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Patterns of Legal Change: Shareholder and Creditor Rights in Transition Economies

Published online by Cambridge University Press:  17 February 2009

Katharina Pistor
Katharina Pistor
Affiliation:
Assistant Professor for Public Policy, Kennedy School of Government, Harvard University.
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The reform of the enterprise sector in the former socialist countries has been at the core of the economic reform programs, which were launched ten years ago, beginning in Poland and followed by other governments throughout the region. A key element of the enterprise reform package was privatisation. Depending on the country and the specific area of the law in question, this reform measure was preceded, accompanied, or followed by legal reforms. Legal reforms in the region have been comprehensive and affected not only areas immediately relevant for the enterprise sector, but the entire legal system ranging from constitutional, administrative, criminal and civil law to the organization and procedural rules of the court system. This paper focuses on laws that are immediately relevant for the restructuring and financing of enterprises, in particular the rights of shareholders as stipulated in company laws, securities regulations, and the right of creditors as holders of collateral and in bankruptcy. The paper investigates the patterns of legal change in these areas of the law and identifies key determinants of legal change. The method employed is a formalised comparison of legal change based on pre-defined legal indicators. A data base was constructed, which codes the development of shareholder and creditor rights from 1990 through 1998 for 24 transition economies (excluding only Serbia, Tadjikistan and Turkmenistan). The paper joins a growing literature that uses cross-country formalised legal indicators to investigate the interaction between legal and economic change using statistical tools. It introduces the data used and descriptively analyses the patterns of legal change that can be observed. A statistical analysis of the interaction between legal and economic change is addressed in a separate paper.

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Articles
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European Business Organization Law Review (EBOR) , Volume 1 , Issue 1 , March 2000 , pp. 59 - 107
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Copyright © T.M.C. Asser Press and the Authors 2000

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References

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23 Pistor(1995), op. cit. n. 1.

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26 See Elster, , Offe, and Preuss, , Institutional Design in Post-communist Societies: Rebuilding the Ship at Sea, (The Hague, NL, Cambridge University Press 1998)CrossRefGoogle Scholar, for the pattern of institutional change in Bulgaria, the Czech Republic, Hungary and Slovakia.

27 La Porta, et al. (1998), supra n. 2.

28 Details for the definition of variables and their coding are given in Appendix 1.

29 Part of Poland, of course, received French law during the Napoleonic wars. However, subsequent German law has been stronger.

30 Note that periodically Bosnia belonged to the Austro-Hungarian empire, but this has not strongly affected its legal development during the 19th century.

31 Owen, , The Corporation under Russian Law, 1800-1917, (The Hague, NL, Cambridge University Press 1991)CrossRefGoogle Scholar; International Encyclopedia of Comparative Law, National Reports, supra n. 22, 1.

32 La Porta, et al. (1998), supra n. 2.

33 Ibid.

34 Compare also the indicators for economic reforms of the EBRD in: EBRD (1998), supra n. 19.

35 Feldbrugge, op. cit. n. 24; Pistor, , “Company Law and Corporate Governance in Russia”, in: Sachs, and Pistor, (eds.), supra n. 1,pp. 165–187Google Scholar; Gray, and Hendely, , “Developing Commercial Law in Transition Economies: Examples from Hungary and Russia”Google Scholar, ibid., pp. 139–164.

36 This information was given by Alexander Shapleigh of USAID. According to USAID, the results have not been equally strong in all countries. Good results were achieved in shareholder rights reforms in Armenia, Kazakhstan, Kyrgyzstan and Romania. For creditor rights, good results were reported for Kazakhstan, Kyrgyzstan, Latvia, Poland, Romania and Ukraine. Since this assessment is highly subjective, in our analysis we include all countries that have received USAID for legal reforms of shareholder and creditor rights.

