Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Gustav Klimt, Portrait of Adele Bloch-Bauer (1907)
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Chapter 3Corporate Federalism
• US corporate law history– State legislative chartering– General incorporation
• Internal affairs doctrine– Regulation of foreign corporations– Choice of law rules– Pseudo-foreign corporations
• Federal abstention• “Race of laxity”
– Delaware wins race– Race to bottom or top?
Module II – Corporations and Policy
Citizen of world
Law profession
Corporate practice
Bar exam
Corporations:A Contemporary Approach
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1. Fundamentals– Introduction to firm– Corporate basics
2. Corporations and policy– Corporate federalism– Corporate social responsibility – Corporate political action
3. Corporate form– Organizational choices– Incorporation– Locating corporate authority
4. Corporate finance– Numeracy for corporate lawyers– Capital structure
5. Corporate externalities– Piercing corporate veil– Corporate environmental liability– Corporate criminal liability
6. Corporate governance – Shareholder voting– Shareholder information rights– Public shareholder activism
7. Fiduciary duties– Shareholder litigation– Board decision making – Board oversight – Director conflicts– Executive compensation – Corporate groups
8. Stock trading– Securities markets– Securities fraud class actions– Insider trading
9. Corporate deals– Sale of control– Antitakeover devices– Deal protection
10. Close corporations– Planning– Oppression
1. Fundamentals– Introduction to firm– Corporate basics
2. Corporations and policy– Corporate federalism– Corporate social responsibility – Corporate political action
3. Corporate form– Organizational choices– Incorporation– Locating corporate authority
4. Corporate finance– Numeracy for corporate lawyers– Capital structure
5. Corporate externalities– Piercing corporate veil– Corporate environmental
liability– Corporate criminal liability
6. Corporate governance – Shareholder voting– Shareholder information rights– Public shareholder activism
7. Fiduciary duties– Shareholder litigation– Board decision making – Board oversight – Director conflicts– Executive compensation – Corporate groups
10. Close corporations– Planning– Oppression
Chapter 3Corporate Federalism
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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State legisl
ative sp
ecial c
harterin
g
Dartmouth C
ollege ca
se (1
819)
General in
corp
oratio
n statutes
Delaware G
CL (1899)
Take
over w
ave (1
980s)
Federal s
ecuriti
es laws (
1933, 1934)
SOX (2002)
Sherman A
ntitrust
Act (1
890)
1800 19501900 20001850
US corporate law timeline
D-F (2
010)
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Justice John Marshall
Dartmouth College v. Woodward(US 1819)
Corporation: private property or social institution?
“A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence.”
“But …. It is no more a state instrument, than a natural person exercising the same powers would be.”
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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3. State corporate statutes can be amended (and thus change corporate rights) because of:
a. General police powers of states
b. Reservation of rights – see MBCA § 1.02
c. Constitutional power of state to amend contracts
4. Early corporate statutes distrusted corporate power -- placing limits on corporate purposes, activities, and capitalization. True or false?
1. Corporations are:a. “Artificial beings” created
by and modifiable by the legislature
b. “Contracts” that cannot be unilaterally amended by the legislature
2. US corporations could only be formed by special legislative enactment, until the early 1900s when Delaware enacted a “general corporation law.” True or false?
Pop quiz(corporate law history)
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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5. New Jersey passed the first “liberal” corporate law that -- a. Allowed corporations to
own stock in other corporations (permitting holding companies)
b. Allowed shareholders to bring derivative suits
c. Allowed shareholders to do away with BODs
6. New Jersey lost its “lead” to Delaware when NJ Governor Woodrow Wilson re-regulated NJ corporations. True or false?
7. The takeover wave of the 1980s was a response to the “conglomeration” of the 1960s. True or false?
8. Hedge funds (private investment pools) have have pressured PHC managers to generate high short-term returns for shareholders. Hedge funds rely on -a. Institutional investors
(mutual funds and pension funds) to vote for their proposals
b. Derivative suits to compel management action.
Answers: 1- AB / 2-F / 3-B / 4-T / 5-A / 6-T / 7-T / 8-AB
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Horizontal corporate federalism
(1) Regulation of “foreign corporations”
(2) Internal affairs doctrine
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Suppose a corporation in the business of selling doughnuts –
– Is incorporated in Delaware – Is headquartered in
North Carolina– Locates its retail outlets in
California– Gets its capital from
investors in Florida
Suppose the corporation–1. Sells bad doughnuts in
California – what law applies?
2. Prevents shareholders from voting in Florida – now what law?
MBCA Chapter 15
Foreign corporations
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Internal affairs doctrine …
• Operation of doctrine• Constitutional dimensions
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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McDermott Inc. v. Lewis (Del. 1987)
Panama City, Panama
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Public shareholders
McDermott Delaware
McDermott International
BEFORE
McDermott Delaware
McDermott International
100%RemainingPublic Shs
8%
New public shareholders
92%
AFTER
10%90%100%Exchange
(1:1 + $0.35)
So what if subowns parent shares?
