European Business Organization Law Review

, Volume 1, Issue 1, pp 59–107 | Cite as

Patterns of Legal Change: Shareholder and Creditor Rights in Transition Economies

  • Katharina Pistor


Corporate Governance Transition Economy Legal Rule Minority Shareholder Legal Reform 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. 1.
    Pistor, Law Meets the Market: Matches and Mismatches in Transition Economies, (Washington D.C., unpublished mimeo, The World Bank 1995); Gray, Evolving Legal Framework for Private Sector Development in Central and Eastern Europe, (Washington, D.C., The World Bank 1993); Sachs and Pistor, Rule of Law and Economic Reform in Russia, (Boulder, Co., Westview Press 1997).Google Scholar
  2. 2.
    La Porta, et al., “Law and Finance”, 106 Journal of Political Economy (1998) 1113–1155; La Porta, et al., “Legal Determinants of External Finance”, 52 Journal of Finance (1997) 1131–1150; Levine, “The Legal Environment, Banks, and Long-Run Economic Growth”, 30 Journal of Money, Credit, and Banking (1998) 596–613.Google Scholar
  3. 3.
    Pistor, et al., “Law and Finance in Transition Economies”, Economics of Transition (2000) (forthcoming).Google Scholar
  4. 4.
    North, Institutions, Institutional Change and Economic Performance (Cambridge, Cambridge University Press 1990), 1st edn. (New York, Norton 1981) p. 4.CrossRefGoogle Scholar
  5. 5.
    Easterbrook and Fischel, The Economic Structure of Corporate Law, (Cambridge, Mass., Harvard University Press 1991). The convergence hypothesis has been most prevalent among macro-economists. They show strong trends towards convergence in levels of GDP per capita among regions within the US. See on strong convergence of OECD countries Dorwick and Nguyen, “OECD Comparative Economic Growth 1950–1985”, 79 American Economic Review (1989) 1010–1030; however, only conditional convergence for developing countries Barro and Sala-i-Martin, “Convergence”, 100 Journal of Political Economy (1992) 223–251.Google Scholar
  6. 6.
    North, supra n. 4; Roe, “Chaos and Evolution in Law and Economics”, 109 Harv. L.Rev. (1996) 641–668.Google Scholar
  7. 7.
    Coffee, “The Future As History: The Prospects for Global Convergence in Corporate Governance and Its Implications”, 93 NW Univ L Rev. (1999) 631–707. For a similar point based on a case study of recent trends in German corporate governance see Gordon, “Corporate Governance: Pathways to Corporate Convergence? Two Steps on the Road to Shareholder Capitalism in Germany”, 3 Colum J Eur L (1999) 219. However, he correctly points out that political constraints, as well as long-term practices of insider governance may limit the scope of convergence. See ibid. at p. 241.Google Scholar
  8. 8.
    Roe (1996), supra n. 6; Bebchuk and Roe, “A Theory of Path Dependence in Corporate Governance and Ownership”, 52 Stanf. L Rev. (1999) 127. See also Gordon, supra n. 7.Google Scholar
  9. 9.
    Easterbrook and Fischel, The Economic Structure of Corporate Law, (Cambridge, Mass., Harvard University Press 1991); Ramseyer, “The A-Contextual Logic to the Japanese Keiretsu”, in: Roe (ed.), Corporate Governance Today, (New York City, offset 1998) pp. 527–563.Google Scholar
  10. 10.
    See La Porta, et al. (1998), supra n. 2, at p. 1126.Google Scholar
  11. 11.
    Black, “Is Corporate Law Trivial?: A Political and Economic Analysis”, 84 NW Univ L Rev. (1990) 542–597. The argument holds that efficient capital markets, well-functioning and competitive managerial labor, and product markets, are more effective constraints on managerial power than formal legal constraints.Google Scholar
  12. 12.
    Black and Kraakman, “A Self-Enforcing Model of Corporate Law”, 109 Harv. L.Rev. (1996); 1911–1982. Hay, et al., “Toward a Theory of Legal Reform”, 40 European Economic Review (1996) 559–567.Google Scholar
  13. 13.
