listing standards that impose governance requirements on listed companies. By contrast regulation of the relationship between workers and companies, such as mandatory employee representation on the board of directors along the lines of German codetermination, or state support for employee ownership through tax benefits as in american employee stock ownershi plans, is beyond the scope of this Article This Article also focuses on large companies where at least some shareholders do not work in the business. A well-drafted law, of course, must also consider the special problems of close corporations. The procedural protections that are appropriate for a company with 10,000 shareholders would be ludicrous and crippling for a tiny company with five shareholders who all work in the business . The National Contexts That Shape Corporate law Five aspects of national context, in our view, shape and limit corporate law: the goals of corporate law the sophistication of capital markets and related institutions, the sophistication and reliability of legal institutions; the ownership structure of public companies and the cultural expectations of participants in the corporate enterprise. In this Part, we describe how these features interweave to form the context of corporate law in developed economies. We then demonstrate, using Russia as a case study, how these features differ markedly in emerging economies--differences in context that require differences in company lay A. Corporate Law in Developed Economies II Similarly, British company law, for our purposes, includes statutory company law, the common law of fiduciary duty, the London Stock Exchange's listing standards and guidelines, and the City Code on Takeovers and Mergers a brief word on codetermination, for those who think this issue too important to be excluded from our Article: we are not convinced that mandatory employee participation on boards of directors is a good idea even in Germany, where it began. Moreover, the effort to transplant the two-tier board to the Czech republic has failed. Investors there care only about what they see as the"real "board--the management board. See John C. Coffee, Jr, Institutional Investors in Transitional Economies: Lessons from the Czech Experience, in 1 Corporate Governance in Central Europe and Russia: Banks, Funds, and Foreign Investors 111, 152-53 (Roman Frydman, Cheryl w. Gray Andrzej Rapaczynski eds, 1996)[hereinafter Coffee, Czech Institutional Investors]. Russia offers an especially weak case for mandating employee participation in corporate governance. First, employees in most privatized companies own ample shares to elect their own directors under our proposal for mandatory cumulative voting. Second, in Russia and other newly privatized economies, many companies must greatly reduce their work force toremain competitive. Current employees will often resist these changes. Third, under Communism, Russian company unions had symbolic value but no real power. They remain weak and often corrupt. The Russians with whom we have discussed codetermination find an assumption underlying codetermination - that labor unions can aggressively represent the interests of employees--amusing
11 Similarly, British company law, for our purposes, includes statutory company law, the common law of fiduciary duty, the London Stock Exchange's listing standards and guidelines, and the City Code on Takeovers and Mergers. 12 A brief word on codetermination, for those who think this issue too important to be excluded from our Article: we are not convinced that mandatory employee participation on boards of directors is a good idea even in Germany, where it began. Moreover, the effort to transplant the two-tier board to the Czech Republic has failed. Investors there care only about what they see as the "real" board -- the management board. See John C. Coffee, Jr., Institutional Investors in Transitional Economies: Lessons from the Czech Experience, in 1 Corporate Governance in Central Europe and Russia: Banks, Funds, and Foreign Investors 111, 152-53 (Roman Frydman, Cheryl W. Gray & Andrzej Rapaczynski eds., 1996) [hereinafter Coffee, Czech Institutional Investors]. Russia offers an especially weak case for mandating employee participation in corporate governance. First, employees in most privatized companies own ample shares to elect their own directors under our proposal for mandatory cumulative voting. Second, in Russia and other newly privatized economies, many companies must greatly reduce their work force to remain competitive. Current employees will often resist these changes. Third, under Communism, Russian company unions had symbolic value but no real power. They remain weak and often corrupt. The Russians with whom we have discussed codetermination find an assumption underlying codetermination -- that labor unions can aggressively represent the interests of employees -- amusing. 