2001] The Rise of Dispersed Ownership 11 displayed at the end of the nineteenth century.If it is too much to claim that it is"deja vu,all over again,"the parallels are at least striking. Finally,Part III challenges the"political thesis"that social democracy and strong securities market co-exist.Others have also challenged this very ambitious claim,noting that England supplies a strong counterexample of social democracy co-existing with strong securities markets.20 This Article will advance a more general objection:Financial nstitution ncluding the much-used example of German universal bank do not operate as buffe rs that can protect sh reholder interests from social-democratic pressures.Rather.because large financial intermediares tend to be state controlled (directly or indirectly),they are likely to be more exposed to political pressures to subordinate shareholder interests.Even arge blockh are more visible and exposed than s small shareholders,who themselves can constitute a significant politic interest group.As politicians in democracies with dispersed ownership have repeatedly found,political actions that cause (or are perceived to cause)a stock m arket decline are painful and self-disciplining. Concentrated ownership,then,may survi ve not because large financial inte ries are good monitors or politically less vulnerable,but because the status quo favors incumbent interest groups against new entrants who wish to compete.Further,as I have elsewhere argued,"institutions seem to prefer ty to c trol.As a result, ed owne rship is no more a natural state than is dispersed ownership,but is the artifact of a particular set of legal controls and political pressures.More importantly,across Europe today,financial institutions appear on the verge of liberation-and seem delighted at the prospe et of being able to liquidate their controlling blocks Ultimately,the policy m ssage of t this Article e is optimistic.While formidable obstacles may exist to the development of liquid securities markets,both in transitional economies and in civil-law countries,a wholesale transplantation of common-law rules is not necessary.Self-help measures ng self-regulation, an provide functional substitutes that significantly compensate for any deficit i minority protection that the use of civil-law standards entails.This does not mean that substantive law reform is unimportant,or that self-regulation can adaptive strategies can be designed for nations,individual marke and individual firms.What is most important for the emergence and survival of dispersed ownership in new legal environments is that public sharcholders No.218,655,000).available at http://papers.ssn 655 Corporate Imaged with the Permission of Yale Law Journal
The Rise of Dispersed Ownership displayed at the end of the nineteenth century. If it is too much to claim that it is "d6jA vu, all over again," the parallels are at least striking. Finally, Part III challenges the "political thesis" that social democracy and strong securities markets cannot co-exist. Others have also challenged this very ambitious claim, noting that England supplies a strong counterexample of social democracy co-existing with strong securities markets." This Article will advance a more general objection: Financial institutions-including the much-used example of German universal banks-do not operate as buffers that can protect shareholder interests from social-democratic pressures. Rather, because large financial intermediaries tend to be state controlled (directly or indirectly), they are likely to be more exposed to political pressures to subordinate shareholder interests. Even large blockholders are more visible and exposed than anonymous small shareholders, who themselves can constitute a significant political interest group. As politicians in democracies with dispersed ownership have repeatedly found, political actions that cause (or are perceived to cause) a stock market decline are painful and self-disciplining. Concentrated ownership, then, may survive not because large financial intermediaries are good monitors or politically less vulnerable, but because the status quo favors incumbent interest groups against new entrants who wish to compete. Further, as I have elsewhere argued,2' institutions seem to prefer liquidity to control. As a result, concentrated ownership is no more a natural state than is dispersed ownership, but is the artifact of a particular set of legal controls and political pressures. More importantly, across Europe today, financial institutions appear on the verge of liberation-and seem delighted at the prospect of being able to liquidate their controlling blocks. Ultimately, the policy message of this Article is optimistic. While formidable obstacles may exist to the development of liquid securities markets, both in transitional economies and in civil-law countries, a wholesale transplantation of common-law rules is not necessary. Self-help measures, including exchange self-regulation, can potentially provide functional substitutes that significantly compensate for any deficit in minority protection that the use of civil-law standards entails. This does not mean that substantive law reform is unimportant, or that self-regulation can provide a fully adequate substitute for public law enforcement, but only that adaptive strategies can be designed for nations, individual markets, and individual firms. What is most important for the emergence and survival of dispersed ownership in new legal environments is that public shareholders 20. E.g., BRIAN R. CHEFFINS, PUTTING BRITAIN ON THE ROE MAP: THE EMERGENCE OF THE BERLE-MEANS CORPORATION IN THE UNITED KINGDOM (SSRN Elec. Library, Working Paper No. 218,655, 2000), available at http://papers.ssrn.com/paper.taf?abstractid=218655. 21. John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor as Corporate Monitor, 91 COLUM. L. REv. 1277 (1991). Imaged with the Permission of Yale Law Journal 2001]
