratio of insiders to independent directors (a majority of independent directors is good).

Since the U.S. is the birthplace of corporate governance reform, it is not surprising that the modal U.S. public company now follows many of these governance standards. U.S. boards tend to be small by international standards (although this is not legally mandated). They also tend to have well-developed committee structures. In contrast to the law of many jurisdictions, the U.S. (and UK) permit the full delegation of board powers to committees of the board.24 In addition, listing rules and legal pressure strongly encourage a standard set of committees. In the 1970s, the New York Stock Exchange (NYSE) first required listed companies to appoint audit committees staffed by independent directors. In the wake of the recent Enron cohort of financial scandals, the major U.S.

21 S 84 Aktiengesetz.

22 On the contrast between strong UK and weak U.S. removal rights, see Paul Davies, Shareholder

Value, Company Law and Securities Market Law: A British View, in Klaus J. Hopt and Eddy

Wymeersch (eds.), CAPITAL MARKETS AND COMPANY LAW 261 (2003).

73 See Martin Lipton and Jay W. Lorsch, A Modest Proposal for Improved Corporate Governance, 48 THE BUSINESS LAWYER 59, 64-5 (1992) (optimal boards should not exceed 10 members).

24 5 '41(c)(2) Delaware General Corporation Law; 58.25 Revised Model Business Corporation Act, On the UK, see Davies, supra note 14, 320-1 and footnote 78. UK boards may delegate their powers if, as is usual, the company's articles permit them to do so.

exchanges have proposed requiring an absolute majority of independent directors on the boards of listed companies as well as establishing board compensation and nomination committees composed entirely of (NYSE), or, by a majority of (Nasdaq25), independent directors. In response to the same wave of scandals, the Securities and Exchange Commission (SEC) has promulgated rules requiring all public companies to disclose whether they have a 'financial expert' who is independent from management serving on their audit committee (and if not, to explain why not).26 It should be noted here, however, that most U.S. companies have had a majority of nominally independent directors since the 1970s without any legal requirement to this effect—and also with little hard evidence that these directors have improved corporate performance.27

The corporate boards of other major jurisdictions are less regulated. The boards of British public firms tend to be small, like their U.S. counterparts, and their articles now frequently require audit and compensation committees staffed by non-executive directors, in keeping with emergent norms of good governance. But British firms nonetheless typically have fewer non-executive directors than American companies, notwithstanding the 1992 recommendations of the influential Cadbury Report.28 French companies, by contrast, are required by law to limit executive directors to one-third of the board.29 The independence of the French board is qualified, however, by the powerful statutory role of the French president directeur-ghteral (PDG), a combined chairman of the board and chief executive officer, who typically dominates other directors and may even have the informal power to select them with the aid of controlling shareholders.30

German and Japanese boards are even further removed from the contemporary model of the U.S. board. Large corporations in both jurisdictions tend to have unwieldy boards, albeit not for the same reasons. German law mandates that the supervisory boards of all companies with more than 20,000 employees

23 Nasdaq stands for National Association of Securities Dealers Automated Quotation System. 16 See SEC Release N"33-8177 (2002), implementing $$406, 407 of the Sarbanes-Oxley Act.

27 See, e.g., Benjamin E. Hermalin and Michael S. Weisbach, The Effects of Board Composition

and Direct Incentives on Firm Performance, 20 JOURNAL OF FINANCIAL MANAGEMENT 101 (1991);

Sanjai Bhagat and Bernard Black, The Uncertain Relationship Between Board Composition and Firm

Performance, 54 BUSINESS LAWYER 921 (1999).

28 Davies, supra note 14, 319, 324. The Cadbury Report recommendations have been integrated

into the Combined Code adopted by the London Stock Exchange.

