Corporate governance issues: United States and the European Union.

Consequently, in the late 1970s and 1980s, corporate charter amendments were adopted by a few corporations, which allowed directors in the face of a change in control to consider the social and economic effects of the acquisition on the target's employees, suppliers, customers, and others. (137) Today, many states have statutes that permit (or in one instance require) directors and officers of corporations chartered within their states to consider the interests of other constituencies beyond the corporation's shareholders, at least in certain situations, particularly with a change of control. (138) Delaware, a renowned state in regards to corporate law, which did not formally adopt a constituency statute per se, stated in its 1985 supreme court decision, Unocal Corp. v. Mesa Petroleum Co., (139) that, in analyzing the effect of an imminent takeover on the "corporate enterprise," the directors may consider its "impact on 'constituencies' other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally)." (140) The Delaware court qualified its decision in Mesa by stating in Revlon, Inc. v. MacAndrews & Forbes, Inc. that, once the target firm was clearly going to be sold, the duty of the target's board "changed from the preservation of [the target firm] as a corporate entity to the maximization of the company's value at a sale for the stockholders' benefit." (141) In other words the "board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders." (142) Apparently, the board's responsibilities under Unocal were altered in that the directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders. (143) Subsequently, the same Delaware court held in Paramount Communications, Inc. v. Time, Inc. (144) that "directors are not obliged to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy." (145) Although when looked at as a whole, these Delaware cases tend to show an erratic approach in regulating incumbent managers' duties in responding to unsolicited takeover bids, one thing appears to be consistent in these cases: the Delaware courts tend to give victory to the party which (when considering marketplace realities of the bid) is most likely to end up with control over the assets; that is, "the Delaware courts pick winners." (146) Regardless of case law, the widespread adoption of constituency statutes in the United States, whether in takeovers or otherwise, at least demonstrates a trend, and, therefore, is here to stay. (147)

What is the position of foreign countries and, in particular, the European Union? (148) The American corporate governance system, as seen above, adheres to the idea of shareholder primacy. Because the United Kingdom, Austria, and Canada share a legal system based on English common law and equity principles, they are similar to the United States--shareholder primacy is the predominant norm in each of these countries. In England, for example, Section 309 of the Companies Act of 1985 requires incumbent managers to take into account the interests of employees as well as shareholders when making decisions about takeovers, hence the applicability of the equivalence of constituency statutes in the United States. (149) Indeed, case law in England emphasizes that fundamental decisions regarding takeovers are the prerogative of shareholders and not management. (150) Hence, management action that may serve to defeat such shareholder control falls outside the scope of delegated management authority. (151)

On the other hand, some countries such as Germany and Japan feature stronger protection for the employees, creditors, and other nonshareholder constituencies as a whole--a prime example of a stakeholder-orientated system. (152) German corporate law creates a fiduciary duty between managers and a diverse group of constituencies, including shareholders, employees, and society. (153) Consequently, the hallmark of the corporate system is its codetermination regime--a regime that provides employees with structural protection through representation in corporate institutions. (154) Therefore, the German two-tiered board calls for the companies to be managed by a managing board (Vorstand) (155) that conducts day-to-day business of the firm and a supervisory council (Aufsichtsrat) (156) that elects and monitors the firm's management and approves major corporate decisions. (157) Similarly, in Austria, Denmark, Luxembourg, the Netherlands, and Sweden, employee participation in the supervisory board is mandated.158 France, Ireland, Portugal, and other E.U. member states have enacted laws that merely include aspects of employee participation in corporate governance. (159) For example, in France, when employees' shareholding reaches 3%, employees are given the right to nominate one or more directors subject to certain exceptions. (160) Although employee representation on the board does not give them decision-making power per se, their structural involvement as nonshareholder constituencies of the firm is effective in mitigating informational asymmetries, thereby facilitating informal negotiations among corporate constituencies. (161)

Because company law is one area of law that is criticized for not keeping up with the integration process of the European Union, (162) much work is underway to maximize harmonization, in spite of the obvious differences and inherent difficulties in doing so. (163) One major area in which this has occurred is takeovers. By harmonizing takeover law, the E.U. has furthered its underlying goal of creating a larger union of member states and taking advantage of the economic power and growth that a larger union could generate. (164) After the announcement of a takeover bid, a management board may not take any action outside the ordinary course of business that could prevent the offer from being successful unless it is specifically authorized in a general meeting. (165) In a dual board system, this authorization may be given by the supervisory board--assuming that both boards represent the interests of the company. (166) In other words, the boards have the authority to take action against a hostile takeover if they both agree on the same strategy. (167) The board is to act in the best interest of the corporation, (168) but, because of the different corporate structure that exists in Europe, it may be difficult to determine what the company's best interest is (or even to establish who is entitled to define it), especially during a takeover bid. (169) Unfortunately, there has been no consensus (and therefore no national rules adopted) regulating takeover bids in Europe because of friction--and perhaps national pride. (170) Presently, it appears that only the United Kingdom has an effective takeover regulation. (171) England's openness to hostile takeovers is reflected in its large number of successful takeover bids; in fact, England is the host of 90% of all European takeovers. (172) England's takeovers tend to be governed by market forces rather than private or public regulation. (173) It seems even more apparent national pride and other considerations make it even harder to attain national regulation. By looking at Germany's actions or rationale prior to the European Parliament's failed vote on the E.U.'s directive for regulating hostile takeovers, one can see the goal may be farfetched. (174) Germany implemented takeover legislation in November 2001, basically following the principle of maximizing shareholder value, providing for full disclosure to shareholders and granting the target board some limited power to adopt defensive measures under certain conditions. (175) The E.U.'s proposed measure, which was rejected by Germany because of the E.U.'s strongly-held position that target boards behave neutrally in the face of a hostile bid, was in opposition to Germany's measure of granting the target board the ability to take defensive measures in the face of a hostile bid. (176) Germany's negative vote created a deadlock at the European Parliament in July 2001, in spite of the fact the E.U. draft had adopted fifteen amendments to allow for national differences. (177) Germany nonetheless passed its 2001 legislation, which became effective in January 2002, with no E.U. takeover directive in force--although a new proposal is being developed. (178) Hence, although shareholder wealth maximization is the most widely-held method for promoting economic growth and efficiency, it is certainly not the only one that will achieve positive economic ends. (179)

V. CONCLUSION