Delaware's Dominance: A Peculiar Illustration of American Federalism

Abstract

Delaware rose to preeminence in the incorporation market after a key point of inflection for corporate law. Around the turn of the 20th century, “laissez faire” statutes signaled a shift from state regulation of corporations to private ordering and markets at a time when the decline of ultra vires, quo waranto, and regulation of foreign corporations first made it possible for a state to attract substantial incorporation business from its neighbors. The regulatory impulse of the earlier corporations statutes, however, did not disappear. It simply moved to federal law — in antitrust, securities, or labor — setting up a strong federalism dimension for the “who makes corporate law” debate. In many ways this federalism discussion is still framed by the key question of corporate law from the 1960s and 1970s: Is Delaware’s dominance explained by a “race to the bottom” skewing corporate law in favor of management interests who influence state lawmaking at the expense of shareholders (and suggesting a greater role for federal law) or by a “race to the top” with state law incorporating rules that reflect preferences made through markets? The key legal concepts of federalism appearing in this debate date from the New Deal and focus on whether the federal government will preempt state corporate law, usually by adding regulation to a space that state law has left to private ordering. Corporate law federalism is in need of an update. An “on-off” view of allocating law-making power between state or federal government has given way in other fields to a more nuanced view of interactive federalism. This chapter, part of a book, “Can Delaware Be Dethroned? Evaluating Delaware’s Dominance of Corporate Law”, presents the richer and more nuanced space of 21st century corporate law federalism that has some points in common with federalism discussion in other subject areas and some that reflect the particular history of the development of corporate law. The last section suggests how this federalism dimension influences the race between the states in a way that essentially has locked Delaware’s dominance in place.