The Political Economy of Corporate Law Reform in Australia
| Author | Michael J Whincop |
| DOI | 10.22145/flr.27.1.4 |
| Published date | 01 March 1999 |
| Date | 01 March 1999 |
| Subject Matter | Article |
THE
POLITICAL
ECONOMY
OF
CORPORATE
LAW
REFORM
IN
AUSTRALIA
Michael JWhincop*
INTRODUCTION: REFORM
AND
REALPOLITIK
The decision to centralise, or to decentralise, the responsibility for law-making
in
relation to asubject of
shared
legislative competence is afundamental dilemma for
the
polities of afederation. The advantages
and
disadvantages of
both
are well known.1
Amongst
other things, centralisation promotes national unity,
it
decreases regulatory
"arbitrage",
it
may
reduce search
and
compliance costs,
and
it
capitalises
on
economies
of scale
in
administration
and
law-making.
By
contrast, decentralisation is
more
receptive to local conditions,
and
offers the advantages
that
derive from inter-
jurisdictionalcompetition.
Australian corporate
law
has seen its share of the debate.2
That
debate has
been
undeniably
directional-there
has been, over the
past
forty years, considerable
momentum
towards
centralisation.3Each legislative step taken
in
that
period
has
been
one
closer to centralised national laws
and
administration.
The
only real opposition
came
to the Commonwealth's
attempt
to arrogate legislative
power
to itself
in
the
Corporations Act 1989 (Cth), which the
High
Court
struck
down
as unconstitutiona1.4
After the States
were
duly
bribed, they acquiesced
in
ascheme which achieved
most
of
1
2
3
4
BCom (Hons),
LLB
(Hons) MFM (Qld),
PhD
(Griff). Senior Lecturer, Faculty
of
Law,
Griffith University. I
wish
to
thank
Ian
Ramsay
and
an
anonymous
referee for
helpful
comments,
and
Oliver Bennett
and
Elsa
van
Wijk for research assistance.
On
the
economics
of
federalism, see F H Easterbrook, "Antitrust
and
the
Economics
of
Federalism" (1983) 26 JL&
Econ
23;
DNKing,
Fiscal
Tiers:
The
Economics
of
Multi-Level
Government (1984); R A Posner,
Economic
Analysis
of
Law
(4
th
ed
1992)
at
635-650; 5Rose-
Ackerman, "Does Federalism Matter? Political Choice
in
aFederal Republic" (1981) 89 J
Pol
Econ
152; C M Tiebout, "A
Pure
Theory
of
Public Expenditures" (1956) 64 J
Pol
Econ
416.
An
overview
of
the
debate
can
be
found
in
I M Ramsay,
"Company
Law
and
the
Economics
of
Federalism" (1990) 19 F L Rev 169
at
170-172. The federalism
debate
rode
its
peak
shortly
after New South
Wales
v
Commonwealth
(The
Incorporation
case)
(1990) 169 CLR 482.
For
adiscussion
of
the
transition from
the
Uniform
Companies
Acts
of
the
1960s, to
the
cooperative
scheme
legislation of
the
1980s, to
the
current
national
scheme laws, see
HAJFord, R P
Austin
and
I M Ramsay,
Ford's
Corporations
Law
in Australia
(8
th
ed
1997)
at
46-53.
New South
Wales
vCommonwealth (1989) 169 CLR 482.
78
Federal
Law
Review
Volume
27
the centralisation the invalid Act
had
sought.5State legislation was enacted to maintain
an
almost
amusing
pretence
that
the Commonwealth's legislation
applied
as State
law-notwithstanding
the Commonwealth's structural domination of the
forum
for
corporate
law
reform, the Ministerial Council for Corporations.6Since then,
nothing
has
disturbed
the equilibrium.
That
includes the unexpected scare of the
High
Court's
decision
in
Gould vBrown.7
In
that
case, the vesting of "State" jurisdiction
under
the
Corporations
Law
in
the Federal
Court
was
viewed
as unconstitutional
by
three
judges. Even if the
view
was
endorsed
by
one of the two
new
justices,
it
would
be
no
great
threat
to the national scheme. The Federal
Court
would
simply fall back to the
previous principles of associated jurisdiction.8
We
have
now
had
uniform laws for almost
twenty
years,
and
uniform
administration for almost ten. This article asks
whether
there is acase for
returning
power
to
the
States to enact
and
administer their
own
corporations laws, and, if so,
how
much
power? Given the debate's momentum, anyone
who
would
answer
those
questions affirmatively bears aweighty onus. Even the
natural
advocates of
decentralised
federalism-political
conservatives
and
academic
lawyer-economists-
have
found
enthusiasm
for state corporate
law
hard
to muster. The
current
Treasurer,
the
Hon
Peter Costello,
supported
national
law
in
opposition.9The
law
reform
program
he
has
sponsored
in
government
has
not
even
regarded
decentralisation as
an
issue
worthy
of scrutiny. The
most
substantial theoretical treatment of the subject,
Ian
Ramsay's article
in
this Review, is agnostic
about
the choice.
10
In
answering
this question, Iacknowledge the realpolitik of the situation.
Change
is
unlikely. The
arrangement
is acushy one for
most
of the parties concerned. The State's
indexed grants keep
them
fairly happy.11 Unless the tax base
was
substantially
5
6
7
8
9
10
11
Commonwealth,
State
and
Northern
Territory
Law
Officers,
Heads
of
Agreement for Future
Corporate
Regulation (1990).