25 Art. L, 225-22 Code de commerce. See also Art, 225-17 (the board cannot number more than 18 members).

30 Eddy Wymeersch, A Status Report on Corporate Governance Rides and Practices m Some Continental European States, in Klaus J. Hopt et al. (eds.), COMPARATIVE CORPORATE GOVERNANCE: THE STATE OF THE ART AND EMERGING RESEARCH 1045, 1113-14 (1998). The Lot relative aux Nouvelles Regulations Economiques (NRE) of 15 May 2001, allows French open companies, if they so choose, to separate the offices of president and directeur general in order to align themselves with the international 'good governance' prescription of separating the CEO role from that of the chairmanship of the board. Art. L. 225-51-1 Code de commerce. Even when—and if—French companies choose to divide these offices, however, the directeur general is expected to continue to dominate French boards. See Pierre Henri Conac, The Separation of the Offices of Chairman of the Board and Chief Executive Officer of the Societe's Anonymes by the NRE (Working Paper 2001).

must have at least 20 directors.31 Japanese convention—not law—has led to equally large boards, averaging 25 directors in one study and 19 directors in another but occasionally growing to as many as 54 directors (though this is rapidly changing).32 In both cases large boards serve important organizational functions: accommodating employee directors in German companies and rewarding senior executives for a lifetime of service in Japan. Accordingly, the members of the German supervisory board are all non-executive directors, as we have previously noted, while the Japanese directors are predominately upper-level corporate insiders. But in either case, it is doubtful that the full German or Japanese board of a large company can be a searching monitor or a nimble decision maker.33

This does not mean, of course, that Japanese and German companies lack an effective governing organ; it merely means that this organ is not what we have previously identified as the board. Arguably, real governance in most German companies occurs largely on the level of the management board.34 The supervisory board might be better analogized to an amalgam of the audit, compensation, and nominating committees on a U.S. board, with the additional functions of disclosing management policy to labor and arbitrating potential labor disputes. The parallels among the German, Japanese, and other board systems becomes still more suggestive when one considers that Japanese law requires shareholders to elect a committee of 'statutory auditors,' at least half of whom must be corporate outsiders, to oversee management in close collaboration with the company's outside accounting auditors.35

31 These large minimum board sizes are required by Germany's codetermination laws. The general

corporation statute itself requires only that an Aktiengesellschaft (AG) must have a minimum of three

and a maximum of 21 members. §95 Aktiengesetz. Recent efforts to reduce the mandatory board size

for large firms have been thwarted by the opposition of organized labor.

32 Hideki Kanda, Comparative Corporate Governance Country Report: Japan, m Hopt et al,

supra note 30, 921, 924 (average of 25 directors); Yoshiro Miwa and J. Mark Ramseyer, Who

Appoints Them, What Do they Do? Evidence on Outside Directors from Japan (working Paper

2003, available at law.upenn.edu) (Tokyo Stock Exchange companies averaged 19 directors in 1985,

with a range up to 54). Note, however, that since 1997, when Sony, the prominent Japanese electronics

company, reduced its board size from 35 to 12, numerous other Japanese companies have followed

suit, ostensibly in order to enhance efficiency by separating the formulation of policy from its

implementation.

33 See David Yermack, Higher Market Valuation of Companies with a Small Board of Directors, 40

JOURNAL OF FINANCIAL ECONOMICS 185 (1996).

M Thus, German law provides that it is the responsibility of the management board, and the management board alone, to manage the AG. §76 I Aktiengesetz. The supervisory board can veto some transactions bur—in contrast to a U.S., UK, or French board—cannot instruct the management board to take any action with a minor exception necessary to implement the Co-determination Act. Martin Peltzer and Anthony G. Hickinbotham (eds. and translators), GERMAN STOCK CORPORATION ACT AND CO-DETERMINATION ACT 10 (1999).

