Corporate Ownership Structure and the Evolution of Bankruptcy Law: Lessons from the United Kingdom

INTRODUCTION The corporate world today subdivides into rival systems of dispersed and concentrated ownership, each characterized by different corporate governance structures.1 The United States falls into the former category, whereas major industrial rivals such as Japan and Germany are members of the latter. The past decade has seen intense academic debate over possible explanations for the different systems of ownership and control in key developed economies. Anecdotal evidence suggesting that market forces may be serving to destabilize traditional business structures and foster some form of convergence in a U.S. direction has given the controversy powerful current relevance. For those seeking to account for the existence of rival systems of dispersed and concentrated ownership, the United Kingdom has proved to be something of a "problem child. " Britain is a companion to the United States in the dispersed ownership category since, as is the IMAGE FORMULA7 case in the U.S., publicly quoted companies are a pivotal feature of the corporate economy, and large business enterprises typically have diffuse ownership structures. Given the similarities between the two countries, a logical way to test the various theories offered to account for the configuration of America's system of ownership and control is to see whether they have explanatory power in a British context. When this sort of analysis has been done, however, events occurring in the U.K. have tended to cast doubt upon each hypothesis. This has been the outcome, for instance, with theories concerning financial services regulation, political ideology, and minority shareholder protection. This Article's purpose is to refer again to the British experience to test and refine an additional hypothesis that has been offered to explain why the corporate economy is organized differently in the U.S. than in countries such as Germany and Japan. Corporate bankruptcy, it has been said, is the "crucial missing piece in understanding corporate governance. "2 According to this thesis-an "evolutionary" account of corporate governance-a country's system of bankruptcy law is either "manager-driven"3 or "manager-displacing," with the former offering the executives of a financially troubled firm substantial scope to launch a rescue effort and the latter having a strong bias in favor of liquidation. The thinking, in very basic terms, is that a manager-driven bankruptcy regime complements dispersed share ownership, while its manager-displacing counterpart aligns with a governance regime where concentrated ownership prevails. Given the configuration of the U.K.'s system of ownership and control, this would imply that Britain should have a manager-driven bankruptcy system. As we will see, though, the country's bankruptcy laws strongly protect lenders, and few British companies that end up in formal bankruptcy proceedings escape liquidation. How is it possible to reconcile Britain's diffuse share ownership structure with a bankruptcy regime that has strong manager-- displacing features? Three possibilities come to mind. First, the U.K.'s system of ownership and control may function differently from what the received wisdom implies. Second, closer scrutiny may reveal that Britain's bankruptcy regime in fact operates in a manager-driven fashion, despite the apparent bias in favor of liquidation. Third, the relationship between bankruptcy and corporate governance posited by the evolutionary account might need to be rethought in light of the IMAGE FORMULA10 British experience. This Article examines each of these possibilities and ultimately argues that the third option is correct. Moreover, modifying the thesis that there is a strong link between a country's bankruptcy regime and the configuration of its corporate economy allows us to develop a more powerful explanation of corporate governance systems that merits further investigation. …