长 The Yale Law Journal [Vol.111:1 be able to hold control against the attack of the control seeker who wishes to avoid paying a control premium.As will be seen,the United States and the United Kingdom have developed independent and divergent techniques to address this problem,the former relying on the shareholders'a board of director)to protect their right agents(the to a control premium, and the latter relying on mandated olltive action (a shareholder vote)This divergence illustrates a central theme of the Article:There is not a single common-law solution to the most important problems of corporate law.but rather multiple functional substitutes I.THE EVIDENCE ON CONVERGENCE Attempts to describe an ongoing transition in corporate governance and structure are always vulnerable to the criticism that they rely on anecdotal evidence.By now,however,the available evidence is substantial and involves quantitative as well as qualitative data.For the sake convenience,the most salient four ca nt evidence can be grouped under the following ies.Although the transition is far from complete,the collective weight of the evidence suggests that a new equity culture has received de facto (if not yet formal)acceptance across Europe,with both investors and regulators seeking to encourage its develo t.That such a transition 3PaeP0sB3M-0U03.DeMO1300日44e·a ence of sweeping legal changes,or any apparent at least mildly inconsistent with the LLS&V thesis. A.Formal Legal Change Formal legal change is the area where those adopting a path-dependent perspective have suggested that change would be the slowest and most 22.The board of directors'obligation to obtain a control premium for its shareholders befor from pu crs【o a nev v controlling shareholder .2d 4245(De1. 3)片 ,56 A.2d1279,1286De1 23.In contrast to U.S.law.British law tial bid. n7eepote ual contr bit时y to make a co nch it mus to huy out the at the same ion,65 WASH.U.LQ.69,9(1987).Specifically.under the City Code on Take-Ove n a hundre der offer for more than thirt 04.1 t.British law and U.S.law b protect older's right in som ut they use unified common-law approach. Imaged with the Permission of Yale Law Journal
The Yale Law Journal be able to hold control against the attack of the control seeker who wishes to avoid paying a control premium. As will be seen, the United States and the United Kingdom have developed independent and divergent techniques to address this problem, the former relying on the shareholders' agents (the board of directors) to protect their right to a control premium,2 " and the latter relying on mandated collective action (a shareholder vote).23 This divergence illustrates a central theme of the Article: There is not a single common-law solution to the most important problems of corporate law, but rather multiple functional substitutes. . 'THE EVIDENCE ON CONVERGENCE Attempts to describe an ongoing transition in corporate governance and structure are always vulnerable to the criticism that they rely on anecdotal evidence. By now, however, the available evidence is substantial and involves quantitative as well as qualitative data. For the sake of convenience, the most salient evidence can be grouped under the following four categories. Although the transition is far from complete, the collective weight of the evidence suggests that a new equity culture has received de facto (if not yet fornal) acceptance across Europe, with both investors and regulators seeking to encourage its development. That such a transition has occurred in the absence of sweeping legal changes, or any apparent shift within Continental Europe toward common-law legal standards, seems at least mildly inconsistent with the LLS&V thesis. A. Formal Legal Change Formal legal change is the area where those adopting a path-dependent perspective have suggested that change would be the slowest and most 22. The board of directors' obligation to obtain a control premium for its shareholders before it allows control to pass from public shareholders to a new controlling shareholder is a thread that runs through much Delaware case law. See Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34, 42-45 (Del. 1993); Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989); Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1288 (Del. 1988). 