The
Heads
of
Agreement
are
often
known
as
the
Alice
Springs
Agreement
after
the
place
where
agreement
was
reached.
The
States
agreed
to
the
preparation
of
uniform
legislation to be enacted
by
the
Commonwealth
Parliament,
and
applied
by
the
States. The
Commonwealth
agreed
to
pay
grants
to
each
of
the
States to
compensate
them
for
the
revenue
lost
by
surrendering
administration
to
the
Commonwealth.
See H A J
Ford
et
aI,
above
n 3
at
52; RTomasic
and
SBottomley,
Corporations
Law
in Australia (1995)
at
75-76.
AMinisterial Council
was
established
in
December 1978
in
aformal
agreement
between
the
Commonwealth
and
the
States.
It
was
to
supervise
the
administrative
body
created
by
that
agreement.
The
Alice Springs
Agreement
reconstitutes
that
Council as aMinisterial
Council
for Corporations.
It
is
the
primary
body
for deliberations
by
the
States
and
the
Commonwealth
regarding
amendments
to
the
legislation, except for
those
regarding
takeovers, securities, futures,
and
public fundraising,
which
are
within
the
Commonwealth's
sole responsibility.
Amendments
on
other
matters
are
not
to
be
introduced
without
the
Council's approval. Each State
and
the
Northern
Territory
has
one
vote,
but
the
Commonwealth
has
four
deliberative
and
one
casting votes.
(1998) 26 ACSR 317.
Stack v
Coast
Securities
(No
9) Pty Ltd (1983) 154 CLR 261;
Fencott
vMuller (1983) 46 ALR 41.
The
Hon
PCostello, "Restoring Confidence
in
Corporate
Morality" (1990) 34 Quadrant
20.
I M Ramsay,
above
n
2.
See below text
accompanying
nn
167-173.
Aboven5.
1999 Political Economy
of
Corporate Law Reform in Australia 79
changed, the States' incentive to compete for incorporations
would
be quite weak.
12
The
Commonwealth
controls the reform agenda as amonopolistic
supplier
of a
product-corporate
law-with
an
inelastic
demand,
with
all of the advantages
that
entails.
The fact
that
apolitical deal is astable one does
not
necessarily make
it
a
good
one.
The test is
not
whether
the Commonwealth can keep
supplying
laws-clearly,
it
can-
but
whether
some
other
arrangement
would
produce
better laws. The
stimulus
for
examining this issue is the Corporate Law Economic Reform
Program
(CLERP),
introduced
by
the
current
government in 1997.13 Ishall argue
that
while one
may
agree
with
the basic premise of
CLERP-improving
economic efficiency
and
reducing
transaction
costs-we
can
have
little confidence in the
path
the
program
claims will
lead
us
to those goals. CLERP persists in the great delusion of central
governments-
that
they
can
pick optimal corporate governance terms better
than
the parties to
corporate contracts. The key
C14ERP
reforms-fundraising,
takeovers, directors' duties
and
corporate
governance-are
only marginally more likely to
be
preferred
than
the
rules they replace. Idevelop this
argument
in
Part
II.
We
must
therefore go
beyond
the
current
reform debates to revisit the dynamics of
corporate
law
reform
in
this country. We
need
aprocess of "metareform", which
revisits the responsibilities for
producing
and
reforming corporate
law
rules.
Part
III
canvasses arange of options regarding metareform. The
most
obvious alternative to
the status
quo
is state competition
in
respect of some or all of the areas of the law. Ialso
examine "simulated" federalism, which
would
entitle individual states to convert
current
sections of the Corporations Law into menus,
with
the extant rule being the
default
where
corporate contracts
do
not
otherwise express achoice. Iconsider the
merits of
industry
regulation
by
permitting stock exchanges to compete
with
the
Commonwealth
for incorporations. My preference lies
with
state competition,
with
some
exceptions being
made
for external administration, securities
and
futures
regulation,
and
minimum
standards
for takeovers.
Part
IV
examines the role of the
Commonwealth
in
this model. It can serve avital role in
upholding
the integrity of
competition.
Part
Vis aconclusion, which links this article
with
alarger,
at
times
selective, debate
about
monopolies
in
this country.
THE
CORPORATE LAW ECONOMIC REFORM
PROGRAM
Context
The
background
to CLERP is
studied
elsewhere.14 It replaced the Corporate Law
Simplification Taskforce initiative introduced
by
the previous government.
Appointed
in
October 1993, the Taskforce was charged
with
simplifying Australia's corporate
legislation,
in
order
to make the Corporations Law abetter expressed document,
and
12
13
14
DJ
Cumming
and
JGMacintosh, "The Role of Interjurisdictional
Competition
in
Shaping
Canadian
Corporate
Law" (1997)
unpublished
paper
(trivial gains
from
attracting
incorporations fatal to competition).
Corporate
Law
Economic Reform Program, Strategy Document (1997).
The
Treasurer,
"New
Focus for Corporate Law", Press Release
No
15, 4
March
1997; BBaxt,
"Costello's
Dual
Challenge" 13:8
Co
Director
25;
RTomasic, Editorial (1997) 7:2
Aust
JCorp L;
ICampbell, "Corporate
Law
Economic Reform Program:
Returning
the
Law
to its
Fundamental
Purpose" (1997) 49
Aust
Co
Sec 138.
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