Corporate law preemption in an age of global capital markets

Southern California Law Review

Volumn 81, Issue 6, 2008, Pages 1067-1114

  Brummer, Chris ^a  

^a VANDERBILT UNIVERSITY   (United States)

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EID: 56849116606     PISSN: 00383910     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (243)

1. The impact of this competition is a matter of perennial debate. See, e.g., William L. Cary, Federalism and Corporate Law: Reflections upon Delaware, 83 YALE L.J. 663 (1974) (arguing that federalism engenders regulatory competition leading to a race to the bottom);
2. Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. LEGAL STUD. 251, 255 (1977) (arguing that federalism encourages states to provide laws maximizing shareholder wealth and a race to the top).
3. See also Daniel R. Fischel, The "Race to the Bottom " Revisited: Reflections on Recent Developments in Delaware's Corporation Law, 76 Nw. U. L. Rev. 913, 921-22 (1982) (arguing that federalism incentivizes states to compete to create climates that encourage mutually beneficial contractual arrangements);
4. Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 YALE L.J. 2359 (1998) (arguing that federalism engenders efficiency-creating regulatory competition).
5. See, e.g., Roberta Romano, The Need for Competition in International Securities Regulation, 2 THEORETICAL INQUIRIES L. 387, 400 (2001) (describing the federal oversight by the Securities and Exchange Commission as a "monopoly over issuers").
6. See also Frederick Tung, From Monopolists to Markets?: A Political Economy of issuer Choice in International Securities Regulation, 2002 WIS. L. REV. 1363, 1367 (2002) ("[B]ecause each national regulator insists on exclusivity in regulating the ... trading of securities within its national borders, territoriality effectively grants each regulator a national 'monopoly' on regulation.").
7. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified as amended in scattered sections of 11, 15, 18, 28, and 29 U.S.C.).
8. See, e.g., Larry Catá Backer, The Sarbanes-Oxley Act: Federalizing Norms for Officer, Lawyer, and Accountant Behavior, 76 ST. JOHN'S L. REV. 897, 905-11 (2002);
9. Stephen M. Bainbridge, The Creeping Federalization of Corporate Law, REGULATION, Spring 2003, at 26;
10. Roberta S. Karmel, Realizing the Dream of William O. Douglas-The Securities and Exchange Commission Takes Charge of Corporate Governance, 30 DEL. J. CORP. L. 79, 81 (2005);
11. Larry E. Ribstein, Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002, 28 IOWA J. CORP. L. 1, 57-59 (2002).
12. See also generally Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 YALE L.J. 1521 (2005) (arguing that Sarbanes-Oxley's corporate governance provisions should be optional rather than mandatory).
13. See Romano, supra note 2, at 392-97.
14. Mark J, Roe, Delaware's Competition, 117 HARV. L. REV. 588, 596 (2003) ("[S]tates govern internal corporate affairs ....").
15. Id. ("[F]ederal rulemakers, via the SEC, govern the external trading of the firm's securities.").
16. Id. at 597 (stating that "the internal affairs doctrine is just an understanding, not a crisp constitutional rule," and highlighting Sarbanes-Oxley and securities-related disclosure requirements as examples of federal regulations of internal affairs).
17. See, e.g., 17 C.F.R. §§ 240.14a-9, -101 (2007) (setting forth the information required in proxy materials).
18. See, e.g., 15 U.S.C. § 78j-1(m)(4) (2006) (requiring audit committees to establish procedures for "the receipt, retention, and treatment of complaints... regarding accounting, internal accounting controls, or auditing" and for "the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters"); § 7264 (requiring issuers to disclose whether they have passed a code of ethics for senior financial management); § 7265 (mandating the SEC to promulgate rules requiring issuers to disclose whether a "financial expert" sits on its board's audit committee);
19. C.F.R. § 240.10A-3(b)(3) (setting forth whistleblowing procedures); § 244.100 (setting forth additional disclosure requirements for issuers employing non-GAAP financial measures); Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, Securities Act Release No. 8340, Exchange Act Release No. 48,825, Investment Company Act Release No. 26,262, 68 Fed. Reg. 66,992 (Nov. 28, 2003) (setting forth disclosure requirements as to an issuer's nominating committee, the nominating process, and other related issues).
20. See also Karmel, supra note 4, at 98-129 (discussing the regulatory changes made by the SEC in response to Sarbanes-Oxley).
21. See infra notes 18,172-76 and accompanying text.
22. Securities Act of 1933,15 U.S.C. §§ 77a-aa (2006).
23. Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-nn (2006).
24. See, e.g., Karmel, supra note 4, at 82.
25. See generally John C. Coffee, Jr., Market Failure and the Economic Case for a Mandatory Disclosure System, 70 VA. L. REV. 717 (1984) (providing the four following claims in support of a mandatory disclosure system: (1) because securities research, as a public good, is usually underprovided, a mandatory disclosure system subsidizes search costs, which has the effect of increasing both the quantity and accuracy of information; (2) investors would otherwise incur excess social costs in pursuing trading gains; (3) the theory of self-induced disclosure is limited by its questionable assumption that manager and shareholder interests can be perfectly aligned; and (4) even in an efficient capital market, rational investors would still need the kind of information best provided through a mandatory disclosure system to optimize their portfolios);
26. Merritt B. Fox, Retaining Mandatory Securities Disclosure: Why Issuer Choice Is Not Investor Empowerment, 85 VA, L. REV. 1335 (1999) (arguing that the mandatory disclosure system ensures a socially optimal level of disclosure that is unlikely to be attained under an issuer choice regime);
27. Paul G. Mahoney, Mandatory Disclosure as a Solution to Agency Problems, 62 U. CHI. L. REV. 1047 (1995) (proposing the reduction of agency costs as a superior efficiency justification for the rise of the mandatory disclosure system, although incompatible with the system's current focus on accuracy enhancement).
