Communities and Their Corporations: Towards a Stakeholder Conception of the Production of Corporate Law

Abstract

Corporate law drives corporate decision making. Yet, while local, state, and national communities broadly regulate the corporations that operate within them, they typically do not make or enforce the corporate legal norms that frame the governance of these entities. On the contrary, states and, through its inaction, the federal government allow corporate promoters (corporate managers) to choose the corporate law that governs their conduct. This system of corporate-law production has predictable results: it leads to substantive outcomes that favor managers, it ensures that corporate legal norms will further the interests of other stakeholders only to the extent that they do not vary significantly from managerial preferences, and it stifles genuine legal innovation. If substantive corporate law is to have a genuine regulatory role, including making corporate actors accountable to the communities most affected by their decisions, this must change. Stakeholder communities - jurisdictions within which firm activities have substantial effects - should address governance issues for such firms in order to further important regulatory interests, including protecting not only shareholders, but also workers, customers, creditors, and others.

This Article explores the structure of American corporate law and the unavoidable link between its production and substance. It considers how the internal affairs doctrine - the prevailing horizontal choice-of-law rule that provides that the law of the state of incorporation governs the relationships among directors, officers, and shareholders - results in the dominance of managers’ interests and prevents other stakeholders (except, to a limited extent, shareholder interests) from having a voice in corporate law making. It then explores why the doctrine, although widely accepted, is both under-scrutinized and flawed, and why abandoning strict adherence to the doctrine is essential for any jurisdiction seeking to utilize corporate law as a regulatory tool. Moreover, it challenges the various arguments Delaware and its supporters offer for retaining the doctrine: that the state-to-state competition it facilitates enhances legal innovation; that the certainty and uniformity it provides are necessary for firms to function; and that the U.S. Constitution prohibits other states from regulating corporate internal affairs.

This Article, which is adapted from a presentation at Case Western Reserve Law Review’s Symposium on Corporations and Their Communities, concludes that an alternative choice-of-law regime that allocates law-making authority based on substantial operational and other contacts - akin to the regimes that prevail in other areas of state business regulation - is both workable and preferable.

Keywords: internal affairs, corporate law, corporate governance, Delaware, race to the bottom, race to the top, choice of law, conflicts of law, corporate federalism, stakeholder, corporate governance, incorporation, vantagepoint, dormant commerce clause, interjurisdictional competition, charter competition,

JEL Classification: k22