Corporate Governance and Discovery: the Missing Story About the Genius of American Corporate Law

Abstract: The CG literature has recently focused on public and private enforcement and has revisited derivative and class action litigation from a more comparative perspective with the express intent of considering differences in procedure. Strikingly absent from this debate and the entire corporate governance literature since Romano hailed the “Genius of American Corporate Law,” is any mention of a truly unique feature of American civil procedure: modern civil discovery. This paper fills this gap, arguing that American civil discovery (adopted in 1938) has had profound effects on the evolution of American corporate governance. The impact of shareholder derivative-, and class actions is intimately bound up with how modern discovery (1) affords litigants unprecedented tools to investigate corporate internal wrongdoing, (2) significantly decentralizes and leverages judicial investigative powers, (3) empowers parties with the greatest incentives to uncover wrongdoing, and (4) structures the litigation process more generally. Not only does discovery routinely afford litigants, regulators, shareholders, and the public access to information about internal corporate practices that would not see the light of day in civil law jurisdictions. But the requirement to produce such information during discovery ex post forces corporations ex ante to produce, collect, store, and maintain information about internal practices, business decisions, and control systems. Because corporations must anticipate future involvement in litigation, civil discovery shapes corporate governance, organization and practice regardless of any concrete litigation threat. We conclude with some normative prescriptions for the comparative corporate governance debate.