The Puzzling Divergence of Corporate Law

Mark D. West*

ABSTRACT

The finding of divergence between the corporate laws of Japan and the United States is especially interesting given the similar economic status of the countries, extensive interaction, and similar corporate and securities law starting points that evolution-toward-efficiency and path dependence theory suggests would foster similar patterns of statutory development. This Article attempts to identify precisely which institutions lead to such divergence. Through an archeological study of the development of Japanese corporate law, I argue that a likely explanation for this divergence is the tendency of the Japanese system to rely on exogenous shocks to stimulate statutory change. A substantial explanation for Japan’s reliance on exogenous shocks lies in Japan’s institutions, particularly in its lack of jurisdictional competition. Continued institutional differences suggest persistent corporate law divergence despite international competition.

The Model Business Corporation Act and the modern Japanese Commercial Code were both created in 1950 and based on the Illinois Business Corporation Act of 1933. This littleknown historical quirk allows an empirical test of theories of corporate law development and convergence that have recently gained prominence in the literature. Using a fifty-year historical database of nearly 30,000 corporate law provision-observations, I find that despite globalization pressures, these corporate laws have diverged over time. I also find that the common provisions among jurisdictions appear largely to be limited to less significant enabling (non-mandatory) rules, which may further structural diversity.

* Assistant Professor of Law, University of Michigan Law School. I thank Rueven Avi-Yonah, William Carney, Ehud Kamar, Ronald Mann, Curtis Milhaupt, Geoffrey Miller, Masafumi Nakahigashi, Katharina Pistor, Adam Pritchard, Mark Ramseyer, David Skeel, and participants at the 2000 Annual Meeting of the American Law and Economics Association. This article was funded by a Center for Japanese Studies of the University of Michigan Faculty Research Grant and the Nippon Life Insurance Company’s endowment at the University of Michigan Law School.

INTRODUCTION

For some researchers, the dream experiment is the study of identical twins separated at birth and raised in dramatically different environments. If the twins turn out similarly, 1 nature may be more important than nurture. If they turn out differently, nurture may be the more dominant force.

The results of a similar experiment for corporate law could be fascinating. Imagine if a researcher could “raise” a corporate law system from infancy in two different institutional settings. Fifty years later, the researcher could check the development of the systems to determine whether corporate law is, as Robert Clark puts it in a slightly different legal context, “determined by a set of genes fixed in its infancy” or responds instead “to the shifting pressures of a changing environment.”2

This Article identifies and conducts such a corporate law experiment. Due to a series of historical quirks, the Japanese Commercial Code and the Revised Model Business Corporation Act (MBCA), on which most state corporate statutes are based,3 are both based on the Illinois Business Corporation Act of 1933, a statute often described as the first “modern” United States corporate code.4 I compare the development of these three corporate law sources by examining a hand-collected historical database – the most comprehensive one assembled to date for

1 Like the “celebrated studies” of “the twins who are both gunsmith hobbyists

the twins who are both hysterical gigglers.” JONATHAN WEINER, TIME, LOVE, MEMORY: A GREAT BIOLOGIST AND HIS QUEST FOR THE ORIGINS OF BEHAVIOR 236 (1999).

2 Robert Charles Clark, The Morphogenesis of Subchapter C: An Essay in Statutory Evolution and Reform, 87 YALE L.J. 90, 90 (1977)

3 See William J. Carney, The Production of Corporate Law, 71 S. CAL. L. REV. 715 (1998).

4 See, e.g., William H. Painter, Introduction: Symposium on the 1983 Illinois Business Corporation Act, 1985 U. ILL. L. REV. 635, 635 (1985).

investigating corporate law convergence — of nearly 30,000 observations covering the period from 1950 to 2000. Through an analysis of this database, this Article presents and attempts to explain a corporate and comparative law puzzle of what factors influence statutory development. Although I rely particularly on the U.S.-Japan comparison for explanations, the separated-atbirth quirk suggests universally applicable conclusions.

Three additional reasons make Japan a particularly good candidate for comparative analysis in this context. First, Japan is the world’s second largest economy and perhaps the single most economically significant corporate law jurisdiction in the world. Second, the Japanese system has a relatively public revision process, and to the extent that its details are private, they are often revealed by prominent participants in the revision process, either in published memoirs or in interviews that I conducted from 1998 to 2000. Finally, although a considerable literature has developed regarding the political economy of various Japanese corporate governance institutions,5 and some of those studies place particular reliance on general principles of Japanese corporate law, 6 there is virtually no literature in English that focuses on Japanese corporate law as a body of law. This gap in the literature fuels a common misperception among many academics that law in Japan is unimportant. 7 Due at least in part to this misperception, the bulk of scholarship on the important questions of comparative corporate governance and international jurisdictional competition has proceeded with little knowledge –

5 See, e.g., Ronald Gilson & Mark Roe, Understanding the Keiretsu: Overlaps Between Corporate Governance and Industrial Organization, 102 YALE L.J. 871 (1993)

6 Curtis J. Milhaupt, A Relational Theory of Japanese Corporate Governance: Contract, Culture, and the Rule of Law, 37 HARV. INT’L L.J. 1 (1996)

and virtually no discussion — of the corporate law that governs the affairs of many of the world’s largest and most powerful corporations. This Article attempts to narrow that gap while telling for the first time an interesting archaeological story of the evolution of Japanese corporate law. 8

Although some scholars have argued that corporate law on the books is unimportant, 9 a detailed analysis of corporate law development can nevertheless yield important insights. There seems to be emerging a general consensus, based largely on recent empirical studies by financial economists, that corporate law plays an important role in the development of corporate governance structures, as suggested by the close correlation seen between capital market success and legal system characteristics.10 The triviality thesis also may not apply at all to developing economies, 11 a category that certainly applies to much of the history of Japan discussed herein. Recent empirical work further suggests that corporate law can add value even in developed economies,12 and law in a civil regime like Japan arguably plays a more important, less “trivial” role.

Moreover, proponents of the triviality thesis have yet to articulate a theory of corporate law that encompasses the subject of this Article: change. If corporate law does not matter, why

7 See Milhaupt, supra note 6, at 8.

8 While the Japanese literature contains little discussion on the evolution of Japanese corporate law, two recent symposia celebrating the 100th anniversary of the Japanese Commercial Code addressed various revisions. See Tokushu, Shchc100nen: Sono Kiseki to 21 Seiki e no Tenbc [Special Issue: The 100th Anniversary of the Commercial Code: The Code and Developments into the 21st Century], 1155 JURISUTO 5-262 (1999)

9 FRANK EASTERBROOK & DANIEL FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991)

Black, Is Corporate Law Trivial?: A Political and Economic Analysis, 84 NW. U. L. REV. (1990).

10 Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997)

11 Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911 (1996).

12 Robert Daines, Does Delaware Law Improve Firm Value? (working paper, 1999).

does it change? A response that focuses on interest groups and political economy merely raises a further question: why has so much energy been expended over so many years in an effort to change that which is merely trivial? Without a theory that accounts for corporate law change, the phenomena discussed in this Article may present a greater challenge to the triviality thesis than the triviality thesis presents to the subject of this Article.

My argument has three primary components. First, this Article adds empirical evidence to the comparative corporate governance debate by showing that despite a growing literature on convergence of corporate law and governance structures,13 the corporate law regimes of Japan and the United States have actually diverged, not converged, over time. Divergence is an especially interesting discovery in this context, as it appears to have occurred despite the similarities between the two largest economies in the world, despite the high level of interaction between the countries, and despite similar corporate and securities regulation14 starting points that might be expected to foster path-dependent constraints. Although Japan and the United States of course have differing institutional structures, if there is one place that theory would predict convergence, this might be it. But convergence has not occurred, and to the limited extent that common provisions exist, they appear not to be mandatory rules, but arguably less important enabling rules, which may lead to even further diversity in corporate structures. The

13 See, e.g., Lucian Ayre Bebchuk & Mark J. Roe, A Theory of Path Dependence in Corporate Ownership and Governance, 52 STAN. L. REV. 127 (1999)

14 On the U.S. origins of Japanese securities regulation, see Curtis J. Milhaupt, Managing the Market: The Ministry of Finance and Securities Regulation in Japan, 30 STAN. J. INT’L L. 423, 430 (1994).

limited convergence of such diversity-facilitating rules helps elucidate recent claims in the theoretical literature that convergence of rules may not necessarily lead to convergence of corporate structures. 15

Second, one observable trend that fits the divergence data is the reliance of the Japanese system on exogenous shocks such as scandal, international competition, and foreign pressure, to jump-start legal development. By contrast, changes in U.S. corporate legal regimes tend to result from a combination of both exogenous and endogenous stimuli. Changes that are enacted in direct response to exogenous stimuli occur on different corporate law provisions than those that are enacted in response to endogenous factors. The reliance on exogenous stimuli and exclusion of other factors that may influence policy may thus lead to different patterns of corporate law development (but not necessarily fewer corporate law modifications) despite similar starting points, and suggests continued divergence despite increasing internationalization pressures.

Third and finally, I find that a likely explanation for the differing degrees to which U.S. and Japanese corporate legal regimes rely on exogenous shocks can be found in jurisdictional competition institutions. When the state creates a monopoly for corporate charters, that system is more likely than an internally competitive regime to rely on external shocks to jump-start legal development. The reliance is further increased in Japan by policymaking institutions that tend to discourage, or at least do little to encourage, endogenous change. Thus, while some readers may cast theory aside and predict divergence based on institutional differences between the U.S. and Japan, one additional contribution of this Article is a clear determination of which institutional differences matter and to what degree.

15 Bebchuk & Roe, supra note 13

The Article proceeds as follows. In Part I, I briefly discuss the existing debate over convergence in corporate law and governance. In Part II, I examine the historical database to set forth the divergence-centered puzzle of corporate law development in Japan, Illinois, and the MBCA. In Part III, I discuss the historical development of the Japanese Commercial Code to show that the divergence can be explained at least in part by Japan’s reliance on exogenous shocks to produce change. In Part IV, I tell an institutional story of corporate law development to explain the reliance on exogenous shocks. Part V discusses implications for the comparative corporate law and governance debate and the role of foreign legal advisors in corporate law development.

I. THE CONVERGENCE DEBATE

Fueled by globalization, two of the central debates of corporate law in recent years have been the convergence or divergence of corporate governance systems and of corporate law itself. A quick glance at some of the leading recent articles in the field shows that consensus remains elusive on even the most fundamental issues. Ronald Gilson, for instance, states that “the most we can predict is substantial variation both across and within different national systems.”16 John Coffee argues that some form of convergence will be facilitated through one form or another of worldwide securities regulations or standards. 17 Lucian Bebchuk and Mark Roe argue that path dependence makes structural convergence unlikely, and that even if corporate law

16 Ronald J. Gilson, Globalizing Corporate Governance: Convergence of Form or Function, unpublished manuscript available at www.ssrn.com, May 2000, at 34.

17 John C. Coffee, Jr., The Future as History: The Prospects for Global Convergence in Corporate Governance and Its Implications, 93 NW. U. L. REV. 641 (1999).

(hypothetically) converges, corporate governance may not.18 Curtis Milhaupt contends that property rights institutions make structural convergence unlikely.19 Henry Hansmann and Reinier Kraakman write that convergence of “most of corporate law” has already occurred.20

Part of the reason that consensus appears unattainable is the lack of empirical evidence. Anecdotal evidence to support convergence theories abounds. The shrinking of physical distances through advances in communication in recent years at least suggests more frequent cross-border interaction and opportunities for borrowing, 21 if not convergence. But persistent observable differences remain. Given the number and diversity of corporate law systems around the world, it should not be too difficult to find anecdotal evidence to support either theory. 22

Empirical work is forthcoming. The recent efforts of four financial economists – Rafael La Porta, Florencio Lopez-de-Silanos, Andrei Shleifer, and Robert Vishny – have brought empirical work to the forefront of comparative corporate law, finding systematic differences among systems in ownership concentration, capital market development, voting rights, and external finance.23 But these broad “legal family” cross-country studies, while interesting, do not examine provisions of corporate law in detail, and, as John Coffee has noted, may overstate

18 Bebchuk & Roe, supra note 13

19 Milhaupt, supra note 13.

20 Hansmann & Kraakman, supra note 13.

21 See generally ALAN WATSON, LEGAL TRANSPLANTS: AN APPROACH TO COMPARATIVE LAW 94 (1974).

22 Of the above-mentioned articles, Henry Hansmann and Reinier Kraakman offer the most empirical evidence on the issue of convergence of corporate law. Hansmann & Kraakman, supra note 13. The dominance of the shareholder-oriented model in the United States, Europe, and Japan, they argue, results in especially strong legal convergence in the areas of board structure, disclosure and capital market regulation, shareholder suits, takeovers, and judicial discretion in those jurisdictions. Their claims concerning those areas of law are intriguing, but their general descriptive comparisons of the relevant laws do not purport to substitute for rigorous empirical analysis.

23 See Rafael La Porta et al., supra note 10 (all three sources).

both the differences between civil and common law systems and the similarities among systems in each category. 24

Other recent work avoids many of these difficulties. William Carney’s study of the adoption of European Community directives examines corporate law provisions in some detail.25 But because that study does not track changes over time, like the work of the financial economists, it offers little insight into the convergence question. Katharina Pistor examines the development of corporate law provisions over time using a modified version of the variables used by La Porta and others, but still examines relatively broad themes over a relatively short period of time.26 To better understand the legal convergence issue, a more detailed study of statutory development over time is required.

Before discussing my study, a caveat is in order. I am principally concerned with corporate law and governance rules. This concentration admittedly ignores many other areas of law that affect corporations, such as rules regarding banking, labor, tax, commercial transactions, bankruptcy, antitrust, and securities. I do so not because I think that the study would not offer important insights, but largely because tracking the changes in all of these disparate areas of law would be virtually impossible. I justify, or perhaps rationalize to some extent, the exclusion by

24 See John C. Coffee, Jr., Privatization and Corporate Governance: The Lessons from Securities Market Failure, 25 J. CORP. L. 1 (1999)(noting especially the heterogeneity of common law systems)

25 William J. Carney, The Political Economy of Competition for Corporate Charters, 26 J. LEGAL STUD. 303 (1997). Carney’s excellent work on domestic corporate law production, see Carney, supra note 3, which focuses primarily on political economy in a single system, also differs from this comparative study of corporate law development in differing national systems over time.

26 See Katharina Pistor, Patterns of Legal Change: Shareholder and Creditor Rights in Transition Economies, 1 EUR. BUS. ORG. L. REV. 1 (forthcoming 2000)(hereinafter Pistor, Patterns)

noting that most of these areas of law at least share a similar American-influenced history in Japan.27

Besides these substantive areas of law, I also do not discuss extensively such broader factors as enforcement, procedural rules, legal customs, and social norms.28 In some areas, such as self-regulating institutional structures, Japan is roughly equal to the United States

II. A PUZZLE

A. The Common Starting Point of Japanese and U.S. Law

27 See, e.g., David A. Skeel, Jr., An Evolutionary Theory of Corporate Law and Corporate Bankruptcy, 51 VAND. L. REV. 1325 (1998)(arguing that in Japan, the United States, and Germany, the development of corporate governance and corporate bankruptcy institutions is complementary).

