Symbiotic Federalism and the Structure of Corporate Law
New York University School of Law; European Corporate Governance Institute
Edward B. Rock
University of Pennsylvania Law School
Vanderbilt Law Review, Vol. 58, p. 1573, 2005
NYU, Law and Economics Research Paper No. 04-020
U of Penn, Inst for Law & Econ Research Paper No. 04-12
In the public debate sparked by the corporate scandals of the last years, Delaware has been strikingly absent. In contrast to the high profile activity of Congress, the Securities and Exchange Commission, the stock exchanges, federal prosecutors, and even state law enforcement officials, Delaware has been largely mute: no legislation; no rule-making; no criminal investigations; few headlines. In this Article, we use Delaware's relative passivity during this latest episode of corporate law-making as a starting point in the analysis of the shape of American corporate federalism and Delaware's place within it.
We argue that Delaware long ago opted for what we will call a "classical" or "19th-century" common law model of corporate law-making. In Delaware, corporate law is largely judge-made; judicial opinions are filled with quasi-deterministic reasoning; statutory law is comparatively narrow and rarely subject of partisan disputes; the judiciary as well is relatively non-partisan and has claim to technical expertise; and the law is enforced through litigation brought by private parties. We view these traits through the lens of the institutional and political landscape in which Delaware must operate. This landscape is characterized by a federalist system in which Delaware's regulatory powers co-exist with, and can be constrained by, the powers of the federal government. In this system, Delaware is faced with the threat that populist pressures will lead to a federal preemption of Delaware corporate law and thus eradicate the huge profits Delaware derives from being the domicile of choice for public-traded U.S. corporations. By creating and enhancing an apolitical gloss over Delaware's corporate law, the various traits we identify help shield Delaware against this threat. At the same time, the scope of Delaware's corporate law is designed to minimize conflicts by assuring that Delaware has the requisite personal jurisdiction over defendants to enforce its law effectively and that the prevailing conflict rules point to substantive Delaware law as applicable to a corporate law dispute.
But this classical model of law making carries with it intrinsic limitations. Specifically, legal change is slow, standard-based and incremental. Faced with the recent corporate scandals, calls for action, and Sturm und Drang, Delaware reacted accordingly: Basically, it does nothing until cases are brought. Any more pro-active response by Delaware actors would have threatened to undermine the political legitimacy achieved by Delaware's commitment to the classical common law model. But because the classical common law style, together with jurisdictional and conflict rules, constrain Delaware, federal law is needed to complement Delaware's. In that respect, the relation between federal law and Delaware law is symbiotic, rather than antagonistic: Delaware is happy to have federal law pick up the slack and thereby reduce the likelihood that ineffective regulation produces a populist backlash.
Number of Pages in PDF File: 50
Keywords: corporate law-making, Delaware, federalismAccepted Paper Series
Date posted: July 15, 2004 ; Last revised: April 9, 2009
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