Tag: Federalism

Multi-Forum Merger Litigation and the “Market for Preclusion”

The following post comes to us from Sean J. Griffith, T.J. Maloney Chair in Business Law at Fordham University School of Law. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The recent discovery that corporate law litigation very often takes place in courts outside of Delaware has rattled the academic consensus that Delaware won the corporate law “race” by providing a well-managed forum staffed with expert judges willing to decide complex deal cases quickly. In an apparent affront to this settled understanding, recent research shows that more cases are filed against Delaware corporations in other states than in Delaware itself. [1] As a forum for corporate litigation, in other words, Delaware no longer dominates.

Shaken from their settled understandings, commentators have sounded the alarm that fewer cases decided in Delaware could, over time, reduce the expertise of the Delaware judiciary in corporate law matters. Worse, the decisions reached by non-Delaware “dilettantes” threaten to adulterate and degrade the basic Delaware product. In sum, prior commentary on the out-of-Delaware trend has treated it as very bad for corporate defendants, very bad for shareholder plaintiffs, and very bad for Delaware.


A Spatial Representation of Delaware-Washington Interaction in Corporate Lawmaking

Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Last month, the Columbia Business Law Review published “A Spatial Representation of Delaware-Washington Interaction in Corporate Lawmaking.” In this brief paper, I examine interaction between Delaware and Washington in corporate lawmaking, focusing on the shareholder access initiatives in each jurisdiction. The paper uses a straight-forward spatial model of the state-federal interaction, paralleling spatial models that political scientists have used to illustrate other instances of jurisdictional interaction.

In prior work I showed how Delaware corporate law can be, and often is, confined by, or influenced by, federal action. Sometimes Washington acts and preempts the field, constitutionally or functionally, leaving no space for state corporate law action. Sometimes Delaware tilts toward or follows Washington opinion, even if Washington opinion does not square perfectly with the state lawmakers’ own consensus view of the best way to proceed. I examined these channels in Delaware’s Competition, 117 Harvard Law Review 588 (2003), and Delaware’s Politics, 118 Harvard Law Review 2491 (2005).


The Corporate Shareholder’s Vote and Its Political Economy

Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. Work from the Program on Corporate Governance about shareholder voting includes Private Ordering and the Proxy Access Debate by Bebchuk and Hirst; more posts about proxy access are available here. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

At the Columbia Law School conference on the Delaware Chancery Court this November, I summarized my recent working paper The Corporate Shareholder’s Vote and Its Political Economy, in Delaware and in Washington. I discuss this paper below. Related work includes Delaware’s Competition, Delaware’s Politics, and Delaware and Washington as Corporate Lawmakers.

Shareholder power to effectively nominate, contest, and elect the company’s board of directors became core to the corporate governance reform agenda in the past decade, as corporate scandal and financial stress put business failures and scandals into headlines and onto policymakers’ agendas. As is well known to corporate analysts, the incentive structure in corporate elections typically keeps shareholders passive, and incumbent boards largely control the electoral process, usually nominating and electing themselves or their chosen successors. Contested corporate elections are exceedingly rare. But shareholder power to directly place their nomination for a majority of the board in the company-paid-for voting documents, as the SEC has pushed toward, could revolutionize American corporate governance by sharply shifting authority away from insiders, boards, and corporate managements. During the past decade, the SEC proposed, withdrew, and then promulgated rules that would shift the control of some corporate election machinery, to elect a minority of the board, away from insiders and into shareholders’ hands. Then, in July 2011, the D.C. Circuit Court of Appeals struck down the most aggressive of the SEC’s rules.


Defending Against Shareholder Proxy Access

J.W. Verret is an Assistant Professor at George Mason University School of Law and a Senior Scholar at the Mercatus Center’s Financial Markets Working Group. This post is based on a working paper by Mr. Verrett, which is available here. Additional posts on proxy access are available here.

In my paper Defending Against Shareholder Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank, I propose a variety of new defenses boards can implement to subvert and limit the reach of proxy access under the new federal proxy access regime to be implemented under Dodd-Frank.  I also consider the legality of those defenses under Delaware law and the prospect of federal pre-emption.

