Wednesday, February 13, 2008

The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choic

I recently participated in an excellent conference hosted by Ralf Michaels. The conference was entitled The New European Choice-of-Law Revolution: Lessons for the United States? and was held at the Duke University Law School on February 9, 2008. I served on the panel on Corporate Law, and presented the following talk, which will serve as the introduction to the longer paper that will follow.

The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law

We have been asked to consider aspects of the European choice of law revolution. The revolution is both vertical—shifting power over the field from Member State to the institutions of the European Union and horizontal, shifting the basis on which conflicts are resolved among competing systems. (Symeonides 2008). That consideration is meant to be undertaken with a sensitivity to Mathias Reimann’s recent plea for more comparison in choice of law. (Reiman 2001). Yet it must also be sensitive to the antagonisms as well as the complentarity of comparative law and conflicts.

“Twenty years later, the suggestion that the interdependence of comparative and conflicts law is one between potential antagonists deserves new attention. The unification process, one of the major défi of comparatists, directly threatens the conflict of laws methodology. If uniform rules expand-- be they transnational or international rules, codified or uncodified--the whole conflicts system is trumped. If uniform rules develop to such a point that they become the major source of law, they torpedo conflict of laws.”

(Fauvarque-Cosson 2001, at 414).

We hope that this exercise will provide a basis for conversation across the Atlantic, at a minimum, and perhaps reinvigorate the field in the United States. (Reed 2001). We engage in this exercise aware of the interdependency that is a consequence of the imperatives of contemporary economic globalization and its regulatory effects. “In a globalizing world of interdependent legal systems, determining which laws apply to international private transactions is of crucial importance.” (Conference Announcement 2008).

While the object of this activity is traditionally private law generally, and international private transactions in particular, I will “look beyond the traditional topics of private law (contract, tort, property) to those areas that present the most urgent and interesting problems today.” (Reiman 2001, at 645). Thus, I will examine a different aspect of this revolution in both private law and choice of law, an aspect that has become apparent only in the last decade or so. My focus is corporate law and a species of vertical choice of law. The revolution is European, and its consequences of relevance to the United States.

The problem is deceptively simple: A person buys shares and seeks to exercise shareholder rights to pressure corporate managers to adopt policies permitted but not mandated by the law of the chartering state. What law applies if the purchaser is a natural person who is a citizen of the state in which the company is domiciled? Does a different law apply if the purchaser is a (1) legal person, or (2) the government of the chartering state, or (3) a foreign state or a group of foreign states? In each case a party acting in a private capacity is seeking to engage in a discrete transaction and to exercise their rights as shareholders to the extent permitted by law. Yet it is likely that these transactions will be treated differently—a different legal regime may apply.

I will suggest to you that the revolution in private choice of law has become complicated. In a world in which corporations act like states, in a world in which states act like corporations, private choice of law is not exclusively private any more. My focus, then, is on the complicating factor of public authorities seeking the protection and advantages of private law in their non-sovereign activities. In this respect there has been a European Revolution, to be sure, especially in the field of corporate regulation. The contemporary focus has been on the destruction of the traditional choice of law system for situs of the regulation of corporate “internal affairs” through the federalization of old horizontal choice of law regimes through a reinvigorated jurisprudence grounded in non-discrimination (art. 12 EC) and freedom of establishment (art. 43 EC) within a framework that privileges the elaboration of an internal market (art. 14 EC). (Dammann, 2005). But an emerging focus is that of the regulation of interests in companies held by states in their non-sovereign capacity—golden shares. Golden shares can be defined as a power to veto certain changes in the corporate charter. More specifically it refers either to a particular class of stock or a regulatory system that gives the state a continuing power over certain fundamental corporate decisions especially with respect to formerly state owned enterprises that have been privatized. The Reuters Financial Glossery defines “golden shares as “A share that confers sufficient voting rights in a company to maintain control and protect it from takeover. The golden share prevents potential predators from buying shares and then using them to outvote the company's existing owners.” (Reuters Financial Glossary, Golden Share, 2008).

Ironically, in the form of the developing golden share jurisprudence of the European Court of Justice, this revolution has considerable conservative tendencies, tendencies that may seek to rigidly maintain the nice, safe, traditional barriers between public and private law but which ignore changes in the realities of the character of public and private institutions. I will suggest that the new choice of law revolution requires incorporation of public authorities as private actors in a private law with public effects across borders. This is choice of law as an instrument of corporate regulation. But the regulatory function involves the use by public authorities of private law for public ends. Should public law apply, should private law apply, should the form of governmental action make a difference or does only the effect of the action determine the availability of private or pubic law as the standard for governing the actions contemplated by a state? A preliminary consideration of these complications for private choice of law that serves as the focus of this paper. The field of private choice of law is no longer a closed system positing one realm of private and another of public law and in which the state is a subject but not object of law at either the domestic or multilateral level. (Michaels 2005). Nor is private law founded necessarily on direct regulation by state actors upon receptive private actors; the meaning of regulation and jurisdiction are becoming increasingly fuzzy. (Backer 2007).