28. See Roe, supra note 6, at 611-12 (discussing the scope of SEC regulations over corporate affairs such as voting, proxies, and general disclosure).
29. See Sean J. Griffith & Myron T. Steele, On Corporate Law Federalism: Threatening the Thaumatrope, 61 BUS. LAW. 1, 5-6 (2005) (illustrating the incremental changes initiated by Congress through amendments to the existing securities laws or by the SEC through regulatory authority granted by the Exchange Act).
30. Indeed, federal incorporation has been attempted a number of times, with each attempt meeting with failure. See, e.g., John Armour & David A. Skeel, Jr., Who Writes the Rules for Hostile Takeovers, and Why?-The Peculiar Divergence of U.S. and U.K. Takeover Regulation, 95 GEO. L.J. 1727, 1752 (2007) ("Many of Roosevelt's corporate law advisors wanted to... enact a federal incorporation statute that would make Congress ... the principal regulator of corporate law. But the campaign for federal incorporation foundered...." (internal citation omitted)).
31. See also Roe, supra note 6, at 600 (noting that there is currently no prospect for a federal incorporation statute).
32. See, e.g., Jill E. Fisch, The New Federal Regulation of Corporate Governance, 28 HARV. JX. & PUB. POL'Y 39, 48 (2004) (discussing the success Delaware courts had in developing the duty of good faith and takeover standards).
33. See Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55 STAN. L. REV. 679, 686 (2002) (stating that Delaware nearly stands alone in its legislative and judicial efforts to attract incorporations).
34. See also Griffith & Steele, supra note 17, at 10 (noting that the Delaware Court of Chancery "can be thought of as an expert regulatory agency");
35. Robert K. Rasmussen & Randall S. Thomas, Timing Matters: Promoting Forum Shopping by Insolvent Corporations, 94 NW. U. L. REV. 1357, 1385 (2000) (noting the efficiency of Delaware's laws and the experience of its judiciary).
36. Approximately 22 percent of Delaware's total revenues are derived from corporate chartering. DEL. DIV. OF CORPS., DEP'T OF STATE, 2007 ANNUAL REPORT 2 (2008), available at http://corp.delaware.gov/2007DivCorpAR.pdf. Indeed, "the raison d'etre behind [Delaware's corporate chartering] system has been [to raise] revenue for the state. "
37. Cary, supra note 1, at 668. Just as much as Delaware benefits, so do nonstate actors.
38. See, e.g., id. ("Delaware corporate counsel take pride in their role and enjoy the fees that flow from it.");
39. Lawrence A. Hamermesh, The Policy Foundations of Delaware Corporate Law, 106 COLUM. L. REV. 1749, 1774-76, 1783-86 (2006) (discussing the state's attempts to foster, rather than disrupt, preexisting commercial relationships based in Delaware).
40. Two forms of preemption are generally addressed in the literature: conflict preemption and field preemption. E.g., JAMES T. O'REILLY, FEDERAL PREEMPTION OF STATE AND LOCAL LAW: LEGISLATION, REGULATION AND LITIGATION §§ 8.3-4 (2006). Under conflict preemption, the state law is preempted insofar as it is inconsistent with the federal statute.
41. Id. § 8.4.
42. Field preemption is, in contrast, analytically a more expansive form of preemption. Unlike conflict preemption, field preemption moves beyond the effects of state and federal law and examines whether state law conflicts with "the dominant federal interest, the expression of congressional purpose, and the pervasiveness of the federal regulatory system." Id. § 8,3. As a result, field preemption analysis hinges on whether the courts can determine if Congress has decided, expressly or impliedly, to exclude state regulation,
43. This article addresses both forms of preemption, and focuses on the "nationalization" of corporate law-not only, as Robert B. Ahdieh rightfully describes, "the imposition of regulation on a relatively de-regulated market," Robert B. Ahdieh, From "Federalization " to "Mixed Governance " in Corporate Law: A Defense of Sarbanes-Oxley, 53 BUFF. L. REV. 721, 742 (2005), but also the displacing of local regulatory markets by the federal government.
44. See Winter, supra note 1, at 252 ("[T]he decision as to which state to incorporate in is in almost all cases a managerial decision ... not dictated by law or administrative decision.").
45. See Romano, supra note 1, at 2365 (stating that because federal securities laws apply to all publicly traded firms and states cannot lower the federal standards, "states have essentially abandoned the regulation of public firms to the SEC").
46. Cf. Tung, supra note 2, at 1379-80 (contrasting the competitive corporate charter model with the monopolistic securities regulation regime).
47. Romano, supra note 2, at 392-93 ("[C]ompetition is desirable because it reduces the possibility that a regulator will be able to . . . redistribute wealth from the regulated sector to preferred individuals or organizations.").
