Passports, Private Choice, and Private Interests: Regulatory Competition and Cooperation in Corporate, Securities, and Bankruptcy Law

INTRODUCTION Generally speaking, nations regulate on a territorial basis. Each state regulates transactions and entities within its territory. Regulatory competition proponents are generally suspicious of the ability of government to regulate efficiently, asserting that regulatory regimes tend to be captured by private interests that manipulate regulation in order to redistribute wealth in their direction. Ideally for regulatory competition advocates, allowing regulated entities to choose the regulatory regime that will govern their affairs-"private choice"-will generate more efficient regulation. Private choice breaks the "regulatory monopolies" enjoyed by regulators under the dominant territorial approach.' In the areas of corporate, securities, and bankruptcy law, it forces governments and their regulators to compete to offer regulation that firms and their investors prefer. In the face of private choice, the argument goes, regulators will compete, since regulatory bureaucracies wish above all else to augment their own prestige. They do this by maximizing the number of firms and transactions under their regulatory purview. Among scholars of international regulatory reform, harmonization is often viewed as the polar opposite-the nemesis-of competition.2 While competition calls IMAGE FORMULA92 for a diversity of regulatory regimes promulgated by rivalrous lawgivers from various jurisdictions, each striving to satisfy consumer demand in a global market for law, harmonization implies standardization of substantive rules across multiple jurisdictions. Far from putting competitive pressure on regulators, according to this view, harmonization merely extends across national borders the reach of regulators' stodgy monopolies.3 Harmonization and competition, however, may not necessarily be antipodal in all contexts. Far from incompatible, competition and harmonization may be complements in some circumstances. In particular, competition requires harmonization on choice of law. Competition requires states to allow private actors implicitly or explicitly to opt out of territorial regulation. A decision to exit must be respected in order for competition to emerge. From a political economy perspective, some degree of harmonization of substantive rules may also facilitate competition. Establishing a common baseline-a set of minimum requirements-among states may enable political deals that allow competition as to remaining aspects in an area of regulation. In this article, I discuss regulatory competition in the related areas of corporate, securities, and bankruptcy law. As all of these areas address firms' relations with investors, they share an affinity that offers a natural focus of inquiry. I contrast two different forms that regulatory competition may take. The first is private choice, or what I call "direct competition." In this arrangement, firms are free to elect the regulatory regime that will govern their affairs, regardless of the location of a firm's assets, personnel, registered office, or transactions. The paradigmatic example is corporate charter competition among US states. The second form of competition I refer to as the "regulatory passport" arrangement, which has also been variously described as "mutual recognition" and "reciprocity."4 In this scenario, states agree to recognize the extraterritorial reach of firms' home country regulatory regimes, forswearing territorial regulation by host countries. Harmonization over choice of law rules is necessary for both these forms-- facilitating the competition that results. In the case of direct competition, states' agreed choice of law rule is to defer to each firm's private choice of regulation. In the IMAGE FORMULA95 case of the regulatory passport, states agree to apply each firm's home country law. In addition, a regulatory passport system typically involves some harmonization of substantive rules as a condition to allowing extraterritorial effect to home country regulation. …