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THE EVOLUTION OF SHAREHOLDER AND CREDITOR PROTECTION IN AUSTRALIA: AN INTERNATIONAL COMPARISON

Published online by Cambridge University Press:  16 February 2012

Helen Anderson ,
Michelle Welsh ,
Ian Ramsay  and
Peter Gahan
Helen Anderson
Affiliation:
Centre for Corporate Law and Securities Regulation, Melbourne Law School, University of Melbourne and Senior Research Fellow, Department of Business Law and Taxation, Monash University
Michelle Welsh
Affiliation:
Workplace and Corporate Law Research Group, Department of Business Law and Taxation, Monash University
Ian Ramsay
Affiliation:
Centre for Corporate Law and Securities Regulation, Melbourne Law School, University of Melbourne
Peter Gahan
Affiliation:
Department of Management and Marketing, Melbourne University.
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Abstract

This article is part of a larger international investigation of the effects of a country's legal origins on the style of business regulation. We employ an innovative ‘leximetric’ methodology to numerically code the protective strength of Australian corporate law for both shareholder and creditor protection for the period 1970 to 2010. This leximetric methodology has been used in a prominent international debate concerning the development of legal rules and the effects of different styles of regulation on a range of economic outcomes—the legal origins debate. Drawing on similar data compiled by Armour, Deakin, Lele and Siems in five other countries (France, Germany, India, the UK and the US) for the period 1970 to 2005, we compare changes in the level of protection afforded to Australian shareholders and creditors with developments in other countries. Our analysis finds that in Australia there was a sustained upward trend in shareholder protection, but not in the case of creditor protection. Compared to the five other countries, the level of protection afforded to shareholders under Australian law was relatively high, and this was the case for the level of protection afforded to creditors as well. We also examine the extent of convergence and divergence in shareholder and creditor protection among the countries in the study. We find persistent divergence in shareholder protection, with the extent of divergence in 2005 similar to that in 1970. For creditor protection, we find increasing divergence among the countries over the period of study. Our findings are not supportive of legal origins theory.

Type
Article
Information
International & Comparative Law Quarterly , Volume 61 , Issue 1 , January 2012 , pp. 171 - 207
Copyright
Copyright © British Institute of International and Comparative Law 2012

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References

1 Armour, J et al, ‘How Do Legal Rules Evolve? Evidence from a Cross-country Comparison of Shareholder, Creditor, and Worker Protection’ (2009) 57 AmJCompL 579Google Scholar. See also M Siems, ‘Shareholder, Creditor and Worker Protection: Time Series Evidence About the Differences Between French, German, Indian, UK and US Law’ (2009) University of Cambridge Working Paper No 381 <http://www.cbr.cam.ac.uk/pdf/WP381.pdf>.

2 La Porta, R et al, ‘Law and Finance’ (1998) 106 Journal of Political Economy 1113CrossRefGoogle Scholar. See also La Porta, R et al, ‘Legal Determinants of External Finance’ (1997) 52 JFin 1131Google Scholar; La Porta, R, Lopez-de-Silanes, F and Shleifer, A, ‘Corporate Ownership Around the World’ (1999) 54 JFin 471Google Scholar.

3 See eg Lele, P and Siems, M, ‘Shareholder Protection: A Leximetric Approach’ (2007) 7 Journal of Corporate Law Studies 17CrossRefGoogle Scholar; Siems, M ‘Shareholder Protection Around the World (“Leximetric II”)’ (2008) 33 Delaware JCorpL 111Google Scholar.

4 The relevant literature is reviewed in La Porta, R, Lopez-de-Silanes, F and Shleifer, A, ‘The Economic Consequences of Legal Origins’ (2008) 46 JEconLit 285Google Scholar.

5 Lele and Siems (n 3).

6 Armour et al, ‘How Do Legal Rules Evolve?’ (n 1).

7 Armour et al also published a study involving 25 countries, including 7 whose legal origins lay in English law: Canada, India, Malaysia, Pakistan, South Africa, the UK and the US. Armour, J et al, ‘Law and Financial Development: What We Are Learning From Time Series Evidence’ (2009) Brigham Young ULRev 1435Google Scholar.

