2006] WAR VS LEGAL ORIGIN 475 "comply or explain"rule instead requires a firm not following the rule to explain why it chose not to. As we see later,civil law nations'heavy role in their economies is a twentieth-century phenomenon,not a longstanding one.And,where it counts most he for financial ma kets by mo st m asure mon law nations regulate their securities markets, via codes an lators,more heavily than do civil law systems.We pick up the over- regulation thread again in Part II,but first let's see how strong those classical differences between legal origins are today. C.The Differences Erode The preceding section shows that classical differences probably did not determine financial differences in the first place.Next we see that those classical differences do not sharply persist today for financial law To be sure what I call classical differences civil law's propensity to codify and its judiciary's unwillingness to invent ways to remedy wrongdoing-are in dispute.Civil law analysts see assertions of such differences as reflecting the prejudices of common law commentators, not the reality of their nations'judicial institutions.s6 But in this sec tion I take the classical diffe ences or prejudices at face val and argue,first,that these differences were never powerful enough to determine deep divergences in financial markets (because both sys- tems'core tools can achieve the goal of investor protection)and,sec- ond,that enough of these classical contrasts have eroded that whatever subtle differences persist cannot explain disparities in modern financial markets rst off,today both civil and common law regulate and codify Consider Frederick Schauer's evaluation: [Elven in common law countries,the civil law model seems so much in the ascendancy,and the common law model seems so much in decline. [Classic common law]open-ended lawmaking and rulemaking is now rare,with detailed statutes and detailed regulations far more the norm now than in the past.37 And how relevar t are the classic differences to finance?These dif ferences affected judicial action,not securities regulation which is L.STUD.(2006)(des See,e.g,Carl Baudenbacher,Some Re arks on the Method of Civil Law,34 TEX.INT' I he Commo 37Frederick Schauer,The Failre of the Common Lat,36 LJ.765.773 (a4)
WAR VS. LEGAL ORIGIN "comply or explain" rule instead requires a firm not following the rule to explain why it chose not to. As we see later, civil law nations' heavy role in their economies is a twentieth-century phenomenon, not a longstanding one. And, where it counts most here - for financial markets - by most measures common law nations regulate their securities markets, via codes and regulators, more heavily than do civil law systems. We pick up the overregulation thread again in Part II, but first let's see how strong those classical differences between legal origins are today. C. The Differences Erode The preceding section shows that classical differences probably did not determine financial differences in the first place. Next we see that those classical differences do not sharply persist today for financial law. To be sure, what I call classical differences - civil law's propensity to codify and its judiciary's unwillingness to invent ways to remedy wrongdoing - are in dispute. Civil law analysts see assertions of such differences as reflecting the prejudices of common law commentators, not the reality of their nations' judicial institutions. 36 But in this section I take the classical differences - or prejudices - at face value and argue, first, that these differences were never powerful enough to determine deep divergences in financial markets (because both systems' core tools can achieve the goal of investor protection) and, second, that enough of these classical contrasts have eroded that whatever subtle differences persist cannot explain disparities in modern financial markets. First off, today both civil and common law regulate and codify. Consider Frederick Schauer's evaluation: [E]ven in common law countries, the civil law model seems so much in the ascendancy, and the common law model seems so much in decline. [Classic common law] open-ended lawmaking and rulemaking is now . rare, with detailed statutes and detailed regulations far more the norm now than in the past.37 And how relevant are the classic differences to finance? These differences affected judicial action, not securities regulation - which is Codes, 6 J. CORP. L. STUD. 113, 13 (2oo6) (describing them as the "best means of developing adaptive but nevertheless effective corporate governance practices"). 36 See, e.g., Carl Baudenbacher, Some Remarks on the Method of Civil Law, 34 TEX. INT'L L.J. 333, 357-6o (1999). But see Richard B. Cappalli, At the Point of Decision: The Common Law's Advantage over the Civil Law, i2 TEMP. INT'L & COMP. L.J. 87, 87-91 (1998). 37 Frederick Schauer, The Failure of the Common Law, 36 ARIZ. ST. L.J. 765, 772 (2004). 200o6]
