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Private Enforcement of Corporate Law: An Empirical Comparison of the United Kingdom and the United States

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  • John Armour
  • Bernard Black
  • Brian Cheffins
  • Richard Nolan

Abstract

It is often assumed that strong securities markets require good legal protection of minority shareholders. This implies both “good” law—principally, corporate and securities law—and enforcement, yet there has been little empirical analysis of enforcement. We study private enforcement of corporate law in two common‐law jurisdictions with highly developed stock markets, the United Kingdom and the United States, examining how often directors of publicly traded companies are sued, and the nature and outcomes of those suits. We find, based a comprehensive search for filings over 2004–2006, that lawsuits against directors of public companies alleging breach of duty are nearly nonexistent in the United Kingdom. The United States is more litigious, but we still find, based on a nationwide search of court decisions between 2000–2007, that only a small percentage of public companies face a lawsuit against directors alleging a breach of duty that is sufficiently contentious to result in a reported judicial opinion, and a substantial fraction of these cases are dismissed. We examine possible substitutes in the United Kingdom for formal private enforcement of corporate law and find some evidence of substitutes, especially for takeover litigation. Nonetheless, our results suggest that formal private enforcement of corporate law is less central to strong securities markets than might be anticipated.

Suggested Citation

  • John Armour & Bernard Black & Brian Cheffins & Richard Nolan, 2009. "Private Enforcement of Corporate Law: An Empirical Comparison of the United Kingdom and the United States," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 6(4), pages 687-722, December.
    • Handle: RePEc:wly:empleg:v:6:y:2009:i:4:p:687-722
    DOI: 10.1111/j.1740-1461.2009.01157.x
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    Cited by:

    1. Cumming, Douglas & Knill, April & Richardson, Nela, 2015. "Firm size and the impact of securities regulation," Journal of Comparative Economics, Elsevier, vol. 43(2), pages 417-442.
    2. Xu, Wenming, 2016. "Reforming private securities litigation in China: The stock market has already cast its vote," International Review of Law and Economics, Elsevier, vol. 45(C), pages 23-32.
    3. Brochet, Francois & Srinivasan, Suraj, 2014. "Accountability of independent directors: Evidence from firms subject to securities litigation," Journal of Financial Economics, Elsevier, vol. 111(2), pages 430-449.
    4. Crutchley, Claire E. & Minnick, Kristina & Schorno, Patrick J., 2015. "When governance fails: Naming directors in class action lawsuits," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 81-96.
    5. Régis Blazy & Nirjhar Nigam, 2019. "Corporate insolvency procedures in England: the uneasy case for liquidations," European Journal of Law and Economics, Springer, vol. 47(1), pages 89-123, February.
    6. Naaraayanan, S. Lakshmi & Nielsen, Kasper Meisner, 2021. "Does personal liability deter individuals from serving as independent directors?," Journal of Financial Economics, Elsevier, vol. 140(2), pages 621-643.
    7. John Quinn, 2019. "The Sustainable Corporate Objective: Rethinking Directors’ Duties," Sustainability, MDPI, vol. 11(23), pages 1-12, November.

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