Deconstructing the “Anglo-American” Corporate Model

In the mid-1950s, L.C.B. Gower, a pre-eminent U.K. corporate law academic, was a visiting professor at Harvard Law School.  An intriguing by-product was a 1956 Harvard Law Review article where he compared and contrasted numerous aspects of U.S. and U.K. company law.  Similar multi-topic comparisons of these jurisdictions have been largely unknown since.  Instead, combining salient features of American and British corporate governance and corporate law into a single “Anglo-American” model to contrast that model with arrangements elsewhere has been the predominant approach. 

In a recent working paper we deconstruct the Anglo-American corporate model by undertaking the first thorough comparison of U.S. and U.K. corporate law in decades.  We show that there are significant doctrinal corporate law differences between the two jurisdictions, which means referring to an “Anglo-American” model in the corporate context can be misleading.  Still, due to an additional key finding — substantial similarities exist between the U.S. and the U.K. from a practical perspective — the notion of an Anglo-American corporate model cannot be dismissed out-of-hand.  A distinction between what Roscoe Pound referred to in the early 20th century as “law in books” (substantive legal doctrine) and “law in action” (enforcement and compliance) is crucial in this regard. 

In our paper, we focus on arrangements affecting publicly traded companies rather than all corporations.  Also, with the United States, to make our analysis of state corporate law tractable, we only discuss the position in Delaware, the most popular U.S. state for public company incorporations.  Our analysis of U.S. and U.K. corporate law nevertheless remains distinctively multi-faceted.  Topics we discuss include boards, directors’ duties, selection of directors, shareholder “decision” rights, shareholder litigation and corporate takeovers, with some of the key facets that illustrate the distinction between “law in books” and “law in action” when deconstructing the Anglo-American corporate model summarized below.

Boards

U.S. public companies have considerably less discretion when structuring their boards than their U.K. counterparts but functionally the results are similar.  For instance, U.K. companies theoretically have considerably greater flexibility to allocate managerial authority than Delaware companies but in both jurisdictions this inevitably ends up in the hands of the board.  Similarly, while the U.K. Corporate Governance Code offers publicly traded companies greater flexibility than relevant federal securities law and the listing rules of major U.S. stock exchanges with respect to issues such as independent director representation on boards and the deployment of board committees, American and British boards resemble each other substantially regarding board composition and structure.

Directors’ Duties

We show that typically director conduct that would be a breach of duty in the United States would be a breach of duty in Britain, and vice versa.  This is the case despite substantial doctrinal differences.  In Delaware, case law is the core source of the duties that directors owe whereas, in Britain, a statutory codification seemingly has fully displaced common law rules.  Also, while in Delaware directors owe duties to their companies categorized as care and loyalty, in the U.K. directors’ duties are not formally bifurcated in the same way.

Director Selection

The most remarked upon difference between the United States and Britain in the corporate law context has been that the U.K. empowers shareholders more substantially, with some praising Britain in this regard and others claiming that  shareholder rights afflict British companies with counter-productive short-termism.  We show that, in fact, shareholder rights often correspond substantially and, where there are differences, outcomes tend to be similar.  For instance, while in the United States corporate legislation vests shareholders with the right to elect directors at annual shareholder meetings, and in Britain the matter is left to the corporate constitution, British publicly-traded companies inevitably vest shareholders with equivalent rights.  Moreover, in both countries shareholders almost always overwhelmingly endorse the incumbent board’s nominees to serve as directors, and it is standard for the entire board to stand for election at each annual meeting of the shareholders despite this not being mandated.  Also, corporate legislation in both Delaware and the U.K. affords shareholders the right to remove a director before the director’s term expires.

Shareholder “Decision” Rights

With collective shareholder “decision” rights that potentially impinge on the authority of the board, as opposed to the director “appointment” rights just discussed, in various ways shareholders are favored legislatively in Britain.  For instance, shareholders who own 5% or more of a company’s shares have a statutory right to call a shareholder meeting, whereas, in Delaware, the right of shareholders to call a meeting depends upon the terms of the corporate constitution.  Shareholders in Britain also have full formal control over the content of the corporate constitution in a manner lacking in Delaware.  Moreover, while both Britain and the United States give shareholders a vote on executive compensation known as “say on pay”, the British regime is more robust in several ways.  U.K. shareholders additionally have veto powers over the issuance of shares and substantial related party transactions their Delaware counterparts lack. 

