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Legal Capital – Is There a Case against the European Legal Capital Rules?

Published online by Cambridge University Press:  17 February 2009

Peter O. Mülbert  and
Max Birke
Peter O. Mülbert
Affiliation:
Professor of Law, Mainz University, Director of the Center for German and International Law of Financial Services, Mainz.
Max Birke
Affiliation:
LL.M. (University of Chicago).
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Extract

Legal capital rules have traditionally been among the cornerstones of European Union Company Law. This led to the early promulgation of the Second (“Capital”) Directive concerning the formation and maintenance of a legal capital. The unanimity of the basic decision in favor of legal capital rules became apparent once again as recently as last year in the EU regulation on the European Corporation (SE), that requires a minimum capital of € 120,000 and contains rules governing the raising and maintenance of this capital.

Type
Articles
Information
European Business Organization Law Review (EBOR) , Volume 3 , Issue 4 , December 2002 , pp. 695 - 732
Copyright
Copyright © T.M.C. Asser Press and the Authors 2002

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References

1 Second Council Directive 77/91 of December 13 1976, OJ [1977] L 26/1.

2 Council Regulation No. 2157/2001 of Oct. 8, 2001 on the Statute for a European Company (SE), OJ [2001] L 294/1.

3 Macey, /Enriques, , “Creditors Versus Capital Formation: The Case Against the European Legal Capital Rules”, 86 Cornell L. R. (2001) 1165–1204.Google Scholar

4 Macey/Enriques, supra n. 3, at pp. 1184 et seq.

5 Kübler, , Aktie, Unternehmensfinanzierung und Kapitalmarkt (Köln: Ges. für Bankwissenschaftliche Forschung 1989)Google Scholar; Bauer, , Gläubigerschutz durch eine formelle Nennkapitalziffer – Kapitalgesellschaftsrechtliche Notwendigkeit oder überholtes Konzept? (Frankfurt: Lang 1995)Google Scholar; Klose-Mokroß, , Gläubigerschutz am Beispiel der Lehre von der verdeckten Sacheinlage (Frankfurt: Lang 1997)Google Scholar; for an overview of the various criticisms see Schön, , “Internationalisierung der Rechnungslegung und Gläubigerschutz”, Wirtschaftsprüfung-Sonderheft [2001] 74–79.Google Scholar

6 See SLIM Report available at http://europa.eu.int/comm/internal_market/en/update/slim/slim4en.pdf

7 See “A Modern Regulatory Framework for Company Law in Europe: A Consultative Document of the High Level Group of Company Law Experts”, (2002), at p. 1Google Scholar, available online at http://europa.eu.int/comm/internal_market/en/company/company/modern/index.htm

8 See the Consultation Document of the High Level Expert Group, supra n. 7.

9 For example, the response by a group of highly renowned German practitioners and academics, published in Zeitschrift für Wirtschaftsrecht (ZIP) (2002) at pp. 1310et seq.Google Scholar, is very supportive of the legal capital rules as are the statements by the German federal government and the German employers' association (both are available online at <www.rws-verlag.de>). For a very negative assessment of the legal capital rules see Allen, & Overy, , A Modern Regulatory Framework for Company Law in Europe, 2002 (available online at <www.allenovery.com>).).>Google Scholar

10 See Manning, /Hanks, , Legal Capital, 3rd ed. (Westbury, N.Y.: Foundation Press 1990) at pp. 176–197Google Scholar for a description of the process of abolition of the legal capital regime in the US.

11 See the Report of the Committee on Corporate Laws, 34 Bus. Law. (1979) at p. 1867: “The amendments of the Model Business Corporation Act (the ‘Model Act’) reflect a complete modernization of all provisions of the Model Act concerning financial matters, including (a) the elimination of the outmoded concepts of stated capital and par value …It has long been recognized by practitioners and legal scholars that the pervasive statutory structure in which ‘par value’ and ‘stated capital’ are basic to the state corporation statutes does not today serve the original purpose of protecting creditors…”

12 Manning/, supra n. 10, at pp. 180-181.

13 Manning/Hanks, supra n. 10, at pp. 182-186.

14 See the enumeration in Manning/Hanks, supra n. 10, at p. 177 (as of 1990); remarkably, Delaware, whose law is applicable to most large corporations, is missing from the list. However, whereas Delaware in principle adheres to the notion of legal capital, its legal capital provisions are not nearly as strict as those of the Second Directive, and can be easily evaded, see Bauer, supra n. 5, at pp. 132–33, 197-200, 213-237; Manning/Hanks, supra n. 10, at pp. 93-94.