476 HARVARD LAW REVIEW [Vol.120:460 where much of the action is for American financial markets.ss Indeed more than thirty-five years ago,one general retrospective summarized the thinking then on legal origins:"there is no longer much difference between [the civil and the common law]"39 because the differences eroded in the twentieth century"by reason of the parallel [institutional] developments [in all nations] to satisfy the same societal needs."40 Th off the m state's regulatory needs exceed the regu- latory level that either the civil or common law tradition induced in prior centuries. Modern socioeconomic similarities among the richer nations presumably pressed all affected nations toward new and roughly similar regulatory institutions. cond,civil law jurisprudence has adopted common law modes Civil law es no longer try to codify comprehen sively.41 French Code of Commerce is now but an empty shell.[I]t could not provide an adequate conceptual framework for the new institu- tions which arose from the industrial revolution of the Igth century."4 True,civil law judges perhaps once refrained from implying duties. from looki g at facts ir and fror ecede n a common law way but these diffe s toda y ar s sta than they once might have been.Moden civil law judges look at the functions of the legislation and interpret rules in light of function. They develop a shadow common law in key areas;although they tie their lawmaking to the legislative text,that text can have duty-type, Article 1382 o f the French civ code,which simply says tha 38 Recent legal origin literature recognizes this.but hasn't vet re undermine the basic legal origins theory SLa Porta st al.W 1577 eph Dainow.The Civil Law and the Common Lat:Some Points of Comparison.15 AM J.COMP.L.419,434(g67). THE:see ala sil S.Markesinis Basil E rope and L ing in E Ne,in n.On the Convergence (and Divergence)of the Civil Law and the Comon Late.17 STAN. ()(finding more convergence tha divergence). Dainow fights the commor See Dai ote 39,at 434 n lawmaking in supra note 8, t155 enis Tallon,Reforming the Codes in a Civil Law Country,15 J.SOC'Y PUB.TCHRS.L33, 35Kata Funken,The Beat of Both WorldsThe TnTwdComveh Civil Law and the Common 【4-160uy 2003),avarlable at http /ssrn.com See Baudenbacher,supra note 36,at 347:Katharina Pistor,Legal Cround Rules in Coordi- nated and Liberal Market Economies 19 (European Corporate Governance Inst.,Law Working Paper No. 200 sr.co 95763 (l Gerr teah case awbeyond the specific strictures of the civil cod)
HARVARD LAW REVIEW where much of the action is for American financial markets. 38 Indeed, more than thirty-five years ago, one general retrospective summarized the thinking then on legal origins: "there is no longer much difference between [the civil and the common law] '39 because the differences eroded in the twentieth century "by reason of the parallel [institutional] developments [in all nations] . . to satisfy the same societal needs." 40 Thus, first off, the modern state's regulatory needs exceed the regulatory level that either the civil or common law tradition induced in prior centuries. Modern socioeconomic similarities among the richer nations presumably pressed all affected nations toward new and roughly similar regulatory institutions. Second, civil law jurisprudence has adopted common law modes. Civil law countries no longer try to codify comprehensively. 41 "The French Code of Commerce is now but an empty shell . [I]t could not provide an adequate conceptual framework for the new institutions which arose from the industrial revolution of the 19th century. '42 True, civil law judges perhaps once refrained from implying duties, from looking at facts in a common law way, and from using precedent in a common law way, but these classic differences today are less stark than they once might have been. 43 Modern civil law judges look at the functions of the legislation and interpret rules in light of function. They develop a shadow common law in key areas; although they tie their lawmaking to the legislative text, that text can have duty-type, open-ended standards, such as that of good faith. 