Introduction
A longstanding choice-of-law rule known as the internal affairs doctrine has predominated over corporate law matters in the United States since at least the 1860s.1 Acknowledged by the Supreme Court2 and generally followed by the states,3 the doctrine holds that the internal affairs of a corporation are governed by the law of the state where it is incorporated,4 notwithstanding where it may be headquartered. This state-by-state approach to corporate regulation, many have argued, has prompted a race to the bottom in the market for corporate law whereby states compete for corporate chartering.5 In reality, this has meant that the winner of the race — Delaware — has crafted most of the corporate law in effect within the United States.6
Today, despite vocal dissidents,7 Delaware remains the premier state for incorporation. Sixty-seven percent of Fortune 500 companies and two million entities in total are incorporated in the state.8 A few noteworthy reincorporations out of Delaware as of late have sparked conversation on the potential for Delaware to be dethroned by states like Nevada or Texas.9 Yet there is no substantial empirical evidence that “DExit” is really happening.10 The vast majority of companies incorporated in Delaware are sticking with the state,11 as are most large companies choosing destinations for initial public offerings (for now).12
Still, Delaware’s supremacy is on shaky ground. A recent Supreme Court development could shift power from Delaware even if the state does manage to remain in first place for corporate chartering. Looming over the internal affairs doctrine and Delaware’s superiority is the dormant commerce clause, which has traditionally prevented states from unduly obstructing commerce beyond their borders.13 While the Supreme Court used to regularly overturn state statutes with extraterritorial effect on commerce under the dormant commerce clause,14 more recently the Court has upheld statutes with significant extraterritorial effects in other states.15 In light of other weaknesses with the internal affairs doctrine,16 scaling back the dormant commerce clause threatens to dilute Delaware’s supremacy by enabling other states — through muscular outreach statutes — to regulate the corporate governance matters of Delaware-incorporated companies. This strikes at the very heart of what makes it the de facto regime for American corporate law.
To date, scholars have analyzed the relationship between the dormant commerce clause and the internal affairs doctrine.17 Moreover, scholars and courts have encountered the doctrine’s “indeterminacy” when states debate what exactly falls within the boundaries of internal affairs (and conversely, what does not).18 To address these phenomena and others, some have called for a constitutional mandate of the internal affairs doctrine;19 some have proposed a federal incorporation system;20 and others have advocated for a new interest-balancing conflicts rule.21
This Note offers a new contribution to this body of scholarship by arguing that a weaker dormant commerce clause is an emerging threat to Delaware because it is conceivably less protective of the internal affairs doctrine. Fully appreciating the impact of the dormant commerce clause on the internal affairs doctrine results in a more nuanced account of the evolving status of Delaware, incorporation, and corporate governance.
The Note proceeds as follows. Part I discusses the development of the internal affairs doctrine, including both its staying power and its frailty. Part II then reviews the two seminal internal affairs doctrine Supreme Court cases, along with Eccles v. Shamrock Capital Advisors, LLC22 from New York, to show that the internal affairs doctrine as a conflict-of-laws solution entails unsettled questions along two different dimensions of horizontal federalism.23 Next, Part III explains the connection between the dormant commerce clause and the internal affairs doctrine. With that established, it analyzes National Pork Producers Council v. Ross24 and extracts themes to explain how the condonement of extraterritorial regulation could have import for the internal affairs doctrine. Finally, Part IV highlights the nascent threat that Delaware faces as a result of these effects, presenting yet another challenge in its battle to remain the leader for corporate law.
I. Origins and Developments
Delaware’s status as the preeminent incorporation hub is rooted in the history and mechanics of the internal affairs doctrine. This position is naturally unsteady, in part because the internal affairs doctrine is fallible. Its acceptance came to fruition as a result of its simplicity and corresponding practical incentives for states — reasons that are historically contingent and potentially outdated. With a drastically different economic landscape for corporations today than when the doctrine was first adopted, it might be considered less necessary than it once was. Understanding the historical developments that led to the acceptance of the doctrine sheds new light on how today’s changing landscape jeopardizes the universality of Delaware’s corporate law regime.
