Is Corporate Law Nonpartisan?

Abstract

Only rarely does the United States Supreme Court hear a case with fundamental implications for corporate law. In Carney v. Adams, however, the Supreme Court had the opportunity to address whether the State of Delaware’s requirement of partisan balance for its judiciary violates the First Amendment. Although the Court disposed of the case on other grounds, Justice Sotomayor acknowledged that the issue “will likely be raised again.” The stakes are high because most large businesses are incorporated in Delaware and thus are governed by its corporate law. Former Governors and Chief Justices of Delaware lined up to defend the state’s “nonpartisan” approach to its judiciary. The case raises the question of why nonpartisanship is taken to be an advantage for Delaware and whether the processes by which corporate law is made are generally politically partisan or not. Despite these developments, however, the place of political partisanship in corporate law has been largely overlooked.

This Article offers a framework for analyzing the role of political partisanship in corporate law. It begins by showing that there is suggestive evidence of a relationship between political partisanship and the substance of corporate law at the state level. When corporate law materially differs across states, those differences are often predicted by which party controls the state’s government. Political party entrepreneurs also agitate for corporate law reforms at the state level. Yet, Delaware adopts a conspicuously nonpartisan approach to corporate law. As is widely observed, how Delaware makes corporate law, from its constitution, to its legislature, to its judiciary, is unusual. It is designed to insulate that law from political partisanship. More surprisingly, this began when Delaware first became a leading home to incorporations a century ago. In fact, the same thing was true of New Jersey during its brief period of prominence before Delaware. Why?

We suggest that the answer relates to corporate law’s central debate regarding the “market for corporate law.” In the United States, the internal affairs doctrine allows corporations to choose the state whose corporate law governs them by incorporating in the jurisdiction of their choice. This doctrine produces a form of regulatory competition that is structurally biased to produce a winner that favors “demand-side” interests, i.e., the interests of corporate decision-makers themselves. Understanding this dynamic has been one of corporate law’s foundational concerns. We complement that literature by arguing that nonpartisanship provides a competitive advantage in Delaware’s quest to appeal to these interests. Delaware’s approach enables it to afford great weight to the interests of nationally diverse and heterogeneous shareholders and makes it less likely that the state will sacrifice shareholders’ interests to please local constituents. The internal affairs doctrine thus indirectly works to favor incorporations to a state with a nonpartisan approach.

Our framework also offers new insights into the debate on the federalization of corporate law and the Supreme Court litigation. Specifically, we argue that within First Amendment jurisprudence, the Supreme Court can and should carefully consider its ruling’s effects on Delaware nonpartisanship.

Keywords: Delaware, Corporate Law, First Amendment, Regulatory Competition, Supreme Court

JEL Classification: K22, N2