35 Japanese statutory auditors {kansayaku) are elected at the general shareholders meeting and play a role that is broader than that of an audit committee on a U.S. board (although Japanese kansayaku are elected to be auditors, not directors). Japanese statutory auditors conduct both a financial audit of the books and a 'compliance audit' of whether the company is complying with applicable laws and directors are complying with the company's charter and its own fiduciary duties. The auditors' report, which contains the results of both audits, must accompany notice of the annual shareholders meeting

In sum, all of our major jurisdictions have a formal or informal managing board. Even when this managing board is not the legally-established board, moreover, the legal board could assume a management role and operate the company in the interests of its shareholders equally well in every jurisdiction-excepting, as always, the case of Germany. Thus, the typical Japanese board is evidently a clumsy instrument for policing the agency relationship between shareholders and managers, because of both its size and its composition of loyal senior executives, but this result is not mandated by law. Japanese boards could be much smaller and composed of independent directors or shareholder representatives without any change in the law, and in fact this is happening. The PDG dominates the boards of French companies partly as a result of French corporate law, but the shareholder majority nevertheless holds the PDG at the end of a short leash by virtue of the majority's removal powers.36 Although the U.S. and UK board structures are more open to management by shareholder representatives than the other structures, shareholder passivity can easily shift control of U.S. boards to strong-willed CEOs. Only in Germany are limitations on effective shareholder representation on corporate boards at least partly attributable to law—or, more particularly, to the laws that mandate labor representation and a strict separation of powers between supervisory and management boards.

3.1.1.4 Facilitating collective action

A final dimension of the extent of shareholder influence over corporate appointments concerns the ability of the shareholder majority to surmount its own collective action problem. Whenever corporate ownership is splintered among numerous shareholders, the law can enhance or diminish shareholder influence by facilitating or deflecting collective action by the shareholder majority. A review of voting procedures among the major corporate law jurisdictions suggests that no regime has attempted to minimize the costs of participation in corporate governance by disaggregated shareholders. Nevertheless, there are clear differences among jurisdictions in how their procedures are likely to affect collective action by small and middle-sized shareholders.

and be sent to shareholders two weeks prior to the meeting. An alternative to the institution of statutory auditors was recently introduced by the 2002 amendments to the Special Audit Act, which allows Japanese companies to choose between the traditional auditor structure and a board committee structure similar to that of many U.S. companies. More particularly, 'large companies' may choose to replace traditional statutory auditors with a structure of three new board committees—the audit committee, the compensation committee, and the nominating committee—providing that each of these three committees is comprised of a majority of independent directors. A number of companies, including Sony, Toshiba, and Hitachi have already announced their adoption of the new structure.

36 In cases in which the offices of chairman and CEO of French companies are divided, see supra note 30, only the board will be able to remove the CEO and—mote significantly—removal will be possible only for cause, as with the management board in Germany. Art. L. 225-55 Code de commerce; §84 Aktiengesetz.

Voting mechanisms are the most conspicuous example. Every major corporate jurisdiction provides a mechanism for allowing small shareholders to vote at shareholders meetings without the need to be present at the meetings. There are three principal mechanisms: mail voting,37 proxy sohcitation by corporate partisans, and proxy voting through depository institutions. Large Japanese firms with 1,000 or more shareholders must provide a form of 'mail voting* in which shareholders receive a ballot from the company that can be returned by mail in lieu of giving a proxy or attending the shareholders meeting.38 Likewise French law provides for mail voting for small and medium-sized shareholders who leave their shares on deposit with a bank or broker, although this procedure is said to be complex and seldom used.39 A more radical alternative to mail voting is a universal ballot that presents all competing candidates for the board at company expense as in the new Russian statute, for example.

In the U.S., UK, and many other jurisdictions, proxies are solicited by corporate partisans themselves: by management alone in the case of an uncontested vote, and by both management and its opponents in the case of a contested vote. This form of proxy solicitation is relatively unregulated in most of these jurisdictions. In the U.S., however, heavy regulation of proxy solicitation has been a major obstacle to shareholder action. A 1992 reform of the proxy system40 relaxed many of the regulatory barriers to shareholder communication, such as filing and disclosure requirements. Nevertheless, significant barriers remain, including a registration requirement for any 5% 'group' of shareholders whose members agree to coordinate their votes.''1 In addition, waging a full-scale proxy contest requires a multi-million dollar investment to satisfy the SEC's disclosure requirements, obtain the target's shareholder list, hire proxy solicitors and public relations experts, and defend against hostile litigation.

