Relationship of federal and state corporation law

Summary

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.

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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.

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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.”

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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…”

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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]

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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.

Transcript

[A]

Welcome to Shareholder Primacy from Free Float Media, a podcast about activist investing, securities law, and all the ways the financial and legal worlds intersect and collide in real life. Hi, Ann. Hope you're doing well. We're back, Ann and me. Ann Lipton is a law professor at the University of Colorado who teaches and researches securities and business law. She holds up the legal end of the podcast.

[B]

And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast.

[A]

Our podcast.

[B]

I guess it's my turn again to remind everyone that if you want to contact us with comments or questions or requests for topics, you can reach us at our email address. Shareholder primacyreefloat. One Word llc.

[A]

Excellent. So, Ann, this is great because I have all these questions that I've been sort of saving up that I wanted to run past. A really smart lawyer.

[B]

Thanks.

[A]

So that's you. So that's you. So a couple weeks ago, and another one I've been kind of saving up was motivated by our talk a couple weeks ago about the speech that SEC Chair Paul Atkins had delivered to all those leaders in Delaware. Kind of, I don't know, encouraging, threatening, threatening, threatening them. About two subjects, shareholder precatory proposals and mandatory arbitration of disputes, lawsuits, security. We talked about this. Yes, we've talked about this many ways before. Context of companies kind of trying to leave Delaware, going to Texas or Nevada. We looked at different cases and lawsuits and in federal and state courts. But this leads to a question that I've been pondering and wanted to ask you for a while. It's formerly related to securities laws and their relationship and conflicts at the federal and state level. And the heading that I thought of, which I think you wanted to refine. Change. Refine. I just thought about it in terms of federal preemption of state corporation law. So I was kind of wondering as all this stuff unfolded, both, you know, Atkins's speech, but also earlier stuff like when Delaware passed SB21, and when Delaware passed, I can't remember the law the year before for 313.

[B]

For shoulder agreements.

[A]

Yeah, right. Yes. I kept wondering, is there going to be an opportunity for the federal government to just kind of step in? And the verb. The verb I thought of was to preempt.

[B]

Yeah. No, that is what preemption would mean. But it's just.

[A]

But there's a lot more to it than that.

[B]

There's more to it than federal preemption. Yes, exactly.

[A]

And you set me straight and you said, let's talk about the more and Then we can talk about preemption. Is that roughly correct?

[B]

Exactly.

[A]

All right, good. So we thought we'd be interested in fun to talk about the nature of that, what it would look like, and just also speculate a little bit about how likely various forms of that might sort of be in the coming, coming years. So that's, that's what I had in mind. And you were so kindly said. Yes, we can talk about that. So there are some. Go ahead. Yeah.

[B]

No, no, yeah. I mean, yeah, I don't know. Well, it's complicated.

[A]

Right. Well, there's some principles we need to talk about, I think.

[B]

Yeah.

[A]

And then we can talk about where this takes us.

[B]

Right.

[A]

I mean we should start with the foundation. So go ahead.

[B]

Yeah. So like the ultimate foundation here is that the constitution says. The U.S. constitution says.

[A]

Yes, that one, that's the one that we worry about with increasing frequency these days.

[B]

Yeah. Well, it provides that Congress has the power to regulate interstate commerce.

[A]

And that among all these states, started with the 13 of them and now we got 50 of them.

[B]

Exactly. Congress has the power to regulate interstate commerce. And that power has been read very broadly. So once upon a time it would. Was viewed very narrowly. So an entirely intra state business like a mining company was something like beyond the power of Congress to regulate. But over time it's been read pretty broadly on the theory that everything economic affects everything else. So probably for the most part, Congress has the power to, to regulate a lot of. Most business activity and probably most if not all corporate governance, in fact. And this is why ever since the

[A]

early 1900s, theoretical power, they theoretically have the power to. Okay, go ahead.

[B]

Yeah. And so ever since the early 1900s, there have been proposals for Congress to essentially create a federal corporation law that would, it wouldn't be this thing where you choose Delaware or Texas or Nevada. It would just be. You incorporate under federal law. And federal law would dictate all the rules. And the preemption principle is simply if Congress passes a law on a subject that conflicts with a state law on the subject Congress's law controls, that's preemption.

[A]

And that's, that's has. That goes well beyond business too.

[B]

That goes for.

