Corporate Law Federalism in Historical Context: Comparing Canada and the United States.

• Author: Hutchison, Camden

Although American and Canadian corporate law share many similarities, they are also marked by important institutional differences. Among the most notable are the differing roles of federal versus state/provincial policymaking in the two countries: while American corporate law has been deeply influenced by jurisdictional competition among the states, Canadian law has instead been shaped by federal legislative activity, as seen today in the standardizing influence of the Canada Business Corporations Act. These different institutional histories have led to distinct evolutionary paths, with important substantive consequences for contemporary corporate law.

Despite considerable academic attention to the subject of corporate law federalism, these historical differences between Canada and the United States are not well understood. This article explains why jurisdictional competition arose in the United States but not Canada by examining the "Great Merger Movement" of the late nineteenth and early twentieth centuries. Specifically, this article makes three related arguments: (1) in the United States, the rise of jurisdictional competition was driven not by corporate governance issues, as is often assumed, but rather by the desire to avoid state and federal antitrust restrictions; (2) for a variety of reasons, cartelization and price fixing were more viable in Canada than the United States, delaying the onset of consolidative mergers; and (3) when the Canadian merger movement finally arrived, Canadian federal company law readily facilitated industrial consolidation, reducing the incentives for individual provinces to compete to attract company charters.

The different experiences of Canada and the United States reveal an intriguing historical irony--while Canadian corporate law is sometimes criticized as lacking in competitive responsiveness, the roots of this complacency are closely tied to the turn-of-the-century merger movement, in which Canadian law was less restrictive than its traditional American counterpart.

Malgre les nombreuses similitudes que partagent le droit des affaires americain et canadien, ils sont aussi marques par des differences institutionnelles importantes. On compte parmi les plus notables les roles du federal par rapport a ceux des etats ou des provinces dans l'elaboration des politiques des deux pays; tandis que le droit des affames americain fut grandement influence par une competition juridictionnelle entre les etats, le droit canadien a plutot ete faconne par l'activite legislative federale, tel qu'on le voit aujourd'hui avec l'influence de standardisation de la Loi canadienne sur les societes par actions.

En depit de l'attention considerable des academiciens sur le sujet du federalisme en droit des affaires, ces differences historiques entre le Canada et les Etats-Unis ne sont pas tres bien comprises. Cet article entend expliquer pourquoi une competition juridictionnelle est survenue aux Etats-Unis et non au Canada, en analysant le << Grand mouvement des fusions >> de la fin du dix-neuvieme et du debut du vingtieme siecle. Plus particulierement, cet article propose trois arguments : (1) aux Etats-Unis, la montee de la competition juridictionnelle etait motivee non pas par les problemes de gouvernance des entreprises, tel qu'on le suppose souvent, mais plutot par le desir d'eviter les restrictions anti-trust etatiques et federales; (2) pour plusieurs raisons, la cartellisation et la fixation des prix etaient plus viables au Canada qu'aux Etats-Unis, entrainant un retard a l'emergence des fusions par consolidation; et (3) lorsque le mouvement canadien des fusions survint finalement, les lois sur les compagnies federales canadiennes ont grandement facilite la consolidation industrielle, reduisant de ce fait les incitatifs pour les provinces a competitionner seules pour attirer les compagnies a charte.

Les experiences differentes du Canada et des EtatsUnis revelent une interessante ironie historique--alors que le droit des affaires canadien est parfois critique pour son manque de reactivite a la concurrence, les racines de cette complaisance sont etroitement reliees au tournant du siecle du mouvement des fusions, lors duquel le droit canadien etait moins restrictif que sa contrepartie americaine conventionnelle.

