Creditor protection through mandatory disclosure since long is a highly debated issue among corporate lawyers. This paper considers whether the legal system should compel corporations to disclose information publicly in order to better protect its creditors. First, the paper elaborates on the various economic rationales of mandatory disclosure advanced by proponents of that approach. Second, it rehearses the theoretical framework of mandatory disclosure. Third, it gives a brief overview of the law on those mandatory disclosure requirements that primarily or at least in part aim at corporate creditor protection. Fourth, it outlines limitations of mandatory disclosure with respect to creditors and debtor companies. Fifth, it briefly surveys several important challenges to mandatory disclosure regulation with respect to materiality, standardization, comprehensibility and timeliness. And finally, this paper deals with various legislative options to enforce creditor-protective mandatory disclosure.

Private enforcement of EC competition law has reached a new stage with the publication of the European Commission's Green Paper entitled ‘Damages actions for breach of the EC antitrust rules’. Even though it is unclear whether any legislative action at the Community level will follow, the Green Paper has triggered a lively debate. Private enforcement faces a number of external challenges, such as the possibility of introducing a ‘plea bargaining system’ into EC competition law, the ‘more economic approach’ and coordination with public enforcement. Private enforcement is furthermore beset with a number of intrinsic difficulties, the passing-on problem arguably being the central one. This article attempts to find a solution to that problem, i.e., to the difficulties raised by the passing-on of damages through the various levels of the distribution chain. After evaluating the various options proposed by the European Commission in its Green Paper, it comes to the conclusion that a ‘factor approach’ is the most appropriate. A draft provision for potential secondary EC legislation addressing the passing-on problem is offered, attempting to reconcile the insights of economic theory with the exigencies of civil litigation in the courthouse. This provision stipulates the unavailability of the passing-on defence against direct purchasers unless the direct purchaser has entered into a fixed-quantity, cost-plus contract with his purchaser. Indirect purchasers are entitled to damages provided there is no break in the chain of causation. Their damages should be quantified on the basis of the price difference at the direct purchaser level, i.e., the difference between the price actually paid by the direct purchaser and the hypothetical price the direct purchaser would have paid but for the cartel. This amount is multiplied by a certain factor (fraction) taking into account the likely pass-on rate.

An important field in comparative corporate governance research during the last decade has tried to illuminate the prospects of convergence on a uniform organisational model and legal clothing for the modern firm. The volume under review assembles many of the formative statements in the debate, most of which have been published elsewhere earlier and were only slightly adapted for reprint. Hence, the book does not aim primarily at providing up-to-date reflections on the most recent developments and insights – with the notable exception of the editor's introduction – but at enabling corporate law scholars who have not been following the controversy closely to familiarise themselves with the major arguments characterising the discussion. However, the editorially skilful arrangement of the articles goes far beyond a chronologically accurate reiteration of the evolution of the debate and thereby awards even the expert in the field an opportunity to reclassify certain claims and counterclaims and reassess their validity. Moreover, after rereading the contributions consecutively, the identification of clearly distinguishable and antagonistic strands of thought, popular among corporate law commentators, does not seem to adequately capture the picture. The chapters procure a more nuanced impression of the debate which is characterised rather by discrepancies in accentuation than by sharp and irreconcilable contrasts.

In February 2006, the London School of Economics (LSE) held its second postgraduate company law conference, which focused on corporate governance in transition economies, capital maintenance and social responsibility of multinational corporations.

The General Agreement on Tariffs and Trade (GATT) remains a central document in international trade law. From its inception in 1947 until the establishment of the World Trade Organisation (WTO) in 1995, the GATT provided the legal and institutional framework for negotiating the relaxation of government-mandated trade protection of goods. It was originally intended that the agreement would be administered by an International Trade Organisation (ITO) – a specialised agency of the United Nations that would also act as a forum for the negotiation of international commitments on services, employment policy, international investment, economic development and the treatment of restrictive business practices. The ITO, however, proved too ambitious for some States, and attempts to create it finally died when President Truman announced that he would not submit the Charter to Congress for ratification. An Interim Committee for the ITO was set up under the auspices of the United Nations in 1948, which provided a legal status for the provisional treaty. The GATT remained the only multilateral instrument governing international trade until the establishment of the WTO, operating under the loose arrangement of the Interim Committee for forty-seven years. An updated (although legally distinct) version of the GATT was incorporated into the WTO as one of thirteen multilateral agreements on trade in goods. As a multilateral agreement, the GATT is a compulsory legal instrument, binding all incumbent WTO Members and acceding countries; unlike the plurilateral agreements, participation in the GATT is not optional.

Employee board representation can serve information dissemination purposes. This comment argues that in Germany, which (still) has a bank-oriented financial system, transparency may be better served by using codetermination (under which up to half of the supervisory board is composed of employees) as an information channel, rather than by importing the mandatory disclosure requirements that are typical of Anglo-Saxon jurisdictions. There are two reasons for this. One is that the evidence about the efficiency of mandatory disclosure requirements is mixed. The other is that mandatory disclosure is an intrinsic component of market-oriented financial systems such as the US financial system.

