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Legal capital: an outdated concept

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  • John Armour

Abstract

This paper reviews the case for and against mandatory legal capital rules. It is argued that legal capital is no longer an appropriate means of safeguarding creditors' interests. This is most clearly the case as regards mandatory rules. Moreover, it is suggested that even an 'opt in' (or default) legal capital regime is unlikely to be a useful mechanism. However, the advent of regulatory arbitrage in European corporate law will provide a way of gathering information regarding investors' preferences in relation to such rules. Those creditor protection rules that do not further the interests of adjusting creditors will become subject to competitive pressures. Legislatures will be faced with the task of designing mandatory rules to deal with the issues raised by Ônon-adjustingÕ creditors in a proportionate and effective manner, consistent with the Gebhard formula.

Suggested Citation

  • John Armour, 2006. "Legal capital: an outdated concept," Working Papers wp320, Centre for Business Research, University of Cambridge.
  • Handle: RePEc:cbr:cbrwps:wp320
    Note: PRO-2
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    File URL: https://www.cbr.cam.ac.uk/fileadmin/user_upload/centre-for-business-research/downloads/working-papers/wp320.pdf
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    References listed on IDEAS

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    Cited by:

    1. Benito Arruñada, 2010. "Institutional Support of the Firm: A Theory of Business Registries," Working Papers 508, Barcelona Graduate School of Economics.

    More about this item

    Keywords

    Corporate Law; Creditor Protection; Legal Capital; Regulatory Competition;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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