8 Mitchell, R et al, ‘The Evolution of Labour Law in Australia: Measuring the Change’ (2010) 23 AustlJLabL 61Google Scholar. See also M Jones and R Mitchell, ‘Legal Origin, Legal Families and the Regulation of Labour in Australia’ in S Marshall, R Mitchell and I Ramsay (eds), Varieties of Capitalism, Corporate Governance and Employees (Melbourne University Publishing 2008); S Cooney, P Gahan and R Mitchell, ‘Legal Origins, Labour Law and the Regulation of Employment Relations’ in M Barry and A Wilkinson (eds), Research Handbook of Comparative Employment Relations (Edward Elgar 2011); S Cooney et al, ‘Legal Origins and the Evolution of Australian Labour Law: 1970–2010’ (2009) Research Report, Workplace and Corporate Law Research Group, Monash University, 2009 <http://www.buseco.monash.edu.au/blt/wclrg/legal-origins-australia-labour-law.pdf>. The authors use the labour law index put forward in Deakin, S, Lele, P and Siems, M, ‘The Evolution of Labour Law: Calibrating and Comparing Regulatory Regimes’ (2007) 146 IntlLabRev 133Google Scholar.

9 La Porta et al, ‘Law and Finance’ (n 2).

10 The last category is effectively omitted in the more recent work by La Porta and his colleagues: see La Porta et al, ‘The Economic Consequences of Legal Origins’ (n 4) 288.

11 See, for example, Pistor, K et al, ‘The Evolution of Corporate Law: A Cross-country Comparison’ (2002) 23 University of Pennsylvania JIntlEconL 791, 794Google Scholar.

12 See generally Hansmann, H and Kraakman, R, ‘The End of History for Corporate Law’ (2000) 89 Georgetown LJ 439Google Scholar; Bebchuk, L and Roe, M J, ‘A Theory of Path Dependence in Corporate Ownership and Governance’ (1999) 52 Stanford LRev 127CrossRefGoogle Scholar; Schmidt, R H and Spindler, G, ‘Path Dependence, Corporate Governance and Complementarity’ (2002) 5 IntlFin 311Google Scholar.

13 See La Porta et al, ‘The Economic Consequences of Legal Origins’ (n 4) 288; Deakin, Lele and Siems (n 8) 134–35.

14 Armour et al, ‘Law and Financial Development’ (n 7), citing Beck, T, Demirguc-Kunt, A and Levine, R, ‘Law and Finance: Why Does Legal Origin Matter?’ (2003) 31 JCompEcon 653Google Scholar. These arguments are criticized by Armour et al.

15 See Glaeser, E and Shleifer, A, ‘Legal Origins’ (2002) 117 QJEcon 1193Google Scholar; Djankov, S et al, ‘The New Comparative Economics’ (2003) 31 JCompEcon 595Google Scholar; La Porta et al, ‘The Economic Consequences of Legal Origins’ (n 4).

16 La Porta et al, ‘Corporate Ownership Around the World’ (n 2).

17 ibid.

18 La Porta et al, ‘The Economic Consequences of Legal Origins’ (n 4) 298.

19 This has been the subject of debate in its own right: see Berg, J and Cazes, S, ‘Policymaking Gone Awry: The Labour Market Regulations of the Doing Business Indicators’ (2008) 29 CompLabLPolJ 349Google Scholar; Voigt, S, ‘Are International Merchants Stupid? Their Choice of Law Sheds Doubt on the Legal Origins Theory’ (2008) 5 Journal of Empirical Legal Studies 1CrossRefGoogle Scholar.