Transplanting a market-oriented component into a bank-oriented financial system brings the risk of inconsistencies, as it affects the complementarities that exist among the intrinsic components of a bank-oriented system. This comment thus concludes that before suggesting ways to transplant further mandatory disclosure requirements into the German financial system, or improve existing ones, one should consider how to use or improve the use of codetermination as an information dissemination channel.

Executive compensation has been a topic of intense debate in the United States for decades. The controversy goes back to the early 1990s when, on the one hand, the high average level of CEO pay drew critical attention from the media and the public at large and, on the other hand, prominent financial economists urged companies to structure pay packages to provide managers with incentives to increase the value of the firm in the long run, regardless of the sociological or moral discussions on the amount of compensation granted. Throughout the following decade, a new executive pay pattern has emerged and become dominant: US public companies have been inclined to raise executive compensation with the specific aim of improving the sensitivity of managers' wealth to company performance.

The first afternoon session included three presentations addressing the issue of whether regulatory requirements are required or helpful to ensure efficient creditor protection. The chairman, Marcus Lutter of the University of Bonn, introduced the afternoon's topic by highlighting the positive effects a legal capital concept might have. John Armour of Cambridge University questioned this concept in his presentation by arguing that such a regime was outdated in today's economy. Holger Fleischer of the University of Bonn followed with additional critical remarks. In his comments, he referred to the distinction between voluntary and involuntary creditors, the latter having no opportunity to protect themselves by means of a contract. One example given were tort victims. John Armour focused strongly on a similar distinction; however, he referred to them as adjusting creditors and non-adjusting creditors. Most participants agreed on the major relevance of this distinction.

European public company law restricts most distributions by requiring maintenance of a net asset reserve (‘cushion’) of at least the aggregate nominal value of issued shares. This cushion is determined absolutely (without assessment of true values or ongoing solvency by directors, as is permitted in most other jurisdictions) by the latest annual statutory accounts (balance sheet test). An alternative solvency test would require directors to certify sufficiency of assets on an ongoing basis. The amount of the ‘cushion’ is arbitrary (with wide variations between comparable companies and Member States), unrelated to the mischief addressed and thus contrary to general European law principles. EU law establishes four possible balance sheet tests: two (with many variations) under the Fourth Directive (an historic cost and stricter revaluation based test), one (with many variations) under the modernised Fourth Directive, which allows or requires fair value accounting, including the distribution of certain unrealised profits, and one under the International Accounting Standards (IAS) Regulation regime. These tests produce widely divergent results for distributable profits. The Fourth Directive departs markedly from reality and in practice conforms imperfectly with true and fair view principles, the implementation of which varies markedly between Member States. The modernised Fourth Directive and the IAS regimes vary widely according to the options used, confer considerable discretion on company boards and are often very volatile, failing to provide a stable basis for prudential decisions. Prudential regulators have accordingly overridden some of these standards. The results of these tests are diverse, complex, costly, subject to regulatory arbitrage and irrational. Statements designed for financial reporting purposes are inappropriate for setting prudential decisions. The proposed solvency assurance is designed to address the mischief by a proportionate, focused assurance of solvency, with director certification before distributions of liquidity for a year and availability of sufficient assets to meet all liabilities for the foreseeable future – a stricter version of the test currently imposed in the United Kingdom for capital distributions in company reconstructions. Such a test should be adopted as an option throughout the European Union with issues of sanctions and controls being a matter for Member State discretion.

One of the standard requirements of company law is the restriction of distributions to shareholders in order to protect the legitimate interests of the company's creditors. As lawful dividends don't have to be paid back when the company runs into losses at a later stage, we need a measuring rod in order to decide on the availability of funds for distribution. The traditional balance sheet test is running into criticism due to the rigidity of the old rules and the conflicts between the philosophy of IAS/IFRS and the concept of creditor protection. Newly offered devices like the solvency test aim at giving a better view of the business prospects of the company but they suffer from a limited time horizon and a wide range of discretion for directors. This makes them particularly problematic when long-term obligations have to be addressed. In the end, a combination of balance sheet test and solvency test seems to be a reasonable solution.

Fraudulent transfer law in the United States provides a safety net for corporate creditors. It prohibits insolvent debtors from making transfers or incurring obligations for less than reasonably equivalent value. Moreover, it reaches any transaction that lacks economic substance and that is designed merely to make it hard for creditors to monitor the debtor. The distinctive shape of fraudulent transfer law in the United States is not replicated in the other common law or in civil law jurisdictions. Nevertheless, the functions it performs are likely to be part of any legal regime that protects the rights of creditors and other investors.