23. In contrast to U.S. law, British law discourages most defensive tactics in corporate control battles, but it does restrict the potential control acquirer's ability to make a coercive, partial bid. Specifically, British takeover law imposes a buyout obligation on the control buyer under which it must offer to buy out the remaining minority shareholders at the same price as it paid to the control seller. See Deborah A. DeMott, Comparative Dimensions of Takeover Regulation, 65 WASH. U. L.Q. 69, 94 (1987). Specifically, under the City Code on Take-Overs and Mergers, which is a self-regulatory code, a tender offer for more than thirty percent and less than a hundred percent is precluded unless first approved by a majority vote of the shareholders. Id. at 93-94. In short, British law and U.S. law both protect the public shareholder's right in some circumstances to share in a control premium, but they use totally divergent approaches, not a unified common-law approach. Imaged with the Permission of Yale Law Journal [Vol. I111: 1
2001] The Rise of Dispersed Ownership 13 formal change generally rquires legislative action and can be blocked by political interest groups or strongly motivated minorities (who may have little concern with overall efficiency).Still,even here,significant change is evident. The clearest evidence relates to the transition economies.Employing a methodology that uses cross-country formalized legal indicators to measure statistically the degree of legal change,Katharina Pistor constructed a database covering twenty-four transition economies (namely,most of the formerly soci list stat in Europ and Fu that tracked th development of shareholder and creditor rights from 1990 through 1998. She concluded:"Despite substantial differences in the initial conditions across countries,there is a strong tendency towards convergence of formal legal rules as the result of extensive legal reforms."%She notes,howe “law reform ha bee ly responsive to conomic change rathe As discussed later,this same pattern appears to be evident in the development of diffused securities markets in both the United States and the United Kingdom. The direction change has been uniformly in the "Anglo Saxon"direction:"By 1998,legal changes had been introduced that raise the level of investor protection in most transition economies above the level of the civil law systems and brought them within close range of the average for common law countries. 2 In overview,this transition seems largely to have involved the outright substitution of common-law rules for civil-law rules,with the total package of legal reforms usually designed by foreign legal advisors (often supplied by the United States).Still,because these reforms have been legislatively adopted,this wholesale transplantation seems to indicate that,at least under the pressures faced by transition,lawmakers have not fel hat leoa s To e prop ples that ar osen are li the a the t groups ir in rated owners n the efficient. vor the wnership struc beca es have c k and transiti Id.at 2. Imaged with the Permission of Yale Law Journal
2001] The Rise of Dispersed Ownership 13 marginal, 24 because formal legal change generally requires legislative action and can be blocked by political interest groups or strongly motivated minorities (who may have little concern with overall efficiency). Still, even here, significant change is evident. The clearest evidence relates to the transition economies. Employing a methodology that uses cross-country formalized legal indicators to measure statistically the degree of legal change, Katharina Pistor constructed a database covering twenty-four transition economies (namely, most of the formerly socialist states in Europe and Eurasia) that tracked the development of shareholder and creditor rights from 1990 through 1998.25 She concluded: "Despite substantial differences in the initial conditions across countries, there is a strong tendency towards convergence of formal legal rules as the result of extensive legal reforms." 26 She notes, however, that "law reform has been primarily responsive to economic change rather than initiating or leading it." 27 As discussed later, this same pattern appears to be evident in the development of diffused securities markets in both the United States and the United Kingdom. The direction of these changes has been uniformly in the "AngloSaxon" direction: "By 1998, legal changes had been introduced that raised the level of investor protection in most transition economies above the level of the civil law systems and brought them within close range of the average for common law countries . 28 In overview, this transition seems largely to have involved the outright substitution of common-law rules for civil-law rules, with the total package of legal reforms usually designed by foreign legal advisors (often supplied by the United States). Still, because these reforms have been legislatively adopted, this wholesale transplantation seems to indicate that, at least under the pressures faced by transition economies, lawmakers have not felt 24. Bebchuk and Roe properly argue that legal rules are the product of political processes. To the extent that interest groups play a role in such processes, the corporate legal rules that are chosen are likely to reflect the relative strength of the relevant interest groups. Bebchuk & Roe, supra note 4, at 157-58. In particular, controlling shareholders who enjoy substantial private benefits of control in countries characterized by concentrated ownership will wish to maintain the existing legal rules that favor their interests, even if a different ownership structure would be more efficient. Id. at 158, Arguably, the data in this Section is consistent with the Bebchuk and Roe prediction, because the most rapid and thoroughgoing formal legal changes have occurred in transitional economies, where strongly entrenched interests that were aligned with the existing legal structure did not already exist. 