Trapped in a metaphor: The limited implications of federalism for corporate governance

George Washington Law Review

Volumn 77, Issue 2, 2009, Pages 255-307

  Ahdieh, Robert B ^a  

^a NONE

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EID: 67649535643     PISSN: 00168076     EISSN: None     Source Type: Journal    
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References (224)

1. See William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 YALE L.J. 663, 663, 705 (1974);
2. Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. LEGAL STUD. 251, 255-56 (1977).
3. See Cary, supra note 1, at 666.
4. Perhaps tellingly, Winter's original contribution to the "debate" included no such statement. As we will see, only in later work did Winter reference a "race to the top"-and soon thereafter, back away from that suggestion. See infra note 51.
5. See infra Part I.
6. Cf. Mark J. Loewenstein, Delaware as Demon: Twenty-Five Years After Professor Cary's Polemic, 71 U. COLO. L. REV. 497, 501 (2000).
7. See infra Parts II, III.
8. See Cary, supra note 1, at 665-66.
9. See Winter, supra note 1, at 263-67;
10. see also Henry G. Manne, Our Two Corporation Systems: Law and Economics, 53 VA. L. REV. 259,260 (1967);
11. Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110, 112 (1965);
12. Henry G. Manne, Some Theoretical Aspects of Share Voting, 64 COLUM. L. REV. 1427,1430 (1964). To be clear, I do not mean to claim that patterns of managerial and state competition are unrelated. My point is simply that they are distinct in important respects and deserve to be analyzed as such. Most critically, they point corporate law literature in different directions; if shareholder-managerial relations are our priority, then efficiency in the capital markets and resulting managerial competition should be our focus. Alternatively, if we embrace the relations of state and firm as the critical agenda of corporate law, then a continued focus on federalism and state competition is in order.
13. This reductionist move might be tied to the modern rejection of earlier scholars' equation of the distinct goals of shareholder protection and maximization of shareholder wealth. Winter thus highlighted the ways in which heightened shareholder protection might actually decrease shareholder wealth. See Winter, supra note 1, at 258-62. Here, I emphasize a related, but different point: state competition's improvement of the quality of state law may potentially increase the wealth of the modern public corporation. It may do nothing, on the other hand, to protect shareholders against managerial abuses-including managers' potential expropriation of the full value of any improvements in state law. As to each of these ends, competitive mechanisms of efficiency can be found in the operation and regulation of the modern public corporation. But those mechanisms are quite distinct. One lies in the nature of American corporate law, and the other in the efficient markets of American corporate finance.
14. to As I emphasize in Part III, this claim should not be understood as a condemnation of federalism or an argument for federal-level rules of corporate governance. Rather, my argument seeks to highlight federalism's true place in corporate law-as both more and less than what the conventional discourse would suggest.
15. It is no answer that federalism is necessary, but insufficient, to advance the substantive quality of American corporate governance. My argument is that it is not-at least in absolute terms-necessary either.
16. See ADOLF A. BERLE, Jr. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY 84, 115, 128-40 (1932).
17. See infra text accompanying notes 102-04. As the above discussion makes clear, my emphasis herein is on the large, publicly held companies that stand at the center of the theoretical analysis of modern corporate law, as distinguishable from the array of distinct corporate entities to which the standard account, and hence my critique of the latter, speak less directly.
18. Cf. Bernard S. Black, Is Corporate Law Trivial?: A Political and Economic Analysis, 84 NW. U. L. REV. 542, 577 (1990) (implicitly distinguishing legal changes' role in "enlarging the pie" versus "transferring] wealth from managers to shareholders"). Tangentially to the analysis herein, I would characterize the corporate federalism literature-with its primary focus on interstate competition-as directed to the horizontal dimensions of federalism. It can thus be distinguished from the mainstream federalism literature, which has focused primarily on the vertical dimensions of federalism-the allocation of power between federal and state authorities. Given as much, I believe that closer engagement across those literatures promises synergies for each.
19. My argument, thus, is not that state competition is irrelevant to the modern public corporation. Nor do I predict any necessary race to the bottom, notwithstanding the corporate literature's general resistance to agnosticism on the "race debate." See, e.g., Roberta Romano, Is Regulatory Competition a Problem or Irrelevant for Corporate Governance?, 21 OXFORD REV. ECON. POL'Y 212, 229 (2005). Here, I reject a dichotomous choice between top and bottom. Although I question assertions of a state competition-driven race to the top, I do not predict a race to the bottom.
20. See infra Part II.
21. See infra Part IV.
22. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.).
23. See Robert B. Ahdieh, From "Federalization" to "Mixed Governance" in Corporate Law: A Defense of Sarbanes-Oxley, 53 BUFF. L. REV. 721, 721 (2005).
24. One might plausibly cite Ralph Winter's reply to Cary in support of this contrarian claim of a limited (and elective) role for state competition in American corporate governance. That the embrace of efficient capital markets does not dictate a concomitant embrace of federalism is suggested by state competition's fairly tangential place in Winter's actual analysis, as distinct from his rhetoric. See Winter, supra note 1, at 261-62.
25. There is, as such, no necessary institutional implication of a belief in capital market efficiency. The latter can equally be reconciled with corporate scholars' prevailing commitment to federalism in corporate law or with an opposing desire to federalize corporate law.
26. BERLE & MEANS, supra note 12, at 5-6. I do not, it bears noting, mean to suggest that the existing corporate literature is exclusively directed to questions of state competition and the separation of ownership and control. By any fair accounting of the field's seminal works and the emphasis of each passing year's new scholarship, however, its central focus would appear to lie in just those questions. Cf. infra notes 55-56.
27. Stephen M. Bainbridge, Director Primacy and Shareholder Disempowerment, 119 HARV. L. REV. 1735, 1736 (2006); see also id. at 1742 ("Th[e] process of competitive federalism tends to produce those laws preferred by investors.").
28. FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 222 (1991).
29. See Cary, supra note 1, at 666.
30. See id. at 668.
31. See id. at 663-68.
32. See id. at 665-68.
33. See Winter, supra note 1, at 255 n.15.
34. See id. at 254-58.
35. Some of the perception of sharp disagreement can be traced to the tone of Winter's response, which was admittedly quite dismissive of Cary's claim. See, e.g., id. at 257 ("That the impact of a legal system on investors would be known only to law professors and Mr. Nader seems a rather tenuous proposition."). When one goes beyond tone and considers the substance of his argument, however, one finds that Winter is largely in agreement with Cary.
36. See id. at 263-66.
37. See id.
38. Again, Winter did not dispute that the legal protections of shareholders might decline. See id. at 259. For Winter, however, this was not "the bottom." Rather, any such decline should be understood as a product of shareholders' willingness to grant managers wider discretion in hopes of securing higher returns. See id.
39. See Cary, supra note 1, at 665 ("In all fairness it should be noted that if Delaware had not entered the race, other states would have joined in to attract the lucrative business of incorporating.").
40. See id. at 668 ("[T]he raison d'etre behind the whole system has been achieved-revenue for the state of Delaware.").
41. See id. ("With some justification Delaware corporate counsel take pride in their role and enjoy the fees that flow from it. The system 'engenders a volume of business for the bar which tends to be regarded as a vested interest. . . .'").
42. See id. at 665-66;
43. see also Gillian Hadfield & Eric Talley, On Public Versus Private Provision of Corporate Law, 22 J.L. ECON. & ORG. 414, 415 (2006);
44. Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55 STAN. L. REV. 679, 681 (2002).