28 See, e.g., Melvin A. Eisenberg, Corporate Law and Social Norms, 99 COL. L. REV. 1253 (1999)(social norms)

29 See Mark D. West, Private Ordering at the World’s First Futures Exchange, 98 MICH. L. REV. xx (forthcoming 2000)

Only fifteen years after the first published description of the corporate form appeared in Japanese,30 the Japanese government in 1881 commissioned German legal scholar Hermann Roesler to attempt a first draft of a commercial code. The eventual code that resulted from Roesler’s efforts, promulgated in 1899, was based largely on the German code, and is said to have drastically altered customary business practices. 3 1

The 1899 legal structure remained basically intact until its revision by the officials of the U.S. Occupation of Japan following World War II (known as “SCAP” for Supreme Commander for the Allied Powers or “GHQ” for General Headquarters). SCAP officials saw a need for great change in Japan’s commercial and financial structure. Shareholding should be widely dispersed, they believed, corporate governance should be democratic, and the wartime zaibatsu conglomerates should be dissolved and their executives purged.32 Although a number of tactics could have been used to accomplish these goals, the Occupation reformers had a New-Dealnuanced vision of democracy that “relie[d] on law as a vehicle to effect social and political change.”33 The bulk of the legal work of the Occupation was assigned to the SCAP Legal Section, 34 but the task of creating a revised Antimonopoly Law fell to the Anti-Trust and Cartels

30 YUKICHI FUKUZAWA, SEIYC JIJC [CONDITIONS OF THE WEST ] (1958, 1866). See Azumi Ann Takata, From

Merchant House to Corporation: The Development of the Modern Corporate Form and the Transformation of Business Organization in Japan, 185-192 (Ph.D Dissertation, Sociology, Stanford, 1994).

31 Law No. 48 of 1899. The Code was revised in 1911, 1933, and 1938, but consistently retained its German flavor as well as its relatively anti-shareholder stance. See Makoto Yazawa, The Legal Structure for Corporate Enterprise: Shareholder-Management Relations Under Japanese Law, in LAW IN JAPAN: THE LEGAL ORDER IN A CHANGING SOCIETY 547, 547 (Arthur Taylor von Mehren ed. 1963).

32 See, e.g., ELEANOR M. HADLEY, ANTITRUST IN JAPAN (1970)

33 John O. Haley, Consensual Governance: A Study of Law, Culture, and the Political Economy of Postwar

Japan, in 3 THE POLITICAL ECONOMY OF JAPAN: CULTURAL AND SOCIAL DYNAMICS 32, 38 (Shumpei Kumon & Henry Rosovsky eds. 1992)

34 See, e.g., ALFRED C. OPPLER, LEGAL REFORM IN OCCUPIED JAPAN (1976).

Division of the Economic and Scientific Section. The job was assigned to American judge P.T. Kime and American lawyer Lester Salwin,35 who created drafts of what became the Japanese Antimonopoly Law36 in 1947 and the Trade Association Law37 in 1948.38

These tasks completed, the Anti-Trust Division in 1949 turned its attention to a related body of law not yet appropriated by the Legal Section for examination: the Commercial Code.39 The task fell specifically to Lester Salwin and newcomer Irving Eisenstein. Both, coincidentally, were sons of German Jewish immigrants, 1931 graduates of the University of Illinois, and trial lawyers from Chicago.40 In fact, of the five members of the Division who worked on the Commercial Code, three (Salwin, Eisenstein, and First Lieutenant Robert W. Hudson) were Illinois lawyers.41

Of the three Illini, Lester Salwin (1911-1984) was the clear leader. Salwin was an experienced litigator,42 a prolific scholar,43 a dedicated public servant,44 and, as a contemporary

35 See, e.g., Seita & Tamura, supra note 31, at 168-69 & n. 345.

36 Shiteki Dokusen no Kinshi to Kcsei Torihiki no Kakuho ni Kansuru Hcritsu, Law No. 54 of 1947.

37 Jigycsha Dantai Hc, Law No. 191 of 1948.

38 1948 also brought a minor Commercial Code revision that deleted provisions that permitted the issuance of partially paid shares. See Law No. 148 of 1948.

39 Thomas L. Blakemore & Makoto Yazawa, Japanese Commercial Code Revisions, 2 AM J. COMP. L. 12, 14 (1953). The Division received assistance from the Legal Section, particularly from Thomas Blakemore and Kurt Steiner. See, e.g., Lester Salwin, Note for File, Mar. 21, 1941, National Diet Library, Modern Japanese Political History Materials Room, NDL ESS(E) 06792

40 On Salwin, see Telephone Interview with Marjorie Salwin (daughter), Jan. 18, 1999

41 See Masafumi Nakahigashi, Sengo Shchc no Saishuppatsu [The Postwar Restarting of the Commercial Code], HCRITSU JIHC, June 1999, at 27, 28.

42 See, e.g., DeMotte v. DeMotte, 364 Ill. 421

43 See, e.g., Lester N. Salwin, Japanese Anti-Trust Legislation, 32 MINN. L. REV. 588 (1948)

from the Anti-Trust Division told me more than fifty years later, a “peppery sort of character.”45 Salwin apparently was known for his tendency to “pound the table” and was said to be “dramatic and authoritarian. Not much happened until Salwin arrived.”46

Salwin began the Commercial Code revision process began with his so-called “Six Points Memo” of January 25, 1949. The main six points47 were (1) stockholders’ right of access to books and records, (2) transferability of shares, (3) voting rights (including voting trusts, voting lists, proxies, classes of shares), (4) protection against dilution, (5) minority stockholders’ rights and remedies (including ultra vires acts, obligations of officers and directors, auditors, stock acquisitions, mergers and consolidations, “court actions re wrongful acts,” and (6) foreign corporations.48

The memo led to the establishment of the first Legislative Council to study pending laws, in June 1949. In August, the Council created a Commercial Law Subcommittee, 49 which

(1952)(hereinafter Salwin, Commercial Code)

44 At various times, Salwin was employed by the Social Security Administration, the Department of Justice, the Smaller War Plant Corporation, the Office of the Alien Property Custodian, the Office of Price Administration, the Small Business Administration, the American Embassy in Japan, and, of course, SCAP. Telephone interview with Marjorie Salwin, Jan. 18, 1999.

45 Telephone interview with Eleanor M. Hadley, Feb. 7, 1999.

46 Id.

47 Despite the nomenclature, the memo actually contained 16 points, as well as a separate section on foreign

corporations. TAKEO SUZUKI, SHCHC TO TOMO NI AYUMU [WALKING WITH COMMERCIAL LAW] 615-16 (1977).

Japanese experts were surprised by the Six Points Memo. As Takeo Suzuki, the leading Japanese figure in the revision process put it, “The request from GHQ for revision came just as we expected, but it included provisions on strengthening the role of and elevating shareholders beyond anything we had imagined. . . . If these requests became reality, wouldn’t they simply be used by troublemakers?” SUZUKI, supra, at 162.

48 This document, as well as many other important documents in the revision process, are reprinted in MASAFUMI

NAKAHIGASHI, SHCHC KAISEI SHCWA 25/SHCWA 26 – GHQ/SCAP BUNSHC [1950-1951 COMMERCIAL CODE REVISIONS: THE GHQ/SCAP DOCUMENTS] (2000). Special thanks to Masa Nakahigashi for providing early drafts of this book.

49 The Subcommittee was chaired by Kenzo Takayanagi, a constitutional scholar who had studied with Wigmore.

See, e.g., KYOKO INOUE, MACARTHUR’S JAPANESE CONSTITUTION 178 (1991)

included five judges, six lawyers, fourteen bureaucrats, ten law professors (three from the University of Tokyo), and five industry leaders.50 A lengthy series of negotiations followed between the Subcommittee and SCAP officials. 51

It is difficult to say what the Commercial Code might have looked like without the Illini – – Salwin, Eisenstein, and Hudson — who relied heavily on Illinois law in the reform process. As a “helpful guide,” Salwin began by furnishing the Japanese representatives with “citations to the Illinois Business Corporation Act of 1947” on each of the main points of the Six Points Memo.52 Salwin’s subsequent drafts relied heavily on Illinois law.

YEARS, 1947-67 71 (Dan Fenno Henderson ed. 1968). He had, however, been instrumental as the draftsman of the

pre-war Code

50 Chart of participants in SUZUKI, supra note 47, at 628-29. Despite the importance of the revisions, there was little glamour for the participants in the revising process. Meetings were held at Akasaka Palace in Tokyo three times weekly in meetings that lasted at least half a day and often into the night. SUZUKI, supra note 47, at 157-58. One Japanese participant recalls bringing his food from home and spending the entire time in a room in a Ueno

temple. 3 CHUSHAKU KAISHAHC [ANNOTATED COMPANY LAW] 1 (Tadao Ômori eds. 1967)(statement in

introduction by Ômori). Another remembers difficulty finding a hotel room (many were either destroyed in the war or occupied by SCAP personnel), and lodging at the same temple. KEN’ICHIRO ÔSUMI, SHCJIHC 60NEN: WATAKUSHI GA AYUNDA MICHI [60 YEARS OF COMMERCIAL LAW: THE PATH I WALKED] 152 (1988). Still another

remarks that although the furnishings were nice, the air conditioning did not work, the air was stifling, and he “had real problems with long meetings because I am allergic to cigarette smoke.” SEIJI TANAKA, SHCHC TO TOMO NI ROKUJANEN [60 YEARS WITH COMMERCIAL LAW] 322 (1982).

51 Eisenstein’s handwritten notes show that the meeting held on July 11, 1949, at which it was decided that there were to be “no more Commercial Code meetings unless we call for them,” was the fifty-ninth such meeting. NDL ESS(C) 09679. The actual meetings between U.S. and Japanese representatives “were of a character unknown to Roberts Rules of Order.” Blakemore & Yazawa, supra note 39, at 14. Regulations for the Council Amending the Commercial Code existed, see Regulations for the Council Amending the Commercial Code, Feb. 3, 1949, ESS(C)06793, but were apparently of little import, see Masafumi Nakahigashi, GHQ Aite no Kentc no Seika [The

Fruits of the Battle with GHQ], in NIHON KAISHA RIPPC NO REKISHITEKI TENKAI [THE HISTORICAL DEVELOPMENT OF JAPANESE CORPORATE LEGISLATION] 218, 229 (Michiyo Hamada ed. 1999). SCAP wanted results fast, and one Japanese participant remarks that “we really did too much too soon.” TANAKA, supra note 50, at 322. According to Takeo Suzuki, Salwin was not particularly genteel at all times. When Suzuki remarked to Salwin, “You are focusing completely on American law, but how about the Continental system? To completely ignore it strikes me as strange,” Salwin replied, “If you want to talk about Continental law, we’ve got an Austrian officer here who knows much more than you. What are you talking about?” After Suzuki stammered some more replies, Salwin said, “You’re all red, Suzuki,” and Suzuki reports that he never returned to the meetings. TAKEO SUZUKI, IKUSANGA:

SHCHCGAKUSHA NO OMOIDE [MANY MOUNTAINS AND RIVERS: THE MEMORIES OF A COMMERCIAL LAW SCHOLAR]

54-55 (1993). In another version of the story, Suzuki tells Salwin that labor reforms have gone too far, and Salwin accuses him of being a Communist. See SUZUKI, supra note 47, at 164-66.

52 Salwin, Commercial Code, supra note 43, at 487.

The use of Illinois as a model has been attributed by SCAP Legal Section contemporaries not to “the excellence of the legislation of that state but simply of the fact that the particular SCAP officials in charge of revision hailed from Chicago.”53 Another observer noted in 1956 that the Japanese adoption was a result of the fact that “[s]ome dominant officer of the occupying forces was apparently familiar with and addicted to the Illinois law.”54 But the use of Illinois as precedent appears to have been more than personal prerogative. The 1933 Illinois Business Corporation Act was by most accounts “a landmark statute”55 and “the most modern of state statutes.”56 Among the more innovative features of the 1933 law were a replacement of the terms capital stock and share stock with stated capital and shares (Section 2), a purpose clause that enabled all activities other than banking, insurance, and railroading to be conducted under one law (Section 3), class voting (Section 54), and provisions for annual meetings of shareholders (Section 26).57

At least in part due to its modernity, the Illinois Act subsequently became the precedent document for the Model Business Corporation Act. As one of the Model Act’s drafters notes somewhat colloquially:

You may wonder what statute the model act was modeled upon. The parent act is the Illinois Business Corporation Act enacted in 1933. . . . The reasons for this substantial use of the Illinois act are: first, the Illinois act was an original and modern statute containing most of the principles and approaches that the

53 Blakemore & Yazawa, supra note 39, at 15.

54 Whitney Campbell, The Model Business Corporation Act, 11 BUS. LAW. 98, 109 (1956).

55 Painter, supra note 4, at 635.

56 Charles W. Murdock, Why Illinois? A Comparison of Illinois and Delaware Corporate Jurisprudence, 19 S. ILL. U. L.J. 1, 1 (1994).

57 For all changes, see generally Henry Winthrop Ballantine, A Critical Survey of the Illinois Business Corporation Act, 1 U. CHI. L. REV. 357 (1934)

committee thought desirable, and, secondly, the members of the drafting committee had been participants in the drafting and development of the Illinois act.58

A cynic might also note that the drafters of the Model Act were Chicago lawyers who had participated in the drafting of the Illinois statute.59 Whether the case, the provisions of the Model Act were eventually mimicked by most U.S. jurisdictions,60 making the 1933 Illinois Act an early precedent for modern U. S. corporate law.

In fall 1949, Salwin circulated a draft based on Illinois law, and solicited views of legal experts and economic leaders. Japanese academic scholarship blossomed, and was largely critical of the “drastic” proposed increases in shareholders’ rights.61 In October, Keidanren (the Federation of Economic Organizations), representing business interests, submitted its first opinion papers on the proposed law. In a 16-point memo, Keidanren supported the law, but, among other things, opposed provisions granting shareholders rights to view corporate records and appraisal rights in mergers, recommended that derivative suits be available only to shareholders who held at least one percent of a firm’s stock, and wanted discussions on

58 Campbell, supra note 54, at 100.

59 See, e.g., Campbell, supra note 54, at 98-100

60 Carney, supra note 3.

61 “[W]ith hardly a single exception, the scholars of Japan openly opposed these amendments. . . . [T]he Japanese uniformly felt that the measures required would encourage shareholder-strife and hamper honest management.” Blakemore & Yazawa, supra note 39, at 20. For critiques, see, e.g., Teruhisa Ishii, Torishimariyaku Seido Kaisei no Hckc [Direction of the Reform of the Director System], 1 HCSC JIHC 337 (1949)

HCSC JIHC 276 (1949)

cumulative voting for directors.62 A similar seven-point memorandum from the Tokyo Chamber of Commerce followed in February 1950, in which it proposed limiting the right to sue derivatively to ten-percent shareholders, supported a requirement that plaintiffs bringing suits against corporations post a bond, and opposed shareholders’ rights to view corporate records, limits on share transfer restrictions, and appraisal rights in mergers.63

The two biggest controversies appear to have been shareholders’ rights to view corporate records and cumulative voting. As for viewing records, Japanese negotiators argued that such rights would be exercised by labor groups or corporate rabble-rousers, and accordingly wanted to require shareholders to apply to a court to view records. SCAP rejected this theory, and rejected a subsequent Japanese draft that would have allowed management to refuse a shareholder demand if it would “remarkably harass the management” in favor of simply providing that shareholders could not abuse the inspection right.64 As for cumulative voting – an Illinois invention–,65 as committee member Takeo Suzuki explained, for the Japanese side, “It’s no exaggeration to say that nearly half of the hard work and difficulty of the 1950 revision was spent trying to relax that requirement.”66 (They failed.)

62 Keizai Dantai Rengokai Shchc Kaisei Iinkai, Shchc ni Kansuru Iken (1949), reprinted in SUZUKI, supra note 47, at 622.

63 Tokyo Shckc Kaigijc Shcjihcoki Iinkai, Shchc Kaisei ni Kansuru Iken (1950), reprinted in SUZUKI, supra note 47, at 623-6. As participant Tatsuo Ôsumi puts it, referring especially to the strengthening of shareholders’ rights, “The financial circle, the academic circle, and in fact every other group opposed the changes together.” Tatsuo Ôsumi, Shchc Kaisei no Ikisatsu to Sono Shcrai [The Circumstances and Future of the Commercial Code Revisions], 28 HCRITSU JIHC 9 (1956).