15 Schön, supra n. 5, at p. 75; also see Euler, , “Paradigmenwechsel im handelsrechtlichen Einzelabschluss: Von den GoB zu den IAS?”, 57 Betriebsberater (2002) 875–880Google Scholar for a comparison of the traditional German rules and IAS.

16 Kübler, , “The Organization of Global Financial Markets”, 158 JITE (2002) at p. 9CrossRefGoogle Scholar: according to Kübler, , “creditors have hardly benefited from this form of accounting”.Google Scholar

17 See Bernhard Walter (former chairman of the management board of Dresdner Bank) in Schneider, , “Diskussionsbericht: Gesetzliches Garantiekapital und Kreditentscheidung der Banken”, 43 Die Aktiengesellschaft (1998) at p. 373Google Scholar: if banks were making credit decisions on the basis of accounting information on legal capital, the credit market would collapse.

18 Regulation EC 2002 of the European Parliament and of the Council on the application of international accounting standards of May 27, 2002, available online at http://europa.eu.int/comm/internal_market/en/company/account/official/reg2002-3626/reg2002-3626_en.pdf

19 Cf. Kübler, supra n. 16, at p. 10.

20 Schön, supra n. 5, at p. 76.

21 Euler, supra n. 15, at p. 880.

22 Art. 1 para. 1.

23 European Court of Justice, decision of March 9, 1999(C-212/97), [1999] ECR I-1459 et seq.

24 Under this theory the corporate law of the country in which a corporation has its real seat is applicable to the internal affairs of the company. The opposing view – the incorporation theory – lets the law of the country in which the company has incorporated govern its internal affairs; see Schmidt, K., Gesellschaftsrecht, 3rd ed. (Köln: Heymann 1997) at pp. 27 et seq.Google Scholar

25 For discussions of the Centros-decision see, for example, Kindler, , “Niederlassungsfreiheit für Scheinauslandsgesellschaften? – die “Centros”-Entscheidung des EuGH und das Internationale Privatrecht”, Neue Juristische Wochenschrift (1999) 1993Google Scholar; Werlauff, , “Ausländische Gesellschaft für inländische Aktivität”, Zeitschrift für Wirtschaftsrecht (ZIP) (1999) 867Google Scholar; more recently Mülbert, /Schmolke, , “Die Reichweite der Niederlassungsfreiheit von Gesellschaften”, Zeitschrift für vergleichende Rechtswissenschaft 100 (2001) 233Google Scholaret seq., with further references.

26 According to its preamble the Second Directive also deals with the solution of intra – shareholder conflicts, see the Second Council Directive 77/91 of December 13 1976. However, this purpose of the Directive is beyond the scope of this article, but see Kübler, supra n. 5, at pp. 33-35.

27 Davies, , “Legal Capital in Private Companies in Great Britain”, 43 Die Aktiengesellschaft (1998)346.Google Scholar

28 Habersack, , Europäisches Gesellschaftsrecht (München: Beck 1999) at p. 74Google Scholar; Drinkuth, , Die Kapitalrichtlinie – Mindest- oder Höchstnorm (Köln: O. Schmidt 1998).Google Scholar

29 Mülbert, , “Kapitalschutz und Gesellschaftszweck bei der Aktiengesellschaft”, in: Schneider, Uwe H., Peter, Hommelfhoff, Karsten, Schmidt, Wolfram, Timm, Barbara, Grunewald, Tim, Drygala (eds.), Festschrift für Marcus Lutter (Köln: O. Schmidt 2000) at p. 551Google Scholar; Habersack, supra n. 28, at p. 77.

30 For a description of this doctrine see text accompanying infra n. 37.

31 For an overview see Habersack, supra n. 28, at p. 87; Schwarz, , Europäisches Gesellschaftsrecht (2000) at pp. 376–378Google Scholar; the European Court of Justice left the question open in one of its decisions, see ECJ (Meilicke) decision of July 16, 1992 (C-83/91), [1992] ECR I-4919 et seq.