20 See particularly A Musacchio, ‘Do Legal Origins Have Persistent Effects Over Time? A Look at Law and Finance Around the World’ (2008) Working Paper No 08-030, Harvard Business School, Harvard University; M Amin and P Ranjan, ‘When Does Legal Origin Matter?’ (2008) Working Paper No 080912, Department of Economics, University of California-Irvine; Klerman, D and Mahoney, P, ‘Legal Origins?’ (2007) 35 Journal of Comparative Economics 278CrossRefGoogle Scholar; Armour et al, ‘How Do Legal Rules Evolve?’ (n 1); Roe, M, ‘Legal Origins, Politics, and Modern Stock Markets’ (2006) 120 Harvard LRev 462Google Scholar; Acemoglu, D, Johnson, S and Robinson, J, ‘The Colonial Origins of Comparative Development: An Empirical Investigation’ (2001) 91 AmEconRev 1369Google Scholar. See also the critiques in (2009) 57 AmJCompL 765–876.

21 La Porta et al, ‘Law and Finance’ (n 2).

22 ibid 1132–33.

23 La Porta et al, ‘Law and Finance’ (n 2); La Porta et al, ‘The Economic Consequences of Legal Origins’ (n 4) 286.

24 Pistor, K, Raiser, M and Gelfer, S, ‘Law and Finance in Transition Economies’ (2000) 8 Economics of Transition 325, 327CrossRefGoogle Scholar.

25 Berkowitz, D, Pistor, K and Richard, JF, ‘Economic Development, Legality, and the Transplant Effect’ (2003) 47 EurEconRev 165Google Scholar; see also Berkowitz, D, Pistor, K and Richard, JF, ‘The Transplant Effect’ (2003) 51 AmJCompL 163Google Scholar.

26 Lele and Siems, ‘Shareholder Protection’ (n 3) 19. Other criticisms include the difficulty of ensuring that the coding is transparent, accurate and consistent; a danger of home country bias in the selection of the items; and issues of weighting of items: see Armour, J et al, ‘Shareholder Protection and Stock Market Development: An Empirical Test of the Legal Origins Hypothesis’ (2009) 6 Journal of Empirical Legal Studies 343, 349–50CrossRefGoogle Scholar.

27 Armour et al, ‘Law and Financial Development’ (n 7).

28 Lele and Siems, ‘Shareholder Protection’ (n 3) 17. Belgium and Italy have also been coded separately for the period 1995 to 2005 (using the 60 items developed by Lele and Siems to measure shareholder protection) and the results compared to several other European countries: C Van der Elst, ‘Law and Economics of Shareholder Rights and Ownership Structures: How Trivial are Shareholder Rights for Shareholders?’, (2010) Tilburg Law and Economics Center Discussion Paper No 2010-009 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1553094>.

29 Lele and Siems, ‘Shareholder Protection’ (n 3) 43–44. Further results of this study are reported elsewhere. See Armour et al, ‘How Do Legal Rules Evolve?’ (n 1); Lele, P and Siems, M, ‘Diversity in Shareholder Protection in Common Law Countries’ (2007) 5 Journal for Institutional Comparisons 3Google Scholar; Siems, M, ‘Shareholder Protection Across Countries: Is the EU on the Right Track?’ (2006) 4 Journal for Institutional Comparisons 39Google Scholar; Deakin, Lele and Siems, ‘The Evolution of Labour Law’ (n 8); S Fagernäs, P Sarkar and A Singh, ‘Legal Origin, Shareholder Protection and the Stock Market: New Challenges from Time Series Analysis’ in B Yurtoglu and K Gugler (eds), The Economics of Corporate Governance and Mergers (Edward Elgar 2008); P Sarkar, ‘Corporate Governance, Stock Market Development and Private Capital Accumulation: A Case Study of India’ (Corporate Accountability, Limited Liability and the Future of Globalisation conference, London, 2007) <http://www.cisd.soas.ac.uk/Editor/assets/prabirjitsarkar.pdf>; Deakin, S and Sarkar, P, ‘Assessing the Long-run Economic Impact of Labour Law Systems: A Theoretical Reappraisal and Analysis of New Time-series Data’ (2008) 39 Industrial Relations Journal 453CrossRefGoogle Scholar.