44 A "striking example is Article 1382 of the French civil code, which simply says that 38 Recent legal origin literature recognizes this, but hasn't yet recognized in print how it can undermine the basic legal origins theory. See, e.g., La Porta et al., What Works?, supra note ig, at 15, 27-28. 39 Joseph Dainow, The Civil Law and the Common Law: Some Points of Comparison, 15 AM. J. COMp. L. 419, 434 (1967). 40 Id. at 420; see also Basil S. Markesinis, Learning from Europe and Learning in Europe, in THE GRADUAL CONVERGENCE 1, 30-32 (Basil S. Markesinis ed., 1994); John Henry Merryman, On the Convergence (and Divergence) of the Civil Law and the Common Law, 17 STAN. J. INT'L L. 357, 359 (ig8I) (finding more convergence than divergence). Dainow fights the common conclusion that the two have lost many of their old differences, but he focuses on lawmaking involving topics other than economic regulation. See Dainow, supra note 39, at 434. 41 See MERRYMAN, supra note 8, at 155. 42 Denis Tallon, Reforming the Codes in a Civil Law Country, 15 J. Soc'Y PUB. TCHRS. L. 33, 35 (1980). 43 See Katja Funken, "The Best of Both Worlds": The Trend Towards Convergence of the Civil Law and the Common System 14-16 (July 2003), available at http://ssrn.com/ abstract=476461. Again, some civil law theorists say the differences never were so stark. 44 See Baudenbacher, supra note 36, at 347; Katharina Pistor, Legal Ground Rules in Coordinated and Liberal Market Economies 19 (European Corporate Governance Inst., Law Working Paper No. 30/2005, 2005), available at http://ssrn.com/abstract=695763 ("[In Germany . the good faith principle . has been widely used . and has allowed courts to develop extensive ,case law' beyond the specific strictures of the civil code."). [Vol. 120:46o
2006 WAR VS.LEGAL ORIGIN 477 anyone causing damage to another by their fault must compensate for the damage."4s From that open-ended legislative standard a law of torts emerged.6 German corpor ate litigation further illustrates the modern civil law system's interpretive capacity. When a German corporation trans- ferred assets to a subsidiary in a way shareholders disliked,a share- holder sued The text of the German corporate code did not require that shareholders approve the transaction.A legal origins analyst might have predicted that the civil law jud anc would lacking legislative guid- ot act,leaving the erman sharehold cted That's not what happene The German court held that the trans fer hurt shareholders such that the shareholder assembly had to ap- prove it.The German court thus widened the zone of protection be- yond the legislature's words.47 The doctrine persisted,morphed,and adjusted.The ensuing debate and judicial moves to define the scope of the doctrine ok to me like the e typical aftermath of a major Dela ware corporate law court decision True,whether German courts do this often enough and well enough still needs to be evaluated. But they can and do use tools that resemble common law fiduciary duties. Third,and ironically here,the common law judge often feels ham- -the very weakness attributed vil law judge.48 As William Bratton ncluded:"With [Dela ndependent lega I significance],the state court effe tively announces that no body of substantive principles informs certain applications of the legislature's corporate code,inviting transaction planners to exploit the literal word at will."49 Textualist theories of common law jurisprudence,such as those associated with Justice not the general clause [of the code]but the case law of the courts which produces the rules.) this ht into a civi capact towork with open-ended to Mars obbe Cororate Gro:C Sharcholder Mectin and Minor Gelatine nd Macrotron Case sive lat a note 1212 (In civil law countries .judges are not even supposed to inter (Del.Ch.) (Del.1963)(Delaware court refusing to go beyond the terms of a statute to recognize a de facto W.Bratton,Gam ng Delaware,4o WILLAMETTE L.REV.853.854(2004):see also Signifi Good Faith,and the Interpvetation of Venture 439 (Del REV.825,827(2004 But cf.Schnell v.Chris-Craft In 97
