For Optional Federal Incorporation

By Dent, George W. | Journal of Corporation Law, Spring 2010 | Go to article overview

For Optional Federal Incorporation


Dent, George W., Journal of Corporation Law


For decades, state chartering of public corporations and Delaware's domination of this activity have been criticized by many business law scholars.1 They believe, as Bill Cary put it, that Delaware has led a "race for the bottom" that has "watered the rights of shareholders . . . down to a thin gruel."2 To escape this "race for the bottom," some have urged mandatory federal chartering of public corporations.3 Even among critics of state chartering, this position has never commanded broad support for fear that mandatory federal incorporation would only make matters worse.4 Whatever the flaws of incorporation in Delaware, they cannot be too bad, or investors would flee Delaware corporations for companies chartered in other states. Because mandatory federal incorporation would preempt all competition, it threatens abuse with no means of escape.

This objection disappears, though, if federal incorporation were voluntary.5 The federal government then would simply offer a 51st option that would be elected only if superior to the other 50. If the choice were entrusted to shareholders, they could escape the status quo in which states compete for franchise fees primarily by appealing to corporate executives. Even if federal incorporation never became dominant, its potential appeal to investors would prod Delaware to pay them more heed.

Part I of this Article describes the current corporate governance problem and defects of state chartering. Part II explains why federal incorporation is likely to be superior. Part III weighs and rejects mandatory federal incorporation of public companies. Part IV argues for optional federal incorporation.

I.WHY FEDERAL INCORPORATION?

A. The Growing Corporate Governance Problem

Complaints about corporate governance have been voiced for as long as there have been public companies. The central problem was long ago identified as the separation of ownership and control-executives (especially the chief executive officer (CEO)) held sway and could run public companies to their own advantage and at the expense of the shareholders.6 In theory, a corporation is "managed by or under the direction of a board of directors."7 Also in theory, the directors are chosen by (and thus responsive to) the shareholders. The executives are hired hands who serve at the pleasure of the board. In practice, however, CEOs deeply influence, if not entirely dominate, their boards.

Recent developments show that the corporate governance problem has not abated and may indeed have worsened.8 Executive compensation at public companies has ballooned to wild excess.9 Worse, the compensation plans of many CEOs have little to do with the success of the company.10 Stock options are intended to motivate CEOs to raise the firm's stock price, but many boards back-date or "spring load" options so that CEOs profit even if the stock does not appreciate.11

The current economic downturn has revealed another facet of the problem. The compensation plans of many CEOs offer them lavish rewards if their companies prosper, but leave them unscathed if their companies flounder. In other words, managers and stockholders share in the good times, but in bad times the shareholders alone suffer all the losses.12 Not surprisingly, CEOs respond to these incentives by committing their companies to huge risks.13 This strategy disastrously exacerbated the damage to investors when the economy and the stock market collapsed. Obviously corporate boards were not protecting shareholders when they adopted these plans.

The flight of capital abroad has underscored America's corporate governance problem. Until recently the United States was unrivaled as an investment venue. Now many countries protect investors better than America does.14 As the Paulson Committee found, the resulting exodus of investors threatens to deprive American industry of the funds needed for robust growth.15 The costs of our poor corporate governance are large. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

For Optional Federal Incorporation
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.