Near the end of a review of the one of the latest in the recent series of “golden share” cases decided by the European Court of Justice (Commission v. Federal Republic of Germany 2007), Peter Zumbansen and Daniel Saam wondered whether: “we would even be able to see that deep into the conundrical internal life of the corporation, while applying our shareholder/stakeholder, public/private distinctions to make sense of it all. Can it be really all that difficult to heed the insightful warnings of the past not to take such categorizations as depictions of reality, but rather to understand them as the semantic representation of difficult but deliberate choices?” Zumbansen & Saam 2007, at 1049; citing Cohen, 1927; Hale 1923; Cohen 1933; and Kennedy 1976). As Zumbansen and Saam suggest, the corporation sits at the nexus of a number of legal regimes. Issues of internal regulation of corporations that operate across borders implicate a horizontal choice of law, and touch on the power of a state to regulate the economic entities operating within its brders. (Dammann 2003). To some extent, they might also implicate vertical choice of law at the supra-national or federal level. For example, in the United States, federal securities laws may pre-empt to some extent, the power of states to regulate certain matters of corporate governance. This is particularly true with respect to state anti-takeover legislation. (CTS Corp. v. Dynamics Corp. of America 1987). Issues of corporate personality implicate the scope and nature of corporate obligations in home and host states in the social and political sphere. (Backer 2006). Corporate internal governance issues, once considered strictly economic and confined to internal corporate stakeholders, have been broadened to include social and political issues and the concerns of outside stakeholders beyond the regulatory authority of the chartering state. (Hansmann & Kraakman 2002 (European context). The relationship between economic and political issues of corporate governance, of accountability to internal stakeholders and to external stakeholders implicates horizontal and vertical choice of law issues in new and largely unexplored ways. (Johns 1994). We are at a frontier between fields well worth exploring.

The recent golden share jurisprudence of the European Court of Justice has excited much commentary with respect to these nexus issues. These cases have substantially supra-nationalized the rules of Member State involvement in formerly state owned enterprises. The form in which these state interests were expressed varied. Some were cast in the form of formal privileged stake in the enterprise. (Commission v. French Republic 2002; Commission v. United Kingdom 2003; Federconsumatori v. Cmune di Milano 2007). Others suggested an involvement as the product of specifically targeted regulation. (Commission v. Protuguese Republic 2002; Commission v. Kingdom of Belgium 2002; Commission v. Kingdom of Spain 2003). Still others presented hybrid private public arrangements (Commission v. Federal Republic of Germany 2007).

These cases have been examined for their political effect. (Miller & Bock 2003). It has been suggested that the cases represent an attack on the German system of corporate governance. (Zumbansen & Saam 2007). It can be viewed as a simple elaboration of long standing principles of European Law grounded in basic provisions of the Treaties—principally the non-discrimination and free movement of capital obligations—in the amplification of a harmonized company law. (Rhodes & Appledoorn 1998). From a choice of law perspective it represents a greater effort to move choice of law issues up from the Member State to the European level, and by harmonizing, eliminating the horizontal choice of law issue. Yet, it represents far more than that.

The focus of this paper will be on the basis for determining the law applicable to Member States as shareholder—that is, as holders of interests in economic enterprises as private actors—and the substance of that law. As in the private law context, there are three foundational issues. The first is substantive law differences among competing legal regimes, that is the extent to which substantive rules differ enough to affect behavior and the legal consequences of activity. (Cf. Guaranty Trust Co. v. York 1945). The second are rules for choosing among these competing state regulatory regimes, that is the classic choice of law context. The third is the preemption of those methods by harmonization of either substantive or choice of law rules either up to a supra-national or federal level (Trautman 1992; Rustad 2007) or out to the private sector. (Backer 2007).

The paper starts with a critical examination of the development of the jurisprudence of golden share regulation in the E.U. It begins with an elaboration of the narrowest doctrinal meaning of that jurisprudence—this line of cases looks to the issue of the “rights that the State continues to hold after privatising formerly state owned enterprises.” (Grundmann & Florian 2003). It then suggests the way in which the cases also begin the construction of a new framework for considering choices of law in a new context—where a state actor seeks to enter the market or a private person. The analysis will draw attention to the difficulties of defining the private conduct of public entities in connection with other entities. States may both regulate and own an interest in economic enterprises. But those enterprises may be independent of the state that either regulates or owns an interest therein. The object will be to sketch the parameters of the current jurisprudence as well as to note those lacunae in that elaboration. Yet even when states act in their private capacity, their effects may be indirectly regulatory. As a consequence, rules applicable to private actors—including the protections of free movement of capital, and a protection for a vigorous shareholder democracy regime, may not be available to states acting as private entities, even outside of their home territories.