WAR VS. LEGAL ORIGIN anyone causing damage to another by their fault must compensate for the damage. '45 From that open-ended legislative standard a law of torts emerged.4 6 German corporate litigation further illustrates the modern civil law system's interpretive capacity. When a German corporation transferred assets to a subsidiary in a way shareholders disliked, a shareholder sued. The text of the German corporate code did not require that shareholders approve the transaction. A legal origins analyst might have predicted that the civil law judge, lacking legislative guidance, would not act, leaving the German shareholder unprotected. That's not what happened. The German court held that the transfer hurt shareholders such that the shareholder assembly had to approve it. The German court thus widened the zone of protection beyond the legislature's words.47 The doctrine persisted, morphed, and adjusted. The ensuing debate and judicial moves to define the scope of the doctrine look to me like the typical aftermath of a major Delaware corporate law court decision. True, whether German courts do this often enough and well enough still needs to be evaluated. But they can and do use tools that resemble common law fiduciary duties. Third, and ironically here, the common law judge often feels hamstrung by the legislative corporate rule - the very weakness attributed to the civil law judge.48 As William Bratton concluded: "With [Delaware's doctrine of independent legal significance], the state court effectively announces that no body of substantive principles informs certain applications of the legislature's corporate code, inviting transaction planners to exploit the literal word at will."4 9 Textualist theories of common law jurisprudence, such as those associated with Justice 45 H. PATRICK GLENN, LEGAL TRADITIONS OF THE WORLD 137 (2d ed. 2004); see also BASIL S. MARKESINIS, FOREIGN LAW AND COMPARATIVE METHODOLOGY 90 (1997) ("[I]t is not the general clause [of the code] but the case law of the courts which produces the rules."). 46 For this insight into a civil law judiciary's capacity to work with open-ended legislation to build judge-made law, see Beck et al., supra note 5, at 658-59. 47 See Marc L6bbe, Corporate Groups: Competences of the Shareholders' Meeting and Minority Protection - the German Federal Court of Justice's Recent Gelatine and Macrotron Cases Redefine the HolzmUller Doctrine, 5 GERMAN L.J. 1057, 1057 (2004). For another instance of expansive lawmaking in the civil law judiciary, see Baudenbacher, supra note 36, at 339-40, who notes how French courts create and expand product liability tort remedies. But cf Glaeser & Shleifer, supra note 6, at 1212 ("In civil law countries . judges are not even supposed to interpret the codes very much . ). 48 See, e.g., Hariton v. Arco Elecs., Inc., 182 A.2d 22, 25-26 (Del. Ch. 1962), affd, 188 A.2d 123 (Del. 1963) (Delaware court refusing to go beyond the terms of a statute to recognize a de facto merger). 49 William W. Bratton, Gaming Delaware, 40 WILLAMETTE L. REV. 853, 854 (2004); see also D. Gordon Smith, Independent Legal Significance, Good Faith, and the Interpretation of Venture Capital Contracts, 40 WILLAMETTE L. REV. 825, 827 (2004). But cf Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 197I). 2006]
478 HARVARD LAW REVIEW [Vol.120:460 Scalia,are similar:common law judges should be hamstrung by legis- lative words.so Fourth com mon law systems have codified much of their financial law and thereby have become more regulatory. Once it could be said that if the "common law stands for anything,it is absence of codes, and likewise civil law stands for codification."s But American re- formers began codifving in 1802.with the uniform law Commission efforts of the [Unifor Laws]Conference have substantially promoted lega ication i American stat ly in th area of commercial law. s the had a Uniform Commercial Code.Since 1923,the American Law In- stitute has been recapitulating,in code-like form,American law."