The Mandatory Law Puzzle: Redefining American Exceptionalism in Corporate Law

Abstract

American corporate law stands out when compared to other legal systems. At no time is this more apparent than with regard to the use of mandatory law. Corporate law in the United States is largely enabling, whereas most other countries around the globe rely heavily on mandatory corporate law.

The traditional view seeks to explain this American exceptionalism by pointing to the phenomenon of regulatory competition. According to this view, regulatory competition has eroded mandatory corporate law norms in the United States, whereas the absence of such competition has allowed mandatory norms to persist in other countries. This narrative, however, confuses cause and effect. Regulatory competition exists where it is allowed to exist; the decisive question is why so many countries have chosen to protect their mandatory corporate law norms by suppressing regulatory competition while the United States has done the opposite.

This Article argues that efficiency considerations are key to understanding this mandatory law puzzle. The efficiency of enabling versus mandatory corporate law is not uniform across countries; instead, it depends on numerous social and institutional factors, particularly the efficiency of stock markets, ownership patterns, judicial infrastructure, and labor market flexibility. As a result, enabling corporate law is substantially more efficient in the United States than it is in many European countries. In other words, the U.S. commitment to private ordering in corporate law might not be a simple political choice that other countries can copy at will, but rather the reflection of various deepseated institutional and social characteristics.