Regulation by litigation has been the dominant regulatory modality in U.S. corporate law for over a century. But that model is in crisis. The shareholder suit, the trigger of the state law-dominated, fiduciary duty-based model of regulation, has been drawn into disrepute. The crisis is most apparent in merger suits, which have been brought against virtually every deal, but which invariably generate no real benefit for anyone other than the lawyers that file and defend them. Delaware, the leading regulator in U.S. corporate law, has recently taken steps to address the problem, but the immediate result seems to have been a flood of litigation out of Delaware and into other fora. Regulation by litigation thus has demonstrated a tendency to devolve into rent seeking by attorneys.
But there is an alternative to regulation by litigation—that is, simply, regulation. The alternative regulatory model thrives on the other side of the Atlantic Ocean where both the United Kingdom and Ireland have adopted a model based on the application of detailed ex ante codes governing the conduct of bidders, targets, and other market participants in takeovers and merger transactions. These codes are drafted, interpreted, and enforced by expert panels comprised of bankers, lawyers, institutional investors, and other market professionals. Litigants, courtrooms, and judges are rarely involved. In spite of this—or perhaps because of it—these code and panel-based regimes are generally viewed as highly successful: offering flexibility, speed, and certainty at relatively low administrative cost. In light of the success of the Anglo-Irish model, the obvious question becomes whether a similar approach might work in the U.S. Remarkably, it has not been tried.
The divergence in regulatory modalities between the U.S. and Anglo-Irish systems is especially striking given the similarities between the underlying legal and economic systems. The legal systems in all three countries are based on common law principles. All three countries have highly developed stock markets with dispersed ownership of publicly traded firms. All three take agency costs as the central problem of corporate governance. And all three—especially the U.S. and the UK—experience high levels of takeover and merger activity in comparison with other countries. Yet, in spite of the American federal system and its fifty “laboratories of democracy,” each with a strong incentive to compete for corporate charters, no U.S. state has yet been tempted to adopt the Anglo-Irish model of merger regulation. Instead, all fifty states apply a form of regulation by litigation.
In our Article, Resolving the Crisis in U.S. Merger Regulation: A Transatlantic Alternative to the Perpetual Litigation Machine, published at 35 Yale Journal on Regulation 1 (2018), we explore these two models of merger regulation, tracing the development and current operation of each and exploring their relative costs and benefits. We ask basic comparative law questions, such as how have such closely related legal and economic systems developed such widely divergent approaches to merger regulation and, more importantly, why have these differences persisted in an era of convergence and globalization. We then spring from these questions to a larger normative inquiry into the relative costs and benefits of the Anglo-Irish and U.S. systems. After weighing these considerations, we propose a hybrid regulatory model to address the crisis in U.S. merger litigation.
Our Article intersects several lines of scholarly debate. First, in offering an alternative to regulation by litigation, we contribute to the corporate and procedural law literature focusing on how litigation effectively (or ineffectively) serves regulatory objectives, addressing the promise and peril of ordinary shareholders serving as “private attorneys general.” Second, we engage the law and economics literature, analyzing the costs and benefits of alternative models of regulation and applying these to the real world context of shareholder litigation. Third, in addressing why no U.S. state has experimented with a regulatory alternative to merger litigation, we contribute to the corporate law literature on the inter-state competition for corporate charters, shedding light on how the “race to the top” or “race to the bottom” might actually work. Fourth, we apply insights from the interest group theory of corporate law to highlight the dominance of the corporate bar as the Achilles heel of Delaware corporate law. Fifth and finally, we contribute to the comparative law literature by demonstrating how the form of legal regulation can be as important in determining outcomes as the substance of the rules.
The entire article is available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3136458.
Dan Awrey is a Professor of Financial Regulation at University of Oxford. Blanaid Clarke is the McCann Fitzgerald Chair in Corporate Law at Trinity College Dublin- School of Law. Sean Griffith is the T.J. Maloney Chair in Business Law at Fordham University School of Law.