Professor Bainbridge...on law, politics, religion, culture & food

There is one fundamental difference between the US and Europe: In the US, you change jurisdiction only, in Europe you change language and – considering Continental Europe and the Isle(s) – a whole legal system (Civil law and Common law). In the US, there is no major change in the way judges think about legal problems from a methodological point of view (e.g. with respect to the importance and usage of precedent). Everywhere you go, there is some corporate statute which is embedded in a common law environment. Thus, for lawyers, the methodological rules of the game are the same pretty much in any given state, no matter if you are situated in Utah or in Delaware. A lawyer knows how to deal with the legal material, to find out what the law actually is and what to expect if things go bad, i.e. if the parties end up in court. This is different in Europe. If you take Germany and England as an example, you won’t find a German lawyer who is able to provide legal counsel about the English corporate system in a way which suffices the needs of clients, and vice versa. Imagine an English lawyer trying to advise on matters arising out of a civil law system. This won’t work. And this is true not only with respect to the methodological level. If you want to advise your client upon matters of Spanish corporate law, you better speak and read Spanish (or take any of the languages of the 27 Member States). Additionally, people tend to expect the law to work in a certain way. Although there was the phenomenon of Germans using English corporations (the “Limited”), a sudden decline in numbers occured after the first brave promoters-now-shareholders saw that they had to deal with the English tax, accounting and supervision system. Suddenly many people realized that they could not rely on their local counsel, but that they had to ask an English lawyer and English accountants to do the job. How do you find a counsel you trust in England when you live in Munich? Moreover, this sort of English legal and other counsel tends to be much more expensive than in Germany. Therefore, in the end, after summing up all the costs you incur by incorporating and running an English corporation, it may well be cheaper to use the German form, even if up-front costs appear to be higher. Additionally, statistical data suggests that a considerable number of “Limiteds” ends up in bankruptcy recently. The absence of a minimum capital seems to have motivated many to incorporate a business in spite of not having the means to keep it alive. True, the existence of minimum capital does not hinder bankruptcy. However, in Germany and other European countries, there seems to be at least some truth to the argument that people opting out of a minimum capital system with low minimum capital sometimes have other things in mind than doing business on the basis of a sound business plan. This and the lack of expertise with a foreign legal form led many banks and potential business partners to the conclusion not to deal with a “Limited” at all or to ask for substantially higher securities.
In the end, the “Limited” as the example of a competing corporate form will be relevant in some special settings, mostly in cross-border transactions. However, for someone doing business in France/Germany only, a French/German legal form will be easier to get along with.

Considering these points, to compare the US and Europe with respect to the existence of corporate competition has something of comparing apples and oranges.

I can definitely see how regulatory competition of this type can push regulation lower, but I’m still a little uncertain about how this mechanism, in practice, might necessarily lead to optimal levels of regulation.  Clearly, in theory (and, according to some research, in reality), a jurisdiction with optimal levels of regulation will have an advantage in terms of cost of capital offered to companies listing in that market or incorporating there.  However, regulatory costs are very quantifiable at the individual level—a company can estimate its costs if it lists/incorporates in a high-regulation jurisdiction.  Cost of capital, however, is diffuse and harder to quantify in the particulars.  I know that X offers cheaper capital, generally speaking, but does it necessarily offer cheaper capital to me?  And if I can’t put an exact figure on it, I’m taking a risk that the costs won’t be outweighed by the benefits.  If this is the case, won’t jurisdictional competition tend to push for sub-optimal levels of regulation?