A. An Opportunistic Delaware
Courts first articulated the internal affairs doctrine in the 1860s,25 and the idea that corporations were governed by their chartering state’s law soon became a seemingly obvious proposition.26 During this pre-industrial era, corporations operated almost exclusively within a single resident state.27 On top of that, a corporation had inextricable ties to its chartering state’s legislature and was therefore considered an “arm[] of the state” in which it was created;28 it only made practical sense to abide by the rules of the chartering state.29 Little interstate conflict over corporate regulation could arise in this context. But by the latter part of the nineteenth century, things were changing. The development of major railroads provided a boon to the economy that proliferated a network of corporate operations across several states.30 And as interstate commerce grew, so did interstate litigation over state jurisdiction to hear certain matters.31 This development presented a host of new challenges for state and federal courts.32
As businesses began operating across state lines, state legislatures were liberalizing their chartering requirements.33 Recognizing the incorporation market that this created, New Jersey began offering charters to any corporation that was willing to pay for one.34 This drew in foreign corporations and prompted what is known today as the “race for the bottom” in corporate law.35 New Jersey would maintain its position until 1913, when it passed restrictive amendments to its incorporation law and presumably turned off many companies.36 In stepped Delaware to take the reins.37
Suffice it to say, Delaware has not looked back since, going all in on its state chartering enterprise. Through legislation and court decisions, it has promulgated a corporate law regime that largely satisfies corporate executives;38 it has beefed up its Chancery Court, a court of equity that specializes in corporate matters and decides cases expeditiously;39 it has given significant power to a council of corporate practitioners that essentially decides all amendments to the Delaware General Corporation Law (DGCL);40 and over time, it has enshrined a robust industry of local registration services.41 There are two primary consequences from this history: First, Delaware has become highly dependent on its chartering revenues. By 2022, over twenty-eight percent of its net revenue derived from this business.42 Second, Delaware corporate law has amassed considerable staying power. It enjoys incumbent advantages given its familiarity, quality, and scale.43 At least for now, these factors have insulated Delaware from its challengers.
B. A Delicate Doctrine
The foundation for Delaware’s control over corporate law today is still the internal affairs doctrine, which allows Delaware to govern “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders.”44 To date, the doctrine’s main appeal — its simplicity — has been sufficient for most to accept it as a resolution of horizontal federalism disputes in corporate law. But this justification is contestable and lacks modern import. Further, history shows that challenges to the doctrine have limited its scope and demonstrated that it is not firmly affixed.
As previously mentioned, the internal affairs doctrine initially came about before the Industrial Revolution, when corporations were tethered to the states in which they were created.45 A new approach to corporate regulation might have been warranted once the economy changed in the late nineteenth century, but state incentives ran counter to adopting a new regime.46 Once power shifted from states to corporations during the chartering frenzy,47 any action by a state to revisit its corporate law regime or prevent out-of-state businesses from chartering would have put that state at an economic disadvantage.48 Thus, the collective action problem ran amok, and a classic race to the bottom ensued.49 This inertia behind the internal affairs doctrine was then dignified by courts as the proper conflict-of-laws solution to horizontal disputes in corporate law.50 After quite some time, the rule is still with us today.
The doctrine’s simplicity undergirds its staying power. It is true that governing all of a corporation’s internal affairs under a single jurisdictional umbrella makes for a streamlined regulatory landscape.51 To otherwise subject corporate governance to different regulations from different states — potentially conflicting with one another — could be imprudent and cause confusion.52 For many, this justifies applying the doctrine with full force: If the case involves an internal affair, the rule requires application of the chartering state’s law.53 Former Delaware Supreme Court Justice Jacobs takes this argument further, suggesting that “the stability and certainty afforded by the internal affairs doctrine justifies according that doctrine constitutional status”54 under the Commerce Clause, Due Process Clause, or Full Faith and Credit Clause.55 Even short of constitutional status, which the U.S. Supreme Court has refrained from recognizing,56 the internal affairs doctrine’s functionality gives it teeth. Every state in the country (to varying degrees) abides by some version of the rule.57
So does that settle it? Well, not exactly. In reality, corporate regulation has evolved to enable actions that the internal affairs doctrine would purportedly prevent. Two trends have contributed to this development. First, the rule’s boundaries have tightened from covering a broad notion of the “internal affairs” of a corporation to only corporate governance, narrowly defined.58 As corporate stakeholders such as employees and creditors demanded legal protections that a shareholder-centric corporate law regime would not accommodate, other bodies of law subsumed aspects of corporate regulation thought not to concern core corporate governance issues.59 Second, because of regulatory ambition from nonchartering states and a broader trend toward interest-balancing approaches to conflict-of-laws issues,60 the internal affairs doctrine’s weight has been reduced from a blanket “jurisdictional bar” to a mere “choice of law” presumption.61 As a result, the version of the rule today is fainter than what it once was.62 Hence, we have a triumvirate regime for corporate regulation: The federal government, individual states where companies operate, and chartering states now all get different pieces of the regulatory puzzle.63 Ironically, then, we arguably live in a version of the “economically disruptive” reality that some have argued would result without the internal affairs doctrine.64 This historical evidence of the doctrine’s constriction is a convincing indication that new pressures on the doctrine could portend even further winnowing.
