Many thanks to Gordon and the Glom for the invitation! As Gordon’s introduction noted, I write principally in the area of corporate governance, increasingly from a comparative perspective. Over recent years I’ve focused on the corporate (or company) laws of common-law countries, aiming to describe and explain a core divergence that catches many US readers by surprise – US shareholders’ governance powers are substantially weaker than those possessed by their counterparts in the UK, Canada, and Australia. In this initial post I’ll describe some of the more striking differences among their corporate legal systems and in a follow-up post I’ll summarize the theory developed in my recent book to explain why these otherwise similar systems differ so markedly when it comes to the core allocation of power between shareholders and boards of directors.
While our more right-leaning politics and strong market orientation lead many to assume that the US must exhibit greater shareholder-centrism as a matter of corporate law than these other countries, this is demonstrably not the case. Indeed, among the corporate legal systems investigated for my book, UK public company shareholders possess the strongest governance powers, hands down. UK shareholders with 5 percent voting power can demand a meeting at any time, at which directors can be removed without cause by a simple majority – and no contractual limitations on that removal right are permitted. By contrast in Delaware (where, as Glom readers will be well aware, most US public companies incorporate), shareholders have no default power to call meetings, and the board can be staggered into three classes, in which case the statutory default rule is that directors can be removed only for cause. It’s also worth noting that US shareholders face far more substantial impediments to behind-the-scenes collective action under securities regulation, rendering it even more difficult for US shareholders to band together and discipline management by threat of removal.
UK shareholders can also amend the constitution (the core governance document) unilaterally, by special resolution of a 75 percent majority. In Delaware a charter amendment must be proposed by the board first, which obviously allows the board to veto changes it doesn’t like.
There are also enormous differences in the regulation of hostile takeovers. Critically, UK boards are literally barred from implementing poison pills and other takeover defenses without shareholder approval. This differs markedly from Delaware, where boards have enormous discretion to maintain defenses, regardless of shareholder wishes – a particularly illuminating distinction that looms large in the explanatory theory that I’ll summarize in my next post.
Under the model articles for public companies, UK shareholders can even “direct the directors to take, or refrain from taking, specified action” by special resolution. In reality there’s no need to do this when they can simply threaten removal by a simple majority. Nevertheless it remains quite illuminating as a matter of theory, as this notion of directing the directors is utterly foreign to Delaware corporate law.
UK shareholders also possess preemptive rights to participate pro rata in new stock issuances, even in public companies. One might reasonably ask how that amounts to a “governance” right. Historically it’s been a very powerful weapon for British shareholders, because if a cash-strapped company made a subscription offering and prominent institutions were collectively to snub it, that would prove quite embarrassing, sending a very bad signal to the market. Consequently, preemptive rights gave those institutions substantial leverage in subsequent discussions with management. In Delaware, meanwhile, preemptive rights exist only if the charter creates them (which it typically doesn’t).
So, what about other common-law countries? Do they tend to resemble more closely the UK model, with stronger shareholders, or the US model, with weaker shareholders? While Australia and Canada both fall somewhere between the UK and US extremes, their core governance structures more closely resemble the UK approach. Australian public company shareholders lack default preemptive rights and the ability to compel board action, but these features are of lesser practical significance, as described above. Their core governance powers, meanwhile, strongly resemble those available in the UK, including substantial capacity to call special meetings, remove directors without cause, initiate charter amendments, and approve takeover defenses.
In Canada the core governance structures similarly resemble those available in the UK, though they do fall closer to the middle of the spectrum in certain areas. Notably, the approach to takeover defenses adopted by the Ontario Securities Commission (which oversees the Toronto Stock Exchange) effectively resembles the position advocated in Delaware in the 1980s by Chancellor Allen in his Interco opinion (rejected by the Delaware Supreme Court in Paramount v. Time), permitting a target board to adopt a poison pill yet requiring that it be pulled once the success or failure of the hostile bid comes down to adequacy of price. While somewhat more permissive than the UK and Australian takeover regimes, this approach does fundamentally favor the shareholders by giving them the last word on the success or failure of a hostile bid in a manner deviating markedly from the long-standing Delaware approach.
In sum, shareholders in the UK and jurisdictions following its lead are far more powerful and central to the aims of the corporation than are shareholders in the United States. The natural question is why. I’ll turn to this in my next post.
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