    Shleifer and Vishny, “A Survey of Corporate Governance”, 52 Journal of Finance (1997) 737–783.Google Scholar
  14. 14.
    La Porta, et al. (1998), supra n. 2; La Porta, et al. (1997), ibid. The authors of these studies also mention the importance of effective enforcement institutions. Yet, even if these variables are controlled, the contents of legal rules and their origin seems to matter.Google Scholar
  15. 15.
    Levine (1998), supra n. 2.Google Scholar
  16. 16.
    La Porta, et al. (1998), supra n. 2.Google Scholar
  17. 17.
    Bebchuk and Roe (1999), supra n. 8; Bebchuk, “A Rent-Protection Theory of Corporate Ownership and Control”, 7203 NBER Working Paper Series (1999); Pistor, “Law as a Determinant for Stockmarket Development in Eastern Europe”, in: Murrell (ed.), Assessing the Value of Law in Transition Economies, (Ann Arbor: University of Michigan Press 2000 (forthcoming)).Google Scholar
  18. 18.
    Despite these differences in initial conditions, commentators agree that transition economies are increasingly converging on a control structure with concentrated ownership rather than sustaining dispersed ownership. See Berglöf, “Corporate Governance in Transition Economies: The Theory and Its Policy Implications”, in: Aoki and Kim (eds.), Corporate Governance in Transitional Economies, (Washington, D.C., The World Bank 1995) pp. 59–98 with data for the largest companies in three transition economies. For a theoretical explanation of the instability of non-control structures, see Bebchuk (1999), supra n. 17.Google Scholar
  19. 19.
    Brainard, “Reform in Eastern Europe: Creating a Capital Market”, Economic Rev. (1991) 49–58; EBRD, Transition Report (London, European Bank for Reconstruction and Development (EBRD) 1998).Google Scholar
  20. 20.
    La Porta, et al. (1998), supra n. 2.Google Scholar
  21. 21.
    Many of the countries in Central and Eastern Europe modeled their legal systems in the interwar period on the German system. In the countries of South-Eastern Europe that used to be part of the Ottoman empire, French law had stronger influence, mostly because of the reception of French law in the 19th century when the Ottoman empire reformed its legal system. Nevertheless, the borrowing does not suggest that the model was followed closely, or other legal systems were not consulted in the process. A brief summary of the history of formal private law in different countries can be found in: International Encyclopedia of Comparative Law, National Reports, (Tübingen, J.C.B. Mohr 1972). For a summary of the socialist legal system, see Zweigert and Kötz, Einführung in die Rechtsvergleichung auf dem Gebiet des Privatrechts, 2. Aufl. (Tübingen, J.C.B. Mohr Paul Siebeck 1984) pp. 332–403. This legal family has now been discarded from this book. See Zweigert and Kötz, Introduction to Comparative Law, 3rd edn. (Oxford, Clarendon Press 1998).Google Scholar
  22. 22.
    There is, of course, a lively debate about the relevance of legal families. The area of the law for which the legal families have been developed is the core of civil law, i.e., contract law, property rights, and torts. Constitutional and administrative law development usually do not follow the same pattern. Even for other areas of private law, including corporate law and capital market development, it is doubtful, whether a consistent set of criteria exists that makes the distinction of different legal families meaningful.Google Scholar
  23. 23.
    Pistor(1995), op. cit. n. 1.Google Scholar
  24. 24.
    Butler, Soviet Law, 2nd edn. (London, Butterworths 1988); Feldbrugge, Russian Law: The End of the Soviet System and the Role of Law, (Dordrecht, Martinus Nijhoff Publishers 1993).Google Scholar
  25. 25.
    See Feldbrugge (1993), op. cit. n. 24, pp. 236–239 for details.Google Scholar
  26. 26.
    See Elster, Offe and Preuss, Institutional Design in Post-communist Societies: Rebuilding the Ship at Sea, (Cambridge, UK, Cambridge University Press 1998), for the pattern of institutional change in Bulgaria, the Czech Republic, Hungary and Slovakia.CrossRefGoogle Scholar
  27. 27.