II. Contests of Internal Affairs
Changes to the boundaries and the weight of the internal affairs doctrine show that it is malleable. Delaware’s rise as the leader in U.S. corporate law has come with myriad challenges from other states over the contours of the internal affairs doctrine and just how expansively it applies. A pair of U.S. Supreme Court cases in the 1980s and one recent New York Court of Appeals case illustrate these different dimensions of internal affairs challenges. Above all, what these cases show are the different contests of horizontal federalism extant in internal affairs doctrine cases. Spotting them unveils a distinct frontier in Delaware’s fight to maintain its grasp on corporate law.
A. The Supreme Court’s Light Tread
The leading Supreme Court cases on the internal affairs doctrine came out of the mergers and acquisitions craze of the 1980s. Hostile takeovers and leveraged buyouts were relatively novel corporate governance tools, posing new interjurisdictional legal issues when applied to large, publicly held companies.65 The Court took up these issues in Edgar v. MITE Corp.66 and CTS Corp. v. Dynamics Corp. of America,67 both of which examined whether the disputes were properly internal affairs matters.68
MITE, the first case, specifically involved Delaware. MITE Corp., the respondent, was a Delaware-incorporated and Connecticut-domiciled firm that made a tender offer for Chicago Rivet, incorporated in Illinois.69 Illinois had a state securities statute that imposed certain tender offer requirements on both Illinois corporations and certain other corporations in which Illinois shareholders owned at least ten percent of the stock.70 Illinois Secretary of State James Edgar argued that Illinois had a predominant interest in the matter because of the internal affairs doctrine.71 The Court was unconvinced. For one, it said that the Illinois statute went beyond the doctrine because it purported to cover any “tender offers . . . for which 10% of the outstanding shares are held by Illinois residents.”72 Under this interpretation, Illinois corporate law would impermissibly extend to many non-Illinois-incorporated businesses.73 Additionally, the Court held that tender offers were not matters of “internal affairs” because they are transactions where stock is transferred to a third party — defeating any claim that the dispute was purely between directors, officers, and shareholders.74
Just five years later in CTS, the Supreme Court mentioned the internal affairs doctrine in a similar hostile takeover dispute.75 But the Court distinguished the Indiana Act in CTS from the Illinois statute in MITE.76 Unlike the Illinois statute, the Indiana Act applied only to “corporations incorporated in Indiana” and “corporations that have a substantial number of shareholders in Indiana.”77 Accordingly, the Court concluded that Indiana had discretion to regulate the tender offer requirements for Indiana-incorporated businesses because “promoting stable relationships among parties involved in the corporations [that the state] charters” falls within the internal affairs gamut.78 Thus, in CTS, the Court was sympathetic to the states’ abilities to impose regulations on businesses that they had chartered, giving the internal affairs doctrine its most significant recognition ever.79
The two opinions, taken together, say little on how the internal affairs doctrine actually works. Notably, the Court made no constitutional commitment to the internal affairs doctrine. At most, the CTS Court embraced the idea that a chartering state is “traditionally” the state that regulates corporate governance, but it stopped short of solidifying a robust version of the internal affairs doctrine.80 Another observation is that its internal affairs discussions pertained to the boundaries of the internal affairs doctrine. The Court asked whether the cases concerned matters that were internal (giving the chartering state the governing right) or external (likely denying the chartering state the governing right). In MITE, the Court answered that tender offers from foreign third parties were beyond the internal affairs doctrine and therefore outside of a chartering state’s power.81 In CTS, the Court framed the locus of the case as being shareholder rights, which it considered an internal affairs subject.82 In both instances, the Court resolved horizontal federalism disputes — inquiries of the scope of state police power over corporate activity.
