Market For Corporate Charters Research Articles

The Origins of the Market for Corporate Law

AbstractI study the origins of the market for corporate charters and the emergence of Delaware as the leader of this market. Specifically, I assemble new data on 19th- and 20th-century corporations to evaluate two widely held beliefs: (1) the U.S. Supreme Court is responsible for enabling a national market for corporate charters in the 19th century and (2) Delaware became the leader in this market only because New Jersey (the initial leader) repealed its extremely liberal corporate laws in 1913. I argue against both claims: The Supreme Court always opposed a national market for corporate charters, and New Jersey’s decline began a decade before its 1913 repeal. It is more likely that the market for corporate charters emerged as a collateral consequence of interstate commerce and that New Jersey declined because Delaware and other states simply copied its laws.

Corporate Purpose and the Separation of Powers

Despite its intense focus on inter-jurisdictional competition, corporate law scholarship has thus far overlooked the influence of inter-branch competition on business organizations. This Article shows how inter-branch struggles for control over corporations catalyzed the advent of modern corporate law and helped propel Delaware to its dominant position in the market for corporate charters. For centuries, the legislature, judiciary, and executive vied for the decisive role in dictating the means and ends of corporations. Through the nineteenth century, competition among the branches produced a dysfunctional and volatile relationship between government and private enterprise, with each branch successively assuming a leading role in corporate oversight, only to falter under the weight of its unique structural limitations. The resulting instability ultimately proved so intolerable as to prompt the creation of an entirely new paradigm of liberalized corporate codes at the dawn of the twentieth century. Delaware’s innovation of and rigorous adherence to corporate law’s newfound separation of powers gave it a crucial, yet previously unappreciated, edge in the competition for corporate charters. Moreover, modern corporate law’s system of checks and balances curbed longstanding abuses and ushered in an equilibrium among the branches that has served as a foundation for economic growth in the United States since. Beyond illuminating a novel factor in Delaware’s ascendency, corporate law’s separation of powers poses unappreciated problems and provides preliminary solutions for the ongoing debate over corporate purpose. A growing chorus of progressive academics and policy-makers has called on the government to impose and enforce corporations’ social obligations. This Article offers new grounds for skepticism towards these proposed reforms, because they would jeopardize corporate law’s hard-fought equilibrium among the branches by reviving the unilateralism and dysfunction that once plagued the United States’ corporate law regime. Accordingly, this Article contends that vesting the government with a proactive role in imposing and enforcing corporate purpose, whether at the state or federal level, is ill advised. Yet this Article also providers reform-minded progressives with a concrete framework for structuring an expanded power to enforce corporate purpose with minimal risk to corporate law’s separation of powers.

Federal Forum Provisions: Historical Development and Future Evolution

The Securities Act of 1933 provides for concurrent federal and state jurisdiction. In 2015, plaintiffs significantly increased the frequency with which they filed Securities Act claims in state court, where dismissal rates are lower and weaker claims have greater settlement value. The cost of directors and officers insurance for issuers conducting initial public offerings, the form of transaction most sensitive to Securities Act litigation risk, has increased dramatically. This increase is concurrent with plaintiffs’ shift away from federal court. Federal Forum Provisions (FFPs) appear in charters or bylaws. They require that Securities Act claims be litigated in their traditional forum, federal court. FFPs arose as a direct response to plaintiffs’ shift from federal to state court Securities Act litigation. In Sciabacucchi, Delaware Chancery held that FFPs are invalid. That opinion is currently on appeal to Delaware’s Supreme Court. Part I of this note reviews data documenting the migration of Securities Act claims from federal to state court, and shows that approximately 75% of all issuers today facing Securities Act claims face at least one complaint filed in state court. Part II analyses plaintiffs’ incentive to migrate, and focuses on the lower probability of state court dismissal, combined with an array of other procedural advantages that benefit plaintiffs in state court. Part III presents novel data documenting a rapid and significant increase in the cost of directors’ and officers’ insurance. Part IV documents the evolution and propagation of FFPs, and shows that they have been adopted primarily by Delaware-chartered issuers who face a significant risk of Securities Act IPO litigation. Part V summarizes other scholars’ findings that the stock prices of issuers with FFPs declined in a statistically and financially significant manner in response to Chancery’s decision in Sciabacucchi. Part VI concludes with observations regarding the future evolution of FFPs contingent on the pending decision by Delaware’s Supreme Court. If FFPs are upheld as valid, then Delaware will have a further advantage in the market for corporate charters. If FFPs are held invalid, issuers will face incentives to petition other states to adopt legislation affirming the validity of FFPs. If that occurs, insurers will have a rational incentive to impose a “Delaware penalty” on issuers who are likely subject to Securities Act liability and who charter in Delaware rather than in states that enforce FFPs. If this market response emerges, it will be the first instance in which there is an immediate, quantifiable reason not to charter in Delaware. This result cannot be positive for Delaware’s ability to compete in the market for corporate charters.