30 Armour et al, ‘Shareholder Protection and Stock Market Development’ (n 26).

31 ibid 353.

32 ibid 371.

33 La Porta et al, ‘Legal Determinants of External Finance’ (n 2) 1135. These items were restrictions on going into reorganization, no automatic stay on secured assets, secured creditors being ranked first in the distribution of assets, and management not remaining in office when the company is being reorganized.

34 S Djankov et al, ‘Debt Enforcement Around the World’, (2007) ECGI Working Paper No 147.

35 La Porta et al, ‘Law and Finance’ (n 2) 1134.

36 ibid 1135.

37 ibid 1139.

38 See S Djankov, C McLeish and A Shleifer, ‘Private Credit in 129 Countries’ (2007) 84 JFinEcon 299, 301.

39 Armour et al, ‘Law and Financial Development’ (n 7).

40 ibid.

41 It is relevant to note what we do not do in this study. Many explanations have been put forward for why a country's laws are the way they are. This study does not seek to answer the question, in the Australian context, of whether ‘law follows’ as a result of local forces, or whether ‘law matters’ and is itself, either functionally or formally, the cause of change within a country. Nor does it seek to address the claim that the greater the protection afforded to shareholders and creditors by a country's legal system, the more external finance companies in that country will be able to obtain. Most importantly, it does not seek to say whether the common law or civil law systems are ‘better’ and, if so, how and why they are better. As we have already observed, there have been attempts to answer these questions, and the research published thus far has been subject to criticism regarding the methodology employed.

42 Lele and Siems, ‘Shareholder Protection’ (n 3); Armour et al, ‘How do Legal Rules Evolve?’ (n 1). The approach of the authors to constructing the indices and the choice of data for shareholder and creditor protection is explained in these publications.

43 Armour et al, ‘How do Legal Rules Evolve?’ (n 1).

44 Siems, M, ‘Numerical Comparative Law: Do We Need Statistical Evidence in Order to Reduce Complexity?’ (2006) 13 Cardozo JIntlCompL 521–40Google Scholar.

45 These limitations and others are acknowledged by Armour et al, ‘How Do Legal Rules Evolve?’ (n 1).

46 M Siems, ‘The Web of Creditor and Shareholder Protection in 25 Countries: A Comparative Legal Network Analysis’ (2010) <http://ssrn.com/abstract=1537564>.

47 Armour et al, ‘How do Legal Rules Evolve?’ (n 1) 599.

48 Lele and Siems, ‘Shareholder Protection’ (n 3).

49 ibid 35.

50 ibid.

51 ibid 36.

52 Armour et al, ‘How Do Legal Rules Evolve?’ (n 1) 612.

53 ibid.

54 ibid 612.

55 Lele and Siems, ‘Shareholder Protection’ (n 3) 30.

56 ibid 31.

57 See n 50 and accompanying text.

58 See G Stapledon, ‘Share Ownership and Control in Listed Australian Companies’ (1999) Melbourne Law School Research Paper <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=164129>; A Lamba and G Stapledon, ‘The Determinants of Corporate Ownership Structure: Australian Evidence’, (2001) Melbourne Law School Public Law and Legal Theory Working Paper 20 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=279015>; La Porta, et al, ‘Corporate Ownership Around the World’ (n 2). The work of La Porta et al in relation to share ownership concentration in Australia has been drawn upon by MJ Roe, ‘Political Preconditions to Separating Ownership from Corporate Control’ (2000) 53 Stanford LRev 539, 562Google Scholar; and both Stapledon's research and that of La Porta et al in relation to share ownership concentration in Australia has been drawn upon by B Cheffins, ‘Comparative Corporate Governance and the Australian Experience’ in I Ramsay (ed), Key Developments in Corporate Law and Trusts Law: Essays in Honour of Professor Harold Ford (LexisNexis Butterworths 2002); and Dignam, A and Galanis, M, ‘Australia Inside-out: The Corporate Governance System of the Australian Listed Market’ (2004) 28 Melbourne ULRev 623Google Scholar.

