Anne Tucker writes:
Kent Greenfield recently published a provocative article with Democracy on ending Delaware's dominance over corporate law. As is Greenfield's way, he makes a familiar story sound fresh and raises an interesting question. Is it democratic for a state with less than 1% of the country's population to have its laws control more than half of the Fortune 500 companies? Greenfield says no.
Power without accountability has no democratic legitimacy. If companies could choose which state’s environmental, employment, or anti-discrimination law applied to them, we’d be outraged. We should be similarly outraged about Delaware’s dominance in corporate law.
Outraged? Really? Look, we don't live in a democracy, we live in a federal republic, and that has consequential implications.
In particular, as the Supreme Court majority recognized in Justice Lewis Powell’s CTS decision, the country as a whole benefits from the existing scheme under which Delaware has achieved its dominance. As Justice Powell explained in that case, the markets that facilitate national and international participation in ownership of corporations are essential for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that corporations generally are organized under, and governed by, the law of the state of their incorporation. This is so in large part because ousting the states from their traditional role as the primary regulators of corporate governance would eliminate a valuable opportunity for experimentation with alternative solutions to the many difficult regulatory problems that arise in corporate law. As Justice Brandeis pointed out many years ago, “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of country.”
And who says Delaware is not accountable? In a federal republic, accountability doesn't just come out of a ballot box. Even if state competition is not a spring to the top, it is at least walking race in which competition from other states limits what Delaware can do. In addition, of course, Delaware faces competition from the federal government (see Mark Roe's work on the topic), although that usually results in quack corporate governance.
Haters are going to hate. Academics like Greenfield and Bebchuk will always bust Delaware's chops. After all, academics are rewarded for developing novel ideas, without much regard to those ideas’ validity or viability, which biases them (us) against the status quo. Meanwhile, Delaware chugs along producing the best corporate law in the world. Not perfect, to be sure. There is much to be criticized in Delaware law and I have done my fair share of criticism (how the Delaware Chancery Court so consistently misapplies the boundaries of Revlon, to cite but one example). But as an investor or business person, I'd rather that my business be run under Delaware corporate law than anyone else's (I mean, have you looked at California corporate law?).