48. See infra notes 34-36 and accompanying text.
49. Cf Bernard S. Black, Is Corporate Law Trivial?: A Political and Economic Analysis, 84 NW. U. L. REV. 542, 574 (1990) (acknowledging that although state lawmakers may make legislative mistakes, "[corporate lawmaking by the states is not fiat but rather a dialogue between lawgivers and the corporate community," and emphasizing that "[c]ompanies have the final say in that dialogue because they can re-incorporate elsewhere") (emphases added)).
50. Perhaps the best-known advocate of this position is William Cary, who has articulated the foundational argument on the matter, See Cary, supra note 1.
51. See Mahoney, supra note 15, at 1111-12 (supporting mandatory disclosure systems as "the most cost-effective step ... to combat the very large and persistent promoter problem").
52. See Robert A. Prentice, The Inevitability of a Strong SEC, 91 CORNELL L. REV. 775, 799-832 (2006) (refuting competing regulatory theories that would place greater control in the hands of corporate managers in favor of a mandatory disclosure system as the most efficiency-enhancing regime).
53. See Roe, supra note 6, at 600 ("[T]he federal government can displace state corporate law, and rather easily. Legislation can preempt state corporate law, and it has.").
54. But see ROBERTA ROMANO, THE GENIUS OF AMERICAN CORPORATE LAW 3-4 (1993) ("[F]ederal regulations are mandatory....[but] not preemptive.... [T]he federal securities regime establishes minimum disclosure requirements, which states can expand...." (emphasis added)).
55. Yet even here, importantly, the competition engendered would have its limits. See William W. Bratton & Joseph A. McCahery, The New Economics of Jurisdictional Competition: Devolutionary Federalism in a Second-Best World, 86 GEO. L.J. 201, 223-24 (1997) (perceptively noting that the bundling of public goods may be so diverse that only a republic with as many jurisdictions as people could ensure a perfect match between all of an individual's preferences and the services his or her jurisdiction provides).
56. See generally Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J. POL. ECON. 416 (1956) (arguing that consumers will move to the communities best representing their particular set of preferences, assuming, inter alia, they are fully mobile, informed, and faced with a variety of choices).
57. See, e.g., Fischel, supra note 1, at 922 ("A scheme of regulation by fiat would replace a system of fifty states striving to create an attractive climate for private parties to maximize their joint welfare.");
58. Winter, supra note 1, at 274-76 (arguing that competition among the states for corporate charters leads to a race to provide an "optimal return" for both management and shareholders).
59. See Tung, supra note 2, at 1380, 1385 (stating that the U.S. corporate-law model encourages competition among states to satisfy consumer preferences).
60. For those scholars supportive of federalism, such devolving allows those actors with the best information about local conditions and preferences to provide rules and regulations, as well as permitted local experimentation and innovation. Cf. ROMANO, supra note 31, at 5.
61. See Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 VA. L. REV. 247, 287-319 (1999) (discussing the relationships and benefits arising from the corporate structure, which includes, inter alia, the ability for shareholders to commit capital while yielding control to corporate directors).
62. See also Margaret M. Blair, The Neglected Benefits of the Corporate Form: Entity Status and the Separation of Asset Ownership from Control, in CORPORATE GOVERNANCE AND FIRM ORGANIZATION: MICROFOUNDATIONS AND STRUCTURAL FORMS 45 (Anna Grandori ed., 2004) (presenting additional benefits of the corporate form such as preventing individual investors from unilaterally destroying the business entity).
63. Lucian Arye Bebchuk & Assaf Hamdani, Vigorous Race or Leisurely Walk: Reconsidering the Competition over Corporate Charters, 112 YALE L.J. 553, 574 (2002). Some scholars, however, have argued that even assuming firms are free to incorporate in any state, the choice is actually far more constricted in practice. See Robert Daines, The Incorporation Choices of IPO Firms, 77 N.Y.U. L. REV. 1559, 1569, 1572 (2002) (observing the trend that initial public offering incorporation choices from 1978 to 2002 revealed a bimodal incorporation choice: either Delaware or the firm's home state).
64. Romano, supra note 1, at 2373, 2388 (arguing that because firms will migrate to favorable regulatory regimes, states can increase their revenues by offering desirable regulations).
65. See Roberta Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L. ECON. & ORG. 225, 236 (1985) ("In a story of reactive responsiveness... most states respond to corporate desires in order to maintain their position, and not to enlarge their market shares." (emphasis added)).
66. See Fischel, supra note 1, at 922 (describing corporate federalism as a system "of fifty states striving to create an attractive climate for private parties to maximize their joint welfare" (emphasis added)).
67. Cf. ROMANO, supra note 31, at 38 (remarking that "a state with a large proportion of its budget financed by the franchise tax will be responsive to firms, since it has so much to lose").
68. See ROMANO, supra note 31, at 5 (noting that "federalism spurs innovation in public policy because of the incremental experimentation afforded by fifty laboratories of states competing for citizens and firms").
69. See, e.g., Christopher Grandy, New Jersey Corporate Chartermongering, 1875-1929, 49 J. ECON. HIST. 677 (1989);
70. William E. Kirk, III, A Case Study in Legislative Opportunism: How Delaware Used the Federal-State System to Attain Corporate Pre-Eminence, 10 J. CORP. L. 233 (1984);
71. Joel Seligman, A Brief History of Delaware's General Corporation Law of 1899, 1 DEL, J. CORP. L. 249 (1976).
72. Bebchuk & Hamdani, supra note 38, at 568.
73. Id. at 578.
74. Id. at 578 tbl.5.
75. Indeed, Bebchuk and Hamdani have noted that, according to the Herfindahl index, a measure frequently employed by economists to measure market concentration, both the market for out-of-state incorporation and the market for Fortune 500 companies are nearly twice the level at which the government considers industries to be highly concentrated. Id. at 579.
