8.2.2 Accounting methodology

Although all of our major jurisdictions require public companies to disclose similar 'hard' financial information requirements, jurisdictions differ with respect to the detail they require. All jurisdictions have moved toward the Anglo-Saxon accounting principles. Japan (under U.S. influence) and the EU (under UK influence) have adopted accounting methodologies based upon the 'fair presentation' (or 'true and fair view') principle.40 As a result, even Germany, which traditionally applied a more conservative 'precaution' approach (Vor-sichtsprinzip) to balance-sheet items,41 has moved closer to the Anglo-American approach.42 Nevertheless, important differences remain.43 Accounting methodologies in continental Europe and Japan (still) are significantly less demanding

33 Regulation S-K, Items 401, 402, and 404. 36 Id. Item 304.

37 (16(a) 1934 Securities Exchange Act (as amended by 5403 Sarbanes-Oxley Act).

38 Japanese disclosure requirements are less stringent than those in the U.S., but more demanding

than the EU's minimal standards. For example, Japan mandates the insider trading reporting require-

ment found in 516(a) U.S. 1934 Securities Exchange Act (Art. 163 SEA) as well as the provision

imposing liability rule for short-swing profits found in 516(h) (Art. 164 SEA). Like the EU, however,

Japan only requires the disclosure of the value of aggregate director compensation, not the terms of

individual compensation packages. See supra 5.1.1 and 5.2.1.

39 The governance importance of mandatory disclosure has recently been recognized by the

European Commission. See A Plan to Move Forward supra note 10, 12-3 (proposing to enhance

corporate governance disclosure); Art. 4(4) Proposal for a Transparency Directive (requiring disclos-

ure of matters to which auditors draw attention without qualifying their report).

40 An. 2 Statements of Financial Accounting Concepts defines 'fair presentation' as accounting

information that is televant (timely, predicative and feedback value) and reliable (reliable, neutral and

faithful). The European Court of Justice confirmed in Tomberger [1996] EUROPEAN COURT REPORTS I

3145 that Art. 2 Fourth Company Law Directive [1978] JO L 222/11 posits 'true and fair view' as the

overriding EU accounting principle; commentators define 'true and fait view' as requiring accounting

information that is certain and reliable: see Mathias Habersack, EUROPAISCHES GESELLSCHAPTS-

RECHT N*223 (2nd ed. 2003).

41 See Klaus J. Hopt, Common Principles of Corporate Governance in Europe, in Basil S.

Markesinisfed.), THE COMING TOGETHER OF THE COMMON LAW AND THE CIVIL LAW 105,114 (2000).

42 See Epstein and Mirza, supra note 28, 2-9. 43 See also supra 4.2.1.

than the UK and the U.S. and the effectiveness of recent reforms, such as requiring EU firms listed on regulated markets to comply with International Accounting Standards (IAS) by 2005, remains to be seen.44 This allows Japanese and continental EU firms to make significantly more opaque financial reports than UK and U.S. companies, and may lead to reports that are startlingly different from those of UK or, especially U.S. firms.45 Although it is difficult to maintain that U.S. accounting reports are always revealing in the wake of recent U.S. accounting scandals such as Enron and WorldCom,46 these reports still disclose more than their continental counterparts.

The traditional divergence between Anglo-Saxon and continental European accounting methods partly reflected differences in sources of external finance. U.S. and UK firms traditionally relied more on capital markets, which tend to penalize accounting opacity or conservativeness. Today, pressure from the international capital market, and the desire to access the U.S. equity market in particular, have forced the largest EU and Japanese firms to adopt accounting practices that are comparable to those used by U.S. firms.47 Indeed, U.S. securities law bars foreign companies that fully satisfy their home country disclosure requirements from selling securities to U.S. investors or listing securities on U.S. exchanges, without restating their results to accord with U.S. Generally Accepted Accounting Principles (U.S. GAAP), or providing a reconciliation between home country standards and U.S. GAAP.

8.2.3 Exiting disclosure requirements

The specialized disclosure obligations attaching to the status of a public company would do little to protect shareholders if managers could easily escape them. Restructuring to 'go private' or delist voluntarily from a public market is not practicable for most public firms, but for smaller companies evasive deregis-tration or delisting might seem possible. For this reason, regulations that impede

44 For the EU, see Regulation on the Application of International Accounting Standards [2002] OJ L 243/1; for Japan, Charles Smith, Called to Account, INSTITUTIONAL INVESTOR, December 2002, 62 (discussing recent accounting standards and regulation reforms); Dean A. Yoost and Ross Kerley, New Accounting Rules Enhance Disclosure, THE NIKXEY WEEKLY, 28 May 2001, 7.

41 See, e.g., Wemer F. Ebke, Accounting, Auditing and Global Capital Markets, in Theodor Baums, Klaus J. Hopt and Norben Horn (eds.), CORPORATIONS, CAPITAL MARKETS AND BUSINESS IN THE LAW 113,119-20 (2000} (emphasizing differences between German and U.S. accounting law); Rafael La Porta, Florencio Lopez-de-SUanes, Andrei Shleifer and Robert W. Vishny, Law and Finance, 106 JOURNAL OF POLITICAL ECONOMY 1113 (1998); Karl van Hulfe, International Harmonisation of Accounting Principles: A European Perspective, 36 WrrsCHAFTSPRUFERKAMMER-MITTEILUNGEN 44 (1997). On accounting divergence, see also supra Chapter 4, note 61.

