Who Makes the Rules?
Who Makes the Rules?
This chapter takes up the foundational question of who sets the rules of the game. Virtually all U.S. corporations are formed (“incorporated”) under the laws of a single state by filing articles of incorporation with the appropriate state official. Selecting a state of incorporation has important consequences, because of the so-called “internal affairs doctrine,” which is a conflicts of law rule holding that corporate governance matters are controlled by the law of the state of incorporation. Virtually all U.S. jurisdictions follow the internal affairs doctrine, even if the corporation in question has virtually no ties to the state of incorporation other than the mere fact of incorporation. Because it is state law that historically has provided the rules of the corporate governance game, the state with the most—or, perhaps more accurately, the most important—incorporations wins. As it has been for a century, Delaware is the runaway winner of the competition among the states to grant corporate charters. More than half of the corporations listed for trading on the NYSE and nearly 60 percent of the Fortune 500 corporations are incorporated in Delaware. The vast bulk of economically significant corporate governance disputes thus are resolved under Delaware law. However, the passage of Sarbanes–Oxley and Dodd–Frank, along with various other developments, demonstrates that Delaware has new competition as the standard setter for corporate governance. The new competitor is not another state, but the federal government. The vertical competition between Delaware and Washington has become at least as important as the horizontal competition between Delaware and its sister states.
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