Introduction I. State Corporate Chartermongering and the Rise of Delaware A. Mounting Industrial C bnsolidation B. New Jersey C hartennongering C. State Law Competition and the Rise ol Delaware II. Industrial Consolidation and Canadian Corporate Law A. Canadian Anti-Combines hiw B. Canadian Company Law Conclusion Annex A Introduction

A defining feature of American corporate law is its decentralized institutional structure. Alone among developed nations, the United States has never adopted a national corporation law, leaving the formation and governance of business organizations to the laws of the individual states. This subnational system may seem quaint in an era of globalized economic activity, but it has given rise to one of the world's most influential business jurisdictions--the state of Delaware. (1) Indeed, Delaware's success is widely attributed to the nature of the US system itself, which has incentivized states to tailor their laws in order to attract out-of-state firms. (2) Many scholars argue that state competition has undermined corporate governance standards, (3) while others praise it as an important source of economically efficient legal rules. (4) Regardless of perspective, nearly all agree that jurisdictional competition has profoundly shaped American law. (5)

Superficially, Canadian corporate law appears to share a similar decentralized character. In Canada, the provinces, territories, and federal government each have the power to form corporations, and--as in the United States--corporations are not required to be physically located in their "home" jurisdiction. (6) Despite these structural similarities, significant jurisdictional competition has never emerged in Canada. Indeed, Canadian corporate law has instead been characterized by increasing uniformity, particularly in recent decades. (7) Rather than develop their own distinct legal rules, many provinces have followed the Canada Business Corporations Act, a federal act passed in 1975 to modernize Canadian corporate law. (8)

In the United States, the costs and benefits of state competition have long been subject to academic debate. The question of whether state competition leads to greater or lesser economic efficiency--often referred to as the "race to the top" versus "race to the bottom" debate--is one of the classic research issues in American corporate legal scholarship. (9) Despite the attention it has received in the United States, the possibility of similar competition in Canada remains underexplored. For a time, the only published research on the subject was by Ronald Daniels, then at the University of Toronto. Writing in the early 1990s, Daniels questioned the benefits of standardization, a goal he saw as unduly emphasized by the Canadian corporate legal community. (10) In his article "Should Provinces Compete? The Case for a Competitive Corporate Law Market," Daniels argued in favour of jurisdictional competition in the model of the United States. Despite his enthusiasm, however, Daniels acknowledged institutional obstacles to greater provincial competition in Canada. According to Daniels, these obstacles included (1) the broad and overlapping jurisdiction of the provincial securities regulators and (2) the centralized appellate authority of the Supreme Court of Canada, both of which served to limit the development of distinctive provincial corporate law. (11)

In response to Daniels, Jeffrey Macintosh and Douglas Cumming have expressed skepticism as to the viability of Canadian jurisdictional competition. (12) Unlike Daniels, who sees provincial conformity around the CBCA as the product of competitive pressures, Macintosh and Cumming find little evidence that provinces compete for corporations. Employing a variety of statistical measures, the authors conclude that provincial legislatures have pursued a strategy of uniformity, not competition, and that a number of institutional barriers have discouraged provincial legal innovation. (13) Like Daniels, Macintosh and Cumming cite provincial securities regulation and the centralized appellate authority of the Supreme Court of Canada as factors undermining provincial competition. (14) But they also point to broader obstacles, including the relatively sparse body of Canadian corporate legal precedent (which encourages provincial courts to rely on cases from other provinces), (15) protectionist regulations of provincial law societies (which have discouraged Canadian lawyers from recommending out-of-province incorporation), (16) and a general lack of "competitive consciousness" among the Canadian legal and policy communities. (17) Writing from the American perspective, Roberta Romano has cited many of these same factors as discouraging jurisdictional competition in Canada. (18) Finally, Christopher Nicholls offers a simpler explanation--given the smaller size of the Canadian economy, there may not be enough revenue at stake to incentivize provinces to actively compete. (19) Ultimately, although perspectives on the issue vary, the existing literature broadly suggests that competition among the provinces has been limited by institutional factors distinctive to Canadian federalism.

Without disputing these factors, this article takes a different approach to the question of Canadian legal competition. Rather than analyzing the current institutional environment, this article provides a historical explanation of how that environment came to exist. More specifically, this article argues that divergent patterns of jurisdictional competition in Canada and the United States can be traced to the corporate merger movements of the late nineteenth and early...