7 listing standards that impose governance requirements on listed companies.11 By contrast, regulation of the relationship between workers and companies, such as mandatory employee representation on the board of directors along the lines of German codetermination,12 or state support for employee ownership through tax benefits as in American employee stock ownership plans, is beyond the scope of this Article. This Article also focuses on large companies where at least some shareholders do not work in the business. A well-drafted law, of course, must also consider the special problems of close corporations. The procedural protections that are appropriate for a company with 10,000 shareholders would be ludicrous and crippling for a tiny company with five shareholders who all work in the business. I. The National Contexts That Shape Corporate Law Five aspects of national context, in our view, shape and limit corporate law: the goals of corporate law; the sophistication of capital markets and related institutions; the sophistication and reliability of legal institutions; the ownership structure of public companies; and the cultural expectations of participants in the corporate enterprise. In this Part, we describe how these features interweave to form the context of corporate law in developed economies. We then demonstrate, using Russia as a case study, how these features differ markedly in emerging economies -- differences in context that require differences in company law. A. Corporate Law in Developed Economies
Corporate law, as we define it above, is generally understood to have a largely economic function in developed economies. This function might be characterized as maximizing the value of corporate enterprises to investors and therefore (on the whole)to society, or as minimizing the sum of the transaction and agency costs of contracting through the corporate form. From this perspective, corporate law provides a set of rules(often default rules that can be varied in the corporate charter)that encourage profit-maximizing business decisions, provide professional managers with adequate discretion and authority, and protect shareholders (and to some extent creditors)against opportunism by managers and other corporate insiders But no one imagines that corporate law accomplishes these objectives by itself. Many other control mechanisms also limit departures from the profit-maximization norm. In the United States, for example, a competitive product market, a reasonably efficient capital market an active market for corporate control, incentive compensation for managers, and at least occasional oversight by large outside shareholders all exert pressures on corporate managers to enhance firm value. Sophisticated professional accountants, elaborate financial disclosure, an active financial press, and strict antifraud provisions assure shareholders of reliable information about company performance. Sophisticated courts(such as the Delaware Chancery Court), administrative agencies(such as the Securities and Exchange Commission ), and self-regulatory organizations(such as the New York Stock Exchange)keep sharp eyes out for corporate skullduggery These multiple private and legal controls shoulder much of the burden of protecting investors in public companies, so that the corporate law itself can tilt far in the direction of providing managerial discretion and enhancing transactional flexibility. Most American state corporate statutes(typified by Delaware's) have evolved into"enabling"laws, many of whose major provisions are default rules. Moreover, many of the mandatory rules in American corporate codes have survived because they are either unimportant, avoidable through advance planning, or match reasonably well what the parties would have chosen anyway. The statutes are accompanied by fiduciary doctrines that give the courts wide latitude to review opportunistic behavior ex post, but the courts generally punish only the most egregious instances of self-dealing or recklessness. All else is left to private institutions and the market B. The Goals of Corporate Law in Emerging Economies B See, e. g, American Law Inst, Principles of Corporate Governance: Analysis and Recommendations S2.01(a)(1994)hereinafter Principles of Corporate Governance](stating that, subject to certain constraints, a corporation should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain"(citation omitted). There are important departures from this norm, such as German codetermination or the antitakeover provisions in some American state corporate laws. But these are seen as just that --departures from an overall efficiency norm. We do not enter here the debate over whethe corporate law can or should encourage companies to pursue goals other than profit maximization 4 See black, Is Corporate Law Trivial?, supra note 3, at 551-62
