Globalizing Up Corporate Law

While many criticize globalization as producing a ‘race to the bottom’ in which multinational corporations move activities to nations with less legal protections accorded to workers, the environment, and so on, others argue that globalization may actually lead to an increase in legal protection---‘trading or globalizing up’. My forthcoming book chapter, contributes to the dialogue by looking at globalizing up in the corporate law context and specifically at examples in which globalization has led to greater legal protections for minority shareholders against self-enriching conduct by controlling parties or large shareholders. While existing literature has examined globalizing up through the importation of corporate laws and corporate governance institutions by nations seeking to attract foreign capital for local corporations, this chapter, by discussing three recent cases, explores how globalization increases protections of minority shareholders when, as a result of international capital flows, foreigners become subject to a different nation’s more demanding corporate law.

The first of the three cases discussed in this chapter is the Southern Peru Copper litigation in the Delaware courts. In this litigation, the Mexican majority shareholder of a Delaware corporation discovered to its dismay that Delaware courts may impose huge liability for the sort of expropriation from a controlled corporation which is commonplace in many countries throughout the world, including Mexico.

Next, this chapter discusses the Delaware Chancery Court’s ruling in the Puda Coal litigation, which demands particular vigilance by outside directors of Delaware corporations whose business is overseas. This decision can be viewed as a compliment to Southern Peru Copper insofar as it addresses the inability of a US court to sanction foreign controllers who loot the company and remain abroad. The Court’s response is effectively to hold the US-based directors financially hostage and thereby indirectly impose on foreign controlling parties more demanding US corporate law.

After discussing these two examples of Delaware courts imposing more protective US corporate laws on corporations controlled by non-US actors, this chapter switches gears to a case imposing a more stringent non-US law on a U.S. actor. Here, the chapter discusses the UK’s Financial Services Authority fining David Einhorn and his Greenlight Capital investment fund for dumping shares of an English company after receiving non-public information from the company in a situation in which Greenlight’s sales would have been legal under US law.

Finally, this chapter looks at some of the broader implications of the phenomenon of globalizing up illustrated in these cases. Specifically, the chapter uses these cases to compare the impact of globalizing up through the importation of corporate law and globalizing up as a result of large shareholders becoming subject to other nations’ laws through global capital flows. While the latter may reach fewer shareholders than the former, it may subject the large shareholders it reaches to more effective corporate law protections for minority shareholders of the sort that are more difficult for many nations to import into their domestic corporate law. The chapter also explains how there can be a laddering up of corporate law protections by virtue of the interplay between these two modes of globalizing up corporate law.

Franklin A. Gevurtz is Distinguished Professor of Law at the University of the Pacific, McGeorge School of Law.