Though U.K. shareholders have more robust decision rights than their U.S. counterparts, evidence is lacking that they rely on those rights more substantially.  It is very rare, for instance, for U.K. shareholders to vote against resolutions a company proposes, so the additional veto powers they have will most often be moot.  Institutional shareholders in Britain are routinely criticized for their passivity.  Hedge fund activism and shareholder proposals are considerably more prevalent in the United States than in Britain. 

Shareholder Litigation

As well as possessing “collective” decision rights, shareholders in both Delaware and the U.K. also enjoy rights that can be exercised individually.  With respect to individual shareholder rights, the “law in books” and “law in action” distinction mentioned above is particularly pertinent.  Our paper, canvasses various individual rights, including the scope for individual shareholders to sue directors on behalf of their companies by way of “derivative litigation” and the ability of shareholders to commence “direct” suits when a legally protected personal shareholder right has been infringed.  We highlight, that from a “law in books” perspective, litigant shareholders in the United States lack substantial advantages as compared with their British counterparts.  However, matters are much different with “law in action”.  In various ways we specify, the litigation environment in the United States is more hospitable than it is in Britain.  Accordingly, shareholder lawsuits occur much more often Stateside. 

Takeovers

Finally, our paper also canvasses takeover regulation.  We focus on those of the “hostile” variety where the acquiror seeks to obtain control of the potential target company by making an offer to the shareholders of the target to buy their shares and the target’s directors are antagonistic toward what has been proposed.  Formally, much differs between our two jurisdictions.  In Delaware the courts take center-stage in defining permissible takeover defenses, with jurisprudence developing as a result of ex post litigation of takeover tactics.  In contrast, the U.K. has in place a body specifically established to oversee the takeover process known as the “Takeover Panel”, which prioritizes ex ante regulation to pre-empt later disputes.  Britain’s takeover regime additionally offers target company boards considerably less scope to deploy defensive tactics than does Delaware law. 

Despite the different approaches to takeovers in the United States and Britain, the end result is often similar.  While Delaware boards have substantially greater formal latitude to shut down hostile bids than their British counterparts, obstacles can arise.  For instance, the threat of litigation can deter boards from deploying an anti-takeover device like a poison pill and if a board adopts a pill a bidder can dismantle it by winning a proxy contest to replace the incumbent board with allies.  Also, in the U.K., the minimal scope target companies have to take defensive action will often be moot because regulatory factors encourage bidders to make offers on terms a target company board is likely to endorse, meaning that the takeover ultimately becomes “friendly”.  Due to Takeover Panel rules, once an announcement of a possible offer has been made, a bidder operates under a tight timetable, a bid can only succeed if the putative acquiror receives acceptances representing at least a majority of the company’s voting rights, all accepting target shareholders must be paid the same consideration, and the bidder must be prepared to acquire all of a company’s shares in the event of success.  This combination places a bidder under a strong onus to put forward an offer that is sufficiently attractive to persuade a target company’s directors to recommend the bid.  This correspondingly is another instance where, despite legal disparities, outcomes with U.S. and U.K. public companies are substantially similar. 

Conclusions and Implications

Ultimately, we identify sufficient differences between corporate governance-related corporate law in the U.S. and the U.K. to demonstrate that there is no monolithic Anglo-American corporate model.  At the same time, there are substantial functional similarities between U.S and U.K. corporate law, particularly from a “law in action” perspective.  Our research shows that those who study shareholder rights in the context of corporate governance must pay close heed to how regulations operate in practice.  If policymakers fail to do this, they may well find that borrowing regulatory approaches from other jurisdictions will not generate the results anticipated.  We do not seek to explain why similar functional outcomes is a persistent theme with corporate law in the United States and Britain.  However, with our deconstruction of the Anglo-American model as the departure point, follow-up research can explore the reasons for the trend we have identified. 

 

The complete paper is available for download here.