The financial crisis has reignited the debate on how to best strike a balance between private ordering and regulatory intervention. As a matter of legislative technique this requires a policy decision whether a ‘rules’ or a ‘principles’ approach should be pursued. It is therefore with considerable foresight that Professors Lord Eatwell and Kern Alexander of the Judge Business School at the University of Cambridge organised a conference on ‘Principles v. Rules in Financial Regulation’, which took place in Cambridge from 11 to 12 April 2008. This issue carries a conference report by Kern Alexander and major contributions by Steven L. Schwarcz, Edward J. Kane and David G. Mayes.

The European Business Organization Law Review presents three articles, by Schwarcz, Kane and Mayes, analysing some of the main issues regarding principles versus rules in financial regulation. These articles result from papers presented at a symposium in April 2008 entitled ‘Principles v. Rules in Financial Regulation’ organised by the Centre for Financial Analysis and Policy and the Centre for Corporate and Commercial Law Studies at the University of Cambridge. The symposium attracted academics, policy-makers, regulators and practitioners from several leading jurisdictions representing a range of disciplines including accounting, economics, finance and law, who were invited to present papers on specific areas of the principles-versus-rules debate in financial regulation and to discuss the impact of the global credit and financial crisis on principles-based regulation.

This essay, prepared for a University of Cambridge conference on ‘Principles Versus Rules in Financial Regulation’, posits a new issue in that debate. Although principles-based regulation is thought to more closely achieve normative goals than rules, the extent to which that occurs can depend on the enforcement regime. A person who is subject to unpredictable liability is likely to hew to the most conservative interpretation of the principle, especially where that person would be a potential deep pocket in litigation. This creates a paradox: unless protected by a regime enabling one in good faith to exercise judgment without fear of liability, such a person will effectively act as if subject to a rule and, even worse, an unintended rule.

This paper traces the financial-institution crisis of 2007–2008 to a breakdown in the incentives of regulators, supervisors, managers and investors to perform adequate due diligence on securitised investments. Investors allowed their trust in the reputations of credit-rating firms and the giant financial firms that manufactured highly rated tranches of securitised loan pools to blind them to the casino ethics of these firms' managers and line employees.

Government credit-allocation schemes generate incentive conflicts that undermine the effectiveness of government supervision and eventually produce financial crisis. For political reasons, most countries establish regulatory arrangements that embrace three contradictory elements: (1) politically directed subsidies for selected borrowers (US beneficiaries have included homeowners and builders); (2) subsidised provision of explicit or implicit repayment guarantees for the creditors of financial institutions that participate in the credit allocation scheme; and (3) defective government monitoring and control of the subsidies to leveraged risk-taking that the other two elements produce. The competition encouraged incentive-conflicted supervisors to outsource much of their due discipline to credit-rating firms and accountants. This outsourcing encouraged institutions to leverage and securitise their loans in ways that pushed credit risks on poorly underwritten loans into corners of the market where supervisors and credit-rating firms were not obliged to look for them and in fact failed to discern the dangers posed until it was too late. That taxpayers are forced to pay the bill for this regulatory failure is a scandal of the highest order.

This article considers the nature of the rules that would need to exist to enable a satisfactory regulatory regime for cross-border banks in Europe in the light of the present crisis. It sets out first what would need to apply in normal circumstances when banks are sound before going to consider how earlier coordinated intervention and ultimately resolution before capital is eroded can be achieved. It suggests in particular that harmonising the detail of regulatory systems would be very time-consuming but not strike at the heart of the problem which is how countries can cooperate across legal boundaries and the structure that banks would need to have to make this feasible. It concludes by exploring the institutional structures that might make this possible, suggesting that if any new European level body is needed, the most important would be a resolution agency as demonstrated by US experience.

In this paper, we use case studies to document how dominant shareholders have circumvented mandatory bid rules to appropriate wealth from minority shareholders. Dominant shareholders are numerous in Continental Europe. Creative compliance with mandatory bid rules reveals the failure of boards and regulators to protect minority shareholders and the difficulties of legislating in this area. We propose enhanced means for protecting their interests.

A large number of new rules which rely on disclosure requirements have been introduced in EU corporate governance in recent years, to the extent that disclosure requirements seem to be the predominant if not the only regulatory method used. This article takes a critical look at this development with the aim of assessing whether too much reliance has been put on disclosure as a regulatory instrument in this area. The arguments in favour of disclosure requirements are studied, as are those situations where disclosure is most likely to prove an ineffective or insufficient tool. Furthermore, it is examined how the current disclosure regimes in EU corporate governance can be improved to ensure that they will be more effective.

The Societas Europaea (SE) has developed unexpected popularity in Germany (cf., the empirical study in Eidenmüller, Engert and Hornuf, Die Aktiengesellschaft 2008, 721 et seq.). Since the incorporation of Allianz SE, more publicly listed enterprises have taken this legal form (e.g., BASF SE, Fresenius SE, Porsche SE). The SE has become attractive to mid-sized companies in Germany as well. Legal advisers and legal scholars in Germany consequently have had a breadth of experience with this new supranational company type. This experience forms the basis of the following recommendations to further improve the legal framework and increase the attractiveness of the SE for large and mid-sized companies in Germany and Europe.

This article discusses the limitations of the orthodox economic theory of the firm as a nexus of contracts. Various experimental studies have shown that the aggregation of individuals in groups changes behaviour and preferences systematically. This perspective has been formalised by models of interdependent preferences. Based on a prominent approach of interdependent preferences, intention-based preferences, two types of labour contracts, incentive contracts and bonus contracts are analysed. Results are compared with the predictions of the orthodox economic theory.

Niklas Luhmann's sociological systems theory sees in an organisation neither a group of acting individuals nor a single corporative actor, but instead a social system. For Luhmann, a social system is a closed network of communication processes that recursively engender each other. This article introduces the reader to this particular way of understanding organisations. For this purpose, we will have to look at certain individual issues within Luhmann's theory. We will start with a few explanatory notes on Luhmann's theory of communication. Subsequently, key terms from the field of systems theory such as ‘system’, ‘medium/form’, ‘autopoiesis’ and ‘structure’ will be introduced. With the help of these notions, we will be able to clarify what Luhmann understands by a social system in general. For Luhmann, organisations are social systems of a particular type. In the last two sections, the specific characteristics of organisations as subsystems of the society will be outlined.