CLS Blue Sky Blog

A Rule-Based Method for Comparing Corporate Laws

Scholars, lawyers, judges, and policymakers frequently need to compare corporate laws, both internationally and domestically.  In part, this need results from the internal affairs doctrine, a conflict-of-laws rule that is unique to corporate law.  The doctrine requires that courts apply the corporate law of the state or country of incorporation to the corporation’s internal affairs.  Because corporations can easily and inexpensively incorporate anywhere—regardless of the locations of their headquarters or operations—the internal affairs doctrine enables them to pick their governing laws from an almost worldwide menu. The result is that even many corporations operating solely in the United States are governed by foreign corporate laws.  Lawyers must make comparisons to assist their clients in choosing legal regimes, judges must make comparisons to apply foreign entity laws in their cases, policymakers must make comparisons to decide what corporate and entity laws to offer, and corporate legal scholars must make comparisons to make sense of the differences.

To make those comparisons, researchers need a method.  Those who simply begin searching the foreign law for a similar rule almost invariably fall into a ubiquitous trap: Even the same verbal rule often does not produce the same results in different legal systems, and widely differing verbal rules often do produce the same results. Comparative law scholars have generated numerous methods for avoiding this trap.

They have also developed some widely accepted standards or principles by which to judge those methods.  Although comparisons may be rule-based, they are expected to take context, including legal traditions, into account. They must be capable of discovering and including institutions that perform the same functions, even when those institutions are contained in disparate doctrines and described by different terminology. They must recognize that when concepts do exist in different jurisdictions, they may be understood differently.  Comparisons must take into account the means by which and the extent to which the legal systems actually enforce their rules.

This exacting list of requirements has thus far prevented the field of comparative law from meeting corporate law’s need for a simple and intuitive comparative method that corporate law experts can apply without extensive comparative law training.  In A Rule-Based Method for Comparing Corporate Laws, forthcoming in 94 Notre Dame Law Review, I seek to fill that need.  In the article, I specify a rule-based method for comparing corporation laws that, when executed well, can meet all of the expectations listed above.  Parts of the method—such as the use of country experts—are already in wide use.  Other parts—the extraction, juxtaposition, and comparison of rules—are new.  The method is for comparison of a single aspect of one entity law with the corresponding aspect of another. It requires participation by an expert in each of the corporate laws to be compared.

The method consists of six steps. The first step is to create a hypothetical fact scenario that raises the aspect of corporate law that is of interest to the researchers. The scenario should be stated in concrete, physical terms, without using the legal jargon of either country.  The second step is to choose two comparable entity types for comparison. Comparisons of “U.S. law” with the law of some other country are necessarily inexact, because no U.S. law of corporations actually exists.  Corporate law differs from state to state as much as it differs from the law of some foreign jurisdictions.

The third step is to conduct the research necessary to resolve the scenario under the law applicable to each entity type, in essentially the same manner that an attorney would if tasked with rendering an opinion. The researchers should state who wins on the facts of the scenario in each country.  In doing so, they identify the governing rule in each jurisdiction.

The fourth step is to extract from their research the rules—whether legal, practical, or something else—that directly determined the resolution in each country, express those rules in parallel to the extent practical, and juxtapose them. The fifth step is to express the most important respects in which the extracted rules are the same or different. These fourth and fifth steps are new and crucial to success of the method.

When researchers attempt to compare without method, what they usually produce is a narrative about the law of each country in the relevant respect.  That narrative may be 10 pages or a single paragraph on each jurisdiction. The researchers stop there, thinking that the comparison is either complete or obvious. But the production of such narratives is not comparison—it leaves the task of comparing to a reader who is typically much less capable of doing it than is the writer.

The sixth step is to apply the researchers’ evaluative criteria to reach useful conclusions. Because the method is efficient, flexible, and easy to use, it can be applied by corporate law scholars, legal reformers, judges, and policymakers to compare specific aspects of corporate law between two jurisdictions; by corporate lawyers to choose entity types internationally or domestically; and by corporate litigators to anticipate the effect of the court’s choice of law.

This post comes to us from Lynn M. LoPucki, the Security Pacific Bank Distinguished Professor of Law at UCLA School of Law. It is based on his recent article, “A Rule-Based Method for Comparing Corporate Laws,” available here.

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