[A]

I mean there's like. That's law.

[B]

Yeah, that's just law.

[A]

Okay.

[B]

There are all kinds of questions about what does it mean to conflict and all of that. But that's the basic principle. Yes, 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. It's left a lot of it intact. And that's why we have sort of a mixed system today.

[A]

Mixed in the sense that there's some regulation and some law at the federal level, but a lot of it, which we'll talk about in a minute. Yeah, at the state level.

[B]

Exactly.

[A]

Okay, cool. Let's take a dig into that a little further then, I suppose.

[B]

Well, I mean, it's state. So for the most part, other than a few unusual entities like certain kinds of banks, state law is where. How you charter like you. You pick a state and you incorporate in that state. That state sort of declares you are a corporation.

[A]

In our state.

[B]

In our state. And that state defines certain basic ground rules, like what has to be in the charter, the powers of the board and the shareholders, what can be considered at shareholder meetings, what the equity structure looks like, most everything else. And state law tends to operate in two ways. First, there are like sort of statutory rules. Your charter must contain these items. It may contain these other items. This is the procedure by which you merge these statutory rules. But then on top of that, as we talk about a lot here, the board has fiduciary obligations, and sometimes controlling stockholders have fiduciary obligations and officers, these fiduciary obligations of care and loyalty that goes beyond what the statute, the minimal powers and requirements of the statute that essentially dictates how boards and officers and so forth are supposed to exercise their discretion within the powers conferred by the statute. And those fiduciary obligations are very contextual. They're like what is demanded of loyalty or care may depend on any particular specifics of any of a scenario.

[A]

So I have a couple quick questions or just to confirm. So my understanding is those fiduciary duties, law. And there's really two basic ones, law and care. There's other fiduciary duties that are kind of thought about, but they all kind of track back to law and care. Those are mostly in cases and not in statute.

[B]

Right, exactly. Like the. Exactly. So, like, those are. It's all developed through case law.

[A]

Right. All right, cool. So if you want to learn about those, you have to read the cases. The nature of some fiduciary duty that somebody says, I have a duty to run advance notice bylaw terms, which I want to ask you about. Another.

[B]

Oh, yeah, all that's in case law.

[A]

I have to go read a bunch of cases to understand there's no statute, there's no DGCL number to go find.

[B]

Yeah. I mean, you might see Some sort of basic, like the phrase loyalty may very well appear in the statute. Certainly appears also in the NBC, the Model Business Corporation act, which a lot of states have adopted. But what it means, what it requires at any given moment is almost entirely going to be a case law issue.

[A]

Judges develop that, except to the extent

[B]

that SB21, this recent Delaware statute, it's complicated. What it requires is developed by case law. But there's this idea of cleansing where an action that might otherwise be deemed disloyal can be cleansed by a shareholder vote or board action. And that was entirely common law in Delaware until SB21, until they started writing

[A]

some law, some statutory law.

[B]

Exactly. And other states might have a statutory set forth.

[A]

So before we talk about the federal end of this, it's worth noting, and I think we're gonna hit this up a little later, is there's 50 such states that all have different corporation laws.

[B]

Yeah, but a lot of states.

[A]

But Delaware, of course, is the biggie.

[B]

Yeah, but they all. Yeah, a lot of states also, it'll be the same because a lot of them will have adopted the Model Business Corporation act or a variation of it.

[A]

Right. Or. And a lot of them also kind of refer to or follow Delaware.

[B]

Yeah, exactly.

[A]

In their day to day kind of stuff.

[B]

What I tell my students is outside of Delaware, you're basically either going to follow Delaware or explain why you're not. You know, like those are your options.

[A]

Okay, so that's your choice.

[B]

Yeah.

[A]

All right, cool. So that's this kind of foundation. In terms of the question I was starting to ask, what we just described would be what may get preempted. Well, theoretically, conceivably, but we'll get to that. Okay, great. And the preemptor would be, I suppose, federal out of some sort of federal.

[B]

Yeah, it would have to be.

[A]

So what does that look like?

[B]

I mean, yeah, but I'm not sure. I mean, it's complicated. So. Yeah. So when we talk about federal law, I mean, this is. So usually when we talk about corporate law and Feds, we're talking about the securities regulation, the securities Act. And the usual thing to say is that these acts deal with disclosure, they require disclosure to investors. But I would also say that increasingly aspects of federal law intrude on what we call corporate governance.

