Lawrence A. Cunningham · April 2009
77 GEO. WASH. L. REV. 685 (2009)
Professor Robert Ahdieh offers to reinterpret the debate over whether state competition for corporate charters leads to more or less optimal results—a race to the top or bottom. He presents the more modest stances taken by the debate’s titans, William Cary and Ralph Winter, and suggests narrower differences between them than appeared in later literature. Referring to this “race debate” as “the starting point for the study of corporate law,” Professor Ahdieh opines that the literature overvalues state charter competition for corporate governance and underappreciates advancing corporation law’s normative end to address the costs of separation of ownership from control in the modern public corporation.
In this Comment on Professor Ahdieh’s article, several threshold quarrels concern what may be perceived as some overstatement in the piece. First, it is not obvious that the question of state charter competition is the starting point for the study of corporation law. Second, the article may overstate how often or seriously scholars make or take assertions about federal corporation law being presumptively inefficient or that the Sarbanes-Oxley Act is automatically suboptimal because it is a federal rather than a state statute. Third, although the article suggests that it is inaugurating a conversation, discourse transcending the race debate has been ongoing for some time. Fourth, one may question assertions that there is a lack of topics for discussion in corporation law or a lack of scholarship addressing the mechanisms and roles of markets in corporate practice and governance.
These objections aside, what is new in the article is a crystallization of the importance of institutional design. Professor Ahdieh may be right about the need for greater attention to questions of institutional design in corporate law scholarship. In particular, an interesting argument holds that there is nothing inevitable about the characteristics of federal corporation law that should be feared by devotees of state corporation law production.
The following analysis first reviews Professor Ahdieh’s corrective account of the state competition debate and its identification of what is significant about that competition (regulating the regulators). It critiques discussion of implications for federal corporation law that Professor Ahdieh highlights as among the most significant subjects to which his article contributes, challenging some grounds for supposing that federal corporation law would be enabling and detailing the larger quarrels referred to above.
Nevertheless, this analysis then takes up Professor Ahdieh’s implicit invitation to meditate on the possible form that federal corporation law may plausibly assume. This discussion suggests that, despite longstanding evidence, beliefs, and prescriptions to the contrary, it is possible to imagine federal corporation law that is enabling. Recent deregulatory proposals by the U.S. Department of the Treasury (“Treasury Department”) in cognate fields suggest examples of how this could work, involving consolidation of regulatory power in the federal government and substantial delegation of that power to self-regulatory organizations, especially stock exchanges. In turn, this deregulatory stance may be sustained when one considers that Washington’s regulatory monopoly in securities regulation may be ending amid globalization because numerous other national regulators and exchanges now compete with the United States.
One practical result of global regulatory competition is that market-driven regulation of the regulators becomes stronger. A contending academic result is that opponents of regulatory competition, concerned that it ratchets quality regulation down, may not embrace that competition either. For them, amid capital market globalization, search for a form of transnational consolidated supervisor may be necessary—precisely to provide mandatory, rather than enabling, regulations. The state corporation law race debate that Professor Ahdieh opposes may simply be replayed as an international securities regulation race debate. Ultimately, however, political realities accompanying the 2008–09 global economic crisis, revealing both market failure and regulatory weakness, do not create an auspicious time for such deregulatory reform. Proposals presented as alternatives to the Treasury Department’s suggest just such a search for international regulatory consolidation. Yet, just as Professor Adhieh emphasizes, reform discussions—whatever shape they take—should engage with questions of institutional design.
