Chapter 3
Chapter 3 Corporate Federalism
Class Outline
(updated 23 Aug 06)
Chapter 3 Corporate Federalism
A. A Brief History of Corporate Law Federalism
1. Early antecedents
2. Early development of U.S. corporate law
o evolution of corporate attributes
o Trustees of Dartmouth College v. Woodward
3. The modern corporation
o Managerialism before 1980 ("rusty girders ... wind")
o 1980s takeovers
▪ emergence of shareholder primacy
▪ leveraged buyout
o 1990s mergers and restructurings
▪ stock options
o 2005 Hedge fund activism
o state / federal regulatory interaction
B. The Internal Affairs Doctrine
1. Background on the Internal Affairs Doctrine
o Choice of law rule: law of the state of incorporation governs “internal affairs”
o Judicial nature of rule
o Internal affairs v. external affairs
▪ internal affairs: shareholder / management relations
▪ external affairs: labor, tax, contracts, torts, property
o exceptions: pseudo-foreign corporations
2. Lessons from California and three generations of antitakeover statutes
o “first generation” state antitakeover laws
▪ Edgar v. MITE Corp.
o “second generation” state antitakeover laws
▪ CTS Corp v. Dynamics Corp of America
o “third generation” state antitakeover laws
▪ Amanda Acquisition Corp. v. Universal Foods Corp.
3. The Internal Affairs Doctrine Revisited
o VantagePoint Venture Partners 1996 v. Examen, INC.
C. The State Charter Competition Debate
• choice of state of incorporation
o practical factors
o state competition
▪ "race to the bottom"
▪ "race to the top"
o preeminence of Delaware –why?
Class Notes
Chapter 3 Corporate Federalism
|A. A Brief History of Corporate Law Federalism |
|Justice John Marshall [in Trustees of Dartmouth College v. Woodward |Judge Easterbrook (in Amanda Acquisition) |
|(US 1819)] | |
| |To say that states have the power to enact laws whose costs exceed |
|A corporation is an artificial being, existing only in contemplation|their benefits is not to say that investors should kiss their |
|of law. Being the mere creature of law, it possesses only those |wallets goodbye. States compete to offer corporate rules attractive|
|properties which the charter of its creation confers upon it, either|to firms. Laws that in the short run injure investors and protect |
|expressly, or as incidental to its very existence. |managers will in the longer run make the state less attractive to |
| |firms that need to raise new capital. ... States regulating the |
|[pic] |affairs of domestic corporations cannot in the long run injure |
| |anyone but themselves. |
| |[pic] |
|B. The Internal Affairs Doctrine |
|What is a foreign corporation? |MBCA § 15.01 AUTHORITY TO TRANSACT BUSINESS REQUIRED |
| | |
|Can a corporation in the business of selling hamburgers be |(a) A foreign corporation may not transact business in this state |
|incorporated in Delaware, locate its retail outlets in California, and|until it obtains a certificate of authority from the secretary of |
|have its headquarters in North Carolina. How can it operate (with full|state. |
|corporate attributes to own property, enter contracts, sue and be |(b) The following activities, among others, do not constitute |
|sued, provide limited liability for investors) in each of these |transacting business within the meaning of subsection (a): |
|states. What is a "foreign corporation"? See MBCA ch. 15. |(1) maintaining, defending, or settling any proceeding; |
| |(6) soliciting or obtaining orders, whether by mail or through |
|Could California decide it does not want a hamburger chain selling in |employees or agents or otherwise, if the orders require acceptance|
|its state? Is a corporation a "person" under the US Constitution's |outside this state before they become contracts; |
|privileges and immunities clause? Is a corporation a person under the |(9) owning, without more, real or personal property; |
|14th Amendment's due process and equal protection clauses? Is a |(10) conducting an isolated transaction that is completed within |
|corporation a person with respect to the protection of the dormant |30 days and that is not one in the course of repeated transactions|
|commerce clause? |of a like nature; |
| |(11) transacting business in interstate commerce. |
|[pic] |(c) The list of activities in subsection (b) is not exhaustive. |
| |MBCA § 15.03 APPLICATION FOR CERTIFICATE OF AUTHORITY |
| | |
| |(a) A foreign corporation may apply for a certificate of authority|
| |to transact business in this state by delivering an application to|
| |the secretary of state for filing. The application must set forth:|
| |(1) the name of the foreign corporation or, if its name is |
| |unavailable for use in this state, a corporate name that satisfies|
| |the requirements of section 15.06; |
| |(2) the name of the state or country under whose law it is |
| |incorporated; |
| |(3) its date of incorporation and period of duration; |