25. KATHARINA PISTOR, PATTERNS OF LEGAL CHANGE: SHAREHOLDER AND CREDITOR RIGHTS IN TRANSITION ECONOMIES (Eur. Bank for Reconstruction & Dev., Working Paper No. 49/2000, 2000), available at http://www.ebrd.com/english/region/workingp/wp49.pdf. 26. Id. at 2. 27. id. 28. Id. at 13. Imaged with the Permission of Yale Law Journal
14 The Yale Law Journal [Vol.111:1 obliged to maintain continuity with their historical legal systems.Radical legal change is at least sometimes possible. A possible response to the evidence of sharp discontinuity in the law of transitional economies is that mass privatization programs in these countries imposed a diffused,Anglo-Saxon structure of share owne ship on these countries and so required a corresponding movement to Anglo-Saxon (or common-law)systems of corporate governance and securities regulation.From this perspective,one might argue that no similar rate of legal change should be predicted for those economies in which an insider dominated system of wnership already prevailed.In short,if form follows function (that is,if legal rules are determined by the system of corporate governance that preexists those rules),then no similar rapid legal transition should necessarily be expected in the Continental economies in which concentrated ownership is still the norm The actual picture is,however,more mixed.Rather than individual states modifying their own individual statutes,law reform within the European Community has proceeded largely on the basis of efforts at harmonization.2 That is,a Company Law directive will be much negotiation)by the European proposed (after n Union' uncil of Ministers,and an effort will then be made to secure its ratification by member states. Although such efforts have regularly succeeded in other private law areas, they have elicited major struggles in the corporate law area.Throughout the 1980s,efforts by the Eu an Union to opt directives deal ng takeover bid proc es,codetermination,and employee rights all failed amidst considerable ideological controversy about the place of the private corporation in European society.0 Yet contemporaneously,the European Union adopted a variety of securities-oriented directives intended to integrate disclosure and transparency standards in order to facilitate a pan- European securities market.' In short,while the old battles over codetermination and workers'rights continue,little,if any,opposition surfaces to directives intended to develop securities markets or improve disclosure standards.Again,this suggests that at least the al of liq securities markets has become a“motherhood issue'”with no active opponents. ng and evalu -0 (9) 31.Geiger,supra note 29.at 1789-90. Imaged with the Permission of Yale Law Journal
The Yale Law Journal obliged to maintain continuity with their historical legal systems. Radical legal change is at least sometimes possible. A possible response to the evidence of sharp discontinuity in the law of transitional economies is that mass privatization programs in these countries imposed a diffused, Anglo-Saxon structure of share ownership on these countries and so required a corresponding movement to Anglo-Saxon (or common-law) systems of corporate governance and securities regulation. From this perspective, one might argue that no similar rate of legal change should be predicted for those economies in which an insiderdominated system of concentrated ownership already prevailed. In short, if form follows function (that is, if legal rules are determined by the system of corporate governance that preexists those rules), then no similar rapid legal transition should necessarily be expected in the Continental economies in which concentrated ownership is still the norm. The actual picture is, however, more mixed. Rather than individual states modifying their own individual statutes, law reform within the European Community has proceeded largely on the basis of efforts at harmonization." That is, a Company Law directive will be proposed (after much negotiation) by the European Union's Council of Ministers, and an effort will then be made to secure its ratification by member states. Although such efforts have regularly succeeded in other private law areas, they have elicited major struggles in the corporate law area. Throughout the 1980s, efforts by the European Union to adopt directives dealing with takeover bid procedures, codetermination, and employee rights all failed amidst considerable ideological controversy about the place of the private corporation in European society." Yet contemporaneously, the European Union adopted a variety of securities-oriented directives intended to integrate disclosure and transparency standards in order to facilitate a panEuropean securities market.3 In short, while the old battles over codetermination and workers' rights continue, little, if any, opposition surfaces to directives intended to develop securities markets or improve disclosure standards. Again, this suggests that at least the goal of liquid securities markets has become a "motherhood issue" with no active opponents. 