13 See, e.g., American Law Inst., Principles of Corporate Governance: Analysis and Recommendations § 2.01(a) (1994) [hereinafterPrinciples of Corporate Governance] (stating that, subject to certain constraints, "a corporation should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain" (citation omitted)). There are important departures from this norm, such as German codetermination or the antitakeover provisions in some American state corporate laws. But these are seen as just that -- departures from an overall efficiency norm. We do not enter here the debate over whether corporate law can or should encourage companies to pursue goals other than profit maximization. 14 See Black, Is Corporate Law Trivial?, supra note 3, at 551-62. 8 Corporate law, as we define it above, is generally understood to have a largely economic function in developed economies. This function might be characterized as maximizing the value of corporate enterprises to investors and therefore (on the whole) to society, or as minimizing the sum of the transaction and agency costs of contracting through the corporate form.13 From this perspective, corporate law provides a set of rules (often default rules that can be varied in the corporate charter) that encourage profit-maximizing business decisions, provide professional managers with adequate discretion and authority, and protect shareholders (and to some extent creditors) against opportunism by managers and other corporate insiders. But no one imagines that corporate law accomplishes these objectives by itself. Many other control mechanisms also limit departures from the profit-maximization norm. In the United States, for example, a competitive product market, a reasonably efficient capital market, an active market for corporate control, incentive compensation for managers, and at least occasional oversight by large outside shareholders all exert pressures on corporate managers to enhance firm value. Sophisticated professional accountants, elaborate financial disclosure, an active financial press, and strict antifraud provisions assure shareholders of reliable information about company performance. Sophisticated courts (such as the Delaware Chancery Court), administrative agencies (such as the Securities and Exchange Commission), and self-regulatory organizations (such as the New York Stock Exchange) keep sharp eyes out for corporate skullduggery. These multiple private and legal controls shoulder much of the burden of protecting investors in public companies, so that the corporate law itself can tilt far in the direction of providing managerial discretion and enhancing transactional flexibility. Most American state corporate statutes (typified by Delaware's) have evolved into "enabling" laws, many of whose major provisions are default rules. Moreover, many of the mandatory rules in American corporate codes have survived because they are either unimportant, avoidable through advance planning, or match reasonably well what the parties would have chosen anyway.14 The statutes are accompanied by fiduciary doctrines that give the courts wide latitude to review opportunistic behavior ex post, but the courts generally punish only the most egregious instances of self-dealing or recklessness. All else is left to private institutions and the market. B. The Goals of Corporate Law in Emerging Economies
Corporate law in an emerging economy must address a broader set of goals, and operate within a far less evolved market and legal infrastructure, than corporate law in developed economy. The paradoxical consequence is that the protective function of corporate law becomes more important precisely when fewer other resources are available to support that nction Consider first the goals of corporate law in emerging economies. The efficiency goal of maximizing the companys value to investors remains, in our view, the principal function of corporate law. But the balance between investor protection and the business discretion of corporate managers needed to achieve this goal will be quite different in emerging than in developed economies. In addition, in countries that are emerging from heavy state control of industry, a second central objective is the political goal of fostering public confidence in a market economy and in private ownership of large enterprises The efficiency goal dictates that corporate law provide more investor protection in emerging than in developed economies, for several reasons. One is that insiders are likely to exercise voting control over most public companies. Such controlled ownership structures raise the obvious concern that the insiders, whether managers or controlling shareholders, will behave opportunistically toward other shareholders. In Russia, for example, the structure of mass privatization has led to the great majority of privatized public companies being controlled by management-led coalitions of managers and workers, which typically hold 51-75% of a companys voting shares. Outside shareholders -including banks and investment(voucher) funds-- hold