45. My reference to states' attention to managerial demands is not intended to suggest that this necessarily comes at shareholders' expense. I am not staking out a position, thus, on whether state competition leads to the bottom or the top. Instead, as will become clear, I believe that both advocates and critics of state competition should acknowledge its orientation to managerial demands. The entirely separate, and critical, question for corporate governance is whether managerial demands are aligned with shareholder interests.
46. See supra note 8 and accompanying text.
47. See Winter, supra note 1, at 263-64. Winter states that: The fact that shareholders generally, and major institutional investors in particular, find little need for "control" strongly suggests that forces other than formal legal structure profoundly shape corporate performance and provide substantial protection for shareholders. If the law of corporate governance is to make sense, it must take into account the constraints these forces impose on the parties to corporate transactions. These constraints arise largely from competition in two markets which interact with each other and with the capital market: (1) the market for products and services and (2) the market for management control. Id. In Winter's precise construction, thus, two of the relevant markets-the products markets and the market for corporate control-were characterized as interacting with the third-the capital markets. See id. Other nonregulatory mechanisms of managerial constraint, it bears noting, have also been identified. See, e.g., Daniel R. Fischel, The "Race to the Bottom" Revisited: Reflections on Recent Developments in Delaware's Corporation Law, 76 NW. U. L. REV. 913, 918-20 (1982) (noting constraints including managers' oversight of their fellow managers, as well as compensation mechanisms by which managers "share the risk bearing function with shareholders").
48. Elaborating Winter's argument slightly further, competition with one's counterparts in the products market requires efficient management of the relevant enterprise and resulting efficiency in pricing, as well as access to capital for purposes of modernization and innovation. The former can be expected to constrain management extractions manifested in product pricing. See Winter, supra note 1, at 264. The latter forces managers to face the capital markets. See id. at 262-66;
49. see also id. at 264-65 ("Professor Henry Manne has written a series of articles arguing that share price and the capital market exert discipline on the behavior of corporate management. The body of his work has yet to be seriously confronted by corporate critics, much less weakened."). The cost of capital varies widely, of course, in accordance with its relative security. Corporations subject to lax management control-or, to be more precise, a less-than-optimal degree of managerial discretion-can thus be expected to pay more to secure funds than competitors operating under rules more valued by shareholders and creditors. See id. at 257. Winter states that: Management must induce investors freely to choose their firm's stock instead of, among other things, stock in companies incorporated in other states or other countries, bonds, bank accounts, certificates of deposit, partnerships (general or limited), individual proprietorships, joint ventures, present consumption, etc. . . . [A] corporation's ability to compete effectively in product markets is related to its ability to raise capital, and management's tenure in office is related to the price of stock. Id. Whether a product of default rules of the state of incorporation, or explicitly built into the corporate charter or bylaws of a particular firm, governance rules favoring managers over shareholders-agency failures and attendant costs-can thus be expected to hurt managers as much as shareholders. Of course, such an analysis must depend on a repeat player dynamic in corporate finance, such that managers expect to return to the capital markets subsequent to any deviation from optimal rules. Such an assumption is not especially heroic, however, in the case of the modern public corporation. Cf. id. ("If management is to secure initial capital and have continuous access to ready capital in the future, it must attract investors away from the almost infinite variety of competing opportunities."). Further policing managerial behavior is the market for corporate control. Here, Winter highlighted that suboptimal managerial performance creates opportunities for arbitrage. See id. at 265-66; see also Ronald J. Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 STAN. L. REV. 819, 841-42 (1981). Investors can thus be expected to seek control of poorly managed firms, aiming to enhance returns through the curtailment of managerial rent-seeking, or improvements in the quality of management more generally. See Winter, supra note 1, at 266. In the face of this threat, managers will further self-regulate their choices to maximize shareholder value. See id. at 257 ("[T]o retain its position management has a powerful incentive to keep the price of stock high enough to prevent takeovers, a result obtained by making the corporation an attractive investment.").
50. See Winter, supra note 1, at 257-58, 266.
51. See infra notes 55-56 and accompanying text. Some scholars, to be sure, have been careful to tease out the distinct dynamics and normative goals at work in the operation and regulation of the modern public corporation. See, e.g., Larry E. Ribstein, Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of2002, 28 J. CORP. L. 1, 58 (2002) ("The state-based system of regulating corporate governance can be considered one of the main strengths of the U.S. capital markets.").
52. Ralph K. Winter, The "Race for the Top" Revisited: A Comment on Eisenberg, 89 COLUM. L. REV. 1526, 1529 (1989).
53. Michael Abramowicz, Speeding Up the Crawl to the Top, 20 YALE J. on REG. 139, 142 (2003).
54. See, e.g., id. at 140 & n.2.
55. Although Winter's argument was assuredly a defense of federalism and state competition, it is important to be clear about his precise reasoning: Winter framed his argument as a response to Cary. See Winter, supra note 1, at 255-56. More specifically, Winter's argument was presented as a refutation of Cary's suggestion of a race to the bottom, driven by charter competition among states. See id. at 255-58. So understood, Winter's essential claim was that the federalist design of corporate law need not produce a race to the bottom. See id. But this was not because of anything distinctive about federalism. Rather, it was because of the independent dynamic of competition in capital, product, and corporate control markets. See id. at 262-66. Winter's essential finding was not that federalism was good, but rather that it was not bad. See id. at 255-56; see also Easterbrook & Fischel, supra note 24, at 218.
56. See Winter, supra note 1, at 255-58.
57. See, e.g., Abramowicz, supra note 46, at 139-41 (embracing "the increasing scholarly consensus that competition improves corporate law"); see also id. at 140 ("The corporate law literature tells a story of progress, slow but sure."). A significant majority of corporate scholars today would thus likely endorse at least some notion of capital market efficiency, some resulting pressure on managers to compete, and at least some march toward the top, however slow the climb might be and however unlikely it is to reach the acme of efficiency. See, e.g., id. at 139-41.
58. In fairness, some suggestion of the affirmative claim can be found in Winter's original article. See Winter, supra note 1, at 275-76. In later work, moreover, Winter explicitly invoked the rhetoric of a "race to the top" in corporate law. See Ralph Winter, Private Goals and Competition Among State Legal Systems, 6 HARV. J.L. & PUB. POL'Y 127,128-29 (1982) [hereinafter Winter, Private Goals] ("As long as Delaware is competing, there will be a race to the top."). Perhaps notably, however, Winter would thereafter step back from that claim. See Winter, supra note 45, at 1528 ("I am far more confident that Professor Cary's argument about the race to the bottom is wrong than I am that my argument that Delaware is leading a race to the top is right."). At best, he suggested, interstate charter competition might be expected to motivate a "leisurely walk" to the top. See id. at 1529.
59. See, e.g., Lucian Arye Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 HARV. L. REV. 1435, 1438-49 & nn.10-14 (1992) (discussing the traditional corporate law "race to the bottom" versus "the top" debate and its focus on state competition).
60. See id.
61. In critiquing the collapse of managerial and state competition, it bears noting that I do not mean to suggest they are unrelated. Nor do I dispute, as I explain in Part III, that each pattern of competition may contribute to the efficient operation and regulation of the modern public corporation. My only point is that in analyzing them as distinct patterns, we avoid certain pitfalls with which our analysis is presently plagued, and perhaps achieve certain new insights as well.