76. Robert M. Daines, Does Delaware Law Improve Firm Value?, 62 J. FIN. ECON. 525, 538 (2001).
77. See DEL. DIV. OF CORPS., DEP'T OF STATE, 2006 ANNUAL REPORT 1 (2007), available at http://corp.delaware.gov/ 2006%20Annual%20Report%20with%20Signature%20_2_.pdf.
78. Kahan & Kamar, supra note 20, at 720.
79. For reasons as to why "local favoritism" might persist, see Bebchuk & Hamdi, supra note 38, at 573-74.
80. Id. at 580-81.
81. Id. at 580.
82. Id. at 580-81.
83. Id. at 581.
84. Id.
85. See generally Kahan & Kamar, supra note 20 (arguing that Delaware is the only state "engaged in significant efforts to attract incorporations of public companies").
86. See generally Cary, supra note 1, at 704 (favoring a federal interest in corporate conduct as much as in the market for its securities because "civilizing jurisprudence" should uplift standards, not allow them to deteriorate);
87. Donald E. Schwartz, A Case for Federal Chartering of Corporations, 31 BUS. LAW. 1125, 1125 (1976) (favoring federal chartering in order to escape managers and directors finding the most permissive state law in which to incorporate and to "modernize the scope of the corporation's and management's goals beyond responsibility to shareholders").
88. See generally, e.g., John C. Coffee, Jr., The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role, 89 COLUM. L. REV. 1618 (1989) (suggesting that an active judiciary is necessary to counteract a regime of primarily contractual freedom);
89. Elvin R. Latty, Why are Business Corporate Laws Largely "Enabling"?, 50 CORNELL L.Q. 599 (1965) (asserting that corporate laws are enabling in the sense that they are characterized by freedom of choice in determining allocation among the interested parties of risks, control, and profit).
90. Investors, as a result, can craft rules after the IPO stage that allow for the maximization of shareholder value. See Black, supra note 27, at 587 (remarking that the total one-time tax-deductible cost for reincorporation is about $40,000-880,000 which, for a company of any size, is trivial, especially compared to the recurring average costs of 5300,000 associated with printing and mailing annual reports).
91. Such rules include requirements like the majority-vote requirement to approve a charter amendment and the duty of loyalty. Id. at 552-54. This view also assumes that unattractive laws would undergo revision at the local level,
92. id. at 554, although, as shall be shown below, this is not always the case.
93. Id. at 589.
94. Roe, supra note 6, at 594.
95. See id.
96. See Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 VA. L. REV. 757, 776 (1995) (noting that the more firms that have adopted a particular contract term, the more often such term is litigated, and thus, the more likely the contracts of all firms will use that term, resulting in network benefits).
97. See id.
98. Id. at 777.
99. See id.; Romano, supra note 40, at 280 (noting the benefits of precedent and certainty that the state of Delaware offers firms).
100. Klausner, supra note 65, at 782-83.
101. Id. at 783.
102. Id.
103. See id. at 784.
104. Id. at 785.
105. Investors tend to view unusual terms skeptically, often as adverse information about the issuer, whether or not it actually is, which creates pressure towards uniformity. Id. (referencing underwriters' common advice that firms adopt familiar terms in their charters and indentures before issuing stocks or bonds to the public).
106. See also Henry T. Greely, Contracts as Commodities: The Influence of Secondary Purchasers on the Form of Contracts, 42 VAND. L. REV. 133, 152-58 (1989) (discussing standardization in securities markets).
107. Marcel Kahan & Michael Klausner, Path Dependence In Corporate Contracting: Increasing Returns, Herd Behavior and Cognitive Biases, 74 WASH. U. L.Q. 347, 363 (1996).
108. See id.
109. See Kahan & Kamar, supra note 20, at 724 (noting that Delaware's franchise tax represent su/vacompetitive returns, reflecting profit margins of several thousand percent).
110. Bebchuk & Hamdani, supra note 38, at 589-98.
111. See id. at 598.
112. See id. at 603.
113. Roe, supra note 6, at 591-92 (noting that Delaware's competition comes not from states, but from the federal government, and remarking that the federal system "can, and often does, take over economic issues of national importance," and could do so in the area of corporate law).
114. See supra Part III.B.
115. Roe, supra note 6, at 592 (expressing the view that there has never been, and never will be, a full state-to-state "race to the bottom" of corporate law since Delaware players know that the federal government can take away their corporate lawmaking power in whole or in part).
116. See, e.g., ROBERTA ROMANO, THE ADVANTAGE OF COMPETITIVE FEDERALISM FOR SECURITIES REGULATION 3 (2002) (arguing that the current legislative agenda of de facto federal monopoly of securities law is inefficient and that the better approach would be a "market-oriented approach of competitive federalism that would expand, not reduce, the role of states in securities regulation," as "[u]nder such an approach, corporations would be able to select their securities regime from among those offered by states, the SEC, and even other nations, with the result that securities regulators would compete for firms' registrations");
117. Stephen J. Choi & Andrew T. Guzman, Portable Reciprocity: Rethinking the International Reach of Securities Regulation, 71 S. CAL. L. REV. 903 (1998) (proposing a regime where an issuer of securities is allowed to choose the regime of securities regulation that will govern it, with all participating nations committing to respecting each firm's particular choice).