37 For a discussion of the effects of the takeover guideline in Poland, see Soltysinski, , “Transfer of Legal Systems as Seen by the “Import Countries”: A View from Warsaw”, in: Drobnig, et al. (eds.), Systemtransformation in Mittel- und Osteuropa und ihre Folgen für Banken, Börsen und Kreditsicherheiten, (Tübingen, Mohr Siebeck 1998) pp. 69–82Google Scholar. Compare this with the positive evaluation of the City Takeover Code for transition economies by Coffee, , “The Lessons From Securities Market Failure: Privatization, Minority Protection, and Investor Confidence”, draft of September 1999.Google Scholar

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39 Hirschman, , Exit, Voice, and Loyalty; Responses to Decline in Firms, Organizations, and States, (1970)Google Scholar; Coffee, , “Liquidity Versus Control: The Institutional Investor as Corporate Monitor”, 91 Colum. L Rev. (1991) 1277–1368.CrossRefGoogle Scholar

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41 Black and Kraakman, supra n. 12.

42 Berglöf (1995), supra n. 18; Berglöf, and Von, Thadden, “The Changing Corporate Governance Paradigm: Implications for Transition and Developing Countries”, Proceedings of the Annual Bank Conference on Development Economics, (Washington, D.C., The World Bank 1999)Google Scholar; Porta, La et al. , “Corporate Ownership Around the World”, 54 Journal of Finance (1999) 471–517.CrossRefGoogle Scholar

43 Coffee (1999), supra n. 37.

44 Unfortunately, it was not possible to obtain reliable data on changes in disclosure requirements for all countries. Most laws have provisions mandating the annual disclosure of company information to their shareholders. We did not include this variable, because of the lack of variance, and because it does not reflect the extent of disclosure requirements for publicly traded companies.

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46 Pistor (1999), supra n. 17; Coffee (1999), supra n. 37. For experiences in other parts of the world see also Rosen, , “The Myth of Self-Regulation or the Dangers of Securities Regulation Without Administration: The Indian Experience”, 2 J Comp Corp L & Sec Reg (1979) 261–302Google Scholar, as well as Pistor, and Wellons, , The Role of Law and Legal Institutions in Asian Economic Development, (Hong Kong, Oxford University Press 1999), ch. 6.Google Scholar

47 Pistor (1999), supra n. 17.

48 This requirement typically does not apply to all joint stock companies, but only those which exceed the stipulated number of shareholders, i.e., 500 in the case of Russia and Kazakhstan.

49 Pistor (1997), supra n. 35.

50 Ibid.

51 In fact, in the early period many of the former Soviet Union republics required 60%. This may, however, be counter-productive, because it decreases the likelihood for a shareholder meeting to reach the quorum.

52 Berglöf, , “Reforming Corporate Governance: Redirecting the European Agenda”, 24 Economic Policy (1997) 93–119Google Scholar; Coffee (1999), supra n. 7.

53 On the pros and cons of the US Bankruptcy Code see Baird, , The Elements of Bankruptcy, (New York, Westbury 1993) p. 283.Google Scholar

54 Gray and Hendely (1997), supra n. 35.

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58 For a detailed analysis of Russian law on security interests see Oda, supra n. 56.

59 EBRD, Model Law on Secured Transactions, (London, EBRD 1994).Google Scholar

60 According to information obtained from the EBRD, the following countries have established registers for security interests which used the EBRD model law or US law: Azerbaijan (1998); Belarus (1999); Bulgaria (1996); Estonia (1996); FYR Macedonia (1998); Georgia (1997); Hungary (1997); Kazakhstan (1998); Kyrgyzstan (1997); Latvia (1999); Lithuania (1998); Moldova (1996 – simplified version now under revision); Poland (1998); Romania (1999); Ukraine (1997/99); Uzbekistan (1998). The enactment of these laws, however, is only the first step. Functioning registries for security interests in movables apparently exist as of now only in Bulgaria, Hungary, Latvia, Lithuania, with some reservations in Poland, and apparently since March 1999 in Ukraine.

61 Summers (1997), supra n. 57.

62 An example is the German law on concerns. Art. 317 of the German law on marketable share companies (AktG), for example, states that a company which controls another one without having concluded a control contract, may be held liable for damages incurred by that company or its shareholders, if it made that company conclude detrimental transactions without compensation.

63 Compare Art. 106 of the Russian Civil Code with Art. 6, section 3 of the Joint Stock Companies Act.

64 Note: since we do not code for law in the former Yugoslav republics, our coding is likely to overstate the absence of law in this region.