    La Porta, et al. (1998), supra n. 2.Google Scholar
  28. 28.
    Details for the definition of variables and their coding are given in Appendix 1.Google Scholar
  29. 29.
    Part of Poland, of course, received French law during the Napoleonic wars. However, subsequent German law has been stronger.Google Scholar
  30. 30.
    Note that periodically Bosnia belonged to the Austro-Hungarian empire, but this has not strongly affected its legal development during the 19th century.Google Scholar
  31. 31.
    Owen, The Corporation under Russian Law, 1800–1917, (Cambridge, UK, Cambridge University Press 1991); International Encyclopedia of Comparative Law, National Reports, supra n. 22, 1.Google Scholar
  32. 32.
    La Porta, et al. (1998), supra n. 2.Google Scholar
  33. 33.
  34. 34.
    Compare also the indicators for economic reforms of the EBRD in: EBRD (1998), supra n. 19.Google Scholar
  35. 35.
    Feldbrugge, op. cit. n. 24; Pistor, “Company Law and Corporate Governance in Russia”, in: Sachs and Pistor (eds.), supra n. 1, pp. 165–187;Gray and Hendely, “Developing Commercial Law in Transition Economies: Examples from Hungary and Russia”, ibid., pp. 139–164.Google Scholar
  36. 36.
    This information was given by Alexander Shapleigh of USAID. According to USAID, the results have not been equally strong in all countries. Good results were achieved in shareholder rights reforms in Armenia, Kazakhstan, Kyrgyzstan and Romania. For creditor rights, good results were reported for Kazakhstan, Kyrgyzstan, Latvia, Poland, Romania and Ukraine. Since this assessment is highly subjective, in our analysis we include all countries that have received USAID for legal reforms of shareholder and creditor rights.Google Scholar
  37. 37.
    For a discussion of the effects of the takeover guideline in Poland, see Soltysinski, “Transfer of Legal Systems as Seen by the “Import Countries”: A View from Warsaw”, in: Drobnig, et al. (eds.), Systemtransformation in Mittel- und Osteuropa und ihre Folgen für Banken, Börsen und Kreditsicherheiten, (Tübingen, Mohr Siebeck 1998) pp. 69–82. Compare this with the positive evaluation of the City Takeover Code for transition economies by Coffee, “The Lessons From Securities Market Failure: Privatization, Minority Protection, and Investor Confidence”, draft of September 1999.Google Scholar
  38. 38.
    In comparative law methodology, analyzing the function of legal rules rather than trying to find identical legal rules in different systems has long been recognized. See Zweigert and Kötz (1984), op. cit. n. 21, who call this approach a functional approach to comparative law. Critical, however, Frankenberg, “Critical Comparisons: Re-thinking Comparative Law”, 26 Harv. Int LJ (1985) 411–455. On the importance of functional substitutes in corporate governance and securities market regulation, see Coffee (1999), supra n. 7.Google Scholar
  39. 39.
    Hirschman, Exit, Voice, and Loyalty; Responses to Decline in Firms, Organizations, and States, (1970); Coffee, “Liquidity Versus Control: The Institutional Investor as Corporate Monitor”, 91 Colum. LRev. (1991) 1277–1368.Google Scholar
  40. 40.
    La Porta, et al. (1997), supra n. 2.Google Scholar
  41. 41.
    Black and Kraakman, supra n. 12.Google Scholar
  42. 42.
    Berglöf (1995), supra n. 18; Berglöf and Von Thadden, “The Changing Corporate Governance Paradigm: Implications for Transition and Developing Countries”, Proceedings of the Annual Bank Conference on Development Economics, (Washington, D.C., The World Bank 1999); La Porta, et al., “Corporate Ownership Around the World”, 54 Journal of Finance (1999) 471–517.Google Scholar
  43. 43.
    Coffee (1999), supra n. 37.Google Scholar
  44. 44.
    Unfortunately, it was not possible to obtain reliable data on changes in disclosure requirements for all countries. Most laws have provisions mandating the annual disclosure of company information to their shareholders. We did not include this variable, because of the lack of variance, and because it does not reflect the extent of disclosure requirements for publicly traded companies.Google Scholar
  45. 45.
