Corporate Law Preemption in an Age of Global Capital Markets

Abstract

At the heart of the extensive literature on corporate law federalism is the belief that federalism engenders regulatory competition and federalization eliminates it. Federalism, a mode of governance where states act as providers of corporate law, is said to drive states to compete for charters. By contrast, federalization, which occurs when the federal government promulgates law, preempts state-level competition. Consequently, scholars who believe that regulatory competition promotes the provision of "good" laws have long railed against federal securities statutes like Sarbanes-Oxley that nationalize elements of traditional (state) corporate law. Meanwhile, other scholars have lauded preemptive securities regulation arguing that federal intervention prevents the dismantling of regulatory standards and a race to the bottom.

This Article argues that both sides of the debate mistake the impact of federalization on the market for corporate law. Drawing on recent legal and empirical scholarship, this Article shows that as a descriptive matter the domestic market for corporate law is in some regards animated less by competition than what is an increasingly international market for securities law. States do not generally compete vigorously to attract charters due to Delaware's longstanding domination of the market and other supply-side disincentives. On the other hand, national securities regulators face intense pressure to provide cost-effective rules to draw foreign issuers to their home markets. These observations suggest that where federal regulators preempt, they are engaged in what can be considered a "doubled race." First, they must monitor for market failure and ensure that Delaware, the dominant supplier of corporate charters, provides sound corporate law. And second, they must themselves cope with the onslaught of competition from other national regulators seeking to attract securities transactions. As a result, preemption is a weaker counterweight to any competition arising among states than many scholars have anticipated.

Keywords: federalism, federalization, corporate law, securities law, regulatory competition