558. Lucian A. Bebchuk & Assaf Hamdani, Federal Corporate Law: Lessons from History, 08/2006; subsequently published in Columbia Law Review, Vol. 106, No. 7, November 2006, 1793-1838.
Abstract: This paper analyzes the history of federal intervention in corporate law and draws from it lessons for the future. We show that the replacement of state law arrangements by federal ones has not been sometimes in favor of investors and sometimes in favor of corporate insiders. Rather, the federal government has systematically replaced state law arrangements with ones imposing tighter constraints on insiders. Without federal intervention, state law would have produced a corporate system that provides substantially weaker investor protection than the U.S. enjoys today. We also show that federal interventions have systematically taken advantage of additional tools (including public enforcement, criminal sanctions, gatekeeper liability, and agency-based regulations) beyond those that state law has chosen or been able to use. Thus, unless one views existing levels of investor protection as substantially excessive, past patterns suggest that state competition is unlikely to produce by itself an adequate level of investor protection. Furthermore, the recurring need for federal officials to rectify state law failures in order to provide investors with adequate protection suggests that, going forward, federal lawmaking should be proactive rather than reactive. We thus recommend that Congress appoint a National Corporate Law Commission that will review all corporate law issues governed by state law to identify those that should be partly or fully federalized either because tighter restrictions on insiders are needed or because the additional tools available to federal law would be useful.