29. For an overview of this process, see Coffee, supra note 18, at 667-70. See also Uri Geiger, Harmonization of Securities Disclosure Rules in the Global Market-A Proposal, 66 FORDHAM L. REV. 1785 (1998) (describing and evaluating efforts at harmonization). 30. Coffee, supra note 18, at 668-69; Amir N. Licht, International Diversity in Securities Regulation: Roadblocks on the Way to Convergence, 20 CARDOZO L. REV. 227, 239-40 (1998). 31. Geiger, supra note 29, at 1789-90. Imaged with the Permission of Yale Law Journal [Vol. I111: 1
2001] The Rise of Dispersed Ownership 15 B.The Structure of Share Ownership Considerable evidence exists that the traditional system of concentrated ownership is at least marginally weakening across Europe.Data compilec by the Conference Board shows a measurable decline in the stakes held in the twenty-five largest corporations by banks and nonfinancial corporations in Ger France,and Japan.Traditionally,these holders were the allies of the founding families and managements that ran the larges European and Japanese companies.Yet,over just a one-year period between September 30,1998,and September 30,1999,these traditional stakeholders unwound their holdings to the following degree: TABLE 1.CLOSELY HELD OWNERSHIP IN THE TWENTY-FIVE LARGEST CORPORATIONS September 30,1998 September30,1999 France 33.5% 30.2% Germany 24.2% 17.8% Japan 21.2% 140g Of course.a one-vear trend may be unrepresentative.and these data do not den trate that the shar moved into the hands of public investors. nce of a substitutior effect- -that is,the shares are passing into the hands of more active owners. Thirty-five percent of the outstanding shares of the forty largest companies on the Paris Bourse are now held by American and British institutional investors.Over same period,U.S. stitutional in tor have dramatically increased their investments in foreign equity.The largest twenty-five U.S.pension fund holders of international equity held $110.8 billion in foreign equities in 1996,$181.1 billion in 1998,and $265.6 billion in Sept mber,1999-a nearly 150%increase in only two years. With this heightened,for addition voice. More importantly,many expect that this rate of change will soon accelerate,at least in some of the largest and most traditional European cconomies. Germany,a high capital gains tax locked financial 33.1a Imaged with the Permission of Yale Law Journal
The Rise of Dispersed Ownership B. The Structure of Share Ownership Considerable evidence exists that the traditional system of concentrated ownership is at least marginally weakening across Europe. Data compiled by the Conference Board shows a measurable decline in the stakes held in the twenty-five largest corporations by banks and nonfinancial corporations in Germany, France, and Japan.32 Traditionally, these holders were the allies of the founding families and managements that ran the largest European and Japanese companies. Yet, over just a one-year period between September 30, 1998, and September 30, 1999, these traditional stakeholders unwound their holdings to the following degree: TABLE 1. CLOSELY HELD OWNERSHIP IN THE TWENTY-FIVE LARGEST CORPORATIONS 33 September 30, 1998 September 30, 1999 France 33.5% 30.2% Germany 24.2% 17.8% Japan 21.2% 14.0% Of course, a one-year trend may be unrepresentative, and these data do not demonstrate that the shares so unwound necessarily moved into the hands of public investors. Yet, there is also evidence of a substitution effect-that is, the shares are passing into the hands of more active owners. Thirty-five percent of the outstanding shares of the forty largest companies on the Paris Bourse are now held by American and British institutional investors.34 Over this same period, U.S. institutional investors have dramatically increased their investments in foreign equity. The largest twenty-five U.S. pension fund holders of international equity held $110.8 billion in foreign equities in 1996, $181.1 billion in 1998, and $265.6 billion in September, 1999-a nearly 150% increase in only two years.35 With this heightened ownership comes, of course, a demand for additional voice. More importantly, many expect that this rate of change will soon accelerate, at least in some of the largest and most traditional European economies. In Germany, a high capital gains tax locked financial 32. Carolyn Kay Brancato, Corporations Outside U.S. Become More Subject to Investor Demands, CORP. GOVERNANCE ADVISOR, July-Aug. 2000, at I. 33. Id. 34. John Tagliabue, Resisting Those Ugly Americans, N.Y. TIMES, Jan. 9, 2000, § 3, at 10. 35. Brancato, supra note 32, at 1. Imaged with the Permission of Yale Law Journal 2001]