65 Information obtained from the EBRD.

66 Oda (1999), supra n. 56.

67 Note that they were first included in the Civil Code, which borrowed heavily from the Dutch Civil Code.

68 Avilov, et al. , General Principles of Company Law for Transition Economies, (OECD, 1999)Google Scholar, strongly advocate that such provisions should be strictly limited to these cases.

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76 Obviously, this can be only a rough estimate of the relative importance of shareholder and creditor rights, as the variables included are not encompassing, and not all variables may have equal weight.

77 EBRD (1998), supra n. 19, p. 118.

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79 EBRD (1998), supra n. 19.

80 La Porta, et al. (1997), supra n. 2.

81 Blumberg, , The Multinational Challenge to Corporation Law (New York, Oxford University Press 1993) p. 316Google Scholar; Dunlavy, , “Corporate Governance in the Late 19th Century Europe and USA – The Case of Shareholder Voting Rights”, in: Hopt, et al. (ed.), supra n. 75, pp. 5–39Google Scholar. Accounts of the development of corporate law in the US and Germany since the 19th century show a close interaction between legal and economic development. See Assmann, in: Hopt, and Wiedemann, (eds.), Aktiengesetz: Groβkommentar, Introduction, Vol. I for Germany, (Berlin, Walter de Gruyter 1992)Google Scholar. For a summary of the development in the US, cf. Coffee, , “The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role”, 89 Colum. L Rev. (1989) 1618–1691 and Black and Kraakman, supra n. 12CrossRefGoogle Scholar. Note also that the enactment of extensive minority shareholder protection in the US in 1933/4 follows on the heels of the publication of the famous book by Berle, and Means, , The Modern Corporation and Private Property, (New York, Council for Research in the Social Sciences, Columbia University 1932)Google Scholar, in which they point out the weakness of dispersed small shareholders vis-à-vis company management. Response driven legal evolution has also been observed for the development of corporate law and securities regulations in emerging markets in Asia. See Pistor and Wellons, op. cit. n. 46.

82 Pistor, , “Privatization and Corporate Governance in Russia: An Empirical Study” in: McFaul, and Perlmutter, (eds.) Privatization, Conversion and Enterprise Reform in Russia (Boulder, West view Press 1995), pp. 69–84Google Scholar; Pistor, supra n. 35; Coffee, , “Institutional Investors in Transitional Economies: Lessons from the Czech Experience”Google Scholar, in: Frydman et al., supra n. 70; Black, , Kraakman, and Tarassova, , Russian Privatization and Corporate Governance: What Went Wrong? (Stanford, John M. Olin Program in Law and Economics 1999)Google Scholar. Among economists, there was little interest in the extent and effectiveness of the law at the outset of reform. In their attempt to explain the extremely low valuation of Russian companies in privatization, Boycko et al., do not even discuss the possible role of the weak legal environment: Boycko, et al. , “Privatizing Russia”, Brookings Papers for Economic Activity (1993) 139–180Google Scholar. But see Sachs in his comments to that paper, ibid., p. 181 with reference to Pistor (1995, ibid.).

83 Pistor, supra n. 17.

84 Bebchuk (1999), supra n. 17.

85 La Porta, et al., supra n. 42.

86 Bebchuck (1999), supra n. 17

87 Ibid.

88 Frydman, , Pistor, and Rapaczynski, , “Investing in Insider-Dominated Firms: A Study of Russian Voucher Privatization Funds”, in: Frydman, et al. (eds.), supra n. 70, pp. 187–241Google Scholar. Filatov, et al. , Insider Control and Managerial Entrenchment in Privatised Firms in Russia: Analysis and Policy Implications (Nottingham, University of Nottingham Business School 1999).Google Scholar

89 A first attempt is made in Pistor et al. (2000) supra n. 3. Using data on the effectiveness of legal institutions (legality) they show that countries differ remarkably in this respect and that these differences can explain differences in financial market development in transition economies. Using a large sample set (which excludes transition economies), Berkowitz, Pistor and Richard, show that domestic demand for a transplanted legal order is an important determinant for the long-term development of legality (Berkowitz, , Pistor, and Richard, , Economic Development, Legality and the Transplant Effect, EBRD mimeo (1999)).Google Scholar