118. But see James D. Cox, Regulatory Duopoly in U.S. Securities Markets, 99 COLUM. L. REV. 1200 (1999) (questioning whether investors can efficiently price differences in regulatory regimes);
119. Merritt B. Fox, The Issuer Choice Debate, 2 THEORETICAL INQUIRIES L. 563 (2001) (doubting that firm managers have the right incentives to choose optimal regulation regime).
120. 15 U.S.C. § 77e (2006).
121. LARRY D. SODERQUIST, UNDERSTANDING THE SECURITIES LAWS, § 9.4 (4th ed. 2005).
122. Compare id. (noting the $10 million in assets and five hundred shareholder threshold), with 17 C.F.R. § 240.12g(3)-2 (2007) (creating an exemption for foreign private issuers with less than three hundred U.S.-resident shareholders).
123. Tung, supra note 2, at 1371.
124. See Romano, supra note 1, at 2365 (noting that the territorial approach, which prohibits states from lowering or raising the regulatory standard, has resulted in states abandoning any attempt to regulate securities even though they are not preempted from doing so by federal law).
125. See Robert B. Ahdieh, Making Markets: Network Effects and the Role of Law in the Creation of Strong Securities Markets, 76 S. CAL. L. REV. 277, 280 (2003).
126. See Klausner, supra note 65, at 783.
127. Id.
128. See, e.g., ERNST & YOUNG, GLOBALIZATION: GLOBAL IPO TRENDS REPORT 2007, at 16 (2007), available at http://www.ey.com/Global/assets.nsf/ International'SGM_IPO_Trends2007/$file/Global_IPO_Trends_2007.pdf ("New York, during the last century at least, was regarded as the center of the financial world.").
129. For example, in the years following World War II, New York outpaced London in the number of international issues by nearly four to one. YOUSSEF CASSIS, CAPITALS OF CAPITAL: A HISTORY OF INTERNATIONAL FINANCIAL CENTRES, 1780-2005, at 207 (Jacqueline Collier trans., 2006). The success of the U.S. market continued, though at times unevenly, up through the 1990s, a boom-time for international listings, with "the number of foreign companies listed on the NYSE increasing] from 100 to almost 400."
130. Luigi Zingales, Is the U.S. Capital Market Losing Its Competitive Edge? 2 (ECGI Working Paper Series in Finance, Working Paper No. 192/2007, 2007), http://papers.ssm.com/so13/papers.cfm?abstract_id=1028701 ("NASDAQ enjoyed similar fortune, while the European exchanges, including London, lost market share.").
131. ERNST & YOUNG, supra note 94, at 8.
132. COMMITTEE ON CAPITAL MARKETS REGULATION, THE COMPETITIVE POSITION OF THE U.S. PUBLIC EQUITY MARKET 1 (2007), http://www.capmktsreg.org/pdfs/ The_Competitive_Position_of_the_US_Public_Equity_Market.pdf.
133. Id. at 1-2.
134. Id. at 2.
135. Id. at 16.
136. Thomas Frostberg, AIM Grabbing Nasdaq Business: U.S. Companies Find New Investors on London Market, S.F. CHRON., Apr. 28, 2006, at D1.
137. COMMITTEE ON CAPITAL MARKETS REGULATION, supra note 96, at 11 tbl.5.
138. See Zingales, supra note 94, at 14.
139. Hong Zhu & Ken Small, Has Sarbanes-Oxley Led to a Chilling in the U.S. Cross-Listing Market?, CPA J., Mar. 2007, at 32, 32, available at http://www.nysscpa.org/cpajournal/2007/307/essentials/p32.htm.
140. Id. at 36.
141. Id.
142. See Zingales, supra note 94, at 19-20.
143. See Frostberg, supra note 100.
144. Martin Waller, U.S. Companies Turn to AIM for Growth, TIMES (London), Nov. 14, 2005, at 45.
145. Chris Brummer, Stock Exchanges and the New Markets for Securities Laws, 75 U. CHI. L. REV. (forthcoming 2008) (manuscript at 37-40, on file with author).
146. Rebecca Knight, SEC Fights Financial Gobbledygook, FIN. TIMES (London), May 11, 2007, at 9;
147. Press Release, Sec. Exch. Comm'n, SEC Votes to Modernize Disclosure Requirements to Help U.S. Investors in Foreign Companies (Aug. 27, 2008), available at http://www.sec.gov/news/press/2008/2008-183.htm.
148. See Class Action Fairness Act of 2005, Pub. L. No. 109-2, 119 Stat. 4 (codified as amended in scattered sections of 28 U.S.C.).
149. See also Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, 112 Stat. 3227 (codified as amended in scattered sections of 15 U.S.C.);
150. Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 (codified as amended in scattered sections of 15 U.S.C. and 18 U.S.C. § 1964).
151. The Tokyo Stock Exchange, for example, is considering greater use of English and the creation of U.S.-styled trading instruments for foreign issuers. Sundeep Tucker, Tokyo Faces an Uphill Battle in Attracting Foreign Listings, FIN. TIMES (London), June 28, 2007, at 38.
