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Published online by Cambridge University Press: 24 January 2025
The decision to centralise, or to decentralise, the responsibility for law-making in relation to a subject of shared legislative competence is a fundamental dilemma for the polities of a federation. The advantages and disadvantages of both are well known. Amongst other things, centralisation promotes national unity, it decreases regulatory “arbitrage”, it may reduce search and compliance costs, and it capitalises on economies of scale in administration and law-making. By contrast, decentralisation is more receptive to local conditions, and offers the advantages that derive from interjurisdictional competition.
Australian corporate law has seen its share of the debate. That debate has been undeniably directional-there has been, over the past forty years, considerable momentum towards centralisation. Each legislative step taken in that period has been one closer to centralised national laws and administration. The only real opposition came to the Commonwealth's attempt to arrogate legislative power to itself in the Corporations Act 1989 (Cth), which the High Court struck down as unconstitutional.
I wish to thank Ian Ramsay and an anonymous referee for helpful comments, and Oliver Bennett and Elsa van Wijk for research assistance.
1 On the economics of federalism, see F H Easterbrook, “Antitrust and the Economics of Federalism” (1983) 26 J L & Econ 23; D N King, Fiscal Tiers: The Economics of Multi-Level Government (1984); RA Posner, Economic Analysis of Law (4th ed 1992) at 635-650; S Rose-Ackerman, “Does Federalism Matter? Political Choice in a Federal Republic” (1981) 89 J Pol Econ 152; CM Tiebout, “A Pure Theory of Public Expenditures” (1956) 64 J Pol Econ 416.
2 An overview of the debate can be found in Ramsay, I M, “Company Law and the Economics of Federalism” (1990) 19 FL Rev 169 at 170-172Google Scholar. The federalism debate rode its peak shortly after New South Wales v Commonwealth (The Incorporation case) (1990) 169 CLR 482.
3 For a discussion of the transition from the Uniform Companies Acts of the 1960s, to the cooperative scheme legislation of the 1980s, to the current national scheme laws, see Ford, H A J, Austin, R P Ramsay, I M, Ford's Corporations Law in Australia (8th ed 1997) at 46-53Google Scholar.
4 New South Wales v Commonwealth (1989) 169 CLR 482.
5 Commonwealth, State and Northern Territory Law Officers, Heads of Agreement for Future Corporate Regulation (1990). The Heads of Agreement are often known as the Alice Springs Agreement after the place where agreement was reached. The States agreed to the preparation of uniform legislation to be enacted by the Commonwealth Parliament, and applied by the States. The Commonwealth agreed to pay grants to each of the States to compensate them for the revenue lost by surrendering administration to the Commonwealth. See HA J Ford et al, above n 3 at 52; Tomasic, R Bottomley, S, Corporations Law in Australia (1995) at 75-76Google Scholar.
6 A Ministerial Council was established in December 1978 in a formal agreement between the Commonwealth and the States. It was to supervise the administrative body created by that agreement. The Alice Springs Agreement reconstitutes that Council as a Ministerial Council for Corporations. It is the primary body for deliberations by the States and the Commonwealth regarding amendments to the legislation, except for those regarding takeovers, securities, futures, and public fundraising, which are within the Commonwealth's sole responsibility. Amendments on other matters are not to be introduced without the Council's approval. Each State and the Northern Territory has one vote, but the Commonwealth has four deliberative and one casting votes.
7 (1998) 26 ACSR 317.
8 Stack v Coast Securities (No 9) Pty Ltd (1983) 154 CLR 261; Fencott v Muller (1983) 46 ALR 41.
9 The Hon Costello, P, “Restoring Confidence in Corporate Morality” (1990) 34 Quadrant 20Google Scholar.
10 IM Ramsay, above n 2. See below text accompanying nn 167-173.
11 Aboven5.
12 Cumming, D J Macintosh, J G, “The Role of Interjurisdictional Competition in Shaping Canadian Corporate Law” (1997)CrossRefGoogle Scholar unpublished paper (trivial gains from attracting incorporations fatal to competition).
13 Corporate Law Economic Reform Program, Strategy Document (1997).
14 The Treasurer, “New Focus for Corporate Law”, Press Release No 15, 4 March 1997; B Baxt, “Costello's Dual Challenge” 13:8 Co Director 25; R Tomasic, Editorial (1997) 7:2 Aust J Corp L; I Campbell, “Corporate Law Economic Reform Program: Returning the Law to its Fundamental Purpose” (1997) 49 Aust Co Sec 138.
15 Govey, I, “The Simplification Process: Aims and Prospects” (1995) 5 Aust J Corp L 125Google Scholar; Lavarch, M, “The Government's Approach to Corporate Law Reform” (1994) 4 Aust J Corp L 1Google Scholar.
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17 Black, BS, “Is Corporate Law Trivial?: A Political and Economic Analysis” (1990) 84 NWUL Rev 542 at 563Google Scholar. See also B H Kobayashi and L E Ribstein, “Federalism, Efficiency and Competition” (1997) unpublished paper.
18 The two are not completely interchangeable. It is better to be able to contract around rules than it is to be able to choose the application of another law, since one has to take the residual mandatory rules in the chosen system: see below text accompanying nn 123-124.
19 Cf Wishart, D, “Simplification and Motherhood” 1996:2 Butterworths Corp L Bull 16Google Scholar. See generally Whincop, M J, “Rules, Standards, and Intransitive Statutes: What the Economic Reform of Corporate Law Might Have Looked Like” (1999) 17 C & S LJ 11Google Scholar.
20 To confine a bibliography to book-length works, see F H Easterbrook and D R Fischel, The Economic Structure of Corporate Law (1991); RA Posner and KE Scott, Economics of Corporate Law and Securities Regulation (1980); BR Cheffins, Company Law: Theory, Structure, and Operation (1996); H N Butler and LE Ribstein, The Corporation and the Constitution (1995); R Romano, The Genius of American Corporate Law (1993).
21 Coase, RH, “The Nature of the Firm” (1937) 4 Economica 386CrossRefGoogle Scholar. The synthesis of this insight with the neoclassical theory of the firm coining the nexus of contracts description occurs in Alchian, A A Demsetz, H, “Production, Information Costs and Economic Organization” (1972) 62 Am Eco Rev 777Google Scholar and Jensen, MC Meckling, W H, “Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure” (1976) 3 J Fin Eco 305CrossRefGoogle Scholar.