B. State Tinkering
Battles in state courts have a more voluminous history and present their own challenges to the internal affairs doctrine.83 Much of that history is of the same ilk as MITE and CTS at the federal level: cases ascertaining the boundaries between internal and external for the purpose of determining which state’s law should govern the dispute.84 Powerful economic states like California and New York often try their hands at governing companies headquartered in their states (but incorporated elsewhere, often in Delaware) with aggressive “outreach statutes.”85 Such statutes, which are extraterritorial regulations from nonchartering states, can tee up litigation over the boundaries of the internal affairs doctrine when these laws differ from a chartering state’s law.86
The cases that less frequently surface in state courts are those that balance competing state interests instead of just determining internal versus external affairs boundaries like MITE and CTS. That is, notwithstanding where a corporation is chartered, a state where the corporation is domiciled (but not chartered) may have a predominating interest in an internal affairs matter such that its law overrides the chartering state’s law. This presents a fundamentally different inquiry about the weight of the internal affairs doctrine. To be sure, this is part of what made the 2024 New York case Eccles v. Shamrock Capital Advisors draw the attention of corporate scholars and practitioners.87 In this case, the Court of Appeals adopted a balancing analysis, resisting the foregone conclusion that the law of the chartering state (here, Scotland) automatically governs a corporation’s internal affairs.88 While the impact of the case remains to be seen, a state high court lending credence to the idea that a nonchartering state’s law might govern an internal affair is a significant development.
The dispute in Eccles involved FanDuel, incorporated in Scotland with its headquarters in New York.89 The plaintiffs (common shareholders including the company’s founders) alleged that the defendants (directors and preferred shareholders) breached their fiduciary duties by deliberately undervaluing the consideration in a merger deal.90 Central to this dispute was whether Scots or New York law applied as to the scope of fiduciary duties. The plaintiffs pleaded several causes of action under New York law and argued that under a balancing test, the court should apply New York law to the case.91 The defendants instead asserted that because the case concerned a dispute between directors and shareholders — a traditional matter of internal affairs — Scots law must govern.92 And for its part, Scots law prescribed director fiduciary duties to corporations themselves, but not to shareholders.93
The court sided with the defendants’ conclusion that Scots law should apply but adopted the plaintiffs’ balancing approach. First, it stated that the matter was one of internal affairs and that under New York precedent, “the ‘general[]’ approach is to apply the law of the state of incorporation.”94 While holding that the law of a chartering state “presumptively applies” to internal affairs issues, the court also clarified that this presumption could be overcome by showing that (1) “the interest of the place of incorporation is minimal,” and (2) “New York has a dominant interest in applying its own substantive law.”95 Applying this balancing test to the facts, the court concluded that because FanDuel’s offices and shareholder base sufficed as significant contacts with Scotland, and because “only 10–15% of FanDuel’s total revenue was derived from New York customers,” Scots law applied.96
Eccles crossed somewhat of a hallowed barrier; the court adopted a less deferential version of the internal affairs doctrine than has been traditionally explicated.97 Formulations of the rule often plainly declare that the law of the state of incorporation determines issues relating to a corporation’s internal affairs.98 However, the Restatement (Second) of Conflicts articulates a looser choice-of-law inquiry for what law should govern an internal affairs question.99 It explains that the “law of the state of incorporation will be applied” unless “some other state has a more significant relationship to the occurrence and the parties.”100 In Eccles, New York essentially retreated to the Restatement test — a more open-ended inquiry than the historical, binary “general approach” favored by Delaware.101 Despite concluding that Eccles concerned an open-and-shut internal affairs matter,102 the court acknowledged a possibility that a nonchartering state’s law could overcome the presumption of adhering to the chartering state’s law.103 This development may significantly alter how state courts treat horizontal federalism conflicts in corporate law cases.
