Varieties of Corporate Law-Making: Competition, Preemption, and Federalism
Research Handbook on the Economics of Corporate Law (Claire A. Hill & Brett H. McDonnell, eds., Edward Elgar, 2012)
26 Pages Posted: 10 Jul 2012 Last revised: 24 Sep 2012
Date Written: July 10, 2012
In few areas have legal scholars focused more closely on the sources of law than in the study of corporate governance. Questions of institutional design thus pervade the literature of corporate law. Most prominent among these questions have been ones surrounding the allocation of law-making authority as between federal and state authorities: What is the dynamic by which corporate law will be generated at the state level, absent federal intervention? What is the normative quality of the resulting rules? When might a federal role be advisable, if not essential, in the regulation of public corporations? What form ought any such intervention take, and what distortions might it be expected to introduce into our traditionally state-based regime of corporate law?
There has been much debate over these questions, to which the literature of law and economics has contributed mightily. To a striking degree, however, scholars have come to embrace – at least in broad terms – a common view on these questions. In this standard account, sub-national rules of corporate governance are to be preferred. State law – and the dynamic of state competition that arises from it – generates (at least some) efficiency gains, helping to reduce agency costs, as between shareholders and managers. For these and other reasons, the law and economics literature admonishes, the scope of federal law in an optimal regime of corporate governance should be limited. Federal rules may have a role in imposing mandatory disclosure obligations, regulating aspects of the issuance and trading of corporate securities, and in selected other circumstances, but not more generally.
In this chapter, I suggest that this account of corporate law, widely accepted as it has become in the law and economics literature, deserves a closer look. As to what might be thought of as its horizontal and vertical axes – the perception of (horizontal) state competition as beneficial for shareholder-managerial relations, and the notion of (vertical) federal preemption as properly limited – the meaning and implications of the conventional account turn out to be more ambiguous. A careful analysis thus highlights critical limitations of each of these claims, and offers a more complex picture of the optimal sources of corporate law. Ultimately, a closer analysis of the horizontal dimension of state-to-state interaction and the vertical dimension of potential federal intervention points us to the same result in institutional design: a more mixed architecture of corporate law-making.
Keywords: corporate law, federalism, separation of ownership and control, agency costs, shareholders, managers, charter competition, state competition
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