The Equilibrium Content of Corporate Federalism

This Article offers a positive political economy of corporate federalism. It draws on the history of corporate law and basic concepts of evolutionary game theory to locate the content of corporate federalism in two stable equilibriums. The first equilibrium prevails in the charter market, following from Delaware's successful pursuit of an evolutionarily stable strategy to maximize rents from the sale of charters. The strategy, first followed by New Jersey, caused a radical change in corporate law in the late nineteenth century. Since then, stability has ruled. Corporate law's basic, enabling outline changed little during the twentieth century. Operative incentives, market structure, and regulatory results have been more constant than dynamic, even as Delaware often has adjusted its strategy as it has adapted to events. The second equilibrium is more political than economic and prevails among the makers of national corporate law - Congress, the Securities and Exchange Commission, the stock exchanges, and the federal courts. These actors react to events in a more volatile manner. But even here equilibrium has prevailed since 1934. In theory, under the prevailing norm, national regulation covers the securities markets and mandates transparency respecting firms with publicly traded securities while internal corporate affairs are left to the states. In practice, federal lawmakers sometimes disregard the norm, entering into internal affairs as the national system grows episodically. This national intervention into internal affairs is inevitable because Delaware follows an evolutionarily stable strategy that constrains its ability to respond to shocks that create national political demands. But national regulators follow a norm of cooperation even as they make these incursions. Federal regulators never structure interventions so as to disrupt the state equilibrium. They leave Delaware in place, along with its stable strategy and its rents. The Article asserts that this is the core of the federalism, a view that contrasts with a prevailing subject matter-based conception. From this perspective, the threat of disabling federal intervention has sunk into the deep constitutional structure, leaving Delaware safe in the present context.