46 See, e.g., Baruch Lev, Corporate Earnings: Facts and Fiction, 17 JOURNAL OF ECONOMIC

PERSPECTIVE 27 (2003} (providing an anatomy of earnings manipulation}.

47 As a result, mutual recognition of accounting standards has become a high priority regulatory

item. See Technical Committee, International Organisation of Securities Commissions (IOSCO),

IASC Standards—Assessment Report (May 2000, available at iosco.org) (recommending to IOSCO

members to permit multinational issuers to use 30 selected International Accounting Standards for

cross-border offerings and listings).

exit from the status of a publicly traded company can serve as a commitment device and source of investor protection in their own right.48

In our major jurisdictions, two kinds of legal regimes govern the withdrawal of a company from public reporting obligations. First, in all jurisdictions, an issuer that must disclose because of its 'public' status cannot stop complying with its obligations unless it meets certain criteria. In some jurisdictions, these criteria are quantitative. For example, U.S. reporting requirements for public companies cease to apply when the number of shareholders drops below 300 (or, in some circumstances, 5 00),49 whereas Japanese public registration requirements cease to apply when the number of an issuer's shareholders falls below 300 or its legal capital drops below 500 million yen.50 In jurisdictions that distinguish between the closed corporate form and the open form with freely transferable shares, the adoption of the open form triggers disclosure obligations that remain in force unless shareholders initiate a change to the close corporate form. The typical example is Germany, where the Aktiengesetz—the corporation code—imposes disclosure obligations aimed at protecting investors rather than a separate, U.S.-style securities code.51 France, in contrast, pursues a hybrid approach, which combines the disclosure obligations of a continental company law and an Anglo-Saxon-style code of securities regulation.52

Second, companies that are not only public but also exchange-listed must comply with the rules governing voluntary delisting from their exchanges. For example, the NYSE permits securities to be delisted only upon approval of (1) the company's audit committee and (2) a majority of the company's full board of directors; and only after providing shareholders with at least 45 (but no more than 60) days' written notice.53 In other jurisdictions, the law specifically empowers listing or supervisory authorities to oppose delisting applications when it is in the interests of investors to do so.54

48 See Edward Rock, Securities Regulation as Lobster trap: A Credible Commitment Theory of

Mandatory Disclosure, 23 CARDOZO LAW REVIEW 675 (2002).

49 5512(d), 15(d) 1934 Securities Exchange Act.

50 The exact rules are more complex. See Art. 24(1) Securities and Exchange Law and Art. 3-6(1)

Securities and Exchange Ordinance.

51 See Rudiger von Rosen, Die Rechttiche Ordnung des geregelten Kapitalmarkts, in Heinz-Dieter

Assmann and Rolf A. Schutze, HANDBUCH DES KAPITALANLAGERECHTS N°238 (2nd ed. 1997)

(Anglo-Saxon jurisdictions rely upon securities regulation to protect investors, whereas in Germany

investor protection is directly provided by the Aktiengesetz); Karsten Schmidt, GESELLSCHAFTSRECHT

842-7, 1147-8 (4th ed. 2002) (information rights are mandatory and shareholders in Aktienge-

sellschaften benefiting from 'smaller firms' accounting simplifications may ask for accounts reflecting

'larger firms' requirements); Uwe Huffer, AKTIENGESETZ, N°l 5131 (5th ed. 2002) (limited discretion

for implementation through charter provisions).

" See Reglement COB 98-10 (firms may stop complying with requirements applicable to public issuers when the number of shareholders drops below 100); Hubert de Vauplane and Jean-Pierre Bomet, DROIT DES MARCHES FINANCIERS N°494 (3rd ed. 2001).

53 Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No.

1 Thereto by the New York Stock Exchange, Inc. To Amend its Rule 500 Relating to Voluntary

Delistings by Listed Companies, SEC Release No. 34-39394 (3 December 1997, available at

www.sec.gov).

54 See Art. L 421-4 Code Monetaire et Financier (France); S38 Borsengesetz (Germany); Art. 112

Securities and Exchange Law (Japan).

8.2.4 Why make disclosure mandatory?

Commentators disagree about the severity of potential distortions in corporate disclosure policies in the absence of mandatory disclosure and, consequently, about the appropriate scope of mandatory disclosure. Existing evidence cannot resolve this controversy, especially in connection with the pricing function of mandatory disclosure. For example, both supporters and critics of the U.S. mandatory disclosure legislation, the Securities Act of 1933 and Securities Exchange Act of 1934, acknowledge that empirical studies can neither demonstrate that their benefits outweigh their costs, nor show the converse.55 Moreover, there is even controversy over the importance of informationally efficient share prices in the secondary market.56