Centros, California’s ‘Women on Boards’ Statute and the Scope of Regulatory Competition

Abstract

In its 1999 Centros decision, the European Court of Justice affirmed that the EU right of establishment protects a corporation’s right to select a state of incorporation. Specifically, Centros rejected the argument that, under the real seat doctrine, the country in which the corporation’s head office is located may deny recognition or apply domestic corporate law to a corporation that is validly formed in another EU state. At the time, commentators broadly viewed Centros as opening the door to greater regulatory competition in Europe. Twenty years later, we examine Centros through the lens of SB 826—the California statute mandating a minimum number of women on boards. SB 826, like Centros, raises questions about the extent to which a forum state, as opposed to the state of incorporation, can impose its laws on corporations that operate within its borders. In the US, these questions are typically addressed by application of the internal affairs doctrine which provides that the law of the state of incorporation applies to the corporation’s internal affairs. Both SB 826 and Centros thus highlight the critical importance of the scope of the internal affairs doctrine. In this article, we stress the importance of the shareholder primacy norm to understanding the scope of US corporate law, which results in corporate law focusing primarily on matters of shareholder economic interest. We argue that the internal affairs doctrine should be understood within the context of the shareholder primacy norm and therefore directed to rules oriented to enhancing firm economic value. Considered in this context, SB 826 is distinctive in that it focuses on broader societal interests than traditional corporate law. In the same vein, EU corporate law has traditionally had a broader stakeholder orientation. We posit that the limited impact of the Centros decision, an impact which differed significantly from its predicted revolutionary effect, can be attributed to the greater focus of EU corporate law on social ordering and a more limited adherence to the shareholder primacy norm. Ironically, California’s adoption of SB 826 may portend a movement of the US towards Centros-style governance.