Employee involvement in a very general sense is by and large an accepted policy goal in the European Union. Its forms nonetheless vary considerably among Member States and sometimes include boardroom representation. Board composition, performance and incentive structures are core areas of the ongoing corporate governance debate in Europe and most other parts of the world. These two discourses are rather disparate. Recent EC legislation and jurisprudence do not proactively pursue an integrated approach. The following paper maps out overlapping areas of employee participation and corporate structure, explores some theoretical underpinnings for employee involvement from a contract-theory perspective and analyses issues specific to internationally engaged corporate groups. Finally, a transaction-based approach for modernisation of employee involvement is suggested. Preference is given to default rules that do not require employees to be represented at board level yet leave room for agreements to that effect. The plasticity of private law, the resilience of the corporate form and the governance-assisted employment relationship can defy petrification. Transaction-based employee involvement promotes a productive conjunction of corporate governance components consonant with the specific character of the employment relationship. An evolutionary approach to reform requires flexible legislation instead of deference to existing models. However, consensual model building needs proper enabling tools. Academic groundwork in private international law, contract, labour and corporate law is called for.

The European Court of Justice has presented a powerful challenge to national regulators. In a series of landmark decisions, it has recognised the right to freely choose the corporate law system of any Member State, irrespective of where the newly established company will have its actual seat of administration or do business. In this issue, Tobias H. Tröger analyses the impact of this jurisprudence. Finding that Europe is different from the United States, he argues for a careful approach towards harmonised rules on European corporate governance. José Miguel Embid Irujo then studies the realities of the law of corporate groups in the European Union.

This article first describes the history of the use of the term ‘new institutional economics’ (NIE) since its introduction by Oliver Williamson. It shows how the term has evolved from a generic term to a standard term on the basis of NIE conference publications and collective volumes that appeared between 1984 and 1997. In 1997, the International Society for New Institutional Economics was founded. Ronald Coase, Douglass North and Oliver Williamson were the driving force behind this development. In the second part of this article, the meaning of the NIE is outlined according to the basic concepts of Williamson and North. The ideas of these two protagonists are compared with each other and their better-known criticisms are described and assessed. The final part of the article deals with possibilities for broadening and deepening the objectives and analytical style of the NIE. It concludes with the observation that the potentialities of the NIE are far from being exhausted.

European securities regulation and corporate governance are test cases for determining whether efficient rules will be obtained by dynamic competitive processes or centralised regulatory action. The 2004 Markets in Financial Instruments Directive (MIFID) belies the diagnosis that Europe may be experiencing ‘regulatory fatigue’. On the contrary, an important policy change has been ushered in, as MIFID is intended to shape a pan-European retail culture through law. In this issue, Niamh Moloney undertakes a comprehensive analysis of the Directive, emphasising that the relationship between law and investor activity is still unproven.

This article discusses the plans of the European Commission to harmonise shareholder rights in the European Union. At the same time, it puts forward various reasons why this would not be a significant step forward and argues that it should therefore be reconsidered whether the intended directive on shareholder rights is really needed.

This essay argues that the 2004 Markets in Financial Instruments Directive, the investment services cornerstone of the Financial Services Action Plan, represents a bold attempt to build a pan-EU retail investor culture, relying on the transformative effects of law. While the institutional markets have attracted most attention under the FSAP, this strategy represents a sharp change in EU policy, is ambitious given the state of the retail markets and provokes important questions as to the role of law in generating retail activity and the role of the retail investor in developing effective and strong EU capital markets. This essay examines how MIFID attempts to build a retail investment culture through law, the market reality behind this policy shift, what the role of law is in this process and what the emerging retail regime suggests as to the characteristics of the emerging ‘EU retail investor’ as a target of regulatory policy and engine of retail market integration. The newly adopted MIFID conduct of business regime lies at the heart of this ambitious retail agenda and is used as a case study in this analysis. The risks and costs of this approach are, however, high given the unproven relationship between law and investor activity, whether domestic or pan-EU. The essay therefore considers whether this new regulatory and policy strategy on the retail investor is sufficiently nuanced and, in particular, whether, given the risks of imposing inappropriate rules on an immature marketplace, it is matched by appropriate retail investor governance.

This article addresses the question what will be the impact of the recently admitted choice of corporate law in Europe and how regulators can and should react.

Drawing on the empirical evidence and theoretical insights produced in the abundant debate on charter competition in the United States, this article argues that the European scenario differs significantly from the American one. A look at the most relevant differences and an analysis of European incorporators' incentives leads to the conclusion that no Member State occupies at present, or has proper incentives and political manoeuvring space to assume in the future, a similarly preponderant position like the winner of the historical American competition for corporate charters. Although the individual preferences of decision-makers may motivate some cross-border (re)incorporations, no dominant State of incorporation will emerge in the European Union in the medium term.

