This is a time of spirited debate about the state-federal allocation of corporate regulation. Arguments about the legitimacy of charter competition and Delaware’s national role as a corporate lawmaker are as intense as ever. The Sarbanes-Oxley Act simultaneously has triggered a loud discussion about the legitimacy of federal intervention into corporate internal affairs traditionally regulated by the states. We, however, see no cause for excitement on either front. Despite recent evidence of infirmities in the charter market, we think Delaware legitimately plays a national role. At the same time, we see no support for the view that recent federal expansion into internal affairs territory destabilizes or impairs corporate law’s federal structure.
This Article explains why corporate federalism remains robust, offering a positive political economy. Drawing on the history of corporate law and basic concepts of evolutionary game theory, we locate the content of corporate federalism in two stable equilibriums. The first equilibrium prevails in the charter market, following from Delaware’s successful pursuit of an evolutionarily stable strategy to maximize rents from the sale of charters. The strategy, first followed by New Jersey, caused a radical change in corporate law in the late nineteenth century. Since then, stability has ruled. Corporate law’s basic, enabling outline changed little during the twentieth century. Operative incentives, market structure, and regulatory results have been more constant than dynamic, even as Delaware often has adjusted its strategy as it has adapted to events.
The second equilibrium is more political than economic and prevails among the makers of national corporate law—Congress, the Securities and Exchange Commission, the stock exchanges, and the federal courts. These actors react to events in a more volatile manner. But even here equilibrium has prevailed since 1934. In theory, under the prevailing norm, national regulation covers the securities markets and mandates transparency respecting firms with publicly traded securities, while internal corporate affairs are left to the states. In practice, federal lawmakers sometimes disregard the norm, entering into internal affairs as the national system grows episodically. But they follow a norm of cooperation even as they make these incursions. Federal regulators never structure interventions so as to disrupt the state equilibrium. They leave Delaware in place, along with its stable strategy and its rents. In our view, this is the core of federalism, a view that contrasts with a prevailing subject matter-based conception.
Authors
William Bratton