62. ROBERTA ROMANO, THE GENIUS OF AMERICAN CORPORATE LAW 1 (1993). Besides the examples noted above, see supra notes 23-24 and accompanying text, additional evidence of this understanding can readily be found. See, e.g., Henry N. Butler & Larry E. Ribstein, Opting Out of Fiduciary Duties: A Response to the Anti-Contractarians, 65 Wash. L. Rev. 1, 69-70 (1990) (characterizing charter competition as directed to protecting shareholder interests);
63. Stephen J. Choi & Andrew T. Guzman, Choice and Federal Intervention in Corporate Law, 87 Va. L. Rev. 961, 961-62 (2001); Michael E. DeBow & Dwight R. Lee, Shareholders, Nonsharehold-ers and Corporate Law: Communitarianism and Resource Allocation, 18 Del. J. Corp. L. 393, 406-07 & n.59 (1993);
64. Fischel, supra note 41, at 921-22;
65. Romano, supra note 15, at 217-23;
66. Roberta Romano, Competition for Corporate Charters and the Lesson of Takeover Statutes, 61 Fordham L. REV. 843, 846 (1993) [hereinafter Romano, Competition] ("The best assessment of the evidence is that a federal system is for the better and that Delaware's code, for the most part, benefits shareholders."); Roberta Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L. Econ. & Org. 225, 279-81 (1985) [hereinafter Romano, Law as a Product]; see also Bebchuk, supra note 52, at 1439 ("[SJupporters of state competition regard it as a 'race for the top.' According to this view, charter competition drives Delaware and other states to offer rules that maximize shareholder value; consequently, the regulation of corporate affairs should be left to the states."); Arthur R. Pinto, The Constitution and the Market for Corporate Control: State Takeover Statutes After CIS Corp., 29 WM. & MARY L. REV. 699, 716-17 n.75 (1988);
67. Robert B. Thompson, Preemption and Federalism in Corporate Governance: Protecting Shareholder Rights to Vote, Sell, and Sue, 62 LAW & CONTEMP. PROBS. 215, 222 (1999).
68. See, e.g., ROMANO, supra note 55, at xii ("Ever since Berle and Means, the central issue of corporate law has been how to create a legal structure that monitors management."); Stephen M. Bainbridge, The Board of Directors as Nexus of Contracts, 88 IOWA L. REV. 1, 9 (2002);
69. Cary, supra note 1, at 665; Fischel, supra note 41, at 916-17;
70. Faith Stevehnan Kahn, Pandora's Box: Managerial Discretion and the Problem of Corporate Philanthropy, 44 UCLA L. REV. 579, 610 n.120 (1997);
71. Alan R. Palmiter, Reshaping the Corporate Fiduciary Model: A Director's Duty of Independence, 67 TEX. L. REV. 1351,1357 n.12 (1989);
72. Dalia Tsuk, From Pluralism to Individualism: Berle and Means and 20th-century American Legal Thought, 30 LAW & Soc. INQUIRY 179, 180 (2005); Winter, supra note 1, at 262 ("With a few exceptions, the legal literature is single-mindedly concerned with the discretion corporate management can exercise as a result of the 'separation of ownership and control' popularized by Berle and Means."). See generally William W. Bratton, Berle and Means Reconsidered at the Century's Turn, 26 J. CORP. L. 737 (2001).
73. One might think about this point at two levels: To begin, state competition is not determinative of the quality of the content, versus the form, of the rules of corporate governance. Beyond content or form, however, it is not determinative of the real-world quality of corporate governance, given managers' need to answer to the capital markets for their actions, regardless of any discretion they might be granted by law. In a sense, the Model Business Corporation Act's distinction between "standards of conduct" and "standards of liability" might be understood in the latter light. See Charles M. Elson & Robert B. Thompson, Van Gorkom's Legacy: The Limits of Judicially Enforced Constraints and the Promise of Proprietary Incentives, 96 Nw. U. L. REV. 579, 582 (2002).
74. See Frank H. Easterbrook & Daniel R. Fischel, The Corporate Contract, 89 COLUM. L. REV. 1416,1417 (1989) [hereinafter Easterbrook & Fischel, Corporate Contract] ("The corporate code in almost every state is an 'enabling' statute.");
75. see also Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38 STAN. L. REV. 271,279 n.15 (1986) [hereinafter Easterbrook & Fischel, Close Corporations] ("The classic example of an enabling statute is the Delaware Code, which provides investors in both publicly and closely held corporations with a set of standard form terms which they can vary by agreement.").
76. See, e.g., Melvin Avon Eisenberg, The Structure of Corporation Law, 89 COLUM. L. REV. 1461, 1524 (1989);
77. Jeffrey N. Gordon, The Mandatory Structure of Corporate Law, 89 COLUM. L. REV. 1549, 1597 (1989).
78. See supra notes 40-42 and accompanying text.
79. See Winter, supra note 1, at 263-64.
80. In a sense, this analysis might be seen to echo Bernard Black's assertion of the triviality of corporate law. See Black, supra note 14, at 543-44.
81. Given my focus on the broad dynamics of competition that undergird the modern study of corporate law, the state operates almost entirely as a black box herein. For the most part, I believe this is consistent with the analysis I hope to undertake. I acknowledge, however, the greater complexity that the unpacking of that box would entail. In particular, it is striking to consider how state litigation in corporate law would seem to speak directly to the substantive quality of corporate governance. My claim, however, is that state competition does not speak directly to the substance of corporate governance, as distinct from state law. One reconciliation of the orientation of state courts to the substantive quality of corporate governance with the argument advanced herein, then, might be the claim that state litigation of corporate law disputes involves no dimension of competition. Cf. David A. Skeel, Jr., The Unanimity Norm in Delaware Corporate Law, 83 Va. L. REV. 127, 158 (1997). This might also help us to understand the empirical evidence that shareholder value is greater in Delaware-incorporated firms. See, e.g., Robert Daines, Does Delaware Law Improve Firm Value?, 62 J. FIN. ECON. 525,527 (2001). The critical question, of course, is what we should understand such studies to establish. Although they suggest that the choice of Delaware law may be welfare-enhancing to shareholders, they do not tell us why. They do not establish that state competition is the source of such welfare gains. More specifically, they do not tell us whether such increases in shareholder wealth are generated by what I characterize herein as "vertical" versus "horizontal" gains in shareholder value. State competition may be shifting surplus to the firm, and thereby generating shareholder wealth-but without regard to any enhancement in the quality of corporate governance.
82. See supra note 55 and accompanying text.
83. See infra note 71.
84. See infra Part III. Further, it is not a question of whether state rules are preferable to national rules. In many areas of law, state law has been seen as preferable, in offering a wider menu of choices to relevant consumers, perhaps more effectively meeting a varied universe of demand. Neither modern theories of corporate law nor its empirical reality, however, are readily reconciled with this account. The model of state competition at the heart of corporate law analysis thus presumes a charter competition driven by similar demand curves among the universe of firms. Delaware's dominance among firms not incorporated in their home states, see Chris Brummer, Corporate Law Preemption in an Age of Global Capital Markets, 81 S. CAL. L. REV. 1067, 1082 (2008), meanwhile, suggests that diversity of corporate form is not part of the reality either. That said, state law-and even state competition-may be a source of value in corporate law in ways other than in offering a diverse choice of law. See infra Part III.
