The Real Difference in Corporate Law between the United States and Continental Europe: Distribution of Powers (Part 1)(Part 2)
This article challenges some common assumptions in comparative corporate law. It argues that differences in the degree of shareholder protection between common law and civil law countries are often overestimated, while some more fundamental corporate law differences remain overlooked. A milestone publication in this regard is the article by La Porta et al. entitled Law and Finance. The authors introduced an index to measure investor protection statistically and found that common law countries performed better on average than civil law countries. A broad array of legal sources, however, reveal many mechanisms that interfere with, or substitute for, the mechanisms for shareholder protection used to construct the index. A recoding of the index to include these sources yields no significant differences between common law and civil law jurisdictions. This finding casts doubt on the received premise of recent research that common law jurisdictions offer better shareholder protection than civil law jurisdictions. It highlights instead the existence of a fundamentally different distribution of legal powers between U.S. and Continental European corporations. This article shows that this difference shapes the functioning of the shareholder protection mechanisms that comprise the index of La Porta et al. Furthermore, the difference in power distribution undermines the relationship they allege between shareholder protection and ownership structures and better explains the differences in ownership structures, as well as many other aspects of corporate life.