The Race to the Bottom Recalculated: Scoring Corporate Law Over Time

Abstract

The most enduring and widespread academic disputes in American corporate law concern jurisdictional competition. Scholars have debated, at great length, questions stemming from the ability of corporations to choose what jurisdiction to incorporate in: To what extent do states compete for incorporations? Has the jurisdictional competition between states produced better or worse corporation law (has it been a “race to the bottom”, or one to the top)? To what extent has the Federal government influenced this state competition? Is meaningful state competition still occurring or was the race won or lost long ago? Debates over these questions have often foundered because of difficulties associated with ascertaining whether the corporation law in question is good or bad, and whether it has gotten better or worse over time. In this Article, we seek to break the scholarly log jams concerning corporate law federalism by undertaking the first systematic attempt to measure how U.S. corporate law has evolved since 1900. Using three indices developed to measure the relative strength of corporation law across nations, we evaluate three vital bodies of U.S. corporate law, those of Delaware and Illinois and the Model Business Corporation Act, from the beginning of the twentieth century to the present day.

Our results are novel in several respects. We find that the protections afforded to shareholders by state corporation law have decreased since 1900 but only modestly so, which implies that state competition has not been very vigorous. When we use measures that count protections provided by federal as well as state law, however, we get a different result. We find that requirements adopted by the federal government since the 1930s have significantly increased shareholder protection, suggesting that federal intervention has played a crucial and perhaps underappreciated role in shaping U.S. corporate law and enhancing shareholder rights. Beyond its specific findings, this study’s methods provide scholars new ways to answer some of the most fundamental questions in corporate law.

Keywords: corporate law, state jurisdictions, incorporation, shareholder protection