[A]

Yes, keep going.

[B]

So the ordinary thing you say is it's disclosure, but it's not really. So when we talk, especially when we're talking about public companies. So, for example, federal law extensively regulates shareholder voting and not just disclosure requirements. For shareholder voting, they have rules about bundling different items together. Like you can't like so that shareholders get to vote on individual specific items. That's a substantive rule about how the votes have to be taken, which you

[A]

normally would based on what we talk about. Normally you'd find that in at the state level based on what you would talk about.

[B]

Right. But there aren't, as far as I know, I'm unaware of any specific state level rule that says you, you can't like that has anything about structuring votes so that you have to vote like in bundles around bundling meeting.

[A]

Sure.

[B]

Like here are these two items. You vote for them both together or neither. But you can't go one or the other. Like take one and not the other. Like I'm unaware of any state rules on that. That's purely federal. Now part of the reason it's purely federal, I think is because it's been federal since like 1934. And so like some of the reason that the federal, like there isn't state law in some of the spaces, almost certainly because the federal government has been regulating for so long, there was just no chance for states to, to step in.

[A]

They weren't going to bother you.

[B]

Exactly. So the federal proxy rules, the tender offers, there's lots of regulation of tender offers. And again not just disclosure obligations, but also rules like you have to hold the tender offer for 20 days or you know, you have to make it possible for you have to accept over subscriptions on a pro rata basis. So once again, I'd call that corporate governance. But it's under the. But it's a federal law.

[A]

It's regulated by a federal law.

[B]

Yeah.

[A]

And it's usually by the agency that that federal law empowers.

[B]

Exactly. And usually this is for public. For public. Like federal law operates, tends to. When it does governance rules, it tends to operate on either publicly traded companies or only listed companies. So there are a lot of places where federal law adds some basic minimal requirements for corporate governance in listed companies. Like the stock exchanges are required by statute to set certain rules for independent boards, independent audit committees. Audit committees have to have certain powers. They have to have procedures like taking whistleblower complaints.

[A]

They have to intervent how their auditor's independent.

[B]

Exactly. They have to. And compensation committees have to be independent and shareholders get non binding votes on executive compensation. That's federal say on pay corporations aren't allowed to make loans to executive officers. So all of this is corporate governance regulation. But it's federal. It's not based on the law of the state of incorporation.

[A]

Right.

[B]

And then.

[A]

Yeah, go ahead.

[B]

No, and one thing we've talked about this before a while ago is that some federal disclosure requirements and like, I'm making air quotes. Disclosure requirements are really more like.

[A]

Those are good. Yeah, right.

[B]

They're not really disclosure requirements. They're like a backdoor to substantive regulation. I like to use the cybersecurity rules as an example. Boards have to make detailed disclosures of how they're managing cybersecurity risk. And you can call that a disclosure requirement, but board could say, well, we're actually not managing cybersecurity.

[A]

Yeah, right. Forget it. We're like, we're neglecting it completely.

[B]

But obviously no board is going to do that. So by requiring disclosure of detailed stuff about how the board is managing cybersecurity risk, you are functionally requiring boards to

[A]

care about cybersecurity, to have some policy and some procedure around cybersecurity risk.

[B]

Exactly. So there are ways that the federal's disclosure requirements are essentially something like a federal duty of care.

[A]

Oh, interesting.

[B]

And like books and records, like corporations have to maintain appropriate internal books and records. Now it's tied to disclosure because you can't accurately disclose if you don't have accurate books and records. But what it really. But by requiring books and records directly, what you're requiring is proper care be taken within the corporation. And then.

[A]

Sure.

[B]

The final thing I'd say on this. And this is probably way further than you wanted to go.

[A]

No, this is good. This is great. Outside of the. We're laying a groundwork for answering.

[B]

Exactly. So outside of what we think of as corporate law, when we get to other areas like financial regulation or environmental regulation or health regulation, there are a lot of requirements that firms set up governance structures. They have to have a compliance officer. They have to use certain procedures when taking action. They have to document those procedures. And that starts to look like corporate governance regulation in the sense that it's regulating the procedures within the corporation that it has to follow to comply with duties under health law or environmental law. Sean Griffith at Fordham is. And I have to do the shout out, wrote a great paper on how all this compliance regulation is really regulation of corporate governance at the federal level.