59 This list is extracted from Austin, RP, Ford, HAJ and Ramsay, IM, Company Directors: Principles of Law and Corporate Governance (LexisNexis Butterworths, 2005), 54Google Scholar. As they observe, it is relevant to refer to corporate law in Delaware given that approximately 50 per cent of all listed companies in the US and more than 50 per cent of companies in the S&P 500 index (which is the key benchmark index for the US equity markets) are incorporated in the State of Delaware. Armour et al analyse the law of Delaware for the purpose of their leximetric coding of the US: Armour et al, ‘How do Legal Rules Evolve?’ (n 1) 602. In relation to shareholder advisory votes on the remuneration report, the difference between Australia and the US has narrowed since Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, which added section 14A to the Securities and Exchange Act 1934. This section requires public companies subject to the US federal proxy rules to provide their shareholders with an advisory vote on executive remuneration, generally known in the US as ‘say-on-pay’ votes, and to provide a further advisory vote on the desired frequency of say-on-pay votes. On 25 January 2011, the US Securities and Exchange Commission (SEC) adopted a rule specifying that say-on-pay votes required under the Dodd-Frank Act must occur at least once every three years, beginning with the first annual shareholders’ meeting taking place on or after 21 January 2011. Under the rules, companies are also required to hold a ‘frequency’ vote at least once every six years in order to allow shareholders to decide how often they would like to be presented with the say-on-pay vote. The SEC rule is titled Shareholder Approval of Executive Compensation and Golden Parachute Compensation, Release Nos 33-9178; 34-63768; File No S7-31-10.

60 Part 2F.1A of the Corporations Act, introduced into the former Corporations Law by the Corporate Law Economic Reform Program Act 1999.

61 (1843) 2 Hare 461; 67 ER 189.

62 LS Sealy, ‘The Rule in Foss v Harbottle: The Australian Experience’ (1989) 10 Co Law 52.

63 Ramsay, I, ‘Corporate Governance, Shareholder Litigation and the Prospects for a Statutory Derivative Action’ (1992) 15 University of New South Wales LJ 149Google Scholar.

64 See, for example, S Bainbridge, ‘Shareholder Activism in the Obama Era’, (2009) UCLA School of Law, Law-Econ Research Paper No 09-14 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1437791>; J Hill, ‘The Rising Tension between Shareholder and Director Power in the Common Law World’ (2010) 18 Corporate Governance: An International Review 344.

65 See, for example, Bratton, WW and Wachter, ML, ‘The Case Against Shareholder Empowerment’ (2010) 158 University of Pennsylvania LRev 653Google Scholar.

66 Corporations Act, Ch 2E. This Chapter of the Corporations Act was a response to some of the corporate collapses of the 1980s that were caused by insiders of public companies transferring corporate funds to themselves. It can be seen that Chapter 2E is an example of a regulatory approach to governance problems that sees empowering shareholders as the solution. For a more recent example, see the Explanatory Memorandum to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2004 (Cth), which contains numerous references to the desirability of improving shareholder participation, increasing shareholder activism and enabling shareholders to ‘influence the direction of the companies in which they invest’.

67 See, for example, Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004. Other examples are referred to in notes 86 and 88.

68 Corporations Act, s 249D(1). The shareholders requisitioning the directors to call the meeting must be entitled to vote.

69 Companies and Securities Advisory Committee, Shareholder Participation in the Modern Listed Company: Final Report (June 2000) 9–10Google Scholar.