32 The minimum capital necessary to incorporate a GmbH, which is not covered by the Second Directive, is set at Euro 25,000, see Sec. 5 GmbHG.

33 Sec. 9 of the German Marketable Share Company Act has implemented Art. 8 for the German Aktiengesellschaft; for the GmbH, to which the Directive does not apply, the German courts have in effect established the same prohibition by case law, see Ulmer, , in: Hachenburg, GmbH-Gesetz, Vol. 1, 8th ed. 1992 (Peter, Ulmer [ed.])Google Scholar, § 5 n. 157 with a survey of the relevant case law.

34 Habersack, supra n. 28, at p. 82 n. 30.

35 See § 36a para. 1 AktG.

36 Bauer, supra n. 5, at p. 203, calls contributions in kind the central problem of legal capital regimes.

37 On hidden contributions in kind see K. Schmidt, supra n. 24, at pp. 892 et seq.; Hüffer, , Aktiengesetz, 5th ed. (München: Beck 2002)Google Scholar § 27 n. 9 et seq.; Pentz, , in: Bruno, Kropff and Johannes, Semler (eds.), Münchener Kommentar zum Aktiengesetz, Vol. 1, 2nd ed. (München: Beck 2000)Google Scholar § 27 n. 84 et seq.; Lutter, /Gehling, , “Verdeckte Sacheinlagen”, 43 Wertpapiermitteilungen (1989) 1445Google Scholar; Groß, , “Die Lehre von der verdeckten Sacheinlage”, 36 Die Aktiengesellschaft (1991) 217Google Scholar; Mülbert, , “Das magische Dreieck der Barkapitalaufbringung”, 154 Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht (1990) 145et seq.Google Scholar

38 An example would be a shareholder who is obliged to contribute cash, which is then used by the company to purchase assets or services from this investor. The majority view does not require intent of the contributing party, see Lutter, in: Wolfgang, Zöllner (ed.), Kölner Kommentar zum Aktiengesetz, Vol. 2, 2nd ed. (Köln [u.a.]: Heymann 1988)Google Scholar § 66 n. 32; K. Schmidt, supra n. 24, at pp. 893 et seq; Hüffer, supra n. 37, § 27 n. 14 et seq.; Pentz, supra n. 37, § 27 n. 94. For a practical example, see the IBH-decision of the German, Bundesgerichtshof, 43 Neue Juristische Wochenschrift (1990) 982.Google Scholar

39 K. Schmidt, supra n. 24, at pp. 895 et seq.; Hüffer, supra n. 37, § 27 n. 9 (calling the consequences “catastrophic”).

40 For details see Pentz, supra n. 37, § 27 n. 106 et seq.; Lutter/Gehling, supra n. 37, at p. 1455.

41 Enriques/Macey, supra n. 3, at p. 1178.

42 Habersack, supra n. 28, at pp. 94 et seq.

43 In particular: the maximum number of shares to be acquired, the duration of the period for which the authorization is given, and the maximum and minimum consideration.

44 In this context, Art. 19 refers to the limits on distributions to shareholders in Art. 15 clarifying that it considers the repurchase of shares as a special form of distribution.

45 Art. 19 sub. 3 contains another exception: Member States may decide not to apply the authorization requirement (see above (1)) to shares acquired in the context of employee stock option programs.

46 For an overview see Hüffer, supra n. 37, § 57 n. 12; Lutter, supra n. 38, § 57 n. 15 et seq. For an extensive treatment see Henze, , in: Hopt, Klaus J. and Herbert, Wiedemann (eds.), Groβkommentar Aktiengesetz, 4th ed. (Berlin: de Gruyter 2000) § 57 nn. 35–70.Google Scholar

47 Habersack, supra n. 28, at p. 89; Schwarz, supra n. 31, at p. 379; Drinkuth, supra n. 28, at pp. 184-186; Mülbert, supra n. 29, at pp. 545 et seq.; Nienhaus, , Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung (2002) at pp. 121–127.Google Scholar

48 Henze, supra n. 46, § 57 n. 35 et seq. with a large number of examples; for more examples see Hüffer, supra n. 37, § 57 n. 12; Lutter, supra n. 38, § 57 nn. 28-30. It is controversial whether in addition some sort of intent is necessary for the finding of a hidden distribution; the majority view rejects such an intent requirement, see Hüffer, supra n. 37, § 57 n. 10; Henze, supra n. 46, § 57 n. 46 et seq.