The regulatory burden on shareholder action in the U.S. law should not be exaggerated, however. U.S. securities law can also favor shareholder insurgency. For example, the SEC's proxy rules can force incumbent managers to make sweeping and often embarrassing disclosures, guarantee that insurgent solicitation materials will reach the company shareholders, and in some cases permit

37 Japanese and French law provides for mail voting. Art. 21-3 Special Audit Act (Japan) (manda-

tory) and Art. 239-2 Commercial Code (Japan) (optional); Art. L. 225-107 Code de commerce

(France) (right to vote by correspondence). Note that both jurisdictions also provide for proxy voting.

38 This is optional for smaller companies, whereas voting with electronic means is optional for all

companies.

19 Maurice Cozian, Alain Viandier and Florence Deboissy, DROIT DES SOCIETES N*847 (15th ed. 2002) (pointing out that, following the adoption of the NRE, companies may amend their articles and allow for videoconferencing and distance voting). Note too that French law requires management to send out forms for mail voting only if it must request proxies, which it has no reason to do if it is supported by a shareholder large enough to meet the quorum requirements of a shareholder meeting single-handedly (which may be done with no shares on a second call for an ordinary shareholder meeting, and only 25% of the shares outstanding for a second call on a special shareholder meeting: Art. L. 225-98 and 225-96 Code de commerce).

40 Regulation of Communication Among Shareholders, SEC Release N"34-31326 (1992)

41 SEC Rule 13d-5.

shareholders to piggyback proposals opposed by management at negligible cost on management's own proxy solicitation. In addition, there is a developed U.S. case law to protect the integrity of shareholder voting from managerial manipulation. Finally, the U.S. may be the only jurisdiction to permit corporations to compensate successful insurgents ex post for their campaign costs.

The principal alternative to partisan proxy soUcitation is proxy management by financial intermediaries and depositary institutions. In the U.S. and UK, financial institutions—such as pension funds, mutual funds, and unit trusts—hold title to shares and play a large and growing role in corporate governance. For the most part, however, the stakes held by these institutions do not rise to a level where they qualify their holders as corporate insiders. By contrast, the brokerage houses that serve as depositary institutions play little role in corporate governance.

Matters stand differently in Continental Europe, where depository institutions— banks or trusts—often manage the proxies of small and middle-sized shareholders. In Germany, for example, corporate supervisory boards do not solicit proxies, and it is unclear whether they have the power to do so.42 Instead, small investors typically purchase shares through banks, leave their shares on deposit in the same banks, and periodically assign their (revocable) proxies to these banks. The banks are under a statutory duty to inform their depositors how they intend to vote their deposited shares, while the depositing shareholder has the right to direct a different vote.43 Nevertheless, shareholders rarely disapproved their banks' recommendations in the past, with the consequence that the banks—which routinely vote with management—have insulated German companies from hostile takeovers or proxy contests.44 To reduce the proxy role of depository institutions, corporations have recently acquired the power to designate third parties to serve as shareholder representatives.45 It remains to be seen, however, whether this change in the law will empower shareholders or merely shift voting power out of the hands of the middleman and directly into the hands of management's hand-picked representatives.46

The German case is hardly unique, moreover. Financial intermediaries in France channel the proxies of small shareholders into management's hands even more directly. Under French law, signed blank proxies returned to the company are automatically tallied as management votes at shareholder meetings.47 Thus, French companies sometimes contract with banks and other

42 See Karsten Schmidt, GESELLSCHAFTSRECWT 854 (4th ed., 2002). Compare Uwe Huffer, Aktien-

gesetz N°25 $134 (5th ed. 2002).

43 $128 Aktiengesetz.

44 Mark J. Roe, Some Differences m Corporate Structure in Germany, Japan, and the United

States, 102 YALE LAW JOURNAL 1927, 1942 (1993). See also Stefan Prigge, A Survey of German

Corporate Governance, in Hopt et oL, supra note 30, 943.