Cases like MITE and CTS at the federal level and Eccles at the state level show two dimensions of the internal affairs doctrine that can be challenged when determining how to apply the rule: boundaries and weight. Along the former axis, cases like MITE and CTS indicate that the lines can be blurred between “internal affairs” and everything else.104 As to the latter, state courts can accord the internal affairs doctrine less weight, applying it as a mere presumption rather than a per se rule.105 Both of these threats emanate from battles of horizontal federalism, mainly implicating the governing power of a chartering state versus that of a forum state. These interstate fights raise major questions in horizontal federalism jurisprudence.
C. Shifting Landscape
Despite horizontal federalism conflicts being central to what the internal affairs doctrine seeks to manage, those studying the doctrine have not fully appreciated the implications of the latest jurisprudential shifts for horizontal federalism. Recent scholarship loosely acknowledges horizontal federalism but is less concerned with contemporary changes in horizontal federalism jurisprudence.106 Perhaps most on point, Professor Mohsen Manesh discusses regulations that test the “edges” of the internal affairs doctrine, acknowledging that these statutes pose threats to Delaware.107 But this scholarship does not squarely confront how the Supreme Court’s doctrinal treatment of horizontal federalism questions may significantly alter the landscape for the internal affairs doctrine.108 Nor have commentators on federalism and corporate governance linked the concepts directly.109
It is intuitive that states formulating open-ended or narrow internal affairs rules could eat at Delaware’s “absolute” domain over corporate disputes.110 This is precisely the upshot that some fear cases like Eccles will facilitate.111 The threat coming from the Supreme Court’s changing view of horizontal federalism is less obvious but equally troubling. As the Supreme Court expands the extraterritorial effect of state power,112 there are consequences in areas of the law where states’ rights are already in tension with one another. The internal affairs doctrine is one of those areas,113 and Delaware, as its largest beneficiary, stands to lose ground as the Court lays these changes without bolstering the internal affairs doctrine.
Weaker internal affairs rules114 and more aggressive extraterritorial regulation from nonchartering states could pose the ultimate threat to Delaware. But even alone, allowing states to sometimes regulate the corporate governance of companies incorporated elsewhere would be a devastating blow. Of course, whether a state narrowly or generally applies the internal affairs doctrine matters only to the extent that its own state law differs from (or conflicts with) that of the chartering state.115 Thus, it would behoove scholars to place more focus on jurisprudential developments involving horizontal federalism to effectively portray the outlook for the internal affairs doctrine and Delaware. One recent development has been the reorientation of the dormant commerce clause, which could have major consequences for the internal affairs doctrine.
III. Federalism’s Sleeping Giant
The dormant commerce clause and the internal affairs doctrine are often implicated together given the natural overlap in their operations.116 However, recent internal affairs doctrine scholarship has not kept up with the changing landscape of the dormant commerce clause at the Supreme Court. In particular, the recent 2023 case National Pork Producers Council v. Ross authorizes extensive forms of extraterritorial regulation that may extend to corporate law.117 Because protection against extraterritorial corporate regulation serves as the basis for the internal affairs doctrine, the Court’s decreased interest in striking down extraterritorial state laws creates the potential for states to erode Delaware’s power. Hence, even if Delaware maintains its status as the premier corporate-charter destination, that alone will not save it from extraterritorial aggrandizement.
A. Dormant Commerce Clause and Internal Affairs
The dormant commerce clause principle derives from a combination of Congress’s Article I power to regulate interstate commerce118 and federal law’s supreme status vis-à-vis state law under Article VI.119 Its thrust is that Congress’s power to regulate interstate commerce implies a negative power that — to some extent — prevents states from erecting barriers to interstate commerce or discriminating against out-of-state commercial actors.120 Over time, this principle has shaped limits on the ability of states to regulate outside of their borders.