85. My basic proposition might alternatively be framed as follows: state competition may improve the alignment of law with managerial demand, but it does nothing to alter or shift that demand. Rather, it takes managerial interests as it finds them.
86. See infra Part III.
87. See infra Part IV.B.
88. As its point of departure, the analysis just concluded builds off the dominant view of corporate scholars of some baseline efficiency in the capital markets and some resulting pressure on managers to compete. See supra note 50. Assuming such efficiency, Part II questions the gains to be added by state competition in corporate governance. My essential argument, however, does not involve any endorsement of market efficiency. For those who would question such efficiency, thus, the argument simply emphasizes that state competition cannot serve as a surrogate mechanism for efficient regulation of the separation of ownership and control. Meanwhile, for those who would critique the quality of modern corporate governance, the argument emphasizes that it is the inefficiency of the markets that is the appropriate target of their attack, rather than state competition. See infra Part IV.B.
89. A distinct, and more inchoate, articulation of a direct role for state competition in enhancing the substantive quality of corporate governance might characterize it as a distinct source of information on the nature of efficient governance. State competition, in this account, is a source of new information above and beyond that known to managers. Perhaps it can predict the effects of certain choices in corporate governance in ways beyond the capacity of individual managers. More poetically, perhaps it may offer insights into the "unknown unknowns" former Secretary of Defense Donald Rumsfeld made famous. See Philip Stephens, The Unwitting Wisdom of Rumsfeld's Unknowns, FIN. TIMES, Dec. 12, 2003, at 19 (quoting Rumsfeld press conference). On the face of standard accounts of state competition in corporate law, there is little ground to support such a notion of state competition as "creative." Such competition responds to managerial demand, not some invisible hand of efficiency. If managers lack the ability or incentive to generate insight into relevant unknowns, state competition in corporate law-by its very nature-should do no better.There is, to be sure, the notion of some "wisdom of crowds." See JAMES SUROWIECKI, THE WISDOM OF CROWDS 235 (2004). Collective knowledge may thus be greater than the sum of the individual knowledge that constitutes its parts. The latter's implications for corporate law lie in the capital markets and hence the mechanisms of managerial competition, however, rather than state competition. See Ronald J. Gilson & Reinier H. Kraakman, The Mechanisms of Market Efficiency, 70 VA. L. REV. 549, 553-54 (1984).
90. Such rules might be seen as the converse of the "market perfecting" state rules which Easterbrook sees as welcome in the marketplace of corporate law. See Frank H. Easterbrook, Managers' Discretion and Investors' Welfare: Theories and Evidence, 9 DEL. J. CORP. L. 540, 570 (1984).
91. See Lucian Arye Bebchuk & Allen Ferrell, Federalism and Corporate Law: The Race to Protect Managers from Takeovers, 99 COLUM. L. REV. 1168,1175-76 (1999) (describing the ways in which antitakeover provisions benefit incumbent managers); see also Frank Easterbrook & Daniel Fischel, The Proper Role of a Target's Management in Responding to a Tender Offer, 94 HARV. L. REV. 1161,1184 (1981). But see Guhan Subramanian, A New Takeover Defense Mechanism: Using an Equal Treatment Agreement as an Alternative to the Poison Pill, 23 DEL. J. CORP. L. 375, 390-97 (1998).
92. See Gilson, supra note 42, at 839-40. But see Winter, supra note 1, at 275-76. Mechanisms that minimize disclosure, insofar as such disclosure is seen to facilitate the operation of efficient capital markets, would be to similar effect. Cf. Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911, 1920-21 (1996) ("Sophisticated professional accountants, elaborate financial disclosure, an active financial press, and strict antifraud provisions assure shareholders of reliable information about company performance."); Merritt B. Fox, Retaining Mandatory Securities Disclosure: Why Issuer Choice Is Not Investor Empowerment, 85 VA. L. REV. 1335, 1379-80 (1999);
93. see also John C Coffee, Jr., The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role, 89 COLUM. L. REV. 1618,1618 n.l (1989) (arguing that courts should "create ex ante incentives for the disclosure of private information"). The imposition of heavier burdens on shareholders in proxy contests, finally, might also be included in this category. See Gilson, supra note 42, at 843.
94. Cf. Coffee, supra note 74, at 1618 n.l (counseling courts to construct fiduciary obligations of corporate law strictly, absent contractual opt-out "permit[ting] accurate pricing of the departure").
95. See supra note 50.
96. For sake of argument, I leave aside the possibility of reincorporation overseas, notwith-standing the increasingly real possibility of that approach. See Drawing Lines Around Corporate Inversion, 118 HARV. L. REV. 2270, 2271-72 (2005).
97. See supra note 58 and accompanying text.
98. See supra text accompanying notes 58-61.
99. I return to this possibility infra, when I consider the efficiency implications of potential national rules of corporate law. See infra Part IV.A.
100. See Winter, supra note 1, at 262 (noting that corporations do not "[l]ive by [l]aw [a]lone").
101. See supra notes 40-43 and accompanying text.
102. One might posit a chicken-and-egg argument here, in which state competition is essential to efficient corporate governance, assuming a certain initial state of affairs. If relevant law effectively insulates managers from the capital markets at the outset, the logic goes, state competition is needed to undermine that insulation and thereby trigger managerial competition. From there, managerial competition can take care of the rest. On several counts, I am dubious about this argument. To begin, it is difficult to reconcile with our continuing attention to federalism in corporate law, since state competition would presumably have exhausted its contribution sometime in the early 1900s. More substantively, given the limited efficacy of antitakeover protections, as well as managers' need to compete not only in the market for corporate control but also in the capital markets and the products markets, see Winter, supra note 1, at 263-66, even managers who start off in the "insulated" jurisdiction should be under pressure to compete. As I argue below, moreover, this result does not change, even if the relevant alternative to state competition is not a state regime without competition, but instead a national regime of corporate law. See infra Part IV.A. Even there, managerial competition continues to exert force, assuming the operation of efficient capital markets.
103. See infra Part IV.A.
104. See Winter, supra note 1, at 257; see also supra note 42.
105. See Winter, supra note 1, at 257. I do not dispute that managerial competition might be somewhat more limited in the face of national versus state rules of corporate governance. Given the international equities markets, as well as alternative domestic investment vehicles, however, there is no reason to expect it to be significantly limited. See infra note 157 and accompanying text. Further, even this caveat will depend on whether some degree of competition predates the emergence of relevant national-level rules of corporate governance.
106. See infra Part IV.B.
107. See Roberta Romano, The Future of Hostile Takeovers: Legislation and Public Opinion, 57 U. CIN. L. REV. 457, 457 (1988).
108. As suggested above, there are other examples as well, see supra notes 73-74 and accompanying text, but state antitakeover statutes represent the most prominent, and most hotly debated, case. Given their consequently higher salience, they are appropriately viewed as a proxy for the broader dynamic at work.
109. See supra note 45 and accompanying text.
110. It accomplishes little to respond-as has become common, see, e.g., EASTERBROOK & FISCHEL, supra note 24. at 223-that
111. See supra notes 55-56 and accompanying text.
112. Generating good law, thus, is not the same thing as generating good governance.
113. See, e.g., ROMANO, supra note 55, at 1 (characterizing federalism as "[t]he genius of American corporate law").
114. I do not dispute the relatively lower transaction costs of corporate re-chartering, as compared with the physical dislocation potentially necessary for interstate competition in certain other areas of law and regulation. The latter speaks to the relative dynamism of competition, however, not its presence or absence.