70 The philosophy underpinning the Parliamentary Joint Committee report and its recommendations is expressed in the following terms and draws an analogy between shareholder engagement in the corporate sphere and political democracy: ‘Shareholders own their companies, so engagement with company boards is their right, but there is benefit beyond the exercising of that right. Shareholder engagement through dialogue, disclosure and voting ensures the accountability of company boards and management, providing an important check on their power that serves to improve corporate governance standards. This works in much the same way as the central tenets of democracy improve the standards of political governance via the accountability of elected representatives’ (Parliamentary Joint Committee on Corporations and Financial Services, Better Shareholders—Better Company: Shareholder Engagement and Participation in Australia (June 2008) para 2.23).

71 Mitchell, R, O'Donnell, A and Ramsay, I, ‘Shareholder Value and Employee Interests: Intersections Between Corporate Governance, Corporate Law and Employee Interests’ (2005) 23 Wisconsin IntlLJ 417Google Scholar.

72 MJ Roe, ‘Capital Markets and Financial Politics: Preferences and Institutions’ in Oxford Handbook on Capitalism (OUP forthcoming).

73 ibid. An example of a poison pill is a provision in a company's constitution that allows the board to issue new shares to existing shareholders at a substantial discount if a hostile takeover is launched for the company. The effect is to make the takeover more expensive, as the bidder will then need to acquire these new shares to acquire control of the target company. Another example is a provision that allows the board to issue shares that have special voting rights or dividend rights if a hostile takeover is launched. Again, the effect is to make the takeover more expensive for the hostile bidder. A staggered board of directors, where a proportion of the directors is elected each year, instead of all the directors being elected each year, can make a hostile takeover more difficult as the new owner cannot immediately replace all of the directors. In Australia, by contrast, although staggered boards of directors are common, s 203D of the Corporations Act provides that shareholders of a public company can at any time vote to remove a director from office, so the effect is that a new owner can use this provision to remove all the directors and replace them with directors of his or her choosing.

74 See also Takeovers Panel, Frustrating Action, Guidance Note 12 (2010). This Guidance Note outlines when the Panel may consider frustrating action (action by the target company that results in a takeover not proceeding) to be unacceptable. Some examples of frustrating action contained in the Guidance Note are: significant issuing or repurchasing of shares; acquiring or disposing of a major asset; undertaking significant liabilities or changing the terms of the company's debt; declaring a special or abnormally large dividend; and a significant change to the company's share plans.

75 See Ramsay, I (ed), The Takeovers Panel and Takeovers Regulation in Australia (Melbourne University Publishing 2010), ch 1Google Scholar.

76 Roe (n 58).

77 ibid.

78 ibid 553, 560.

79 ibid 560.

80 Cheffins (n 58), 23.

81 ibid.

82 ibid 22.

83 C Bruner, ‘Power and Purpose in the “Anglo-American” Corporation’ (2010) 50 Virginia JIntlL 579.

84 ibid 612.

85 See the research of Mitchell et al (n 8).

86 For example, the Corporations Legislation Amendment Act 1991 strengthened the insider trading laws; the Corporate Law Reform Act 1992, among other things, restricted financial benefits to the related parties of public companies, including directors; and the Corporate Law Reform Act 1994 enhanced disclosure to shareholders.

87 The Takeovers Panel (called the Corporations and Securities Panel when it was first created) was established pursuant to s 171 of the Australian Securities Commission Act 1989.

88 For example, the Company Law Review Act 1998 introduced, among other things, enhanced accounting requirements and increased the rights of shareholders to inspect company books and call meetings; the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 gave the Australian Securities Commission increased powers; and the Corporate Law Economic Reform Program Act 1999, among other things, established the Financial Reporting Council, introduced the shareholder's statutory derivative action and increased the powers of the Takeovers Panel.

89 Corporations Law Amendment (Employee Entitlements) Act 2000.

90 For a detailed discussion on European insolvency law and the effect of the EU, see PJ Omar, ‘The Emergence of a New European Legal Order in Insolvency’ (2004) International Company and Commercial Law Review 262; PJ Omar, ‘Four Models for Rescue: Convergence or Divergence in European Insolvency Laws? Part I’ (2007) International Company and Commercial Law Review 127; PJ Omar, ‘Four Models for Rescue: Convergence or Divergence in European Insolvency Laws? Part 2’ (2007) International Company and Commercial Law Review 171; di Luigi, MC, ‘An Invasive Top-down Harmonisation or a Respectful Framework Model of National Laws? A Critique of the Societas Europaea Model’ (2008) International Company and Commercial Law Review 58Google Scholar.

