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STATEMENT OF CHARLES CROMPTON, JR., PARTNER, POTTER,
ANDERSON & CORROON, WILMINGTON, DEL. Mr. CROMPTON. Thank you very much, Senator Biden. We, in Delaware, too, recognize our Senator's competence and contribution to our State and to the Congress.
Senator HARTKE. Let me explain. Unfortunately the Communications Subcommittee, which is under this full committee, has failed to put in proper communications equipment in this room. You will have to pull up that microphone to get people in the back to hear you.
Mr. CROMPTON. In examining the rights and responsibilities of the corporation in the United States today, one suggestion advanced by several commentators is that a Federal incorporation law is needed to curb corporate abuses.
The premise underlying these proposals is that the State chartering system has collapsed, and that Delaware in particular has led a “race to the bottom” among the States in a greedy competition to attract the most business by awarding the broadest license to corporate management.
Some of the less gracious proponents of a Federal preemption of this field have referred to Delaware as a “pygmy State” which is totally incapable of regulating the corporate giants which are creatures of its law. Thus, it is argued, the modern, multinational corporation has been permitted to run loose in what is alleged to be an unprecedented crime wave, and a comprehensive Federal program is said to be the only way to stem this tide.
I submit that the issue of a Federal incorporation law is purely a red herring, for the central goal of these proposals is not really to amend or improve the substantive law of incorporation, or to propose standards for the organic act governing corporate activities. The true aim is to establish new Federal controls to remedy various social ills as perceived by these proponents by assuming the ultimate power to revoke the charter of a corporation.
To justify the need for a Federal law governing the creation of corporations, the Nader-sponsored Corporate Accountability Research Group, for example, in its study “Constitutionalizing the Corporation”, cites abuses involving discriminatory employment practices, industrial pollution of the environment, illegal advertising, product safety standards, illegal foreign sales commissions, and the like.
Not one of these issues has ever been the subject of Delaware's incorporation law, nor probably of any State's chartering system. It is thus difficult to see how the State statutes can be blamed for such ills. In fact, virtually every one of the abuses cited is already the subject of a Federal law or regulation of some sort. It is ironic that this failure of Federal regulation can be used to justify its extension to a totally new
Let us remember that there is a very substantial body of Federal corporation law—both statutory and judge made. What is proposed now is Federai preemption of a totally new area, and the application of Federal standards not to be tested in the crucible of congressional debate, but by a system of “politicizing" the corporation's basic structure.
In any event, no one denies that these substantive issues the economic and other abuses alleged to be a product of the current sys
tem-are properly the subject of Federal action. However, they are not properly within the province of a chartering statute—whether it be State or Federal.
The proposals made by the Nader group have been very carefully packaged in a shiny wrapping of popular or at least newsworthy causes. This technique is subject to the same charge of false and deceptive advertising which the study castigates corporations for striving to sell a product not by stating facts such as price and quality, but by "associating their products with alluring superstars or beckoning moods”, such as using a French filmstar to advertise perfume or a rugged cowboy to peddle cigarettes.
The substance of the Nader proposals behind this glittering facade is to "decentralize" the corporation and subject it to “a major redesign.” Again, it is ironic that total central, Federal control is recommended to accomplish this "decentralization."
I said earlier the plan is to politicize the corporation, because the end result of the Nader plan is to replace the shareholder as the ultimate arbiter of corporate activity, with the "citizen" or “the consumer" or the "public.” These goals would be accomplished by such means as forbidding the conglomerate pursuit of multiple business; establishing an outside limit on the market share of the business of any company; forbidding any employee or agent of a corporation from serving as a director of his company; and requiring the entire board of directors to be "professional" full-time directors with qualifications and salaries to be controlled by a Federal law or administrative policy. (It is astounding on this last point, that the Nader study concludes that because the power over a director's "subsistence" includes power over his "will," it is wrong for Delaware and other States to leave it to management to fix director's pay, without recognizing that the same power over his will would appear to follow the Federal control of a director's salary under the Nader proposal.)
Whatever view one has on the merits of these proposals, they are certainly proper topics for Federal debate, if they are candidly presented for what they are-amendments to the antitrust laws or other basic economic regulatory provisions involving a fundamental change in national economic and social policies.
