Increased Frequency for Delaware Choice of Law in Merger Agreements and the Implications for Scholarly Research

Abstract

The legal community has long recognized that business corporations heavily favor Delaware as the state of incorporation. However, a recent study suggested that despite Delaware’s prominence as the place of incorporation, companies “flee” from Delaware with respect to both choice of law and forum, and instead prefer New York. In Professor Eisenberg and Miller’s study, while 181 acquirers were incorporated in Delaware, only 135 chose Delaware law, and while there were only five acquirers that were incorporated in New York, 63 merger contracts chose New York law. Building on Professor Eisenberg and Miller’s work, we study a data of 343 merger and acquisitions contracted on between January 1, 2011 and June 30, 2011. We find that companies only display a New York bias when companies have connections to New York. In other words, a company’s place of incorporation, place of business, and merger attorneys’ locale substantially influence the choice of law for merger deals. Our study shows that by eliminating acquirers that are domiciled — either incorporated or having a primary place of business — in New York, as well as eliminating merger attorneys that have presences in New York, the data reflects little New York bias.Specifically, when the acquirer has no place of business in New York, only 12.23 percent of the merger deals chose New York law. Going one-step further, out of the ninety merger deals that did not have any New York connection, only 8.89 percent chose New York law. By eliminating all New York connections, the study shows that companies are much less likely to choose New York law. Moreover, the data reflects that a Delaware incorporated acquirer is more likely to choose Delaware law to govern their merger deals than any other state law — 64.37 percent of Delaware incorporated acquirers chose Delaware law, whereas only 14.94 percent chose New York law. Indeed, our data shows that when we follow the methodology and use the assumptions of the Eisenberg and Miller study in constructing our data set, the frequency with which Delaware law was chosen to govern the merger deal had substantially increased when compared to the frequency with which Delaware law was chosen by the parties in the Eisenberg and Miller study. Our results further nullify the premise that Delaware corporations are engaged in a flight to choose New York law in their merger agreements.