Legal regimes of limited liability serve different functions governed by distinct normative principles. The enabling function of limited liability aims at facilitating investment in risky activities and at organising principal/agent-relationships within the firm. In this area, choice of law may readily be allowed. At the other end of the spectrum, the protective function of limited liability regimes serves the objective of protecting outsiders from externalisation of risk. In this area, choice of law is much more problematic. Fraudulent transfer law belongs in the latter group, whereas corporate law belongs in the former. However, the German version of a limited liability regime cuts across these distinctions by including the protective function in the normative scope of corporate law, thereby downgrading the law of fraudulent transfers. As will be become apparent, this structural feature explains most of the differences that emerge when comparing the German law of fraudulent transfers with its American counterpart. The recent case law of the ECJ poses a major challenge to the traditional approach. It seems that the best way to deal with the challenge is for German law to develop towards the American model.

The first round of discussion focused on the presentation by Rickford and Schön's commentary on it. It concentrated on the question of how to determine distributable profits and whether to apply a balance sheet test, a solvency test or a combination of both.

Conventional economic reasoning suggests that formal insolvency proceedings should commence once the greater of the going concern value or the liquidation value of a firm falls below the value of its liabilities. Since this test is difficult to apply in practice, an additional cash flow test is needed: formal insolvency proceedings should commence if a firm is not able to pay its due debts. Two factors complicate this analysis: risk-shifting incentives of shareholders/managers in the vicinity of insolvency and the (rapid) decline of a firm's going concern value once it approaches insolvency. The former problem should be addressed by a liability rule for wrongful trading. Based on a review of the current legal position in the United States, the United Kingdom and Germany, a uniform European rule is proposed that imposes liability on managers of insolvent companies for trading while they knew or should have known that insolvency was more probable than not, unless they can show that they took all reasonable steps to avoid insolvency. The decline of a firm's going concern value once it approaches insolvency provides all stakeholders with an incentive to try a workout to save as much of the going concern value as possible. However, workouts often fail in practice due to free-rider effects. Cooperation duties are proposed as a means to support workouts. Such duties should be triggered once a workout is initiated. It is suggested that bankruptcy rules, in general, and rules on the initiation of bankruptcy proceedings, in particular, should in principle be enabling rather than mandatory.

Using a 1977 article by Robert Clark as the starting point, this article attempts to shed new light on the question of whether and when shareholder loans to her company should be either equitably subordinated or, as courts have done in a few recent cases, recharacterized as equity. In its emphasis on the particular issue of shareholder loans, the article has a narrower compass than Clark’s article, which uses a four-part typology to explore the relationship among fraudulent conveyance law, equitable subordination, veil piercing and dividend restrictions. But the article also expands Clark's analysis in several respects. The most important adjustment involves the general Nonhindrance ideal, which we use to identify a crucially important form of interference with the rights of creditors that Clark does not himself consider directly.

Part 1 of the article very briefly describes the 1939 Supreme Court case that served as a well-spring for equitable subordination doctrine in general, and for subordination of shareholder loans in particular. Part 2 then focuses on a series of recent decisions that have wrestled with the question whether shareholder loans should be recharacterized as equity contributions. Recharacterization doctrine is closely related to equitable subordination, but most courts view it as a separate development. Part 2 suggests that much of the confusion in the cases could be eliminated by disentangling two issues, whether the status of a loan is ambiguous (which raises issues of Truth, in terms of Clark's typology) and whether it was likely to destroy value that would otherwise go to creditors (the Nonhindrance concern); and by distinguishing bankruptcy recharacterization from the tax characterization cases that seem to have spawned the new doctrine. Part 3 then concludes by briefly considering the German and Austrian approaches to these same issues, which focus on capitalization and creditworthiness.

The most important, and initially counterintuitive, implication comes in Part 2: whereas US courts have treated security interests as a badge of legitimacy in assessing shareholder loans, secured loans are actually the most worrisome form of shareholder investment. These security interests, we argue, should be disallowed.

This comment concerns the financing of distressed corporations by shareholder loans. In the United States as well as in Germany, shareholder loans may be subject to subordination or even recharacterization as equity. The comment argues that the risk of an undue exploitation of a shareholder-lender's insider status can effectively be neutralized by the law of fraudulent conveyances and unlawful preferences, supplemented by a general prohibition of securing shareholder loans.

This paper is concerned with the risks to creditors from strategic business decisions taken by directors. It seeks to explain both why the law should impose creditor-regarding duties when the shareholders no longer have any substantial equity in the company and why such duties should not be imposed when the shareholders still have a substantial economic interest in the company. It goes on to argue that duties on directors to put the company into a formal insolvency procedure once the company has reached a state of insolvency do not adequately meet the interventionist criterion. The incidence of such duties depends in part on whether a balance sheet or a cash flow test is used for insolvency, but in any event duties to open formal insolvency procedures are too rigid unless they operate only when all hope of rescue has disappeared. However, the paper also argues that the need to promote a ‘rescue culture’ for companies in financial distress may lead the legislature to limit the creditor-regarding duty arising before, but in the vicinity of, insolvency to cases of liquidation and not to extend it to companies being handled through procedures whose main aim is to save the company or (parts of) its business as a going concern.