| |(4) the street address of its principal office; |
| |(5) the address of its registered office in this state and the |
| |name of its registered agent at that office; and |
| |(6) the names and usual business addresses of its current |
| |directors and officers. |
| |(b) The foreign corporation shall deliver with the completed |
| |application a certificate of existence (or a document of similar |
| |import) duly authenticated by the secretary of state or other |
| |official having custody of corporate records in the state or |
| |country under whose law it is incorporated. |
|What law governs corporations? |Can states change their corporate laws? |
| | |
| What happens if the shareholders of ABC Company are dissatisfied |Given that corporate law is a matter of incorporation-based |
|with the firm's management and sue for breaches of fiduciary duties. |private choice, can states changes their corporate laws? What if |
|Which law applies if they sue in -- |Delaware decides to change its rules that govern shareholder |
|North Carolina court, where most of the shareholders reside |suits, making it more difficult for shareholders to assert their |
|Georgia court, where the company is headquartered |fiduciary rights? Can Delaware unilaterally change a private |
|Delaware court, where the company is incorporated |arrangement -that is, the corporate relation between investors and|
|California court, where the CEO has winter home |managers? |
| | |
|Choice of law - look for interests/contacts? What is the internal |See Del GCL § 394 ; NC Bus Corp Act § 55-1-02. § 55-1-02. |
|affairs doctrine - why do we have it? |Reservation of power to amend or repeal. Why do the states reserve|
| |the power to amend their corporate statutes - you don't see this |
| |reservation elsewhere in the law! |
|McDermott Inc. v. Lewis (Del 1987) |
| |
|McDermott International recapitalized (that is, changed how it was financed) so that 90% of its voting stock was held by public |
|shareholders and 10% was held by its US subsidiary, McDermott Delaware. |
| |
|This is against the law of Delaware, where McD-Delaware is incorporated, and the law of Louisiana, where McD-Delaware is headquartered |
|and does most of its business. But Panama law, where McD-Int’l is incorporated, allows a company to send voting stock to a sub, even |
|though this gives management the ability to vote stock it never paid fore! |
| |
|A McD-Delaware shareholder sued to stop the reorganization plan that put voting stock of McD-International in the US sub. The defendants|
|argued “internal affairs doctrine”. |
|Questions |Delaware court: |
| | |
|What is the reason for the prohibition against US companies placing |Delaware’s well established conflict of laws principles require that|
|their voting stock in a subsidiary? |the laws of the jurisdiction of incorporation – here the Republic of|
| |Panama – govern this dispute involving McDermott International’s |
|What is the Delaware court attitude? |voting rights. |
| |Under the prevailing conflicts practice, neither courts nor |
| |legislatures have maximized the imposition of local corporate policy|
| |on foreign corporations but have consistently applied the law of the|
| |state of incorporation to the entire gamut of internal corporate |
| |affairs. In many cases, this is a wise, practical, and equitable |
| |choice. |
| | |
| |Given the significance of these considerations, application of the |
| |internal affairs doctrine is not merely a principle of conflicts |
| |law. It is also one of serious constitutional proportions -- under |
| |due process, the commerce clause and the full faith and credit |
| |clause -- so that the law of one state governs the relationships of |
| |a corporation to its stockholders, directors and officers in matters|
| |of internal corporate governance. |
|CTS Corp v. Dynamics Corp of America (US 1987) |
|The Indiana legislature didn't much like that corporate raiders were acquiring control of Indiana businesses. To stem the tide, the |
|legislature passed a "control share" statute that said that any shareholder of any Indiana corporation that acquired a controlling |
|interest -- by passing a 20% or 33% or 50% threshold -- could not vote its shares unless it received permission from a majority of other |
|shareholders. How might this prevent coercion in a tender offer? Why does this may takeovers less likely? Doesn't this interfere with |
|the relationship between shareholders and corporate management? |
| |
|A shareholder of CTS, an Indiana corporation, challenged the Indiana statute under the federal Commerce Clause. What were the |
|arguments? How did the Supreme Court respond? What is the "blueprint" that the Supreme Court outlines for antitakeover statutes? |
|Discrimination - "the Indiana Act is not [a statute that |Does it make any difference that most corporate raiders are not from|
