Shareholder Protection Across Time

It has long been assumed that shareholders’ rights in the United States diminished considerably through the 20th century as a result of a competition among states to attract and retain corporations. More recently, various commentators have disputed the significance of this “race to the bottom,” (or “to the top,” depending upon one’s view of the efficiency of the rules that were displaced during such a race). They say the traditional focus on developments in state corporate law is misleading because it overlooks the substantial growth in federal influence over corporate law since the 1930s and particularly since the early 2000s. Thus far, neither the notion of a decline in shareholder rights, nor the effect of federal intervention on shareholder protection, has been subject to systematic empirical study.

In “Shareholder Protection Across Time” (which is a revised version of the working paper available at we undertake a pioneering historically-oriented leximetric analysis of U.S. corporate law to provide insights concerning the evolution of shareholder rights. There have previously been studies of U.S. corporate law seeking to measure the pace of legal change . Our study, which covers from 1900 to the present, is distinctive because it is the first to quantify systematically the level of protection afforded to shareholders across time.

To measure changes affecting shareholder protection we draw upon quantitative techniques developed by academics researching comparative corporate governance. In particular, we rely on three indices constructed to measure aspects of corporate law on a cross-border basis. These are a six element “anti-director rights index” (ADRI), an “anti-self-dealing index” (ASDI) and a 10 variable shareholder protection index constructed by an academic team associated with Cambridge University’s Centre for Business Research (CBR SPI).

We use each of the three indices to measure shareholder protection under three important sources of corporate law, those of Delaware and Illinois and the Model Business Corporations Act (MBCA), the highly influential model set of laws promulgated by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association. For each of the three indices we start by ascertaining the present-day score for each of these three corporate law regimes. We then work backwards to identify changes to the law that would have caused scores to move up or down over time.

We use our methodology to test three hypotheses:

  • Given a general consensus that competition among states for incorporation business served to erode shareholder rights, corporate law index scores, to the extent they primarily reflect state law, should decline over time.
  • Given that various observers have suggested reform at the federal level bolstered shareholder protection, corporate law index scores, to the extent they primarily reflect federal law, should increase over time.
  • If hypothesis 2 is verified and changes to federal law substantially influenced the scoring of individual components of a corporate law index, aggregate scores for that index should have remained stable or increased over time because the upward effect of the federal reforms should have offset the downward effects of the state law competition.

Our findings on balance confirm H1, but the downward trend in shareholder protection provided by state law was hardly robust. This implies that if state law was ever affected by a meaningful “race” for incorporation business, this “race” likely did not occur during the 20th century.

H2 and H3, in contrast, are strongly confirmed. Federally-oriented reform bolstered considerably shareholder protection over time and indeed more than off-set whatever diminution occurred due to state law changes.

To ensure that our findings have not been compromised due to deploying indices afflicted by a “present day” bias, we identify changes to corporate law occurring since 1900 emphasized by those saying shareholder protection afforded by state law diminished considerably. We conclude that for the most part these changes did not have a substantial impact on shareholder protection. We also consider a 14-point list of shareholder rights constructed in 1929 and show that shareholders have the same rights today as they did then, with the exception of two types of shareholder protection already accounted for under the ADRI.

Our paper makes a significant contribution to our understanding of the development of corporate law by tracking quantitatively the development of shareholder protection over time. We leave open for present purposes the normative implications of the trends we have identified. Our paper, however, should provide an improved foundation for policy analysis by offering for the first time an empirical analysis of the development of shareholder protection over time.

The preceding post comes to us from Brian Cheffins, the S J Berwin Professor of Corporate Law at the University of Cambridge, Faculty of Law, Steven Bank, the Paul Hastings Professor of Business Law and Faculty Director of the Lowell Milken Institute for Business Law and Policy at UCLA Law and Harwell Wells, Associate Professor of Law at Beasley School of Law, Temple University. The post is based on their recent article which is entitled “Shareholder Protection Across Time” and available here.