[A]

Corporate governance, corporate behavior. Right. So the next logical question is that's kind of the grayish boundaries between federal and state and kind of the areas they work in. And I've said before that in my mind, which is only partially correct, the federal government tended to regulate communication between shareholders and between the company and its shareholders and states kind of regulated most everything else, but that seems to have been kind of gotten kind of leaky.

[B]

Yeah, exactly, exactly. It's a much more complex process. And Delaware. There have been multiple warnings to Delaware that if you don't regulate things, like if we think we. If independent boards are important and Delaware doesn't require board independence, and it never does. It just requires, you know, like, it's helpful to have independent board members because they can cleanse conflicts. But there's nothing in Delaware law that requires independent board members. So, you know, the continuing, ongoing issue for Delaware is that if it doesn't regulate something, then the feds may step up and regulate something.

[A]

Right.

[B]

And now it's out of Delaware's hands.

[A]

Right. And that's what we're gonna hopefully hit up briefly shortly. So now that we've got this whole corpus. Is that. Sorry, I like that word corpus of law. So the overseers at the state level is the state in which you decide to incorporate, which is mostly Delaware, but

[B]

not as much, I would normally say. Absolutely. It's the state of incorporation. That's what controls. Except I think we mentioned this on an earlier show that Texas seems to be trying to challenge that because it's trying to regulate corporate governance for companies that are headquartered in Texas or that trade on the Texas stock exchange, even if they're not incorporated in Texas. It's done this with a few different things, so we'll see if there's a fight about this. But traditionally, the state of incorporation.

[A]

Right. And then at the federal level, the principal way this stuff gets enforced is our. Basically the. Our old friend the sec.

[B]

The sec. If it's willful evasions of the law, it can be criminal. And that would be the Justice Department.

[A]

And they tend to. I don't know if they collaborate, but they kind of know what each is up to.

[B]

Yeah, they know. Yeah. And so usually the SEC sort of like, if they had. Often they'll pursue the same case, like an insider trading case. So the SEC will step back, wait for the criminal prosecution, and then they'll step up.

[A]

Right. So that would be. But that's really bad. As you say, criminal stuff. And then there's also a role for the exchanges, right?

[B]

Well, yeah, the exchanges operate under SEC oversight. And a lot of. Also what they do, Congress has mandated. So Congress is like, the reason the exchanges require independent. Have all these independence requirements is because Congress required that the exchanges adopt independence requirements.

[A]

And that's a way for the SEC to kind of delegate some of its.

[B]

Yeah, Exactly. It's sort of a complex little system

[A]

to say, okay, we'll let the exchanges do this rather than our doing it ourselves.

[B]

Well, I mean, the exchanges are supposed to kind of be self regulating, but they do operate under the SEC's eye. And I've always had, you know, the SEC sometimes, you know, can encourage that certain action be taken. But the sec, I mean, it's really important is that the SEC can only exercise powers that are authorized by Congress. So if Congress, say, passes a statute that prohibits fraud, the SEC can administer that statute, but it can't turn the fraud, turn that statute into a negligence statute. Like, there are limits. Like, Congress has given the SEC a fairly free hand. But at the end of the day, the SEC can't go further than the outer limits of what Congress has authorized to do.

[A]

And that's going to become important, I think, just based on your saying it to my question, which really. Perfect. All right, so that's who does what and how do they then handle the inevitable disputes that come, like between a shareholder and a company or between shareholders or something like that? At the state level, my sense is that people just sue each other. Yes.

[B]

So, yeah. So at state law, all of the corporate governance standards of state law are almost entirely enforced by private actions. Disputes among the players, maybe, you know, essentially shareholders and corporate managers, directors, officers and so forth. So one, you know, somebody sues somebody else within the corporate form, and the state enforces the requirements, the requirements of its law. The only time you have, like, governmental getting involved, like governmental entity, like the state attorney general, perhaps getting involved. And this is a really minimal space. So there's this very old timey concept known as quo warrento.

[A]

Say that again.

[B]

It's two words. Quo warrento.

[A]

Quo warrento. Essentially, it deals with lawyer's Latin, right?

