Federalism and corporate law: The race to protect managers from takeovers

This paper analyzes certain important shortcomings of state competition in corporate law. In particular, we show that, with respect to takeovers, states have incentives to produce rules that excessively protect incumbent managers. The development of state takeover law, we argue, is consistent with our theory. States have imposed antitakeover protections that have little policy basis and have provided managers with wider and more open-ended latitude to engage in defensive tactics than endorsed even by the commentators most favorable to the use of such tactics. Furthermore, states have elected, even though they could have done otherwise, to impose antitakeover protections on shareholders who did not appear to favor them in a way that left shareholders with little choice or say. Finally, we conclude by pointing out that proponents of state competition cannot reconcile their unqualified support of state competition with the current state of corporation law.