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This Article presents a critical economic analysis of the European Union's legal capital rules as codified by the Second Directive. Professors Enriques and Macey explore the fundamental differences between United States and European Union approaches to the conflict between fixed and equity claimants and argue that the European Union should abandon its inefficient approach. The costs associated with the European legal capital rules-particularly costs to shareholders, creditors, and society as a whole-significantly outweigh any benefits accrued by creditors. The authors suggest that a public-choice theory best explains the existence of the European legal capital rules, in that certain influential interest groups benefit from the rules despite their inefficiency. In conclusion, this Article advocates that the European Union should abandon its current legal capital rules in favor of more flexible, contractarian rules in order to facilitate entrepreneurship and business development in European markets.

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