Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law

Abstract

Corporate law scholars have long debated whether state competition for corporate charters is a "race for the bottom" or a "race for the top." This paper offers an analysis of the dynamics and performance of state charter competition. I show how the presence of managerial opportunism and externalities may lead states to adopt undesirable corporate law rules. The analysis identifies the various issues with respect to which state competition is likely to fail, and he advocates an expansion of federal regulation to govern all of these issues. I also connect the state competition question with the question of contractual freedom in corporate law and argue that many scholars should reconsider their inconsistent views regarding these two questions. Finally, I conclude by addressing potential objections to the expansion of federal corporate regulation.

Keywords: Delaware, state competition, federalism, race to the top, race to the bottom, corporate governance, corporate law, agency costs, managerial opportunism, private benefits of control, takeovers