The transnational law market, regulatory competition, and transnational corporations.(Symposium)

I. COMPETITION FOR LAW AS A PRODUCT

Competition in markets for goods and services is a central feature of market economy systems. The market decides which products and services are offered and at what prices. The boundaries of the market depend on society's decision as to what constitute tradable goods. On its face, law does not appear to belong in this category. We perceive law to be a framework within which trade takes place. We do not, however, consider law itself to be a product.

Nevertheless, law has become a commodity in many parts of the world and in relation to many different topics. Individuals and companies seek attractive legal regulations, and countries compete for customers of their legal wares. For example, an Italian entrepreneur residing in Bremen could set up an English limited company for her business, finance the enterprise with bonds and loans under New York law, choose arbitration in Switzerland for all disputes that arise, and, should she find herself ruined by her creditor's claims, file for private bankruptcy in France. All of this may be organized from a villa in Bremen with the aim of gaining maximum financial and strategic advantage.

Jurisdictions advertise their legal products and react sensitively to changes in demand. If the statutes of a country do well in business, the tax-paying legal services industry does well too. For this reason, the English Law Society has published a brochure entitled "England and Wales: the jurisdiction of choice." (1) The alleged advantages of English law are described in glowing terms. In his foreword, then-English Secretary of State for Justice Jack Straw writes, "This brochure sets out the reasons for our success and lets people know why it is in their own interests to use English law and to settle their disputes here." (2) The professional representatives of legal professionals in Germany could not let this go unanswered. They countered with the brochure "Law made in Germany." (3) In her foreword, then-Minister of Justice Brigitte Zypries says, "Law made in Germany is a guarantee for success." (4) The character of law as a commodity can hardly be expressed more clearly.

This article analyzes important aspects of the law market. It is a market for legal rules, not a market for investments. (5) This article initially investigates the reasons for the emergence of the law market and continues to illustrate this market with findings in the fields of company law, contract law, the law of dispute resolution, and insolvency law. It highlights the role of transnational corporations as important market actors. Particularly, the normative analysis of the law market and its consequences are of great importance. Based on considerations of economic efficiency, this article develops policy recommendations for the structure of the European legal framework.

This article's focus on the aforementioned fields of law does not mean that the law market is restricted to these areas. Similar developments can also be observed in the law of property and family law. (6) However, for the purposes of illustration and identification of the decisive structural issues and problems of "law as a product," concentration on the areas selected here is sufficient. The same applies with regard to the focal treatment of the European law market. There is, of course, a similar market in other regions as well, particularly in and between the United States of America. Although this article makes comparisons with the law market in the United States, the focus here is the European perspective, especially considering that the framework conditions for the law market differ significantly between the United States and Europe.

On its face, the issue of "law as a product" is relatively profane in character. However, this article shows that the subject raises significant philosophical questions, particularly in regard to legal policy conclusions that may be drawn from assessing the emerging market for law. These philosophical issues cannot be exhaustively discussed here. However, an answer will be given to the question of which conceptual course-setting elements are decisive for recommending or not recommending certain framework conditions for the law market.

Part II discusses the emergence of the transnational law market, while part III discusses some of its more important segments. Part IV analyzes characteristics and effects of the law market, while part V examines the special role of transnational corporations as market actors. Part VI presents a normative assessment of the law market, and part VII develops some policy recommendations with respect to the European governance framework. Concluding remarks follow in part VIII.

II. EMERGENCE OF A TRANSNATIONAL LAW MARKET

Market activity only arises if there is supply and demand for a particular product or service. The fact that law has become a product across broad subjects and regions is linked to structural changes on the supply-and-demand side of law as a commodity.

A. Demand Side

On the demand side, the ability to choose which law shall apply (i.e., conflict of laws options) in global transactions has made the law market possible. In addition, technological changes have occurred, which make an informed choice significantly easier.

1. Expanded Opportunities for Choice of Law

Anyone dissatisfied with the legal rules of a certain jurisdiction can leave the country, at least in cases that do not involve a dictatorial regime, and find comfort in a state that has more preferable laws. In doing so, one escapes the regulatory dictates of the country in which she previously lived. Historically, physical exit was often the only possibility of expressing dissatisfaction. (7) In some respects, this is still the case today. Anyone seeking to legally escape taxation by a country must, in most cases, actually move his place of residence or his business activities out of that country. The situation is similar in another sphere of life, namely marriage, where temporary departure from one's own jurisdiction is normally necessary in order to make use of more liberal marriage provisions (i.e., "wedding tourism").

