Company Law and the Economics of Federalism

Abstract

This article links corporate regulation with developments in economic and corporate theory. The issue employed for this purpose is one that dates back more than one hundred years in Australia: whether companies should be regulated by the federal government or by state governments. Much attention has focused on the constitutional power of the federal government to regulate both the incorporation of companies and the trading activities of companies. A fundamental question however is whether it is better to regulate companies at the national level or the state level. A review of the economic literature relating to federalism indicates that some government functions are best carried out at the state level rather than the national level. The question is whether the regulation of companies is one of these functions. The article provides an economic analysis of the appropriate level of legal regulation using the regulation of companies as the focus. This becomes part of a broader debate over issues of federalism. Linked to this economic analysis are recent developments in corporate theory. It becomes evident that different theories of the company entail different views concerning not just the extent to which companies should be subject to regulation but also the level of government at which corporate regulation should be undertaken.