Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Gustav Klimt, Portrait of Adele Bloch-Bauer (1907)
Module II – Corporations and Policy
Chapter 3
Corporate Federalism
• US corporate law history
Bar
exam
Corporate
practice
Law
profession
Citizen of
world
Corporations:
A Contemporary Approach
– State legislative chartering
– General incorporation
• Internal affairs doctrine
– Regulation of foreign corporations
– Choice of law rules
– Pseudo-foreign corporations
• Federal abstention
• “Race of laxity”
– Delaware wins race
– Race to bottom or top?
Chapter 3
Corporate Federalism
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1.
Fundamentals
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2.
Corporations and policy
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3.
Chapter 3
Corporate Federalism
Sale of control
Antitakeover devices
Deal protection
Close corporations
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Corporations:
A Contemporary Approach
Securities markets
Planning
Securities fraud class actions
Oppression
Insider trading
Corporate deals
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10.
Shareholder litigation
Board decision making
Board oversight
Director conflicts
Executive compensation
Corporate groups
Stock corporations
trading
Close
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9.
Shareholder voting
Shareholder information rights
Public shareholder activism
Fiduciary duties
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8.
10.
Piercing corporate veil
Corporate environmental liability
Corporate criminal liability
Corporate governance
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7.
Numeracy for corporate lawyers
Capital structure
Corporate externalities
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6.
Organizational choices
Incorporation
Locating corporate authority
Corporate finance
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5.
Corporate federalism
Corporate social responsibility
Corporate political action
Corporate form
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4.
Introduction to firm
Corporate basics
Planning
Oppression
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1800
1850
1900
1950
2000
US corporate law timeline
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Corporation:
private property or
social institution?
“A corporation is an artificial
being, invisible, intangible,
and existing only in
contemplation of law.
Being the mere creature
of law, it possesses only
those properties which the
charter of its creation
confers upon it, either
expressly, or as incidental
to its very existence.”
“But …. It is no more a state
instrument, than a natural
person exercising the
same powers would be.”
Dartmouth College v. Woodward
(US 1819)
Justice John Marshall
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Pop quiz
(corporate law history)
1. Corporations are:
a. “Artificial beings” created
by and modifiable by the
legislature
b. “Contracts” that cannot be
unilaterally amended by
the legislature
2. US corporations could only be
formed by special legislative
enactment, until the early
1900s when Delaware
enacted a “general corporation
law.” True or false?
Corporations:
A Contemporary Approach
3. State corporate statutes can be
amended (and thus change
corporate rights) because of:
a. General police powers of
states
b. Reservation of rights –
see MBCA § 1.02
c. Constitutional power of
state to amend contracts
4.
Chapter 3
Corporate Federalism
Early corporate statutes
distrusted corporate power -placing limits on corporate
purposes, activities, and
capitalization. True or false?
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5. New Jersey passed the first
“liberal” corporate law that -a. Allowed corporations to
own stock in other
corporations (permitting
holding companies)
b. Allowed shareholders to
bring derivative suits
c. Allowed shareholders to
do away with BODs
6. New Jersey lost its “lead” to
Delaware when NJ Governor
Woodrow Wilson re-regulated
NJ corporations. True or
false?
7. The takeover wave of the
1980s was a response to the
“conglomeration” of the 1960s.
True or false?
8. Hedge funds (private
investment pools) have have
pressured PHC managers to
generate high short-term
returns for shareholders.
Hedge funds rely on a. Institutional investors
(mutual funds and pension
funds) to vote for their
proposals
b. Derivative suits to compel
management action.
Answers: 1- AB / 2-F / 3-B / 4-T / 5-A / 6-T / 7-T / 8-AB
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Horizontal corporate federalism
(1) Regulation of “foreign corporations”
(2) Internal affairs doctrine
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Suppose a corporation in the
business of selling doughnuts –
– Is incorporated in Delaware
– Is headquartered in
North Carolina
– Locates its retail outlets in
California
– Gets its capital from
investors in Florida
Foreign
corporations
Suppose the corporation–
1. Sells bad doughnuts in
California – what law
applies?
2. Prevents shareholders from
voting in Florida – now what
law?
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
MBCA Chapter 15
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Internal affairs doctrine …
•
•
Corporations:
A Contemporary Approach
Operation of doctrine
Constitutional dimensions
Chapter 3
Corporate Federalism
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McDermott Inc. v. Lewis
(Del. 1987)
Panama City, Panama
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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AFTER
BEFORE
Public
shareholders
New public
shareholders
100%
90%
10%
Exchange
(1:1 + $0.35)
McDermott
Delaware
100%
McDermott
International
Remaining
Public Shs
McDermott
International
8%
92%
McDermott
Delaware
So what if sub
owns parent shares?