on average 15-20% of the voting shares, while the remaining shares are likely to be held by individuals, by other companies, and by a state property fund. 6 This ownership structure presents a clear risk of opportunism toward outside shareholders. Although the te Is The corporate laws of emerging economies tend to reflect a different balance between enabling and restrictive provisions than do the laws of developed economies. The survey of advanced emerging markets in the Appendix shows that many of these countries have retained(in varying degrees)more substantive and procedural protections for outside shareholders and creditors than have developed economies such as the United States See Joseph Blasi Andrei Shleifer, Corporate Governance in Russia: An Initial Look, in 2 Corporate Governance in Central Europe and Russia: Insiders and the State, supra note at 78, 79-82(reporting a urvey of 200 privatized Russian companies that shows mean(median)employee ownership of 65%(60%)) For background on Russias privatization scheme, see Anders Aslund, How Russia Became a Market Economy 223-71(1995): Maxim Boycko, Andrei Shleifer Robert Vishny, Privatizing Russia 69-123 ( 1995); and Maxim Boycko, Andrei Shleifer Robert w. Vishny, Voucher Privatization, 35J. Fin Econ. 249, 256-65(1994)[hereinafter Boycko, Shleifer& Vishny, Voucher Privatization o I7 A recent example in which even sophisticated investors were hurt was a large stock issuance(roughly bling the number of outstanding shares) by the Komineft Oil Company, which had been among the most popular Russian stocks among foreign investors. The new shares were sold in early 1994, principally to the anagers and employees of Komineft, at far below market value, but the issuance was not publicly announced until six months later. The issuance heavily diluted the interests of large shareholders who invested in
15 The corporate laws of emerging economies tend to reflect a different balance between enabling and restrictive provisions than do the laws of developed economies. The survey of advanced emerging markets in the Appendix shows that many of these countries have retained (in varying degrees) more substantive and procedural protections for outside shareholders and creditors than have developed economies such as the United States. 16 See Joseph Blasi & Andrei Shleifer, Corporate Governance in Russia: An Initial Look, in 2 Corporate Governance in Central Europe and Russia: Insiders and the State, supra note *, at 78, 79-82 (reporting a survey of 200 privatized Russian companies that shows mean (median) employee ownership of 65% (60%)). For background on Russia's privatization scheme, see Anders Aslund, How Russia Became a Market Economy 223-71 (1995); Maxim Boycko, Andrei Shleifer & Robert Vishny, Privatizing Russia 69-123 (1995); and Maxim Boycko, Andrei Shleifer & Robert W. Vishny, Voucher Privatization, 35 J. Fin. Econ. 249, 256-65 (1994) [hereinafter Boycko, Shleifer & Vishny, Voucher Privatization]. 17 A recent example in which even sophisticated investors were hurt was a large stock issuance (roughly doubling the number of outstanding shares) by the Komineft Oil Company, which had been among the most popular Russian stocks among foreign investors. The new shares were sold in early 1994, principally to the managers and employees of Komineft, at far below market value, but the issuance was not publicly announced until six months later. The issuance heavily diluted the interests of large shareholders who invested in 9 Corporate law in an emerging economy must address a broader set of goals, and operate within a far less evolved market and legal infrastructure, than corporate law in a developed economy. The paradoxical consequence is that the protective function of corporate law becomes more important precisely when fewer other resources are available to support that function. Consider first the goals of corporate law in emerging economies. The efficiency goal of maximizing the company's value to investors remains, in our view, the principal function of corporate law. But the balance between investor protection and the business discretion of corporate managers needed to achieve this goal will be quite different in emerging than in developed economies.15 In addition, in countries that are emerging from heavy state control of industry, a second central objective is the political goal of fostering public confidence in a market economy and in private ownership of large enterprises. The efficiency goal dictates that corporate law provide more investor protection in emerging than in developed economies, for several reasons. One is that insiders are likely to exercise voting control over most public companies. Such controlled ownership structures raise the obvious concern that the insiders, whether managers or controlling shareholders, will behave opportunistically toward other shareholders. In Russia, for example, the structure of mass privatization has led to the great majority of privatized public companies being controlled by management-led coalitions of managers and workers, which typically hold 51-75% of a company's voting shares. Outside shareholders -- including banks and investment (voucher) funds -- hold on average 15-20% of the voting shares, while the remaining shares are likely to be held by individuals, by other companies, and by a state property fund.16 This ownership structure presents a clear risk of opportunism toward outside shareholders.17 Although the
