Podcast Summary: Shareholder Primacy – Relationship of Federal and State Corporation Law

Podcast: Shareholder Primacy
Hosts: Mike Levin & Ann Lipton
Episode Date: November 5, 2025
Theme: Examining the complex interplay, conflicts, and evolution between federal and state law governing corporations in the U.S., including preemption, enforcement, and recent trends from regulatory bodies like the SEC.

Episode Overview

This episode dives deep into the evolving relationship between federal and state corporate law. Mike Levin (activist investor) and Ann Lipton (law professor) discuss foundational principles, practical boundaries, and current controversies—especially federal “preemption” over state law, the SEC’s influence, and how states (especially Delaware) and federal authorities interact, overlap, and sometimes conflict.

Key Discussion Points & Insights

1. Defining Federal Preemption and Its Limits

• What is Preemption?
  • Preemption means federal law overrides conflicting state law. Congress has broad constitutional power to regulate interstate commerce, which extends to most business, but has generally chosen not to assert dominance over corporate governance. [04:37–05:13]
  • Quote (Ann, 02:44):
    “Is there going to be an opportunity for the federal government to just kind of step in? And the verb I thought of was to preempt.”
  • Quote (Ann, 05:13):
    “The Supremacy Clause, that if there's a conflict, Congress wins. But even though Congress theoretically has the power to regulate most corporate governance, it actually has chosen not to exercise that power.”

2. Role & Power of States (Delaware as the Paradigm)

• State Chartering:

  • Companies are chartered in specific states, which set most rules on governance—board powers, shareholder rights, equity structure, etc. [06:06]

• Statute vs. Case Law:

  • Fiduciary duties of “care and loyalty” are mostly developed through court cases, not statutes. [07:18–08:24]
  • Quote (Ann, 07:18):
    “My understanding is those fiduciary duties… are mostly in cases and not in statute.”
  • Ann (08:06): “You might see some sort of basic, like the phrase loyalty…in the statute. But what it means…is almost entirely going to be a case law issue.”

• States Follow Delaware:

  • Many states copy Delaware or follow its precedents due to its prominence and influential case law. [09:08–09:22]
  • Ann, 09:25:
    “What I tell my students is outside of Delaware, you're basically either going to follow Delaware or explain why you're not.”

3. Federal Securities Law and “Leaky Boundaries”

• Historic Federal Focus (“Disclosure”):

  • Federal law (securities acts) originally focused mainly on disclosure but now seeps into substantive governance, particularly for public companies (e.g., shareholder voting, bundled proposals, tender offer rules). [10:00–12:03]
  • Ann, 12:41:
    “Stock exchanges are required by statute to set certain rules for independent boards, independent audit committees…That’s federal say on pay…not based on the law of the state of incorporation.”

• Subtle/Substantive Regulation via Disclosure:

  • Disclosure demands (e.g., cybersecurity risk management) functionally create standards on process and care—blurring lines between mere information-sharing and direct governance expectations. [13:05–14:22]
  • Ann, 13:54:
    “…the federal's disclosure requirements are essentially something like a federal duty of care.”

• Expanding Federal Influence:

  • Regulations often target public/listed companies, mandating governance structures (e.g., audit committees, independence) which Delaware and many states do not require. [12:41–13:04; 15:47]

4. Enforcement & Legal Pathways

• State Enforcement:

  • Corporate governance disputes at state level are nearly always private lawsuits; only in rare, egregious cases can state attorneys general dissolve corporate charters (e.g., for criminal conduct). [19:11–21:14]
  • Ann, 19:57:
    “Quo warrento…deals with the problem of a corporation that literally exceeds the scope of its authorized powers.”

• Federal Enforcement:

  • SEC has broad powers for investigation and enforcement, but private shareholder powers under federal law are limited. Exchanges operate under SEC oversight. [21:24–22:22]
  • Ann, 18:03:
    “The exchanges are supposed to kind of be self-regulating, but they do operate under the SEC’s eye.”
  • Ann, 21:34:
    “…the vast majority of the rules that Congress and the SEC lay down are only enforceable by the [SEC].”

5. Modern Tension: SEC’s “Soft Power” and Limits

• Recent Developments:

  • The SEC, under Chair Paul Atkins, is pushing the limits of its rulemaking authority, especially given congressional gridlock. Atkins has pressed Delaware to enact governance reforms the SEC can’t directly force—raising questions about true federal “preemption” versus regulatory influence. [27:33–29:31]
  • Ann, 28:27:
    “Atkins obviously has some views about what additional corporate governance rules he'd like to see in the world, but the SEC can't put them into place because…Congress hasn't exercised that power.”

