Anybody for federalizing corporate law?

The Law Blog has dug up that old issue of whether we should federalize state corporation law, linking a recent Delaware article worrying this might happen.

I don't think this is in the cards. It's not just because it would be bad policy – it's because markets for law, and most definitely for corporate law, are a reality that even the federal government can't fight. For a discussion of corporate law in the broader context of markets for law, see my article with Erin O'Hara, Corporations and the Market for Law.

Although the Delaware article muses about SOX as the possible beginning of the end for state law, in fact SOX's effect on the cross-listing market better illustrates the competitive constraints on federal law. See my Cross-Listing and Regulatory Competition.

As far as policy goes, though we often hear about the problems of state corporation law, SOX is hardly evidence that corporate law would enter Nirvana on the day of a federal takeover. Nor is SOX the only example. The Law Blog notes that the argument for federal corporate law is that

[t]o attract business to the state, the Delaware legislature elevates the interest of corporate management over shareholders in areas such as insider trading and proxy voting. Sooner or later, the thinking goes, in an era of skyrocketing executive pay and corporate scandal, Congress will act against this.

Sooner or later? Last time I looked, insider trading and proxy voting were already largely governed by federal law.

Comments

[M. Hodak]

I'm starting to think that SOX may have had one unintended consequence that was positive--as the trump card when someone starts to agitate for federalization of corporate governance. As in,

Person A: "Hey, leaving corporate governance up to the states just creates a race to the bottom. Anyone can do anything they want! Imposing federal standards for corporate behavior would better protect the shareholders."

Person B: "SOX."

By the way, I've noticed, or maybe it's just my imagination, that the more that federal authorities regulate some area of corporate behavior the more controversies that continue to arise in those areas. That has certainly been my experience in executive compensation and corporate disclosures.