The Delaware Trap: An Empirical Study of Incorporation Decisions

One of the most enduring debates in corporate law centers on why Delaware has become the dominant state in the market for corporate charters. Traditionally, two perspectives dominated the debate, the “race to the top” perspective that sees competition among states as driving legal rules toward efficiency and the “race to the bottom” perspective that sees competition among states as driving legal rules toward the interests of corporate managers. The two dominant perspectives have struggled to explain why approximately half of companies incorporate in Delaware, while the other half incorporate in their home states. Whether the choices are attributable to the quality of state law or to characteristics of the companies themselves or both has given rise to a large, but inconclusive empirical literature.This Article uses a large dataset of corporate financings to shed new light on this mystery and uncovers strong evidence that some of the strongest factors in incorporation choice are factors unrelated to either the quality of state law or the characteristics of individual companies. Instead, the data strongly suggest that demographic markers of sophistication, such as choice of law firm and headquarters location, predict the jurisdictional choice about as well as state law or the business attributes of companies. Companies with more demographic markers of sophistication tend to choose Delaware incorporation, and companies with fewer demographic markers of sophistication tend to choose home-state incorporation. The finding persists even when other attributes of the company are controlled for, such as its industry classification, the amount of money raised, or whether the company is public or private. Indeed, the sophistication factors arguably predict Delaware incorporation as well or better than any factors documented in the vast literature on state competition for corporate charters.The findings have important implications for the state “race-to-the-top” debate in corporate law. At a minimum the results in this Article make it clear that the choice of legal representation is an important missing variable in models of incorporation decisions. The fact that the choice of law firms drives the jurisdictional choice has far broader implications. If law firms drive the jurisdictional choice they may steer companies toward states that serve the law firms’ own interests without regard to the quality of legal rules or the needs of the client. When the state chosen is Delaware, as it often is, there are few alternative jurisdictions that shareholders and managers can agree on. As a result, companies inadvertently fall into a “governance trap” from which reincorporation out of state is nearly impossible. This interpretation would suggest that Delaware’s carefully calibrated positioning in the charter market has largely eliminated meaningful competition among the states for the quality of corporate law.

Delaware Law as Lingua Franca: Theory and Evidence

AbstractWhy would a firm incorporate in Delaware rather than in its home state? Prior explanations have focused on the inherent features of Delaware corporate law and on the positive network externalities created by so many other firms domiciling in Delaware. We offer an additional explanation: a firm may choose Delaware simply because its law is nationally known and thus can serve as a lingua franca for in-state and out-of-state investors. Analyzing the incorporation decisions of 1,850 venture-capitalist-backed start-ups, we find evidence consistent with this lingua franca explanation. Indeed, the lingua franca effect appears to be more important than other factors that have been shown to influence corporate domicile, such as corporate law flexibility and the quality of a state’s judiciary. Our study contributes to the literature on the market for corporate charters by providing evidence that Delaware’s continued dominance is in part due to investors’ familiarity with its corporate law.

Delaware Law as Lingua Franca: Evidence from VC-Backed Startups

Why would a firm incorporate in Delaware rather than in its home state? Prior explanations have focused on the inherent features of Delaware corporate law, as well as the positive network externalities created by so many other firms domiciling in Delaware. We offer an additional explanation: a firm may choose Delaware simply because its law is nationally known and thus can serve as a “lingua franca” for in-state and out-of-state investors. Analyzing the incorporation decisions of 1,850 VC-backed startups, we find evidence consistent with this lingua-franca explanation. Indeed, the lingua-franca effect appears to be more important than other factors that have been shown to influence corporate domicile, such as corporate-law flexibility and the quality of a state’s judiciary. Our study contributes to the literature on the market for corporate charters by providing evidence that Delaware’s continued dominance is in part due to investors’ familiarity with its corporate law.

Why the North Dakota Publicly Traded Corporations Act Will Fail

In this short essay for a forthcoming symposium, I comment on the North Dakota Publicly Traded Corporations Act. North Dakota hopes that the Act will empower it to compete with Delaware in the market for corporate charters. In my view, North Dakota is doomed to failure. If state chartering competition is a race to the bottom, managers will prefer Delaware to North Dakota because the former facilitates the extraction of private rents. If state competition is a race to the top, investors will prefer the director primacy approach taken by Delaware to the shareholder primacy one adopted by North Dakota. Either way, North Dakota loses.

