Federalized Deregulatory Corporate Law
posted by Lawrence Cunningham
Since the country’s founding, states have fashioned most of the regulatory landscape for the incorporation and supervision of corporations in the United States. Many laud the resulting competition among states as they pioneered innovation in laboratories of experimentation to determine the optimal structure of corporate law.
In recent years, that competition abated considerably, Delaware having won, with some newfound competition for it from Washington taking the place of erstwhile state competitors. To many, including Roberta Romano, that state system of corporate regulation appeals and a deep commitment to state production sought, yielding a race to the top; to others, say Lucian Bebchuk, that system fails miserably, being a race to the bottom, and can only be corrected by preempting state corporation law and vesting corporate authorization and supervision in federal law.
The logic of the Treasury Department’s blueprint for changes in US financial regulation offers up yet another alternative that may likely be unappealing to both sides of that debate. State corporate law could be preempted in pretty much the same way that the blueprint imagines preempting state insurance law.
An optional federal corporation charter could begin the transformation, perhaps followed in future years by mandatory federal incorporation for corporations of systemic significance. This program could likewise include forms of business organization, other than the corporate form, that states from time to time have authorized, such as limited liability companies or limited liability partnerships.
Power to establish legal regulatory principles applicable to corporations would be vested in Congress. It would then delegate those functions to new federal agencies that Treasury’s blueprint proposes, which it calls the business conduct regulator and the corporate finance regulator. They bear a resemblance to today’s Securities and Exchange Commission, except with a commitment to further delegation of authority to self-regulatory organizations along lines that the Commodity Futures Trading Commission is famous for.
So these federal agencies would delegate many functions to self-regulatory organizations (SROs), principally the stock exchanges, including the New York Stock Exchange the NASDAQ as well as foreign exchanges, like the London Stock Exchange. Those organizations would assume responsibility for establishing applicable laws and regulations and resolving resulting disputes, chiefly through forums such as binding arbitration.
Delaware and the other US states would be out of this business, at least for enterprises of any significant size or systemic significance. Competing global stock exchanges would supersede them. A race to the bottom or top would ensue on a world scale. The result would be a federalization of corporate law but probably on highly deregulatory terms.
October 15, 2008 at 10:14 am
Posted in: Corporate Law
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