152. See Sarah Murphy & Virginia Flower, SEC Deregistration: The Solution for Non-U.S. Companies, PLC MAGAZINE, May 2007, available at http://plc.practicallaw.com/2-313-0998.
153. For a sample of the literature on the assessment of the potential costs and benefits of regulation, see John C. Coffee, Jr., Racing Towards the Top? The Impact of Cross-Listings and Stock Market Competition on International Corporate Governance, 102 COLUM. L. REV. 1757 (2002) (arguing that strong securities laws attract firms);
154. Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997) (finding that legal environments that protect financiers from exploitation by entrepreneurs results in expanded equity markets).
155. See, e.g., Brummer, supra note 109;
156. Joseph A. Grundfest, Internationalization of the World's Securities Markets: Economic Causes and Regulatory Consequences, 4 J. FIN. SERVICES RES. 349, 361-62 (1990).
157. See Grundfest, supra note 115, at 361-62.
158. Brummer, supra note 109 (manuscript at 26-34).
159. Ethiopis Tafara & Robert J. Peterson, A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework, 48 HARV. INT'L L.J. 31, 33-34 (2007).
160. Id. at 34.
161. See ERNST & YOUNG, supra note 94, at 14 (noting that, in contrast to the past, where "big global companies ... were compelled to have [NYSE] listings as part of their offerings," now "the increased liquidity" of foreign markets has "made the US market... less competitive").
162. See Brummer, supra note 109 (manuscript at 40-41).
163. See id. (manuscript at 36).
164. See Tafara & Peterson, supra note 118, at 34.
165. See ERNST & YOUNG, supra note 94, at 14.
166. MCKINSEY & CO., SUSTAINING NEW YORK'S AND THE U.S.' GLOBAL FINANCIAL SERVICES LEADERSHIP 7 (2007), http://www.nyc.gov/html/om/pdf/ ny_report_final.pdf.
167. Id. at 10.
168. Id. New York is not the only city dependent on financial-securities transactions. Other U.S. cities heavily reliant on financial services include Hartford (one in every eight private sector jobs), Charlotte (one in twelve), Boston (one in fourteen), San Francisco (one in fourteen), and Miami (one in eighteen).
169. Id. at 36.
170. See Brummer, supra note 109 (manuscript at 37-40).
171. Id.
172. Id.
173. See supra Part III.C2.b.i.
174. ERNST & YOUNG, supra note 94, at 14.
175. Only in Europe have advances been made that have begun to embrace aggregate litigation in the field of securities litigation. See Richard A. Nagareda, Aggregate Litigation Across the Atlantic and the Future of American Exceptionalism, 62 VAND. L. REV. (forthcoming 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id- 1114858. Yet, the U.S. model remains by far the most advanced and most comprehensive.
176. Id.
177. Roel C. Campos, Comm'r, Sec. Exch. Comm'n, Remarks Before the Governance for Owners Conference (Mar. 22, 2007), available at http://www.sec.gov/ news/speech/2007/spch032207rcc.htm.
178. Such distinctions, however, are very crude, as most regulatory systems utilize a mix of both rules and principles. Lawrence A. Cunningham, A Prescription to Retire the Rhetoric of "Principles-Based Systems" in Corporate Law, Securities Regulation, and Accounting, 60 VAND. L. REV. 1411, 1412-13 (2007).
179. See also Paul A. Merolla, Principles-Based Versus Rules-Based: What Really Matters, INVESTMENTNEWS, NOV. 19, 2007, at 10, available at http://www.investmentnews.com/apps/pbcs.dll/article?AID-/ 20071119/REG/711190301/101 Id (discusssing the merits of the two approaches and advocating for greater focus on the outcomes of each regulatory regime).
180. Stephen Joyce, Global Regulators Disagree on Effective Enforcement Tools, Practices, [Jan.-June] Sec. Reg. & L. Rep. (BNA), at 191, 191 (Feb. 11, 2008).
181. Id.
182. See supra Part III.C2.b.ii.
183. In the United States, for example, due diligence is a high fee-earning
184. See 15 U.S.C. § 77k (2006). In other countries, however, due diligence remains a foreign concept.
185. Among financial centers, these differences can be stark. First-year New York attorneys at top firms earn, on average, $160,000 a year plus bonuses, approximately 25 percent more than their nearest competitors, those lawyers practicing in London's Magic Circle firms. See Magic Circle Duo Follows Wall Street to Match $160K Pay Benchmark, LEGAL WEEK, Jan. 2, 2007, http://www.legalweek.com/Articles/1004621/ Magic+circle+duo+follows+Wall+Street+lead+to+match +160k+pay.html.
186. Klausner, supra note 65, at 785.
187. Some regulators, for example, may require disclosure of executive compensation and related-party transactions where others do not.
188. See Choi & Guzman, supra note 84, at 934.
189. Id. at 934-35.
190. Indeed, even larger companies could conceivably attempt to buy back shares and relist them on foreign markets, effectively facilitating their departure from a jurisdiction.
191. See supra notes 79, 81-82 and accompanying text.
192. For example, some countries have different private constituencies wielding different forms and degrees of influence over national regulators.
