Private enforcement of corporate law: An empirical comparison of the UK and US

It is often assumed that strong securities markets require good legal protection of minority shareholders. This implies both ‘good’ law – principally corporate and securities law – and enforcement, yet there has been little empirical analysis of enforcement. We study private enforcement of corporate law in two common law jurisdictions with highly developed stock markets, the United Kingdom and the United States, examining how often directors of publicly traded companies are sued, and the nature and outcomes of those suits. We find, based on a comprehensive search for filings over 2004–2006, that lawsuits against directors of public companies alleging breach of duty are nearly non-existent in the UK. The US is more litigious, but we still find, based on a nationwide search of decisions between 2000 and 2007, that only a small percentage of public companies face a lawsuit against directors alleging a breach of duty that is sufficiently contentious to result in a reported judicial opinion, and a substantial fraction of these cases are dismissed. We examine possible substitutes in the UK for formal private enforcement of corporate law and find some evidence of substitutes, especially for takeover litigation. Nonetheless, our results suggest that formal private enforcement of corporate law is less central to strong securities markets than might be anticipated. Introduction Nearly a century ago, Roscoe Pound memorably drew attention to the divide between ‘law in books’ and ‘law in action’. The distinction between substantive legal doctrine (‘law in books’) and enforcement (‘law in action’) is emerging as an important element in an ongoing debate about the extent to which law explains differences in financial markets around the world. Beginning in the late 1990s, a group of financial economists known collectively as LLSV reported in a series of widely cited studies that corporate and securities laws which protect minority shareholders are associated with deep and liquid securities markets and diffuse share ownership. This research focused almost entirely on ‘law in books’. Enforcement – whether by public agencies or private individuals, whether civil or criminal, or whether through formal lawsuits or more informal channels – was left to one side.