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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“…. [courts and legislatures] have consistently applied the law of the state of incorporation to the entire gamut of internal corporate affairs. In many cases, this is a wise, practical, and equitable choice.”
“ … application of the internal affairs doctrine is not merely a principle of conflicts law. It is also one of serious constitutional proportions—under due process, the commerce clause and the full faith and credit clause.”
McDermott Inc. v. Lewis (Del. 1987)
Delaware Supreme Court
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Constitutional dimensions …(what is pseudo-foreign corporation?)
Compare (and distinguish): • Wilson (Cal. App. 1982)• Vantage Venture Partners (Del. 2005)
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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A pseudo-foreign corporation
• incorporated in Utah• most of its assets,
payroll, sales and shareholders in California
Shareholder voting• California requires
cumulative voting• Utah has straight
(plurality) voting.
A pseudo-foreign corporation
• incorporated in Delaware
• most of its assets, payroll, sales and shareholders in California
Shareholder voting• California requires
separate class voting• Delaware “single
class” voting Distinguish
Wilson v. Louisiana-Pacific Resources Inc (Cal. App. 1982)
Vantagepoint Venture Ps v. Examen Inc (Del. 2005)
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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“If California's statute were replicated in all states, no conflict would result. We conclude that the potential for conflict is, on this record, speculative and without substance.”
“We conclude that to the extent that the cumulative voting requirement imposed by section 2115 upon pseudo-foreign corporations is shown to have any effect upon interstate commerce, the effect is incidental, and minimal in relation to the purpose which that requirement is designed to achieve.”
Wilson v. Louisiana-Pacific Resources Inc(Cal. App. 1982)
PrivateChoice
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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“The internal affairs doctrine is not … only a conflicts of law principle.”
“In CTS, the Supreme Court concluded that ‘so long as each State regulates voting rights only in the corporations it has created, each corporation will be subject to the law of only one State.’ Accordingly, we hold Delaware's well-established choice of law rules and the federal constitution mandated that Examen's internal affairs … be adjudicated exclusively in accordance with the law of its state of incorporation, Delaware.”
Vantagepoint Venture Partners v. Examen Inc(Del. 2005)
Justice Randy Holland
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Vertical corporate federalism
(1) State antitakeover statutes
(2) Role of Delaware
(3) Race to the top / bottom
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Anti-takeover statutes
1st generation 2nd generation 3rd generation
Edgar v. MITE(US 1982)
CTS v. Dynamics(US 1987)
• Response / hostile TO• State securities law• “fairness” review• Example: Illinois
• Mgmt lobby• Domestic corporations• Voting rights (control shs)• Example: Indiana
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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“The markets that facilitate… ownership of corporations are essential for providing capital…. The beneficial free market system depends at its core upon the fact that a corporation… is organized under, and governed by, the law of a single jurisdiction [its State of incorporation].”
“It is thus an accepted part of the business landscape in this country for States to create corporations, to prescribe their powers, and to define the rights that are acquired by purchasing their shares.”
CTS v. Dynamics (U.S. 1987)
Justice Lewis Powell
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Anti-takeover statutes
1st generation 2nd generation 3rd generation
Edgar v. MITE(US 1982)
CTS v. Dynamics(US 1987)
Amanda(7th Cir 1989)
• Response / hostile TO• State securities law• “fairness” review• Example: Illinois
• Mgmt lobby• Domestic corporations• Voting rights )control shs)• Example: Indiana
• Mgmt (w/ SH input)• Incorporation-based• Merger moratorium• Example: Wisc, Del
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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“If our views of the wisdom of state law mattered, Wisconsin’s takeover statute would not survive.… Wisconsin’s law makes a potential buyer less willing buy, but this is equally true of [many] other rules of corporate law.”
“To say that states have the power to enact [inefficient anti-takeover laws] is not to say that investors should kiss their wallets goodbye. States compete to offer corporate codes attractive to firms.”
Amanda Acquisition v. Universal Foods (7th Cir. 1989)
Judge Frank Easterbrook
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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“Incorporation-based private ordering”
• What is the “race of laxity”?
• Why has Delaware won it?
• Is this good or bad?
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Delaware bar
Delaware judiciary
Delaware legislature
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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William Cary’s “race to bottom”
Ralph Winter’s “race to top”
Mark Roe’s “vertical corporate federalism”
Using the E&E
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Using the E&E
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Using the E&E
Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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Corporations:A Contemporary Approach
Chapter 3Corporate Federalism
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The end
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