particular form of controlled ownership in Russia may be unique, experience teaches that in newly industrialized economies-also require strong minority protections shipstructure family-controlled companies with minority public participation--the classic owne Outside investors, facing ex ante a high risk of insider opportunism, will insist on a high expected rate of return in the cases when insiders turn out to behave properly, to compensate for the risk of bad behavior. In an extreme case like Russia, where the risk of insider opportunism is especially high(we explore below the multiple reasons for this), these rational discounts of share prices--to far below the shares' fair value assuming good behavior--can virtually paralyze the equity markets. Honest(nonopportunistic)managers won,' t offer shares at what they see as ridiculously low prices. Investors, meanwhile, won't pay more because they don't know which managers will misbehave. The risk of government misbehavior(such as renationalization, currency controls, or confiscatory taxation) further increases the gap between managers perception of their firms value and market prices for the firms shares. Russian companies that have sought to issue shares have found that investors are willing to pay only a fraction of the companys true worth In theoretical terms, Russian companies operate in a market with a severe"lemons (adverse selection) problem, in which only low-quality issuers are interested in raising equity capital at current prices. Strong minority protections respond to this problem by narrowing the range and reducing the likelihood of insider opportunism. Investors will then pay more for Komineft before the issuance was belatedly announced. See Neela Banerjee, Russian Oil Company Tries a Stock Split in the Soviet Style, Wall St J, Feb. 15, 1995, at Al4. Efforts by the Russian Securities Commission to have the issuance cancelled failed: Komineft's management merely apologized to investors and promised not to make a secret share issuance again. See Julie Tolkacheva, Komineft Agreement Leaves Investors Cool. Moscow Times. Oct. 31.1995 at 111 I8 In the Czech Republic, for example, mass privatization led to financial institutions(usually banks and investment funds)and financial-industrial groups holding controlling stakes in many large companies. See Coffee, Czech Institutional Investors, supra note 12, at 112-13 I 9 It is well established that, under an American-style enabling statute, controlling shareholders frequently extract private gains from corporations at the expense of minority shareholders, despite the market constraints discussed in section L.A. See, e.g, Michael J. Barclay Clifford G. Holderness, The Law and Large-Block Trades, 35 J. L.& Econ. 265, 267-78(1992): Stuart Rosenstein David F. Rush, The Stock Return Performance of Corporations That Are Partially Owned by Other Corporations, 13 J. Fin. Res. 39(1990) Roger C. Graham, Jr. Craig E. Lefanowicz, The Valuation Effects of Majority Ownership for Parent and Subsidiary Shareholders(Oregon State Univ. College of Bus. Working Paper, Feb. 1996) 20 Two examples: first, in the one true Russian public stock offering to date, by the Red October candy company in 1994, relatively few investors were willing to buy at the offering price. See Janet Guyon, Russian Firms Face Fund-Raising Woes in the Wake of Privatization Explosion, Wall St J, Apr. 17, 1995, at B6A Second, the Russian natural gas giant, Gazprom, tried in mid-1995 to sell a roughly 10% stake to foreign investors, but withdrew the offer after discovering that the price investors would pay was far below outside estimates of Gazprom's true value. See Steve Liesman, Limits on Sale Damp Shares of Gazprom, Wall St J Eur, Apr. 3, 1995, at 11