    Stigler, “Public Regulation of the Securities Markets”, 27 Journal of Business (1964) 117–142; Jarrell, “The Economic Effects of Federal Regulation of the Market for New Security Issues”, 24 J L&Econ (1981) 613–675; Coffee, “Market Failure and the Economic Case for a Mandatory Disclosure System”, 70 Virg. L Rev. (1984) 717–753; Seligman, “The Historical Need for a Mandatory Corporate Disclosure System,” 9 J Corp L (1983) 1–61; Hopt and Baum, “Börsenrechtsreform in Deutschland”, in: Hopt, et al. (eds.), Börsenreform — Eine ökonomische, rechtsvergleichende und rechtspolitische Untersuchung, (Stuttgart, Schäffer-Poeschel Verlag 1997) pp. 287–467. The debate is now taking a new turn, where the importance of (some) regulation is acknowledged in principle, but the need for federal versus state (or decentral) regulation debated. See Romano, “Empowering Investors: A market Approach to Securities Regulation”, 107 Yale Law Journal (1998) 2359–2430.Google Scholar
  46. 46.
    Pistor (1999), supra n. 17; Coffee (1999), supra n. 37. For experiences in other parts of the world see also Rosen, “The Myth of Self-Regulation or the Dangers of Securities Regulation Without Administration: The Indian Experience”, 2 J Comp Corp L & Sec Reg (1979) 261–302, as well as Pistor and Wellons, The Role of Law and Legal Institutions in Asian Economic Development, (Hong Kong, Oxford University Press 1999), ch. 6.Google Scholar
  47. 47.
    Pistor ( 1999), supra n. 17.Google Scholar
  48. 48.
    This requirement typically does not apply to all joint stock companies, but only those which exceed the stipulated number of shareholders, i.e., 500 in the case of Russia and Kazakhstan.Google Scholar
  49. 49.
    Pistor (1997), supra n. 35.Google Scholar
  50. 50.
  51. 51.
    In fact, in the early period many of the former Soviet Union republics required 60%. This may, however, be counter-productive, because it decreases the likelihood for a shareholder meeting to reach the quorum.Google Scholar
  52. 52.
    Berglöf, “Reforming Corporate Governance: Redirecting the European Agenda”, 24 Economic Policy (1997) 93–119; Coffee (1999), supra n. 7.Google Scholar
  53. 53.
    On the pros and cons of the US Bankruptcy Code see Baird, The Elements of Bankruptcy, (New York, Westbury 1993) p. 283.Google Scholar
  54. 54.
    Gray and Hendely (1997), supra n. 35.Google Scholar
  55. 55.
    Wood, Comparative Law of Security and Guarantees, Law and Practice of International Finance (London, Sweet and Maxwell 1995).Google Scholar
  56. 56.
    Oda, “Law on Secured Transaction in Russia”, in: Simons (ed.), The Russian Civil Code, (The Hague, Kluwer Law International 2000) (forthcoming).Google Scholar
  57. 57.
    Pistor, op. cit. n. 1; Summers, “Recent Secured Transaction Law Reform in the Newly Independent States and Central and Eastern Europe”, 23 Rev of Central and Eastern European Law (1991) 177–203.Google Scholar
  58. 58.
    For a detailed analysis of Russian law on security interests see Oda, supra n. 56.Google Scholar
  59. 59.
    EBRD, Model Law on Secured Transactions, (London, EBRD 1994).Google Scholar
  60. 60.
    According to information obtained from the EBRD, the following countries have established registers for security interests which used the EBRD model law or US law: Azerbaijan (1998); Belarus (1999); Bulgaria (1996); Estonia (1996); FYR Macedonia (1998); Georgia (1997); Hungary (1997); Kazakhstan (1998); Kyrgyzstan (1997); Latvia (1999); Lithuania (1998); Moldova (1996 — simplified version now under revision); Poland (1998); Romania (1999); Ukraine (1997/99); Uzbekistan (1998). The enactment of these laws, however, is only the first step. Functioning registries for security interests in movables apparently exist as of now only in Bulgaria, Hungary, Latvia, Lithuania, with some reservations in Poland, and apparently since March 1999 in Ukraine.Google Scholar
  61. 61.
