The reach of state corporate law beyond state borders: reflections upon federalism

New York University Law Review

Volumn 84, Issue 5, 2009, Pages 1149-1168

  Jacobs, Jack B ^a  

^a Supreme Court of Delaware ^*  (United States)

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EID: 70450206022     PISSN: 00287881     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (78)

1. See, e.g., DEL. CODE ANN. tit. 8, §101 (2001);
2. MODUL BUS. CORP. ACT. §2.02(a) (2005).
3. See, e.g., Andrew G.T. Moore II, A Brief History of Delaware and the Amendatory Process, in 1 DELAWARE LAW OF CORPORATIONS AND BUSINESS ORGANIZATIONS H-1 (R. Franklin Balotti & Jesse A. Finkelstein eds., 3d ed. 2001);
4. J AMES WILLARD HURST, THE LEGITIMACY OF THE BUSINESS CORPORATION IN THE LAW OF THE UNITED STATES, 1780-1970, at 15 (The Lawbook Exchange 2004) (1970) ("After independence the consistent practice was to create corporations by special statute.").
5. See, e.g., HURST, supra note 2, at 26 ("[T]he corporate form encouraged the muster or retention of resources by offering investors an assured frame of limited commitments .").
6. In Delaware, for example, the Constitution of 1897 provided that "[n]o corporation shall hereafter be created, amended, renewed or revived by special act, but only by or under general law ." DEL. CONST., art. IX, § 1.
7. WILLIAM T. ALLEN ET AL., COMMENTARIES AND CASES ON THE LAW OF BUSINESS ORGANIZATION 88 (2d ed. 2007).
8. 21 Del. Laws 445-503 (1899).
9. Sherman Antitrust Act, ch. 647, 26 Stat. 209 (1890) (codified as amended at 15 U.S.C. §§ 1-7 (2006)), was passed in 1890. The Clayton Act, ch. 323, 38 Stat. 730 (1914) codified as amended at 15 U.S.C. §§ 12-27, 29 U.S.C. §§ 52-53 (2006)), which amended the Sherman Act, was passed in 1914.
10. Paul G. Mahoney, The Political Economy of the Securities Act of 1933, 30 J. LEGAL STUD. 1, 5 (2001) (discussing dominance of "institutions and wealthy investors" rather than retail investors" in United States securities markets before World War I).
11. See EDWIN BURK COX, TRENDS IN THE DISTRIBUTION OF STOCK OWNERSHIP 197 1963) (hypothesizing that number of stockholders in United States grew from one million in 1900 to ten million by 1930).
12. JOEL SELIGMAN, THE TRANSFORMATION OF WALL STREET: A HISTORY OF THE SECURITIES AND EXCHANGE COMMISSION AND MODERN CORPORATE FINANCE 42-50 (rev. ed. 1995) (discussing inability of state statutes to prevent securities fraud before Great Depression).
13. Securities Act of 1933, ch. 38, 48 Stat. 74 (codified as amended at 15 U.S.C. §§ 77a-77aa (2006)).
14. Securities Exchange Act of 1934, ch. 404, 48 Stat. 881 (codified as amended at 15 U.S.C. §§ 78a-78mm (2006)).
15. 15 U.S.C. § 78n(a) (2006);
16. 17 C.F.R. § 240.14a (2009).
17. See 15 U.S.C. §§ 78m(d), 78n(d)-(f) (2006);
18. 17 C.F.R. §§ 240.13d-1 to -102, 240.14d-1 to -103, 240.14e-1 to -6 (2009).
19. 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). For a general discussion of the impact of the Sarbanes-Oxley Act,
20. see Symposium, Corporate Governance Five Years After SarbanesOxley: Is There Real Change?, 52 N.Y.L. SCH. L. REV. 475 (2007-08).
21. American Recovery and Reinvestment Act of 2009, Pub. L. No.111-5, Div. B, Tit. VII, §7001, 123 Stat. 115, 516-520 (amending 12 U.S.C. §5221) (limiting executive compensation).
22. See, e.g., Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. POL. ECON. 110, 113 (1965) ("[T]he potential return from the successful take-over and revitalization of a poorly run company can be enormous.").
23. E.g., id. ("Only the take-over scheme provides some assurance of competitive efficiency among corporate managers . ").