64 See Memorandum dated June 27, 1949 of Kurt Steiner, Subject: Revision of the Commercial Code, NDL LS 10304

65 See Jeffrey N. Gordon, Institutions as Relational Investors: A New Look at Cumulative Voting, 94 COLUM. L. REV. 124, 142 (1994)

66 SUZUKI, supra note 47, at 168. The committee chair, in an eloquent letter to Eisenstein, stated that his studies with Edward Warren at Harvard Law School led him “personally” to agree with the introduction of cumulative

Although the U.S. made compromises,67 its position ultimately prevailed on both issues, and on most others, in the final draft passed by the Diet in May 1950.68 As a result of the revisions, shareholder rights were dramatically increased, boards of directors were established, the prewar power of statutory auditors was curtailed, individual share ownership was fostered, and concepts of director accountability were introduced – all largely along the lines of the Illinois Business Corporation Act.69 The revisions were relatively well received, at least in part due to the solicitation of input from the various groups and to the fact that the necessity of Code revisions had been recognized long before the Occupation. 70

voting, but he made it clear that his position as chairman of the committee was insufficient to persuade the entire committee in the face of Bar and Chamber of Commerce opposition. Letter of Dec. 9, 1949 from Kenzo Takayanagi to Irving Eisenstein, NDL ESS(E) 06787.

67 Salwin, supra note 43, at 488.

68 Salwin, supra note 43, at 488, 497-510.

69 Although the 1950-51 revisions were based largely on Illinois law, they were not a wholesale importation. Some very non-Illinois previsions remained in Japan – the most prominent examples being the German internal auditor system, the corporate registration system, and directors’ liability to non-creditor third parties where directors have acted in bad faith or have committed gross negligence resulting in injury to third parties. Shchc 266-3

70 See, e.g., Kenzo Takayanagi, Historical Introduction, in 1 THE CODES TRANSLATION COMMITTEE, THE COMMERCIAL CODE OF JAPAN ANNOTATED ix, xl (1931)

B. Subsequent Developments

To attempt to measure the degree of similarity among Illinois, Japan, and the MBCA in 1950 and over the ensuing half-century, I rely on a typology of 142 MBCA provisions created by John MacKerron and developed in a series of articles by William Carney. 71 MacKerron identified important MBCA provisions and typed them into six categories: pure enabling rules, enabling/empowerment rules, default opt-out rules, mandatory rules, and mandatory constraints on enabling rules. Carney used a slightly modified version of MacKerron’s typology to examine the adoption of MBCA provisions in each of the fifty states, relying on comments to the MBCA that listed states of adoption as well as state-by-state searches. I take MacKerron and Carney’s methodology two steps further by adding temporal and transnational dimensions. To track code developments over time, I examined each of the three codes – the MBCA, Japan, Illinois – in every year since 1950, a test facilitated by the systems’ common history. In total, including the analysis of Delaware law that I add for comparison, I examined 142 provisions in four jurisdictions for each year in a 50-year period for a total of 28,400 provision-year observations. I

a plaintiff shareholder or creditor to post a bond only if the defendant corporation could prove to a court that the suit or request was filed by the plaintiff – or, in Suzuki’s example, a sokaiya — with wrongful intent. On his way home from the meeting, Suzuki dropped in at the Ministry of Justice, which gave its approval to the compromise. The Suzuki-Salwin compromise became article 59 of the Code and was enforced simultaneously with the 1950 revisions. Law No. 290 of 1951. See SUZUKI, supra note 47, at 189-90. Suzuki proclaims that “This revision was like my own one-man play. It was such a trivial little thing, and I don’t know whether it had any significance whatsoever.” SUZUKI, supra note 47, at 191. Contemporary scholars disagree with the self-effacing comment, and the provision still remains important in derivative actions. Nakahigashi, supra note 51, at 286.

71 Carney, supra note 3, at 730

ASSOCIATION, MODEL BUSINESS CORPORATION ACT ANNOTATED (3d ed. 1997).

use the MBCA typology to attempt to answer two discrete questions: (a) How similar were the codes in 1950? and (b) How similar are the codes today?

Using the 142 MBCA provisions listed in Carney’s study, in each case, I noted the date of adoption of a similar provision, if any, in each of the four jurisdictions.72 I use 1950 (the date of the adoption of the new Japanese Code and the MBCA) as a baseline, and assign 1950 as the adoption date for a provision adopted in any jurisdiction in 1950 or earlier. Provisions with pre-1950 roots conceivably might have some qualitative differences with 1950 revisions. I do not investigate such distinctions in detail, in part because the origins are notoriously difficult to assess, and in part because large-scale reform suggests an integration of the existing provisions into the new legal framework.

Although the MBCA is not adopted in toto in any single jurisdiction, the MBCA typology nevertheless presents a convenient and relatively accurate metric by which all three systems can be measured. The methodology has been tested, and more scholars and practitioners are familiar with the MBCA model than with the law of either Japan or Delaware. Moreover, after the starting date of 1950, it is the MBCA, not the Illinois code, that becomes a standard model (along with Delaware) for development both in the U.S. and among Japanese policymakers who look to the U.S. system for answers. As Carney has shown, substantial uniformity (74.4% on the 142 provisions) exists between the MBCA and the statutes of the several states.73 Finally, the most thorough recent revision to the MBCA occurred more than 17

72 Particularly helpful sources were: Japan — SENGO 50-NEN KAISHAHC SHINENHYC 8 (Shcjihcmu Kenkyukai ed. 1995) and SUZUKI, supra note 47, Illinois — THE CORPORATION LAW COMMITTEE OF THE CHICAGO BAR ASSOCIATION, ILLINOIS BUSINESS CORPORATION ACT ANNOTATED (1934)

73 Carney reports that the 142 provisions are adopted in an average of 37.21 states, or 74.4% of the states, and that 77 of those provisions are adopted in forty or more states. See Carney, supra note 3, at 731.

years ago, a period of time that should be sufficient for jurisdictions to examine even the more recent provisions with some care.

In his study, Carney takes a formal approach that focuses on the syntax of each corporate law provision. This approach makes sense if one is attempting to measure the direct dispersion of MBCA provisions as Carney did, 74 but here my goal is to track broad similarities among systems to determine whether and to what extent convergence has occurred. Given that the institutional environments in which the systems function differ dramatically, and that the standard comparative law definition of convergence is “the phenomenon of similar solutions in different systems,”75 I take a slightly different approach.

I classify a provision as functionally similar if the function of the statute, as expressed by the language of the statute and accompanying commentary, is substantially similar. 76 I do not classify statutes as functionally similar statutes that simply serve the same broad corporate governance goal. I classified the following three examples (each involving Japan, the most difficult jurisdiction for side-by-side comparison if for no other reason than language) as

74 While Carney takes a formal approach in most cases, in some cases counting uniformity only when the language exactly matches, see Carney, supra note 3, at 764 n. 217, 765 n. 229, a close reading of his work occasionally reveals a functional approach, see Carney, supra note 3, at 761 & nn. 181, 187

75 Ugo Mattei, Eficiency in Legal Transplants: An Essay in Comparative Law and Economics, 14 INT’L REV. L. & ECON. 3, 5 (1994).

76 For the MBCA, commentary was limited to the annotated MBCA. For Illinois and Delaware, in the handful of cases in which similarity was ambiguous, I relied on annotations to those codes and occasionally to cited cases. For Japan, a civil law jurisdiction, I relied both on court opinions (particularly those cited in the commentary to MOHAN ROPPC HENSHA IINKAI, MOHAN ROPPC [MODEL CODE] (1999)) and scholarly commentary to illuminate ambiguous provisions. Particularly helpful were MASAHIRO KITAZAWA, KAISHAHC [COMPANY LAW] 283-85 (1982)

KEN’ICHIRO ÔSUMI, KABUNUSHI SCKAI [SHAREHOLDERS’ MEETINGS] (1974)

each jurisdiction, I of course may have missed case law that is not directly responsive to statutory provisions.

functionally similar, though they may not necessarily have been so classified using Carney’s methodology:

• The MBCA requires a minimum of 10 days’ notice before shareholders meetings. 77 Japan’s statute requires a minimum of two weeks. 78

• The MBCA explicitly states that a director may resign at any time. 79 Although the Japanese Commercial Code has no such explicit provision, it does provide that directors are governed by the provisions that govern mandates,80 and the Civil Code provides that a mandate may resign at any time.81

• The MBCA states explicitly that shareholders may vote through a voting agreement.82 Although the Japanese Commercial Code has no such explicit provision, the Japanese Civil Code and accompanying common law provide that such agreements prevail over Commercial Code voting provisions so long as they are not contrary to public policy. 83

While a functional approach may not yield unassailable results in every case, it is likely to provide more insights into the convergence question than a rigid formal approach, and seems no less precise than the “legal family” classifications based on legal systems’ country-of-origin and other amorphous factors that dominate the recent literature. 84 Still, perhaps because of the size of the database, I found the results using a formal approach like Carney’s to be substantially similar.

77 MBCA § 7.05.

78 Shchc § 232.

79 MBCA § 8.07.

80 Shchc § 245(3).

81 Minpo § 651(1)

82 MBCA § 7.31.

83 Minpc 90, 91

84 See Coffee, supra note 24.

1. Baseline: 1950. First, I examine the similarity in 1950 among the three codes with similar origins.85 Two measures are useful. First, I examine the number of provisions adopted in 1950 that eventually would become part of the MBCA. In Part V, I attempt to measure the relative importance of various provisions, but for now, I focus on the purely quantitative measure. In 1950, the MBCA had adopted 68 of the 142 provisions that would eventually be incorporated into the modern MBCA, Japan had adopted 79, and Illinois 76. See Column A, Table 1. Second, I examined the adoption in 1950 of the 68 provision of the modern MBCA in force in 1950. Of these 68 provisions, Japan in 1950 had adopted 49, and Illinois 63.86 See Column B, Table 1. In short, the data support the historical story, suggesting that while Japan and Illinois may not have been strictly identical, corporate law in 1950 did not differ substantially among Japan, Illinois, and the MBCA.

Table 1: Provisions Adopted in Each Jurisdiction

Jurisdiction A. Number of modern

MBCA provisions

adopted in 1950 B. Number of 1950

MBCA provisions

adopted in 1950 C. Number of modern

MBCA provisions

adopted in 2000

MBCA 68 68 142

Japan 79 49 86

Illinois 76 63 113

2. Convergence or Divergence? 2000. The best evidence of convergence or the lack thereof among the jurisdictions should come from a comparison of 1950 commonality with 2000 commonality. Compare the Table 1 data in Column C with those in Columns A and B. The

85 I also examined the 23 provisions of the Japanese code considered “important” by its primary drafter, Lester Salwin, in a 1952 Georgetown Law Review article. Salwin, Commercial Code, supra note 43. The list is essentially identical to that of Japanese scholars, see Osamu Mimura et al., Zadankai, Rippc Tantckan ga Kataru Sengo no Kaishahc Kaisei Jijc [Roundtable: The Circumstances of Postwar Company Law Revision as Told by Those Persons in Charge of Legislation], in three parts, 1229 SHCJI HCMU 8, 1230 SHCJI HCMU 6, 1231 SHCJI HCMU 8 (1990), at 1229 SHCJI HCMU 13. Of these 23 provisions, 15 are clearly and directly linked to Illinois.

86 In 1950, using a formal approach, the three jurisdictions were uniform on 30 provisions

numbers reflect an increase in adoptions in each jurisdiction

a functional approach, and, for comparison, all three jurisdictions using a formal approach that relies on specific statutory language.

The higher initial uniformity between Illinois and Japan reflects the direct borrowing undertaken in 1950 by the Occupation authorities. Note, however, that by 1985, the common provisions among those two jurisdictions are equal to the number of common provisions in all three jurisdictions, tentatively suggesting mild convergence. This development is largely due to the 1983 revision of Illinois’s corporate law, through which it adopted several MBCA provisions that had already been incorporated into the Japanese code. 87

87 See, e.g., Painter, supra note 4. It is difficult to discern a distinct pattern from a comparison of Illinois and Japanese adoptions. Of the 33 MBCA provisions adopted in Illinois but not in Japan, 13 were adopted by Illinois in its 1983 overhaul. The adoption rate among the 50 states (as reported by Carney) of those 33 MBCA provisions is 37.75 states, a number almost identical to the overall MBCA provision adoption rate. See supra text at note 73. Of the 10 MBCA provisions adopted in Japan but not in Illinois, all were adopted in Japan in 1950, and six were not adopted by the MBCA until 1984, suggesting little post-1950 MBCA-based innovation in Japan. Those 10 provisions are adopted in an average of only 23.7 states.

The gradual increase in the number of common provisions indicates an increase in common solutions, but not convergence. As law expands to address a variety of new problems, we might expect to find an increase in the raw total number of common solutions over time between any two systems in virtually any field. To measure convergence properly, one must take into account the large number of post-1950 provisions on which the jurisdictions disagree. In percentage terms, the numbers of adoptions of MBCA provisions in 2000 are lower than the numbers of adoptions of 1950 MBCA provisions in 1950. See Table 2. Compared to the degree of convergence in 1950, the evidence suggests less total convergence in 2000.

Table 2: Percentage Provisions Adopted in Each Jurisdiction

Jurisdiction A. Percentage of 1950 MBCA

provisions adopted in 1950 B. Percentage of modern MBCA

provisions adopted in 2000

MBCA 100% 100%

Japan 72.1 % 60.6%

Illinois 92.6% 79.6%

Divergence – or the lack of substantial convergence, is further demonstrated by the differences in the rates of MBCA provision adoptions. Figure 2 compares the adoptions of modern MBCA provisions in each jurisdiction, and adds Delaware, the leading corporate law jurisdiction in the United States. The data are interesting for at least two reasons. First, despite a common starting point in the law, the results over time for the jurisdictions fantail toward divergence. Second, note that Japan is slowest to adopt MBCA-compatible provisions over time. While Japan begins in 1950 with more modern MBCA provisions than any other jurisdiction (almost identical to Illinois, from which it borrowed), its position is reversed by 2000.

The development of corporate law in these jurisdictions presents a bit of a puzzle. Why is it that despite relatively similar starting points, the systems diverged? At least three simple explanations, focussing particularly on Japan, have potential to explain the difference.

First, perhaps there is something institutionally different about Japan’s legal system that leads to few Commercial Code reforms. Differences between civil and common law systems may indeed account for some differences, despite my efforts to account for case law differences.88 But note that the “flatlining” of Japanese development seen in Figure 2 occurs only in relation to MBCA-compatible provisions. As Part III will show, Japanese corporate law changes often

88 See supra note 76.

during the Occupation. See Table 3. Divergence results not because of a lack of revision in Japan, but because the revisions implemented in Japan do not follow the MBCA pattern.

Table 3. Japanese Code Revisions Since 1950

Code Number of Revisions

Civil Code 19

Commercial Code 22

Criminal Code 10

Code of Criminal Procedure 16

Code of Civil Procedure 11

Constitution 0

Source: 1999 MOHAN ROPPC 941, 1178-1180, 1385, 1553, 1696, 1860 (Haneri Roppc Hensha Iinkai ed. 1998).