[The ALI's]Restatements are rather like the Civil Law codes in their sys- tematic structure e of abstractly fo nulated rules ."53 And law code re often mor e detailed than civil law codes,leaving less cretion for the common law judge.s Moreover.codification here wasn't inimical to markets.Business interests often aanted it,as they thought the common law confusing giving the legal profession too much power to extract rents in busine tra profes interests sisted codification. Indeed a strong tr lition of legal the s concludes tha ex ante precise codification yields better predictability for business than ex post judicial general decisionmaking.Jeremy Bentham is the classic critic of the common law on this score:"In his view,the funda- mental evil was the common law that had evolved over hundreds of years. was unclea r,unce and full of fictions and tautologies the judiciary was slow and unjust.”s6 Bentham codification. Indeed,imagine an inquiry into why secured credit and securitiza- tion are so strong in the United States.One would bump into article o of the Uniform Commercial Code-a code so richly drafted that it leaves little in etive discretion for the judge n ght the pothesize that it's the American capacity to codify in deta that facili 085CA,rnote10,at16-17,23-25,2g-30 GE LEG AT THE CIVIL LAW 47(1953) 39(987 See id.at 267-68 (discussing English codes) see Donald J.Smythe. (u the Diffusion of the Uni J.INT'LL.435,476(2ooo)
HARVARD LAW REVIEW Scalia, are similar: common law judges should be hamstrung by legislative words.s° Fourth, common law systems have codified much of their financial law and thereby have become more regulatory. Once it could be said that if the "common law stands for anything, it is absence of codes, and likewise civil law stands for codification."' But American reformers began codifying in 1892, with the Uniform Law Commission. "[T]he efforts of the [Uniform Laws] Conference have substantially promoted legal unification in the American states, especially in the area of commercial law . ,52 Since the 1950s, the United States has had a Uniform Commercial Code. Since 1923, the American Law Institute has been recapitulating, in code-like form, American law. "[The ALI's] Restatements are rather like the Civil Law codes in their systematic structure of abstractly formulated rules . . . .,53 And common law codes are often more detailed than civil law codes, leaving less discretion for the common law judge.5 4 Moreover, codification here wasn't inimical to markets. Business interests often wanted it, as they thought the common law confusing, giving the legal profession too much power to extract rents in business transactions.5 5 The legal profession, not business interests, resisted codification. Indeed, a strong tradition of legal theorists concludes that ex ante precise codification yields better predictability for business than ex post judicial general decisionmaking. Jeremy Bentham is the classic critic of the common law on this score: "In his view, the fundamental evil was the common law that had evolved over hundreds of years. It was unclear, uncertain, and full of fictions and tautologies; the judiciary was slow and unjust. 5' 6 Bentham recommended codification. Indeed, imagine an inquiry into why secured credit and securitization are so strong in the United States. One would bump into article 9 of the Uniform Commercial Code - a code so richly drafted that it leaves little interpretive discretion for the judge. One might then hypothesize that it's the American capacity to codify in detail that facili- 50 See SCALIA, supra note io, at 16-17, 23-25, 29-30. 51 R.C. VAN CAENEGEM, JUDGES, LEGISLATORS AND PROFESSORS: CHAPTERS IN EUROPEAN LEGAL HISTORY 39 (1987); see also F.H. LAWSON, A COMMON LAWYER LOOKS AT THE CIVIL LAW 47 (953). 52 ZWEIGERT & KOTZ, supra note ii, at 252 (emphasis added). 53 Id. The Restatements are not themselves law. The uniform codes become law when enacted. 54 See id. at 267-68 (discussing English codes). 55 See Donald J. Smythe, Transaction Costs, Contagion Effects, and the Diffusion of the Uniform Sales Act, 19o6-47, at 5 (July 2005), available at http://ssrn.com/abstract=799324. 56 Gunther A. Weiss, The Enchantment of Codification in the Common-Law World, 25 YALE J. INT'L L. 435, 476 (2000). [Vol. 120:46o