45 $134 Aktiengesetz.

46 On the conflict of interests attending the designation of shareholder representatives by the

company, see Theodor Baums (ed.), BERICKT DER REGIERUNGSKOMMISSTON CORPORATE GOVERN

ANCE N-121-4 (2001).

41 Art. L. 225-106 Code de commerce.

financial intermediaries to solicit blank proxies from holders of bearer shares on deposit.48

Dutch law goes even further. It permits the use of a depository intermediary to strip shareholders of their vote entirely. This intermediary is a specialized voting trust (administratie Kantoor), authorized by statute and established by the corporation itself, which holds and votes the corporation's stock and issues the beneficial owners of this stock nonvoting trust certificates in its place.49

In addition to the proxy system, many other legal devices bear on protecting the power of the shareholder majority through the appointments strategy. These include limitations on the terms of written proxies,50 statutory provisions granting (or withholding) access to shareholder lists,51 prohibitions on circular voting structures (the voting of shares that are directly or indirectly owned by the company itself),52 and quorum requirements for shareholder action.-53 All are common measures that bear importantly on the possibilities for manipulating the shareholder vote.

3.1.1.5 Reflecting on the appointment rights strategy

With the exception of Germany, the structure, composition, conditions of removal, and decision-making characteristics of the board of directors are broadly similar across public companies in our major jurisdictions. A shareholder majority can remove a director at least as easily in France or Japan as it can in the U.S.,

48 This is uncommon, it appears, principally because quorum requirements are so low that it is

seldom necessary for management to take the extra step of searching for votes.

49 Dutch law allows the holders of these trust certificates a modicum of voice in lieu of a vote. For

example, certificate holders representing 10% capital have the right to demand an 'investigation'

(enquete) into the policy and conduct of management (Book 2, Art. 346 Dutch Civil Code) and to

petition the commercial court to call a special shareholders meeting (Art. 110/2). Van Empel, supra

note 11, 140,142-7. Furthermore, individual holders of certificates that have been issued 'with the

cooperation' of the company have the right to attend and address shareholders meetings (Art. 117/2,

123/4), even if they cannot vote as shareholders.

50 For example, under German law a written proxy can be conferred to banks for a maximum

period of 15 months. $135 IT Aktiengesetz. Under French law a proxy is ordinarily valid for one

shareholder meeting only. Art 132 Decret N"67-236 du 23 mars 1967.

51 Gaining access to lists of beneficial (or bearer) shareholders for purposes of waging a proxy fight

is difficult in most major jurisdictions.

52 Most jurisdictions forbid controlled subsidiaries from voting the shares of their parent com-

panies. The control threshold can be left unspecified as it is in France (Art. L. 233-31 Code de

commerce) or it can be set at a variety of ownership percentages as it is in Japan (Art. 241 Commercial

Code, 25%) and Delaware (5160(c) Delaware General Corporation Law, 50%). German law goes

further by barring controlled subsidiaries from owning the shares of their parents except in special

circumstances (S71d Aktiengesetz).

" Reliance on quorum requirements differs widely among key corporation jurisdictions. The U.S. is a high-quorum jurisdiction. See, e.g., 5216 Delaware General Corporation Law (establishing a 50% default quorum and 33.3% mandatory quorum). Other jurisdictions have lower quorum requirements: in France, the mandatory quorum is 25%, but if this is not reached, there is no quorum requirement for a second meeting (Art. L. 225-98 Code de commerce); in the UK two members are a quorum unless rhe charter specifies otherwise (5 S 370-370A Companies Act); in Japan, the default quorum is half the voting stock, which the charter cannot reduce below 33.3% for ordinary resolutions to elect directors or auditors and for all extraordinary resolutions (Art. 239,256-2, 280, 343 Commercial Code).

and probably more so. By contrast, a shareholder majority might in theory have to wait several years before it could remove the management board in Germany.54

Jurisdictions group differently, in the architecture of their proxy systems. Here, the principal distinction is between the U.S., UK, and Japan on the one side, and France and Germany on the other. In the U.S. and UK, at least, the votes of small and middle-sized shareholders can actually decide proxy contests. On the Continent, however, the proxies of smaller shareholders are typically swept into the coffers of intermediary institutions and ultimately delivered into the hands of the incumbent board. Two factors explain these differences among jurisdictions: the presence or absence of codetermination and the ownership structure of public companies.