Because of its questionable constitutional roots, Justices’ competing views on balancing federalism, and a variety of regulatory interests to accommodate, the principle is widely considered incoherent.121 Perhaps expectedly, this has resulted in a disjointed doctrinal framework. Applying the principle includes administering several fact-intensive tests like the interstate discrimination test122 and the Pike balancing test,123 just as it requires considering a variety of exceptions.124 The vitality of these inquiries, at this very moment, is in flux.125
The relevant point of overlap between the dormant commerce clause and the internal affairs doctrine harkens back to the conception of vertical and horizontal federalism set forth earlier.126 The dormant commerce clause as a matter of federal law can be generalized as a vertical restraint on state power to regulate interstate commerce; variably, the internal affairs doctrine is a horizontal restraint (between the states themselves) on state police power to regulate corporations. In reality, these planes of power certainly overlap.127 As Professor Allan Erbsen points out, the dormant commerce clause also acts horizontally by “play[ing] a coordinating role in the exercise of concurrent state authority” that limits the “possibility of excessive friction” between states.128 This helps to explain why the dormant commerce clause is often simultaneously implicated in internal affairs doctrine cases. The internal affairs doctrine operates as somewhat of an obscure carveout to the dormant commerce clause, allowing chartering states to extraterritorially regulate the corporate governance affairs of businesses headquartered elsewhere.129
Indeed, in both MITE and CTS — the hallmark Supreme Court cases on the internal affairs doctrine — the appellees offered theories that the respective state laws inflicted upon them (as businesses not actually located within those states) violated the dormant commerce clause.130 In MITE, the Court invalidated the Illinois statute on dormant commerce clause grounds because it imposed an excessive burden on interstate tender offers that exceeded Illinois’s local interests.131 By contrast, the CTS Court upheld the Indiana Act.132 “Because nothing in the Indiana Act impose[d] a greater burden on out-of-state offerors than it d[id] on similarly situated Indiana offerors,” the Court reasoned, the Act did not violate the dormant commerce clause.133
Similar cases would be analyzed differently by the Court today. Lately, the Court has narrowed the dormant commerce clause, condoning forms of extraterritorial regulation that the principle once barred.134 Widening the sphere of state police power in this way will make it more difficult for the Court, going forward, to strike down extraterritorial state regulations that encroach on traditional internal affairs matters. This could be seriously unsettling for Delaware.
B. Ross and Extraterritoriality
National Pork Producers Council v. Ross is the latest in a line of decisions that has narrowed the dormant commerce clause to the benefit of states seeking to regulate extraterritorially.135 To be clear, Ross (and other cases) did not involve internal affairs matters.136 Perhaps this helps to explain why the potential implications for the internal affairs doctrine has eluded scholars thus far. But the sentiment from Ross — that extraterritoriality of economic regulation is a practical reality of a modern economy — upsets the rationale that has long kept the internal affairs doctrine alive.137
Ross considered a challenge to a California ballot measure that, in relevant part, prevented the in-state sale of pork that “is the product of a breeding pig” confined in such a way that does not “allow [it] to lie down, stand up, fully extend limbs, [or] turn around freely.”138 National Pork’s linchpin argument against the measure was that it violated the dormant commerce clause because “the majority” of compliance costs would fall on out-of-state producers since California imported almost all of its pork.139 The Court denied that claim in a fractured decision.140 In piecing together the opinions and parsing the disagreements among the Justices, it seems the Court upheld the law for two reasons, both of which indicate a permissive view toward extraterritorial regulation.141
First, the Court denied National Pork’s claim that dormant commerce clause precedent can be read as standing for an “‘almost per se’ rule against” any “extraterritorial effects.”142 Justice Gorsuch stated that the “petitioners read too much into too little” from “discrete cases,” closing off any latent theories that extraterritorial regulations by states are unconstitutional as such.143
Second, the Court disagreed over whether the ballot measure failed the Pike balancing test, which assesses whether the burden that a law places on interstate commerce is clearly outweighed by local benefits.144 Whether and how to apply the Pike test was the real point of division between the Justices.145 The majority made clear that Pike should no longer be viewed as a separate inquiry from the main dormant commerce clause test that assesses out-of-state discrimination.146 That being so, the petitioners’ claim necessarily failed because they conceded that the law was not discriminatory.147
Differences aside, the Court confirmed that the bellwether test for deciding when a state law has violated the dormant commerce clause is whether the law is “designed to benefit in-state economic interests by burdening out-of-state competitors.”148 As such, the only clearly cognizable claims left under the dormant commerce clause are those that can satisfy the high bar of this discrimination test, which is the “very core” of the constitutional principle.149
These results from Ross indicate that the Court now takes a softer view on extraterritorial regulation under the dormant commerce clause,150 but this was not so when the Court last decided its two big internal affairs doctrine cases that also raised dormant commerce clause questions: MITE and CTS.151 What has been lost since MITE and CTS were decided in the 1980s are two lines of cases that barred states from regulating beyond their borders even without discriminating against out-of-state entities.152 During the period when the Court last discussed the draw of the internal affairs doctrine, it was regularly striking down state laws under these lines of cases.153 It has now been several decades since the Court has done so.154 This federalism reorientation — exemplified by Ross — puts the internal affairs doctrine on shaky ground. Certainly, a bigger sphere of regulatory power for nonchartering states, combined with the unceasing infringement on the boundaries of the internal affairs doctrine,155 does not bode well for Delaware.
