Delaware’s domination of corporate law in the U.S. has long fascinated academics. While there is wide consensus that Delaware’s preeminence arose out of decades of state-to-state competitive pressures, there is sharp disagreement and debate about the nature of those competitive pressures, that is, whether the competition has been a salutary or nefarious one—a race to the top or to the bottom. Both sides of the debate believe that states compete to attract corporate franchise tax revenues, but they differ as to what the estimated $500 million annual prize incentivizes states to do. Race-to-the-top theorists argue that the prize motivates states to compete to make better, more efficient, corporate law in an effort to discourage shareholders from causing a reincorporation outside of Delaware. Race-to-the-bottom theorists argue that the prize motivates states to pander to managerial interests because managers are the constituents that control the initial incorporation decision.
The debate took an interesting turn in 2003 when Mark Roe in Delaware’s Competition, 117 Harv. L. Rev. 588, 591–92 (2003), argued that the ongoing debate was badly misconceived. He observed, “Whether or not the states are racing, and whether they are racing to the top or to the bottom, we live in a federal system where Washington can, and often does, take over economic issues of national importance.” Given Washington’s tendency to take corporate lawmaking power away from the states, Roe explained, “we have never had, and we never could have had, a full state-to-state race in corporate law.” After applying a “public choice, institutional analysis” to the Washington-Delaware relationship, Roe concluded that this federal-state “structure privileges state-level deals between managers and investors in Delaware” while excluding outside interest groups, such as unions, public interest groups, and financial institutions, thus keeping broad political concerns out of its corporate law. However, when a key issue attracts federal attention—by, for example, gaining media salience or being linked to anxiety about the economy, wide coalitions of outside interest groups emerge to affect the making of corporate law at the federal level. In sum, Delaware holds the agenda-setting power but is constrained by the threat that Congress, federal courts, the Securities and Exchange Commission, or the New York Stock Exchange will intervene to preempt Delaware on a particular issue. As Roe put it,
“Delaware gets to say the words, but only as long as the federal authorities tolerate its script.” These dynamics, in turn, motivate Delaware to forge a moderate, status-quo oriented path between managers and investors, entrenching a quasi-contractual paradigm, which Roe referred to as the “conservative, boardroom-centered nature of American corporate law.”
Roe’s pivot to the Washington-Delaware relationship and his emphasis on the power of federal corporate lawmakers to trump Delaware are important moves in the debate over the determinants of American corporate law. Yet Roe’s analysis raises the obvious question: Why does Congress allow Delaware to grab the agenda-setting power, allocating for itself (and its affiliates) only the ex post decision of whether to displace Delaware? Why permit Delaware to have the first crack at making corporate law? Roe answered this question with three alternative and non-mutually exclusive hypotheses. First, those interest groups clamoring for federal action may be able to achieve sufficiently what they want via external constraints such that they are happy to recede from the federal incorporation agenda. Second, as a historical matter, the “serendipitous alignment of interests, policymakers, and scandal just has never been right for full nationalization of corporate law.” Third, failing to federalize corporate law may be precisely what policymakers or key interest groups, for example, the productivity-oriented policymakers, want. They do not want corporate law to be hijacked by a competing interest group to whom they are even more antagonistic than the investors and corporate managers who are privileged under Delaware’s regime.
We shed light on the question of why Congress does not displace the states in the important task of making corporate law. It does so by looking back at an important element in the story of Delaware’s domination of corporate law: the failure of Congress to implement federal incorporation. In 1908, during the last year of the Theodore Roosevelt’s final term as President, Congress had what may have been its best opportunity to enact a federal incorporation law. Roosevelt, perhaps the greatest presidential champion of federal chartering, asked Congress to consider a proposal to amend the Sherman Act to rectify some of the Act’s deficiencies as part of an extensive federal chartering scheme for interstate corporations. That proposal was known as the “Hepburn bill,” not to be confused with the Hepburn Act of 1906, which granted the Interstate Commerce Commission the power to set maximum railroad rates. Despite widespread dissatisfaction with the Sherman Act, populist anxiety over the power of large corporations, and big business publicly embracing the general notion of coming under federal control, the Hepburn bill died a quick death.
After examining the excellent histories compiled by Lawrence Mitchell, Martin Sklar, and others and reviewing select primary sources, this essay finds some support for Roe’s three hypotheses, but especially his second explanation—that the alignment of interests and scandal has never been right for the full nationalization of corporate law. As this essay discusses, organized interest groups failed to come together in sufficient strength to support the Hepburn bill. But a fuller explanation for the failure of federal incorporation must also account for Roosevelt’s intransigence, coupled with his unorthodox views about the proper role of corporations in society, which translated into idiosyncratic strategic choices that helped to doom the bill’s survival. Finally, this study also finds that strong federalism norms, as expressed in deep-seated fears of centralized power and an ongoing commitment to states’ rights, significantly constrained the ability of Congress to implement federal incorporation. These norms should continue to inhibit the complete displacement of state corporate law.