49 Hüffer, supra n. 37, § 62 n. 9; Henze, supra n. 46, § 62 n. 42. The status quo for the GmbH is more complicated: Sec. 30, 31 of the GmbHG only explicitly provide that hidden distributions have to be returned when they decrease the assets of the corporation to below the legal capital figure; it is debated whether and in which cases other hidden distributions also have to be returned to the corporation, see K. Schmidt, supra n. 24, at pp. 1138 et seq.; Lutter, /Hommelhoff, , GmbH-Gesetz, 15th ed. (Köln: Schmidt 2000) § 29 n. 50Google Scholar; Hueck/Fastrich, in: Baumbach, /Hueck, , GmbH-Gesetz, 17th ed. (München: Beck 2000) § 29 n. 71 et seq.Google Scholar

50 Henze, supra n. 46, § 62 nn. 42-44; Hüffer, supra n. 37, § 62, n. 9. In the example the shareholder would have to repay the complete purchase price to the corporation who in return would be obliged to return the supplied goods to the shareholder.

51 Some Member States have introduced another type of complementary provision into their corporate laws, the so called “recapitalize or liquidate”-rule: these provisions require that, whenever the losses of a company cause a firm's net assets to fall below the minimum capital, the firm has to either inject new equity capital or reorganize into a different type of company with a legal capital requirement no greater than the remaining net assets; see Enriques/Macey, supra n. 3, at pp. 1183-1184 for an overview and evaluation of these provisions.

52 It is not clear what purpose Art. 23 serves, or, for that matter, whether it serves any useful purpose; for a critical discussion see Wymeersch, , “Article 23 of the second company law directive: the prohibition on financial assistance to acquire shares of the company”, in: Jürgen, Basedow, Hopt, Klaus J., Hein, Kötz (eds.), Festschrift für Ulrich Drobnig (Tübingen: Mohr Siebeck 1998) at pp. 725–747.Google Scholar

53 The creditor can also demand collateral; for an illuminating analysis of the disciplining and selective function of collateral see Emons, , “Kreditsicherheiten aus informationsökonomischer Sicht”, in: Wolfgang, Wiegand (ed.), Berner Bankrechtstag – Personalsicherheiten (Bern: Stämpfli 1997) at pp. 13–21.Google Scholar

54 See Ross, /Westerfield, /Jaffe, , Corporate Finance, 6th ed. (Boston, MA: Irwin/McGraw-Hill 2002) at pp. 427et seq.Google Scholar

55 This assumption is critical for the further analysis. However, that management always, or even generally, acts in the interests of shareholders is far from clear. There is a vast literature dealing with the conflict of interests arising between shareholders and management in the large public corporation and on governance structures to assure that managers act in the interests of shareholders dating back to the classic work by Berle, /Means, , The Modern Corporation and Private Property (New York: Macmillan 1932)Google Scholar. Also see the seminal agency-theory article by Jensen, /Meckling, , “Theory of the firm: Managerial behavior, agency costs and ownership structure”, 3 Journal of Financial Economics (1976) 305–360CrossRefGoogle Scholar. In this article we assume that the mechanisms to overcome the divergence of interests between managers and shareholders work smoothly and efficiently.

56 Ross/Westerfield/Jaffe, supra n. 54, at pp. 427-430.

57 The resulting efficiency losses can be termed the agency costs of debt, see Jensen/Meckling, supra n. 55, at pp. 333 et seq.; Ross/Westerfield/Jaffe, supra n. 53, at p. 427; Lin, , “Shift of Fiduciary Duty Upon Corporate Insolvency: Proper Scope of Directors' Duties to Creditors”, 46 Vanderbilt L. R. (1993) 1485.Google Scholar

58 Ross/Westerfield/Jaffe, supra n. 54, at p. 429.

59 Ross/Westerfield/Jaffe, supra n. 54, at pp. 428-429.

60 See Myers, , “Determinants of Corporate Borrowing”, 5 Journal of Financial Economics (1976) 147, 155.CrossRefGoogle Scholar