[B]

Yeah. It deals with the problem of a corporation that literally exceeds the scope of its authorized powers. Like there are certain. Like they're used. Like, if you just think back to a time when a corporation was not allowed to hold stock in another corporation, that was literally forbidden. So it would be quo warranto if they tried to do that. Today, of course, there are very few actions that go beyond the corporation's authorized power. But theoretically, the state attorney generals can step in to actually require the corporations stick to their authorized power. And today, the sort of main use of this is dissolving corporations that are used to break the law on the idea that we are only chartering you, you only get to exist for legal compliance. Now, obviously, corporations break the law all the Time without getting their charters dissolved. It's the idea being that you're functioning essentially for the purpose of breaking the law, but you are only chartered to do lawful things. So every, you know, every few years the, you know, or maybe the Attorney General of Delaware, for example, is, you know, constantly announcing that she's dissolving the charters of various, you know, enterprise organized in Delaware. Really bad for engaging criminal activity. Some of these were organized by Trump actually a few years ago. That was funny.

[A]

Oh, interesting.

[B]

It was a whole like campaign contribution funneling thing. Anyway. Excellent.

[A]

Yeah, so, so that, so that's at the state level. People sue each other, you go to chance record.

[B]

Other than this one little, you know, role, it's almost entirely people suing each other.

[A]

Okay, cool. Private at the SEC is different. But the sec, right, has a whole enforcement division.

[B]

Exactly. So the sec, you know, we think about, you know, securities class actions get a lot of headlines. But the fact is that the, that the enforcement powers of shareholders, as shareholders, like individual private actors, are very, very limited. They have only a very few causes of action. The vast majority of, of the rules that Congress and the SEC lay down are only enforceable by the. So the SEC can bring a lawsuit, but it has, it has invest various kinds of investigatory powers over, you know, because it exercises oversight of brokerages and

[A]

so it does examinations and so forth. Right, yeah, yeah, yeah.

[B]

And they have in house agency courts, but they're used less and less because there have been constitutional challenges to them.

[A]

Oh, interesting.

[B]

So this actually enforce their own rules as well.

[A]

Yeah, right. They threaten to delist you. Yeah, which we've talked about like you know, with Tesla and so forth. They, you know, they. Okay, so. And this actually gets to an interesting point that I've kind of thought about sometimes, which is I'd always wonder. And the SEC, because of their regulatory approach to this, that they kind of, you know, SEC issues, you know, no action relief. We've talked about that in shareholder proposals. I've always said the Delaware Chancery should have a no action process where if you have some sort of problem, like with an advanced notice bylaw or something, you should be able to just go to some sort of magistrate.

[B]

They actually do have a procedure and see, I didn't know you were gonna ask that because I'd have looked it up and researched it. Now I can't research it on the fly. But they do have a procedure. Actually a lot of states have a procedure where you can certify questions to the court and it can choose to decide them like, is this okay? But I know that the Delaware Supreme Court will take certified questions from the sec.

[A]

Oh, and that's what we talked about with Atkins.

[B]

Exactly. But I don't know the extent to which that procedure is available for private parties.

[A]

Oh, so there may be a little glimmer of hope for.

[B]

Yeah. But as I said, I don't know if that's available for.

[A]

Anyway. All right.

[B]

It's definitely available for the SEC and for courts.

[A]

All right, so let's cover one other little subject, then we'll take a quick break. So we've talked about the law, how they vary by state. We talked about who's responsible for which, you know, state courts versus the SEC and how they enforce. So what's. Let's set up our next set of questions. How are these parties kind of related to each other? Kind of over the years there's been a relationship that's evolved.

[B]

Yeah, exactly. I mean. Well, it used to be that almost everything was state corporate law and there were no securities laws. I mean, the securities laws didn't exist until 33.

[A]

Yeah, until 1933. Until 1933.

[B]

And even after the Depression and even after the securities laws passed in 33 and 34, the. They were much, much thinner than they are today and covered a lot less of governance issues than they do today. The takeover and proxy stuff, a lot of that wasn't added until the 60s. But what tends to happen is that Congress is very reactive. Like there's a scandal and then suddenly there's new federal corporate governance. So the big ones were Enron, WorldCom, Global Crossing in 2001, after which Congress passed a lot of laws requiring board independence.

[A]

That's when Dodd Frank came along.

[B]

And then. Well, that was. And after the financial. So a lot of these governance rules come up in response to a major crisis when Congress responds by creating essentially federal corporate law.

