Publicly traded firms, in the wake of the Enron and WorldCom collapses, face increased scrutiny from the Department of Justice, the SEC, state attorneys general, an active plaintiff’s bar, stock exchanges, and the 2002 Sarbanes-Oxley Act (Sarbanes). Firms increasingly face shareholder challenges demanding increased power over executive compensation, merger and acquisition decisions, and directorial elections. While substantive state law traditionally governed the internal workings of corporations, since 2002 Congress, federal courts, and the SEC have deliberately—and sometimes with good reason—intruded into these state law areas. The resulting increase in compliance costs, coupled with expanding areas of liability for directors, and uncertainty over the federal government’s often ad hoc rulemaking is forcing an increasing number of executives and public firms to explore the benefits of going private, and simultaneously pricing some private firms out of the United States’ public markets altogether. Unprecedentedly diffuse ownership in today’s public capital markets makes those markets’ retention of firms and top executives critical to America’s long-term economic health.
Federal courts have aided Sarbanes’ intrusions into state corporate law by creating, enforcing, and broadly interpreting new rules that effectively supplant well-established state corporate law. Though SEC officials recognize that state law theoretically controls corporate governance, its leadership recently suggested that the SEC “empower investors” by creating new federally mandated directorial duties beyond substantive fiduciary duties developed over centuries of state common-law evolution. Despite recognizing the excruciatingly high costs of compliance for small firms, SEC officials seem intent on creating duties based on social benefits and a “culture of compliance” among public companies. Federal courts, however, at times check the SEC when it overreaches and fails to consider the economic consequences of its actions while acting in the name of corporate governance. Indeed, Stoneridge Investment Partners, L.L.C. v. Scientific-Atlanta, Inc. suggests that the Supreme Court will not give in to political and institutional advocates of far-reaching reforms where Congress has not expressly authorized such regulation. . . .