    Summers (1997), supra n. 57.Google Scholar
  62. 62.
    An example is the German law on concerns. Art. 317 of the German law on marketable share companies (AktG), for example, states that a company which controls another one without having concluded a control contract, may be held liable for damages incurred by that company or its shareholders, if it made that company conclude detrimental transactions without compensation.Google Scholar
  63. 63.
    Compare Art. 106 of the Russian Civil Code with Art. 6, section 3 of the Joint Stock Companies Act.Google Scholar
  64. 64.
    Note: since we do not code for law in the former Yugoslav republics, our coding is likely to overstate the absence of law in this region.Google Scholar
  65. 65.
    Information obtained from the EBRD.Google Scholar
  66. 66.
    Oda (1999), supra n. 56.Google Scholar
  67. 67.
    Note that they were first included in the Civil Code, which borrowed heavily from the Dutch Civil Code.Google Scholar
  68. 68.
    Avilov, et al., General Principles of Company Law for Transition Economies, (OECD, 1999), strongly advocate that such provisions should be strictly limited to these cases.Google Scholar
  69. 69.
    Roe, “Some Differences in Corporate Structure in Germany, Japan, and the United States”, 102 Yale LJ (1993) 1927–2003; Berglof (1995), supran. 18; Aoki, “Controlling Insider Control: Issues of Corporate Governance in Transition Econmies”, in; Aoki and Kim (eds.), supra n. 18, pp. 3–32.Google Scholar
  70. 70.
    Rostowski, “The Banking System, Credit and the Real Sector in Transition Economies”, in: Rostowski (ed.), Banking Reform in Central Europe and the Former Soviet Union, (Budapest, CEU Press 1995) pp. 16–41; Dittos and Prowse, “Corporate Control in Central Europe and Russia: Should Banks Own Shares?”, in: Frydman, et al. (eds.), Corporate Governance in Central Europe and Russia, (London, Central European University Press 1996), Vol. 1, pp. 20–67.Google Scholar
  71. 71.
    Corbett and Mayer, “Financial Reform in Eastern Europe: Progress with the Wrong Model”, Oxf. Rev. Econ Pol (1992).Google Scholar
  72. 72.
    Berglöf (1995), supra n. 18.Google Scholar
  73. 73.
    Buch, “Creating Efficient Banking Systems”, in: Sieber (ed.), Kieler Studien, (Tübingen, J.C.B. Mohr 1996); Baer and Gray, “Debt as a Control Device in Transitional Economies: The Experience of Hungary and Poland,” in: Frydman et al. (eds.) supra n. 70, vol. 1, pp. 68–110; EBRD, Transition Report — Financial Sector in Transition, (London, European Bank for Reconstruction and Development (EBRD) 1998).Google Scholar
  74. 74.
    Claessens, et al., Ownership and Corporate Governance: Evidence from the Czech Republic, International Symposium on Capital Markets and Enterprise Reform (Washington D.C., World Bank 1996).Google Scholar
  75. 75.
    Coffee, “Inventing a Corporate Monitor for Transitional Economies: The Uncertain Lessons from the Czech and Polish Experiences”, in: Hopt, et al. (eds.), Comparative Corporate Governance — The State of the Art and Emerging Research (Oxford, Clarendon Press 1998) pp. 67–138.Google Scholar
  76. 76.
    Obviously, this can be only a rough estimate of the relative importance of shareholder and creditor rights, as the variables included are not encompassing, and not all variables may have equal weight.Google Scholar
  77. 77.
    EBRD (1998), supra n. 19, p. 118.Google Scholar
  78. 78.
    Boycko, et al., “Voucher Privatization”, 35 Journal of Financial Economics (1993) 249; Frydman and Rapaczynski, “Markets and Institutions in Large Scale Privatization: An Approach to Economic and Social Transformation in Eastern Europe”, in: Corbo, et al. (eds.), Reforming Central and Eastern European Economies: Initial Results and Challenges, (Washington, D.C., The World Bank 1992) pp. 253–274; Classens et al., (1996), supra n. 74.Google Scholar
  79. 79.
