future of codetermination after Centros: Will German corporate law move closer to the U.S. model?, The

Fordham Journal of Corporate & Financial Law, 2003 by Dammann, Jens C

INTRODUCTION

Despite some dissenting voices,2 most U.S. scholars agree that the maximization of shareholder wealth is by far the most important goal of U.S. corporate law.3 The same cannot be said with regard to German corporate objectives.4 While scholars have recently noted a global trend towards the maximization of shareholder wealth as the primary goal of corporate law,5 German corporate law continues to attach considerable importance to the interests of other stakeholders.6 Most importantly, German corporate law is designed to serve the interests of employees as well as those of shareholders.7 Under German codetermination law, employees are represented on the boards of corporations, thereby participating in their management.8 This difference between U.S. and German corporate law is closely connected to the countries' respective conflicts of law rules.

In the U.S., corporate internal affairs are governed by the law of the state of incorporation.9 Consequently, a corporation can select the corporate law it finds most desirable simply by incorporating in the corresponding state.10 Some scholars have expressed doubt as to whether this system actually serves to maximize shareholder wealth, arguing that the U.S. system allows managers to pick corporate law rules that benefit them, rather than the corporation, at the expense of shareholders.11 These scholars identify a "race to the bottom" phenomenon as states, eager to collect incorporation fees, pass ever more management-friendly rules in an effort to attract corporations.12 Others have criticized this "race to the bottom" theory on the ground that it does not account for the influence of capital markets: Managers have a strong incentive to make a corporation's shares attractive to shareholders, lest capital markets punish the corporation and, by extension, its managers." Regardless of the theories that have developed with regard to this topic,14 one thing has never been in dispute: The state of incorporation doctrine, if applied without exception, does not allow state legislatures to impose rules that would allow workers to benefit at the expense of shareholders. Even if some states adopted such rules, corporations would easily avoid them by reincorporating elsewhere.15

Unlike the U.S., most states in the European Community,16 including Germany, have traditionally adhered to what is known as the "real seat doctrine"17 According to this doctrine, the internal matters of a corporation are governed by the law of the country in which its headquarters is located.18 Thus, a corporation cannot choose the more attractive corporate law of another member state unless it is also willing to move its headquarters.19 Since headquarter relocation costs will usually outweigh the advantages of a more attractive corporate law, corporations usually have no choice but to accept the corporate law of the state where their headquarters are located.20 It is for this reason that Germany has been able to develop its codetermination laws, which allow workers to participate in the management of corporations.21 While shareholders and managers tend to resent codetermination, the real seat doctrine does not allow them to easily avoid the relevant laws by reincorporating elsewhere.

Due to recent developments in the law of the European Community, namely the decision of the European Court of Justice ("Court") in Centros Ltd. v. Erhvervs-og Selskabsstyrelsen,22 it is unlikely that the real seat rule will continue to persist in the European Community. It is not surprising that Centros has provoked an avalanche of publications.23

What is surprising, however, is that scholars have all but ignored what may be the single most relevant question in the wake of Centros: Will Germany be able to keep its codetermination laws, thereby ensuring that German corporate law focuses on the interests of workers as well as shareholders?24 The most extensive discussion of the question, in an article by Horst Hammen ("Hammen"), does not exceed three pages.25 Hammen, whose approach will be discussed in detail in Part Three, comes to a negative conclusion.26 He argues that under Centros, corporations are free to choose their state of incorporation and that the German legislature cannot impose codetermination on corporations incorporated in another member state.27

This article holds the opposite to be true. It argues that the German legislature could legally, and with only minor modifications, extend the German system of codetermination to cover pseudo-foreign corporations, thereby protecting the German system of codetermination from the effects of the state of incorporation doctrine. Hence, there is no reason to believe that German corporate law will have to follow the U.S. example of focusing solely on the maximization of shareholder wealth. Rather, German corporate law will be able to continue to focus on the interests of both workers and shareholders.

Part I of this article summarizes the Centros decision and the resulting controversy in European and U.S. legal scholarship. Part II provides a short overview of the German system of codetermination. Part III argues that the German law of codetermination restricts the freedom of establishment. Part IV focuses on the question of justification and comes to the conclusion that the German system of codetermination is likely to pass scrutiny by the European Court of Justice. The Conclusion contains a brief summary of the preceding parts.