The fact that Japan has not followed the MBCA pattern suggests a second explanation based on a lack of direct continuing influence. Perhaps there is no reason to expect Japan to adopt MBCA provisions, or provisions that mimic those of the MBCA, after the Occupation reformers leave in 1950. Three factors play against this reasoning. First, the Japanese political process of corporate law revision almost always involves a thorough examination of solutions adopted in foreign (non-Japanese) legal systems, particularly the U. S. system, and particularly the MBCA approach. In fact, in my experience, the MBCA is more readily available in bookstores in Tokyo than in New York.89 Second, although Japan could be slow in generally to accepting transplanted systems, it seems unlikely that Japan is still “getting used to” its transplanted corporate law after fifty years. Finally, it seems unlikely that Japanese law reform leaders are rejecting MBCA solutions as a sort of backlash in which efficiency takes a backseat to politics.90 Although some backlash to Occupation reforms occurred in the first revision after the end of the Occupation, reversal was not a continuing trend. Of the multitude of revisions

89 The MBCA is published in Japanese as AMERIKA MOHAN KAISHAHC (Mashiro Kitazawa ed. 1988).

90 See Mark J. Roe, Backlash, 98 COLUM. L. REV. 217 (1998).

imposed by Occupation officials in 1950, as Part III will show, only three – mandatory cumulative voting, share transfer restriction prohibitions, and a requirement that preemptive rights appear in a company’s charter and apply to all future stock issuances, – were flatly reversed in the ensuing years. That these reversals occurred over a lengthy period of time — in 1955, 1966, and 1974, respectively — at least suggests that decisions were based on changing conditions and not merely kneejerk political backlash.

Finally, perhaps the systems’ substantial uniformity in 1950 means that the most logical subsequent development is divergence. Certainly the starting point matters.91 Still, the commonmeasure divergence seen here would appear directly to contradict elementary notions of evolution-toward-efficiency and path dependence in legal development. Theories of efficient development of corporate law suggest that similar economic selection pressures will lead to similar corporate law solutions.92 Path dependence theory further suggests that systems that begin with a common starting point should be expected to adopt provisions that fit within that existing path-creating framework.

It is true that in many aspects Japan is different from the United States

91 Assuming similar rates of adoption of identical provisions as a percentage of total adoptions in two or more jurisdictions, the starting point may determine whether the subsequent general trend is one of convergence or divergence. If two systems with no common provisions at T1 adopt 10% common provisions, the outcome at T2 will be convergence. If two systems with 100% convergence at T1 adopt 10% common provisions, the outcome at T2 will be divergence. In this case, however, I am not measuring aggregate adoptions, but adoptions of a common, standardized set of provisions.

92 See, e.g., Harold Demsetz, The Structure of Ownership and the Theory of the Firm, 26 J.L. & ECON. 375 (1983)

from the empirical reality that I have documented here, as well as the differing degrees to which the four jurisdictions depicted in Figure 2 comport with theory, suggest the need for a more complex explanation. Although part of that explanation may come from sources outside the scope of this paper such as corporate social norms and other practices, differences in the institutional environment of corporate law nevertheless provide a robust explanation.

III. JAPANESE CORPORATE LAW DEVELOPMENT

The study of the development of Japanese corporate law over time highlights an important feature of the system: the high degree to which it relies on exogenous shocks to instigate reform. Although reliance on exogenous shocks may not be the only reason why U. S. and Japanese laws have diverged, it is an observed trend that fits the data presented in Part II well. I first discuss the institutions that affect corporate law development in Japan. I then briefly discuss process, and finally relate a narrative of Japanese corporate law history to provide concrete examples of the exogenous shock phenomenon.

A. Institutions

In this section, I discuss five broad groupings of institutions and related organizations that are particularly important in contrasting the development of corporate law in Japan with that of the United States: corporate governance institutions, formal state policymaking institutions and organizations, foreign relations constraints, corporate enforcement institutions, and the organized bar. The list is by no means complete, but should serve as a guide for understanding the development of Japanese corporate law discussed in the remainder of this Part.

1. Corporate Governance Institutions. As in other systems, corporate governance constraints influence the path of corporate law in Japan. One particular group of institutions stands out : those that empower Japanese corporate managers. Due at least in part to a combination of the lack of a well-functioning market for corporate control, back-loaded compensation plans, historically weak enforcement of fiduciary duties, and a tendency to promote directors solely from the ranks of insider employees, Japanese managers have developed into a powerful force in the policymaking process.

Japanese managers are well-represented by various business organizations. Japan has 14,000 business organizations, nearly twice as many per capita as the United States.93 Four prominent national business organizations serve almost exclusively political functions, the most powerful of which is the Federation of Economic Organizations, or Keidanren, which includes over 800 of Japan’s largest corporations and 100 trade and industrial organizations.94

93 Yutaka Tsujinaka, Interest Group Basis of Japanese Global Leadership (unpublished manuscript, 1996). Many were founded during the Occupation (48.8% of most influential interest groups, and 44.3% of business and financial groups, were founded during 1946-1966). Michio Muramatsu & Ellis S. Krauss, The Conservative Policy Line and

The Development of Patterned Pluralism, in 1 THE POLITICAL ECONOMY OF JAPAN: THE DOMESTIC TRANSFORMATION 516, 522 (Kozo Yamamura & Yasukichi Yasuba eds. 1987).

94 Besides Keidanren, the Japan Federation of Employers’ Associations (Nikkeiren) has 30,000 employers, is primarily concerned with labor-management relations.” The Japan Chamber of Commerce and Industry (Nissho) is a broad organization mostly composed of small and medium-sized businesses, the central organ of 478 regional chambers of commerce. Though it is not without influence, as the former chairman of the Federation of Economic Organizations once said in the euphemism of the late 1950s, “it is just as hard to organized medium and small enterprises as it is to make imported rice stick together in a ball.” Quoted in T.J. PEMPEL, REGIME SHIFT: COMPARATIVE DYNAMICS OF THE JAPANESE POLITICAL ECONOMY 95 (1998). Finally, the Japan Association of

Corporate Executives (Keizai Dcyakai, formerly translated as the Council for Economic Development) includes

roughly sixteen hundred top business leaders from nine hundred companies, and differs from the other three organizations in that it purports to be nonpartisan and is composed exclusively of individuals. See KEIZAI DCYUKAI

ED., KEIZAI DCYUKAI SAN JYU NEN SHI [THIRTY-YEAR HISTORY OF THE JAPAN ASSOCIATION OF CORPORATE

EXECUTIVES] (1978). In each case, it is by no means an obvious feat that business can get together at all. Although corporate personality may show little variation among Japanese firms, there is some argument to be made that there actually is “greater variation in corporate culture among Japanese companies than among their U.S. counterparts.”

LEWIS M. BRANSCOMB & FUMIO KODAMA, JAPANESE INNOVATION STRATEGY: TECHNICAL SUPPORT FOR BUSINESS

VISIONS 12-13 (1993). U.S. firms have a common culture due to labor mobility and the market for corporate control

Still, it would be a mistake to infer either uniformity in the Japanese business community or an anti-shareholder stance among managers. Although business interests tend to aggregate during good times, they tend to splinter during economic downturns, and the interests of small and large businesses often fail to coalesce. And while shareholder and managerial interests are occasionally at odds, the search for capital often leads managers to the same institutional arrangements favored by shareholders.

2. Formal State Policymaking Institutions and Organizations. The rules of the state policymaking game give rise to two organizations that are especially prominent in Japanese corporate law development : the bureaucracy and advisory committees. Bureaucrats do not formally comprise an interest group. Although there may be slack in any agency relationship, bureaucrats normally attempt to please their agents, who are elected politicians. 95 Politicians, in turn, attempt to please the groups that are able to lobby them most effectively – often corporate interests. In the corporate law context, policymaking government officials are primarily employees of the Ministry of Justice, but also include employees of the Ministry of Finance (MoF) and the Ministry of International Trade and Industry (MITI), and, to a lesser extent, academic advisors from public universities who enjoy somewhat greater flexibility but technically remain public servants. Disagreement both between government and academics and among the branches of government is commonplace.96

95 See J. MARK RAMSEYER & FRANCES ROSENBLUTH, JAPAN’S POLITICAL MARKETPLACE (1993).

96 See SCOTT CALLON, DIVIDED SUN: MITI AND THE BREAKDOWN OF JAPANESE HIGH-TECH INDUSTRIAL POLICY

1975-1993 (1995).

An important part of the policymaking mix is the advisory committee institution, or shingikai.97 Advisory committees play an important role in the policy development process. As Curtis Milhaupt and Geoffrey Miller note:

Although the committees are often derided as ornamental rubber stamps, to dismiss them as meaningless would be a serious mistake. In fact, the committees perform an important role in facilitating group decision-making and resolving disputes. This they accomplish in a number of ways. They provide a supplementary channel for public-private interaction beyond the means previously described. They serve as listening posts for ministry officials while shielding the bureaucrats from direct exposure to interest group influences, and they give affected interests a stake in policy outcomes, since interested parties participate in the process of policy formation. 9 8

Members include scholars, lawyers, politicians, interest group representatives (including representatives from business groups), and bureaucrats. Members are paid small honoraria (reportedly 20,000 to 40,000 yen per meeting in 1995), but reap other benefits in the form of

97 FRANK J. SCHWARTZ, ADVICE & CONSENT: THE POLITICS OF CONSULTATION IN JAPAN (1998). Advisory

committees appear to reflect Japanese social conditions but actually are inventions of the occupation authorities. In this case, occupation authorities established committees through the National Administrative Organization Act (Kokka Gycsei Soshiko Hc, Law no 120. of 1948, art. 8 (“each administrative organ specified in Article 3 . . . can establish consultative bodies by law [that include] knowledgeable and experienced persons . . . .”)) in order “to limit bureaucratic power, open up and better integrate state administration, and pluralize participation in government policymaking, as well as to solicit outside advice.” SCHWARTZ, supra, at 51

98 Curtis J. Milhaupt & Geoffrey P. Miller, Cooperation, Conflict, and Convergence in Japanese Finance: Evidence From the “Jusen ” Problem, 29 L. & POL’Y INT’L BUS. 1, 15 (1997). It is tempting to find something “Japanese” in an area such as this – policymaking and big business should fit the shopworn models. Some who have examined the Japanese system argue that it reflects a tendency in Japanese legislative and administrative rulemaking process toward preclearance of decisions over postclearance. David G. Litt et al., Politics, Bureaucracies, and Financial Markets: Bank Entry Into Commercial Paper Underwriting in the United States and Japan, 139 U. PENN. L.REV. 369, 430-46 (1990). In Japan, parties meet and develop consensus first, which reduces legal challenges later

personal connections, prestige, and the ability to influence national policy. 99 In the case of the Commercial Code, the most important advisory committee is the Ministry of Justice’s Legislative Committee and its Commercial Code and Company Law Subcommittees, the members of which are chosen by Ministry of Justice bureaucrats but are often closely watched by politicians. 100

Although the Commercial Code Subcommittee is a standing body, it rarely meets to discuss abstractly the provisions that would make ideal law, as MBCA drafters purport to do. Nor does it often strike out on its on, as committee-led change requires input from various constituency groups. In practice, the Subcommittee meets intensely and discusses matters of substance only when prompted by exogenous shocks as directed by the bureaucracy. Partly because of the need for input from various constituencies, Subcommittee-led change tends to be relatively slow, prompting calls from some corners to abolish the system. 101

3. Foreign Institutional Constraints. In Japan as elsewhere, foreign pressure can influence the domestic decisionmaking process. In Japan, where formal mechanisms for voice and policy change by non-business interests often are limited by institutional barriers, such outside pressure is often thought to have particular force.102 As with many other exogenous

99 See SCHWARTZ, supra note 97, at 76. Although sometimes a decisive element in the policymaking process, the decisions of committees are not legally subject to review because “they are considered internal government behavior that does not directly affect the legal rights or duties or private citizens.” FRANK K. UPHAM, LAW AND SOCIAL CHANGE IN POSTWAR JAPAN 171 (1987). The same is true for the process of appointing committee members, establishing committee agenda, and “ghost-writing” of their reports by bureaucrats. See id. at 199.

100 In February 1999, the Ministry of Justice announced that it would not longer appoint bureaucrats to the Legislative Committee. Hoseishin, Kanryoiin Zempai e [Bureaucrat Members on Legislative Committee to be Abolished], ASAHI SHINBUN, Feb. 17, 1999, at 1.

101 See Ichirc Kawamoto, Hcsei Shingikai to Shchc [The Legislative Committee and Commercial Law], 1147 JURISUTO 69 (1998).

102 See, e.g., ROBERT M. ORR, JR., THE EMERGENCE OF JAPAN’S FOREIGN AID POWER (1990)(gaiatsu in Gulf

War)

stimuli, government officials become actors in two-level games, forced to compete in two political arenas. 103 Foreign pressure is likely to be particularly powerful when it is linked to specific endogenous domestic pressures that encourage the co-participation of domestic interest

104

groups.

4. Corporate Law Enforcement Institutions. Corporate law enforcement institutions such as rules regarding corporate disclosure, shareholder derivative suits, prosecutorial discretion, and judicial enforcement powers play an especially important role in determining what sorts of newsworthy corporate-related events may arise. With stronger enforcement mechanisms, change-inducing scandals might not occur.

One particular example of the influence of such institutions is the sokaiya. A sokaiya (literally, “general meeting operator”) is usually a nominal shareholder who either attempts to extort money from a company’s managers by threatening to disrupt its annual shareholders’ meeting with embarrassing or hostile questions, or who works for a company’s management to suppress dissent at the meeting. 105 As I have discussed elsewhere, sokaiya have historically flourished in Japan because relatively noncompetitive Japanese corporate law and governance institutions lead to low levels of corporate disclosure. 106 As Part IIIC shows, many Japanese corporate law provisions were enacted in direct response to sokaiya

103 See, e.g., Robert Putnam, Diplomacy and Domestic Politics: The Logic of Two-Level Games, 42 INT’L ORG.

427 (1988)

104 LEONARD J. SCHOPPA, BARGAINING WITH JAPAN (1997)

theoretical model from which Schoppa draws of synergies between domestic and foreign pressure).

105 See Mark D. West, Information, Institutions, and Extortion in Japan and the United States: Making Sense of Sokaiya Racketeers, 93 NW . U.L. REV. 767 (1999).

106 Id .

5. The Organized Bar. Of particular interest when comparing Japanese and U. S. corporate law development is the relative absence of lawyers in the Japanese process. Unlike a federalist system in which local attorneys compete for fees, Japan is unitary not only in its corporate chartering system, but also in its attorney-licensing institutions. Accordingly, while Japanese attorneys, like attorneys everywhere, attempt to maximize their revenues, the dynamics differ. In the absence of rules that directly result in attorney revenue maximization, attorneys are most likely to favor rules that their clients favor in order to maintain clients. Both because of institutional roadblocks to shareholder litigation and a cartel-like monopoly on legal services that allows attorneys to choose the highest revenue-generating cases, Japanese attorneys are more likely to represent corporations, and in turn to support – if they publicly support any policy – managerial interests. Still, there is little support for any corporate issue from the organized bar – the Japan Federation of Bar Associations issues resolutions and recommendations relating to social issues, but rarely to economic ones.

Moreover, institutional restrictions on shareholder litigation and shareholders’ rights ensure that virtually no active plaintiffs’ bar exists in Japan. Due to the lack of a class action mechanism, and the lack of economic incentives to bring derivative suits until 1993,107 only a handful of attorneys are self-identified as plaintiffs’ attorneys.108 These institutional constraints have engendered a path-dependent equilibrium in which very few attorneys have strong incentives to support corporate law revisions.