22 MC Jensen and W H Meckling, above n 21.
23 The idea that corporate law supplies terms that parties would want is most authoritatively expounded in F H Easterbrook and D R Fischel, above n 20. The idea that corporate law may be able to cause parties to communicate unobservable information is suggested in Ayres, I Gertner, R, “Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules” (1989) 99 Yale LJ 87CrossRefGoogle Scholar, and considered in more detail in Ayres, I, “Making a Difference: The Contractual Contributions of Easterbrook and Fischel” (1992) 59 U Chi L Rev 1391CrossRefGoogle Scholar; Johnston, JS, “Opting In and Opting Out: Bargaining for Fiduciary Duties in Cooperative Ventures” (1992) 70 Wash ULQ 291Google Scholar; Whincop, M J, “Of Fault and Default: Contractarianism as a Theory of Anglo-Australian Corporate” (1997) 21 MULR 187Google Scholar.
24 I Ayres and R Gertner, above n 23 (distinguishing tailored and untailored majoritarian default rules); M J Whincop, above n 23 (identifying tailored directors' duties defaults).
25 Disclosure rules may be direct obligations to release information (such as an obligation to prepare accounts), or legal or equitable obligations to another party to make disclosures prior to entering the contract: A J Duggan, M Bryan and F Hanks, Contractual Nondisclosure: An Applied Study in Modern Contract Theory (1994), Whincop, M J, “Precontractual Disclosure by the Insiders of Closely Held Corporations: The Economics of Restrained Self Interest” (1997) 11 JCL 177Google Scholar.
26 I Ayres and R Gertner, above n 23; Ayres, I Gertner, R, “Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules” (1992) 101 Yale LJ 729CrossRefGoogle Scholar; Johnston, JS, “Strategic Bargaining and the Economic Theory of Contract Default Rules” (1990) 100 Yale LJ 615CrossRefGoogle Scholar; M J Whincop, above n 23; Whincop, M J, “Of Dragons and Horses: Filling Gaps in Pre-Incorporation Contracts” (1998) 12 JCL 217Google Scholar. An outcome in which players reveal information about themselves by the strategy they choose is described as a separating equilibrium: Baird, D, Gertner, R Picker, R, Game Theory and the Law (1994) at 125-142Google Scholar.
27 Coase, RH, “The Problem of Social Cost” (1960) 3 J L & Econ 1CrossRefGoogle Scholar.
28 I Ayres, above n 23.
29 F H Easterbrook and D R Fischel, above n 20 at 17.
30 For reviews of the efficient markets literature, see Fama, E F, “Efficient Capital Markets: A Review of Theory and Empirical Work” (1970) 25 J Fin 383CrossRefGoogle Scholar; Fama, E F, “Efficient Capital Markets II” (1991) 46 J Fin 1575CrossRefGoogle Scholar. For application of the theory by lawyers, see Gilson, RA Kraakman, R, “The Mechanisms of Market Efficiency” (1984) 70 Va L Rev 549CrossRefGoogle Scholar; Gordon, JN Kornhauser, L, “Efficient Markets, Costly Information and Securities Research”(1985) 60 NYU L Rev 761Google Scholar; Langevoort, DC, “Theories, Assumptions, and Securities Regulation: Market Efficiency Revisited” (1992) 140 U Pa L Rev 851CrossRefGoogle Scholar. For consideration by Australian scholars, see M Blair and I M Ramsay, “Mandatory Corporate Disclosure Rules and Securities Regulation” in G Walker and B Fisse, Securities Regulation in Australia and New Zealand, Oxford University Press (1994) 264 at 275-277.
31 F H Easterbrook, above n 1 at 34.
32 F H Easterbrook and D R Fischel, above n 20 at 25-30.
33 R Romano, above n 20.
34 Spence, AM, “Monopoly, Quality, and Regulation” (1975) 6 Bell J Eco 407Google Scholar.
35 Romano, R, “Empowering Investors: A Market Approach to Securities Regulation” (1998)107 Yale LJ 2359 at 2387-2388CrossRefGoogle Scholar, referring to Tirole, J, The Theory of Industrial Organization (1988) at 100-105Google Scholar.
36 Cf DJ Cumming and JG MacIntosh, above n 12 at 9-17. Inefficient corporate laws may, however, deter foreign investors if these investors can choose between jurisdictions.
37 See, eg, T Sykes, Bold Riders (1994); R Baxt, “Australian Company Law: Quo Vadis?” (1990) 61 Charter 20. For the theoretical relevance of political backlash to efficiency, see Roe, M J, “Backlash” (1998) 98 Col L Rev 217CrossRefGoogle Scholar.
38 See the comments quoted in I M Ramsay, above n 2 at 171.
39 Beerworth, W J, “The New Tide of Corporate Legislation: Reform or Red-tape?” (1993) 5(3) Syd Papers 116 at 118-119Google Scholar. The Patrick-MUA saga has seen a further example, with calls for laws to prohibit asset stripping within corporate groups: Seccombe, M, “Labor Plans New Asset Stripping Law”,Sydney Morning Herald 12 May 1998 at 7Google Scholar.
40 Gordon, J N, “Corporations, Markets, and Courts” (1991) 91 Col L Rev 1931 at 1957-1958CrossRefGoogle Scholar; Charny, D, “Competition among Jurisdictions in Formulating Corporate Law Rules: An American Perspective on the 'Race to the Bottom' in the European Communities” (1991) 31 Harv Int LJ 423 at 440Google Scholar.
41 This assumes the costs of reincorporating are lower than the implicit subsidy paid to the interest group. If the cost of the subsidy is small, even low cost exit may not be worthwhile: Macey, J R Miller, GP, “Toward an Interest-Group Theory of Delaware Corporate Law” (1987) 65 Tex L Rev 469Google Scholar.
42 Whincop, above n 19.
43 CLERP “is a comprehensive initiative to improve Australia's business and company regulation as part of the Coalition Government's drive to promote business, economic development and employment.”: Corporate Law Economic Reform Program, Policy Reforms (1998) at iii.