Codetermination can account for the most striking deviations from the modal organization form of the board as a single-tier body of shareholder representatives. In the case of the large German firm, codetermination has formalized and extended the pre-existing two-tier structure of the board. The supervisory board has grown larger and more closely regulated, and the autonomy of the management board has increased. Whether intentional or not, these developments are highly functional adaptations to the opposing interests represented on the supervisory board. A small and agile board, split between employees and shareholders and deeply engaged in management, would experience a significant risk of deadlock and great difficulty in preserving company secrets. By contrast, the large and relatively passive supervisory board of German companies today is much less likely to face these problems. By assigning management responsibil-ities exclusively to the management board, the law insulates the company's operations from dissension within the supervisory board and further restricts the need to share information with the supervisory board.

The principal alternative form of codetermination—the Dutch structure regime—insulates the supervisory board rather than management board from conflicts of interest while simultaneously attempting to reflect the interests of both labor and capital in corporate decision-making. The Dutch technique for doing this, of course, is to deny appointment rights to both employees and shareholders (rather than grant rights to both as the Germans do) in favor of a regime of self-appointing boards.55

Unlike codetermination, which is a political choice, the origins of ownership structure are complex. Nevertheless, ownership structure seems to influence the organization of proxy systems almost as much as codetermination shapes the

54 Of course, U.S. shareholders can vote to entrench boards for at least two years by adopting

staggered board and cumulative voting provisions in the charter. See also mfra 7.2.2; Lucian

A. XSebchuk, John Coates IV and Guhan Subramantan, The Powerful Antitakeover force of Staggered

Boards: Theory, Evidence & Policy, 54 STANFORD LAW REVIEW 887 (2002),

55 This device is, technically speaking, not an instance of the appointments strategy at all, but

rather an example of the trusteeship strategy. Nevertheless, its insulating effects bear a distinct kinship

to those of the semi-autonomous management board under the German regime.

organization of corporate boards. Proxy systems matter in the U.S. and the UK, where the modal public company is widely held. Proxy systems matter less in Continental Europe, where controlling shareholders frequently dominate even the largest listed firms.56 Japan stands between these two extremes, with a modal ownership structure that is more dispersed than the typical European company but less so than the typical American company, and a corporate law that is German at its core but heavily influenced by an American prototype.57 There is, of course, an open question of causality in the relationship between law and ownership. It is always possible that a developed proxy system—together with other legal innovations—might have made diffuse ownership more attractive to investors.58 We take no stand on this issue other than to note that future change in ownership structures, particularly in Continental Europe, will provide important insights into the relationship between ownership structure and the law. We return to this theme, as well as the role of ownership codetermination in corporate governance, after reviewing the remaining governance strategies,

3.1.2 The other strategies: Decision rights, trusteeship, incentives, constraints, and affiliation rights

Although the appointments strategy is the dominant mode of protecting the interests of the shareholder class, other strategies also play some role in addressing the management-shareholder agency problem.

3.1.2.1 The decision rights strategy

Direct voting in any company with numerous shareholders involves high process costs and may often result in poor decisions since small shareholders have little incentive to inform themselves. Consequently, corporate law sharply limits the kinds of decisions for which shareholder votes are required or encouraged. As we explain in later chapters, the law ordinarily encourages shareholders to participate directly in substantive decision making only when full delegation to management is clearly inappropriate, as when directors or their equivalents in closed

5S See, e.g., Fabrizio Batca and Maro Beeht (eds.), THE CONTROL OF CORPORATE EUROPE (2002); Rafael La Porta, Florencio Lopez-de-Silancs and Andre Shleifer, Corporate Ownership Around the World, 54 JOURNAL OF FINANCE 471 (1998).