107 See infra text at notes 169-177.

108 See Mark D. West, Why Shareholders Sue: The Evidence from Japan (unpublished manuscript).

B. Process

Almost every postwar Japanese corporate law revision follows “the basic Ministry-of-Justice-designed pattern of Legislative Council and Commercial Law Subcommittee meetings, solicitation of opinions from affected groups, Subcommittee discussion of outline, Subcommittee decision on outline, presentation and decision by the full Legislative Council, drafting of bill by Ministry of Justice, presentation to cabinet, approval by cabinet, submission to Diet, Diet Justice Committee deliberations, enactment, promulgation, effectiveness.”109 Within the Ministry of Justice, corporate law revisions are managed primarily by the Councillor’s Office, which is primarily responsible for general legislative reform, and the Fourth Division of the Civil Affairs Bureau, which is generally responsible for commercial matters (particularly registration, a capacity in which it is not dissimilar to a Secretary of State), and the balance between the two depends on the specific issues and the personnel involved. 110 These organs are said to be understaffed, and the actual drafting (and ironing out to make compatible with other laws, such as the Civil Code) is usually undertaken by three or four members of the Ministry of Justice, a relatively small number compared to other types of revisions.

One hallmark of the Japanese corporate law revision process is the examination of foreign legal systems. 111 As one frequent advisory committee member told me, “All I have to do is make sure that I have a handle on what the Americans, the British, and the Germans do. I lay out the basic workings of those systems, give the pros and cons of each, and everyone oohs and

109 Mitsuo Suzuki, “Shcji Hcmu” 40-nen Shishi [40 -year History of “Commercial Law” Journal], 1402 SHCJI HCMU 11 (1995).

110 Mimura et al., supra note 85, at 1229 Shcji Hcmu 8, 11-12 (statement of Tokyo District Court Judge Takeo Inaba).

111 See generally Shigeru Morimoto, Kckai Kaishah c no Bapponteki Kaisei to Hikakuhc Kenkya [Dramatic Revision of Company Law and the Study of Comparative Law], 1568 SHCJI HCMU 44 (2000).

aahs. That’s almost always how solutions are narrowed down to a manageable list.”112 Given the degree to which Japan has imported much of its formal legal framework in the last 100 years, perhaps it is little surprise that this system not unique to the corporate law.

The process of corporate law reform in Japan is relatively public. Drafts and abbreviated minutes of Subcommittee meetings are circulated to interested parties, reprinted in trade magazines and legal journals, and, more recently, appear on the Ministry of Justice’s internet homepage. 113 The Subcommittee often specifically requests, and regularly receives, detailed comments on pending legislative plans from various policy and interest groups, including the bar, universities, and economic organizations

C. Developments

The history of corporate law development in Japan may be loosely divided into three periods: The Boom Years (1951-1979), Scandal and Reform (1980-1989), and Post-Bubble (1990- present). In each period, corporate law development is guided by differing forms of exogenous shocks.

1. The Boom Years (1951-1979). Although scholarship critical of the new foreigninduced 1950 Commercial Code had always been present, 114 a concerted attack by academics apparently began with the publication of Tatsuo Ôsumi’s “Does the Revised Commercial Code Need to be Re-Revised?” in May 1951.115 Ôsumi cited several problems with the shareholder

112 Anonymous interview, July 1999.

113 http://www.moj.go .jp

114 See, e.g., Suzuki, supra note 70

115 Tatsuo Ôsumi, Kaisei Shchc ha Saikaisei o Hitsuyc to Suru ka [Does the Revised Commercial Code Need to be Re-revised?], 26 SANGYC KEIRI 50 (May 1951). On the article’s impact, see SHCHC KAISEI NO DCKC TO KIHON

democracy-flavored Code, including the potential for abuse that might arise from giving all shareholders the ability to enjoin directors (article 272) or file a derivative suit (article 267), or from giving three-percent shareholders the right to call a special meeting (article 237) or apply to the court for the removal of a director (article 257). 116 Other academic criticism followed, most focusing on the “problem” of giving shareholders an extensive list of rights that would interfere with firm management. 117

Not surprisingly, business voiced agreement with these criticisms. Various interest groups petitioned the Ministry of Justice, each raising similar concerns. 118 The Tokyo Chamber of Commerce, along with Keidanren, the Japan Shipbuilders’ Association, and other groups, advocated restoring directors’ terms to three years instead of the 1950 mandate of two years and the elimination of mandatory cumulative voting. 119 The Tokyo Chamber of Commerce additionally advocated the elimination of derivative suits and preemptive rights restrictions, and supported an exception for small transactions from the general rule that directors cannot enter into transactions with the company without approval.120 A Keio University group went so far as to propose the elimination of directors’ duty of loyalty. 121

MONDAI [TRENDS AND BASIC PROBLEMS OF THE COMMERCIAL CODE REVISIONS] 152 (Kaisha Jitsumu Kyckai ed.

1961).

116 Id.

117 See, e.g., Teruhisa Ishii, Shchc Kaieseigo ni Nokosareta Mondai [The Problems that Remain After the Commercial Code Revisions], 26 SANGYC KEIRI 8 (Aug. 1961)

118 SHCHC KAISEI NI KANSURU IKENSHU [COLLECTION OF OPINIONS ABOUT THE REVISED COMMERCIAL CODE]

(Hcmusho Minjikyoku ed. 1952)

119 TOKYO SHCKCKAIGIJC, KABUSHIKI KAISHAHC KAISEI IKEN CHCSA 27-8 (1952), reprinted in SHCHC KAISEI NO

DCKC TO KIHON MONDAI, supra note 115, at 198-99

120 Id.

121 SHCHC KAISEI NO DCKC TO KIHON MONDAI, supra note 115, at 202, 249-52.

As a consequence of the criticisms, the Code was revised. In August of 1954, the Commercial Law Subcommittee submitted a proposed plan to revise the Code, and the Diet passed it in 1955. The most major substantive changes of the new law were (1) to reverse the 1950 policy of requiring preemptive rights provisions to be in the articles by instead allowing the board to specify (in the absence of a provision in the articles) whether such rights would be granted with each new stock issuance,122 and (2) to require a three-percent shareholder to wait six weeks (formerly two) without receiving notice of a meeting that he or she had proposed before taking such matter to the court. 123

The next changes to the Commercial Code were 1962 changes in accounting rules. 124 The primary impetus for the relatively minor 1962 revisions was changes to the Securities Act in 1957 regarding the inspection of financial affairs of public corporations by certified public accountants. Relevant Commercial Code provisions were revised to iron out contradictions in accounting standards between the Code and the Securities Act. The changes were changes only in form, and none directly affected governance. 125

122 Shchc arts. 166, 347, 280-2

123 Shchc art. 257.

124 See Kitazawa, supra note 122, at 85-6.

125 MAKOTO YAZAWA & TSUNEO ÔTORI, KAISHAHC NO TENKAI TO KADAI [THE DEVELOPMENT AND THEMES OF

COMPANY LAW] 41-42 (1968). Interestingly, these changes were the first in seven years, the longest streak in the postwar era. From 1954 to 1955, the Commercial Code Sub-Committee of the Legislative Advisory Committee met five times on the issue of subscriptions for new shares (provisions not enacted), three times on auditors and public accountants, and five times on raising par value, one time in 1955 on minimum capital requirements, and from 1955 to 1956, met four times on organization of stock companies. From 1954 to 1957, met three times on international maritime shipments of goods. From 1958 to 1962 met 37 times, from 1962 to 1964 met 14 times for 1962 and 1966 revisions, respectively. See Id.

In 1966, two factors led to change

The next revision began as a result of the 1965 collapse of Sanyo Special Steel Company, leaving what at the time was the largest debt in Japanese history (42 billion yen, or at the 1965 exchange rate of 360 yen to the dollar, about $117 million). 130 Subsequent investigation revealed a failure of the statutory auditor system and a general failure to uncover questionable accounting practices by directors. As a result of this and other similar scandals, a movement arose to strengthen the statutory auditor’s role and the auditing of accounts in large companies. 13 1 Although the work of the Commercial Law Subcommittee had until now been focussed largely

126 See See YAZC NIIYAMA, KISHAHC NO SHIKUMI NO HATARAKI [FORM AND FUNCTION OF COMPANY LAW] 45

(1996).

127 Mimura et al., supra note 85, at 1229 SHCJI HCMU 17.

128 YAZAWA & ÔTORI, supra note 125, at 55-62.

129 YAZAWA & ÔTORI, supra note 125, at 59.

130 ICHIRC KAWAMOTO ET AL., NIHON NO KAISHAHC 40 (1993)

13 1 See Malcolm D.H. Smith, The 1974 Revision of the Commercial Code and Related Legislation, 7 LAW IN JAPAN 113, 118-19 (1974)

on financial deregulation, it now was forced to turn its attention to the issue of how to strengthen corporate governance mechanisms.

The Subcommittee focused on two areas. First, it increased the financial auditing power of statutory auditors

132 Shchc 281. The measure passed over the opposition of tax attorneys. SUZUKI, supra note 47, at 493-99. The

Subcommittee was faced with four plans for strengthening the role of the internal (statutory) auditor, an office appointed by shareholders to supervise directors. Mimura, supra note 85, at 1230 SHCJI HCMU 9-11 (statements of Osamu Mimura and Shigeyuki Maeda)

Japanese Organizational Structure], in NIHON KAISHA RIPPC NO REKISHITEKI TENKAI [THE HISTORICAL DEVELOPMENT OF JAPANESE CORPORATE LEGISLATION] 369, 376 (Michiyo Hamada ed. 1999). An analogue in the

U.S. is Michigan’s independent director. See Cyril Moscow et al., Michigan’s Independent Director, 46 BUS. LAW. 57 (1990). Under Plan A, the basic corporate governance structure would not be altered, but the financial auditing powers of auditors would be increased. Under Plan B, following the pre-1950 Code pattern, the management supervisory powers of auditors would be increased, slightly altering the corporate governance calculus. Plan C was dubbed the “German plan,” as it followed the German model of establishing a board of auditors that would have not only management supervisory powers, but also the power to hire and fire directors. Finally, Plan D was the socalled “American plan” of eliminating auditors altogether and instead strengthening the auditing function of the board of directors itself. In the end, Plan A was passed. According to Osamu Mimura, one of the drafters of the 1974 revisions, the failure of Plans C and D was inevitable, as the two plans split the opinions of those who would have favored adopting any sort of foreign system. Moreover, he explains, Plan D would have required a reconfiguration of Japanese corporate governance to separate management responsibility from directorial oversight, as both functions are currently played by employee-directors. Mimura et al., supra note 85, at 1230 SHCJI HCMU 10-11 (statements of Osamu Mimura and Shigeyuki Maeda). In the end, therefore, the choice was between two plans – A and B. Plan B, which involved little systemic borrowing if any, emerged victorious, partially as a result of Plan A’s potential redundancy in light of the auditing functions of public accountants proscribed by the Securities and Exchange Law. Mimura et al., supra note 85, at 1230 SHCJI HCMU 11-12 (statement of Osamu Mimura). Keidanren initially favored Plan D, but flip-flopped to support Plan B, according to some sources out of a realization Plan D would require a complete reconstruction of employment and promotion policies in many corporations. See Mimura et al., supra note 85, at 1229 SHCJI HCMU 21-22 (statement of Takeo Inaba).

133 Pre-1974 Shchc 256-3.

134 See, e.g., DAN FENNO HENDERSON, FOREIGN ENTERPRISE IN JAPAN 264 (1973)

Corporate Governance in Japan: The Position of Shareholders in Publicly Held Corporations, 5 HAWAII L. REV. 135, 163 & n. 181 (1983).

imposed on corporations, the 1974 revisions allowed corporations to opt out of the rule in their articles of incorporation. 135

Following the 1974 revisions, Japan made a rare – and ultimately unsuccessful — attempt of systematic reform not guided by exogenous shock but by endogenous momentum. The Civil Affairs Division of the Ministry of Justice distributed an extensive questionnaire to the legal and business community in Japan, soliciting opinions on nothing less than “the advisability of amending the existing provisions relating to social responsibility of the corporation, the role of the general meeting of shareholders, the structure of the board of directors, the value of each share, and whether to institute provisions designed to make a distinction between large and small corporation in the application of the statutory corporate system.”136 Based in part on the results of the questionnaire, that office in 1977 compiled three sets of draft revisions – one related to the stock system, one related to governance, and one related to accounting and disclosure.137 The initial plan was to ground all future Code revisions in that document, but in practice, as a Ministry of Justice official explains, the revisions listed in the document have only occurred when they become “urgent matters as determined by basic governmental strategies and needs of

13 5 Shchc 256-3.

136 Councillor’s Office, Civil Affairs Bureau, Ministry of Justice, English cover letter to June 12, 1975 Commercial Law Questionnaire, reprinted in Comment, Commercial Law Reform in Japan: The Current Debate, 11 LAW IN JAPAN 102 (1978).

137 Hcmusho Minjikyoku Sanjikanshitsu, Kabushiki seido ni kansuru kaisei Shian [Draft Revised Provisions Relating to Stock System], May 26, 1977

the economic world,”138 each as influenced by exogenous factors – as exemplified by the next set of reforms.

2. Scandal and Reform (1980-1989). Change in the 1980s begins, as it often did, with Takeo Suzuki (1905-1995), who symbolizes the postwar development of Japanese corporate law more than any other individual. Suzuki, whose family founded the giant Ajinomoto food company, 139 taught at the University of Tokyo from 1931 until his retirement in 1986 (and subsequently at Sophia University), and was dean of the law school from 1957 to 1959. He was formally involved in six post-war revisions of the Code, often a leader of the Commercial Code Subcommittee,140 and his scholarship greatly influenced Japanese commercial caselaw and legislation. 141 As Suzuki writes of the events leading up to the 1981 revisions:

I was at a party [in 1975] when Yoshimi Furui, who was then the Minister of Justice, said he wanted to speak with me. He said “Lots of people feel strongly that to keep companies and the financial world from misbehaving, the government is eventually going to have to be the one to do some sort of auditing. But whether auditing is to be done by the Ministry of Justice or the Ministry of Finance, I think that sort of thing should be done not by the government, but by the companies themselves.” When I answered, “Of course,” he said, “Well then, why don’t you revise the Commercial Code? When can you have it completed?” I said, “several years,” and he said, “That’s a real problem. Can’t you do something faster? Even if you just do it piece by piece, please do it quickly.” The first half of the complete revision was the 1981 revisions. 14 2

138 Kcji Harada, Kaishahcsei no Kadai to Tenbc [The Prospects for and Issues of the Company Law System], 1514 SHcJI HcMU 46, 47 (1999).

139 See SUZUKI, supra note 47, at 567-8.

140 See Hitoshi Maeda et al., Zadankai, Suzuki Takeo Sensei no Ningen to Gakumon [Roundtable, The Personality and Studies of Professor Takeo Suzuki], 1102 SHcJI HcMU 12 (1994)

141 See Shigeyuki Maeda, Suzuki Gakusetsu no Hanrei e no Eikyc [The Influence of Suzuki’s Scholarship on Caselaw], 1422 SHcJI HcMU 48 (1996).

