The federal financial bailout contained a small inroad on the national dominance by Delaware law and courts on corporate governance issues, but that state and its courts soon may see larger federal vehicles barreling toward them because of the economic crisis.
Delaware has been nearly synonymous with corporate law for more than a century. The Delaware Court of Chancery describes itself on its home Web page as being “widely recognized as the nation’s preeminent forum for the determination of disputes involving the internal affairs of the thousands upon thousands of Delaware corporations and other business entities through which a vast amount of the world’s commercial affairs is conducted.”
Buttressing that claim are statistics showing that 61 percent of the country’s Fortune 500 companies are incorporated in Delaware, and 55 percent of U.S. companies traded on the New York Stock Exchange or Nasdaq call Delaware their legal home.
Today, however, the concern is federalization of corporate law, said Charles M. Elson, director of the University of Delaware Corporate Governance Center and of counsel to Holland & Knight.
“The possibility of federalization is greater today because of this crisis,” he said. “The storm clouds are there and they have come together to make this much more possible than even two months ago.”
In past years, some states have tried through changes to their own corporate law to attract more businesses, but they were not and are not likely to topple Delaware, said corporate law scholar D. Gordon Smith of Brigham Young University J. Reuben Clark Law School.
“Congress, on the other hand, doesn’t have to compete with Delaware; it can just pre-empt them,” he said, adding, “What Delaware should be most worried about is if people begin to associate the financial crisis with executive misconduct. If people really believe this crisis was caused by greed or failure of oversight, well, Delaware, by and large, regulates those through its fiduciary law.”