[A]

Oh, okay. So. So, so there has been this kind of. I'm not going to say preemption, because we're going to talk about that.

[B]

Yeah.

[A]

Because there's been sort of this expansion where maybe as business evolved and there was this kind of white space that the SEC or that the federal. That was expanded at the federal level, where the SEC kind of got this mandate from Congress to further look at different kinds of disclosures or something like that.

[B]

Yeah, exactly. Yeah. So a lot of these things happened. And so the reason I'm uncomfortable with saying that's just preemption. I mean, it does. And it is preemptive in the sense that states couldn't contradict it. But it there Congress is often in these cases acting in a space where the states haven't acted. So it's not like it's actually so it's more like in the, in the negative. So like Delaware doesn't have any requirements for independence of board members. You can have independent board members and if you do, that's probably good in the event of disputes later. But you're not required to have them. So but then Congress steps in and it says actually you are required to have them if you're exchange traded and call. It's not, I mean it sort of displaces Delaware on the subject, but it's not exactly preemption. And also the federal definition of what counts as independent may be very well be different from Delaware. So it's actually sort of a mush. They're both regulating in the space simultaneously.

[A]

Okay, mush. Let's, let's, let's, let's leave that there just for the moment because we can get to some more current questions and so forth. So let's, let's come back in a minute to talk about the more recent, like in the past weeks and months, efforts of the SEC to kind of influence and maybe, okay, maybe not preempt, but influence state law as illustrated by what we heard from SEC Chair Atkins here at Shareholder Primacy.

[C]

Shareholder Primacy is brought to you by free flow analytics.com the only free database of corporate directors, their influence and their performance. If you own a stock or retirement plan, go to freeflowanalytics.com and look up which of your elected directors are performing well and which aren't. Use your vote in the alternative democracy and get your data @free flow analytics.com now back to the show.

[B]

Welcome back to Shareholder Primacy. I'm Ann Lipton here with Mike Levin and we're continuing to look at the relationship between federal and state corporate governance,

[A]

regulation and law and regulation. And we'll figure out why preemption is not exactly right by but it's not far off. How's that? Okay, so there's some more now that we kind of laid this foundation about who does what and what they and some of where it came from. We can now talk about some of these current questions. So in this context, what's going on? What's happening at the SEC like today, Chair Atkins and so forth kind of in this context, we talked about it briefly when we were commenting about his speech. But let's, so let's really try to delve into that.

[B]

This is where we get to this issue where obviously Atkins plans to be fairly aggressive about SEC rulemaking and repealing rules and so forth, although with the government shut down, we don't know.

[A]

Theoretically that's just a temporary setback.

[B]

I hope so. Oh, no. But the issue is that 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. Not because Congress doesn't have the power to do it, it probably does, but because it hasn't exercised that power. Like, remember, the SEC can only act within its authorized congressional powers. And if Congress hasn't taken action, then the SEC can't actually regulate in that space. So what Atkins appears to be doing as looking around and saying, well, we might be at the limits of what the SEC can do, but he still wants to see certain corporate governance rules. So he's going to Delaware and basically saying, I think you should adopt these corporate governance rules.

[A]

Right.

[B]

Even though normally the theory is if Congress hasn't given the SEC that power, then it's not clear to me why Atkins has any right to demand anything of Delaware.

[A]

Right. Well, and again, just to be clear, and we didn't talk about this first segment, but. Well, his particular program seems to have to do with, at least at the state level, with litigation with, you know, basically Massachusetts.

[B]

So this is a classic lawsuit, right? Yeah. So this is the, this is the class. This is a.

[A]

And this has been a concern for decades.

[B]

It's been a concern for decades. But I just want to lay out what this framework here is. So, I mean, we have, we had a whole show on mandatory arbitration, but like, so first of all, we're talking about securities claims. We're talking about federal securities claims. The issue here is that like, so it goes back and forth. Would you like arbitration or not? It's not about arbitration, first of all. It's about the fact that arbitration, you can require it, that actions be brought individually and therefore kill the class action. And if most investors have lost $1,000, $2,000, not worth bringing an individual arbitration, so you've killed the claims entirely. That's the point. It's not the arbitration part. It's the killing the class action part. But here's the thing about arbitration. Everybody has the right to go to court. It's in the Constitution. Among the constitutional principle, you have the right to go to court. So if you're going to be forced into arbitration when you don't want to be there involuntarily, it's Got to be. Because you contracted, you've signed a contract that said, I agree to arbitration.