115. Cf. Edward L. Rubin & Malcolm Feeley, Federalism: Some Notes on a National Neurosis, 41 UCLA L. REV. 903, 920-23 (1994) (suggesting capacity of federalism to enhance the quality of state regulation).
116. In fact, transaction cost savings from public production of efficient default rules may be quite substantial.
117. See, e.g., Romano, supra note 15, at 229.
118. I do not mean to suggest that corporate scholars have disregarded questions of regulatory (versus managerial) efficiency. Rather, I argue that the conventional analysis has not adequately emphasized the promotion of those distinct ends by the distinct dynamics of state versus managerial competition.
119. 1oo The widely acknowledged role of state competition in the production of corporate law default rules is suggestive. It is true that state competition efficiently generates default rules; unto itself, however, it does not generate efficient default rules.
120. And only thereby the shareholders of the firm, as its residual beneficiaries.
121. See BERLE & MEANS, supra note 12, at 84, 115, 128-40.
122. Id.
123. See Herbert Hovenkamp, The Classical Corporation in American Legal Thought, 76 GEO. L.J. 1593, 1685 (1988) (noting that "Time magazine called The Modern Corporation and Private Property 'the economic Bible of the Roosevelt administration'" (quoting Credit Manager, TIME, Apr. 24, 1933, at 14)).
124. See BERLE & MEANS, supra note 12, at 356.
125. Id. Almost fifty years later, of course, Winter would offer managerial competition as an alternative to such regulation, see supra notes 40-42 and accompanying text, and both the literature and the law would follow suit.
126. See, e.g., Kenneth J. Arrow, Social Choice and Individual Values (1951); James M. Buchanan & Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962); Anthony Downs, Inside Bureaucracy (1967); Mancur Olson, The Logic of Collective Action (1965); Sam Peltzman, Toward a More General Theory of Regulation, 19 J.L. & ECON. 211, 211-14 (1976); George J. Stigler, The Theory of Economic Regulation, 2 BELL J. ECON. & MGMT. SCI. 3, 3 (1971).
127. See BERLE & MEANS, supra note 12, at 356.
128. See supra note 107 and accompanying text.
129. In the basic public choice account, regulatory "goods" are subject to supply and demand in a marketplace characterized by the self-interested behavior of legislatures, regulators and agencies, interest groups, and citizens. See Steven P. Croley, Theories of Regulation: Incorporating the Administrative Process, 98 COLUM. L. REV. 1, 34-35 (1998).
130. See, e.g., SUSAN M. PHILLIPS & J. RICHARD ZECHER, THE SEC AND THE PUBLIC Interest17-25 (1981); William J. Carney, The Political Economy of Competition for Corporate Charters, 26 J. LEGAL STUD. 303, 303 (1997);
131. Frank H. Easterbrook & Daniel R. Fischel, Mandatory Disclosure and the Protection of Investors, 70 VA. L. REV. 669, 670-71 (1984);
132. Jonathan R. Ma-cey & David D. Haddock, Shirking at the SEC: The Failure of the National Market System, 1985 U. III. L. Rev. 315, 315 (1985);
133. Henry G. Manne, Economic Aspects of Required Disclosure Under Federal Securities Laws, in Wall Street in Transition: THE EMERGING SYSTEM AND ITS IMPACT ON THE ECONOMY 21, 25 (Henry G. Manne & Ezra Solomon eds., 1974).
134. At least some of the shift from a discourse of shareholder protection to one of shareholder value, see, e.g., Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 GEO. L.J. 439, 439 (2001) ("[CJorporate law should principally strive to increase long-term shareholder value."); Jonathan R. Macey, Efficient Capital Markets, Corporate Disclosure, and Enron, 89 CORNELL L. REV. 394, 403 n.49 (2004), can be tied to a desire to more fully capture the range of threats to shareholder interests.
135. See Carney, supra note 111, at 303; Frank H. Easterbrook, Federalism and European Business Law, 14 INT'L REV. L. & ECON. 125, 127 (1994); see also Romano, supra note 55, at 16-17.
136. Cf. RoMANO, supra note 55, at 1.
137. See Romano, Law as a Product, supra note 55, at 248-49. Romano observed that costs associated with re-incorporation can be high, but that [s]till, even when the costs are toward the high end, the dollars involved are not overwhelming in comparison to the company's assets or net income. . . . [CJhanging domicile is not frictionless, as the legal debate on state competition assumes, nor [is the cost] so prohibitive as to enable states to disregard the possibility of migration.Id.; see also Black, supra note 14, at 586-89;
138. William W. Bratton, Delaware Law as Applied Public Choice Theory: Bill Cary and the Basic Course After Twenty-Five Years, 34 GA. L. REV. 447, 454 (2000).
139. See Yingyi Qian & Barry R. Weingast, Federalism as a Commitment to Preserving Market Incentives, 11 J. ECON. PERSP. 83, 88 (1997).
140. See Black, supra note 14, at 548 (reasoning that states "restricting] corporate freedom in any important way .. will lose revenue" because corporations "will flee" to states with more liberal corporate statutes).
141. See id.; Easterbrook, supra note 113, at 126 ("The pressure of movement curtails the ability of state and local governments to impose inefficient regulations that transfer wealth to politically effective groups but injure the population at large.");
142. see also Easterbrook, supra note 113, at 127-28 ("When governments become sufficiently plentiful, and when the scope of laws matches the domain of their costs and benefits (that is, when costs and benefits are all felt within the jurisdiction enacting the laws), competitive forces should be as effective with governments as they are with private markets.").
143. See infra notes 121-22 and accompanying text.
144. To a related effect, efficient state corporate law may "minimize the costs to corporations of using agents to create some of the rules that control corporate behavior." See Curtis Alva,Delaware and the Market for Corporate Charters: History and Agency, 15 DEL. J. CORP. L. 885, 890 (1990). This is an entirely different agency, of course, than that attendant to the separation of ownership and control.
145. Again, as I discuss below, state competition might also be hoped to increase efficiency generally, with gains to both firm and state. See infra note 139 and accompanying text. The latter circumstance seems destined to be relatively rare, however, by comparison with the baseline phenomenon of a shift of surplus from state to firm.
146. Notably, this characterization of corporate federalism's role most clearly echoes the earliest scholarly explorations of interstate competition. Charles Tiebout's original analysis concerned the capacity of a decentralized political system to efficiently align the production of public goods with public demand. See Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J. POL. ECON. 416,416, 424 (1956). In this construct, the dependent variable of interest is state behavior-as it is in the horizontal project of corporate law I highlight. See id. Tiebout's parallel metric of efficiency thus lay in the alignment of public regulation and the demands of a mobile citizenry. See id. at 424.
147. See supra notes 58, 78-80 and accompanying text.
148. See supra Part II.
149. See infra Part IV.A.
150. Some attention to these metrics in the existing literature reflects an underlying appreciation of the true role of state competition in corporate law. This only makes our misleading rhetoric-and its distortive effects-even more striking.
151. As emphasized below, this metric is particularly ambiguous in its "efficiency" implications. See infra text accompanying note 139.
152. 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, 244-45 (1997).
