As noted yesterday, I agree with JW Verret that one effect of the pending federal Wall Street reform legislation likely will be to encourage Delaware lawyers now need to turn their attention to thinking up "structural defenses could viably protect against hostile proxy fights while at once surviving: (i) Delaware law’s strictures under Blasius, Chesapeake, Amylin, and other opinions vigorously protecting the shareholder franchise and shareholder rights, (ii) Exchange listing requirements, and (iii) SEC proxy rules."
Back in the 1980s, the so-called merger mania of the period induced states to regulate takeovers even though the federal Williams Act dominated the field. It's at least possible that states will react to the new federal legislation's corporate governance provisions by extending their takeover laws to also regulate proxy contests. If so, the analysis in my article Redirecting State Takeover Laws at Proxy Contests will be relevant--although it would need to be updated to consider the preemptive impact of the new law.
Here's the abstract of my article:
During the 1980s, many states adopted statutes intended to regulate corporate takeovers. The Supreme Court validated one of these statutes, The Indiana Control Shares Acquisition Statute, in CTS Corp. v. Dynamics Corp., 481 U.S. 69 (1987), against both preemption and commerce clauses challenges. Since CTS, state takeover laws have routinely withstood constitutional scrutiny, even though it is generally acknowledged that, by erecting new barriers to hostile tender offerors, they make tender offers less attractive.You can download the article by clicking the title link above.
At the time this article was published (1992), proxy contests were becoming an increasingly important component of hostile takeover battles. Today, of course, proxy contests and various other forms of shareholder activism have become a common feature of the corporate governance scene.
This article considered whether state laws designed to regulate proxy contests would withstand constitutional scrutiny. It surveys whether such laws would be preempted by the federal proxy rules or the Williams Act’s tender offer regulations. It also briefly touches upon the Commerce Clause aspects of any such challenge. The article concludes that state regulation of proxy contests should withstand constitutional challenge.
The analysis would need to updated to account for the new federal financial services reform legislation because that legislation includes many provisions that impact the corporate governance of Main Street firms as well as Wall Streeters. As Larry Ribstein explains, we are experiencing federal preemption by a 1000 cuts:
Although none of the provisions ... is individually earth-shaking, they cumulatively touch many major aspects of corporate governance formerly left to contract and state law. This bill thus clearly adds to the framework for federal takeover of internal governance that SOX established. The overall effect is that it will be increasingly difficult to demark an area left exclusively for state law. This leaves little “firebreak” to protect against judicial incursions in the spaces not yet covered by explicit federal provisions. This could ultimately profoundly affect the relationship between federal and state law regarding business associations.
A generation ago the Supreme Court could say that “no principle of corporation law and practice is more firmly established than a State’s authority to regulate domestic corporations, including the authority to define the voting rights of shareholders.” CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 89 (1987).
Erin O’Hara and I have argued that this separation between federal and state spheres does and should affect the scope of implied preemption of state law by federal statutes. Thus, when the Court held that state securities actions were preempted by the Securities Litigation Uniform Standards Act, it emphasized “[t]he magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 78 (2006). See also my article on Dabit. However, we noted that “[m]any federal ‘securities’ laws reach deep into the kind of internal governance issues covered by the [internal affairs doctrine].” Thus, corporate internal affairs are only “relatively safe from federal preemption” and internal affairs is not “a constitutional boundary, as shown by the continuing forward march of federal corporation law.”
Under the Dodd bill, the forward march picks up the pace.
The process I called The Creeping Federalization of Corporate Law thus continues to accelerate. As I explained back in 2003:
Sadly, the Dodd bill just makes things worse. Much worse.The collapse of Enron and WorldCom, along with only slightly less high profile scandals at numerous other U.S. corporations, has reinvigorated the debate over state regulation of corporate governance. Post-Enron, politicians and pundits called for federal regulation not just of the securities markets but also of internal corporate governance. As Congress and market regulators began implementing some of those ideas, there has been a creeping - but steady - federalization of corporate governance law. The NYSE'S new listing standards regulating director independence is one example of that phenomenon. Other examples appeared to little public debate in the sweeping Sarbanes-Oxley legislation. Taken individually, each of Sarbanes-Oxley's provisions constitutes a significant preemption of state corporate law. Taken together, they constitute the most dramatic expansion of federal regulatory power over corporate governance since the New Deal.
No one seriously doubts that Congress has the power under the Commerce Clause to create a federal law of corporations if it chooses. The question of who gets to regulate public corporations thus is not one of constitutional law but rather of prudence and federalism. In this essay, I advance both economic and non-economic arguments against federal preemption of state corporation law. Competitive federalism promotes liberty as well as shareholder wealth. When firms may freely select among multiple competing regulators, oppressive regulation becomes impractical. If one regulator overreaches, firms will exit its jurisdiction and move to one that is more laissez-faire. In contrast, when there is but a single regulator, exit is no longer an option and an essential check on excessive regulation is lost.
