The starting point for this study of the corporate governance of non-listed companies are the Enron and Parmalat failures. Both multinationals used numerous non-listed companies to facilitate their frauds. Yet in comparison to the managerial abuses now emerging from the “credit crunch” of 2008, these failures seem only to raise deeper concerns about the underlying assumptions of corporate governance and market regulation. Be that as it may, Professors McCahery and Vermeulen have written an impressive study of a neglected area of corporate governance. Their target is the “one size fits all” mentality of regulators and policy-makers, which, they argue, does not attend to the needs of companies not listed on public markets. The diversity of ownership and business structures in non-listed companies – from family businesses to joint ventures, private equity firms and special purpose entities – is the justification for this focus. The authors believe that many general rules of corporate law in America and Europe, Asia and beyond were designed for public companies, and are unsuitable for the governance of non-listed companies.

McCahery and Vermeulen conceive of a new governance framework for non-listed companies which rests on three pillars. The first pillar is the paradigmatic law-and-economics view of the company as a “nexus-of-contracts”, between bargaining parties. The authors see the company as an “incomplete contract”, (p. 23) to be improved by the parties exercising their autonomy to add desired features. Yet the law has not marched in step with these economic developments. Instead, courts have applied the traditional principles of partnership law to attenuate the contractual aspects of non-listed companies. The English case law on quasi-partnerships, beginning with the House of Lords decision in Ebrahimi v. Westbourne Galleries [1973] A.C. 360, is reflected in decisions from the United States, Netherlands, and Germany (p. 27). For the authors, this use of litigation to resolve intra-firm disputes demonstrates that company law is “inherently incomplete”. They welcome recent legislative developments in America introducing hybrid corporate forms such as the Limited Liability Corporation (“LLC”), which re-emphasise the contractual aspects of corporate formation.

Although this analysis is squarely within law-and-economics scholarship, the authors do not approach the familiar concepts uncritically. They note that the applicability of the principal-agent theory to non-listed corporations is problematic (pp. 7, 38), and that the view of the company as a, “one-size-fits-all” contracting vehicle within the first pillar raises important questions for minority shareholders. Two case study chapters follow about developments in Europe, United States and Asia. The European chapter looks at the well-known decisions of the European Court of Justice in Case C-212/97 Centros [1999] ECR I-1459, Case C-208/00 Überseering [2002] ECR I-9919, and Case C-167/01 Inspire Art [2003] ECR I-10155, arguing that reincorporation mobility remains constrained by member state discretion (p. 97). The chapter on the US and Asia suggests that the way ahead for Europe is to introduce new hybrid business forms such as LLCs, with their attractive “pass-through” tax treatment. These have recently been introduced in the UK and Japan. Whilst such hybrid business forms have the drawback of being “relatively untested”, (p. 140) the authors argue these legislative “products” offer better standard form contracts.

This argument is continued into the second pillar on contractual arrangements. The authors examine four types of non-listed firms: (1) joint ventures; (2) family-owned businesses; (3) venture capital-backed firms; and (4) private equity funds and hedge funds. What these firms have in common is that the parties bargain ex ante “to improve their governance structure and maximize the value of their investment” (p. 144). But this is often unsuccessful. In joint ventures, the authors note that a McKinsey study suggests that both equal ownership and majority-minority structures rarely have a viable lifespan of more than 7 years; other studies indicate that family firms tend to fail in their third generation. This demands examination because, as contractual arrangements, joint ventures and family-run companies stand in contrast to one another. Joint ventures tend to have elaborate contractual mechanisms so one party can exit the partnership or buy the other party out; family boards rarely agree formal contracts beforehand to regulate controlling interests or provide for succession. For the authors, the solution lies in more contractual freedom through the use of hybrid vehicles.

There is a further chapter under the second pillar on the governance of private equity funds and hedge funds. This is based on new empirical material, and much of it is fascinating. For the authors, both private equity and hedge funds represent a new form of “shareholder activism” that transcends traditional conceptions of corporate governance, particularly given the illiquid nature of many investments. The authors note that the “aggressive short selling techniques”, (p. 176) pursued by hedge funds provide a perverse incentive to drive down stock prices. Recently, many of these selling techniques have been banned by regulatory bodies in North America and Europe, and some hedge funds have sustained massive losses by unanticipated movements in share prices, such as those of Volkswagon. These developments reflect poorly on the authors' admiration for the contractual innovations of hedge funds and private equity firms.

The final pillar of the governance framework are the optional guidelines voluntarily adopted by non-listed companies, such as soft law principles, best practice standards and regulatory recommendations. The authors believe that these have been developed by the market in response to criticisms that private firms have opaque management structures. For this reason, they welcome the scrutiny under which non-listed companies place themselves. Yet the authors believe that more should be done by regulatory authorities to enhance market transparency. In a further chapter on special purpose entities and related party transactions, the example of the Parmalat group – which was dominated by a family owned trust and non-listed companies – is used to argue for mandatory full disclosure of beneficial ownership and control.

In sum, this book is an encouraging addition to the literature on corporate governance. The academic writing considered is diverse, and the text is enlivened by diagrams, graphs, tables, and statistical comparisons from other economic studies. Equally impressive are the comparative and historical perspectives employed by the writers. But whether the assumptions of contemporary company law scholarship (on which this book is predicated) will survive the credit crunch is surely an open question.