42

We have seen that U.S. corporate law focuses on protecting only shareholders, rather than all stakeholders — with some very limited protections for creditors.  In fact, U.S. corporate law, at least the Delaware variety, contains few rules, period.  Further, even those few rules can mostly be abrogated or circumvented in a corporation’s charter. This lack of strict rules is why this course mainly focuses on fiduciary duties and the occasional shareholder approval requirement.

In sum, Delaware corporate law does little more than enable charter contracting by supplying default terms, gap-filling (?) fiduciary duties, and, importantly, an able judiciary to enforce these terms and duties. By contrast, corporate law outside the U.S. tends to be much more rule based. We have seen one example in UK takeover law. This raises questions: Why is U.S. corporate law as liberal as it is? Is this liberality a good thing?

U.S. corporate law’s liberality and lack of concern for non-shareholder constituencies are intimately related to the rise of Delaware as the foremost state of incorporation. Delaware attracts so many corporate charters mainly because “foreign corporations” — corporations with few or even no operations in Delaware — can opt to be governed by Delaware law as long as they incorporate in Delaware. That is, Delaware’s prominence is predicated on a choice of law rule. Under the “internal affairs doctrine” the applicable corporate law is the law of the state of incorporation. This doctrine undergirds Delaware’s business of “competing for corporate charters.”  Such competition would not be possible if the applicable corporate law were, for example, the law of the state of the corporation’s headquarters, as it is in many non-U.S. jurisdictions.

Charter competition treats corporate law as a product. That is, corporate law appears not as regulation, but as a service to contracting parties organizing a business. The “contract” consists of the charter terms and the applicable corporate law. The contracting parties, in a narrow sense, are those involved in drafting the charter. In a broader sense, the contracting parties include all those who voluntarily interact with the corporation, such as shareholders. To be sure, their agreement to the charter terms is not literally required. But they have the option not to interact, to charge higher prices, to invest less money, and so on, if the charter terms displease them. In anticipation of these options, the drafters of the charter have strong incentives to take these other parties’ concerns into account. Or so the argument goes.

Such reliance on private contracting has indeed been the hallmark of U.S. state corporate law (but not federal securities law) for many decades. It complements the internal affairs doctrine in two ways. First, confidence in private contracting provides a normative underpinning for free choice of corporate law. Second, any restrictions on private contracting imposed by an individual state could be easily circumvented by (re-)incorporating in another state. Do you think this deference to private contracting is appropriate?