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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“…. [courts and legislatures] have
consistently applied the law of the
state of incorporation to the entire
gamut of internal corporate
affairs. In many cases, this is a
wise, practical, and equitable
choice.”
“ … application of the internal affairs
doctrine is not merely a principle
of conflicts law. It is also one of
serious constitutional
proportions—under due process,
the commerce clause and the full
faith and credit clause.”
Delaware Supreme Court
McDermott Inc. v. Lewis
(Del. 1987)
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Constitutional dimensions …
(what is pseudo-foreign corporation?)
Compare (and distinguish):
•
•
Wilson (Cal. App. 1982)
Vantage Venture Partners (Del. 2005)
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Wilson v. Louisiana-Pacific
Resources Inc (Cal. App. 1982)
A pseudo-foreign
corporation
• incorporated in
Delaware
• most of its assets,
payroll, sales and
shareholders in
California
A pseudo-foreign
corporation
• incorporated in Utah
• most of its assets,
payroll, sales and
shareholders in
California
Shareholder voting
• California requires
cumulative voting
• Utah has straight
(plurality) voting.
Corporations:
A Contemporary Approach
Vantagepoint Venture Ps v.
Examen Inc (Del. 2005)
Distinguish
Chapter 3
Corporate Federalism
Shareholder voting
• California requires
separate class voting
• Delaware “single
class” voting
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“If California's statute were replicated in all
states, no conflict would result. We
conclude that the potential for conflict
is, on this record, speculative and
without substance.”
“We conclude that to the extent that the
cumulative voting requirement imposed
by section 2115 upon pseudo-foreign
corporations is shown to have any
effect upon interstate commerce, the
effect is incidental, and minimal in
relation to the purpose which that
requirement is designed to achieve.”
Private
Choice
Wilson v. Louisiana-Pacific Resources Inc
(Cal. App. 1982)
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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“The internal affairs doctrine is not …
only a conflicts of law principle.”
“In CTS, the Supreme Court concluded
that ‘so long as each State regulates
voting rights only in the corporations
it has created, each corporation will
be subject to the law of only one
State.’ Accordingly, we hold
Delaware's well-established choice
of law rules and the federal
constitution mandated that
Examen's internal affairs … be
adjudicated exclusively in
accordance with the law of its state
of incorporation, Delaware.”
Justice Randy Holland
Vantagepoint Venture Partners v. Examen Inc
(Del. 2005)
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Vertical corporate federalism
(1) State antitakeover statutes
(2) Role of Delaware
(3) Race to the top / bottom
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
Slide 18
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Anti-takeover statutes
1st generation
•
•
•
•
2nd generation
Response / hostile TO
State securities law
“fairness” review
Example: Illinois
•
•
•
•
3rd generation
Mgmt lobby
Domestic corporations
Voting rights (control shs)
Example: Indiana
Edgar v. MITE
CTS v. Dynamics
(US 1982)
(US 1987)
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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“The markets that facilitate… ownership
of corporations are essential for
providing capital…. The beneficial
free market system depends at its
core upon the fact that a
corporation… is organized under, and
governed by, the law of a single
jurisdiction [its State of
incorporation].”
“It is thus an accepted part of the
business landscape in this country for
States to create corporations, to
prescribe their powers, and to define
the rights that are acquired by
purchasing their shares.”
Justice Lewis Powell
CTS v. Dynamics
(U.S. 1987)
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Anti-takeover statutes
1st generation
2nd generation
3rd generation
Amanda
(7th Cir 1989)
•
•
•
•
Response / hostile TO
State securities law
“fairness” review
Example: Illinois
•
•
•
•
Mgmt lobby
Domestic corporations
Voting rights )control shs)
Example: Indiana
•
•
•
•
Mgmt (w/ SH input)
Incorporation-based
Merger moratorium
Example: Wisc, Del
Edgar v. MITE
CTS v. Dynamics
(US 1982)
(US 1987)
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
Slide 21
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“If our views of the wisdom of state law
mattered, Wisconsin’s takeover
statute would not survive.…
Wisconsin’s law makes a potential
buyer less willing buy, but this is
equally true of [many] other rules of
corporate law.”
“To say that states have the power to
enact [inefficient anti-takeover laws] is
not to say that investors should kiss
their wallets goodbye. States
compete to offer corporate codes
attractive to firms.”
Judge Frank Easterbrook
Amanda Acquisition v. Universal Foods
(7th Cir. 1989)
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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“Incorporation-based private ordering”
• What is the “race of laxity”?
• Why has Delaware won it?
• Is this good or bad?
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Delaware bar
Delaware legislature
Delaware judiciary
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Ralph Winter’s
“race to top”
Mark Roe’s “vertical
corporate federalism”
William Cary’s
“race to bottom”
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Using the E&E
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Using the E&E
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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Using the E&E
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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The end
Corporations:
A Contemporary Approach
Chapter 3
Corporate Federalism
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