44 I Ayres, above n 23; BS Black, above n 17.
45 'Connor, M A O, “Promoting Economic Justice in Plant Closings: Exploring the Fiduciary/Contract Law Distinction to Enforce Implicit Employment Agreements” in LE Mitchell (ed), Progressive Corporate Law (1995) at 219Google Scholar.
46 Coffee, JC, “Corporate Governance as a Multi-Player Game” (1990) 78 Geo LJ 1495 at 1505-1528Google Scholar; Rosett, JG, “Do Union Wealth Concessions Explain Takeover Premiums? The Evidence on Contract Wages” (1990) 27 / J Fin Econ 247CrossRefGoogle Scholar.
47 J N Gordon, above n 40; M J Roe, above n 37.
48 Demsetz, H, “Wealth Distribution and the Ownership of Rights” (1972) 1 / Leg Stud 223CrossRefGoogle Scholar; Polinsky, A M, An Introduction to Law and Economics (2nd ed 1989) at 122-123Google Scholar.
49 See below text accompanying n 98.
50 R A Posner, above n 1 at 527.
51 Corporate Law Economic Reform Program, Fundraising: Proposals for Reform Paper No 2 (1997) (hereafter “Fundraising Paper”); Corporate Law Economic Reform Bill 1998 (Cth), ch 6D.
52 Whincop, M J, “Due Diligence in SME Fundraising: Reform Choices, Economics and Empiricism” (1996) 19 UNSWLJ 433Google Scholar.
53 Corporations Law, s 1022; cf Companies Code 1981 (Cth), s 98; Companies Regulations reg 43, Sch IV.
54 Corporations Law, ss 66, 1018.
55 Corporations Law, ss 1005, 1006.
56 Corporations Law, ss 1007-1012.
57 Fundraising Paper, above n 51 at 9.
58 Stigler, G, “The Public Regulation of the Securities Markets” (1964) 37 J Bus 117CrossRefGoogle Scholar; Benston, G, “The Value of the SEC's Accounting Disclosure Requirements” (1969) 44 Ace Rev 515Google Scholar; Jarrell, G, “The Economic Effects of Federal Regulation of the Market for New Security Issues” (1981) 24 J L & Eco 613CrossRefGoogle Scholar; Simon, C, “The Effect of the Securities Act on Investor Information and the Performance of New Issues” (1989) 79 Am Eco Rev 295Google Scholar. In Australia, see Brown, P, Taylor, SL Walter, TS, “The Impact of Statutory Sanctions on the Level and Information Content of Voluntary Corporate Disclosure” (1998)CrossRefGoogle Scholar unpublished paper.
59 See, eg, Ross, S A, “The Determinants of Financial Structure; The Incentive Signalling Approach” (1977) 8 Bell J Eco 23CrossRefGoogle Scholar; F H Easterbrook and D R Fischel, above n 20 at 280-282; D Anderson, JR Francis and DJ Stokes, “Auditing, Directorships and the Demand for Monitoring” (1993) 12 J Acctg & Pub Pol 353; JB de Long, “Did JP Morgan's Men Add Value? An Economist's Perspective on Financial Capitalism” in P Temin (ed), Inside the Business Enterprise: Historical Perspectives on the Use of Information (1991) at 205.
60 Jensen, MC, “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers” (1986) 76 Am Eco Rev 323Google Scholar.
61 Corporate Law Economic Reform Bill, els 729-730.
62 Whincop, M J, “Promoters, Prospectuses, and Pragmatism: Updating Fiduciary Duties in a Time of Economic Reform” (1998) 24 Mon UL Rev 454Google Scholar; Whincop, M J, “Token Economics? One View of the Fundraising Reforms” [1997] Butterworths Corps L Bull§ 348Google Scholar; M J Whincop, above n 19.
63 Mahoney, PG, “Mandatory Disclosure as a Solution to Agency Problems” (1995) 62 U Chi L Rev 1047CrossRefGoogle Scholar; M J Whincop, “Promoters, Prospectuses, and Pragmatism: Updating Fiduciary Duties in a Time of Economic Reform” (1998) 24 Mon UL Rev forthcoming.
64 F H Easterbrook and D R Fischel, above n 20 at 303-304.
65 The ASIC is currently considering whether or not to permit the managed funds industry to use short-form prospectuses, with specified disclosure obligations: Australian Securities Commission, Simpler Managed Investment Prospectuses: ASC Policy Proposal (1998). The pressure for these prospectuses is consistent with my argument that standardisation may be valued by markets, because it decreases search and compliance costs. However, the “relief” proposes that a long form prospectus still be prepared.
66 Craswell, R Calfee, J E, “Deterrence and Uncertain Legal Standards” (1986) 2 J L Eco & Org 279Google Scholar.
67 M J Whincop, above n 19 and n 52; Kaplow, L, “Rules Versus Standards: An Economic Analysis” (1992) 42 Duke LJ 557CrossRefGoogle Scholar.
68 See above text accompanying nn 61-62.
69 Corporate Law Economic Reform Bill, els 709, 715, 728, 729, 732 and 733.
70 Fundraising Paper, above n 51 at 7, 10 and 53.
71 See, eg, National Investment Council and Marsden Jacobs Associates, Financing Grawth:Policy Options to Improve the Flaw of Capital to Australia's Small and Medium Enterprises (1995). CLERP acknowledges the point (Fundraising Paper, above n 51 at 52), but it has no effect on any of its recommendations.
72 A cumulative voting entitlement is a right to cast all of the votes one is entitled to,multiplied by the number of directors to be elected, for a single director: eg, General Corporation Law, 8 Del Code§ 214 (1996). It may permit a minority to elect a director. Cf F H Easterbrook and D R Fischel, above n 20 at 63-64 and 73.
73 M J Whincop, above n 52 at 460-462; B Cornelius and J Cooper, “Risk Negotiation in Venture Capital” in J B Ryan and B Gibson (eds), The People Factor in Small Enterprise (proceedings of the 1994 Joint Small Enterprise Association of Australia and New Zealand and Institute of Industrial Economics Small Enterprise Conference). This is an ongoing subject of my research.
74 Corporations Law, ss 260, 461(e), (f), (g), (k).
75 Ayres, I, “Judging Close Corporations in the Age of Statutes” (1992) 70 Wash ULQ 365Google Scholar; Ribstein, LE, “Statutory Forms for Closely Held Firms: Theories and Evidence from LLCs” (1995) 73 Wash ULQ 369Google Scholar; R Romano, State Competition for Close Corporation Charters: A Commentary” (1992) 70 Wash ULQ 409.