142 SUZUKI, supra note 51, at 62-3.

The 1981 revisions, proposed by the Legislative Council on December 24, 1980, passed by the Diet in 1981, and made effective in 1982, 143 constituted the most complete revision of the Code since 1950. On the surface, the revisions – the most important of which can be grouped into six categories — appear to be an odd hodgepodge of unrelated provisions:

• Statutory Auditor. A statutory auditor may call for the convening of a meeting of the board if he determines that a director has violated the law or the corporation’s articles of association. 144

• Directors. A board of directors may not defer to a single director to decide such matters as the disposition of material property, material loans, appointments and dismissal of important employees, or establishment of a branch office. 145 Each director must report to the full board four times per year on “conditions of administration of affairs.”146 The transactions of directors that compete with the company must be approved by a majority board vote (formerly a 2/3 shareholder

vote). 147

• Stock ownership rights. A corporation may not give any of its property to shareholders as remuneration for the exercise or non-exercise of their rights of stock ownership. 148

• Shareholders’ meetings. Shareholders were given the right to make proposals, 149 directors and auditors have a duty to explain relevant matters, 150 and the chairman has the authority to expedite proceedings. 151

• Share value. All shares, whether par or no-par, must have a value of at least 50,000 yen (approximately $200 in 1982) per share. 152

143 Shchc nado no ichibu o kaisei suru hcritsu, Law no. 74 of 1981.

144 Shchc 260-3.

145 Shchc 260.

146 Shchc 260.

147 Shchc 264.

148 Shchc 294-2.

149 Shchc 232-2.

150 Shchc 237-3.

151 Shchc 237-4

152 Shchc 166(2) and 168-3.

• Voting. As a general rule, a subsidiary cannot hold shares in its parent. If Corporation A holds more than ¼ of Corporation B’s issued shares, Corporation B cannot vote any shares it holds in Corporation A. 153

Upon close examination, these six seemingly unrelated changes are tied to three related phenomena that required tinkering with corporate governance mechanisms : scandal, sokaiya, and intercorporate shareholdings.

a. Political and Corporate Scandal. As Suzuki’s anecdote suggests, many of the 1981 revisions grew out of scandal. 154 The Lockheed scandal began as a result of 1976 testimony by Lockheed president A. Carl Kotchian before a subcommittee of the U.S. Senate Foreign Relations Committee that Prime Minister Kakuei Tanaka and other high-ranking Japanese government and business leaders had accepted bribes to promote sales of Lockheed planes to All Nippon Airways. 155 This revelation led to an uncovering of massive illicit corporate activities, to indictments in 1976 of the Prime Minister, and to a trial that stretched from January 1977 to January 1983 and ended in a guilty verdict that surprised noone (one newspaper poll showed that only 4% believed Tanaka’s denials

Scandals like Lockheed did not necessarily point to corporate governance problems

153 Shchc 211-2

154 Before Suzuki’s party, corporate scandal was a subject of Diet debate. See Ichirc Kawamoto, Kabunushi Sckai no Genjc to Hckaisei no Hitsuyc [The Current State of Shareholders’ Meetings and the Need for Legal Revision], 6 HcGAKU SEMINAA 64, 64-65 (1979).

155 Also accused were the President of All Nippon Airways, the secretary general of the LDP, the MITI Minister, the chief cabinet secretary, the Minister of Transportation, the Chairman of the LDP’s Special Committee on Aviation, and both the current and former parliamentary vice ministers of transportation.

156 JACOB M. SCHLESINGER, SHADOW SHOGUNS: THE RISE AND FALL OF JAPAN’S POSTWAR POLITICAL MACHINE

82-90, 147-52 (1997).

the Subcommittee, chaired by Suzuki, preferred self-regulation,157 and accordingly countered with accounting disclosure and checks on the board such as the first two revisions listed

above. 158

b. Sokaiya Scandal. The next three listed 1981 revisions are aimed specifically at the sokaiya,159 whose blackmail activities were seen as a potential international embarrassment after the Lockheed bribery scandal. Most directly, the stock ownership rights provision prohibits a company from purchasing a sokaiya’s silence. The other two provisions were intended to chill sokaiya activity indirectly. By giving legitimate shareholders rights at shareholders’ meetings, it was hoped that the non-disclosure of information on which sokaiya prey could be remedied. And by raising the price of stock, the aim was to limit the ability of a sokaiya to purchase a nominal share in a corporation for the purpose of disrupting the shareholders’ meeting. 160 Less signficant 1981 revisions not listed above — such as allowing a court to refuse a shareholder’s request to view board minutes if such viewing will cause damages to the corporation, 16 1 or reviving a 1938 Code provision allowing a court to dismiss a procedural challenge of a

157 Takeo Suzuki, Showa gojurokunen kaishahc kaisei no seiritsu [The Establishment of the 1981 Company Law Amendments], 747 JURISUTO 22 (1981).

158 At the same time as the Commercial Code revisions, auditing rules were revised to require large companies to be audited by a CPA. Law Regarding Exceptional Rules of the Commercial Code concerning Auditng, etc., of Corporations, as amended by Law. No. 74 of 1981, art. 2.

159 See supra text at note 105.

160 Sokaiya, of course, knew the real purpose of the provisions. Shin Motoki, head of the 1981 subcommittee, recounts the time he was approached by sokaiya:

I had just heard that annual sokaiya income was an average of 10 million yen [about $50,000 in 1981]. A sokaiya came to me and said, “How are we supposed to make a living [after the revisions]?” I said, “You guys make an average of 10 million a year, right? That’s far too much money.”

Statement of Shin Motoki, in Maeda et al., Zadankai, 1422 SHcJI HcMU 20, supra note 140, at 33.

16 1 Shchc 260-4.

shareholder resolution if the alleged procedural violation is immaterial162 – were also aimed squarely at sokaiya abusive tactics. 163

c. Intercorporate shareholdings. Some of the blame for political, corporate, and sokaiya scandals fell on the stable cross-shareholding system, which some thought undermined corporate responsibility. Although Occupation efforts toward widely dispersed shareholdings had seen early success, the individual investor share of corporate equity fell from over 60 percent in 1950 to 28.4 percent in 1982. 164 By itself, the increase in corporate shareholding does not necessarily imply strong need for reform

3. Post-Bubble (1990 -present ). The 1990s brought more corporate law revisions than any other time in Japanese history. The first meaningful revisions after the 1981 overhaul came in 1993.165 The Japanese economic situation in 1993 was quite different than that of 1981. With the bursting of the bubble in 1990, small and big business interests were fractured. Big

162 Shchc 251.

163 Ironically, the anti-sokaiya rules that were the thrust of Suzuki’s efforts were used in 1997 successfully to prosecute executives of the Ajinomoto corporation that was founded by Suzuki’s family.

164 Daiwa Shcken Keizai Kenkyujo, 1982 Kabunushi Sckai Hakusho, 956 SHcJI HcMU 12 (1982).

165 A less complete revision after the 1981 came in 1990, as drafters attempted to distinguish between large and small corporations, ostensibly to help creditors. See YAZC NIIYAMA, KISHAHC NO SHIKUMI NO HATARAKI [FORM AND FUNCTION OF COMPANY LAW] 48 (1996)

business, which was internationally competitive and highly profitable, saw its primary political goal as the reduction of regulation and taxation. Small business, which was neither competitive nor profitable, sought the maintenance of such regulation and tax benefits that protected it from competition. Large and small businesses split not only on the basic issues of deregulation and

taxation, but also on utility and bank protection, the legality of holding companies, exchange rate policies, and government procurement policies. 166 Internally, Keidanren had also grown divided, and in 1993 halted its automatic contributions to the Liberal Democratic Party. By July 1993, the socioeconomic divisions – and another LDP bribery scandal — led to the split of the LDP, ending 3 8 years of single-party dominance. 167

Complicating this scenario further was Japan’s international reputation. The 1989 failure of U.S. raider T. Boone Pickens to receive a seat on the board of Koike Manufacturing Co., a Toyota-affiliated corporation in which his firm held a 20% interest, raised eyebrows in the U.S. about Japan’s “closed markets.”168 Tensions were fueled further by a growing trade surplus with the U.S. In 1989, the United States Trade Representative named Japan as a target of Super 301, and at the same time proposed the Structural Impediments Initiatives (SII) talks. The talks began for the U.S. with the broad aims of changing Japan’s savings-investment balance, distribution system, land policy, exclusionary business practices, and keiretsu business groups. 169

In the Commercial Code revision context in particular, the waning influence of business on the drafting process was evident. As one participant put it in 1990, “In the 1950s, Keidanren

166 PEMPEL, supra note 94, at 166.

167 See SCHLESINGER, supra note 156, at 245-46.

168 See, e.g., LAW AND INVESTMENT IN JAPAN 504-12 (Yukio Yanagida et al. eds. 1994). Desert is another matter – many observers noted that Pickens had no right to demand such a seat, and in fact only owned the shares so long as they were not repurchased pursuant to an agreement with their “actual” owner, Kitaro Watanabe.

and other business groups set forth extremely assertive positions on revisions in opinion papers, but now it seems that they don’t do so as much.”170 Exogenous pressures increased domestic pressures, leading to revisions of the Commercial Code that attempted to strengthen corporate governance through an avenue never before strongly attempted: shareholders. 171

a. 1993. On some SII issues, the U. S. was highly successful in effecting change in areas that benefited not only the U.S. but Japan as well.172 In the corporate arena, although U.S. negotiators did not get everything on their list,173 one particular success stands out: the facilitation of shareholder derivative actions.174 Although the pre-1993 Commercial Code included a derivative suit mechanism, it remained largely unused because it was simply too

169 Not that the U.S. necessarily cared about Japanese corporate governance per se

170 Mimura et al., supra note 85, at 1229 SHcJI HcMU 8, 18 (statement of Mitsuo Suzuki).

171 Some long-term Japan observers may note that corporate law is not the only arena in which Japan appears to require foreign pressure (“gaiatsu “) to produce change, see supra note 103, suggesting that an institutional explanation may be incomplete. But that charge is most often, if not always raised in economic and political contexts in which Japan lacks internal competition such as the legendary lack of competition generated by Japan’s electoral and legislative institutions. See RAMSEYER & ROSENBLUTH, supra note 95. That lack of competition drives exogenous stimuli is precisely my point here. Moreover, foreign pressure is only one exogenous factor that influences corporate law development, further suggesting that foreign pressure alone is an inadequate explanation.

172 “Today, several years after the SII talks, many more Japanese are connected to sewers, and some of these individuals can thank the U.S. for their cleaner and better-smelling environments.” SCHOPPA, supra note 104, at 145.

173 Additional U.S. demands included outside directors and “more flexible exercise of shareholders’ rights and cumulative voting.” Japan Vows to Review Commercial Code, Jiji Press Ticker Service, May 22, 1991.

174 The SII measures that pertained to the Commercial Code do not appear to have faced particularly strong opposition either from the Ministry of Justice or members of the Company Law Subcommittee. See Shaichi Yoshikai, Kaishahc Kaisei Sagyc no Genkyc ni Tsuite [On the Current Status of the Task of Revising the Company Law], 1299 SHcJI HcMU 12 (1992) (arguing that reforms are necessary to appeal to international market)

the Subcommittee. NIHON KEIZAI SHINBUNSHA ED., KABUNUSHI NO HANRAN [SHAREHOLDER REVOLT] 203 (1993).

In this sense, the SII talks may have been most effective in raising the issue for consumer interest groups and foreign corporations.

expensive for shareholders to use. 175 The 1993 Commercial Code amendments 176 altered the derivative suit mechanism in two specific ways. First, unlike the old rule that allowed only a reward of attorneys’ fees, the new Code allowed successful plaintiffs to recover damages for time and money expended in bringing the suit as well.177 Second, it lowered the amount of required filing fees from a percentage of damages claimed to a flat 8,200 yen.178 Many companies opposed the change, arguing that it would bring a flood of frivolous derivative suits.179 Some Japanese academics opposed it as well, arguing that it was “a failure,” that raised worries because it “followed the American strategy,” prompting some to ask, “where the hell was the Keidanren?”180 To some extent the doomsayers proved to be correct, as the number of

175 West, supra note 6, at 1499-1500.

176 The 1993 amendments also included changes easing restrictions on bond issuance (Shchc 297, 309, 311, 313, 314, 17, 320, 321, 322, 324

required to allow access to corporate books from ten to three percent (Shchc 293-6

177 Shchc 268-2.

178 Shchc 267

179 See Keidanren Gives Mixed Reaction to Revised Law, Kyodo News Service, June 4, 1993

180 Mitsugu Kawmura et al., Zadankai, Nihon no Kaisha no Kooporeeto Gabanansu [ROUNDTABLE, JAPANESE CORPORATE GOVERNANCE], 1050 Jurisuto 6, 26 (1994).

derivative suits substantially increased.181 The derivative suit mechanism remains one of the more controversial aspects of Japanese corporate law. 182

b. 1994. Potentially larger programs loomed. In the two-year period after the bubble burst in 1990, the Nikkei 225 index lost over 60% of its value.183 By March 1992, businesses pleaded for some measure to invigorate the market

181 See Mark D. West, Why Shareholders Sue: The Evidence from Japan (unpublished manuscript). In early 1997 business groups pressed for amendments to the Code that would lessen the scope of shareholders eligible to bring suits or limit director liability. Business Sector Seeks Commercial Code Revision, Jiji Press Ticker Service, Feb. 13, 1997. By the end of 1997, the plan had become concrete

company auditor to ask a court to order a shareholder to withdraw a derivative suit. Though endorsed by the Liberal Democratic Party, the plan was staunchly opposed by academics, and failed. See Academics Oppose LDP Plan to Limit Shareholders’ Suits, JAPAN WEEKLY MONITOR, Nov. 17, 1997.

182 The resulting changes in rules regarding derivative actions may be at least a partial explanation for recent changes in Japanese governance structure. Many corporations have reduced the size of their boards dramatically, while others have instituted a system of “executive officers” who have decisionmaking power but are not subject to derivative suit liability. See Shcji Hcmu Kenkyakai, Shikkc Yakuin Saido ni Kansuru Anke-to Shakei Kekka [Composite Results of Poll Regarding Executive Oficer System], 182 SHIRYcBAN SHcJI HcMU 26 (1999)(finding adoption by 45 of 63 responding companies of 140 polled)

183 See Geoffrey P. Miller, The Role of a Central Bank in a Bubble Economy, 18 CARDOZO L. REV. 1063, 1056 (1996).

184 See Corporate Share Buybacks Favored in Keidanren Report, NIKKEI WEEKLY, Mar. 7, 1992, at 3.

185 See Doyukai Proposes Easing Stock Holding Rules, JAPAN ECON. J., Mar. 5, 1988, at 15

186 See George W. Fenn & Nellie Liang, Good News and Bad News About Share Repurchases, Finance and Economics Discussion Series Working Paper 1998-4 (1998)(41% of U.S. firms repurchase shares)

187 Shchc 210.

the Legislative Council recommended a revision of the treasury share provisions, allowing companies to purchase, upon a shareholder majority vote, up to three percent of their shares if those shares were to be sold to employee shareholders within six months.188 The amendment was passed by the Diet in 1994 and enacted in 1995. 189

c. 1997. By 1997, business and government interests were once again more closely aligned. Largely as a result of Keidanren and MITI support, the Commercial Code was revised three times in 1997. 190 First, the May revisions largely concerned stock options. Before 1997, stock options were prohibited, and would have been impossible in any event because of the Code restrictions on treasury shares191 and the requirement that an issuance date of new shares be designated upon the decision to issue such shares.192 Occasionally a company bypassed the restrictions – Sony, for instance, did so in 1995 by creating bonds with detachable warrants, issuing the ex-warrant bonds to institutional investors, and issuing the warrant to its managers 193 — but by and large, the lack of stock options as incentives for managerial performance was seen as an insurmountable corporate governance defect.

188 Shchc 210-2.

189 Law No. 66 of 1994. Initially, few companies utilize the procedure, in part because the retirement of treasury shares results in a tax on shareholders for the theoretically increased share value, regardless of whether the stock price actually rises. See Kaoru Morishita, Dividend Tax Called Obstacle to Stock Buybacks, NIKKEI WEEKLY, June 12, 1995, at 15. A freeze on such taxes from November 1995 resulted in dramatic increases in buybacks. See Stock Buybacks Increasing Among Japanese Companies, NIKKEI WEEKLY, July 6, 1998, at 11.

190 See Kcji Harada, Kaishahcsei no Kadai to Tenbc [The Prospects for and Issues of the Company Law System], 1514 SHcJI HcMU 46, 47 (1999). On the increased role of business in recent revisions, see Shinsaku Iwahara, Kaishah c Kaisei no Kaiko to Tenbc [Reflections on and Prospects for Company Law Revision], 1569 SHcJI HcMU 4, 5 (2000).

