The Delaware Courts, Poison Pills, and Shareholder Wealth

Abstract

The State of Delaware has sought and achieved national prominence in the competition for corporate charters. The remarkable success of Delaware's legal system in this competition is evident in the fact that over 50 percent of the firms listed on the New York and American stock exchanges are incorporated in the state despite it not being the center of their economic activity. Romano (1985; 1987a) argues that the key factors explaining Delaware's major share of reincorporations are its highly responsive state code and comprehensive body of case law deriving from its first-mover advantage. Further, Romano and, separately, Macey and Miller posit that the specificity of Delaware's legal system and its agents, together with the large amount of revenue it stands to lose, ensure that Delaware can offer a credible promise, not easily imitated by competitors, that its legal characteristics will be maintained. These factors predict that Delaware law and courts will exhibit judicial consistency and predictability, thus lowering the legal costs of complex business transactions and thereby attracting corporate charters (see also Herzel and Richman). The consistency of rulings and adherence to precedent in Delaware reduce