|discriminates against interstate commerce] It has the same effects |Indiana? |
|on tender offers whether or not the offeror is a domiciliary or |A corporate takeover pits current management against a team of |
|resident of Indiana" |outside managers. Isn't the effect of the legislation is to prefer |
| |Indiana managers over outside raiders? |
|Inconsistent regulation - "so long as each state regulates voting |Does this mean that the "internal affairs doctrine" is |
|rights only in he corporations it has created, each corporation will|constitutionally mandated? |
|be subject to the law of only one state" |Would it be possible for a state to regulate "pseudo-foreign |
| |corporations"? That is, could California decide to protect its |
| |investors from Delaware corporate law by requiring that California |
| |law corporate apply if most of a company's investors were from |
| |California? |
|Hinder commerce - "The court of appeals failed to appreciate the |What is the "beneficial free market system" that the Court has in |
|significance for commerce clause analysis of the fact that state |mind? What would be the effect if federal courts were to supervise |
|regulation of corporate governance ... is a product of state law" |the "hindrance" potential of state corporate law? |
| |Is the Indiana statue valid because it is beneficial to |
| |shareholders? or because it is merely a product of state law? Why |
| |should Indiana care about its corporation's shareholders, if many |
| |live outside Indiana? |
|Limit tender offers - "Indiana need not define these commodities |What is to keep Indiana from deciding to give management full |
|[corporate shares] as other states do; it need only provide that |protection against takeovers? |
|residents and nonresidents have equal access to them. |Could Indiana, for example, repeal its merger provisions? Or |
| |provide that only incumbent directors or their successors (a dead |
| |hand rule) can agree to any combination with an uninvited bidder? |
|Amanda Acquisition Corp v. Universal Foods (7th Cir. 1989) |
| |
|The Wisconsin legislature doesn't like takeovers any more than did the Indiana legislature. Its legislation, similar to that of |
|Delaware's, places a moratorium on the activities of any acquirer of corporate control. Under the statute a bidder who acquires a |
|controlling interest in a Wisconsin corporation must sit on its investment, and for three years is prohibited from merging or acquiring |
|the assets of the company. This discourages any bidder who would borrow money to buy a control block, since the target's assets would be|
|unavailable for three years to repay the loans. As a practical matter the Wisconsin law chills almost all tender offers - its intended |
|effect! |
|Is the statute pro-shareholder or pro-management? How can the state of Wisconsin impose its will and side with management - what about |
|the corporate contract? Do the law's costs outweigh its benefits? Why is it that a state law that is "economic folly" is tolerated |
|under the Commerce Clause, which is supposed to allow for unhindered economic activities in national markets? What is the nature of |
|judicial review of state corporate law according to CTS? |
|C. The State Charter Competition Debate |
|Market for "incorporations" | |
| |Why incorporate in North Carolina? |
|Why incorporate in Delaware? |North Carolina's legislature follows lead of NC Bar Association, |
|Delaware has highest franchise taxes |Business Law Section |
|Delaware Consittution makes amendments to corporate statute difficult |North Carolina has specialized Business Law Court |
|Delaware has lots of corporate lawyers |See North Carolina's answer. |
|See Delaware's answer. | |
|Debate - "race to bottom" vs. "race to top" | |
|What is the argument by William Cary? What evidence does he marshall that Delaware is | |
|engaged in a systematic dilution of shareholder protections, for the benefit of | |
|corporate managers? | |
|What is the response by Ralph Winter? What evidence does Winter use in arguing that | |
|Delaware cannot engage in a race to the bottom? | |
|How might you determine whether Delaware is engaged in a race to top or bottom? | |
|Incorporation of new IPOs | |
|Re-Incorporation effect on stock prices |Should there be federal intervention? |
|Takeover defenses / executive compensation / parent-subsidiary dealings |(What is Professor Roe's argument?) |
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related searches
- chapter 3 developmental psychology quizlet
- mcgraw hill algebra1 chapter 3 lesson 8
- chapter 3 psychology quizlet test
- psychology chapter 3 quiz answers
- developmental psychology chapter 3 quizlet
- strategic management chapter 3 quizlet
- psychology chapter 3 exam
- psychology chapter 3 test questions
- quizlet psychology chapter 3 quiz
- chapter 3 psychology quiz
- developmental psychology chapter 3 test
- quizlet psychology chapter 3 answers