2006] WAR VS.LEGAL ORIGIN 479 tates secured credit and securitization.One might hypothesize that regulatory codification plays a similar role for American securities law. Although early codifications systematized common law decisions, "the new statutes [have]frequently [been]mea ant to be the primar source of law. rts to honest interpretations of the stat utes and committed to legislative supremacy,.[gave]them the au- thority they claimed for themselves."s7 It may be an exaggeration to say that the real difference between the Napoleonic Code and Ameri- can codification is that the former just predated the latter-but we're all codifiers no Indeed. ch Ameri ican corporate law is codified in the 1933 and 1934 Securities Acts,s8 their major legislative amendments such as the Williamsso and Sarbanes-Oxley Acts,and the SEC's regulatory imple- mentation.Many American corporate lawyers do not decipher fiduci- ary duty cases,but instead apply the detailed rules of the SEC's Regu- lation S-K.6o Remaining big diffe re ces between civil and commo n law lie in the civil law' pench ant for formalism ,in the nature of the trial,and in the availability of a juryo differences unlikely to affect finance deeply.Commercial interests in the United States at times opt for formal rules,preferring their relative certainty.62 Although the civil law often does not use the jury common in the United States,our pri- rporate law court ith this sDelaare mary co that operates without a Legislatures in common law countries today regulate.They tell admi istrative ies to rite the r es to imp ment the le ture' gen ns,thereby redu ing the relative mp courts.What counts today is not method but content-that is,policy. And,to the extent policy does not flow from the pens of regulators promoting the public welfare,it's politics. 57 GI OR THE AGE OF STATUTES 5(1982)(emphasis 59 ,C.5577a-77m 5CFR55229 =74 See,e.g.,Lisa REV erc chant Court:Rethinking the Code's Search I PA akEw679上CieevEmebclersabeptcaoperat without a jury se the of civi ably Itol the d fo dictability
WAR VS. LEGAL ORIGIN tates secured credit and securitization. One might hypothesize that regulatory codification plays a similar role for American securities law. Although early codifications systematized common law decisions, "the new statutes [have] frequently [been] meant to be the primary source of law. Courts, limited to honest interpretations of these statutes and committed to legislative supremacy, . . . [gave] them the authority they claimed for themselves. '57 It may be an exaggeration to say that the real difference between the Napoleonic Code and American codification is that the former just predated the latter - but we're all codifiers now. Indeed, much American corporate law is codified in the 1933 and 1934 Securities Acts,58 their major legislative amendments such as the Williams 59 and Sarbanes-Oxley Acts, and the SEC's regulatory implementation. Many American corporate lawyers do not decipher fiduciary duty cases, but instead apply the detailed rules of the SEC's Regulation S-K.60 Remaining big differences between civil and common law lie in the civil law's penchant for formalism, in the nature of the trial, and in the availability of a jury61 - differences unlikely to affect finance deeply. Commercial interests in the United States at times opt for formal rules, preferring their relative certainty.62 Although the civil law often does not use the jury common in the United States, our primary corporate law court - that in Delaware - operates without a jury, with this seen as one of its advantages. 63 Legislatures in common law countries today regulate. They tell administrative agencies to write the rules to implement the legislature's general instructions, thereby reducing the relative import of the courts. What counts today is not method but content - that is, policy. And, to the extent policy does not flow from the pens of regulators promoting the public welfare, it's politics. 57 GUIDO CALABRESI, A COMMON LAW FOR THE AGE OF STATUTES 5 (1982) (emphasis added). Judge Calabresi critiques judicial deference, 58 15 U.S.C. §§ 77a-77aa, 15 U.S.C. §§ 78a-78mm (2000). 59 15 U.S.C. § 78m(d)-(e), § 78n(d)-(f) (2ooo & Supp. I1 2003). 60 17 C.FR. §§ 229.10-702 (2006). 61 See ZWEIGERT & KOTZ, supra note iI, at 272-74. 62 See, e.g., Lisa Bernstein, Merchant Law in a Merchant Court: Rethinking the Code's Search for Immanent Business Norms, i44 U. PA. L. REV. 1765, 1769-70 (1996). 63 See Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55 STAN. L. REV. 679, 708 (2002). English civil courts also typically operate without a jury. See NEIL ANDREWS, ENGLISH CIVIL PROCEDURE 775 (2003) ("The jury has been excluded from the great majority of civil cases . [due] notably [to] the need for consistency and predictability."). 2006]