The Uneasy Case for Top-Down Corporate Law Harmonization in the European Union

This Article considers whether there is a case for further harmonization of European Community ("EC") corporate law. If one treats corporate law harmonization as a real-world phenomenon, looking at its record thus far and scrutinizing its various rationales, the answer is that there is not. First, the possible justifications for harmonization in the corporate law area do not stand close scrutiny: with no European "Delaware" in sight, it is premature to impose rules to prevent a race to the bottom among European Union ("EU") jurisdictions. Even if harmonization can be justified in theory to correct market failures that Member States are unable or unwilling to correct by themselves, and provided that the new harmonized rules would make society better off (also taking the costs arising from them into account), this Article argues that there is no reason to believe that EC institutions are any better positioned than national lawmakers to tackle market failures. Further, we analyze the rationales for the objective of market integration and argue that in the real world, negative harmonization (i.e. the removal of barriers to the four freedoms) is generally bundled with positive harmonization, so that what can be gained in terms of greater freedom of establishment is usually lost in terms of decreased flexibility. The Article criticizes the level playing field rationale for corporate law harmonization and argues that, far from lowering transaction costs, real-world harmonization has thus far raised them and can hardly be expected to do otherwise in the future. Finally, we dismiss the arguments from scale economies in law production and the correction of national governments' failures as either implausible with regard to corporate law or unconvincing. This Article goes on to highlight the drawbacks of harmonization. Corporate law harmonization substitutes a single lawmaker for twenty-five different ones, or in other words a monopolist for twenty-five competitors, implying a higher risk of excessive regulation and innovation and a lower degree of experimentation. Also, uniform law precludes taking divergent expectations and preferences into account at the national level. Further, real-world harmonization increases the complexity and uncertainty of national corporate laws. Moreover, EC corporate law rules are hard to change and therefore not adaptable to economic or technological developments. Finally, the harmonization process itself is costly in terms of lobbying expenditures and the rent extraction opportunities it grants EC officials and politicians. After testing the proposed general framework by providing an analysis of certain recent initiatives by the EC in the field of corporate law (namely those on shareholder rights, differential voting structures, pyramids, and cross-border mergers), the Article concludes that, ideally, the European Community should restrict its action in this field to simply reducing the barriers to corporations' freedom of movement.