Rethinking Corporate Federalism in the Era of Corporate Reform

Abstract:     
Many commentators have criticized the Sarbanes-Oxley Act of 2002 as evidence of the creeping federalization of corporate law. In this Article, I argue that a realistic threat of federalization is necessary to ensure the robust development of corporate law at the state level. Because Delaware enjoys a monopoly position in the market for out-of-state incorporations, there is little pressure on the state to shape its laws to increase protections for shareholders and other constituent groups.

Only the federal government can credibly serve as a rival to Delaware. The Sarbanes-Oxley Act's impact on Delaware corporate law demonstrates the potential for a dynamic relationship between state and federal regulation of corporate conduct. Recent Delaware court decisions suggest that Delaware's judiciary has begun to respond to the preemptive threat through adjustments to its corporate law jurisprudence. The courts appear to be moving to more restrictive application of the business judgment rule and more vigorous enforcement of officers' and directors' fiduciary duties. This jurisprudential shift demonstrates that Congress can effectively influence state law through legislative measures that do not require complete preemption of state law.

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