Synthesised with the possible restraints Member States can put on corporate law arbitrage, the important conclusion to be drawn from a public policy perspective is that, in the European context, some forces arguably accountable for a socially undesirable pro-managerial tilt in the American market for corporate charters are not present. Thus, the case for remedying centralised legislation is harder to make in the European Union. Some of the prospective and existing harmonisation, even if only providing minimum standards, has to be reassessed from this perspective.

This paper examines the relationship between blockholder ownership, dividend policy and firm value in the largest EU and US companies during 1988–1998. Large owners may benefit other shareholders by effectively controlling company managers, but may also differ from minority investors by a preference for retained earnings, from which they derive private benefits of control. This paper analyses these effects in a non-technical way using simple correlation analysis. The level of blockholder ownership in continental Europe is found to be much higher than in the US/UK, whereas firm value is somewhat lower. A negative association is found between blockholder ownership and firm value in continental Europe, which indicates that the level of blockholder ownership is excessive from a minority shareholder viewpoint. Moreover, although blockholder ownership levels in Europe are not generally associated with lower dividends, increases in blockholder ownership are found to be associated with decreasing dividends, and the stock market appears to respond more favourably to increasing dividends in companies with a high level of blockholder ownership. In the US/UK, higher blockholder ownership is generally associated with lower dividends, which are again negatively correlated with firm value. In both the EU and the US, the results therefore point to conflicts of interest between large blockholders and minority investors, but more strongly so in Europe.

This paper aims to give an analysis of corporate groups, with an emphasis on current ‘trends’ and ‘realities’. Despite the huge effort made by the doctrine and case law, traditional company law no longer covers today's challenges in the field of corporate integration. In fact, the implementation of special statutory and procedural laws on corporate groups is still inadequate in most European countries.

This relevant model of corporate integration and control requires a properly designed ‘philosophy’, which is being provided successfully by some relevant and welcome initiatives, such as the Winter Report, the Forum Europaeum and the trends that have recently emerged in some European countries.

The purpose of this article is to offer a wide-ranging consideration of the policy objectives underlying the derivative action. More specifically, it inquires into an indefinite, but fundamental, question that has received inadequate attention in the literature on corporate law theory in European and English law: what rationale or rationales justify the use of derivative actions? First, an initial analysis of the merits and demerits of the derivative action is presented. The article then analyses the role derivative actions may assume in enforcing corporate accountability. The question addressed is whether its purpose is primarily to deter misconduct or simply to compensate the company for the wrongdoing. The possible benefits and limitations of these rationales are explored. The article then examines the public image, or expressive value, of the derivative action. The purpose is to determine if some of the features inherent in the derivative action procedure enhance or detract from derivative actions being understood as a positive social force. Finally, it briefly considers strategies that can be pursued to reverse the negative effects of those forces that weaken the social meaning of derivative actions so that the action is more likely to be viewed as an instrument that affirms desirable norms in the corporate setting.

Because of a failure to harmonize the regime of takeover defenses, the European Directive on Takeover Bids (DTB) has created broad dissatisfaction. In fact, two key features of the DTB, the board neutrality rule and the break-through rule (BTR), are not mandatory, but can be opted out by Member States. Since both rules were considered chief devices for increasing takeover activity, as they aim to neutralize the most significant anti-takeover defenses, the fact that their adoption will rely upon local choices by national legislatures puts into serious question whether the ultimate outcome of the DTB will be that of promoting a vibrant and efficient pan-European market for corporate control. Optionality is not alone in thwarting harmonization in the field of takeover defenses, as the European legislature has also introduced a reciprocity feature, according to which Member States can decide whether to relax the prohibitions and restrictions arising out of the board neutrality rule and/or the BTR in the event a bid is made by a company which is not subject to the same prohibitions and restrictions.

Although the DTB failed the goal of promoting a strong takeover market by limiting the availability of defensive tactics, both the optionality and the reciprocity features will represent an intriguing test of how Member States will address the underlying policy choices and, where they chose to opt out of the board neutrality rule and/or the BTR, of how companies will react to the possibility of deciding to opt into the pro-takeover EC default regime. The paper argues that optionality: (i) may very well be a sound approach with regard to the BTR, as its beneficial impact is still highly debated, and (ii) represents an acceptable compromise for the gradual implementation of the board neutrality rule. Quite plausibly, at this stage, an abrupt introduction of a mandatory board neutrality rule would have generated, at least in some Member States, a backlash in both national politics and corporate practice. The paper also stresses that reciprocity does not represent a sound policy to govern the regime of takeover defenses.