24. See, e.g., Emanuel Celler, Chairman, U.S. House Judiciary Comm., Conglomerate Merger Investigations, Remarks Before the Seventeenth Annual Antitrust Spring Meeting: Antitrust Report from Official Washington (Mar. 26, 1969), in 38 ANTITRUST L.J. 184, 184-85 (1969) (decrying tactics and effects of 1960s mergers).
25. WILLIAM J. CARNEY, MERGERS AND ACOUISIIIONS 471 (2d ed. 2007) (citing Roberta Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J. L. ECON. & ORG. 225, 234 (1985)).
26. Illinois Business Take-Over Act, Pub. Act No. 80-1421, 1978 III. Laws 1581 (codified at III. Rev. Stat., ch. 121 1/2, ¶ 137.51-.70 (1979)), invalidated by Edgar v. MITE Corp., 457 U.S. 624. 643 (1982).
27. Id.
28. MITE, 457 U.S. 624, 643.
29. Id. at 644.
30. Id. at 646.
31. Id. at 645.
32. McDermott Inc. v. Lewis, 531 A.2d 206, 214-215 (Del. 1987).
33. Id.; see generally VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108, 1112-13 (Del. 2005) (noting that in all but rarest circumstances, federal constitutional principles require use of internal affairs doctrine);
34. Draper v. Gardner Defined Plan Trust, 625 A.2d 859, 865-66 (Del. 1993) (quoting McDermott Inc., 531 A.2d at 214-18) (explaining application of internal affairs doctrine);
35. RESTATEMENT (SECOND) OF CONFLICT OF LAWS §302 & cmt. a (1971);
36. Note, The Internal Affairs Doctrine: Theoretical Justifications and Tentative Explanations for Its Continued Primacy, 115 HARV. L. REV. 1480 (2002) [hereinafter Continued Primacy] (discussing justifications for internal affairs doctrine).
37. RESTATEMENT (SECOND) OF CONFLICT OF LAWS §302 cmt. a.
38. For discussion of control share acquisition statutes, see, for example, Roberta Romano, The Political Economy of Takeover Statutes, 73 VA. L. REV. Ill, 115-16 (1987);
39. Guhan Subramanian, The Influence of Antitakeover Statutes on Incorporation Choice: Evidence on the "Race" Debate and Antitakeover Overreaching, 150 U. PA. L. REV. 1795, 1827 (2002).
40. IND. CODE §23-1-42-1 to -11 (2009).
41. 481 U.S. 69 (1987).
42. Id. at 73-74 (citing IND. CODE ANN. §23-l-42-9(a)-(b)).
43. Id. at 89
44. (citing RESTATEMENT (SECOND) OF CONFLICT OF LAWS §304 (1971)).
45. VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108, 1113 (Del. 2005) (quoting McDermott Inc. v. Lewis, 531 A.2d 206, 216 (Del. 1987)).
46. See, e.g., W. Air Lines, Inc. v. Sobieski, 12 Cal. Rptr. 719, 722 (Dist. Ct. App. 1961) (recognizing validity of internal affairs doctrine, but holding that California law and law of state of incorporation may govern internal affairs if "the totality of California contacts so . require").
47. It is assumed, for purposes of this hypothetical, that the court where the lawsuit is filed has personal jurisdiction over the parties.
48. Delaware is home to 61% of Fortune 500 companies and more than 90% of all United States-based public offerings in 2007 were incorporated in Delaware. HARRIET SMITH WINDSOR, DEL. DEP'T OF STATE, DIV. OF CORPS., 2007 ANNUAL REPORT 1 (2007), available at http://corp.delaware.gov/2007DivCorpAR.pdf.
49. See CAL. CORP. CODE §2115 (West Supp. 2009); N.Y. Bus. CORP. LAW §1320 (McKinney 2003 & Supp. 2009). 40 CAL. CORP. CODE §2115(a).
50. Id. §2115(c)(1)-(2).
51. See VantagePoint Venture Partners 1996 v. Examen, Inc. (Examen 11), 871 A.2d 1108, 1114 (Del. 2005) (citing CAL. CORP. CODE §2115(b) (West 1997 & Supp. 1984)) (emphasis added).
52. W. Air Lines, Inc. v. Sobieski, 12 Cal. Rptr. 719, 728 (Dist. Ct. App. 1961).
53. 187 Cal. Rptr. 852, 857-858 (Ct. App. 1982).
54. See State Farm Mut. Auto. Ins. Co. v. Super. Ct., 8 Cal. Rptr. 3d 56, 63, 67-69 & n.3 (Ct. App. 2003) (applying law of defendant corporation's place of incorporation, rather than California state law, after finding that "the parties' dispute involve[d] the internal affairs of the company").
55. Draper v. Gardner Defined Plan Trust, 625 A.2d 859 (Del. 1993).
