EU Company Law Harmonization between Convergence and Varieties of Capitalism

I recently posted my work EU Company Law Harmonization between Convergence and Varieties of Capitalism (forthcoming in the Research Handbook on the History of Corporation and Company Law, edited by Harwell Wells) here.

The history of EU company law harmonization can be traced back to the early days of the European Economic Community (‘EEC’) during the 1960s. Company law largely remained a prerogative of the Member States, but, starting in the early years, it became one of the areas that the European (Economic) Community sought to harmonize. Since then, the EEC/EC/EU has passed a large number of company law directives and regulations. While practitioners often tend to pay relatively little attention to the directives, EU company law is a prominent subject in academic literature. Views about the effectiveness of harmonization range from a ‘success story of European efforts to regulate’,[1] and the assertion that EU Company law is ‘trivial’.

This chapter sketches the history of EU Company Law, from its beginnings in the 1960s until today. Company law harmonization efforts mirror prevailing fashions about what is considered good corporate law. Harmonization came in two periods, each of which roughly linked to the success of a particular model of capitalism that was on the ascendancy at the time.

The first one began with the formation of the EEC. It was characterized by a dominance of the German model, and a vision of corporate law that one could characterize as belonging to a ‘coordinated’ variety of capitalism (see generally Hall & Soskice 2001).[2]

The second period began in the late 1990s and partly coincides with the ‘convergence in corporate governance’ debate. This period was dominated by ‘liberal’ capitalism oriented towards shareholders and, increasingly, the stock markets. Capital markets gaining in importance, and various forces led to an increased orientation towards the interests of investors in corporations around the world. Germany lost its position as the model jurisdiction for what was considered good corporate law, a role that was increasingly taken over by the UK. Harmonization projects tended to shift to issues more strongly associated with capital markets. Even in other areas, harmonization focused less on minimum substantive standards, and more strongly on transparency and interaction with informed shareholders.

In both periods, EU (or EC) company law fits into the convergence model in various ways. First, harmonization has provided a vector for convergence far longer than the time period usually discussed in the convergence literature. The original model espoused in European company law harmonization was not the shareholder model proposed by the convergence literature. To the extent that EU rules diverge from this model, EC/EU law helped to entrench rules that many scholars today consider inefficient (eg, legal capital) and are not entirely in line with the shareholder model.

Second, in line with the triviality critique of the directives, one could argue that often the directives only led to formal convergence. For example, the Fourth and Seventh Directives, which governed accounting, included so many options that they allowed the Member States to largely leave their own accounting cultures as they were. The introduction of International Financial Reporting Standards for the consolidated accounts of publicly traded firms by the IFRS Regulation of 2002 was most strongly driven by the critique that financial statements across Europe were still not comparable after decades of accounting harmonization.

However, at a certain level, EC/EU harmonization also has helped ‘modern’ convergence. Arguably, the 2002 report of the Winter group, which set the subsequent corporate law agenda, espoused a shareholder perspective, as did the subsequent 2007 Shareholder Rights Directive. Nevertheless, Hansmann and Kraakman describe EU company law harmonization only as a ‘weak force for convergence’, in part because harmonization has been difficult where there were considerable differences between the Member States.

While at least some of the earlier steps of EU harmonization proved to be relatively innocuous, widely-accepted changes in some jurisdictions, in other areas the process got caught up in a ‘clash of capitalisms’. Looking beyond company law harmonization, the EEC/EC/EU as a whole has helped to foster trade, open markets and competition. Openness to trade often upsets national socio-economic arrangements and bargains between interest groups because of the introduction of foreign competition. Competition tends to erode corporate rents, which, among other things, reduces the portion captured by employees. European integration is often seen as a market-oriented project, and a good case can be made that the EU, as a whole, has indirectly helped convergence in corporate governance by markets integration. This is evident from the case law rooted in primary EU law, namely the freedom of establishment cases as well as the cases on Golden Shares. While primary law sought to eliminate national barriers, secondary law in the form of directives often was intended to mitigate the effects of market forces. While primary law tended to promote aspects of liberal capitalism, the initial harmonization program sought to preserve elements of coordinated capitalism.

Throughout both the early and the later (and current) period of harmonization, EU company law remained largely a top-down, technocratic project that was considered imperative to realize the common market. Arguably, an industry of lobbyists and technocrats (including legal academics) developed around it as the group benefiting from it most. However, there was rarely, if ever, a particular industry, lobby, or country that pushed for harmonization. EU Company law harmonization thus developed a balance between proposals coming from Brussels and varying national resistance that provided a counterweight. In the early period, when company law harmonization was influenced mainly by Continental models, the UK stepped on the brakes after joining the EEC in 1973, whereas since the 2000s, when the UK law dominated as the model, Germany and other Continental jurisdictions have been the main objectors.

Martin Gelter is Professor of Law at Fordham University School of Law.