191 Shchc 210.

192 Shchc 280-2.

193 Waranto wo Tsukatta Insentibu Fuyo [Creating Incentives Through Warrants], 1416 SHcJI HcMU 51 (1996).

In response to global competition concerns and increasing corporate demands – particularly from foreign institutional investors, 194 the Diet, acting without advisory committee input, 195 passed a second 1997 bill revising the 1994 treasury share provisions to allow options to be issued to directors, altering section 210-2 to allow purchases of up to ten percent of a company’s stock (as opposed to the previous three percent) if those shares are issued to directors or employees (instead of just employees) within ten years (instead of six months). The following month, the Code was amended to simplify mergers, including the allowance of a modified shortform merger system for small-scale and simplified required disclosures to shareholders in a merger situation, removing a potential merger obstacle in the form of a requirement that two shareholders’ meetings be required (one on the contractual terms of the merger, one after the merger) to approve a merger. 196

A third set of 1997 reforms came in direct response to scandal. In 1997, prosecutors uncovered the largest sokaiya scandal to date, involving scores of executives at major corporations such as Dai-Ichi Kangyo Bank and each of the “Big Four” securities brokerages for

194 Calpers had requested a stock option system in its Corporate Governance Market Principles, Japan document.

195 For the first time in the postwar era, the ruling Liberal Democratic Party, in conjunction with business groups and bureaucrats, constructed the 1997 proposal without submitting it to the Legislative Council or airing it publicly. Scholars, normally included in the process, were outraged. Shortly before the bill’s passage, 225 commercial law scholars issued a statement in which they criticized the LDP for not following protocol, arguing that before introducing stock options, more open discussions should have been held on such issues as manipulation, compensation disclosure, and insider trading. Hadakareta Shchc Kaisei Tetsuzuki o Motomeru Shchc Gakusha Shcmyc [Commercial Law Scholars’ Plea for Open Commercial Law Revision Process], 1457 SHcJI HcMU 76 (1997)(document dated May 12, 1997, first endorsed by University of Tokyo Professor Kenjirc Egashira)

196 Shchc 413

payments to sokaiya of more than $100 million in aggregate.197 In response, the Commercial Code was amended to provide stronger penalties for corporate payments to sokaiya.198 Although many in the business community opposed the measures on the grounds that the law should punish sokaiya and not those who pay them, the scandal this time was of sufficient severity to muffle their voices. 199

c. 1999-2000. Two issues dominated the end of the millenium: mergers and corporate spin-offs. The timing of each was largely the product of a political concession to big business. In early 1999, then Prime Minister Keizo Obuchi formed the Industrial Competitiveness Council, a group modeled after Ronald Reagan’s Commission on Industrial Competitiveness and composed of cabinet ministers and industry leaders, including the presidents of Keidanren, Sony, Toyota, and Asahi Beer.200 The Council, with a direct line to policymakers, was able to shorten greatly the time normally taken for deliberation by the Commercial Code Subcommittee.

Although the timing and policymaking process changed, the impetus for change differed little : Japanese companies needed to restructure largely in response to external competition. As for mergers, in an increasingly international climate, Japan’s firms, despite being quite profitable, are actually relatively small. One roadblock to mergers has been the lack of a share exchange system, which ensured that a single hold-out shareholder could prevent one firm from

197 See West, supra note 105, at 768.

198 Shchc 294-2, 494

199 See Zadankai, Shchc Kaisei to Kigyc Keiei, Jitsumu no Arikata [Roundtable, Corporate Management and Practice and Commercial Code Revision], 1479 SHcJI HcMU 12, 23-24 (1998). On changes in the nature of scandals and the enforcement environment, see Hideaki Kubori, Kaisha Jiken no Shosc to Hensen [Changes and Various Aspects of Corporate Incidents], 1229 SHcJI HcMU 43 (1990)

200 See Naikaku Scri Daijin [Prime Minister], Sangyc Kycscryoku Kaigi no Kaisai ni Tsuite [Regarding the Formation of the Industrial Competitiveness Council], Mar. 19, 1999, available at http://www.kantei.go.jp/jp/sangyo/990421kesai.html

making another its wholly-owned subsidiary. In 1999 the Diet passed a plan allowing compulsory share exchange if endorsed by a two-thirds majority of shares represented at a shareholders’ meeting, along with provisions requiring parent companies to disclose subsidiary information, have subsidiaries examined by auditors, and give appraisal rights to dissenters.201

Second, Japanese corporate law contains no provisions regarding corporate spin-off, in which a corporation divides itself into two or more independent companies. Although similar effects can be had with asset purchase transactions, the absence of such a provision (with favorable tax consequences) is said to be a major roadblock to companies attempting to restructure. The lack of spin-off provisions became a pressing issue in the late 1990s, as Japan attempted broad deregulation in the midst of a stagnating economy and foreign capital influx. The Diet, following the recommendation of the Industrial Competitiveness Council, approved spin-off revisions to the Code in May 2000.202

One final issue arose in spring 2000. In the name of “globalization” and “international competition,” the Ministry of Justice announced plans to overhaul completely the company law provisions of the Commercial Code by 2002. 203 The overhaul, which is said to be the most comprehensive since 1950, will primarily address corporate governance issues such as control,

201 Law No. 115 of 1999. See Henshabu [Editorial Department], Shchc Nado no Ichibu o Kaisei suru Hcritsuan Yckcan Chakan Shian no Kchyc [Announcement of Interim Draft of Legal Plan to Revise a Portion of the Commercial Code], 1532 SHcJI HcMU 4 (1999).

202 Law No. 90 of 2000

203 Hcmusho, 2nengo medo, Kaishahc Seido Kokusai Kjun ni — Shchc, 50nen buri Bappon Kaisei [Ministry of Finance Plans to Bring Corporate System up to International Standard in Two Years: Most Dramatic Reform of Commercial Code in Fifty Years], NIHON KEIZAI SHINBUN, April 12, 2000, at 1

accountability, and strengthening of boards, but will also attempt to modernize the language of the code, which still retains much of its 1899 literary flavor. Finally, in what may be the ultimate nod to exogenous forces, the Code will be revised to allow corporations to conduct shareholders’ meetings over the internet, a move made necessary by the lack of attendance at meetings by foreign shareholders, which apparently resulted in meetings that cannot achieve quorum. 204

C. Summary

The foregoing suggests that while Japanese developments before 1950 closely mimic those of Illinois and the MBCA, innovation after 1950 in Japan has been relatively slow, and, with the possible exception of the 1995 revision, occurs in response to exogenous shocks. Table 4 lists the major post-1950 corporate law changes and the apparent primary motivation for each.

204 Kabunushi Sckai no Netto Katsuyc [Shareholders’ Meetings to be Held on the Net] , NIHON KEIZAI SHINBUN, July 8, 2000, at 1. 2002 revisions may also include revisions to the derivative suit mechanism to limit liability. Although a 1997 plan was rejected, see supra note 181, discussion was revived in 2000 following the Osaka District

Court’s finding of $775 million liability for directors of Daiwa Bank. See, e.g., Shinsaku Iwahara, Daiwa Ginkc Daihyc Soshc Jiken Ichiban Hanketsu to Daihyc Soshc Seido Kaisei Mondai (Jc) [The Daiwa Bank Derivative Suit and the Derivative Suit System Revision Problem], 1576 SHcJI HcMU 4 (2000). Note that the revision motivation in this case is complicated and includes scandal, international pressure, and a potential insurance crisis.

Table 4: Summary of Japanese Corporate Law Developments

Year Change Primary Motivations

1955 Reversal of 1950 policies (preemptive

rights) Backlash

1962 Piecemeal accounting changes Securities Act Reform

1966 Loosening of share transfer restrictions Globalization

1974 Strengthening of auditors Scandal

1981 Strengthening of shareholder monitoring Scandal/Globalization

1993 Derivative suit mechanism strengthening U.S Pressure, Foreign Investor Demands

1994 Limited allowance of share repurchases Stock Market Crash

1997 Allowance of issuance of stock options to

employees Foreign Competition, Foreign Investor

Demands

1997 Mergers simplified Foreign Competition

1997 Sokaiya penalties increased Scandal

1999 Mergers Foreign Competition, Economic

Downturn

2000 Spin-offs Foreign Competition, Economic

Downturn

2002? Overhaul : Governance, Syntax, Internet “Globalization,” “International

Competition,” and Foreign Investors

The data suggest three points. The first point is not that Japanese corporate law does not change. As the above chart suggests, clearly it does. The point is that the types of changes undertaken in the Japanese system are different from the changes seen in the U.S. system despite convergence forces of international competition. Just as Japan has adopted few MBCA solutions, several of the specific reforms listed above, such as sokaiya penalties, do not have direct analogues in the U.S. system, or at least did not occur contemporaneously with Japanese revisions.

Second, in each of the reforms listed above, corporate law development proceeded not in accordance with a broad plan, either of government, managers, investors, or any other interest group. Nor did it follow a model of rapid change toward efficient evolution. Instead, development in Japan is best described as slow and reactionary to various exogenous phenomena. Because changes drafted in response solely to exogenous stimuli differ from other

changes, this systemic characteristic helps explain why differences in corporate law development persist despite a common starting point.

Third, the data do not necessarily suggest that international competition will lead to convergence, even in the long run. Note that of the six revisions enacted in 1997 or later, five respond to international competition issues, a shift related both to the increasingly global economy and the increased role of industry in the Japanese corporate law revision process.205 Noting this trend, proponents of the convergence thesis might argue that this Article is premature. If I would just wait another fifty years or so, they might argue, this international competition would lead to convergence.

The available evidence suggests that this speculation is unlikely, for three reasons. First, Japan started in the same place as the U.S. fifty years ago, and still diverged over time. Starting the convergence process from 2000, in which the systems are not in the same place as they were in 1950, should be even less likely to lead to convergence. Second, although it is true that global competition has increased in recent years, fifty years of interaction and competition with the U.S. have led to divergence, not convergence. Finally, because Japan’s corporate law system responds only to exogenous shocks such as international competition, convergence may come on some limited issues, but more systemic convergence that follows from other sorts of forces as in the United States appears unlikely.

IV. WHY EXOGENOUS SHOCKS?

The previous Part described Japan’s reliance on exogenous shocks as a possible

explanation for differing patterns of corporate law development between Japan and the United

205 See Iwahara, supra note 190, at 5.

States. But what accounts for the greater influence of exogenous shocks in Japan? Given that the economic activity levels and corporate legal structures are relatively similar in both countries, one obvious place to look for differences is in institutional structures.

A. Jurisdictional Competition

The merits of regulatory arbitrage, the ability of jurisdictions to compete for corporate charters based on differing corporate laws, have been well-debated in the literature.206 No such debate occurs in Japan. Although Japan is administratively divided into prefectures, only one system of incorporation and corporate rules exists, with three primary results. First, inefficient arrangements in Japan are often exacerbated by the absence of regulatory competition. 207 Second, the development of corporate law in Japan, as in most systems outside of the U.S., proceeds unhampered by state interest groups, corporate service companies, and general revenue recipients from incorporation.208

Third and more centrally, the lack of competition in Japan means that the rate of change of corporate law often requires exogenous shocks for change. In competitive jurisdictions, change proceeds with relative speed, often led by rent-seeking endogenous actors. In the United States, as the several states compete for franchise tax revenues, led by corporate attorneys and

206 For a recent sampling, see, e.g., Carney, supra note 25, at 318-27(lack of competition for corporate charters can result in inefficient provisions and more restrictive rules)

207 See Carney, supra note 25.

208 To incorporate, incorporators must pay a registration fee of .7% of capital, with a minimum fee of 150,000 yen (about $1,200). Toroku Menkyo Zeihc [Registration and Licensing Tax], outline in 1999 MOHAN ROPPc 2758-59 (Haneri Roppc Hensha Iinkai ed. 1998).

interested managers, changes in one jurisdiction are often rapidly copied in others.209 Examples in the literature abound. Delaware’s major 1967 revision was undertaken in direct response to state competition, 21 0 and its 1988 adoption of an antitakeover statute came in response both to state competition and attempted takeovers of Delaware corporations.211 Illinois responded similarly to state competition in the early 1980s and the subsequent takeover boom, as seen in supra figure 2.212 Occasionally exogenous shocks matter in the U.S. as well, especially in response to what drafters regard as misguided judicial decisions, such as Delaware’s legislative limitation of director liability in the aftermath of Smith v. Van Gorkom.213 But the predominant force is competition-fostered endogenous pressure.

By contrast, in internally non-competitive systems such as Japan, because relatively few endogenous incentives exist, policy is more heavily determined by exogenous events. In Japan, exogenous forces such as foreign pressure, domestic scandal, and global competition are almost always necessary to induce change. Although an endogenous political economy story can still be told, endogenous actors often have fewer incentives to push for change in a unitary system, relying instead on exogenous shocks to jump-start the process.

In such non-competitive systems, finding the appropriate response to exogenous shocks may take precedence over path-dependent forces. Competitive system reformers, precisely because of competitive concerns, create laws that are consistent with existing structures in a

209 See, e.g., Bruce H. Kobayashi & Larry E. Ribstein, Evolution and Spontaneous Uniformity: Evidence From the Evolution of the Limited Liability Company, 34 ECON. INQUIRY 464 (1996).

210 See S. Samuel Arsht, A History of Delaware Corporation Law, 1 DEL. J. CORP. L. 1 (1976)

211 See, e.g., Curtis Alva, Delaware and the Market for Corporate Charters: History and Agency, 15 DEL. J. CORP. L. 885, 905 (1990).

212 See, e.g., Murdock, supra note 56

deliberative process over time. But non-competitive system reformers may be more focussed on finding solutions to shocks, leaving untouched areas that might be prime candidates for legal reform in competitive systems. In non-competitive systems, only those areas of corporate law directly implicated by exogenous shocks are likely to be reformed.2 14

The lesson suggested here is that differing degrees of competition in corporate law systems lead to differing patterns of legal development. Along the continuum of competition, Japan’s unitary jurisdiction (on an island, no less) is at the extreme of non-competition, 215 and the United States federal system is at the other extreme. Somewhere in between is the European system -currently in the midst of debate between the real seat rule, which states that the corporate law of the corporation’s principal place of business governs, and the recent Centros decision by the European Court of Justice,216 which allows limited forum shopping for newly formed corporations.217 The lesser the degree of competition, the greater the chances that corporate law changes will be reactionary. Differing degrees of competition thus help explain not only rates of change, but persistent substantive divergence in corporate law. 218

213 488 A. 2d 858 (Del. 1985). See Del. Gen. Corp. L. § 102(b)(7). For a similar case in Japan, see note 204.

214 Even wide-scale reforms such as those undertaken in 1981 often are rooted in rather small responses to external phenomena. University of Tokyo Professor Hideki Kanda recently noted (in a symposium on corporate law reform) that foreign investment trusts operating in Japan may be disadvantaged by the Commercial Code provision requiring notice for shareholders’ meeting to be sent fourteen days in advance of the meeting. Hitoshi Maeda, et al., Kongo no Kaishahc Kaisei ni Kansuru Kihonteki na Shiten [Basic Views on the Next Company Law Reform], 1548 SHcJI HcMu 8, 19 (2000)(statement of Hideki Kanda)

215 South Korean corporate law development has followed a similar pattern. See Joongi Kim, Recent Amendments to the Korean Commercial Code and Their Efects on International Competition, 21 U. PENN. J. INT’L ECON. L. 273 (2000).