Such controls are not the proper subject for the enabling acts by which corporations are created and under which they operate. Neither should they be left to the regulatory power of some new super-SEC or other new Federal agency as suggested by the Nader group.
Delaware has never attempted to reach such questions under its corporation law, and it is admitted that such vital questions should
not be left to any one or more of the States, whether pygmy or giant. But, the State chartering systems cannot be accused of collapse” in connection with issues which have always been left for Federal action.
In short, the Nader proposals do not justify abandoning a system of chartering which has operated in a fair and flexible manner for 200 years, enabling our corporate managers to adapt to changing economic demands in a startlingly successful manner. One prominent scholar has recently recognized the benefits of the State system. I am guoting from an article by Prof. Ernest Folk cited in my statement.
The scope, form and direction of corporate operations are determined by business needs, by competition, by tax considerations, by the panoply of regulation (Federal, State and local), and by the desires, hopes and fears of men. A statute which enables a great variety of enterprises, from smallest to largest, to accommodate themselves to these complexities performs a significant function. Indeed, this is the ultimate warrant for the kind of statute current today; it provides a suitable framework for an infinite variety of corporate activities.
Hence, a statute may rightly be concerned primarily with structure, form and procedures. None of these is a trivial matter. Moreover, in my view, nothing is gained by an added dimension of regulation through the corporation statute. The line of movement in corporation statutes—towards simplicity, openness and flexibility-has been prudent and wise. More than enough regulation will come when needed, but it will be more effective if it is functional, directed at identified abuses, and not miswoven into a statute properly concerned, as I have suggested, with structure, form and procedures.
It is clear that Congress is the appropriate Federal forum to consider if a new or strengthened statute governing corporate political contributions is needed; or a more stringent antitrust law as currently before you; or a new corporate tax structure. But, these reforms and changes must be functional and substantive rules pointed to specific and identified abuses, and adopted after full political debate.
Federal action may well be called for upon each of the social and economic ills diagnosed by the Nader group, but each must be submitted on its merits to open political debate and not be slipped past the Congress under the guise of a Federal corporate chartering statute.
In contrast to the Nader group's packaging technique, some other proponents of Federal chartering do attempt to justify the proposal with arguments which are relevant and do attempt to establish the superiority of a Federal law of incorporation. Even these arguments however, do not withstand analysis.
It is claimed that a national uniformity of fundamental corporate rights and duties would result from a Federal chartering act. Stockholders, management and all persons dealing with federally chartered corporations would know that in certain areas each national corporation would be identical to each other national corporation.
First, it is far from likely that a Federal chartering statute would provide such uniformity. With hundreds of Federal courts interpreting a new statute unguided by any precedents, inconsistent and conflicting interpretations of rights and duties under the statute are certain to result. Many such conflicting interpretations of such "uniform” acts as the Internal Revenue Code and the Securities and Exchange Act of 1934 remain unresolved today after decades of litigation under these statutes.
No nationally uniform standards are any more likely to result under the Nader proposal. In fact, the long-established Delaware corporation law with its large and cohesive body of interpretation developed over the last 90 years is far more likely to provide a uniform national rule as long as a large number of the large corporations are chartered here. It is not my purpose here to respond to the attacks on the substance of Delaware's law advanced by some.
I have neither the objective detachment nor the time to present a comprehensive response to these attacks. I have attached as an exhibit to this paper, however, a study prepared by the Delaware Corporation Law Committee to refute these attacks and to demonstrate the fairness, wisdom, and equity established under the Delaware statute as applied and interpreted in its courts.
A second argument advanced in favor of a Federal law is that it would eliminate competition among the States for franchise tax dollars, called by some proponents of Federal chartering "charter mongering.” If Federal law governed the manner in which national corporations were structured, State legislatures could not alter those laws in order to attract national corporations away from other States to maintain or increase their revenues.
This argument ignores the fact that many beneficial and enlightened changes have been developed by the so-called chartermongers, and Federal preemption would calcify the law and stifle the creativity of those 50 State laboratories. Even one of the most ardent critics of Delaware's corporation law, William L. Cary in his article in the Yale Law Journal in 1974, has conceded that many of Delaware's innovations "have been salutary; they have effected simplification and flexibility and have eliminated unnecessary and vestigial procedures.”