57 See, e.g., Mitsuaki Okabe, CROSS SHAREHOLDINGS IN JAPAN (2002); Mark Ramseyer and

Minora Nakazato, JAPANESE LAW: AN ECONOMIC APPROACH 111 (1999) (Japanese corporate law

modeled on the U.S. 1933 Illinois Business Corporation Act).

58 Some authors have suggested that strong law encourages diffuse ownership. E.g., Rafael La

Porta, Flotencio Lopez-de-Silanes, Andre Shleifer and Robert W. Vishney, Law and Finance, 106

JOURNAL OF POLITICAL ECONOMY 1113 (1998). One might also expect diffuse ownership structure to

stimulate the legal protection of shareholder rights. The growing importance of equity financing in

Continental Europe may provide a natural experiment of sorts on the relationship between law and

share ownership.

corporations are personally interested in a matter (Chapter 5) or a corporate decision fundamentally alters the enterprise (Chapter 6).59

If the law seldom mandates direct shareholder decision making, however, it may nonetheless permit such decision making. Consider open companies first.60 Here the jurisdiction that does the most to restrict direct decision rights is, significantly, the U.S.—a surprising observation given the otherwise permissive and shareholder-friendly character of U.S. corporate law. As we discuss in Chapter 6, U.S. shareholders can ratify fundamental corporate decisions such as mergers and charter amendments but are powerless to initiate them.61 Moreover, routine matters of corporate policy fall within the exclusive province of the board's authority to 'manage' the corporation.62 Indeed, it is unlikely that U.S. courts would permit shareholders to decide substantive corporate issues even under the aegis of a direct statutory grant of decision-making authority, such as the power of shareholders to amend the corporate bylaws.63

By contrast, other jurisdictions grant more authority to the general shareholders meetings of open corporations. German statutory law appears to limit shareholder voting to a small number of fundamental transactions such as charter amendments or mergers, but it also requires the management board to prepare a resolution on these matters if the shareholders meeting so requests.6'1 In addition, German case law holds that voting rights extend beyond the express statutory list to include other significant transactions with major implications for a shareholder's investment.65 Similarly, a shareholder resolution to amend the articles of an open corporation can be placed on the agenda of the general meeting by a minority of shareholders in Japan, France, and the UK, and subsequently approved over the opposition of the board if it is properly noticed and receives the requisite supermajority vote. In addition, jurisdictions other than the U.S. require shareholder votes on certain routine but important decisions. For example, France, Germany, and the UK require the general shareholders meeting not only to approve the appointment of the company's auditors, but also to approve the distribution or reinvestment of the company's earnings.66

59 See infra 5.1.3 (managerial self dealing and compensation), 5.22 (related transactions by controlling shareholders), 6.21, 6.41. *° For the distinction between open and closed companies, see supra note 3. 81 See mfra 6.2.1.

62 E.g., $141(a) Delaware General Corporation Law.

65 See, e.g., 5109(a) Delaware General Corporation Law. While the matter is not entirely settled, particularly with respect to efforts to amend corporate bylaws to remove ami-takeover defenses, few commentators expect such efforts to succeed in Delaware.

M See 5119 Aktiengesetz (listing matters requiring shareholder vote); 583 Aktiengesetz (requiring management board to prepare and implement shareholder resolutions falling within the competency of the shareholders meeting).

65 See discussion of the Holzmuller case, mfra 6.3.

66 $119 and 5174 Aktiengesetz (Germany); An. L. 232-12 and 225-28 Code de commerce

(France). Under German and French law, shareholders may also approve the financial statements if

the corporate board (or boards) do not. See $173 Aktiengesetz and Art. L. 225-100 Code de

commerce respectively.