91 See generally, M Lutter (ed), ‘Legal Capital in Europe’ in European Company and Financial Law Review (special volume 1, De Gruyter Recht 2006); J Armour, ‘Legal Capital: An Outdated Concept?’ (2006) 7 EBOR 5.

92 The French SARL (Société à responsibilité limitée) stipulated a minimum capital of 50,000 FF until the end of 2003. Thereafter, no minimum capital has been required. See Armour (n 91).

93 See for example, Delaware General Corporation Law, §170(a); §244(a). The Act was amended in 2010 but did not make any relevant changes to the dividend and capital maintenance provisions of stock corporations.

94 (Cm 6456 2005) 41.

95 These have been challenged by Armour and Ferran. See Armour (n 91) 27, who described legal capital as ‘a form of primitive regulatory technology … likely to create more costs than benefits’; also Eilis Ferran, ‘The Place for Creditor Protection on the Agenda for Modernisation of Company Law in the European Union’ (2006) European Company and Financial Law Review 178.

96 For the wider European perspective, see J Rickford, ‘Legal Approaches to Restricting Distributions to Shareholders: Balance Sheet Tests and Solvency Tests’ in H Eidenmüller and W Schön (eds), The Law and Economics of Creditor Protection: A Transatlantic Perspective (TMC Asser Press 2008).

97 306 US 307 (1939).

98 308 US 295 (1939).

99 11 USC §510; Bankruptcy Act 1978.

100 Eigenkapitalersatzrecht.

101 Andreas Cahn, ‘Equitable Subordination of Shareholder Loans?’ (2006) 7 EBOR 287, 289. See also David A Skeel, Jr and Georg Krause-Vilmar, ‘Recharacterization and the Nonhindrance of Creditors’ (2006) 7 EBOR 259, 279.

102 The relevant provisions are §§32a and 32b GmbHG; §135 Insolvency Act (Insolvenzordnung—InsO); and §6 of the Law Concerning the Contestability of Legal Acts of a Debtor Outside of Insolvency Proceedings (Anfechtungsgesetz—AnfG).

103 Both the US and Germany also have substantive consolidation of group companies under certain circumstances.

104 Report of the Review Committee on Insolvency Law and Practice (Cmnd 8558, 1982) (Cork Report) was chaired by Kenneth Cork. The Cork Report was followed by a White Paper in 1984, A Revised Framework for Insolvency Law (Cmnd 9175, 1984), and these led to the Insolvency Act 1986 (UK).

105 Cork Report, ibid [1958–65].

106 Note however that there is a degree of subordination of parent company debt in the UK. See ss 213–215 of the Insolvency Act 1986 (UK). See generally Finch, V, Corporate Insolvency Law: Principles and Perspectives (2nd edn, CUP 2009), 585–87CrossRefGoogle Scholar.

107 Armour et al, ‘How Do Legal Rules Evolve?’ (n 1).

108 Bankruptcy Reform Act of 1978 (US Code Title 11 Bankruptcy). For an explanation of the rationale behind the enactment of this legislation, see Posner, EA, ‘The Political Economy of the Bankruptcy Reform Act of 1978’ (1997) 96 Michigan LRev 47CrossRefGoogle Scholar.

109 11 USC §§362(a)(7), 506, 542(b), 553(a).

110 The Recovery of Debts Due to Banks and Financial Institutions Act 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (known as the SARFAESI Act).

111 Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 2 All ER 552 (CA).

112 The Corporate Law Reform Act 1992 introduced Part 5.3A (which deals with voluntary administration) into the former Corporations Law, now the Corporations Act 2001.