193. Although of course the public-choice story may differ, particularly since national regulators may be subject to a greater degree of domestic constituents, it is likely that they will nonetheless face considerable pressure to promulgate attractive laws. See Brummer, supra note 109, at 37-41 (describing the domestic law pressures informing the promulgations of securities laws).
194. See generally Brummer, supra note 109 (finding that advances in technology have made listing on foreign exchanges, and subsequently, the subjection to that nation's securities laws, a much more viable choice for issuers).
195. 17 C.F.R. § 240.13a-13(b)(2) (2007).
196. Specifically, securities registered by foreign private issuers are exempt from the proxy rules under Section 14 of the Exchange Act. 17 C.F.R. § 240.3a12-3.
197. Edward Rock, Securities Regulation as Lobster Trap: A Credible Commitment Theory of Mandatory Disclosure, 23 CARDOZO L. REV. 675, 681 (2002).
198. See Louis Lowenstein, Financial Transparency and Corporate Governance: You Manage What You Measure, 96 COLUM L. REV. 1335, 1338 (1996) (noting that if the government lowers standards radically for foreign companies "American companies will surely cry foul and demand equal treatment").
199. See also Larry E. Ribstein, Cross-Listing and Regulatory Competition, 1 REV. L. & ECON. 97, 139 (2005), http://www.bepress.com/cgi/viewcontent.cgi?article=1014&context=rle (predicting that the SEC will face pressure from U.S.-based firms to extend benefits of foreign exemptions to domestic firms).
200. In such circumstances, applying different standards to foreign and domestic firms makes interfirm comparisons more difficult. Id. at 130.
201. See also Paul Diaconu, Sr., Impact of Globalization on International Accounting Harmonization 4 (Jan. 18, 2007) (unpublished manuscript), http://papers.ssm.com/sol3/papers.cfm?abstract_id=958478 (noting how harmonization promotes the comparability of international financial information).
202. See Ribstein, supra note 152, at 137 (arguing that U.S. firms would incur costs if domestic securities laws disadvantaged them in competing with their foreign-based rivals in capital and product markets).
203. See id. (noting that such disadvantages would encourage U.S. firms to use their "greater voice in U.S. politics to lobby for exemptions similar to those accorded foreign-based firms"). It is in large part due to such pressures that domestic issuers have been able to profit from many recent benefits provided to foreign issuers. Indeed, in the wake of Sarbanes-Oxley many of the reforms passed to issuers have been ultimately shared by U.S.-domiciled companies or are in the process of being considered for extension to U.S. companies. U.S. issuers can, for example, file reports with the SEC electronically, and would by definition enjoy overseas selling opportunities. It also is likely that U.S. companies will be able to submit their financial information using international financial reporting standards ("IFRS").
204. See Sarah Johnson, Goodbye GAAP: It's Time to Start Preparing for the Arrival of International Accounting Standards, CFO MAGAZINE, Apr. 2008, at 48, available at http://www.cfo.com/ article.cfm/10919122/c_10941875?f=singlepage (discussing the likelihood that U.S. companies will be able to use IFRS in the future).
205. See Lawrence A. Cunningham, From Convergence to Comity In Corporate Law: Lessons from the Inauspicious Case of SOX, 1 INT. J. OF DISCLOSURE & GOVERNANCE 269, 271-72 (2004) (describing the "clumsy global reach" of Sarbanes-Oxley),
206. Id. at 272.
207. See Nikki Swartz, The Cost of Sarbanes-Oxley, INFO. MGMT. J., Sept.-Oct. 2003, at 8, available at http://goliath.ecnext.com/coms2/gi_0199-3288698/The-cost-of-Sarbanes-Oxley .html.
208. Enacted in the wake of massive accounting and other irregularities perpetrated by corporate giants like Enron and WorldCom, Sarbanes-Oxley "changed corporate governance, including the responsibilities of directors and officers, the regulation of accounting firms that audit public companies, corporate reporting, and enforcement." GUY P. LANDER, WHAT IS SARBANES-OXLEY? 1 (2004). Specifically, Sarbanes-Oxley "enhanced audit committee responsibility and auditor oversight, including prior approval for non-audit services by the auditor and the disclosure of all non-audit services of the auditor."
209. Id. at 1-2. In addition, the law required chief executive officers and chief financial officers to certify the accuracy of their companies' annual and quarterly financial reports. Sarbanes-Oxley Act of 2002 § 302, 15 U.S.C. § 7241 (2006);
210. LANDER, supra, at 2. Most importantly, it required companies to maintain procedures to evaluate and make certain disclosures concerning their "disclosure controls and procedures" and "internal control over financial reporting."
211. LANDER, supra, at 10.
212. See also Sarbanes-Oxley Act § 404.
213. For example, a foreign private issuer listing in the United States for the first time is not required to comply with the internal control reporting requirements of section 404 until its second annual report is required to be filed with the Commission. Press Release, Sec. & Exch. Comm'n, SEC Offers Further Relief from Section 404 Compliance for Smaller Public Companies and Many Foreign Private Issuers (Aug. 9, 2006), available at http://www.sec.gov/news/press/2006/2006-136.htm.
214. See C. Evan Stewart, The False Promise "Reform, " N.Y. L.J., Feb. 21, 2008, at 23, available at http://www.law.com/jsp/ nylj/PubArticleNY.jsp?id-1203508159315#.
215. Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards, Securities Act Release No. 8879, Exchange Act Release No. 57, 206, 73 Fed. Reg. 986 (Dec. 21, 2007).