Within the European Union, firms are now free under Articles 43 and 48 EC to choose a corporate form of their liking, regardless of the actual head office (real seat) of the company. However, they are not free to choose the applicable bankruptcy regime. Under Article 3(1), first sentence, of the European Insolvency Regulation (EIR), jurisdiction for main insolvency proceedings lies with the courts of the Member State in which the debtor has the centre of its main interests (COMI). The COMI standard is fuzzy and allows last-minute forum shopping by the management/shareholders of a distressed debtor, to the detriment, especially, of creditors who cannot (easily) adapt. Given the poor performance of the COMI standard, it seems worthwhile to explore the merits of an alternative approach that gives more room to freedom of choice in international company insolvency law in Europe. Various models of free choice are discussed: free choice of the applicable insolvency law, free choice of the applicable insolvency law insofar as it contains substantive – as opposed to procedural – provisions, free choice of the bankruptcy forum (‘unconstrained forum choice’) and free choice of the bank–ruptcy forum in combination with the company law applicable to a company (‘constrained forum choice’). This article shows that, on efficiency grounds, the last model is to be preferred. It would improve matters compared to the status quo, and it would also be easy to implement in practice by changing the wording of Article 3 EIR. Even though this solution is preferable as a policy option, it is not mandated by Articles 43 and 48 EC. However, these treaty provisions do not mandate the COMI standard either. European legislation is thus free to effect the desirable changes to the EIR.

Although this paper focuses primarily on Czech company law, it begins with a description of the general legal development of Czech commercial (including company) law. The first part describes the social and historical background of the Czech law after the period of Communism (1948–1989), some defects ensuing from a paradigmatic understanding of law and problems with Czech case law. The paper tries to manifest that it is impossible to understand the Czech concept of (private) company law without a thorough knowledge of the legal thinking of current Czech judges and the relevant authorities. After this broad introduction, a selection of legal literature dealing with commercial and company law is provided.

The second part of the paper provides some general information on Czech company law, mainly its systematic incorporation into Czech private law and the structure of the Czech Commercial Code. The following sections describe each company type (partnership, limited partnership, limited liability company and joint-stock company) and co-operatives, including the European law connotation, supranational entities and their implementation in Czech law (Societas Europaea, European Interest Groupings and the European Co-operative Society). The anticipated future development of Czech private law (civil and commercial law) is sketched at the end of the paper, taking into account the drafts of the new Civil Code and Commercial Act and other new proposals related to private law.

The corporate governance of investment funds was hardly studied in Italy before the reform of 1998, when the Financial Markets Consolidated Act (TUF) entered into force, amending the rules on management companies (SGRs) and introducing new corporate governance rules for listed companies. Following this reform, it is now clear that the management of SGRs is an extremely delicate and sensitive matter, especially when the legislator assigns a central role in the governance of listed companies to these intermediaries.

From 1998 onwards, commentators have gradually started to pay more attention to this topic, and the quantity and quality of the measures taken by the supervisory authorities and the Professional Association of Fund Managers (Assogestioni) have also increased. Consequently, there has been a very lively and rich debate in recent years.

The present article intends to address this debate and attempts to examine the issue from a double point of view: that of the unit holders (conflict of interests risk) and that of the companies in which the stakes are held (funds as minority shareholders). These aspects may become intertwined in cases in which, for example, a manager buys shares in a company for purposes of control or, at any rate, for purposes other than maximising the profits of the unit holders' investment.

The European Commission has recently announced a proposal to relax the ban on financial assistance by providing a gateway procedure that companies could follow in order to sanitise the granting of financial assistance. This article is unimpressed by the proposal and suggests that adopting it is likely to be a largely pointless exercise. Barring truly exceptional circumstances, no company is ever likely to want to take advantage of the proposed gateway procedure because it is time-consuming, costly, runs the risk of transaction-disrupting minority shareholder actions and exposes directors to excessive personal risks.

A number of ongoing reforms of corporate law are motivated by the need to stimulate entrepreneurship and business creation. Building on the observations that entry is characterised by sunk costs and that the markets for small business finance are imperfectly competitive, we identify a previously overlooked trade-off that such reforms ought to recognise. The appropriate design of the corporate law depends on whether it is the midstream moral hazard and the ensuing lack of finance or the entrepreneurs' inability to recover sunk entry costs that hamper business creation. In circumstances where the former dominates, well-designed mandatory law ought to be efficiency enhancing. In contrast, if the incentives to enter are weak due to the prospect of facing powerful external financiers in the market for post-entry expansion finance, business creation can be boosted by making the law more enabling. Enabling law increases the effective bargaining power of the entrepreneurs in market conditions where their bargaining position would otherwise be weak. It does so by giving the entrepreneurs a credible threat to expropriate the financiers. To the best of our knowledge, neither this trade-off nor the associated effects of corporate law on entry and entrepreneurship have been considered elsewhere in the literature on mandatory v. enabling rules.