61 See Enriques/Macey, supra n. 3, at p. 1169; Ross/Westerfield/Jaffe, supra n. 54, at pp. 427-428.

62 This effect can be formally shown when the equity holders of a firm are seen as holders of a European call option on the value of the (leveraged) firm. This “option” can be exercised at the “strike price” of the face value of the outstanding debt on the “strike date” of the maturity of the firm's debt; see Black, /Scholes, , “The Pricing of Options and Corporate Liabilities”, 81 Journal of Political Economy (1973) 637et seq.CrossRefGoogle Scholar; Jensen/Meckling, supra n. 55, at pp. 333 et seq.

63 For other examples see Ross/Westerfield/Jaffe, supra n. 54, at pp. 427-428; Enriques/Macey, supra n. 3, at pp. 1169 et seq.

64 It is not necessary however, that in such situations the strategy creditors prefer is the socially optimal strategy. There are other situations where the risk aversion of creditors would lead to the choice of socially suboptimal investment choices, for examples see Macey, /Miller, , “Corporate governance and commercial banking: A comparative examination of Germany, Japan and the United States”, 48 Stanford L. R. (1995) 73, at pp. 77–81CrossRefGoogle Scholar; Easterbrook, , “Two Agency-Cost Explanations of Dividends”, 74 American Economic Review (1984) 650, at p. 653.Google Scholar

65 For a description of the argument see Kanda, , “Debtholders and Equityholders”, 21 .J. of Legal Stud. (1991) 431CrossRefGoogle Scholar; others argue, more convincingly, that the additional leverage and the unification of management and risk bearing functions have beneficial disciplinary effects on the quality of management, see Jensen, , “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers”, 76 American Economic Review (1986) 323Google Scholar; Ross/Westerfield/Jaffe, supra n. 54, at p. 436; the additional discipline on management also benefits creditors, Easterbrook, supra n. 64, at p. 657; for a description of the rise in the LBO market in the 1980s see Baker, /Smith, , The New Financial Capitalists – Kohlberg Kravis Roberts and the Creation of Corporate Value (Cambridge University Press 1998).CrossRefGoogle Scholar

66 Mülbert, /Birke, , “In defense of Passivity – on the Proper Role of a Target's Management in Response to a Hostile Tender Offer”, 1 EBOR (2000) 445, at p. 455.Google Scholar

67 Ross/Westerfield/Jaffe, supra n. 54, at pp. 430-431; Lehn, /Poulsen, , “Contractual Resolution of Bondholder-Stockholder Conflicts in Leveraged Buyouts”, 34 Journal of Law & Economics (1991) 645–673CrossRefGoogle Scholar, find a significant rise in the use of “event-risk” covenants, that deal with changes of control, in US bond indentures between 1986 and 1989, suggesting that creditors resorted to these covenants as a reaction to the increase in LBO activities in the 1980s.

68 See Ross/Westerfield/Jaffe, supra n. 54, at p. 431, with a list of covenant provisions and the way in which they protect creditors.

69 See Fama, , “The effect of a firm's investment and financing decisions on the welfare of its security holders”, 68 American Economic Review (1978) 272, at pp. 283–284Google Scholar; Easterbrook, /Fischel, , The Economic Structure of Corporate Law (Cambridge, Mass.: Harvard University Press 1991) at p. 46.Google Scholar

70 Enriques/Macey, supra n. 3, at pp. 1170 et seq.

71 Enriques/Macey, supra n. 3, at p. 1170, with descriptions of other types of possible end periods.

72 Jensen/Meckling, supra n. 55, at p. 338.

73 Also see Manning/Hanks, supra n. 10, at pp. 98-101; Enriques/Macey, supra n. 3, at pp. 1188 et seq.

74 Manning/Hanks, supra n. 10, at pp. 98 et seq.; Kübler, supra n. 5, at p. 32; Klose-Mokroß, supra n. 5, at pp. 124-137.

75 To be sure, the existence of such sophisticated creditors is not all positive for weak creditors, see text preceding infra n. 133. At a minimum, however, weak creditors benefit from the ex ante disciplining effect of the provisions in the covenants.