56. Id. at 869.
57. 871 A.2d 1108(Del. 2005).
58. Id. at 1109-10 n.l;
59. see CAL. CORP. CODE §2115 (enumerating factors that may subject foreign corporations to laws of California);
60. id. §1201 ("The principal terms of a reorganization shall be approved by the outstanding shares . of each class of each corporation the approval of whose board is required .").
61. Examen, Inc. v. VantagePoint Venture Partners (Examen I), 873 A.2d 318, 325 (Del. Ch. 2005).
62. Examen II, 871 A.2d at 1116 ("Delaware's well-established choice of law rules and the federal constitution mandated that Examen's internal affairs . be adjudicated exclusively in accordance with the law of its state of incorporation, in this case, the law of Delaware." (internal citations omitted)).
63. Many states have modeled their corporations statutes on the Model Business Corporation Act, which explicitly "does not authorize [the forum] state to regulate the . internal affairs of a foreign corporation." MODEL BUS. CORP. ACT § 15.05(c) (2005).
64. See, e.g., McDermott, Inc. v. Lewis, 531 A.2d 206, 216-17 (Del. 1987) ("[W]e conclude that application of the internal affairs doctrine is mandated by constitutional principles, except in 'the rarest situations.'" (citation omitted)); Continued Primacy, supra note 28, at 1490-1496 (discussing potential applicability of Due Process Clause, Full Faith and Credit Clause, and Dormant Commerce Clause).
65. 500 U.S. 90 (1991).
66. Id. at 92.
67. See, e.g., Norwood P. Beveridge, Jr., The Internal Affairs Doctrine: The Proper Law of a Corporation, 44 Bus. LAW. 693, 719 (1989) (arguing that internal affairs doctrine should not be "blindly adopted");
68. P. John Kozyris, Corporate Wars and Choice of Law, 1985 DUKE L.J. 1, 96 (suggesting that anti-takeover statutes "fall within the ambit" of state powers to regulate foreign corporations);
69. Continued Primacy, supra note 28, at 1501 (arguing that costs of state legislatures' overruling internal affairs doctrine may outweigh benefits).
70. See, e.g., GUIDO CALABRESI, A COMMON LAW FOR THE AGE OF STATUTES 2 (1982) (discussing "problem of legal obsolescence" and arguing that "because a statute is hard to revise once it is passed, laws are governing us that would not and could not be enacted today");
71. GRANT GILMORE, THE AGES OF AMERICAN LAW 95 (1977) ("[G]etting a statute enacted in the first place is much easier than getting the statute revised so that it will make sense in the light of changed conditions.").
72. See, e.g., ROBERTA ROMANO, THE GENIUS OF AMERICAN CORPORATE LAW 9-11 (1993) (describing interstate competition for corporate charters).
73. See, e.g., 15 PA. CONS. STAT. ANN. §§ 1715(a)-(b) (West 1995); VA. CODE ANN. §§ 13.1-690, -728.9 (2006); R.I. GEN. LAWS § 7-5.2-8(b) (1999 & 2008 Supp.).
74. See STEPHEN M. BAINBRIDGE, CORPORATION LAW AND ECONOMICS 741-747 (2002) (describing content and significance of these "nonshareholder constituency statutes").
75. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954-55 (Del. 1985) (discussing obligations of directors in relation to defensive measures to thwart takeovers);
76. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 185 (Del. 1986) (describing fundamental duty of care of directors in defensive measures).
77. In this regard the Indiana statute could hardly be more explicit: Certain judicial decisions in Delaware . relating to potential change of control transactions that impose a different or higher degree of scrutiny on actions taken by directors in response to a proposed acquisition of control of the corporation, are inconsistent with the proper application of the business judgment rule under this article. IND. CODE §23-l-35-l(f) (2009).
78. N.D. CENT. CODE §§10-35-01 to -33 (Supp. 2007).