76 Corporate Law Economic Reform Program, Directors' Duties and Corporate Governance: Proposals for Reform Paper No 3 (1997) at 21 (hereafter “Directors' Duties Paper”).
77 See, in particular, AWA v Daniels (1995) 16 ACSR 607.
78 Directors' Duties Paper, above n 76 at 28; Corporate Law Economic Reform Bill, cl 2(2).
79 Whincop, M J, “A Theoretical and Policy Critique of the Modem Reformulation of Directors' Duties of Care” {1996) 6 Aust J Corp L 72Google Scholar; PM Redmond, “Safe Harbours or Sleepy Hollows: Does Australia Need a Statutory Business Judgment Rule” in Ramsay, I M, Corporate Governance and the Duties of Company Directors (1997) at 185Google Scholar.
80 Scott, KE, “Corporation Law and the American Law Institute Corporate Governance Project” (1983) 35 Stan L Rev 927CrossRefGoogle Scholar.
81 General Corporation Law, 8 Del Code § 102(b)(7) (1996); American Law Institute, Principles of Corporate Governance (1992) § 7.19. See generally Coffee, JC, “No Exit?: Opting Out, the Contractual Theory of the Corporation, and the Special Case of Remedies” (1988) 53 Brooklyn L Rev 919Google Scholar.
82 See, eg, Romano, R, “Corporate Governance in the Aftermath of the Insurance Crisis” (1990) 39 Emory LJ 1155Google Scholar; Romano, R, “What Went Wrong With Directors' and Officers' Liability Insurance?” (1989) 14 Del J Corp L 1Google Scholar; Schipani, CA, “Defining the Corporate Director's Duty of Care Standard in the United States and Australia” (1994) 4 Aust J Corp L 152Google Scholar; Priest, G L, “The Current Insurance Crisis and Modem Tort Law” (1987) 96 Yale LJ 1521CrossRefGoogle Scholar.
83 The merits of these provisions should not be overstated. In respect of duty of care matters they may create a moral hazard problem, inducing managers to shirk their responsibilities: JC Coffee, above n 81; American Law Institute, Principles of Corporate Governance (1992) § 7.19 (proposing a mandatory limit on minimum liability). The other problem, of course, is that these provisions are often adopted in midstream-as noted previously, the case for these provisions is weaker.
84 See, eg, Hoyle, S, “Directors Rocked by Insurance Increases”, Australian Financial Review, 18 August 1993 at 1Google Scholar. Cf Heath, J, “Premium Declines Predicted from Increased Capacity”, The Insurance Broker, October 1996 at 22Google Scholar.
85 See Epstein, RA, “The Political Economy of Product Liability Reform” (1988) 78 Am Eco Rev 311 at 313Google Scholar.
86 Directors' Duties Paper, above n 76 at 29-40.
87 Whincop, M J Keyes, M E, “Corporation, Contract, Community: An Analysis of Governance in the Privatisation of Public Enterprise and the Publicisation of Private Corporate Law” (1997) 25 F L Rev 51 at 90-93Google Scholar; Romano, R, “The Shareholder Suit: Litigation Without Foundation?” (1991) 7 L J Eco & Org 55Google Scholar.
88 J C Coffee, above n 81; JrCoffee, J C, “Rescuing the Private Attorney General: Why the Model of the Lawyer as Bounty Hunter Is Not Working” (1983) 42 Maryland L Rev 215Google Scholar; JrCoffee, JC and Schwartz, D, “The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform” (1981) 81 Col L Rev 261CrossRefGoogle Scholar.
89 M J Roe, above n 37.
90 Corporate Law Economic Reform Program, Takeovers: Proposals for Reform Paper No 4 (1997) (hereafter “Takeovers Paper”).
91 Ibid at 34-35.
92 See, eg, Mills v Mills (1938) 60 CLR 150; Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483; Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68 (PC).
93 Corporations Law, s 731; Corporate Law Economic Reform Bill, cl 602(b), (c). See generally G Williams, “The Corporations and Securities Panel-What Future” (1994) 12 C & S LJ 165.
94 M J Whincop, above n 23 at 220-221.
95 That is, those in which the bidder announces an intention to acquire a certain proportion of shares, at a certain price, and pro-rates acceptances if these exceed that proportion. These were condemned as coercive: Companies & Securities Law Review Committee, Report to the Ministerial Council on Partial Takeover Bids (1985). This is a doubtful assessment. Few bids are genuinely coercive. Two-tier bids (ie the first 50% of shareholders accepting will receive$ 10, the rest get $5) may be coercive if the “blended” price ($7.50) is below the current market price (eg, if the market price is $8.00). Everyone will race in to accept an offer that is not in their best interests to accept. This is a classic “prisoner's dilemma”, where the individually rational strategy is inconsistent with the collectively rational one. However, the problem is not coercion, as such, but that the individually rational response does not meet the first-order efficiency criterion that the buyer pays more than the current market price. See F H Easterbrook and D R Fischel, above n 20 at 179-180.
96 Corporations Law, s 671-672. The amendment has effect for three years. See generally IM Ramsay, “Balancing Law and Economics: The Case of Partial Takeovers” [1992] JBL 369; Armstrong, S, Lange, HP and Woo, LE, “Can Antitakeover Activity Really Create Wealth” (1994) 11 Asia Pac J of Management 327CrossRefGoogle Scholar.
97 I have dubbed this “monkey wrench contractarianism”, where contractual variation of a legal rule (eg, one permitting partial takeovers) can only occur in one direction: M J Whincop, above n 16 at 260.
98 F H Easterbrook and D R Fischel, above n 20 at 32-34; Bebchuk, L A, “Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments” (1989) 102 Harv L Rev 1820CrossRefGoogle Scholar; Gordon, J N, “The Mandatory Structure of Corporate Law” (1989) 89 Col L Rev 1549 at 1575-1576CrossRefGoogle Scholar. Cf Romano, R, “Answering the Wrong Question: The Tenuous Case for Mandatory Corporate Laws” (1989) 89 Col L Rev 1599CrossRefGoogle Scholar; Macey, JR, “Corporate Law and Corporate Governance: A Contractual Perspective” (1993) 18 J Corp L 185 at 190-193Google Scholar.
