Thursday, January 18, 2007

Brown on the Irrelevance of State Corporate Law

J. Robert Brown, Jr., Univ. of Denver, has posted a paper on SSRN which has been published in the University of Richmond Law Review, The Irrelevance of State Corporate Law in the Governance of Public Companies. Here's the abstract:
Weak state regulation of corporate governance process and the race to the bottom resulted in federal intervention in the 1930s and the adoption of the securities laws. The laws largely ousted the states from the corporate disclosure and proxy process. The duties of directors, however, remained subject to state regulation.
The race to the bottom, therefore, continued. One example was the adoption of waiver of liability provisions. It took less than two decades after Delaware adopted the first such provision in the aftermath of Van Gorkom for all 50 states to have something similar in place. Likewise, fiduciary obligations gradually weakened, with Delaware all but eliminating the duty of loyalty, replacing substantive fairness with ineffective procedural requirements. The predicable scandals and excesses followed.
Congress responded with the adoption of Sarbanes-Oxley and federalizing some portions of the duties of officers and directors. SOX, however, did not do so in a systematic way. As a result, neither the states nor the federal government adequately regulate the behavior of corporate managers. Said another way, the dynamics that resulted in the scandals of the millennium largely remain in place.

1 comment:

  1. Federalism did not stop efforts to provide uniform laws on business and other areas, e.g., The Uniform Commercial Code. While each state interprets uniform laws it adopts, there is quite a bit of consistency from state to state. But state corporate law continues to be competitive, with Delaware leading the way to the race to the bottom. Why is it that the legal profession over the years has had much success with many, many uniform laws but not with corporate law?