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Feb 05, 2013

Comment: The CEO is always right in Delaware

It should be shocking there is no national company law in the US

An innocent alien looking at the business directory for Wilmington, Delaware might assume the town is a mighty humming hive of industry, whose citizens multi-task to the max. One building alone – 1209 North Orange Street – is home to more than 6,500 corporations and is the address of more than 200,000 businesses.

Wilmington’s 70,000 people have to operate almost three corporations per person from each one of the city’s buildings. Some of the corporations ‘in’ Wilmington probably employ more people globally than the 750,000 residents of Delaware; many of them do not employ a single person in the state. It brings to mind the old medieval quiddity of how many angels can dance on a pinhead: it seems an infinite number of companies can ‘work’ out of one building. It is time to take a step back.

On reflection it should be shocking that there is no national company law in the US. We talk of corporate governance and shareholder capitalism, but the US is completely Balkanized in its corporate legal frameworks. Actually, that’s unfair to the Balkans: as countries accede to the EU, their company laws have to adhere to minimum European standards, which are generally quite high.

It has been argued that in the US, the 50 states with their quasi-independence offer a social laboratory where different political and economic ideas can flourish. In fact, it’s a race to the bottom – which is situated just north of the nation’s capital, in Delaware.

Apart from the opacity of the ownership of Delaware corporations – by comparison with which Liechtenstein and the Cayman Islands look like temples to transparency – the real issue is the pernicious reinforcement of the overweening power of corporate executives that decades of Delaware governance has wreaked.

Its judges rule against employees, shareholders, pensioners and consumers alike. Its negation of anti-usury laws common in other states makes the plastic capital of the US the state that grasping credit card companies like to call home. That in turn makes it a major contributor to the house of cards that recently collapsed.

Litigation in Delaware takes place in a Chancery Court, which is one of the more recondite branches of Anglo-Norman law, famous for centuries of obscure decisions invoking even more obscure precedents to deliver the verdict the judges’ prejudices demand. Delaware, however, sells itself on the speed of its judgments – and its reliability: the CEO is always right. Sometimes there is a contest, when there is litigation between companies, but the only question then becomes: ‘Which CEO is right?’

The founding fathers were generally very dubious about corporations, seeing them as shifty boondoggles set up by shysters such as Aaron Burr to make themselves rich. Maybe that reluctance was one reason they were not mentioned in the US Constitution, but have now, as we know, been retrospectively palimpsested into that document by a tortuous line of reasoning from the 14th amendment that sought, unsuccessfully, to guarantee ex-slaves equal rights. Corporations’ present personhood guarantees them perpetual impunity: they can claim almost all of the prerogatives of citizenship except the susceptibility to punishment.

But if ever the Federal government had a hook to grab, it is surely regulating companies that deal nationally, in interstate commerce. Surely there is nothing constitutional to stop Congress requiring any corporation operating in more than one state to abide by basic minimum standards for its governance and conduct.

In the meantime, perhaps, whoever moves a company HQ to Delaware should be prosecuted under some form of the Mann Act: transporting corporate people across state lines for immoral purposes. Certainly, shareholders should assume the worst of any CEO who makes such a move.