Equally important, all EU Member states have given shareholders the right to appoint and to dismiss the auditors of listed and larger non-listed companies,67 while shareholders also elect the 'statutory auditors' of Japanese companies.68

However, the most far-reaching applications of the direct voting strategy are found in the specialized statutes that govern closed companies. A good example is the German limited liability company (GmbH). "Whatever its size (which may be very large in capitalization and number of shareholders), the GmbH form not only mandates shareholder approval of financial statements and dividends, but authorizes the general shareholders' meeting to instruct the company's board (or general director) on all aspects of company policy.69 The default rule for the GmbH form, then, is that shareholders have complete authority to govern the company by direct voting—unless the company is subject to the ^determination law by virtue of the size of its workforce (over 500 employees).70 By contrast, legal regimes for closely held companies in France and the U.S. generally specify a distinction between shareholders and directors (U.S.)—or 'managers' (French SARL)—as the default option but allow the charter to specify close shareholder supervision of the company.71

How important are direct decision rights as a strategy for protecting shareholder interests from managerial opportunism? And how important are differences in the scope of these rights across jurisdictions? The answer to both questions is, 'not very important in most circumstances.' As a practical matter, the logic of collective action leaves the dispersed shareholders of large companies with little alternative to delegating management powers. By contrast, the owners of small companies do not need to delegate management, and controlling shareholders are always in a position to dominate company policy—even if they must sometimes act indirectly by replacing the board.

47 See European Commission, Green Paper, The Role, the Position and the Liability of the Statutory Auditor unthtn the European Union 23 (1996, available at europa.eu.int/comm). However, in most listed companies shareholders merely ratify the choice made by the board (id. 23). See also Commission Recommendation, Statutory Auditors' Independence in the EU: A Set of Fundamental Principles [2002] OJ L 191/22 [auditor should consider whether the governance structure of the audited entity provides safeguards to mitigate threats to his independence).

" Art. 280, 254 Commercial Code (statutory auditors appointed by general meeting of shareholders). Art. 279 (meeting or charter sets auditors' remuneration), Art. 269 (meeting or chatter sets directors' compensation).

f9 Schmidt, supra note 42, 1068; J46 GmbH-Gesetz {financial statements, profit distribution), S$37, 38, 46 GmbH-Gesetz (shareholder instructions).

70 GmbH subject to codetermination must have a two-tier board and is subject to AG rules on the

division of functions between the boards, and between boards and shareholders. Schmidt, supra note

42, 482-3. Clearly, there is a need to specify the board's power precisely if it is used to protect the

interests of non-shareholders as well as shareholders.

71 The French closed corporation form, the SARL, vests power to manage the SARL in one or

more 'managers,1 absent a charter provision to the contrary. Art. L. 221—4 Code de commerce.

There is no parallel to the German statutory provision that binds the manager to follow shareholder

instructions in exercising managerial power. While American closed corporation statutes generally

permit direct shareholder management of the company, this requires a specialized closed corporate

form—the sociiti par actions simpUfUe (SAS)—in France. 5ee Art. L. 227-5 and 227-6 Code de

commerce.

These simple observations nicely explain the distribution of direct decisionmaking rights, both among jurisdictions and between closed and open companies. If the allocation of decision-making rights between shareholders and the board follows the natural logic of delegation, however, one might ask why it should ever be necessary to limit shareholder decision-making authority by law. In fact, the power of the shareholder meeting is strongly restricted in only two major jurisdictions. One of these is Germany, where the two-tier board structure and codetermination create obvious structural impediments to direct shareholder management in public companies.

The second jurisdiction that hobbles the power of the shareholders meeting by statute is the U.S. Here the reason is less straightforward, since one might suppose that direct shareholder decision rights would actually improve the governance of public companies on the rare occasions when those rights wete exercised by disaggregated public shareholders. The reason why these rights are not available to U.S. shareholders is, we suspect, the considerable political power of corporate managers. In particular, if U.S. shareholders were able to shape corporate policy by, for example, amending the corporate bylaws, they could also dismantle the defensive tactics that management erects to ward off hostile acquirers.72