IV. A Rude Awakening
Some state efforts are already underway to test the boundaries of the Court’s new acquiescence in extraterritorial state police power,156 and Delaware’s fate may rest on the weight that courts give the internal affairs doctrine when evaluating these laws. Delaware can battle to maintain its chartering business by keeping controlling shareholders and other corporate actors satisfied.157 It can also continue to defend a broad construction of the internal affairs doctrine.158 Still, these efforts would do little to save it from the expansion of other states’ police power over companies incorporated in Delaware but possessing more significant contacts in the other states. While Delaware’s robust enterprise may be effective in the competitive market for chartering, outreach statutes circumvent this competition by their very nature.
Outreach statutes are not new.159 What is new, however, is that the Court is more likely to uphold statutes that place incidental yet significant burdens on interstate commerce. Specifically, statutes that would fail the two dormant commerce clause theories that the petitioners advanced in Ross — but pass the antidiscrimination test that remains the core of dormant commerce clause jurisprudence — may now be upheld. With respect to corporate law, this means that state statutes that simply regulate the corporate governance of businesses that are headquartered in their states but are chartered elsewhere, without disfavoring those businesses, could plausibly be constitutional.
As an illustrative example, reconsider MITE. Disputing the Illinois statute’s requirements, MITE asserted that the law violated the dormant commerce clause under the Pike balancing test.160 Noticeably absent from the Court’s decision was any suggestion that the statute discriminated against out-of-state businesses, because it did not.161 Yet, under only the Pike balancing test and an extraterritoriality analysis, the Court struck down the Illinois statute.162
It follows that the Illinois statute in MITE, by the Court’s own reasoning in Ross, would not be blocked by the dormant commerce clause today. The statute treated all businesses evenhandedly, and the “absence of discrimination . . . prove[s] decisive.”163 This tracks from the Court’s analysis and was even hinted at just five years after MITE in CTS. Evaluating a statute similar to the one at issue in MITE, the CTS Court declared the act valid “[b]ecause nothing in the Indiana Act impose[d] a greater burden on out-of-state offerors than it d[id] on similarly situated Indiana offerors.”164 This result, alongside the possibility of state courts reading the internal affairs doctrine narrowly, could largely authorize states to regulate aspects of the corporate governance of businesses that reside within their borders, even if they are incorporated elsewhere — butting heads with the internal affairs doctrine.
For years, states like California have tested the waters by exerting pressure on the boundaries of the internal affairs doctrine.165 Ross could now permit states to invade those boundaries in the absence of the Court’s explicit commitment to the doctrine. For example, in 2018, California passed a law that created diversity requirements for the boards of directors of all public companies headquartered in the state.166 Legal commentators both asserted and rejected that this legislation reached a company’s internal affairs.167 But California courts invalidated the law on equal protection grounds, so the internal affairs doctrine issue was never resolved.168
One could imagine a similar law that requires board directors of California-headquartered companies to meet certain job qualifications or education requirements. Here, there would be no equal protection problem. Yet such a law would have a vast impact on interstate commerce, as there are many Fortune 500 companies headquartered in California but incorporated in Delaware.169 Critically, though, the law would not discriminate against out-of-state businesses and therefore would likely pass constitutional muster. Such a law would have the potential to meaningfully erode some of Delaware’s dominance in corporate regulation.