216. Exemption from Registration for Foreign Private Issuers, Exchange Act Release No. 57,350, 73 Fed. Reg. 10,102 (Feb. 19, 2008).
217. For an outline of such approaches, see Tafara & Peterson, supra note 118, at 53-68. For how such regimes may also incentivize reform, see Chris Brummer, Post-American Securities Regulation (Sept. 4, 2008) (unpublished manuscript, on file with author).
218. Even the Supreme Court has worked, wittingly or not, to improve the attractiveness of U.S. capital markets, Specifically, it recently issued a decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008), that will likely "curb what business defendants have portrayed as a relentless search by plaintiffs for alternative deep pockets in securities class actions when the main company involved has collapsed."
219. Tony Mauro, High Court's "Stoneridge" Ruling a Win for Business Defendants, LEGAL TIMES, Jan. 16, 2008, at 8, available at http://www.law.com/jsp/article.jsp?id=1200391525612.
220. In Stoneridge, investor groups sued the cable operator Charter Communications for fraud and also pursued the companies that sold cable boxes that figured in some of Charter's fraudulent transactions. Stoneridge, 128 S. Ct. at 766. The Court ruled that the defendant vendors could not be held liable under section 10(b) of the Exchange Act because the investors did not rely on any statements or omissions by the vendors.
221. Id. at 769. In effect, the Stoneridge ruling shields third-party defendants from broad "scheme liability" for their tangential role in corporate fraud.
222. See id. at 770.
223. It is also worth noting that from a procedural perspective, the passage of the Class-Action Fairness Act of 2005, Pub. L. No. 109-2, 119 Stat. 4 (codified as amended in scattered sections of 28 U.S.C.), has expanded federal diversity jurisdiction in class actions in an effort to prevent lawyers from "forum shopping" for friendly local venues. Press Release, White House Office of the Press Sec'y, President Signs Class-Action Fairness Act of 2005 (Feb. 18, 2005), available at http://www.whitehouse.gov/news/releases/ 2005/02/20050218-11.html. The bill intends to keep out-of-state businesses, workers, and shareholders from being dragged before unfriendly local juries, or forced into unfair settlements.
224. Id.
225. See supra Part V.B.2.
226. Of course, the opposite result is also available. By offering bundled products, corporate-governance requirements may be reformed in order to counter reforms made in other jurisdictions in the domain of securities laws. In such circumstances, corporate law will be reformed even where a jurisdiction does not face direct competition in that field from other jurisdictions.
227. Roe, supra note 6, at 639.
228. Id. at 635-36.
229. Id. at 636.
230. See supra Part IV.B.
231. See Prentice, supra note 30, at 777 (presenting a regulatory competition model, in which all fifty states regulate securities law independently, as an alternative to the "strong-SEC" model currently in place).
232. Policymakers and academics viewed large business entities as inevitable as the economy grew though nonetheless sought to subject them to national control. Federal incorporation was a key initiative in such efforts. Proponents of the measure, including then President Theodore Roosevelt, argued: "In the interest of the whole people ... the Nation should, without interfering with the power of States in the matter itself, also assume power of supervision and regulation over all corporations doing an interstate business." Dalia Tsuk Mitchell, Shareholders as Proxies: The Contours of Shareholder Democracy, 63 WASH. & LEE L. REV. 1503, 1516 (2006). In such a way, good trusts could be encouraged and supervised while bad trusts (monopolies) would be constrained.
233. Id. In particular, a Bureau of Corporations was envisioned, if not to mandate certain behavior, then at least to publicize corporations' finances and activities to ensure that '"corporations represented themselves honestly and... [abided] by federal rules.'"
234. Id. at 1517 (alteration in original)
235. (quoting Melvin I. Urofsky, Proposed Federal Incorporation in the Progressive Era, 26 AM. J. LEGAL HIST. 160, 177 (1982)).
236. Id. For a sampling of the literature,
237. see generally John W. Brabner-Smith, Federal Incorporation of Business, 24 VA. L. REV. 159 (1937) (acknowledging a need to protect the public from abuses of corporate bigness);
238. Cary, supra note 1 (asserting a need for the imposition of federal standards of conduct to deter a race to the bottom among states competing to attract corporations through corporate-friendly law);
239. Joseph C O'Mahoney, Federal Charters to Save Free Enterprise, 1949 WIS. L. REV. 407 (asserting a need to impose federal standards on corporate law so as to prevent monopoly and excessive concentration of economic power by the states);
240. Donald E. Schwartz, Federal Chartering of Corporations: An Introduction, 61 GEO. L.J. 71 (1972) (maintaining that state chartering has failed);
241. H.L. Wilgus, Need of a National Incorporation Law, 2 MICH, L. REV. 358 (1904) (arguing that state law laxity requires federal intervention).
242. Of course, the decoupling of capital markets from corporate law does not mean that governments will not face pressure to provide attractive corporate laws. To the extent to which the costs on corporations are prohibitive, companies could still pressure governments to provide attractive laws. The likelihood, however, of such costs being prohibitive are small. As discussed earlier, incorporation constitutes a relatively small resource outlay for firms. See supra note 60. They would not, however, face the same pressures from the investment banking and legal community. These individuals would continue to do deals to the extent to which the aggregate costs diminished the net volume of securities transactions.
243. See Blair, supra note 33.