It is to three important lacunae that the paper turns to next: these are the questions that were avoided by the European Court of Justice in its golden share opinions, yet reflect the emerging realities of contemporary investment by public entities. The golden share cases could be said to have determined the extent to which a Member State, consistent with its obligations under the Community Treaty, could continue either to retain a superior interest in a privatized firm or by regulation, limit the discretion of the owners of that firm. But the cases might stand for substantially more—it might help define the extent of a Member State’s power to act in a private capacity, the extent to which the E.U. Treaty applies to Member States acting as private persons, the extent to which Member States may enter into relationships with corporations that are not of a regulatory nature, and the consequences for the state in terms of its liability to third parties. This point was clearly made in the December 2007 ruling of the Court of Justice in Federconsumatori v. Cmune di Milano (2007) and stressed in the earlier opinion of the Advocate General, Polares Maduro, in that case, an opinion careful to build on and expand the theoretical discussion of Advocate General Colmer from the earlier golden share cases. (Federconsumatori v. Cmune di Milano 2006, Opinion of Advocate General Maduro).

The first of the three questions touches on the power of a Member State to acquire shares in an undertaking incorporated under its laws but under a regulatory regime equally applicable to it and all other investors. Without the benefit of any special legislation applicable only to the state, can a Member State buy a large stake in a corporation, and use its power as an ordinary shareholder to its benefit? The second touches on the power of a Member State to invest in undertakings not subject to its regulatory control. Can France buy a large, perhaps even a controlling stake, in companies subject to the regulatory authority of Germany, and vote it shares, subject to ordinary company law rules, for the benefit of the citizens of France? The third touches on the consequences of Member States seeking to establish sovereign funds the purpose of which is to take significant positions in undertakings for their collective benefit. May France, Germany and Spain fund an enterprise the purpose of which is to take a large, and perhaps controlling interest, in certain undertakings for the mutual benefit of the members? The elaboration of the emerging jurisprudence, the general principles of EU law and the policies of corporate governance underlying them, to these three questions may be substantially more important in the long run in the contemporary globalized economic system. (Jones 1995).

The paper then considers the implications under public law—principally the law of sovereign immunity (Bankas 2005), another nexus point in the relationships between state and enterprise. Inherent in the golden share cases is an understanding of the nature and character of the public and private role of states and their legal effect for purposes of applying the most basic principles of EU law. But that elaboration of the nature and scope of the public/private distinction in state activity may be different, and substantially different, from that developing under the law of sovereign immunity. If states never lose their public character even when they act in a non-sovereign capacity abroad, but their actions abroad are treated as private within the host state, then the resulting tensions between the law of sovereign immunity and that of substantive state conduct might require resolution. It is worth looking at both the similarities and tensions in the parallel developments of notions of the public/private divide in state action under these two legal regimes and their implications.

The paper ends with a consideration of the insights American law might provide. American corporations are creatures of state law, but state law is a commodity that might be consumed by corporations that can freely seek reincorporation in a jurisdiction more to their liking. States may own shares in enterprises. But they may also regulate domestic corporations in away that makes it much harder for them to engage in certain transactions—the sort of regulatory interference that would be unacceptable under the golden share rules of the European Court of Justice. The template with greatest affinity to the European golden share cases may be the state anti-takeover legislation, initially disfavored and ultimately partially permitted under federal constitutional law principles. (Bebchuk & Ferrell 2001). In those cases, American courts spoke in terms that had significant potential on defining the nature of corporate regulation and the extent of state regulatory involvement in domestic corporation. At the same time, states may act as private actors, or through private actors, with a flexibility that may be unavailable in Europe. (Brotherton v. Cleveland 1999; Del Campo v. Kennedy 2008). The foundational policies that animate these results may be useful for Europeans to consider as they determine the reach of the lessons of the golden share cases, and the role of states as private economic actors—investors and consumers.

The European Court of Justice’s golden share cases provides an excellent window on a difficult issue of choice of law, and a revolutionary one. The trans-nationalization of corporate law norms provides an opportunity not only to examine the changing landscape of choice of law in private law, but also the creation of a new set of vertical choice of law issues involving a changing conception of the state in its relationships with what had been (perhaps over-narrowly considered) the exclusive the objects of its regulation. No longer a matter of which law must be applied, choice of law determinations must now increasingly consider the character of the actors involved in determining the legal regime applicable. States acting in their sovereign capacity, states acting as private stakeholder, corporations imbued with public purpose, all of these considerations will tend to change the face of choice of law in corporate law in the coming decades.



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