A SELF-ENFORCING MODEL OF CORPORATE LAW 109 Harvard Law Review 1911-1982(1996) This paper can be downloaded without charge from the Social Science Research Network electronic library at http://papers.ssrn.com. tafabstract id=10037 Bernard Black Reinier Kraakman In this Article, Professors Black and Kraakman develop a"self-enforcing"approach to drafting corporate law for emerging capitalist economies, based on a case study. a model statute that they helped to draft for the Russian Federation, which formed the basis for the recently adopted Russian law on joint-stock companies. The article describes the contextual features of emerging economies -- including the prevalence of controlled companies and the weakness ofother institutional, market, cultural, and legal constraints-- that make it inappropriate to import company law from developed countries. Professors Black and Kraakman argue that in emerging economies, the best legal strategy for protecting outside investors in large companies while simultaneously preserving managers'discretion to invest is a self-enforcing model of corporate law The self-enforcing model structures corporate decisionmaking processes to allow large outside shareholders to protect themselves from insider opportunism with minimal resort to legal authority, including the courts. Among the model's provisions are a mandatory cumulative voting rule for election of directors, which ensures that mind blockholders have board representation, and a rule requiring both shareholder- and The authors are, respectively, Professor of Law, Columbia Law School, and Professor of Law, Harvard Law School. This Article builds on an earlier article that developed the concept of a"self-enforcing"corporate law in the context of Russia, prepared for the World Bank Conference on Corporate Governance in Eastern Europe and Russia held in December 1994, and which was subsequently published as Bernard Black, Reinier Kraakma Jonathan Hay, Corporate Law from Scratch, in 2 Corporate Governance in Central Europe and Russia nsiders and the State 245(Roman Frydman, Cheryl W. Gray Andrzej Rapaczynski eds, 1996) Acknowledgments should go first to Jonathan Hay, our coauthor on the precursor article, and to Anna Stanislavovna Tarassova, the principal Russian drafter of the Russian company law, the development of which provided the genesis and many of the ideas for this article. Other important participants in the effort to develop Russian company law include Alexander Abramov, lan Ayres, J. Robert Brown, Catherine Dixon, Louis Kaplow, Yevgeni Kulkov, Claudia Morgenstern, Melinda Rishkofski, Howard Sherman, Sergei Shishkin, Victoria Pavlovna Volkova, and John Wilcox. We thank the participants in the World Bank conference especially John Coffee, Ronald Gilson, Bruce Kogut, Mancur Olson, Ibrahim Shihata, and Douglas Webb, for helpful comments on earlier drafts. We also thank participants in the University of Toronto and Harvard Law School Law and Economics Workshops, Lucian Bebchuk, Jill Fisch, Jeffrey Gordon, Christine Jolls, Hideki Kanda, Mark Roe, and especially David Charny for his extensive comments. Finally, we wish to thank Joseph Blasi, Rolf Skog, Andrei Alexandrovich Volgin, and Daniel Wolfe for their comments on the draft law on which this article is based. Research support was provided by the World Bank(for both authors), the Open Society Institute( for Black), and the Harvard Program for Law and Economics, funded by the John M. Olin Foundation(for Kraakman)* The authors are, respectively, Professor of Law, Columbia Law School, and Professor of Law, Harvard Law School. This Article builds on an earlier article that developed the concept of a "self-enforcing" corporate law in the context of Russia, prepared for the World Bank Conference on Corporate Governance in Eastern Europe and Russia held in December 1994, and which was subsequently published as Bernard Black, Reinier Kraakman & Jonathan Hay, Corporate Law from Scratch, in 2 Corporate Governance in Central Europe and Russia: Insiders and the State 245 (Roman Frydman, Cheryl W. Gray & Andrzej Rapaczynski eds., 1996). Acknowledgments should go first to Jonathan Hay, our coauthor on the precursor article, and to Anna Stanislavovna Tarassova, the principal Russian drafter of the Russian company law, the development of which provided the genesis and many of the ideas for this Article. Other important participants in the effort to develop Russian company law include Alexander Abramov, Ian Ayres, J. Robert Brown, Catherine Dixon, Louis Kaplow, Yevgeni Kulkov, Claudia Morgenstern, Melinda Rishkofski, Howard Sherman, Sergei Shishkin, Victoria Pavlovna Volkova, and John Wilcox. We thank the participants in the World Bank conference, especially John Coffee, Ronald Gilson, Bruce Kogut, Mancur Olson, Ibrahim Shihata, and Douglas Webb, for helpful comments on earlier drafts. We also thank participants in the University of Toronto and Harvard Law School Law and Economics Workshops, Lucian Bebchuk, Jill Fisch, Jeffrey Gordon, Christine Jolls, Hideki Kanda, Mark Roe, and especially David Charny for his extensive comments. Finally, we wish to thank Joseph Blasi, Rolf Skog, Andrei Alexandrovich Volgin, and Daniel Wolfe for their comments on the draft law on which this article is based. Research support was provided by the World Bank (for both authors), the Open Society Institute (for Black), and the Harvard Program for Law and Economics, funded by the John M. Olin Foundation (for Kraakman). A SELF-ENFORCING MODEL OF CORPORATE LAW 109 Harvard Law Review 1911-1982 (1996) This paper can be downloaded without charge from the Social Science Research Network electronic library at: http://papers.ssrn.com/paper.taf?abstract_id=10037 Bernard Black Reinier Kraakman* In this Article, Professors Black and Kraakman develop a "self-enforcing" approach to drafting corporate law for emerging capitalist economies, based on a case study: a model statute that they helped to draft for the Russian Federation, which formed the basis for the recently adopted Russian law on joint-stock companies. The Article describes the contextual features of emerging economies -- including the prevalence of controlled companies and the weakness of other institutional, market, cultural, and legal constraints -- that make it inappropriate to import company law from developed countries. Professors Black and Kraakman argue that in emerging economies, the best legal strategy for protecting outside investors in large companies while simultaneously preserving managers' discretion to invest is a self-enforcing model of corporate law. The self-enforcing model structures corporate decisionmaking processes to allow large outside shareholders to protect themselves from insider opportunism with minimal resort to legal authority, including the courts. Among the model's provisions are a mandatory cumulative voting rule for election of directors, which ensures that minority blockholders have board representation, and a rule requiring both shareholder- and