Corporate governance convergence
through cross-border mergers:
the case of Aventis
Arturo Bris and Christos Cabolis
In this chapter we illustrate the role of cross-border mergers in the process of cor-
porate governance convergence. We explore in detail the corporate governance
provisions in Rhône-Poulenc, a French company, and Hoechst, a German firm,
and the resulting structure after the two firms merged in 1999 to create Aventis,
legally a French corporation. We show that, despite the nationality of the firm, the
corporate governance structure of Aventis is a combination of the corporate
governance systems of Hoechst and Rhône-Poulenc, where the newly merged firm
adopted the most protective provisions of the two merging firms. In some cases,
this resulted in Aventis’ borrowing from the corporate governance structure of
Hoechst while in others Aventis replicated Rhône-Poulenc’s structure. Most inter-
esting is the situation where Aventis introduced improved provisions over both
systems. The resulting corporate governance system in Aventis is significantly more
protective than the default French legal system of investor protection.
4.1 Introduction
The extant corporate governance literature, pioneered by La Porta et al. (1997,
1998, 2000, and 2002), provides strong evidence that countries with a common
law system protect investors better than countries with civil law. Better protec-
tion translates into more valuable firms (La Porta et al., 2002) and more devel-
oped financial markets (La Porta et al., 1997), at least since the end of World
War II (Rajan and Zingales, 2003). Once a “better” corporate governance
system has been recognized, the natural question becomes whether and how
countries converge toward that system.
Gilson (2000) identifies three kinds of corporate governance convergence:
functional, formal, and contractual convergence. Functional convergence
occurs when institutions are flexible enough to respond to demands by
market participants, and no formal change in the rules is necessary. Formal
convergence occurs when a change in the law forces the adoption of best prac-
tices. Finally, contractual convergence occurs when firms change their own
corporate governance practices by committing to a better regime, possibly
because the legal system lacks flexibility or laws cannot be changed.
The evidence on functional and formal convergence is mixed. An example of
functional convergence is the creation of new exchanges in Europe, which give
investors the protection that the law does not provide.
At the same time,
Gilson (2000) also recognizes the limits of functional convergence by pointing
out that these countries have started to make reforms at the formal level as well.
In the matter of formal convergence, Johnson and Shleifer (1999) and Coffee
(1999a) analyze the experience of Poland and the Czech Republic and show
that the better protection provided by the Polish commercial code resulted in a
more developed stock market. In this case, however, Pistor et al. (2001)
conclude that, as in medicine, transplants are sometimes rejected, and countries
that have adopted U.S.-type corporate laws do not experience the expected
corporate development.
Evaluating the impact of contractual convergence is equally complicated.
Of this type of convergence the most noticeable example can be found in the
case of the general principles issued by CalPERS as a precondition for investing
in foreign securities. Another example is foreign listing. Dual listing of securi-
ties in the United States is a means for foreign issuers to commit to better gov-
ernance (Coffee, 1999b). However, the choice of a U.S. market is not necessar-
ily a signal of good governance since some companies list in a foreign market
only because they cannot go public in their own (Coffee, 1999b). Additionally,
non-U.S. companies are exempt from several disclosure requirements, so they
do not fully adopt the U.S. system of corporate governance.
We suggest that cross-border mergers provide an alternative mechanism for
the contractual transfer of corporate governance. In a cross-border merger, the
target usually adopts the accounting standards, disclosure practices, and gover-
nance structures of the acquirer. For example, in the 1999 acquisition of
Canadian Seagram by French Vivendi, the newly merged firm adopted the
French accounting system. Similarly, Seita, a French tobacco company, was
acquired in October 1999 by Tabacalera, from Spain, to form a new entity
called Altadis, which started to report under Spanish GAAP. DaimlerChrysler,
the result of the merger of a German and a U.S. company, is domiciled in
Germany and, as such, has adopted a two-tier board structure, as required by
German law.
More generally, Bris and Cabolis (2002 and 2004) show that accountability
and transparency are valued by shareholders and therefore, improvements in
72 Corporate Governance and Regulatory Impact on Mergers and Acquisitions
U.S. companies must file quarterly reports with the Securities and Exchange Commission that
contain interim financial information. Non-U.S. companies are not required to file quarterly
reports. Also, non-U.S. companies and their officers, directors, and controlling shareholders are
exempt from the insider trading rules that apply to U.S. companies.
Hoechst AG Archive: http://www.archive.hoechst.com/english_3er/hoechst_ag/frameset.html

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