There are current and pending laws that already fall within this new category of plausibly constitutional laws that chip away at the internal affairs doctrine. The California Climate Corporate Data Accountability Act170 is on the books and requires large companies within the state to disclose certain environmental metrics and associated financial risks.171 New York’s S3697A would similarly require climate-related financial risk reports,172 and Washington’s S.B. 6092 would enact climate-related disclosure requirements.173
Most of all, two bills from Texas make the point. The Texas Legislature proposed laws that would “legislate corporate governance changes even for companies that are not incorporated in the state, so long as they have headquarters in the state or trade on the Texas Stock Exchange.”174 And both concern topics that are indubitably internal affairs matters: One pertains to a company’s right to refuse shareholder proposals,175 and the other involves the disclosure of proxy advice for shareholders.176 This is no accident; it is a direct effort by the Texas Legislature to dethrone Delaware as the leader in American corporate law,177 and it comes just as the Supreme Court has opened the door for states to make such challenges.
Ultimately, whether nonchartering states can chip away even further at the internal affairs doctrine will be up to the courts, and, in the last instance, the Supreme Court. Favoring Delaware in this feud is the tradition and convenience of the internal affairs doctrine. For the same reasons we still have the doctrine today, courts may be inclined not to disrupt this choice-of-law resolution. The CTS Court itself recognized the benefits of having “a single jurisdiction” govern matters of corporate governance for U.S. capital markets.178 Understandably, the Supreme Court may be hesitant to uproot Delaware law as the foundation of the U.S. corporate law regime after two centuries of investment.
But not all signs for Delaware are positive. Insofar as internal affairs doctrine outcomes run with the results from dormant commerce clause analyses,179 the weight of the internal affairs doctrine may now also be lighter. Thus far, the Supreme Court has shied away from constitutionalizing the internal affairs doctrine despite its longstanding tradition — meaning Delaware should not be confident that it will do so now.180 All the while, the Court has been busy empowering horizontal federalism.181 Once upon a time, the Court was wary of subjecting corporations to competing state regulations.182 However, it might now be less concerned given the complex network of corporate regulation necessitated by our modern economy.183 That could entice the Court to adopt an Eccles-like version of the internal affairs doctrine in its dormant commerce clause analysis,184 to the extent it does so at all.
The role of state courts also cannot be understated. Unless and until these battles make it to the Supreme Court, many of them will play out in state courts. Consider the following: What is the likelihood that in evaluating a Texas outreach statute, the Texas Supreme Court would be inclined to invalidate its legislature’s statute to the benefit of Delaware? It is probably fair to conclude that the Texas statute will at least have a shot at surviving.185
Finally, it cannot be ignored that external pressures have given the internal affairs doctrine a propensity to compress over time. Today’s rule is a remnant of the version that initially covered more ground and operated as a jurisdictional requirement.186 As much as Delaware maintains “absolute” power over a distinct slice of corporate regulation, the scope of that power has been continually diminished.187 This diminution of the internal affairs doctrine, combined with emboldened extraterritorial regulation from competing states, represents a reckoning for Delaware.
Conclusion
Delaware could be in trouble, but for a reason absent from conversation until now. The recent discourse — on DExit, choice-of-law battles, and even outreach statutes — has not zeroed in on shifting Supreme Court jurisprudence with unsettling implications for Delaware’s fate. Maybe this is because of loud voices drawing attention to recent Delaware legislation and court decisions. Or, perhaps, it is because recent dormant commerce clause jurisprudence does not squarely touch upon internal affairs matters. Either way, the Supreme Court has escorted us to a reality in which corporate outreach statutes wading into Delaware’s internal affairs waters are constitutionally plausible thanks to the withdrawal of the dormant commerce clause principle. The opportunity for states to pick at Delaware’s regime is only reinforced by the doctrine’s indeterminate boundaries and the possibilities that cases like Eccles create.
In the absence of a categorical mandate for the internal affairs doctrine, it is unclear how this phenomenon might resolve itself. The days of the dormant commerce clause acting as a threshold blocker to such outreach statutes may be over, and courts may welcome extraterritorial regulation of internal affairs at Delaware’s expense. Both Delaware’s proponents and adversaries should take notice. The future of corporate governance regulation will depend on it.