99 Corporate Law Economic Reform Bill, els 611,614.
100 Panel on Takeovers and Mergers, The City Code on Takeovers and Mergers (1993) rules 5, 9; Proposal for a Draft Thirteenth Directive on Company Law Concerning Takeover and Other General Bids [1989] OJ C64 14/3 (original proposal), [1990] OJ C240 26/9 (amended proposal).
101 Takeovers Paper, above n 90 at 14-16.
102 Ibid at 14.
103 Ibid at 15. Cf H DeAngelo, “Competition and Unanimity” (1981) 71 Am Eco Rev 18. CLERP does not tell us why a handful of shareholders who find it hard to diversify should be favoured above the majority who would prefer a gain-maximising rule.
104 Note that the benefit of the takeover rules will not extend to the majority of unlisted proprietary companies, as the rules do not apply where there are fewer than 50 shareholders: Corporate Law Economic Reform Bill, cl 602; cf Corporations Law, s 619.
105 Ibid at 204-205.
106 F H Easterbrook and DR Fischel, above n 20 at 129-131.
107 I would reject the notion that my criticisms are simply one idiosyncratic reading of the economic literature. I am not aware of any lawyer-economist who favours any of the principles CLERP favours, except for the equal opportunity principle. Economic defences of that rule, however, depend on it facilitating control auctions: Bebchuk, LA, “Toward Undistorted Choice and Equal Treatment in Corporate Takeovers” (1985) 98 Harv L Rev 1695CrossRefGoogle Scholar and “The Sole Owner Standard for Takeover Policy” (1988) 17 J Leg Stud 197. CLERP,however, has advocated a rule permitting off-market transactions in order to decrease the number of auctions: Corporate Law Economic Reform Bill, els 611 item 5, 614.
108 Cf Romano, R, “The State Competition Debate in Corporate Law” (1987) 8 Cardozo L Rev 709 at 753-754Google Scholar, BS Black, above n 17 at 582. See below text accompanying n 250.
109 See above text accompanying n 98.
110 Black, BS, “Shareholder Passivity Reexamined” (1990) 89 Mich L Rev 520CrossRefGoogle Scholar (the incentive for shareholder activism increases exponentially with size of shareholding).
111 See above n 6.
112 To becomes 199A.
113 See above text accompanying nn 81-84.
114 See above text accompanying nn 5-6.
115 I would expect there to be some consultation with the Council regarding form, even though the Council would not have a veto.
116 Goetz, CJ and Scott, R E, “The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms” (1985) 73 Cal L Rev 261CrossRefGoogle Scholar.
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119 I Ayres and R Gertner, above n 23; I Ayres and R Gertner, above n 26.
120 See above text accompanying nn 23-26.
121 M J Whincop, above n 23; I Ayres, above n 26.
122 JrCoffee, JC, “The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role” (1989) 89 Col L Rev 1618 at 1668-1669CrossRefGoogle Scholar; M J Whincop, above n 19.
123 Daniels, R J, “Should Provinces Compete? The Case for a Competitive Corporate Law Market” (1991) 36 McGill LJ 130 at 146-147Google Scholar; Whincop, M J and Keyes, ME, “Putting the 'Private' Back into Private International Law: Default Rules and the Proper Law of the Contract” (1998) 21 MULR 515 at 535Google Scholar.
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125 R Romano, above n 35.
126 See above text accompanying n 30.
127 Coffee, J C, Jr, “Market Failure and the Economic Case for a Mandatory Disclosure System” (1984) 70 Va L Rev 717CrossRefGoogle Scholar. I assume that rule choices are relevant to security-specific risk.
128 Williamson, O E, The Mechanisms of Governance (1996) at137-147CrossRefGoogle Scholar.
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130 Constitution, s 51(xx); The Incorporation case (1990) 169 CLR 482.
131 Rae Committee, Australian Securities Markets and their Regulation; Report from the Senate Select Committee on Securities and Exchange; Volume 1—Report (1974); Sykes, T, Two Centuries of Panic: A History of Corporate Collapses in Australia (1988)Google Scholar. For a review of American commentary to similar effect, see PG Mahoney, above n 129 at 1464-1475.
132 M Kahan, above n 129 at 1512.
133 Salsbury, S and Sweeney, K, The Bull, the Bear and the Kangaroo: The History of the Sydney Stock Exchange (1988)Google Scholar; Adamson, G, A Century of Change: The First Hundred Years of the Stock Exchange of Melbourne (1984)Google Scholar.
134 Companies Act 1867, 30 & 31 Viet c 131, s 38; Companies Act 1900 63 & 64 Viet c 48. Australian legislatures took substantial initiatives in compelling disclosure from public companies: J Waugh, “Company Law and the Crash of the 1890s in Victoria” (1992) 15 UNSWLJ 356.
135 G Stigler, above n 58; GA Jarrell, above n 58;C Simon, above n 58.
136 G J Benston, above n 58.
137 PG Mahoney, above n 129 at 1477-1478.
138 Ibid at 1477.
139 They nonetheless tend to do so: French, K R and Poterba, J M, “Investor Diversification and International Equity Markets” (1991) 81 Am Eco Rev 222Google Scholar.
140 M Kahan, above n 129 at 1511-1512.
141 Corporations Law, s 226A(2).
142 Alternatively, the exchange choice could be locked up in the constitution: Corporations Law, s 136(3).
143 I Ayres, above n 75.
144 On the other hand, as Romano has observed, the exchange effectively externalises the costs of dispute resolution since it uses the state's court mechanism: above n 35.
145 R Romano, above n 35; M Kahan, above n 129 at 1516-1517.
146 B Klein and K Leffler, “The Role of Market Forces in Assuring Contractual Performance” (1981) 89 J Pol Eco 615; L Telser, “A Theory of Self-Enforcing Agreements” (1980) 53 J Bus 27.
147 R Romano, above n 35.
148 Cary, W, “Federalism and Corporate Law: Reflections Upon Delaware” (1974) 83 Yale LJ 663, 666CrossRefGoogle Scholar.
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150 Winter, R K, Jr, “State Law, Shareholder Protection, and the Theory of the Corporation” (1977) 6 J Leg Stud 251CrossRefGoogle Scholar; Fischel, DR, “The 'Race to the Bottom' Revisited: Reflections on Recent Developments in Delaware's Corporation Law” (1982) 76 NWUL Rev 913Google Scholar.