76 Understanding this aspect explains that the remedy to the problem of undercapitalized ventures should not be sought in corporate law, but in the regulation of the dangerous activity or in the imposition of mandatory insurance on such ventures.

77 Enriques/Macey, supra n. 3, at p. 1167.

78 Armour, , “Share Capital and Creditor Protection: Efficient Rules for a Modern Company Law”, 63 Modern Law Review (2000) 355, at p. 373.CrossRefGoogle Scholar

79 Armour, supra n. 78, at p. 374.

80 Armour, supra n. 78, at p. 374.

81 See Bernhard, Walter (former chairman of the management board of Dresdner Bank), “Gesetzliches Garantiekapital und Kreditentscheidung der Banken”, 43 Die Aktiengesellschaft 43 (1998) at p. 371.Google Scholar

82 For example, among German firm Siemens has a legal capital of € 2.665 billion, Beiersdorf has a legal capital of € 215 million, and Infineon, founded in 1999 (that is in the age of modern finance), has a legal capital of € 1.386 billion.

83 Siemens with a legal capital of € 2.665 billion has issued approximately 888 million shares, Beiersdorf with a legal capital of € 215 million has 84 million outstanding shares, and Infineon, with a legal capital of 1.386 billion, has 693 million shares outstanding. All three of these stock exchange listed companies have, therefore, issued shares that represent a fraction of their legal capital of between € 2 and 3.

84 See infra under 6.

85 One historical reason could be that formerly the minimum nominal amount per share was higher than the fraction of € 1 today; also see Manning/Hanks, supra n. 10, at pp. 91 et seq. for similar historical, cultural, and psychological arguments.

86 Mülbert, , “Abschied von der „TBB“ – Haftungsregel für den qualifiziert faktischen Konzern”, 45 Deutsches Steuerrecht (2001) at p. 1942.Google Scholar

87 Lutter, , “Gesetzliches Garantiekapital als Problem europäischer und deutscher Rechtspolitik”, 43 Die Aktiengesellschaft (1998) at p. 376 shows some sympathy for this solution.Google Scholar

88 Dieter, Schneider, “Mindestnormen zur Eigenkapitalausstattung als Beispiele unbegründeter Kapitalmarktregulierung?”, in: Dieter, Schneider (ed.), Kapitalmarkt und Finanzierung (Berlin: Duncker u. Humblot 1987) at 85et seqGoogle Scholar. Schneider argues that, while it is possible to justify a legal capital in imperfect capital markets because in these markets unforeseeable future events may burden the corporation, it is precisely this unforeseeability that makes it impossible to quantify the correct capital for the corporation (at p. 98).

89 Easterbrook, supra n. 64, at p. 653: this reduction of the risk of bankruptcy comes at the expense of foregone tax savings and management discipline, see references in infra n. 65.

90 Enriques/Macey, supra n. 3, at p. 1194 n. 135 enumerate Denmark, France, Germany, the Netherlands, and Sweden. Of course, this is a rather crude measure, because the insolvency rate is influenced by a multitude of factors.

91 Limiting distributions may also benefit creditors as a side effect to benefiting the company in the following manner: Constraining distributions means that money (slack or free cash flow) is left in the firm; the availability of this money leaves firms the chance to exploit future investment opportunities more quickly. This flexibility may constitute valuable real options, see Myers, , “The Determinants of Corporate Borrowing”, 5 Journal of Financial Economics (1977) at pp. 159et seq.CrossRefGoogle Scholar However, free cash flow also provides management with the chance to waste resources without facing the discipline of capital markets, see Jensen, supra n. 64.

92 See supra under 2.3.1.

93 These additional barriers become a serious cost when a firm has no worthwhile projects left to pursue, see Armour, supra n. 78, at p. 374.

94 See supra under 2.3.3.

95 Armour, supra n. 77, at p. 374.

96 See Enriques/Macey, supra n. 3, at p. 1190.

97 See the emphatic statement in Manning/Hanks, supra n. 10, at p. 93: “In the manner of medieval theologians at their worst, lawyers and accountants hold up (and are forced to hold up) sensible economic transactions while they wrangle over the appropriate stated capital treatment for stock subscriptions, agreements to purchase stock, mergers, treasury share cancellation, retirement conversions, stock warrant purchases, option exercises, stock discounts, liquidation preferences, allocation of capital among classes, series, and individual shares, etc, etc, endlessly”.