113 Changes to the UK index are attributable to the Insolvency Act 1986 and the Enterprise Act 2002. The former consolidated the insolvency provisions of the Insolvency Act 1985 and the Companies Act 1985.

114 Bankruptcy Reform Act of 1978 (11 USC Chapter 11). See further G McCormack, Corporate Rescue Law: An Anglo-American Perspective (Edward Elgar 2008), ch 5.

115 The political determinants of the US bankruptcy law's amendment are examined by Posner (n 108).

116 Corporations Act 2001, s 440B.

117 Loi n° 85–98 du Janvier 1985 relative au redressement et à la liquidation judiciaires des enterprises.

118 Article 1 of the law states that the aims of French bankruptcy are (1) saving the enterprise, (2) the preservation of jobs and (3) the payment of creditors’ claims.

119 Reforms to SICA, though passed by the Indian Parliament, are still awaiting implementation: SICA Reform Act 2003.

120 Siems (n 1) 18.

121 ibid 19, citing B Debroy, ‘Some Issues in Law Reform in India’ in Jean-Jacques Dethier (ed), Governance, Decentralization and Reform in China, India and Russia (Kluwer 2000) 339–68.

122 Siems (n 1) 19.

123 Armour et al, ‘How do Legal Rules Evolve?’ (n 1) 613.

124 Armour et al, ‘Law and Financial Development’ (n 7) 1472. For example, in the US and the UK creditors have a comparative advantage in mechanisms that facilitate contracting for greater protection, whereas in Germany creditors are better protected than in other countries mainly through controls over debtor activities.

125 See Drezner, D, ‘Globalization and Policy Convergence’ (2001) 3 International Studies Review 53, 54CrossRefGoogle Scholar.

126 Kerr, C, The Future of Industrial Societies: Convergence or Continuing Diversity? (Harvard University Press 1983) 3CrossRefGoogle Scholar.

127 See Dobbin, F, Simmons, B and Garrett, G, ‘The Global Diffusion of Public Policies: Construction, Coercion, Competition or Learning?’ (2007) 33 Annual Review of Sociology 472, 458CrossRefGoogle Scholar; and Knill, C, ‘Cross-national Policy Convergence: Concepts, Approaches and Explanatory Factors’ (2005) 12 Journal of European Public Policy 764CrossRefGoogle Scholar.

128 Bennett, C, ‘Review Article: What is Policy Convergence and What Causes It?’ (1991) 21 British Journal of Political Science 215, 219CrossRefGoogle Scholar.

129 See Zweigert, K and Kotz, H, An Introduction to Comparative Law (3rd edn, OUP 1998), 39–40Google Scholar.

130 Armour et al, ‘How Do Legal Rules Evolve?’ (n 1), contend that an examination of the indices reported in their article provides some basis on which to measure the extent of both formal and functional convergence. In their view, examining differences at the aggregate index level can be viewed as an indicator of functional equivalence because it recognizes that the same or similar aggregate levels of protective strength can be achieved through the operation of different legal rules and, in doing so, this measure provides some way of capturing substitutions between legal rules in the overall measure of protective strength. The use of this approach to distinguish between formal and functional convergence is somewhat limited because it does not capture the extent to which different legal rules might lead to similar functional outcomes—for example, around the form of corporate governance arrangements at the company level. This would require a measure that captures actual practice at a company level, not just formal rules: see Khanna, T, Kogan, J and Palepu, K, ‘Globalization and Similarities in Corporate Governance: A Cross-country Analysis’ (2006) 88 Review of Economics and Statistics 69CrossRefGoogle Scholar.

131 The co-efficient of variation is calculated as the square root of the squared sum of differences in the value of each index number for all countries, divided by the mean value of the index for all countries. Formally, it is given as: , where is the sum of the differences in aggregate value of our index measuring creditor or shareholder protection between countries c i and c j at time t, and μt is the mean value of the index across all countries at time t.

132 Armour et al, ‘Law and Financial Development’ (n 7).