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Consensus on the Comply or Explain principle (IVOR nr. 86) 2012/3.2.1
3.2.1 General considerations regarding rules and law
mr. J.G.C.M. Galle, datum 12-04-2012
- Datum
12-04-2012
- Auteur
mr. J.G.C.M. Galle
- JCDI
JCDI:ADS370372:1
- Vakgebied(en)
Ondernemingsrecht (V)
Voetnoten
Voetnoten
Rules of adjudications can be considered procedural rules; formal legislation. Rules of change indicate how to change the existing law.
For the Netherlands this is the procedure as laid down in art. 81 of the Dutch Constitution: A statute (wet in formele zin) comes into existence on the basis of the Government and Parliament.
However, the Netherlands for example has two articles (93 and 94) in its constitution that make it possible that under certain circumstances treaties can become a legal source as well. It is not a direct legal source but can become one through the constitution (modified monism).
To be able to analyse the evolution of the comply or explain principle from its start (the Cadbury report) up till now and to provide recommendations to make the principle future-proof, corporate governance codes and the comply or explain principle must first be reviewed from a legal perspective below. Corporate governance codes and the comply or explain principle are rules drafted to be complied with. But what kind of regulation are codes and the comply or explain principle? And subsequently, can this regulation be considered law? This subsection comprises the generally accepted considerations regarding the concepts of rules and law for the purpose of providing a more specific legal qualification for corporate governance codes including the comply or explain principle in the next subsection. In what precise manner the comply or explain principle is legally embedded in national regulation and can be the subject of litigation (and the possible reasonabless and fairness involved) is reviewed further in the comparative legal analysis in chapter 4 per country under review.
In society we have various rules, such as rules regarding morals and decency and rules of law (rechtsregels). What can be considered rules of law? Franken defines law as rules on how to behave, as acknowledged and applied by organs or officials such as civil servants and magistrates. Those behavioural rules are mainly aimed at civilians and concern dos and don'ts (orders and bans). These rules are abstract and general in nature; they are not aimed at a specific person or persons mentioned by name, but aimed at anyone in a specific situation (Franken 2003, p. 100). Moreover, the four legal sources ((i) legislation, (ii) custom, (iii) jurisprudence and (iv) treaty) also define what law is, as Franken states. If a rule comes from one of those legal sources it can be considered law (Franken 2003, p. 100). In his book "The Concept of Law" Hart distinguishes two sorts of law: primary law and secondary law (Hart 1961, p. 79) (Loth and Gaakeer 2005, p. 69). Primary law is aimed at society and prescribes or forbids certain behaviour. Secondary law makes the functioning of the primary rules possible and consists ofrules ofadjudication, rules ofchanges and rules of recognition.1 Rules of recognition prescribe what can be considered to be law: for example a rule formulated by an authorised person in the authorised manner. Rules of recognition deal with the required legality of law. This legality implies that the rule came into force ' through the official channels', meaning that it was issued by the authorised officials. Next to legality, legitimacy is also a requirement for law: law must be rational and justified. There must be a proper and fair motive or reason to issue the rule (Franken 2003, p. 58). For a schematic overview of the claimed features of law see figure 3.2.1 below.
Figure 3.2.1 Features of rules of law (rechtsregels)
As stated above, Franken argues that if a rule originates from a legal source it is considered to be law (Franken 2003, 102). With respect to legal sources (rechtsbronnen) a distinction exists between material legal sources and formal legal sources. A sociologist would state that the factors that influenced the contents of the law are the legal sources, i.e. the material legal sources (De Blois, Henket et al. 1999, p. 27). Examples are political or environmental forces. When taking this study into consideration, the corporate scandals can be considered material legal sources that influenced the development of regulation concerning corporate governance. The four formal legal sources are (i) legislation, (ii) custom, (iii) jurisprudence and (iv) treaty. Legal principles (v) are currently also recognised as a formal legal source (Loth 2007, p. 81) (Franken 2003, p. 108). The recognition of formal legal sources varies in time and place and different legal theories (e.g. legal positivism and natural law) arrive at different sources. For the purpose of determining the legal qualification of codes and the comply or explain principle, the five legal sources are briefly described below.
Two main types of legislation (wetgeving) exist: formal and material legislation. Formal legislation refers to the formal decision of the legislator (e.g. the Netherlands government and Parliament) and concerns the form and manner in which the decision comes into existence. The followedprocedure is decisive whether it concerns formal legislation or not.2 Material legislation is general and abstract law that binds civilians and is drafted by an authorised governmental organ (not necessarily the Parliament but for example a local council); material legislation is sometimes but not always formal legislation (Franken 2003, p. 111). In short, formal legislation refers to the procedure and material law more to the contents. To return to the five legal sources, both formal and material legislation are considered to be a formal legal source by which rules are transformed into law (Franken 2003, p. 113). Although legislation is considered an important legal source, its importance is claimed to have decreased recently because of the growth in international law and influential jurisprudence (Loth 2007, p. 81).
Custom becomes law when two conditions are fulfilled. There must be a repetition of facts (usus): a standing behavioural line followed by a more or less steady group of persons. The second condition is an idealistic moment (ideëel moment - opinio necessitatis), which implies that the standing behaviour is considered to be a legal duty (it is believed that one has to act in accordance with the standing behavioural line) (Loth 2007, p. 81).
Jurisprudence is also considered a formal legal source. In the event that a magistrate finds that a rule as laid down in legislation is ineffective for giving a proper judgement, he reformulates the existing rule or formulates a totally new one to come to a suitable judgement. Subsequently, to become law the new or modified rule has to be followed consistently by other magistrates so that it becomes a standing behavioural line, i.e. jurisprudence. Jurisprudence can be considered a legal source whenever it is believed that in future court cases (by taking legal equality (rechtsgelijkheid) and legal certainty (rechtszekerheid) into account) judgments will be passed in line with this new or modified rule (Loth 2007, p. 81).
A treaty is an agreement between different countries (bilateral or multilateral) concerning certain issues they wish to agree upon. Two main views of international legislation or more specifically treaties exist: the monistic and dualistic views. According to the dualistic view separate national and international legal societies exist; international legislation is only a matter between states and civilians are just bound by their national laws. Therefore, a treaty cannot be considered a legal source in a country that adheres to the dualistic view.3 On the other hand, in the monistic view the international legal order (rechtsorde) coordinates and the national legal orders are subordinate orders: international law has priority over national law. In such countries the treaties can be considered binding material legislation and are important legal sources (Franken 2003, p. 122).
The last legal source from which law can be derived are the legal principles. Legal principles are very influential and can complete or set aside legislation (contra legem). The principles have three functions: a normative, legitimating and actualising function. Through its normative function legal principles can complete or restrict legislation whenever it shows a gap. Secondly, through its legitimating function a principle can give an extra justification for a certain judgment. The third function, the actualising function, helps to adapt the legislation to current times. Legislation is not always easy to amend and update and these legal principles can at least keep the interpretation of legislation up-to-date (Loth 2007, p. 81).
This brief description of the features of law and the formal legal sources certainly does not pretend to be comprehensive and solely serves as support (though necessary) for the possible legal qualification of corporate governance codes and the comply or explain principle as given below.