Corporate Law “Reform” in Multiple Dimensions
In an earlier post, I discussed the U.S. Chamber of Commerce’s foray into the growing conflict over the corporate internal affairs doctrine and whether that doctrine rises to the level of a constitutional imperative. Of course, the Chamber’s efforts in this area are but one small piece of a much larger overall strategy in addressing the production and content of American corporate law. In an article in Sunday’s New York Times, other pieces of that strategy now have become apparent.
The Chamber and others reportedly will launch a campaign following the election in which they may seek to scale back requirements imposed under the Sarbanes-Oxley Act, limit liability of accounting firms, make it harder for prosecutors to bring cases against individuals and firms, limit what they view as overzealous state-level enforcement, eliminate the private right of action under Rule 10b-5, and require some investor claims to be arbitrated. According to the article, they intend to achieve most of these objectives though agency action rather than resorting to legislation.
Wow. The “post-post-Enron” backlash cometh. . . .
We will have to see how all of this plays out, but I will offer three tentative impressions.
1) The Multi-Dimensional Attack. Okay, this isn’t news, but it is a healthy reminder. Tort reform and deregulation efforts – or whatever you want to call them – are most effective if undertaken in multiple dimensions. That is, to reduce or eliminate unwanted regulatory interference, one may focus on altering not only the substance of the law, but also choice-of-law (federal-state and state-to-state) and choice-of-forum (e.g., federal, state, judicial with jury, judicial without jury, nonjudicial). We see the latter two dimensions in the Securities Litigation Uniform Standards Act of 1998, and the last dimension in the Class Action Fairness Act of 2005 and the largely successful efforts to make the Federal Arbitration Act a super-statute, sweeping away lesser statutes before it. Of course, when the three work in conjunction, the perfect deregulatory storm can result. Take, for example, the regulation of welfare benefit plans under ERISA – a vacuous federal regulatory regime combined with broad preemption that stymies state regulatory efforts combined with very limited avenues for individual relief due to ERISA’s remedial scheme and deference to plan administrators. All three of these dimensions are present in the proposals in the Times’ story and the Chamber’s internal affairs doctrine initiative. My point here is not that these initiatives, if successful, will mean that corporate law will end up just like ERISA; rather, it is to remember that all of this stuff which might appear to be so disparate is very much interrelated.
2) Federalism/Schmederalism. At first blush, it’s ironic that some of those who will be supporting these reform efforts were waving the federalism flag when Sarbanes-Oxley and its underlying regs were under consideration. Indeed, these new proposals to preempt state regulatory and enforcement efforts (in fact, authorizing the SEC to do it!) and related efforts to federalize corporate choice of law don’t sound particularly consistent with the norms of federalism – e.g., so much for local experimentation. But, of course, that is until you consider that this was never really about federalism. It’s about getting the preferred regulatory content and the preferred regulators.
3) The Corporate-Law Way. While the prior two impressions may be applicable to other areas, aspects of this are unique to corporate law. The most direct way to achieve uniformity, non-interference, and desired regulatory content would be federal preemption of the field (whether this is viable as a political matter is another question). But the Chamber’s proposals call only for preempting certain state-level regulation – the kinds we have seen recently in, say, New York and California. And while submitting securities claims to arbitration is proposed, there appears to be no similar push to commit all corporate-law disputes in publicly traded firms to arbitral fora. Well, this is because of the unique way in which corporate law is produced at the state level, the law that Delaware produces as a result, and these groups’ preferences for Delaware’s law and courts. An unstated goal here is to maintain and entrench this law-production system.
Just to be clear, while I think some of these proposals raise grave concerns, I am not saying that all aspects are unworthy of consideration. I am suggesting that policy makers take care to consider the whole multi-dimensional picture (including the visible and not-so-visible) in evaluating the merits of each of them.