Corporate governance developments in the Netherlands have concentrated on two distinct legal issues: first, the history and existence of the so-called ‘structure regime’ for large companies and, second, the discussions about a code of conduct for listed companies. In this article, both developments shall be examined. The structure regime reflects the traditional preference in the Netherlands for the stakeholders approach. The discussions about a code of conduct for listed companies have recently placed the issue of shareholders' interests more prominently on the agenda. This prompted the legislature to adopt the Company Structure Reform Act of 2004. With this piece of legislation, a first step has been taken towards granting more power to shareholders to the detriment of other stakeholders. Whether or not this will be the first step of a further development in the direction of a greater focus on shareholders' interests is hard to predict at this point in time.

In its ruling in IMS Health, the European Court of Justice formulates four cumulative conditions to test whether there has been abuse of a dominant position within the meaning of Article 82 EC in the case of a refusal to license an intellectual property right (IPR). The Community courts only find an abuse of dominance in cases of non-licensing of an IPR in ‘exceptional circumstances’. The four conditions are an elaboration of this main criterion, and they revolve around the elements of ‘indispensability’, ‘new product’, ‘exclusion of all competition’ and ‘objective grounds for a licence refusal’.

However, the judgment leaves several questions unanswered, such as on the requirement of the introduction of a new product and on the issue whether the conditions stipulated are (equally) applicable in all competition cases in which IPRs play a central role. In the Microsoft case, currently pending before the Court of First Instance, the Community judicature will have to deal with these questions once more.

One of the situations in which a different interpretation might pertain to the main criterion of ‘exceptional circumstances’, an interpretation that tends more towards a general ‘essential facilities’ approach combined with elements of the ‘leverage theory’, concerns the field of information technology and software development. This scenario involves cases in which a software producer is asked to release certain information to enable other software products to connect with its operating system. The question is whether a small part of an innovation protected by intellectual property law should be disclosed to a competitor. With such information, it would be possible for that competitor to market his own software product. It is important, of course, that the information provided should not represent an essential part of the core activity or functionality of the licensee's product.

Recent decisions by the Spanish national competition authority (TDC) mandate payment systems to include only two costs when setting their domestic multilateral interchange fees (MIFs): a fixed processing cost and a variable cost for the risk of fraud. This artificial lowering of MIFs will not lower consumer prices, because of uncompetitive retailing, but it will however lead to higher cardholders’ fees and, most likely, new prices for point of sale terminals, delaying the development of the immature Spanish card market. Also, to the extent that increased cardholders’ fees do not offset the fall in MIFs revenue, the task of issuing new cards will be underpaid relatively to the task of acquiring new merchants, causing an imbalance between the two sides of the payment networks. Moreover, the pricing scheme arising from the decisions will lead to the unbundling and underprovision of those services whose costs are excluded. Indeed, the payment guarantee and the free funding period will tend to be removed from the package of services currently provided, to be provided either by third parties, by issuers for a separate fee, or not at all, especially to smaller and medium-sized merchants. Transaction services will also suffer the consequences of the fact that the TDC precludes pricing them in variable terms.

Leveraged buy-outs (‘LBOs’) are often perceived as an indirect and fraudulent instance of financial assistance and, as such, are not immune to the ban imposed by Article 23 of Directive 77/91/EEC. In several LBO cases, Italian courts have enforced this type of financial assistance prohibition under Article 2358 Cod. civ. This treatment still largely applies to those leveraged transactions that lie outside the scope of the recently enacted Article 2501 bis Cod. civ., which de facto legitimises merger leveraged buy-outs (‘MLBOs’) subject to the fulfilment of additional information disclosure requirements. In this respect, Italian LBO regulation is broadly similar to that of other European countries. In contrast, US law, which largely relies on fraudulent conveyance statutes, stands at the opposite end of the spectrum. American courts acknowledge the social utility of LBOs and are reluctant to take a negative prejudicial stance against this acquisition method. The US legal treatment draws an ex post distinction between ‘illegal’ and ‘legal’ LBOs on the basis of whether or not such transfers are intentionally fraudulent.

In light of the remarkable differences existing between these two regulatory approaches, we resort to economic analysis in order to understand which legal strategy, if any, is more efficient and why. Our analysis suggests that an outright prohibition on LBOs is an undesirable legal measure. This type of rule has numerous social costs. It reduces efficiency by weakening the market for corporate control and imposes monitoring and administrative expenses. Despite its disadvantages, we show that the prohibition does not mitigate any of the principal-agency problems that characterise an LBO. This task is often better performed by alternative market, contractual and legal strategies.

On balance, the ex post legal strategy seems to be more desirable. However, this type of intervention is faced with a shortcoming that an ex ante prohibition does not have: the problem of ‘hindsight’ bias in the adjudication process. We therefore recommend the adoption of some additional information disclosure requirements along the lines of those required under Article 2501 bis Cod. civ. as a suitable way to mitigate this bias.