Corporate governance issues: United States and the European Union.

(22.) Id. at 155 56. The MBCA, which has been adopted by over thirty states (with some variation in certain states), provides that all corporate powers shall be exercised by or under the authority of the board of directors of the corporation, and that the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of the board of directors. MODEL BUS. CORP. ACT [section] 8.01(b); see also MELVIN A. EISENBERG, CORPORATIONS AND OTHER BUSINESS ORGANIZATIONS STATUTES, RULES, MATERIALS, AND FORMS 747 (2004) [hereinafter EISENBERG SUPPLEMENT]. The Delaware Code imports the same principle as the MBCA. DEL. CODE ANN. tit. 8, [section] 141(a) (2005). The language of the MBCA emphasizes the board's responsibility to oversee management of the corporation. See EISENBERG SUPPLEMENT, supra at 747--48.

(23.) See O'KELLY & THOMPSON, supra note 20, at 45-46 (identifying contractual "relationships between and among [a corporation's] owners, agents, creditors, customers, and affected communities").

(24.) See Michael C. Jenson & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, 3 J. FIN. ECON. 305 (1976) (formulating the argument that a corporation is a nexus of contracts); Contra Melvin A. Eisenberg, The Conception that the Corporation is a Nexus of Contracts, and the Dual Nature of The Firm, 24 J. CORP. L. 819 (1999) [hereinafter Nexus of Contracts] (arguing that the nexus of contracts description of a corporation is inadequate, given a corporation's dual nature of reciprocal arrangements and a bureaucratic hierarchy). Eisenberg stated that "[c]orporate law is constitutional law; that is, its dominant function is to regulate the manner in which the corporate institution is constituted, to define the relative rights and duties of those participating in the institution, and to delimit the powers of the institution vis-a-vis the external world." MELVIN A. EISENBERG, THE STRUCTURE OF THE CORPORATION: A LEGAL ANALYSIS 1 (1976).

(25.) Nexus of Contracts, supra note 24, at 822.

(26.) This is why it "is not surprising that fiduciary duties are used to describe the shareholder-manager relationship but not for other relationships, such as the creditor-manager relationship." See Robert B. Thompson, The Law's Limits on Contracts in a Corporation, 15 J. CORP. L. 377, 390 (1990). A shareholder's residual return "depends on the discretionary performance of another," and should "require[] a different protection than the creditor's fixed return with a senior claim to the assets of the enterprise." Id.

(27.) See O'KELLY & THOMPSON, supra note 20, at 163. The internal affairs doctrine is also known as a choice of law rule because courts look to the laws of the incorporating state to determine the basic rights and duties applicable to a corporation. Id.

(28.) See Stephen M. Bainbridge, A Critique of the NYSE Director Independence Listing Standards, 30 SEC. REG. L.J. 370, 396 (2002). State law for example, determines the vote required to elect directors, powers of the shareholders to remove directors prior to the end of their term in office, etc. See id. at 397.

(29.) Id. at 397 (citation omitted); see also Burks v. Lasker, 441 U.S. 471, 478 (1979) (stating "it is state law that is the font of corporate directors' power"). However, the Sarbanes-Oxley Act and the SEC rules of implementation are said to have encroached upon state rights not only by regulating the internal affairs of the corporations, but also by being extensive in scope. See Greene & Boury, supra note 11, at 23. For example, the Act "assign[ed] particular responsibilities and tasks to executive officers in areas where previously matters were generally left to their discretion and that of the board," and it also mandated specific forms of corporate organization. Id.; see also discussion infra Part II.

(30.) The state of Delaware, the home of many publiclytraded corporations, derives about 30% of its state budget from corporate charters. Florence Shu-Acquaye, The Taxonomy of Director's Fiduciary Duty of Care: United States and Cameroon, 22 N.Y.L. SCH. J. INT'L & COMP. L. 585, 587 n.5 (2003) [hereinafter Taxonomy of Director's Fiduciary Duty].

(31.) O'KELLY & THOMPSON, supra note 20, at 163. This is the case because corporate managers decide upon the state of incorporation. Id. As incorporators, the owners of a firm may shop around and choose to incorporate in whichever state offers the most attractive rules. Id.

