Tuesday, March 23, 2010

Unpacking the Ideological Sub-Structure of Corporate Law--Legal Arbitrage and the Governance of Corporations

One of the greatest strengths of ideology the way in which it can fade into the background.  What appears neutral may be little more than the expression of presumptions that constitute an ideological framework for understanding and managing reality.  Law, and especially the science of law is particularly susceptible to such management.  Lawyers tend to be the servant of law and legal systems. The lawyers' craft is grounded in large part on the ability to absorb the governing ideology of a legal system and then deploy it in two ways: first  to preserve the integrity of the system in which they operate, and second, to use the rules of that system, consistent with its normative ideology to serve the needs of those for whom they work.  

Corporate law is no stranger to this phenomenon. Corporate law, more than  some other fields of law, seems strongly attached to the ideology of the state and state power.  Though one might think that corporate law would be an odd site for the promotion of state and state-system ideology, a little thought suggests the strength of the tie between the normative foundations of corporate law and the normative basis of the state.  That tie was brought home recently while I was reading the excellent article Horst Eidenmüller, Andreas Engert and Lars Hornuf, "Incorporating Under European Law:  The Societas Europaea as a Vehicle for Legal Arbitrage," 10(1) European Business Organization Review 1-33 (2009).  The authors find that European firms use the SE form to avoid mandatory co-determination rules, but not necessarily to shop for the most favorable national corporate law  to fill in gaps in SE regulation.  The analysis is solid and the conclusions strong.  But what drew my attention was the characterization of the behavior to be studied--what is commonly called legal arbitrage.  In their review of the literature, the suthors noted:
Legal arbitrage can be defined  as taking advantage of differences between legal regimes governing the same economic activities (or close substitutes).  In the case of company law, legal arbitrage may occur especially when firms can choose to incorporate in different jurisdictions without having to relocate their business activities.  Corporate law arbitrage is a demand-side precondition for charter competition among jurisdictions:  if firms to not react to differences in company law, there is no point for jurisdictions in competing for incorporation.  Legal arbitrage, therefore bears on the longstanding academic debate on charter competition.
Id., at 4.  The authors cite the greatly influential American authorities for the idea of competition between public regulators for corporate charter business and the ensuing "race for the bottom" when states suffer the indignity of exposing their legislation to a market where exit is possible.  William Cary, "Federalism and Corporate Law:  Reflections Upon Delaware," 83 Yale Law Journal 663 (1974); Ralph Winter, "State Law, Shareholder Protection, and the Theory of the Corporation," 6 Journal of Legal Studies 251 (1977); William Bratton, "Corporate Law's Race to Nowhere in Particular," 44 University of Toronto Law Journal 401 (1994). Though at least in the American context it might enhance shareholder value.  Roberta Romano, The Genius of American Corporate Law (Washington AEI Press 1993).

The description is accurate, but it also veils a set of ideological presumptions that it embraces and advances through its analytical framework.  The first is that corporations must be governed by a single statutory framework.  The second is that there is an optimal statutory framework that is (usually) connected in some way to the site of an entity's center of operations. The third is that statutory competition (arbitrage) reduces the power of the state to assert policy objectives.  These assumptions are in turn based on a more fundamental assumption--that states stand at the center of the regulatory project as the privileged entity, whose authority and autonomy (especially regulatory autonomy to impose its will on all of its subjects) ought to be protected against incursions from non political actors operating within the territory of a given state.  The focus of legal arbitrage is the state and its needs, rather than the corporation.  The object of the study of corporate behavior is to ascertain whether they are behaving in ways that preserve the regulatory privilege of the state within a rule system in which states have some measure of responsibility for providing a basis for permitting the enhancement of shareholder value.   

But if one assumes away the privileged position of the state, it is possible to think about what is called legal arbitrage in a substantially different way.  Globalization makes this possible in ways that would have been more difficult to conceive even a decade ago.  In a world in which  capital may freely moved virtually everywhere, one can view that state as a producer of regulation, a necessarily element of corporation operations.  Corporations consume regulation like they consume labor, capital and other items necessary for their operation. Within this conceptual universe regulatory markets can be understood to operate like other markets--labor, capital, consumer, etc, though subject to its own peculiarities.  Legal arbitrage becomes something less odd, and focused on the corporation rather than the state.    
The self-regulating corporation I suggest here turns the usual analysis upside down. That usual analysis posits the distinctive regulatory problem posed by [multinational corporations] is their ability to operate an integrated command and control   system through two disaggregated institutional structures. The first of these structures is the collection of discrete corporate units parent, subsidiary, sister, and cousin companies that make up the Multi-National Corporation group. The second disaggregated structure housing the Multi-National Corporation is the global system of separate nation-states in which those corporations are registered and do business. . . .  Where a corporation can distribute its operations in a sufficiently complete way, it has turned the tables on the state. . . .  By carefully choosing the place, form, and method of operation, it can effectively decide the manner in which it will be regulated. States may legislate to their hearts’ content, but the enterprise will submit to those regulations only to the extent it is either unavoidable or profitable. The tables have been turned on the state in another important way. From the perspective of the self-regulating corporation, the role of states has changed. No longer holders of a monopoly power to regulate the enterprise, states are now mere producers of a good—regulation—that can be characterized as a cost of operations. Like other operating costs, the costs of law can be modified or reduced through avoidance. Where the entity cannot avoid regulation, it is limited as regulation increases the price of goods. But where there is no monopoly on regulation, then avoidance, and the substitution of one legal regime for another becomes possible. In effect, entity and state have changed
Backer, Larry Catá, The Autonomous Global Enterprise: On the Role of Organizational Law Beyond Asset Partitioning and Legal Personality. Tulsa Law Journal, Vol 41, 2006.  Ideological lenses, especially those fixated on the superiority of the state system, its territorial principle, and presumption that for every entity there is a singular public regulatory home, can cause people to see the same thing in substantially different ways.  In the case of  legal arbitrage or self regulating corporations, the difference in vision is a function of the assumptions about the role of states and the state system in their relation to corporations.   The "problem" of legal arbitrage is important where the preservation of a law hierarchy grounded in the state system is implicitly embraced.  The opportunity presented by the  self-regulating corporation is important where the state is subsumed within a transnational regulatory space.

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