This flexibility and adaptability to new developments available under State corporation laws has enabled American businesses to react to the dramatic changes which have occurred in economic conditions and technological advances, and in the vast array of regulation-both State and Federal-within which they must operate. A rigid and uniform system of corporate laws, in contrast to competition" and experimentation among the States, will inevitably produce a rigid and stifling atmosphere, not allowing corporate institutions to adapt to changing conditions.
Third, it is suggested Federal chartering would provide a single and central forum for debating significant structural features of national corporations. Today, anyone proposing a change in the structure of all national corporations has the unenviable task of convincing each State where national corporations may be chartered to enact the change.
This argument contains several of the same flaws discussed earlier. First, it assumes that all changes should be applied across the board to all national corporations. Debate over a change will be much more diffuse than the present system because corporations adversely effected by any proposed change, even though desirable for others, will be called upon to defend their rights and interests. Federal lobbying will descend to even greater depths of competing specialized interests.
National policies involving economic or social problems will be relegated to the periphery of debate over whether or not corporations should or should not have outside directors representing various special interest groups. Inevitably, the management and control of corporations will be completely politicized, with a chilling-indeed freezing-effect upon capital formation through the corporate form, and, in the words of one commentator, will benefit "just two small groups *** lawyers practicing corporate and securities law, * * * and the reformers who would finally get their hands on real economic power without having to assume any of the risks *** borne by those now wielding the power."
Proponents of Federal chartering have not advanced any valid reason to abandon our present system. Of course, there have been and will be abuses of this system--as there will be of a Federal system if one is adopted. The attempt to blame Delaware and the State system of chartering for every corporate abuse from illegal political contributions to tainted cranberries is to ignore that Delaware's corporation law does not purport to reach these subjects. The blame, if any, is upon the Federal system for failing to enforce its existing laws which do regulate each of these subjects. This failure of the Federal system is indeed a curious reason to give for the transfer of the entire chartering process to that forum.
Thank you very much.
Senator HARTKE. I gather, Mr. Crompton, you do not like the Nader proposal ?
Mr. CROMPTON. I am glad I made that clear.
Senator HARTKE. I am, of course, interested in that. Mr. Nader is going to be here and testify. You know there is much more to this problem than simply corporate chartering. As I stated yesterday, corporate chartering is merely the mechanism, the procedure; whereas, there is a substantive question involved here, and that is what is the role of the corporation. There has been, in my opinion, some feeling that somehow or other it is not the concern of the State to be involved in the determination of that role. And yet, everyone recognizes that Government is a creator of the corporation; and since it is a creator, it has a definite responsibility to become involved in the rights and duties of that corporation.
Mr. CROMPTON. I think, too, Mr. Chairman, that is correct, but as I tried to point out in my formal statement, the role of the creator of the corporation is one of form and one of method and one of maybe just guidelines. The more important, perhaps, certainly the more basic question is what economic or general nationwide limitations will be placed on the activities of the corporation. That is an appropriate topic for Federal action; but that, I submit, should be presented in a straight, substantive and direct statutory enactment and not by assuming the power of creation and which involves the power of suspension or destruction of a corporation, because that would permit the imposition of nationwide standards without them being subjected to the political process and debate.
Senator HARTKE. Let me ask you a question. I do not know if you listened to my introductory statement. I do not think it takes much analysis of public understanding to recognize at the present time that the concentration of economic wealth in this Nation is within the hands of--as Fortune would say—the top 500; is that fair?
Mr. CROMPTON. I think that is fair.
Senator HARTKE. If that is true, are you telling me then that the only legitimate concern that Government has is to go ahead and determine the question of whether or not there has been the enforcement of laws which effect the corporation in general terms without regard to the mechanism, without regard to the public rights?
Mr. CROMPTON. No; I did not mean that, Mr. Chairman. What I meant was that I think it would be wrong to impose a new standard, say a new limitation on the economic scope of a corporation. One of the Nader proposals, I believe, it is that no corporation should be able to engage in more than one or two different kinds of business. I think it would be a mistake for the Congress to impose that kind of regulation on a corporation by means of assuming the power to create and destroy a corporation.