153. See Wallace E. Oates & Robert M. Schwab, Economic Competition Among Jurisdictions: Efficiency Enhancing or Distortion Inducing?, 35 J. PUB. ECON. 333, 336 (1988) ("[Jurisdictions compete for a mobile stock of capital by lowering taxes and relaxing environmental standards that would otherwise deflect capital elsewhere. In return for an increased capital stock, residents receive higher incomes in the form of higher wages. The community must, however, weigh the benefits of higher wages against the cost of foregone tax revenues and lower environmental quality.").
154. See Richard L. Revesz, Rehabilitating Interstate Competition: Rethinking the "Race-to-the-Bottom" Rationale for Federal Environmental Regulation, 67 N.Y.U. L. REV. 1210, 1240-41 (1992).
155. See Jonathan R. Macey & Geoffrey P. Miller, Toward an Interest-Group Theory of Delaware Corporate Law, 65 TEX. L. REV. 469, 505 (1987);
156. see also Ehud Kamar, A Regulatory Competition Theory of Indeterminacy in Corporate Law, 98 COLUM. L. REV. 1908, 1911, 1932-35, 1939-40 (1998). By maintaining a certain lack of clarity in its legal rules, the state of Delaware may simultaneously reduce the ability of another state to "copy" its corporate law (by making the interpretive work of its courts an integral part of the value of its legal regime), while also increasing demand for the services of Delaware counsel. See Kamar, supra, at 1911, 1932-35, 1939-10, 1946.
157. See Kamar, supra note 131, at 1908-11.
158. See ROMANO, supra note 55, at 39-40. Generally, the universe of procedural features attendant to corporate law, including the ease of its amendment, the extent of relevant regulatory expertise, the capacity for effective communication, and the like, can be understood as aspects of the horizontal allocation of value between state and firm.
159. See Kahan & Kamar, supra note 38, at 747.
160. See Ian Ayres, Supply-Side Inefficiencies in Corporate Charter Competition: Lessons from Patents, Yachting and Bluebooks, 43 U. KAN. L. REV. 541, 555 (1995).
161. Another way to think about such distinct metrics is to ask what the account I offer suggests should be our policy focus, in seeking to enhance efficiency. If more effective managerial competition is the key to enhanced corporate governance, versus more active state competition, a different set of reform proposals comes to the fore. As Todd Henderson has recently suggested: Instead of giving the power to legislators, who know less than managers, shareholders, and creditors, why not advocate repealing the Williams Act, changing the rules about how firms repay costs in proxy battles, or any number of other reforms that would keep the burden on firm stakeholders to make these decisions. M. Todd Henderson, The Impotence of Delaware's Taxes: A Short Response to Professor Barzuza's 'Delaware's Compensation' 6 (Univ. of Chi. Law & Econ., Olin Working Paper No.
162. 439, 2008), available at http://papers.ssrn.com/sol3/papers.cfm? abstract-id=1288769. To similar effect, the account I offer might suggest the lifting of constraints on the investment opportunities available to 401(k) and similar account holders, in the service of a more vibrant capital market and hence greater managerial competition.
163. See supra text accompanying note 95.
164. It is important to reemphasize that I do not mean to suggest that the corporate law literature has not highlighted the impact of state competition on regulatory behavior. See supra note 44. The work of William Carney, among others, might be cited as doing just that. See, e.g., Carney, supra note 111, at 306-09. Yet the broad emphasis of corporate law remains where it has been since Berle and Means. See supra notes 55-56 and accompanying text. The motivation, as well as the basic content, of corporate law continues to be the relationship of shareholders and managers and the agency costs attendant to it. See id. Emphasis on the distinct genius of corporate federalism-not as a means to protect shareholders from managers, but as a way to protect the firm against inefficient state law-is therefore in order.
165. See supra notes 126-36 and accompanying text.
166. Much of the talk of state competition as a source of " efficiency" in the existing corporate literature can thus be reduced to the observation that state competition reduces the regulatory constraints on public corporations. See Ahdieh, supra note 19, at 738-41. An understanding of state competition as directed to the horizontal allocation of wealth between state and firm does not suggest such reduction to be inefficient. It highlights, however, that it is not efficient on its face.
167. See supra Part III.
168. See Cary, supra note 1, at 701-03.
169. See Mark J. Roe, Delaware's Competition, 117 HARV. L. REV. 588, 610-12 (2003).
170. See, e.g., William W. Bratton, The Academic Tournament Over Executive Compensation, 93 CAL. L. REV. 1557, 1561, 1567 (2005) (reviewing Lucian Bebchuk & Jesse Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation (2004)); M. Todd Henderson, Paying CEOs in Bankruptcy: Executive Compensation When Agency Costs Are Low, 101 NW. U. L. REV. 1543, 1544-45 (2007).
171. See, e.g., LUCIAN BEBCHUK & JESSE FRIED, PAY WITHOUT PERFORMANCE: THE UNFULFILLED PROMISE OF EXECUTIVE COMPENSATION 1-10 (2004).
172. See David A. Westbrook, Notes Toward a Theory of the Executive Class, 55 BUFF. L. REV. 1047, 1047 (2007).
173. More broadly, this example suggests the potential for the conventional discourse's merger of state and managerial competition to obscure relevant failures in the competitive process-including the possibility that state competition is leaving shareholders better off, without improving-or even while worsening-the central relationship in corporate governance between shareholders and managers. It may, in essence, permit managers to effectively "satisfice" shareholder demands, rather than actually secure efficient results. See BARRY SCHWARTZ, THE PARADOX OF CHOICE: WHY MORE Is LESS 78 (2004) ("To satisfice is to settle for something that is good enough and not worry about the possibility that there might be something better."). In a sense, this is the notion behind Lucian Bebchuk's critique of stock price studies. See Bebchuk, supra note 52, at 1449-50. Some echo of it might also be seen in Mark Roe's recent work. See Roe, supra note 143, at 595. Consider some hypothetical values: Assuming $10 million in corporate surplus (beyond the cost of managerial and state services), one might imagine an initial distribution of $7 million to shareholders, $2 million to managers, and $1 million to the state of incorporation. Efficient state competition might be expected to disgorge the $1 million rent extraction by the state. Even were that gain to the firm credited in its entirety to shareholders, however, it would do nothing to diminish the managerial rent extractions that are also present. If only half were passed on, meanwhile, state competition might fairly be seen as having aggravated the inefficiency in shareholder-managerial relations. Managerial competition is thus critical to efficient results. When such competition is part of the equation, however, distinct questions arise: What is the relative efficiency of state and mana-gerial competition? If each operates with perfect efficiency, the entire outstanding surplus ($3 million, in the hypothetical offered) would be shifted to shareholders. Where state competition is relatively more efficient than managerial competition, on the other hand, the potential for one competition to mask failures in the other-as outlined above-becomes a real concern.
174. See supra notes 40-42 and accompanying text.
175. See id.; see also Winter, supra note 1, at 263-64.
176. See supra notes 81-83 and accompanying text.
177. See supra notes 58-61 and accompanying text.
178. What shareholders value, thus, is not the quality of corporate law per se, but the quality of corporate governance that arises from any given collection of rules. Assuming efficient markets, the quality of law is simply a proxy for the quality of governance. If management could evince good governance directly, or in some other indirect way (i.e., with other proxies), the results would be as efficient as having good state law, if not better.
179. State competition might thus be argued to encourage an increase in the proportion of enabling versus mandatory rules. See Jeffrey N. Gordon, Institutions as Relational Investors: A New Look at Cumulative Voting, 94 COLUM. L. REV. 124, 145-46 (1994).