• Example: Mandatory Arbitration for Securities Claims:

  • SEC and some states (urged by Atkins) seek to require arbitration to limit class actions, but lack a contractual basis to impose this on shareholders—except possibly by embedding it in corporate charters/bylaws, which are state-governed. [29:52–32:46]
  • Ann, 31:14:
    “The only plausible contract in which you can put the arbitration clause is the charter and bylaws. And charters and bylaws are not controlled by federal law—they are controlled by state law.”
  • Ann, 32:24:
    “…he wants mandatory arbitration for securities claims. So he's trying to get Delaware to do it…because he's at the limit of the SEC's powers.”

• Court-Imposed Limits:

  • Attempts to stretch SEC power (e.g. Biden-era rules on private funds) have been struck down by federal courts for exceeding statutory authority. [33:34–34:35]
  • Ann, 34:35:
    “They promulgated a set of substantive rules…The fifth Circuit struck those rules down, saying…the SEC had exceeded its powers…”

6. Political & Regulatory Dynamics

• Congress Remains the Key, but Is Unlikely to Act:

  • True, direct preemption would require congressional action, which is rare and politically unlikely in the current climate. [35:02–36:18]
  • Ann, 35:20:
    “Musk was sort of essentially hinting and threatening that he would use his political influence to get Congress to preempt Delaware corporate law, which it almost certainly has the power to do.”

• States’ Defensive Reactions (“Race to the Bottom” or “Getting Ahead”):

  • Delaware and other states occasionally reform their own governance laws (e.g., SB21) either to stay competitive with other states or to preempt possible, more restrictive, federal intervention. [36:36–37:46]
  • Ann, 37:27:
    “…potentially there was also some thinking, at least in Delaware…that we need to get ahead of whatever the federal government might want to try to do…”

• Changing Corporate Landscape:

  • Federal regulation mostly targets public companies. Private companies, which are becoming more prevalent and financially significant, fall outside most federal governance rules, leaving more ground for state law and possible future controversy. [38:08–38:57]
  • Ann, 38:11:
    “But increasingly, of course, companies are staying private, which they can do because federal securities law allows it and Atkins wants to make it easier still.”

7. SEC “Soft Influence” & Federal Incursion Without Legislation

• Sometimes the federal government “incurs” on state authority just by using rhetorical or regulatory pressure—e.g., the SEC Chair’s public speeches urging state action. [39:46–40:22]
  • Ann, 40:15:
    “Well, they're forcing the states to take action. They're certainly encouraging Delaware to take action.”

Memorable Quotes with Timestamps

• On the foundational split:
  Ann (05:13): “The Supremacy Clause, that if there's a conflict, Congress wins. But even though Congress theoretically has the power to regulate most corporate governance, it actually has chosen not to exercise that power.”
• On federal rule “creep” into governance:
  Ann (13:54): “So there are ways that the federal's disclosure requirements are essentially something like a federal duty of care.”
• On Delaware’s unique status:
  Ann (09:25): “Outside of Delaware, you're basically either going to follow Delaware or explain why you're not.”
• On the SEC’s limited powers:
  Ann (28:27): “The SEC can't put them into place because…Congress hasn't exercised that power.”
• On courts striking down overreaches:
  Ann (34:35): “They promulgated a set of substantive rules…The Fifth Circuit struck those rules down, saying…the SEC had exceeded its powers…”

Noteworthy Moments by Timestamps

• Foundational U.S. constitutional powers [03:38–05:13]
• How state law defines and structures corporate behaviors [06:06–08:24]
• Federal incursion via “disclosure” rules on governance [10:00–14:22]
• State vs. federal enforcement mechanisms [19:11–23:42]
• Recent SEC activism and its limits [28:12–32:46]
• Mandatory arbitration controversy as a preemption flashpoint [29:52–33:31]
• Delaware’s policy shifts under political/federal pressure [36:36–37:46]
• How private company proliferation is shaped by regulatory choices [38:08-38:57]
• SEC’s “soft power” in influencing state responses [39:46–40:22]

Conclusion

Ann and Mike illuminate why the federal/state split in corporate law persists—not because the federal government lacks power, but through a complex mix of legislative strategy, regulatory restraint, political calculation, and mutual influence. The line between “preemption” and mere “influence” remains blurry, especially in governance hot zones like shareholder litigation rights, board independence, and arbitration. Delaware’s legal ecosystem is both a model and a battleground, always evolving in response to federal nudges and power plays.

If you want to understand why America’s corporate legal landscape looks the way it does—and how it might change—this episode is essential listening.