[A]

You waived your court.

[B]

You waived my right to go to court. And when we're talking especially about open market trading, shareholders buying and selling shares, there's. There's no contract there. Like, there's no contract between the shareholder buying the shares and the people they might be suing.

[A]

There's like a certificate of incorporation, but

[B]

that's certainly, like, when you buy your share. Like, there's no contract in which to put an arbitration.

[A]

Yes, correct.

[B]

And so that's the sec like, so depend. Like, if that's Atkins's problem. It's been the problem of any securities person who kind of wanted to see mandatory arbitration that there is not an obvious contract to put arbitration. Now, Congress might be able to regulate on this subject, but right now, like, create, you know, a fictional contract of some kind, but it hasn't. So that means the SEC is sort of at a loss. Like, there's no contract to put the arbitration clause to force someone to arbitrate. But until the bright idea came along that, hey, maybe we can take state law, charters and bylaws as the contract that requires arbitration. Now, again, I don't. I have long said, I don't think that's a correct reading of what charters and bylaws do when we're talking about federal securities fraud claims that you bought on the open market. And you claim I was defrauded into buying the contract of corporate governance, I don't think should be viewed as the contract that dictates the sale. But the point is that 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, as

[A]

we talked about first to F. Right.

[B]

Yeah. So Atkinson is kind of like at the limit of what the SEC can do. So he's now trying to, like, get. But he wants mandatory arbitration for securities claims. So he's trying to get Delaware to do it for. And the states do it for him because he's at the limit of the sec, his powers. Maybe not congressional powers, but Congress hasn't acted and probably won't, and for no other reason than Congress can't act on anything.

[A]

This gets to us to an interesting place, which is kind of where I was wondering when I first wanted to talk about that dreaded word preemption, which is, is there some sort of rule or regulation? And we followed the SEC rulemaking. I have. You have. We Talked about it with universal proxy. There's all sorts of places where the SEC makes lots of rules and there's a whole process and so forth. And part of what I was wondering is, is there some set of rules that the SEC could pursue that would achieve some of its goals? And I think the answer is starting to get to be no.

[B]

No, not for mandatory reputation securities claims. I mean, I.

[A]

Or for many other. For many other aspects.

[B]

Many other aspects of what Atkins wants. I mean, that's exactly the problem. So, like.

[A]

Or for many other aspects of corporate governance.

[B]

Or for corporate governance, or for. Exactly. There are limits to how far he can go with SEC rules. So just a really obvious. I mean, you know, who knows what a court decides later. You know, I'd have to see the rule. But that's the problem. So, like, for example, a great example from the Biden era was the SEC came up with rules to govern private fund investments. They basically thought that private fund investors, like, you know, private funders like their pension funds, whatever, were not necessarily being well treated by essentially private equity firms. And they were concerned about things like side agreements where some investors got favorable terms as compared to other sure things like that. And so they promulgated a set of substantive rules to dictate how private funds had to operate. And the fifth Circuit struck those rules down, saying that they were not authorized by statute, the SEC had exceeded its powers in regulation, and that. So there are limits to how far the SEC can go if Congress doesn't act. And, of course, we all know what the problems are.

[A]

And that was that. And that was my next question, which is that the SEC writes rules pursuant to laws that.

[B]

Pursuant to statutory laws that Congress has passed.

[A]

So there could be some instances or some areas where the federal government would start to preempt or want to try to preempt state law, and it would take acts of Congress. Well, Congress isn't in session right now.

[B]

Yeah. So, like, for example, Delaware already changed its law. But back when Delaware struck Elon Musk's pay package, 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.

[A]

Congress could do that, but it probably,

[B]

if for no other reason. Well, now Delaware already changed its law. You don't need to. Although. But that was something that. If it was. I don't know if it was seriously on the table. I don't know that Musk has that much influence. And there's a filibuster and so forth. But that's the kind of thing Congress could do if it felt that the states were going too far in policing corporate behavior right now. They tended to go sort of the opposite route when they think Delaware is too lax. They, you can call it preemption, but you know, it creates these other rules for, you know, exchange listed companies, things like that.

[A]

All right, so, so, so that's the path. If some enterprising and energetic person at the federal level could be Atkins, could be someone at the White House, it would very likely take acts of Congress to start doing this.

