Havens for Corporate Lawbreaking

Whether corporations are obligated to maximize profits or if they ought to consider societal interests more broadly remains one of the most highly contested debates in corporate law. Yet even the fiercest defenders of the firm’s profit motive concede that the corporation’s profit-seeking function cannot justify breaking the law. As a matter of American corporate law, directors and officers are in breach of their fiduciary duties if they facilitate or engage in profit-maximizing illegal activities. Or so we thought. This Essay reveals a troubling trend of jurisdictions undercutting the legal compliance obligations of directors and officers. The current legal architecture of American corporate law—which enables corporations to shop for applicable corporate law regardless of the location of their physical operations—encourages competition amongst jurisdictions to supply corporate charters. While often considered a strength of American corporate law, it can lead to perverse incentives. Notably, emerging jurisdictions supplying corporate law to American corporations, such as Nevada and the Cayman Islands, have broadly eliminated doctrines that enable shareholder suits against directors and officers who turn a blind eye to corporate lawbreaking. These jurisdictions have also erected a range of procedural barriers that preclude shareholders from holding directors and officers accountable when they actively participate in corporate lawbreaking. In documenting the rise of havens for corporate lawbreaking, this Essay offers two contributions to the literature. Descriptively, it shows how jurisdictional competition can strip away legal compliance obligations that have been widely understood as a “mandatory” feature of American corporate law. In doing so, it showcases that charter competition may not result in a singular version of corporate purpose, but rather may usher in different strands of corporate purpose as it relates to profit-maximizing illicit behavior. Normatively, it argues that public enforcement agencies apply heightened scrutiny to firms incorporated in lawbreaking havens to counteract the negative societal effects of unfettered choice for corporate charters while preserving the well-documented benefits of jurisdictional competition