    EBRD (1998), supra n. 19.Google Scholar
  80. 80.
    La Porta, et al. (1997), supra n. 2.Google Scholar
  81. 81.
    Blumberg, The Multinational Challenge to Corporation Law (New York, Oxford University Press 1993) p. 316; Dunlavy, “Corporate Governance in the Late 19th Century Europe and USA — The Case of Shareholder Voting Rights”, in: Hopt, et al. (ed.), supra n. 75, pp. 5–39. Accounts of the development of corporate law in the US and Germany since the 19th century show a close interaction between legal and economic development. See Assmann in: Hopt and Wiedemann (eds.), Aktiengesetz: Großkommentar, Introduction, Vol. I for Germany, (Berlin, Walter de Gruyter 1992). For a summary of the development in the US, cf. Coffee, “The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role”, 89 Colum. L Rev. (1989) 1618–1691 and Black and Kraakman, supra n. 12. Note also that the enactment of extensive minority shareholder protection in the US in 1933/4 follows on the heels of the publication of the famous book by Berle and Means, The Modern Corporation and Private Property, (New York, Council for Research in the Social Sciences, Columbia University 1932), in which they point out the weakness of dispersed small shareholders vis-à-vis company management. Response driven legal evolution has also been observed for the development of corporate law and securities regulations in emerging markets in Asia. See Pistor and Wellons, op. cit. n. 46.Google Scholar
  82. 82.
    Pistor, “Privatization and Corporate Governance in Russia: An Empirical Study” in: McFaul and Perlmutter (eds.) Privatization, Conversion and Enterprise Reform in Russia (Boulder, West-view Press 1995), pp. 69–84; Pistor, supra n. 35; Coffee, “Institutional Investors in Transitional Economies: Lessons from the Czech Experience”, in: Frydman et al., supra n. 70; Black, Kraakman and Tarassova, Russian Privatization and Corporate Governance: What Went Wrong? (Stanford, John M. Olin Program in Law and Economics 1999). Among economists, there was little interest in the extent and effectiveness of the law at the outset of reform. In their attempt to explain the extremely low valuation of Russian companies in privatization, Boycko, et al., do not even discuss the possible role of the weak legal environment: Boycko, et al., “Privatizing Russia”, Brookings Papers for Economic Activity (1993) 139–180. But see Sachs in his comments to that paper, ibid., p. 181 with reference to Pistor (1995, ibid.).Google Scholar
  83. 83.
    Pistor, supra n. 17.Google Scholar
  84. 84.
    Bebchuk (1999), supra n. 17.Google Scholar
  85. 85.
    La Porta, et al., supra n. 42.Google Scholar
  86. 86.
    Bebchuck(1999), supra n. 17Google Scholar
  87. 87.
  88. 88.
    Frydman, Pistor and Rapaczynski, “Investing in Insider-Dominated Firms: A Study of Russian Voucher Privatization Funds”, in: Frydman, et al. (eds.), supra n. 70, pp. 187–241. Filatov, et al., Insider Control and Managerial Entrenchment in Privatised Firms in Russia: Analysis and Policy Implications (Nottingham, University of Nottingham Business School 1999).Google Scholar
  89. 89.
    A first attempt is made in Pistor et al. (2000) supra n. 3. Using data on the effectiveness of legal institutions (legality) they show that countries differ remarkably in this respect and that these differences can explain differences in financial market development in transition economies. Using a large sample set (which excludes transition economies), Berkowitz, Pistor and Richard, show that domestic demand for a transplanted legal order is an important determinant for the long-term development of legality (Berkowitz, Pistor and Richard, Economic Development, Legality and the Transplant Effect, EBRD mimeo (1999)).Google Scholar

Copyright information

© T.M.C. Asser Press 2000

Authors and Affiliations

  • Katharina Pistor
    • 1
  1. 1.Kennedy School of GovernmentHarvard UniversityUK

Personalised recommendations