98 Kübler, supra n.5, at p. 12; Manning/Hanks, supra n. 10, at p. 27.

99 Armour, supra n. 78, at p. 374.

100 Wymeersch, supra n. 47, at pp. 734 et seq.

101 Enriques/Macey, supra n. 3, at p. 1196.

102 Wymeersch, “Company Law in Europe and European Company Law”, Referat auf dem 1. Europäischen Juristentag, Nürnberg 2001, Abteilung II, Gemeinschaftsweite Unternehmenstätigkeit, at pp. 126 et seq.

103 Davies, supra n. 27, at p. 348.

104 Manning/Hanks, supra n. 10, at p. 95.

105 See Niederleithinger, , “Gesetzliches Garantiekapital als Problem europäischer und deutscher Rechtspolitik”, 43 Die Aktiengesellschaft (1998) at p. 378Google Scholar, and Schuster, , “Gesetzliches Garantiekapital als Problem europäisicher und deutscher Rechtspolitik”, 43 Die Aktiengesellschaft (1998) at p. 379, arguing that the costs are low.Google Scholar

106 For more detailed descriptions of typical covenants see Ross/Westerfield/Jaffe, supra n. 54, at p. 425; Manning/Hanks, supra n. 10, at pp. 105-113; also see the empirical study by Smith, /Warner, , “On Financial Contracting: An Analysis of Bond Covenants”, 7 Journal of Financial Economics (1979) 117et seqCrossRefGoogle Scholar.: they examined public issues of debt in the USA in 1975 (!) and found that 91 % of the bond indentures contained covenants restricting additional leverage, 23 % restricted dividends, 39 % restricted mergers, and 36 % limited the sale of major assets.

107 Ross/Westerfield/Jaffe, supra n. 54, at pp. 430-431; Manning/Hanks, supra n. 10, at pp. 105-113.

108 See the text accompanying infra n. 127.

109 See Haar, , “Die unbeschränkte Haftung der Mehrheitsaktionärs im US-amerikanischen Recht zur Korrektur eines Kapitalmarktversagens”, 64 Rabels Zeitschrift für ausländisches und Internationales Privatrecht (2000) 537–563Google Scholar; Easterbrook/Fischel, supra n. 69, at pp. 54-55; for a more far reaching policy proposal that suggests disregarding shareholders' limited liability with regard to all tort creditors see Hansmann, /Kraakman, , “Toward Unlimited Shareholder Liability for Corporate Torts”, 100 Yale L. J. (1991) 1879, at pp. 1927et seq.CrossRefGoogle Scholar; also see Leebron, , “Limited Liability, Tort Victims, and Creditors”, 91 Columbia L. R. (1991) 1565et seq.CrossRefGoogle Scholar

110 Easterbrook/Fischel, supra n. 69, at p. 55.

111 Easterbrook/Fischel, supra n. 69, at p. 57.

112 Easterbrook/Fischel, supra n. 69, at p. 58.

113 Lutter, , “Gefahren persönlicher Haftung für Gesellschafter und Geschäftsführer einer GmbH”, 47 Der Betrieb (1994) 129et seq.Google Scholar

114 For an enumeration of these benefits see Easterbrook/Fischel, supra n. 69, at pp. 41 et seq.

115 See Basle Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards, 1988 (so called Basle Accords, available at <www.bis.org>); for an economic explanation for the regulation of the banking industry see Fischel, /Rosenfield, /Stillman, , “The Regulation of Banks and Bank Holding Companies”, 73 Va. L.R. (1987) 301et seq.CrossRefGoogle Scholar

116 Grundmann, , “Wettbewerb der Regelgeber im Europäischen Gesellschaftsrecht – jedes Marktsegment hat seine Struktur”, 30 Zeitschrift für Unternehmens- und Gesellschaftsrecht (2001) at pp. 819–820.CrossRefGoogle Scholar

117 Easterbrook/Fischel, supra, n. 69, at p. 61.

118 The concept of signalling in general was developed by Spence, , Market Signalling: Informational Transfer in Hiring and Related Screening Processes (Cambridge, MA: Harvard University Press 1974).Google Scholar

119 For an assertion to the contrary see Schneider, supra n. 88, at p. 103.

120 For a description of this view see Schneider, supra n. 88, at p. 103.

121 Also, the signal only works when the persons running the corporation send out the signal. It is then important that the managers either contribute a significant share of the equity capital or, at least, are certain to act in the interests of shareholders. This has been assumed above, see supra n. 54, but may often be different in real world corporations, see Schneider, supra n. 88, at p. 103.

