The Relevance of Public Law Uncertainty to Private Ordering on Stock Exchanges and Beyond

Could public law uncertainty pose a problem for private ordering in the financial sector, not to mention other contexts? 

In a recent paper in the Journal of Corporate Law Studies, I examine the nature of self-regulation on AIM (the Alternative Investment Market), a stock exchange for SMEs that is operated and regulated by the London Stock Exchange (LSE), which writes and enforces the listing rules. I argue that when public law obligations are clear ex ante, constraints on private ordering are minimised as private self-regulatory actors can contract with certainty. However, doctrinal uncertainty over the availability of judicial review hinders private ordering and informed ex ante contracting, because it is often unpredictable whether private decision-makers will have public law obligations imposed ex post if courts determine their decisions are amenable to judicial review. 

Background
Ever since the ground-breaking Court of Appeal decision in Datafin [1987] QB 815, a seemingly private self-regulatory body may be amenable to judicial review if the nature of power exercised has a sufficiently public character. If a decision is amenable to judicial review—meaning a party can challenge in court whether a public function was exercised lawfully—then public law obligations of procedural and substantive fairness apply (eg, procedural impropriety protections such as the absence of reasons or the presence of bias). Courts may grant remedies via judicial review such as invalidating the decision or granting an injunction.

Private ordering on AIM
Consider for example the ballooning in size of the AIM Disciplinary Procedures and Appeals Handbook, which roughly doubled in length (measured both by word count and number of rules) in October 2018. I suggest that it was no coincidence that the LSE’s overhaul of the AIM Disciplinary Handbook came on the heels of an unsuccessful judicial review claim in 2017 by a regulatory advisory firm, ZAI Corporate Finance, which argued (among other things) that the AIM Disciplinary Committee’s refusal to conduct its disciplinary hearing in public violated public law obligations contained in the European Convention on Human Rights and Human Rights Act 1998 guaranteeing the entitlement to a fair and public hearing before a public authority. It still remains an open question whether decisions of the AIM Disciplinary Committee are amenable to judicial review, since the High Court and Court of Appeal did not directly rule on the matter in the ZAI Corporate Finance v AIM Disciplinary Committee cases (here and here). On the analysis presented in my paper, regulation on AIM (ie, the listing rules and decisions of AIM disciplinary bodies) does not have a sufficiently public character to be amenable to judicial review.

Lessons from AIM as a case study
The roughly doubling in length of the AIM Disciplinary Handbook in the wake of the ZAI judicial review claim demonstrates the need for private self-regulatory actors to articulate more procedurally explicit rules when it is unclear ex ante whether public law duties of procedural propriety are owed. In this way, public law uncertainty unnecessarily imposes transaction costs on private self-regulatory actors who must reappraise their contracts and adjust their private ordering in response to (or in anticipation of) public law duties that are unpredictable because they are potentially owed. The public law uncertainty problem (and resulting transaction costs) arise when the nature of self-regulatory powers exercised is arguably public in character, thereby giving rise to claims for judicial review. And the standard of arguably public is fairly all-encompassing, given that the doctrinal tests for whether power is public in nature ‘cannot be applied coherently’ (see, Campbell 2009).

Generalizable lessons
The problem is not imposing constraints on self-regulation through public law principles, which are clearly necessary to the degree that self-regulation involves both public law and private ordering. Rather, the problem is the uncertainty created in self-regulatory arrangements by a lack of ex ante clarity on whether private actors’ decisions may be challenged ex post on public law grounds. This is particularly problematic in the context of financial regulation, where more certainty allows for more efficient allocation of risk, and less certainty over financial firms’ private ordering can reduce market stability and impose substantial negative externalities.

The remedy, I suggest, is straightforward: clearer articulation of the scope and applicability of public law principles. Clearer judicial guidance on when decisions of private bodies have a sufficiently public element to be amenable to judicial review could be achieved through renewed doctrinal emphasis on the private or public source of power and would enable both more informed private ordering and more robust self-regulation.

Jonathan Chan is a DPhil (PhD) Candidate in Law at the University of Oxford, and a Lecturer in Law at Mansfield College (Oxford).