(32.) See Roberta Romaneo, The State Competition Debate in Corporate Law, 8 CARDOZO L. REV. 709, 720-25 (1987) (discussing in detail the concept of race to the bottom); O'KELLY & THOMPSON, supra note 20, at 165; Taxonomy of Director's Fiduciary Duty, supra note 30, at 587 n.5; see also Daniel R. Fischel, The "Race to the Bottom" Revisited: Reflections on Recent Developments in Delaware's Corporation Law, 76 NW. U. L. REV. 913 (1982); but see William J. Carney, The Production of Corporate Law, 71 S. CAL. L. REV. 715, 722 (1998) (discussing evidence rejecting the race to the bottom hypothesis).

Michael Klausner, on the other hand, believes the incorporation influx to Delaware is based on "network externality." See EISENBERG, supra note 12, at 205. He analogizes this to using a particular software, such as Microsoft: "[j]ust as it may be desirable to use ... Microsoft Windows, whether or not it is better than other software, just because so many other people use it and are familiar with it, so it may be better to incorporate in Delaware, whether or not Delaware is better than [any] other state law, just because so many other corporations use and are familiar with it." Id. (citing Michael Klausner, Corporations, Corporate Law, and Network o[ Contract, 81 VA. L. REV. 757 (1995)).

(33.) O'KELLY & THOMPSON, supra note 20, at 162. The articles of incorporation set forth the terms of a corporation's existence, usually filed with a state agency or office (usually the secretary of state) when the corporation is created. Id. at 161. Hence, these articles are public records that can be accessed by anyone, whereas the bylaws are internal administrative rules that are established after the corporation has been created, and therefore not public documents per se. Id. at 163.

(34.) See D&O Market Still Faces Unresolved Securities Cases, INS. J., July 19, 2004, http://www.insurancejournal.com/magazines/east/ 2004/07/19/features/44601.htm; Greene & Boury, supra note 11, at 26 (stating that the United States will restore confidence through Sarbanes-Oxley).

(35.) See Greene & Boury, supra note 11, at 22.

(36.) "Although the federal securities laws generally have been considered full-disclosure statutes, the U.S. Securities and Exchange Commission ... has been interested in regulating the corporate governance of public corporations to the extent it has any authority to do so. The Securities Exchange Act of 1934 ... established the SEC to administer both the Exchange Act and the earlier Securities Act of 1933.... At that time, responsibility for regulating internal corporate affairs was left generally to state corporation law, state blue sky statutes, and stock-exchange-listing requirements." Karmel, supra note 9, at 849-50.

(37.) Michael Hein et al., The Sarbanes-Oxley Act of 2002 Effects Sweeping Changes to the U.S. Federal Securities Laws, GT ALERT, Aug. 2002, at 1.

(38.) Id.

(39.) See Greene & Boury, supra note 11, at 23. Deregulators argue that the scandals are a result of "over-confidence in the integrity of the markets stemming from their over-regulation...." Id. Hence, the passage of SOX accordingly was largely a duplication of existing laws. Id.

(40.) Larry E. Ribstein, Sarbanes-Oxley After Three Years, (Ill. Law & Econ. Working Papers Series, Paper No. LE05-016, 2005) 21-22, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=746884. For a detailed understanding of the resulting costs from SOX, see id. at 7-19. These costs impact not only U.S companies, but also those non-U.S, firms that list or otherwise sell securities in the U.S., especially those firms that do not have U.S.-style governance structure. Id. at 16-17.

(41.) See EISENBERG SUPPLEMENT, supra note 22, at 1970.

(42.) See id.

(43.) Greene & Boury, supra note 11, at 25. A majority of its members were required to be external to the accounting profession, and the Oversight Board is subject to the SEC's supervision and approval of its standards. Id.

(44.) Karmel, supra note 9, at 877 (citation omitted).

(45.) See id. at 878. This includes: "(1) bookkeeping ...; (2) financial information systems designs and implementation; (3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; (4) actuarial services; (5) internal audit outsourcing services; (6) management functions or human resources; (7) broker or dealer, investment advisor, or investment banking services; (8) legal services and expert services unrelated to the audit; and (9) any other service that the [Oversight Board] determines, by regulation is impermissible." Id. at 878-79 (citation omitted); see also Sarbanes-Oxley Act of 2002 [section] 201(g), 15 U.S.C.S. [section] 78j-1(g) (LexisNexis 2005).

(46.) Karmel, supra note 9, at 879 (citation omitted).