Komineft before the issuance was belatedly announced. See Neela Banerjee, Russian Oil Company Tries a Stock Split in the Soviet Style, Wall St. J., Feb. 15, 1995, at A14. Efforts by the Russian Securities Commission to have the issuance cancelled failed: Komineft's management merely apologized to investors and promised not to make a secret share issuance again. See Julie Tolkacheva, Komineft Agreement Leaves Investors Cool, Moscow Times, Oct. 31, 1995, at 111. 18 In the Czech Republic, for example, mass privatization led to financial institutions (usually banks and investment funds) and financial-industrial groups holding controlling stakes in many large companies. See Coffee, Czech Institutional Investors, supra note 12, at 112-13. 19 It is well established that, under an American-style enabling statute, controlling shareholders frequently extract private gains from corporations at the expense of minority shareholders, despite the market constraints discussed in section I.A. See, e.g., Michael J. Barclay & Clifford G. Holderness, The Law and Large-Block Trades, 35 J.L. & Econ. 265, 267-78 (1992); Stuart Rosenstein & David F. Rush, The Stock Return Performance of Corporations That Are Partially Owned by Other Corporations, 13 J. Fin. Res. 39 (1990); Roger C. Graham, Jr. & Craig E. Lefanowicz, The Valuation Effects of Majority Ownership for Parent and Subsidiary Shareholders (Oregon State Univ. College of Bus. Working Paper, Feb. 1996). 20 Two examples: first, in the one true Russian public stock offering to date, by the Red October candy company in 1994, relatively few investors were willing to buy at the offering price. See Janet Guyon, Russian Firms Face Fund-Raising Woes in the Wake of Privatization Explosion, Wall St. J., Apr. 17, 1995, at B6A. Second, the Russian natural gas giant, Gazprom, tried in mid-1995 to sell a roughly 10% stake to foreign investors, but withdrew the offer after discovering that the price investors would pay was far below outside estimates of Gazprom's true value. See Steve Liesman, Limits on Sale Damp Shares of Gazprom, Wall St. J. Eur., Apr. 3, 1995, at 11. 10 particular form of controlled ownership in Russia may be unique,18 experience teaches that family-controlled companies with minority public participation -- the classic ownershipstructure in newly industrialized economies -- also require strong minority protections.19 Outside investors, facing ex ante a high risk of insider opportunism, will insist on a high expected rate of return in the cases when insiders turn out to behave properly, to compensate for the risk of bad behavior. In an extreme case like Russia, where the risk of insider opportunism is especially high (we explore below the multiple reasons for this), these rational discounts of share prices -- to far below the shares' fair value assuming good behavior -- can virtually paralyze the equity markets. Honest (nonopportunistic) managers won't offer shares at what they see as ridiculously low prices. Investors, meanwhile, won't pay more because they don't know which managers will misbehave. The risk of government misbehavior (such as renationalization, currency controls, or confiscatory taxation) further increases the gap between managers' perception of their firm's value and market prices for the firm's shares. Russian companies that have sought to issue shares have found that investors are willing to pay only a fraction of the company's true worth.20 In theoretical terms, Russian companies operate in a market with a severe "lemons" (adverse selection) problem, in which only low-quality issuers are interested in raising equity capital at current prices. Strong minority protections respond to this problem by narrowing the range and reducing the likelihood of insider opportunism. Investors will then pay more for
shares, which will make higher-quality issuers interested in issuing shares. This will further reduce the ex ante likelihood of expropriation of investors' funds and further raise stock prices, until a new equilibrium is reached with higher share prices and a lower cost of capital To be sure, in a world of perfect contracting, without informational asymmetries, contracting costs, or naive managers or investors, appropriate protections for minority shareholders would emerge by contract, without the need for government fiat. In such an ideal world, marked by extensive disclosure and populated by savvy investors and issuers, corporate planners would have incentives to offer optimal investor protection through their charters. 2 Sophisticated market intermediaries, such as investment banks, accounting firms, and law firms would advise issuers on what disclosures and contractual protections to offer and would bond the reliability of the issuer's disclosures. After shares were issued, the same efficient capital market--together with the product market and the market for corporate control -would police company managements. As a consequence, corporate law could be substantially enabling, even if insiders dominated public companies This description points to a second, more general reason why efficiency concerns favor a protective corporate law in emerging economies. The enabling model and its underlying ptions about capital markets have both strengths and weaknesses in developed countries. But the assumptions that support the enabling model are clearly inapposite in emerging economies, where informational asymmetries are severe, markets are far less efficient, contracting costs are high because standard practices have not yet developed, enforcement of