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Two Cheers for Corporate Law Federalism

Brett McDonnell

University of Minnesota Law School

Journal of Corporation Law, Vol. 30, No. 1

Recent contributions to the literature on United States (U.S.) corporate federalism question whether states compete at all for corporate charters. Network effects call into question whether serious competition is possible or desirable. This paper argues that federalism in establishing corporate law nonetheless remains both possible and desirable. One benefit is that federalism provides a range of laws, with differing laws appealing to differing business organizations.

Federalism also encourages increased legal innovation and adaptation. It is probably true that most states other than Delaware do not actively compete to become a destination for corporate charters. However, all states still have good reasons for updating their corporate laws to better serve the companies which do incorporate within their jurisdiction. Delaware has strong incentives to respond to improvements made by other states. All states also get an important informational benefit from federalism - they can observe how forty-nine other states are adapting their laws and how companies respond to those changes. Delaware's dominance does make it more prone to favor the interests of managers and less prone to consider the interests of other constituencies such as employees. However, the threat of intervention by national actors such as Congress, the Securities and Exchange Commission (SEC), and stock exchanges helps prevent Delaware from becoming too managerialist in its laws.

Number of Pages in PDF File: 45

Keywords: corporate law, federalism, race to the bottom

JEL Classification: G30, K22, L23

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Date posted: February 2, 2005  

Suggested Citation

McDonnell, Brett, Two Cheers for Corporate Law Federalism. Journal of Corporation Law, Vol. 30, No. 1. Available at SSRN: https://ssrn.com/abstract=659445

Contact Information

Brett H. McDonnell (Contact Author)
University of Minnesota Law School ( email )
229 19th Avenue South
Minneapolis, MN 55455
United States
612-625-1373 (Phone)

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