180. See Carney, supra note 111, at 318-19, 329 (correlating incidence of mandatory terms with less competitive climate); Note, The Case for Federal Threats in Corporate Governance, 118 HARV. L. REV. 2726, 2732 (2005) ("Race-to-the-bottom and race-to-the-top scholars, as well as Delaware-monopoly theorists, assume that the federal government, should it choose to be involved at all, would actively create corporate law."); see also Choi & Guzman, supra note 55, at 976-79 (arguing against a federal takeover regime, given the likelihood that the federal government would make some rules mandatory).
181. See, e.g., Douglas M. Branson, Indeterminacy: The Final Ingredient in an Interest Group Analysis of Corporate Law, 43 VAND. L. REV. 85, 108 (1990);
182. Jill E. Fisch, Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy, 31 J. CORP. L. 637, 665-66 (2006); Mark J. Roe, Delaware's Politics, 118 HARV. L. REV. 2491, 2493-98 (2005).
183. In the latter account, of course, regulators are subject to the direct and pervasive influence of interest groups seeking rules consistent with their privately optimal regulatory agenda. See Ian Ayres & John Braithwaite, Responsive Regulation: Transcending the Deregulation Debate 54-73 (1992).
184. The knee-jerk reaction of corporate scholars to this possibility might question why man-agers would engage in such lobbying, given the absence of interstate competition in a national regime of corporate law. Thus, in a national regime, all public corporations face identical constraints, such that none are disadvantaged vis-a-vis their competitors by suboptimal rules. But this misses both the essential point of Winter's claim about managerial competition, see Winter, supra note 1, at 263-64, as well as the reality of modern financial markets. Winter's argument is not about competition for capital among public corporations alone, but rather about competition for capital more generally. It is about investors' choice to invest their funds in, "among other things, stock in companies incorporated in other states or other countries, bonds, bank accounts, certificates of deposit, partnerships (general or limited), individual proprietorships, joint ventures, present consumption, etc." Id. at 257. The rise of derivatives and other synthetic investment products, meanwhile, has rendered Winter's argument even stronger. Even if we leave non-equity investments aside, however, in an increasingly global marketplace, managers' competition now comes from overseas, perhaps even more so than from domestic competitors. Transnational competition for funds among public corporations alone may thus suffice to incentivize managers, without regard to the national versus state character of corporate law. At the margin, such competition may be slightly less vigorous than it might be, were it to include competition among U.S. equities as well. Yet this limitation may be fairly inconsequential, assuming some degree of managerial competition at the outset, preceding the introduction of any national regime of corporate law.
185. It bears reiterating that I do not argue that federalism has no role in fostering optimal rules of corporate governance. As suggested above, it likely does. See supra Part III. The argument I challenge here, however, does not simply suggest that federalism has some role to play in the development and codification of good law. Rather, the claim that efficient federal law is an oxymoron goes a step further to suggest not merely a role for federalism in the creation of optimal rules, but an exclusive role.
186. Besides the conceptual argument I offer above, the possibility of federal enabling rules of corporate law may be suggested by the existence of enabling rules elsewhere in federal law, albeit in very different contexts. The Federal Arbitration Act's choice of law provisions, permitting parties to elect the application of state versus federal law, might be cited in this vein, see 9 U.S.C. § 9 (2006), as well as the choice of law implicit in the nature of diversity jurisdiction, 28 U.S.C. § 1332 (2006).
187. See Kahan & Kamar, supra note 38, at 747; Roe, supra note 155, at 2505-06, 2513-14.
188. See supra note 131 and accompanying text.
189. See Kahan & Kamar, supra note 38, at 747. Implicit suggestions of the potential for relatively efficient regulation by the Securities and Exchange Commission can be found in the work of a diverse array of corporate law scholars. See, e.g., Donald C. Langevoort, The SEC as a Lawmaker: Choices About Investor Protection in the Face of Uncertainty, 84 WASH. U. L. REV. 1591, 1624 (2006); Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 YALE L.J. 2359, 2396 (1998).
190. See Kahan & Kamar, supra note 38, at 747.
191. In the face of indeterminate evidence on the costs and benefits of state versus federal rules, the question of our operative default rule, as between state and federal corporate law, may thus be critical. Romano gives clear voice to the corporate law literature's preference for a state law default. See Romano, supra note 162, at 2383. Above, by contrast, I suggest why the costs of competition and redundancy might arguably favor a national default. Ultimately, however, my argument is properly understood as a rejection of both extremes. We should resist the easy embrace of one default versus another. We do better to interrogate the political economy of each hard case, to see where it leads us. The analysis herein is not a structural argument for national rules over state rules, as such, but a dissent from a single-minded insistence on either possibility.
192. See supra text accompanying notes 18-19.
193. See, e.g., Romano, supra note 162, at 2383.
194. See supra note 164 and accompanying text.
195. In this vein, Romano has notably acknowledged that differences in the lobbying process at the state and federal level are minimal. See Romano, supra note 162, at 2384 n.77.
196. See Bratton & McCahery, supra note 128, at 277 ("[A] plausible case for a competitive solution to a regulatory problem requires a situation-specific demonstration of both projected beneficial effects and the absence of perverse effects identified in the economic literature. Lawyerly presumptions have no place."); Kahan & Kamar, supra note 38, at 747-48 ("[0]ur investigation points to the importance of a more rigorous, fact-based approach to regulatory competition. Neither theory nor anecdotal evidence is enough to establish the actual existence of competition. Rather than assume that jurisdictional competition exists whenever economic factors dictate that it should, one ought to search for hard evidence of actual competition. Doing so may reveal that competition in practice is far weaker than predicted."). As Michael McDonnell has aptly suggested: "Often one's view of the allocation of authority for specific issues will depend on a prediction as to substantive outcomes rather than a general theory of federalism." Michael W. McConnell, Federalism: Evaluating the Founders' Design, 54 U. CHI. L. REV. 1484, 1500 (1987).
197. See Edward L. Rubin, The New Legal Process, the Synthesis of Discourse, and the Microanalysis of Institutions, 109 HARV. L. REV. 1393, 1425-26, 1437-38 (1996).
198. See Robert B. Ahdieh, The Dialectical Regulation of Rule 14a-8: lntersystemic Governance in Corporate Law, 2 J. Bus. & Tech. L. 165. 169-70 (2007); Ahdieh, supra note 19, at 722.
199. A final note is in order regarding the claim of this Section that national regimes may be efficient in their production of optimal (and even optional) rules of corporate governance, and that we consequently ought not essentialize the role of federalism and state competition in securing efficient results. In the text, I focus on the fact that market-motivated managers can be expected to elect optimal rules, even within a regime that is federal, yet enabling. I then outline the reasons a national enabling regime is well within the realm of the possible. But what if I am wrong? What if federal law will, of necessity, be comprised of mandatory rules? If markets remain efficient, it turns out, it ought not matter. The collapse of state and managerial competition in the corporate law literature thus obscures a further mechanism by which optimality might be achieved in a national regime of corporate law. If we continue to assume well-functioning capital markets, managers will still be incentivized to seek efficient rules, even in the face of nationally applicable, mandatory rules of corporate governance. The latter process will necessarily involve greater bargaining and/or transaction costs, requiring managers to lobby for changes in relevant legislative or regulatory rules, or expatriate the firm's place of incorporation. (This leaves aside, of course, the possibility that managers could govern the firm efficiently, regardless of applicable law. See supra note 152.) Assuming efficient markets and resulting managerial competition, however, there is no structural barrier to efficient corporate governance, even in the face of mandatory federal law. But why would managers bother to compete in the face of mandatory national rules? By leveling the regulatory playing field among public corporations, would such a regime not doom managerial competition? Not at all. As noted above, even dating back to Ralph Winter's seminal work, but particularly in today's global and varied capital markets, managerial competition for capital is not exclusively a competition among domestic public corporations. See supra note 157. Rather, it operates across borders and over an array of investment opportunities, making competition vibrant, even in the face of mandatory national rules of corporate law. To be sure, there are significant inefficiencies in the expression of managerial competition in federal lobbying efforts or corporate inversion. I nonetheless highlight it to emphasize the possibility of active managerial competition-and resulting regulatory efficiency-even in the absence of federalism and state competition.