contracts is problematic because of weak courts, market participants are less experienced reputable intermediaries are unavailable or prohibitively expensive, and the economy itself is likely to be in flux In recently privatized economies such as Russia, the contractarian base for the enablin model fails for a third reason: the initial structure of relationships among company participants 2 See generally Michael Jensen William Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3J. Fin. Econ. 305, 312-33(1976)(arguing that entrepreneurs who sell equity bear the anticipated agency costs of equity) For an account of the contribution of such informational intermediaries to the efficiency of merican capital markets, see Ronald J. Gilson Reinier H. Kraakman, The Mechanisms of Market Efficiency, 70 Va L.Rev.549,613-21(1984) 2The most eloquent American proponents of the enabling model are Frank H. Easterbrook Daniel R Fischel, The Economic Structure of Corporate Law 1-39(1991); and Roberta Romano, The Genius of American Corporate Law 86-91(1993). For efforts to develop the limits of the enabling approach, see Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L Rev. 1820, 1835-60(1989) hereinafter Bebchuk, Limiting Contractual Freedom/; Melvin A Eisenberg, The Structure of Corporation Law, 89 Colum. L. Rev. 1461, 1471-515(1989); and Jeffrey N. Gordon, The Mandatory Structure of Corporate Law, 89 Colum. L Rev. 1549, 1554-85(1989) Thereinafter Gordon, Mandatory Structure]. We do not enter here the debate on the proper limits on the enabling approach in a developed economy
21 See generally Michael Jensen & William Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305, 312-33 (1976) (arguing that entrepreneurs who sell equity bear the anticipated agency costs of equity). 22 For an account of the contribution of such informational intermediaries to the efficiency of American capital markets, see Ronald J. Gilson & Reinier H. Kraakman, The Mechanisms of Market Efficiency, 70 Va. L. Rev. 549, 613-21 (1984). 23 The most eloquent American proponents of the enabling model are Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 1-39 (1991); and Roberta Romano, The Genius of American Corporate Law 86-91 (1993). For efforts to develop the limits of the enabling approach, see Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L. Rev. 1820, 1835-60 (1989) [hereinafter Bebchuk, Limiting Contractual Freedom]; Melvin A. Eisenberg, The Structure of Corporation Law, 89 Colum. L. Rev. 1461, 1471-515 (1989); and Jeffrey N. Gordon, The Mandatory Structure of Corporate Law, 89 Colum. L. Rev. 1549, 1554-85 (1989) [hereinafter Gordon, Mandatory Structure]. We do not enter here the debate on the proper limits on the enabling approach in a developed economy. 11 shares, which will make higher-quality issuers interested in issuing shares. This will further reduce the ex ante likelihood of expropriation of investors' funds and further raise stock prices, until a new equilibrium is reached with higher share prices and a lower cost of capital. To be sure, in a world of perfect contracting, without informational asymmetries, contracting costs, or naive managers or investors, appropriate protections for minority shareholders would emerge by contract, without the need for government fiat. In such an ideal world, marked by extensive disclosure and populated by savvy investors and issuers, corporate planners would have incentives to offer optimal investor protection through their charters.21 Sophisticated market intermediaries, such as investment banks, accounting firms, and law firms, would advise issuers on what disclosures and contractual protections to offer and would bond the reliability of the issuer's disclosures.22 After shares were issued, the same efficient capital market -- together with the product market and the market for corporate control -- would police company managements. As a consequence, corporate law could be substantially "enabling," even if insiders dominated public companies. This description points to a second, more general reason why efficiency concerns favor a protective corporate law in emerging economies. The enabling model and its underlying assumptions about capital markets have both strengths and weaknesses in developed countries.23 But the assumptions that support the enabling model are clearly inapposite in emerging economies, where informational asymmetries are severe, markets are far less efficient, contracting costs are high because standard practices have not yet developed, enforcement of contracts is problematic because of weak courts, market participants are less experienced, reputable intermediaries are unavailable or prohibitively expensive, and the economy itself is likely to be in flux. In recently privatized economies such as Russia, the contractarian base for the enabling model fails for a third reason: the initial structure of relationships among company participants