Last month I noted that the Senate was about to repeat its SOX mistake with another ill-fated foray into regulating corporate governance. I focused on provisions for mandatory majority voting, separation of the board chair and CEO jobs, risk committees, say-on-pay, and pay-performance disclosures.
Now Annette Nazareth summarizes (HT Bainbridge) the provisions in the bill that passed the Senate and awaits reconciliation. She notes that the bill “would federalize significant governance and executive compensation matters that have historically been a matter of state law.” Alas, the Senate never voted on an amendment proposed by Delaware’s Carper that would have eliminated (D-Del) that would have eliminated the majority voting provision and a provision for proxy access.
Although none of the provisions Nazareth discusses is individually earth-shaking, they cumulatively touch many major aspects of corporate governance formerly left to contract and state law. This bill thus clearly adds to the framework for federal takeover of internal governance that SOX established. The overall effect is that it will be increasingly difficult to demark an area left exclusively for state law. This leaves little “firebreak” to protect against judicial incursions in the spaces not yet covered by explicit federal provisions. This could ultimately profoundly affect the relationship between federal and state law regarding business associations.
A generation ago the Supreme Court could say that “no principle of corporation law and practice is more firmly established than a State’s authority to regulate domestic corporations, including the authority to define the voting rights of shareholders.” CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 89 (1987).
Erin O’Hara and I have argued that this separation between federal and state spheres does and should affect the scope of implied preemption of state law by federal statutes. Thus, when the Court held that state securities actions were preempted by the Securities Litigation Uniform Standards Act, it emphasized “[t]he magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 78 (2006). See also my article on Dabit. However, we noted that “[m]any federal ‘securities’ laws reach deep into the kind of internal governance issues covered by the [internal affairs doctrine].” Thus, corporate internal affairs are only “relatively safe from federal preemption” and internal affairs is not “a constitutional boundary, as shown by the continuing forward march of federal corporation law.”
Under the Dodd bill, the forward march picks up the pace.
Yet from a policy standpoint the march is very much backward. In my April post I observed that “[a]s financial markets have become far deeper and more competitive since the 30s, it makes little sense for regulators to actually trust them less.” Thus, the Senate has ignored not only the lessons of SOX but the developments in corporate governance and markets that make its governance provisions less necessary than ever.