The debate over shareholder access to the corporate proxy has been a vibrant one, culminating recently in a provision in the Dodd-Frank Wall Street Reform Act authorizing the SEC to adopt a proxy access rule.   Recent reports indicate that the SEC is scheduled to adopt a final rule August 25.  This blog has featured commentary almost since its inception on the issue, particularly Professor Bebchuk’s work advocating for shareholder empowerment.


Does Delaware Compete?

This post is from Mark Roe of Harvard Law School. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

I recently presented Does Delaware Compete? at the Law and Economics seminar here at Harvard Law School. The paper focuses on a long-standing academic inquiry into the nature of state-to-state competition for chartering revenues and the making of corporate law. While the existence of state competition has long been posited — with the controversy being over its nature — recent work has shown that in fact few states try to make money in corporate franchising and only one — Delaware — is very successful at it.

In this paper, I analyze three arenas in which Delaware competes, even if no other state is a strong player today. First and importantly, it must attract firms to reincorporate away from their home states. The dynamism of American business interacts with even a lackluster state-based corporate chartering market to create a broad avenue of chartering competition, as Delaware’s business base is persistently eroding as firms merge, close and restructure. The “half-life” of Delaware’s franchise tax base is surprisingly short. If it fails to be attractive enough to obtain a steady flow of reincorporating firms, that base will erode. Even if no other state is trying, Delaware has to try. Second, an awakening of a dormant competitor is not impossible. I outline what might motivate one or the other. Although the odds of that happening at any one time are small, small does not mean zero. Analysis should focus not primarily on the incentives of states and their legislatures — where most of the focus has been — but on the incentives of businesses and their lawyers. Entrepreneurial lawyers, with clients who want a different corporate law, would be the likely source of state innovation in making corporate law, not the state legislature directly. Similarly, and third, Delaware has reason to consider the risk of a federalization of core elements of its corporate law even if no other state actively competes for charters. A reputation for bad decision-making (or bad decision-makers) could impel Congress to displace Delaware, in whole or, more likely, in part, perhaps as an excuse during an economic downturn or after a scandal. While the odds of full displacement are low, Sarbanes-Oxley shows us that the odds of substantial partial displacement are not.

I then draw parallels between these ideas and those in the industrial organization, antitrust literature on contestable markets: in contestable market analysis, a single producer can dominate a market, but, depending on the nature of its technology and its market, it could lose market share overnight or suddenly face a new entrant if the incumbent missteps badly. To the extent the chartering market is contestable, Delaware competes, even if that’s a weak form of competition. And, once we see Delaware as in a contestable market with other states, we see that Washington could erode Delaware’s dominance just as another state can. In other words, Delaware could face catastrophic loss in two dimensions: the traditional horizontal one of a competing state, and the vertical one of federal displacement. To fully understand the structure of American corporate lawmaking, we must also see the importance of the Delaware-Washington interaction, actual and potential.

The full paper is available for download here.

In another paper entitled Delaware’s Competition, I make the case that over the 20th century, the most important alternative to Delaware in making corporate governance law was not the other states, but Washington, D.C. That paper is available for download here. In a second related paper, entitled Delaware’s Politics, I focus on the political economy of the Delaware-Washington structure: Managers and shareholders are the primary players in Delaware; a much wider set of interests and policies is brought into play when corporate issues move to Washington. That paper is available for download here.

The Role of the States – Foreign and Domestic

The General Counsel of the Securities and Exchange Commission and Harvard Law School graduate, Brian G. Cartwright, recently gave the Distinguished Scholar Address at Widener University School of Law. Entitled The Role of the States (Foreign and Domestic), the speech addressed the question of what the increasingly global nature of securities markets and business will mean for Delaware general corporation law. After reflecting on changes in securities investing and commerce in recent decades, Mr. Cartwright envisioned a world in which “a global stockholder base trades the stock of transnational companies in just a few market centers with a global reach.” As greater parts of the world embraced the benefits of free-market capitalism, he predicted, the U.S. might lose the commanding dominance it once enjoyed, although it would likely remain one of the world’s leading capital markets. Mr. Cartwright likened competition for corporate charters in the U.S. to the situation now prevailing in Europe, and questioned how state competition for corporate charters would play out at the international level.

The speech is available here.