216 European Court of Justice, Mar. 9. 1999, C.21/297.

217 See Gilson, supra note 16, at 27-33.

218 The relationship between jurisdictional competition rules and substantive differences in corporate law is not

new. See Carney, supra note 25. My approach merely proposes a precise explanation of the way in which such rules

B. Other Institutions: Policymaking and Capital Markets

In Japan, the difficulties of a non-competitive chartering system are exacerbated by other institutional constraints that restrict internal change. The advisory committee, a creation of Occupation authorities, has clear analogues in the United States: standing committees on corporate law. But the Japanese advisory committee seems especially built for slowness and lack of innovation, as its agenda is determined solely by the government, but its internal procedures are those of a sub-optimal private legislature, with no formal endogenous mechanism for resolving debates.219 As such, it tends to generate little internal change.

The lack of serious input from attorneys, or indeed in many cases from any other private group other than business interests (or indirectly by sokaiya), also engenders a reliance on exogenous forces. Most prominent by omission is the lack of a plaintiffs’ bar in Japan. 220 In the United States, by contrast, a variety of actors contribute to the corporate lawmaking process, including judges, academics, and most perhaps prominently, attorneys who serve on standing committees of a state’s bar. One result of the Japanese system is that changes are largely driven by politicians, bureaucrats, and business leaders, with other parties having relatively less input through the advisory committee system.221 This institutional arrangement tends to generate a system of change that relies heavily on exogenous forces and less on internal competition.

might function, and focuses the inquiry on jurisdictions in which the state completely monopolizes corporate law in a unitary system.

219 See Alan Schwartz & Robert E. Scott, The Political Economy of Private Legislatures, 143 U. PENN. L. REV 595 (1995).

220 See supra text at note 107.

221 Normative conclusions do not necessarily follow from the lack of jurisdictional competition in Japan. Lucian Bebchuk and Allen Ferrell argue that at least with respect to takeover law, states have enacted rules that excessively protect incumbent managers. Bebchuk & Ferrell, supra note 206. If Bebchuk and Ferrell are correct, Japan can at least proudly claim to have avoided this pitfall.

Finally, perhaps the differing patterns of corporate law development in Japan and the United States can also be explained by the differing roles of capital markets in the two systems. Specifically, perhaps there is relatively little pressure on corporate law in Japan because such a large percentage of Japanese stock is in corporate hands. If this is so, we might expect corporate law changes to come in response only to severe shocks, and without jurisdictional competition, those shocks are likely to be exogenous.

To test this conjecture, consider the percentage of Japanese individual shareholdings over time. From 1950 to 1988, individual shareholding steadily declined, from 61.3% in 1950 to 39.9% in 1970, to 29.2% in 1980, and to 23% in 1988. After 1988, the percentage of individual shareholding rises slightly each year, from 23.6% in 1995 to 25.4% in 1998.222 Accordingly, there might be more pressure on corporate law after 1988, and we might expect more corporate law changes after that date. In fact, that is exactly the trend occurs – as the previous Part shows, the pace of corporate law revisions increased in the 1990s. The correlation between decreased corporate shareholding and increased corporate law changes might suggest that corporate law is needed to replace capital markets arrangements.

On the other hand, the increase in changes post-1990 may reflect other political and economic factors. One easy explanation is that exogenous events were simply more plentiful. Moreover, as the Industrial Competitiveness Council’s creation suggests,223 the increase in corporate law changes may be a reflection not of increased individual shareholdings, but of renewed corporate power. Foreign shareholding may also be a factor. Since 1950, the percentage of shares held by non-Japanese shareholders has risen dramatically, especially since

222 TOKYO SHcKEN TORIHIKIJO, SHcKEN TcKEI NEMPO [SECURITY STATISTICS YEARBOOK], various years.

223 See supra note 200.

1990. In 1990, non-Japanese entities held 4.2% of Japanese shares

In short, it is difficult to draw precise conclusions from capital market trends. The correlation between the decline in corporate shares and the increase in corporate law changes could be indicative of increased reliance and need for corporate law, an increase in exogenous power from foreign shareholders, or some other force. Given all the other evidence, I find the jurisdictional competition and policymaking institutions to be the most powerful forces in determining the overall pattern of corporate law development, but capital markets may play a role within that context.

V. IMPLICATIONS

Beyond the unexpected finding of divergence, the story of corporate law development described in the preceding two Parts has three implications for the comparative corporate law and governance debate. First, although substantial statutory convergence is unlikely, a limited form of convergence on enabling rules may occur. Second, while convergence tends to occur rapidly, divergence appears to be a rather lengthy process. Third, without a thorough understanding of the institutional framework in which corporate law functions, the efforts of modern foreign legal advisors, like their counterparts in the 1950 Occupation, may not necessarily lead to expected results.

224 See TOKYO SHcKEN TORIHIKIJO, supra note 222.

A. Convergence and Divergence

Consider the results of this Article’s empirical project in light a recent study by Katharina Pistor.225 Pistor undertook an empirical examination of corporate law statutes in 24 transition economies. She found a “high level of statutory legal convergence,” which she attributes largely to direct influence: a combination of “foreign technical assistance programs as well as of harmonisation requirements for countries wishing to join the European Union.”226 The convergence that Pistor observes is interesting in light of the Japanese experience. In Japan, the role of foreign legal assistance – in the form of the Allied Occupation – certainly was important, and accounts for the 1950 convergence that we see among systems including Japan. But the harmonization requirements of the European Union suggest a degree of competition, or at least of strong external forces, not seen in the decidedly unitary Japanese system, and may account for the differing results between Pistor’s study and mine.227

To examine ways in which my results may be compatible with Pistor’s, I return to the statutory database. I begin with the assumption that some corporate law provisions are more important than others. In general, mandatory provisions may be more central to code development than other provisions

225 Pistor, Patterns, supra note 26.

226 Pistor, Patterns, supra note 26, draft at 2-3.

227 A further factor may distinguish this Article from Pistor’s work. The corporate law variables that Pistor examines are primarily mandatory corporate law provisions such as cumulative voting and preemptive rights provisions. This Article explores a much broader range of corporate law, encompassing the entire scope of the MBCA.

228 On the importance of mandatory rules in public corporations, see Melvin Aron Eisenberg, The Structure of Corporation Law, 89 COLUM. L. REV. 1461 (1989)

typically point to mandatory provisions.229 Accordingly, I divide the sample into mandatory rules and enabling rules, following MacKerron’s typology.230 Looking at such a division should provide the same sorts of insights that Pistor gains from her use of the provisions initially used by La Porta and others,231 but should avoid the pitfalls of an arbitrary or particularized assignation of weight. Figure 3 shows the relationship of mandatory to enabling rules over the past 50 years for the three comparable jurisdictions as well as Delaware. As seen in the figure, the percentage of mandatory corporate law provisions passed relative to all corporate law provisions adopted has declined over time for each of the four jurisdictions.

The relative increase in enabling rules might be attributable to competition for corporate charters. States compete for corporate charters by offering attractive corporate codes. Market

229 See, e.g., Zenichi Shishido, Japanese Corporate Governance: The Hidden Problems of the Corporate Law and Their Solutions, Columbia Law School Center for Law and Economic Studies Working Paper no. 153, http://papers.ssrn.com/paper.taf?abstract_id=163377.

230 Enabling rules encompass three of MacKerron’s categories (pure enabling, enabling/empowerment, and default-opt out), mandatory rules encompass two (mandatory and mandatory constraints on enabling rules). The division effectively separates true mandatory rules from rules that a corporation may ignore without legal penalty.

23 1 See supra text at note 26.

forces will thus ensure that efficient code provisions survive. Because mandatory provisions are seen as inefficient restrictions on freedom of contract,232 it should not be surprising that an increasingly greater percentage of enabling provisions survive.

But such a jurisdictional competition argument would not explain why Japan, where jurisdictional competition does not exist, has a percentage of enabling provisions equal to that of Delaware. A better explanation for the low percentage of mandatory provisions in Delaware and Japan might be the ability of interest groups to influence regulators in those jurisdictions. In Delaware as in Japan, business-related interest groups have been relatively successful in reducing the percentage of provisions that require mandatory performance by corporations. Although Delaware is subject to state competition, its status as the leading corporate jurisdiction may give it monopolistic qualities similar to those of Japan. 233 Because the MBCA has historically been (arguably) less susceptible to serious interest group influence, it has a higher percentage of enabling provisions. Illinois is somewhere in between.

The general divergence in corporate law seen between Japan and the United States might indicate that the corporate-law demands of corporations in Japan are not begin met to the same extent as in the competitive system of the United States. But such a “frustrated corporate demand” theory is generally inapposite to the standard Japanese political economy story, which assumes that business exerts a heavy hand in revisions through such organizations as Keidanren and its political ties. Figure 3 is not inconsistent with the supposition that Japanese corporations have been quite successful – indeed, over time, more successful than Delaware corporations, in preventing the passage of new restrictive mandatory corporate law provisions. Within the

232 See, e.g., Frank Easterbrook & Daniel Fischel, The Corporate Contract, 89 COLUM. L. REV. 1416 (1989).

233 See Ehud Kamar, A Regulatory Competition Theory of Indeterminacy in Corporate Law, 98 COLUM. L. REV. 1908 (1998).

context of corporate law divergence, it may be that corporate demands are being met at a certain basic level that reflects corporate influence.234

The general increase in enabling provisions across jurisdictions may have significant implications for convergence. Figure 4 shows the declining percentage for each five-year period since 1950 of common enabling provisions relative to all common provisions.235 The data suggest that to the extent that convergence is occurring, it is occurring not on “important” mandatory corporate rules that are said to be a source of path dependence,236 but on enabling rules.237 While divergence occurs on the important rules, the rules that the jurisdictions have in

Figure 4: Mandatory Provisions as a Percentage of Common Provisions

0.48

0.46

0.44

0.42

0.4

0.38

1950 1951- 1956- 1961- 1966- 1971- 1976- 1981- 1986- 1991- 1996

1955 1960 1965 1970 1975

Year 1980 1985 1990 1995 2000

234 Note, however, that the lack of jurisdictional competition also leads to a multitude of inefficient Japanese

corporate law provisions. See J. MARK RAMSEYER & MINORU NAKAZATO, JAPANESE LAW: AN ECONOMIC

APPROACH 110 (1999)

235 Compare to Figure 1.

236 Bebchuk & Roe, supra note 13, at 138.

237 Saul Levmore has argued that divergence among legal systems “often arises in rules that either (a) do not matter or (b) raise issues about which reasonable people . . . could disagree.” Saul Levmore, Variety and Uniformity in the Treatment of the Good-Faith Purchaser, 16 J. LEGAL. STUD. 43, 44 (1987). Perhaps in this case it could be said that corporate lawmakers agree that adaptation is the central problem of organization, and simply disagree on the details.

common are, as a percentage, increasingly the unimportant rules.

The increase in enabling rules might account for some variation in corporate structure. Enabling rules may allow for greater diversity in corporate structure to suit needs of different industries, locations, complementarities, regulatory schemes, and constituencies. Enabling rules may thus encourage particularized solutions to individual problems, or multiple optimum solutions to common problems, which may help explain why structural divergence may continue to occur despite legal change.

The phenomenon observed in 1950 Japan, and again in 1990s Eastern Europe, points to a second possible trend in convergence and divergence of corporate systems. Had the period of comparison between Japan and the United States been the period 1945-1950 and not 1950-2000, we would have observed a tremendous convergence of corporate laws, much like that seen in the 1990-1998 Eastern Europe experience. A tentative conclusion is thus that while convergence tends to take place rapidly, divergence is a phenomenon that tends to occur over lengthy periods of time. Although a complete empirical elaboration of this idea in a broad cross-national context is beyond the scope of this Article, this is not an unexpected result – convergence may occur due to regulatory reasons such as harmonization requirements, because of foreign technical assistance, or because one system is identified as a superior model for mimicry. These sorts of forces are likely to lead to rapid change. Divergence, by contrast, is centered in differences in institutional and political structures, which may lead to less rapid change.

B. Foreign Legal Advisors

In recent years, foreign legal advisors have played a significant role in aiding corporate law reform in transition economies. From Russia to South Korea and across Eastern Europe,238 corporate law often has its substantive origins in the offices of U.S. universities and agencies. As Pistor’s study suggests, the influence of such foreign advisors may bring about broad statutory convergence across jurisdictions.239

Although Japan’s postwar Occupation obviously occurred under somewhat unique circumstances, the influence of foreign legal advisors on that occasion parallels nicely with modern developments. In 1950, as in more modern reform efforts, foreign advisors were confronted with an antiquated system that paid little attention to minority shareholders. In 1950, as in many developing economies today, foreign advisors recommended and established a slightly modified version of the American system.

The Japanese experience suggests that corporate legal reform may not necessarily proceed as path dependence logic might predict. After the task of foreign advisors was completed in 1950, future generations of Japanese reformers were guided not by overarching efficiency concerns, but by exogenous system shocks. Areas of corporate law not directly affected by specific shocks were not revised.

Amy Chua cautions that “Western lawyers involved in the developing world” should not overlook entrenched ethnic divisions in the processes of marketization and democratization. 240

238 See, e.g., Gainan Avilov et al., General Principles of Company Law for Transition Economies (OECD)

239 See Pistor, Patterns, supra note 26.

240 Amy L. Chua, Markets, Democracy, and Ethnicity: Toward a New Paradigm for Law and Development, 108 YALE L.J. 1 (1998).

The data presented in this Article suggest a similar normative claim even in the absence of such ethnic divisions : corporate law reform should proceed with a detailed knowledge of institutional dynamics, particularly of the competitive nature of the system. This is not to suggest that Japan has gone wrong – either because of or despite its corporate law, the Japanese economy in the long run has been a success. The point is that even in the absence of backlash, legal advisors should note that the results of their statutory tinkering may not necessarily be what evolutiontoward-efficiency and strong path-dependent theories would predict. If corporate law is expected to develop along a specified path, the institutions that affect that path should be closely examined. If change by endogenous means is desired, advisors should consider implementing jurisdictional competition institutions or other devices to encourage legal change.

Of course, such institutional tinkering is easier said that done. The relatively simple establishment of competing corporate chartering systems is unlikely to be a complete solution. In fact, without the simultaneous creation of complementary institutions such as franchise-tax incentives and separate bodies of corporate law on which states or other political divisions can compete, such a system standing alone may only result in increased transaction costs.241 The point is simply that advisors should not expect corporate law reforms to have the same effect in differing institutional systems.

CONCLUSION

The use of Illinois as a precedent document for both the Model Business Corporation Act and the Japanese Commercial Code provides an interesting baseline from which to compare corporate law systems and their development over time. The divergence of those statutes —

despite a “separated-at-birth” common beginning and frequent subsequent interaction — presents a bit of a puzzle. In this Article, I have suggested that one possible explanation for the divergence may lie in the reliance on exogenous stimuli to spark corporate law change in Japan. The reliance on exogenous shocks to determine the direction and substance of reform leads Japanese law down a path different from U.S. law. Shock determines revisions, and no shock means no revision. I have posited that a likely explanation for this reliance in Japan is a lack of jurisdictional competition and related rulemaking institutions.

In his study of legal transplants, Alan Watson states that “A successful legal transplant – like that of a human organ – will grow in its new body, and become part of that body just as the rule or institution would have continued to develop in the parent system.”242 The Japanese experience, however, suggests that while growth occurs post-transplant, it may follow an unexpected pattern in the new host. Modern foreign legal advisors aiding developing systems would do well to note the potentially transient nature of convergence even in the face of evolution-toward efficiency theory and path-dependent constraints.

241 See Douglas J. Cumming & Jeffrey G. MacIntosh, The Role of Jurisdictional Competition in Shaping Canadian Corporate Law, 20 INT’L REV. L & ECON. __ (forthcoming 2000).

242 WATSON, supra note 21, at 27.