Fundamental change has now resulted from the fact that free choice of law is on the advance with regard to numerous issues in the private international law of many countries. (8) This applies to the same extent both in Europe and the United States, but less so in many Latin American jurisdictions. (9) Certainly, this development was and is not driven by a desire to make law a product. Choosing freely in private international law is, instead, regarded as an instrument to increase legal certainty with respect to the applicable law and, at the same time, to strengthen private autonomy. (10) With these expanded opportunities for choice of law, however, come increasing opportunities to choose foreign law without having to physically leave the home country, which means considerably lower costs. In principle, escape from mandatory provisions under national law is also possible. Finally, market actors can combine the regulations of different countries with one another, as seen by our Italian entrepreneur in the initial example. It is possible to choose from the different laws offered in various countries based upon what is most favorable for one's own interests in the relevant sphere of life--thus, laws can be "unbundled." (11)

Expanded opportunities for choice of law do not only exist at the level of conflict of laws. The potential subject matters of such conflict of laws choices have also increased considerably in the recent past. This applies in particular to Europe, where the European Union has enriched the law products of the individual EU Member States. In European company law, there is, for instance, the European Public Company (Societas Europaea or SE), which may well be joined in the near future by a European Private Company (Societas Privata Europaea or SPE). (12) Hence, expanded opportunities for choice exist because of changes in private international law and due to altered substantive law products. Taken together, these developments provide for increased opportunities for legal arbitrage and, thus, enable competition for legal rules--law can be selected and deselected by market actors. (13)

These considerations demonstrate also that the market for law products does not and cannot exist without a foundation of legal rules. On the contrary, the law market is instead a function of the applicable law that grants the choice of law opportunities, both in conflict of laws and in substantive law. A change in the conditions of the applicable legal framework automatically facilitates a change in the structure of the law market. I will return to this point later.

2. Increased Ease in Choice of Law

In addition to the expanded choice of law opportunities on the demand side, it is most notably the increased ease in choice of law that has contributed to the emergence of the law market and continues to do so. Technical progress, particularly the Internet, has lowered information and transaction costs considerably, thereby creating the possibility of choosing the best law for individual purposes swiftly and efficiently. Information and transaction intermediaries also contribute to the choice of law by providing professional assistance. For example, anyone wishing to form a foreign company or file for bankruptcy abroad can make use of numerous service providers. Thus, informed choice has become much easier and more accessible. Concerning company law, the English limited company is being intensely promoted, particularly in response to German demand, and professional support is being offered for foreigners who wish to form an English limited company. (14) With respect to insolvency law for individuals, France in particular has become the target for such agents as the "jurisdiction of choice" and is apparently highly attractive to German clientele. (15)

B. Supply Side

The emergence of a transnational market for legal products is not only based on fundamental changes on the demand side. The existence of any market also presupposes suppliers who compete with each other. In the case of legal products, this means that there must be incentives for the participating jurisdictions to market their wares.

With respect to competition for investments, the incentives are obvious. If firms locate investments in their territory, countries profit in terms of higher taxes, employment, and contribution to their GDP. However, there are similar incentives with respect to the competition for legal rules. In the United States, for example, the existence of a market for company law is all but a recent development. (16) It is the small East Coast state of Delaware that by far plays the leading role. Approximately sixty percent of the 500 largest U.S. companies are incorporated in Delaware and are therefore subject to its company law. (17) The state of Delaware has massive incentives to facilitate such incorporations. It obtains more than twenty percent of its entire annual tax revenue from incorporation and franchise fees. (18) By contrast, EU Member States cannot charge such taxes or fees on the basis of the applicable legal conditions. (19) Therefore, they lack the direct financial incentives to market their laws the way Delaware does. This likewise applies to the other areas of the law discussed here.