151 See above text accompanying nn 30.
152 R Romano, above nn 20 and 108, “Law as a Product: Some Pieces of the Incorporation Puzzle” (1985) 1 J L Eco & Org 225 (hereafter Law as a Product) and “Corporate Law and Corporate Governance” (1996) 5 Ind & Corp Change 277 at 313-330.
153 Cf J R Macey and G P Miller, above n 41.
154 R Romano, Law as a Product, above n 152. See also J Netter and A Poulsen, “State Corporation Laws and Shareholders: The Recent Experience” (1989) 18 Fin Management 29. Cf Bebchuk, L A, “Federalism and the Corporation: The Desirable Limits on State Competition” (1992) 105 Harv L Rev 1435 at 1449-1450Google Scholar.
155 However, increases in share price may be attributable not to Delaware law itself, but some other transaction (such as a merger) to which reincorporation was preparatory: Romano, Law as a Product, above n 152 at 268-271.
156 Romano, R, “The Political Economy of Takeover Statutes” (1987) 73 Va L Rev 111CrossRefGoogle Scholar. As to the effects of this legislation, see J M Karpoff and PH Malatesta, “The Wealth Effects of Second Generation State Takeover Legislation” (1989) 25 J Fin Eco 291.
157 Winter, R K Jr, “The 'Race for the Top' Revisited” (1989) 89 Col L Rev 1526CrossRefGoogle Scholar.
158 B S Black, above n 17 at 586-588.
159 Ibid at 589-590.
160 I Ayres, above n 23.
161 Ibid at 1403-06. Cf Schwartz, A, “Relational Contracts in the Courts: An Analysis of Incomplete Agreements and Judicial Strategies” (1992) 21 J Leg Stud 271CrossRefGoogle Scholar.
162 Klausner, above n 117 at 842.
163 Ibid at 845.
164 For details of the legislation, see M J Whincop, above n 23 at 228 (note 267). For a discussion of Australian state legislation to restrict takeovers, see IM Ramsay, above n 2 at 194.
165 Cf Re Australasian Venezolana Pty Ltd (1962) 4 FLR 60.
166 F Fukuyama, The End of History and the Last Man (1992) at 89-97.
167 Coase, R, “The Nature of the Firm” (1937) 4 Economica 386CrossRefGoogle Scholar.
168 It also conforms to new trends in public administration: see below text accompanying n 226.
169 However, this argument is also true of a federal regulator, which will be motivated by such factors as decreasing political risk, the desire to build empires, and increasing the size of its budgetary appropriation.
170 B H Kobayashi and LE Ribstein, above n 17.
171 I Ayres, above n 23. See above text accompanying nn 160-161.
172 DJ Cumming and J G MacIntosh, above n 12 and text accompanying n 12.
173 See, eg, M Gratton, “PM Told Federal-State Tax Mix Key to Reform”, Australian Financial Review, 16 April 1998, p 3; A Ryan, “Letter: States Need Revenue Basis” Australian Financial Review, 27 April 1998, p 20.
174 Maybe that is not wholly true. David Chamy has described some rules as being “focal points”, having a sufficiently fundamental stature that their uniformity matters more than their actual content: above n 40 at 442-446. Corporate examples might include rules on the authority of corporate agents, the ultra vires rule and so on: see, eg, M J Whincop, “Nexuses of Contracts, the Authority of Corporate Agents, and Doctrinal Indeterminacy: From Formalism to Law and Economics” (1997) 20 UNSWLJ 274 at 294. My comment is that the provisions in the Corporations Law on these sorts of issues are both acceptable and uncontroversial. It is hard to imagine why these issues would be the subject of competition. Any need for incremental change could be cooperatively negotiated between six states. State competition would have no baneful effects.
175 Corporations Law, s 1416.
176 Second Corporate Law Simplification Bill 1996, proposed els 112 and 1415.
177 IM Ramsay, “The Expansion of Limited Liability: A Comment on Limited Partnerships” (1993) 15 Syd L Rev 537; Income Tax Assessment Act 1936 (Cth) ss 94J-94Q.
178 JC Coffee, above n 122 at 1636-1639; McChesney, F S, “Intellectual Attitudes and Regulatory Change: An Empirical Investigation of Legal Scholarship in the Depression” (1988) 38 J Leg Ed 211 at 233-234Google Scholar.
179 These provisions prohibit distribution of capital to the shareholders (eg, capital dividends, share buy-backs, and the like), in order to protect creditors: Trevor v Whitworth (1887) 12 AppCas409.
180 Since I propose a Commonwealth law against insolvent trading (see below text accompanying n 183), creditors would also have most of the protections proposed under the Company Law Review Bill 1997, cl 256C.
181 This has been a common provision in debt and preferred stock agreements: Smith, C and Warner, J, “On Financial Contracting: An Analysis of Bond Covenants” (1979) 6 J Fin Econ 117CrossRefGoogle Scholar; Stokes, DJ and Whincop, M J “Covenants and Accounting Information in the Market for Classes of Preferred Stock” (1993) 9 Contemp Ace Res 463CrossRefGoogle Scholar. Cf JC Coffee, above n 46, 1505-28 (impact of hostile takeovers on bond covenants).
182 F H Easterbrook and DR Fischel, above n 20 at 129-130 and 322-323.
183 R K Rasmussen and RS Thomas, “Delaware as a Forum for Insolvent Corporations: Precommitment, Investment Incentives, and the Race to the Top” (1998) unpublished paper.
184 Whincop, M J, “Taking the Corporate Contract More Seriously: The Economic Cases Against, and a Transaction Cost Rationale for, the Insolvent Trading Provisions” (1997) 5 Griff L Rev 1Google Scholar.
185 LA Bebchuk, above n 154 at 1489-1490.
186 M J Whincop and ME Keyes, above n 123 at 535.
187 Cf Jackson, TH and Scott, RE, “On the Nature of Bankruptcy: An Essay on Bankruptcy Sharing and the Creditor's Bargain” (1989) 75 Va L Rev 155CrossRefGoogle Scholar.