122 Ross, , “The Determination of Financial Structure: The Incentive-Signalling Approach”, 8 Bell Journal of Economics (1977) 23–40CrossRefGoogle Scholar; Ruffner, , Die ökonomischen Grundlagen eines Rechts der Publikumsgesellschaft (Zürich: Schulthess 2000) at pp. 145–146Google Scholar. An empirical study by Shah, , “The Nature of Information Conveyed by Pure Capital Structure Changes”, 36 Journal of Financial Economics (1994) 89–126CrossRefGoogle Scholar seems to confirm the latter: the study found that investors believe that managers raise the amount of debt if they believe that the probability of bankruptcy has been decreased and lower the amount of debt if they believe that the probability of bankruptcy has been increased.

123 Modigliani, /Miller, , “The Costs of Capital, Corporation Finance, and the Theory of Investment”, 48 American Economic Review (1958) 261–297.Google Scholar

124 Ross/Westerfield/Jaffe, supra n. 54, at pp. 408 et seq.

125 Ross/Westerfield/Jaffe, supra n. 54, at pp. 422 et seq.

126 Jensen, , “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers”, 76 American Economic Review (1986) at p. 323Google Scholar; Jensen, , “The Eclipse of the Public Corporation”, 5 Harvard Business Review (1989) 61.Google Scholar

127 Baker, /Wurgler, , “Market Timing and Capital Structure”, 62 Journal of Finance (2002) 1–32CrossRefGoogle Scholar; on the related pecking order theory of corporate finance see Ross/Westerfield/Jaffe, supra n. 54, at pp. 438-440.

128 See Armour, supra n. 78, at p. 374; on the desirability of a “standard contract” nature of corporate law generally see Easterbrook/Fischel, supra n. 69, chapter 1; Eisenberg, , “The Structure of Corporation Law”, 89 Colum. L.R. (1989) 1461et seq.CrossRefGoogle Scholar; Gordon, , “The Mandatory Structure of Corporate Law”, 89 Colum. L.R. (1989) 1549et seq.CrossRefGoogle Scholar; Hart, , “An Economist's Perspective on the Theory of the Firm”, 89 Colum. L.R. (1989) 1757et seq.CrossRefGoogle Scholar; Bebchuk, , “The Debate on Contractual Freedom in Corporate Law”, 89 Colum. L.R. (1989) 1395et seq.Google Scholar

129 See supra n. 78 and accompanying text.

130 See supra n. 81 and accompanying text.

131 An example would be that the debtor company violates a covenant; as a sanction, the maturity of the debt is accelerated and this brings the company into liquidity problems, while it would have been able to repay all of its debt at the agreed maturity dates.

132 The situation resembles that of a bank run, where it is in the best interest of individual shareholders to try to withdraw their deposits while it would be in the best interests of creditors as a whole to leave them in the bank; see Armour, supra n. 78, at p. 376; bankruptcy law fulfills a similar economic function, see Schwartz, , “A Contract Theory Approach to Bankruptcy”, 107 Yale L. J. (1998) 1807et seq.CrossRefGoogle Scholar

133 Generally on the desirability of regulatory competition in the field of corporate law see Romano, , The Genius of American Corporate Law (Washington D.C.: AEI 1993)Google Scholar; Easterbrook/Fischel, supra n. 69, chapter 1; Grundmann, supra n. 116, at pp. 783-832. Wymeersch, supra n. 52, at pp. 725-747 makes a compelling case for liberalizing one detail of the legal capital regime, the prohibition of financial assistance in Art. 23.

134 For the content of these rules see supra nn. 11-13 and accompanying text.

135 For details of this capital maintenance regime see Lutter/Hommelhoff, supra n. 49, § 30 and § 31; Hueck/Fastrich, supra n. 49, § 30 and § 31.