However, indirect financial incentives are presumably far more important than direct financial incentives. If the law of a country is used in various territories worldwide, then it means that the country's specialized service providers (e.g., lawyers, tax advisors, and accountants) also do well. (20) They, of course, contribute to the country's GDP and also pay taxes. Former English Secretary of State for Justice Jack Straw is very aware of this. In his foreword to the above-cited brochure published by the Law Society he writes, "the success of the legal services sector plays an unquantifiable role in helping London to maintain its position as a major centre for global commerce." (21) In addition, the export of a country's own law also makes it easier for that country's real economy to succeed in foreign markets. If the legal infrastructure in a foreign environment is familiar, establishment in this environment is easier. The difficulty in quantifying this advantage does not change the fact that it exists and presumably carries considerable weight. There is no other way to explain the enormous efforts made by individual countries to export their laws. (22)

C. The Transnational Law Market as a Recent Phenomenon

Competition for investments has existed for a long time. Choice of law opportunities, particularly in the private international law regimes of many countries, have as well, albeit to a lesser extent. The transnational law market developed as a result of the considerable increase of choice of law opportunities on the demand side, and the marketing of substantive law (i.e., the law products) by individual countries on the supply side. It can no longer be disputed that such a law market exists today in numerous regions and in many substantive fields of the law.

As already touched upon, the title of the German Ministry of Justice brochure, "Law made in Germany," alone speaks volumes. In addition, various institutions assess the quality of the law in different jurisdictions today (e.g., in the form of ranking lists, such as the "Global Competitiveness Report" of the World Economic Forum). (23) The World Bank's "Doing Business Reports" even more clearly demonstrate this phenomenon of global regulatory competition. (24) In these reports, countries are judged according to how well their law fulfills certain functional requirements. For example, the ranking regarding the ease of formation of a company places Germany at number 102 (United States: 6, United Kingdom: 8, and France: 14). It is apparently very difficult to form a company in Germany. Moreover, the ranking list for the ease of transfer of real estate shows France at number 166 (United States: 12, United Kingdom: 22, and Germany: 52), indicating that it is very difficult (i.e., requiring significant effort with respect to time and costs) to acquire or to mortgage real estate in France. While the underlying methodology of these ranking lists must be criticized, (25) it does nothing to alter the lists' influence on development policy and important loan-making decisions. It also does not change the conspicuous fact that they reveal to what extent countries compete with each other for the "best law." Finally, and in the meantime, regulatory competition is further evidenced by the fact that an alignment process related to legal concepts and ideas has started, reflecting the transnational popularity of certain legal products. (26)

The law market as a phenomenon differs from other related phenomena. First, regulatory competition as it relates to legal products is something different from systems competition. (27) The former concerns the choice of specific legal rules, not the choice of a system in the broader sense, which includes not only legal rules, but also the infrastructure of a particular country, its education system, and its many other functions. Secondly, the law market is a market for the legal rules of a country. Therefore, it does not involve the establishment of a private--in the sense of nonstate--legal order or a private legal framework by a corresponding act of the participating parties. (28) Finally, the law market is a legal market. This distinguishes it from bribery or corruption, where legal regulations may be enacted or prepared as consideration for illegal payments. A further differentiation can also be seen with respect to the fact that the law market is a market for generally applicable legal provisions, that is to say rules which do not only apply in special, individual cases. In this respect, the law market differs from, for example, a settlement in civil proceedings or a so-called "plea deal" in criminal proceedings, which merely concern the application of an existing legal provision to specific conduct in an individual case.

III. SEGMENTS OF THE LAW MARKET

The phenomenon of the law market is illustrated below by some of its segments, namely company law, contract law, the law of dispute resolution, and insolvency law. In at least some cases, there are respective empirical studies regarding these segments that go beyond merely showing which jurisdictions are the market leaders. These studies also indicate why certain rules or regulations have been successful in the transnational competition and others not. These findings are important for the economic assessment of the law market in part VI.

A. Company Law

As already mentioned, U.S. company law is dominated by Delaware. The decisive reasons for this have yet to be completely explained. (29) In particular, it remains unanswered whether Delaware's law is attractive because it is more efficient than that of other states, or whether other factors like preferential treatment for the management, network effects, and path dependence play a more important role. Delaware's dominant position relates not only to large corporations, but also to limited liability companies. Limited liability companies are partnerships, which are treated as such for tax purposes, but offer their partners limited liability. A recent survey has shown Delaware as the leader in this respect as well. (30)

In Europe, regulatory competition in company law did not play a significant role for a long time due to the real seat principle in the conflict of laws of many different Member States. The real seat principle states that the law applicable to a company is the law of the state in which the company has its real seat (i.e., where its central place of administration is located). This …