188 J N Gordon, above n 98 at 1591. See above n 174.
189 See above text accompanying nn 156-157.
190 Network and learning externalities may be a disincentive to incorporate in this jurisdiction.
191 Corporations Law, ss 634-648, 673-683 and 687-705.
192 See below text accompanying nn 203-220.
193 Williams Act, codified in 15 USC§§ 78m(d), (e), 78n(d)-(f).
194 Fischel, D R, “Efficient Capital Market Theory, the Market for Corporate Control, and the Regulation of Cash Tender Offers” (1978) 57 Tex L Rev 1Google Scholar.
195 On auctions generally, see Ayres, I and Balkin, J M, “Legal Entitlements as Auctions:Property Rules, Liability Rules, and Beyond” (1996) 106 Yale LJ 703Google Scholar.
196 Above n 107; Bebchuk, LA, “The Case for Facilitating Competing Tender Offers” (1982) 95 Harv L Rev 1028CrossRefGoogle Scholar; Gilson, R J, “Seeking Competitive Bids versus Pure Passivity in Tender Offer Defense” (1982) 35 Stan L Rev 51CrossRefGoogle Scholar.
197 Easterbrook, F H and Fischel, DR, “Auctions and Sunk Costs in Tender Offers” (1982) 35 Stan L Rev 1CrossRefGoogle Scholar; Schwartz, A, “Search Theory and the Tender Offer Auction” (1986) 2 J L Eco & Org 229Google Scholar.
198 See above text accompanying n 99.
199 Clearly, it would be cumbersome to hold that transactions between an investor and a securities firm are bound by the law applying to the company issuing the securities, since that would mean the parties' relation is potentially affected by a range of laws.If the investor has not given decisive instructions as to what securities to buy the securities firm would be unilaterally choosing the law.
200 R Romano, above n 35.
201 One might confine contractual freedom of this sort to institutional and other larger investors, to the exclusion of conventional objects of consumer protection laws.
202 Questions of incentives to develop efficient laws remain, however.
203 Wolfson, N, “A Critique of the Securities and Exchange Commission” (1981) 30 Emory LJ 119Google Scholar; Kripke, H, The SEC and Corporate Disclosure: Regulation in Search of a Purpose (1979)CrossRefGoogle Scholar; Macey, JR, “Administrative Agency Obsolescence and Interest Group Formation: A Case Study of the SEC at Sixty” (1994) 15 Cardozo L Rev 909Google Scholar; G Stigler, above n 58; Philips, SM and Zecher, JR, The SEC and the Public Interest (1988)Google Scholar.
204 F H Easterbrook and D R Fischel, above n 20 at 285.
205 Black, BS, “The Case for Competition in Australian Company Law”, (1997)Google Scholar unpublished paper.
206 Ibid at 11. The “lemons” argument, outlined in Akerlof, G, “The Market for 'Lemons': The Quality of Uncertainty and the Market Mechanism” (1970) 84 Q J Eco 488CrossRefGoogle Scholar, holds that under conditions of information asymmetry, where sellers find credible signals difficult to make, bad products will displace good ones. This is, in sum, a pooling equilibrium in which sellers are indistinguishable, and price reflects average quality.
207 See above text accompanying n 58.
208 Romano, above n 35. See also Whincop, M J and Keyes, ME, “The Market Tort In Private International Law” (1999) 19 NWJ Int L & BusGoogle Scholar (forthcoming).
209 Ibid. See below text accompanying rm 234-242.
210 See above text accompanying n 154-155.
211 See above text accompanying rm 57-58.
212 See above text accompanying nn 53, 63-67. See also M J Whincop, above n 19.
213 Romano, above n 35. See below text accompanying nn 234-240.
214 A possible downside is that multiple jurisdictions with their own non-uniform disclosure requirements may increase the costs of processing information, compared to a federal disclosure schedule (which is not something we currently have).
215 J C Coffee, above n 127.
216 Scholes, M, “The Market for Securities: Substitution Versus Price Pressure and the Effects of Information on Share Prices” (1972) 45 J Bus 179 at 200-204CrossRefGoogle Scholar; Georgakopoulos, N, “Insider Trading as a Transactional Cost: A Market Microstructure Justification and Optimization of Insider Trading Regulation” (1993) 26 Conn L Rev 1 at 20-23Google Scholar; Gilson, R J and Kraakman, R, “The Mechanisms of Market Efficiency”, (1984) 70 Va L Rev 549 at 630-634CrossRefGoogle Scholar.
217 See, eg, J C Coffee, “Insider Trading versus Selective Disclosure: Distinguishing Fraud from Favoritism” in K Lehn and R Kamphis Jr (eds), Modernizing US Securities Regulation: Economic and Legal Perspectives (1992) at 139; N Georgakopoulos, above n 216; Georgakopoulos, N, “Frauds, Markets, and Fraud-on-the-Market: The Tortured Transition of Justifiable Reliance from Deceit to Securities Fraud” (1995) 49 U Miami L Rev 671Google Scholar; Whincop, M J, “Towards a Property Rights and Market Microstructural Theory of Insider Trading Regulation: The Case of Primary Securities Markets Transactions” (1996) 7 JBFLP 212Google Scholar.
218 M J Whincop, above n 217; Black, A, “The Reform of Insider Trading Law in Australia” (1992) 15 UNSWLJ 214Google Scholar; Bostock, T, “Australia's New Insider Trading Laws” (1992) 10 CSLJ 165Google Scholar; Hogan, W, “Insider Trading” (1988) 6 C & SLJ 633Google Scholar. N Georgakopoulos, above nn 216 and 217.
219 The strongest advocate of a contractarian approach to insider trading is Jon Macey: JR Macey, “From Fairness to Contract: The New Direction of the Rules Against Insider Trading” (1984) 13 Hofstra L Rev 9.
220 R Tomasic, Casino Capitalism (1991).
222 M Klausner, above n 117. For a discussion of path dependency and related concepts, see Roe, M, “Chaos and Evolution in Law and Economics” (1996) 109 Haru L Rev 641Google Scholar.
223 Grandy, C, “New Jersey Corporate Chartermongering,1875-1929” (1989) 49 J Eco Hist 677 at 691-692CrossRefGoogle Scholar.
