A self-enforcing model of corporate law

In this Article, Professors Black and Kraakman develop a "self-enforcing" approach to drafting corporate law for emerging capitalist economies, based on a case study: a model statute that they helped to draft for the Russian Federation, which formed the basis for the recently adopted Russian law on joint-stock companies. The Article describes the contextual features of emerging economies - including the prevalence of controlled companies and the weakness of other institutional, market, cultural, and legal constraints -that make it inappropriate to import company law from developed countries. Professors Black and Kraakman argue that in emerging economies, the best legal strategy for protecting outside investors in large companies while simultaneously preserving managers' discretion to invest is a self-enforcing model of corporate law. The self-enforcing model structures corporate decisionmaking processes to allow large outside shareholders to protect themselves from insider opportunism with minimal resort to legal authority, including the courts. Among the model's provisions are a mandatory cumulative voting rule for election of directors, which ensures that minority blockholders have board representation, and a rule requiring both shareholder- and board-level approval for self-interested transactions. The Article examines how to induce voluntary compliance with the company law, as well as the implications of the self-enforcing model for the ongoing debate over the efficiency of corporate law in developed economies.