200. See, e.g., Cary, supra note 1, at 673-75; Winter, supra note 1, at 287-89.
201. See Lucian Arye Bebchuk & Alma Cohen, Firms' Decisions Where to Incorporate, 46 J.L. & ECON. 383, 404-05 (2003);
202. Henry N. Butler, Corporation-Specific Anti-Takeover Statutes and the Market for Corporate Charters, 1988 Wis. L. REV. 365,366;
203. Easterbrook & Fischel, supra note 73, at 1162-64,1184; Romano, supra note 88, at 457; see also Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496, 500 (7th Cir. 1989) (Easterbrook, J.) (acknowledging "that antitakeover legislation injures shareholders"). But see Subramanian, supra note 73, at 390-97. Some have sought to reconcile state antitakeover statutes with a salutary tale of corporate federalism by stressing that state competition is imperfect but yields efficient results with time, see Amanda Acquisition Corp., 877 F.2d at 507, that it is still preferable to federal intervention, see Romano, supra note 88, at 503-04, or that the state competition model does not encourage and is thus not to blame for the existence of antitakeover statutes, see EASTERBROOK & FISCHEL, supra note 24, at 222-23. As Bebchuk and Ferrell argue, however, if antitakeover statutes were mere "fluke[s]" in an otherwise well-functioning theory of corporate federalism, we would not see the ongoing, deliberate steps leading to these statutes by both managers and state officials, who have had more than twenty years to adjust, if they felt the statutes problematic. See Bebchuk & Ferrell, supra note 73, at 1198. Finally, a few scholars have suggested that such statutes may actually be good for shareholders. See, for example, Lucian Arye Bebchuk, The Sole Owner Standard for Takeover Policy, 17 J. LEGAL STUD. 197, 215 (1988): When shareholders might be pressured into accepting an offer the rejection of which would be value maximizing, then, it might be hoped, management will use its obstructing power to block the offer. Indeed, commentators and courts recently have been using such an argument with increasing frequency to justify the use of obstructing tactics. Id. Such claims, however, have commonly been rejected, see, e.g., EASTERBROOK & FISCHEL, supra note 24, at 220 (asserting that "it is easy to discard" the argument that antitakeover statutes "protect shareholders from the effects of 'coercive' tender offers").
204. See Bebchuk & Ferrell, supra note 73, at 1171-72;
205. see also John C. Anjier, Anti-Takeover Statutes, Shareholders, Stakeholders and Risk, 51 LA. L. REV. 561, 575, 580 (1991) (arguing that states' adoption of antitakeover statutes is based on fear and greed, and provides classic evidence of the " 'race to the bottom' that has occurred in state corporate law since the early twentieth century"); Guhan Subramanian, The Influence of Antitakeover Statutes on Incorporation Choice: Evidence on the "Race" Debate and Antitakeover Overreaching, 150 U. PA. L. REV. 1795, 1800-01 (2002). See generally Lyman Johnson & David Millon, Missing the Point About State Takeover Statutes, 87 MICH. L. REV. 846, 848-50 (1989).
206. it has thus been highlighted that Delaware has a mild statute, compared to most other states. See, e.g., Romano, supra note 162, at 2385-86. Regardless, the critical difficulty for advocates of state competition remains: Delaware has an antitakeover statute.
207. See supra notes 18-19, 165 and accompanying text.
208. of course, beyond state law, managers' use of antitakeover protections represents a fundamental challenge to the claim of efficiency in the capital markets and in resulting managerial competition.
209. See, e.g., Winter, supra note 1, at 287-89.
210. At some level, this is true. In the takeover context, managers' market-motivated will to advance shareholder interests must be balanced against the prospect of their displacement as managers. Yet this cannot sustain the standard distinction. Even in the context of takeovers, managerial displacement remains, in any given case, merely a possibility. Given the concomitant-and relatively greater-possibility of remaining in their positions, one would expect managers appropriately motivated by the capital markets to be fairly resistant to antitakeover statutes considered to be harmful to shareholder interests. Antitakeover statutes, then, continue to look like any other example of shareholder-managerial conflict.
211. See supra text accompanying note 22.
212. Although shareholder-manager conflict may not be unique to the antitakeover context, it may be somewhat stronger there.
213. See Guhan Subramanian, The Disappearing Delaware Effect, 20 J.L. ECON. & ORG. 32, 50-51 (2004).
214. See GEORGE J. STIOLER, THE INTELLECTUAL AND THE MARKETPLACE 39-42 (1984).
215. As noted above, regulatory constraints on the allocation of 401(k) and similar funds might also deserve scrutiny from the vantage of a managerial versus state competition-driven account of the mechanisms of efficiency in corporate governance. See supra note 136. Such constraints, in essence, diminish the extent to which the full breadth of the capital markets- including those investments not permitted under existing regulations-can function to encourage effective managerial competition. This result is likely to be particularly harmful, of course, in those spheres in which national-level rules are in force, and direct competition among U.S. equities is consequently more limited.
216. See Winter, supra note 1, at 262.
217. One might particularly question the continuing emphasis on federalism in the corporate law literature, given the increasing popularity of distinct business forms, including limited liability companies and limited partnerships. See, e.g., David Carey & John E. Morris, Blackstone Commands Top Dollar, The Deal.com http://Deal.com, June 22, 2007, www.thedeal.com http://www.thedeal.com (search "Blackstone Commands Top Dollar"). As to these business forms, the internal structure of the firm, as well as the nature of its capital-raising activity, raise questions likely to be overlooked with a continuing emphasis on federalism.
218. See supra notes 50, 70.
219. cf. Bratton & McCahery, supra note 128, at 277 (calling for a "situation-specific demonstration" of the basis for regulatory competition); Kahan & Kamar, supra note 38, at 747-48 ("Rather than assume that jurisdictional competition exists whenever economic factors dictate that it should, one ought to search for hard evidence of actual competition."); McConnell, supra note 169, at 1500 ("Often one's view of the allocation of authority for specific issues will depend on a prediction as to substantive outcomes rather than a general theory of federalism.").
220. As Donald Langevoort has aptly suggested of the Securities and Exchange Commission: "[Its] workings . . . are far more complicated than most of either its critics or enthusiasts portray . . . ." Langevoort, supra note 162, at 1626. Given such complexity, "we need much deeper institutional study motivated by neither doubt nor enthusiasm." Id.
221. See Roe, supra note 143, at 590 (arguing that "chief competitive pressure comes not from other states but from the federal government").
222. See Romano, supra note 15, at 223-24.
223. See Rubin, supra note 170, at 1425.
224. See ROMANO, supra note 55, at 39-40.