224 The next part considers the availability of measures to combat this problem.
225 Romano, Law as a Product, above n 152.
226 IM Ramsay, above n 2 at 199. See also the discussion above text accompanying n 164.
227 I envisage something like a purchaser/provider model: see, eg, T Ashton, “The Purchaser/Provider Split in New Zealand: The Story So Far” (1995) 18 Aust Health Rev 43. For further analysis of the ASIC, see M J Whincop, above n 19.
228 See above text accompanying n 182.
229 For a discussion of the content of these provisions, see Whincop, M J, “Developments in Directors' Statutory Duties of Honesty and Propriety” (1996) 14 C & SLJ 157Google Scholar. For a discussion of enforcement procedures, see Bird, H, “The Problematic Nature of Civil Penalties in the Corporations Law” (1996) 14 C & S LJ 405Google Scholar.
230 Shavell, S, “Criminal Law and the Optimal Use of Nonmonetary Sanctions as a Deterrent” (1985) 85 Col L Rev 1232CrossRefGoogle Scholar; Whincop, M J, “An Economic Analysis of the Criminalisation and Content of Directors' Duties” (1996) 24 ABLR 273Google Scholar.
231 M J Whincop, ibid.
232 Restatement (Second) of Conflict of Laws (1971) § 302(2). See generally P J Kozyris, “Corporate Wars and Choice of Law” [1985] Duke LJ 1, 50.
233 Sykes, EI and Pryles, MC, Australian Private International Law (3rd ed 1991) at 398-399Google Scholar.
234 Uniform Securities Act§ 414, 7B ULA 672 (1985).
235 See generally R Romano, above n 35. R Romano, above n 35.
236 Dutson, S, “The Territorial Application of Statutes” (1996) 22 Mon UL Rev 69Google Scholar; M J Whincop and M E Keyes, above n 124.
237 EI Sykes and MC Pryles, above n 233 at 240-248.
238 Vita Food Products Inc v Unus Shipping Co [1939] AC 277.
239 D S Kelly, Localising Rules in the Conflict of Laws (1974).
240 R Romano, above n 35.
241 This seems a constitutional exercise of power: Breavington v Godleman (1989) 169 CLR 41 at 83; Pryles, MC and Hanks, P, Federal Conflicts of Laws (1974) at 173-174Google Scholar; Australian Law Reform Commission, Choice of Law (Report No 58, 19092) at§ 3.24.
242 See above text accompanying nn 158-161.
243 Corporations Act 1989 (Cth), ss 51-53; Corporations ([State]) Acts 1990, ss 42-44 (in each State). This legislation is in sub}stantially the same terms as the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth). There is equivalent legislation in all States and Territories. See above text accompanying n 7.
244 The leading case is Bankinvest AG v Seabrook (1988) 14 NSWLR 711 (favouring a most appropriate forum approach). It is not universally followed: Dawson v Baker (1994) 120 ACTR 11; Paul v Mid Coast Meat Co Pty Ltd [1995] 1 Qd R 658 at 663; Baffsky v John Fairfax & Sons Ltd (1990) 97 ACTR 1 at 5-6.
245 Exclusive jurisdiction clauses are normally enforced without demur: Oceanic Sun Line Special Shipping Co Inc v Fay (1987) 165 CLR 197 at 224, 230-232, 259-261; The Eleftheria [1970] P 94 at 103; Leigh-Mardon Pty Ltd v PRC Inc (1993) 44 FCR 88 at 99 (“Leigh-Mardon”). See also R K Rasmussen and R S Thomas, above n 183.
246 See generally M J Whincop and M E Keyes, “The Nexus of Forums: A Contractual Theory of Jurisdiction Over Corporations” (1998) 21 UNSWLJ 681.
247 R J Daniels, above n 123 at 186-188.
248 Ibid at 187.
249 Whincop, M J, “Gambotto v WCP Ltd: An Economic Analysis of Alterations to Articles and Expropriation Articles” (1995) 23 ABLR 276Google Scholar (discussing Gambotto v WCP Ltd (1995) 182 CLR 432); M J Whincop, above n 229 (discussing R v Byrnes (1995) 183 CLR 501); Whincop, M J,“A Doctrinal and Relational Critique of Shareholders' Special Contracts” (1997) 19 Syd L Rev 314Google Scholar {discussing Bailey v New South Wales Medical Defence Union Ltd (1995) 18 ACSR 521).
250 R J Daniels, above n 123.
251 See above text accompanying nn 162-163, 223.
252 I suspect, though, that as a matter of politics the Commonwealth is unlikely to agree to abandoning its monopoly unless it can continue to compete with the States.
253 B S Black, above n 205.
254 Black, BS and Kraakman, R, “A Self-Enforcing Model of Corporate Law” (1996) 109 Harv L Rev 1911CrossRefGoogle Scholar.
255 Evidence indicates that in listed companies, share prices increase following an announcement of reincorporation, so there may not even be a substantial risk in these cases: see above text accompanying n 154.
256 JrCoffee, J C, “The Future of Corporate Federalism: State Competition and the New Trend Towards De Facto Federal Minimum Standards” (1987) 8 Cardozo L Rev 759Google Scholar and references cited above inn 108.
257 Managers who refused to table a motion in respect of the amendment, when it favoured their interests, could presumably be enjoined to do so (the right would seem to be the shareholder's individual right, not a corporate right), or sued for breach of duty.
258 One problem is determining what matters of “substance” are, an issue I shall not discuss in detail. Some issues of “procedure” such as increasing the number of days a bidder must give shareholders to review a takeover offer can have substantial effect.
259 The Incorporation case (1990) 169 CLR 482.
260 Re Australian Education Union ex parte Victoria (1995) 128 ALR 609 at 629. If, as in that case, the Commonwealth can regulate the minimum wages of a State's employees, I see no reason in fairness it cannot protect shareholders against adverse changes in a State's laws.
261 Ideally, the Constitution would protect the integrity of contracts from legislation that would change the terms of the exchange. Australia has no provision equivalent to the contracts clause in the U.S. Constitution: art 1, s 10. For a discussion of the provision's scope, see HN Butler and LE Ribstein, above n 20 at ch 2. If, however, the Commonwealth has legislative power to protect corporate contracts, it should use it.
262 National Competition Council, Compendium of National Competition Policy Agreements (1997).