page 1page 2page 3page 4page 5page 6page 7page 8page 9page 10page 11page 12page 13page 14page 15page 16page 17page 18page 19page 20page 21page 22page 23page 24page 25page 26page 27page 28THE NATIONAL COUNCIL FOR SOVIET AND EAST EUROPEAN RESEARCHTITLE: IN SEARCH OF THE LAW-GOVERNED STATEConference Paper #14 of 17Substantive and Procedural Protectionof the Rights of Economic Entitiesand Their OwnersAUTHOR: Peter MaggsCONTRACTOR:Lehigh UniversityPRINCIPAL INVESTIGATOR: Donald D. BarryCOUNCIL CONTRACT NUMBER : 805-01DATE:October 1991The work leading to this report was supported by funds provided by the National Council for Soviet and EastEuropean Research. The analysis and interpretations contained in the report are those of the author.NCSEER NOTEThis paper is #14 in the series listed on the following page. The series is the product of a major conferenceentitled,In Search of the Law-Governed State: Political and Societal Reform Under Gorbachev,which wassummarized in a Council Report by that title authored by Donald D. Barry, and distributed by the Council inOctober, 1991. The remaining papers will be distributed seriatim.This paper was written prior to the attemptedcoup of August 19, 1991.The ConferencePapers1.GIANMARIA AJANI, "The Rise and Fall of the Law-Governed Statein the Experience of Russian Legal Scholarship."2.EUGENE HUSKEY, "From Legal Nihilism toPravovoe Gosudarstvo:Soviet Legal Development, 1917-1990."3.LOUISE SHELLEY, "Legal Consciousness and thePravovoeGosudarstvo."4.DIETRICH ANDRE LOEBER, "Regional and National Variations: TheBaltic Factor."5.JOHN HAZARD, "The Evolution of the Soviet Constitution."6.FRANCES FOSTER-SIMONS, "The Soviet Legislature: Gorbachev'sSchool of Democracy."7.GER VAN DEN BERG, "Executive Power and the Concept ofPravovoeGosudarstvo."8.HIROSHI ODA, "The Law-Based State and the CPSU."9.GEORGE GINSBURGS, "Domestic Law and International Law:Importing Superior Standards."10.ROBERT SHARLET, "The Fate of Individual Rights in the Age ofPerestroika."11.NICOLAI PETRO, "Informal Politics and the Rule of Law."12.PETER SOLOMON, "Reforming Criminal Law Under Gorbachev:Crime, Punishment, and the Rights of the Accused."13.DONALD BARRY, "The Quest for Judicial Independence: SovietCourts in aPravovoe Gosudarstvo."14.PETER MAGGS, "Substantive and Procedural Protection of theRights of Economic Entities and Their Owners."15.WILLIAM B. SIMONS, "Soviet Civil Law and the Emergence ofaPravovoe Gosudarstvo:Do Foreigners Figure in the Grant Scheme?"16.KATHRYN HENDLEY, "The Ideals of the Pravovoe Gosudarstvoandthe Soviet Workplace: A Case Study of Layoffs."17.Commentary: The printed versions of conference remarks byparticipants BERMAN, SCHMIDT, MISHIN, ENTIN, E. KURIS, P. KURIS,SAVITSKY, FEOFANOV, and MGZOLINTABLE OF CONTENTSExecutive SummaryiIntroduction1Protection of Rights of Economic Entities2Introduction2Protection Against theSuperior Agency"3Creation of Entitieswithout Superior Agencies6Protection Against Government andParty Bodies8Protection of Entities' Rights AgainstViolation by Other Entities13Protection of the Rights of Owners of Economic Entities15Introduction15Protection of Entities AgainstAbuses by Managers-the Agency Problem16Protection of Owner's Rights AgainstGovernmental Interference17Protection of Owner's Rights Against Co-Owners1 8Protection of Stock Buyers and Sellers Against Market Fraud19Conclusions19NOTES20SUBSTANTIVE AND PROCEDURAL PROTECTION OF THE RIGHTSOF ECONOMIC ENTITIES AND THEIR OWNERS IN THE USSRPeter B. MaggsExecutive SummaryThe Soviet Union cannot achieve a viable market economy unless it provides for effectivelegal protection of the economic entities and individuals that are participants and investors in thateconomy. Although the Soviet Union has made substantial progress in the short period from1989 to the spring of 1991, it still has far to go to establish the full set of legal protectionsneeded for a market economy. If it is in the interests of the United States for the Soviet Unionto move toward a market economy, the United States should consider providing the USSR withtechnical assistance in creating the additional necessary legal institutions.For many years, Soviet reformers attempted to provide legal protection for managers ofstate enterprises against their superiors in the economic ministries. These attempts failed soregularly and completely as to demonstrate that only a dismantling of the superior agencies canprovide a chance for enterprises to have meaningful legal rights. Under the ministerial system,enterprises did have good protection against interference with their rights by governmentagencies not in the ministerial chain of command, since the ministries would "protect" theirenterprises. The prospective abolition of the ministerial system would require major steps tocreate and invigorate legal institutions to ensure fair treatment of enterprises by governmentagencies. There have been important first steps toward providing judicial review of governmentagency actions, but much more needs to be done.Economic entities in a market need protection against unfair trade practices by othereconomic entities. In the past to the limited extent that there was a market, the ministries alsoprovided this protection for "their own" enterprises. Important legislation is in the drafting stageto provide legal protection against monopolistic practices, intellectual property violation, andother unfair trade practices. However, a great deal will need to be done to move this legislationfrom paper to practice.Owners and prospective owners of economic entities need protection. In marketeconomies, corporation and securities regulation law protects stockholders against abuses bymanagement, protects minority stockholders against majority stockholders, and protects stockbuyers against fraud. None of these protections exists yet in Soviet law, yet without them therecannot be a healthy climate for investment.The Soviet Union has come far, but it still has far to go. it has great need of assistancein the form of educational training, legislative drafting, and institution building if it is to createthe legal protections needed for a market economy.iiSubstantive and Procedural Protection of the Rights of Economic Entities and their Owners inthe USSRby Peter B. MaggsIntroductionThe existence of protected rights for economic entities and their owners is contrary tothe idea of a "socialist state," but is quite