[B]

Yeah.

[A]

The chance of that happening is not high.

[B]

Yeah, but. And it's just that happening is not high. And what. Obviously the agenda right now is pretty deregulatory. So any efforts coming from the SEC or not would almost certain would be in a situation if they thought the states were being too strict.

[A]

Right.

[B]

And right now the states are racing to be as not strict as possible, less strict.

[A]

Right. That was my next question is how would states start to react to this? Which is to sort of say, what do you need?

[B]

Well, that's exactly what we just saw. I think again, SB21, which really loosened the standards for cleansing conflicted transactions. Now I don't know if there was a real threat that Congress would step into the space, but again, that's why Elon Musk was making noise. And maybe if they'd kept their law just that strictly, eventually Atkins would be making noises about that.

[A]

So there was some. Not only was there potentially pressure like from other states, this so called race to the bottom that people talked about for a very long time, but potentially there was also some thinking, at least in Delaware and maybe other states that we need to get ahead of whatever the federal government might want to try to do to.

[B]

Yeah. And that's actually happened the other way as well. Like when it looks like Delaware is afraid that it's too lax and scandals happen, then it tries to get ahead of that as well. To avoid, you know, to avoid federal preemption. To avoid federal preemption. To avoid federal. The federal government making a rule on this at the federal level. So there's always been that kind of

[A]

interaction, this kind of tug and pull.

[B]

Exactly.

[A]

Between the states, but now we have a much more robust.

[B]

Yeah.

[A]

Understanding of where that comes. Comes from.

[B]

But I'll add, like another thing though is that the vast majority of congressional regulation of corporate governance is for public companies, listed companies, and increasingly, of course,

[A]

which is all I usually care about because you're right.

[B]

Exactly. But increasingly of course companies are staying private, which they can do because federal securities law allows it and Atkins.

[A]

And there's a lot more money to allow people to stay. That's a huge reason why.

[B]

Yeah, exactly. Basically you couldn't. It didn't used to be legally possible to raise that much capital without going public. And over time the SEC has made that easier and Atkins wants to make it easier still.

[A]

Right.

[B]

And since most of the federal corporate regulation is for public companies, that's an area where lax state regulation could have bite. I mean, over time, like, you know, let retail investors invest more in private companies. I mean, I think that's sort of a weird thing to say because if retailers investing is not private anymore, but whatever, let retail investors invest more in private companies. Well, these are not companies that are subject to any of the federal corporate governance standards.

[A]

No.

[B]

So you have a few scandals and that's going to be state law dictating what the hell happens.

[A]

Oh, interesting. Okay. Oh, so I think we have started to get the answer to the last question that would be on my mind about this, which is what's the chances of some of more federal incursion? But again, there's two. By incursion we mean two things. The first that I kind of thought of is, you know, what kind of laws and regulations and so forth. But there's this whole idea which really opened my eyes to this, that the federal government can incur on state corporate oversight of corporations just by making speeches at the Weinberg Center.

[B]

Yeah, the threat. So I, you know, would not at all be surprised if Delaware sort of responds to that somewhat heavy handed request. Now it's not like that can do anything to Delaware. Exactly. But you know, the SEC's regulatory power is strong enough and they have enough influence, soft power with companies that I'm sure there are multiple ways that can make life difficult for Delaware if they want to.

[A]

And so, so there's, there's maybe a little bit of preemption already happening.

[B]

Yeah.

[A]

How about that?

[B]

Well, they're forcing the states to take action. They're certainly encouraging Delaware to take action. Right?

[A]

Yeah. Interesting. All right. Wow. This is a much more complete view of this than I even bargained for. I think this is great. This is wonderful. The idea that I can now bounce all these random questions off of an expert is really convenient for me. I hope you don't mind. So we can do more of that at some later point, but we'll find some other subjects that, that interests people too. How's that?

[B]

Okay.

[A]

All right, cool. We're going to wrap up. Then we will return next week with more and different and interesting stuff. But in the meantime, this is Shareholder Primacy, hosted by Ann Lipton and me, Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations. Anne is professor of Law and Lawrence W. DeMuth Chair of Business Law at the University of Colorado Law School. You can find me [e-mail] and Annaw Colorado Edu. Our podcast is produced and distributed by the good people at Free Float Media. Thanks for listening. We will talk again very soon.