State law gives corporate managers extremely broad power to direct increasingly large pools of collective business assets. Not surprisingly, economic incentives, norms, markets, and law all work to constrain the breadth of the power and the potential for abuse of what is other people's money.' State corporate law has occupied the center stage in the legal portion of this landscape, with federal securities law playing a supporting role-at least in the academic presentation of the debate. The New Deal's securities legislation eschewed a general federal corporations statute in favor of a more focused federal role emphasizing disclosure and antifraud protections for those who purchase and sell securities. The Supreme Court has made clear that "fraud" as proscribed in federal law was not to be defined in a way that annexed corporate governance. And, in 1995, Congress expressed a clear desire to limit the use of federal securities fraud lawsuits, at least insofar as those lawsuits were perceived to be frivolous.
Yet, as this Article demonstrates, federal securities law and enforcement via securities fraud class actions today have become the most visible means of regulating corporate governance. Securities fraud law is ostensibly directed at buyers and sellers of securities, but in the context of class actions, this purchaser-seller connection acts more like the minimalist jurisdictional hook of the interstate commerce requirement than a real constraint on the use of securities law to regulate corporate governance. Federal securities law is, of course, not the only legal constraint on managerial behavior, and a shareholder lawsuit based on disclosure is not the only litigation remedy. State law continues to provide the legal skeleton for the corporate form, and state fiduciary duty litigation continues as a mechanism frequently utilized to monitor managers. Yet, in today's world, state law does so almost entirely in two contexts-acquisitions and self-dealing transactions. The empirical evidence in this Article illustrates that corporate governance outside of these areas has passed to federal law and in particular to shareholder litigation under Rule 10b-5.
Robert B. Thompson and Hillary A. Sale,
Securities Fraud as Corporate Governance: Reflections upon Federalism,
56 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol56/iss3/3