Issuer Choice in Europe

Unlike the US, the European Union has a tradition of national securities laws significantly differ-ing from each other. Regulatory idiosyncrasies largely remain today despite recent efforts aiming at more comprehensive harmonization. In addition, in important respects, the current conflict of laws rules contained in European Community securities laws bundle the choice of applicable securities laws with the issuer's registered office, while leaving some regulatory aspects to the law of the market where the issuer's securities are admitted to trading. Hence, to the extent that EU companies can choose their state of incorporation and trading location, they can also choose the applicable securities law among those in place in the 27 EU countries. This article scrutinizes the policy implications of the conflict of laws rules EC securities regula-tion has chosen in two scenarios: the present one, in which obstacles to companies mobility across the EU still make regulatory arbitrage in practice unavailable, and a prospective one in which these obsta-cles are removed. We consider the bundling of securities laws with the issuer's law of incorporation for conflict of laws purposes overall detrimental if corporate law arbitrage is unavailable. On the other hand, we argue that the impact of such rules is beneficial if companies can easily engange in company law arbi-trage. Yet, we qualify our optimistic assessment by showing that bundling securities regulation and corporate law for conflict of laws purposes may have a negative impact on the dynamics of the market for corporate charters. For the regulatory aspects that are governed by the law of the affected market (and specifically for securities law aspects of takeover regulation), we argue that already today issuer choice offers a broad variety of options and a separating equilibrium represents the likely outcome.

Discussion Report: Cost-based and Rule-based Markets for Rules in Corporate Law

In the beginning of the discussion Dr. Arkadiusz Radwan doubted the conclusions of Prof. Marco Ventoruzzo concerning the European market for corporate charters. He pointed out that the distinction between cost-based and rule-based markets was non dichotomous, as rules are a cost factor too.

Competition, Inefficiencies, and Dominance in Corporate Law: Comment

The paper by Oren Bar-Gill, Michal Barzuza, and Lucian Bebchuk (Bar-Gill, Barzuza, and Bebchuk [2006]) comes last in a line of theoretical attempts at explaining whether a market for corporate law exists in the United States, and if so, how that market works. This debate has become one of the classical puzzles among corporate-law scholars. It has been discussed for some time now, and thus a number of conflicting views and accounts at the present time are engaged in a tournament to win the award for the most convincing theory of them all. Essentially, there are three major positions. The first and the orthodox one among economically minded scholars proposes the idea that American corporate law is the product of healthy competition among the states, a process that, almost inexorably, is leading to efficient corporate-law rules (Romano [1985]; Easterbrook and Fischel [1982]). The thesis is very simple. The states try to attract clients (companies deciding their state of incorporation) by offering a better (more desirable to the companies) set of rules to organize the structure and running of the corporation. Competitive pressures push the states to adopt rules that benefit shareholders, and, as in other markets, product quality is in the end optimal. A very suggestive thesis, and still the dominant view. It leaves, however, an uneasy aftertaste, maybe as a result of its overarching reach, extending over the entire corporate-law area. The opposite view is that the perfect world of regulatory competition is far from the truth. It is a myth: the market for corporate charters and corporate law is anything but competitive (Kahan and Kamar [2002]; Bebchuk, Cohen, and Ferrell [2002]; ROE [2003]). Moreover, one could even think that there is no market at all, since there is but one supplier in this so-called market: Delaware. Delaware has a virtual monopoly on incorporation. And a monopoly, not to be forgotten, in the shadow of the federal government, which has gained increasing regulatory powers over corporate law, and can intervene if things go wrong or tend to unwelcome directions. In this gloomy (for healthy competition, we mean) scenario, it is easy to

A European Look at the American Experience of the Delaware Syndrome

Recent decisions of the European Court of Justice on freedom of establishment of companies have effectively overturned the main barriers by which many Member States have sought to protect what they regard as their vital national interests. The doors now lie open to a freer migration of corporations within the European Union, and potentially expose that Union to all of the consequences that the Delaware Syndrome has brought to the US. This article examines the background to the development of that Syndrome in the US, and looks at the ways in which otherUS states responded to it. The effects of this “market for corporate charters” in the US are explored and current views on the present situation summarised. The article then investigates what, if anything, European jurisdictions can learn from this American experience.

Adjudicative Jurisdiction and the Market for Corporate Charters

Both in the United States and in Europe, corporations are free to choose the applicable corporate law by incorporating in the jurisdiction of their choice. However, smaller firms face a number of obstacles in exercising that choice. One such obstacle concerns the law on adjudicative jurisdiction: In the United States as well as in the European Community, corporations are exposed to third-party suits in their state of incorporation even if they have no other ties to that state. In this Article, I argue that while the relevant rule may not matter much in the United States, it probably imposes a considerable burden on corporations in Europe. Moreover, I show that there is no convincing justification for the relevant Community law rule. It does not promise to increase the combined gains reaped by contracting parties, nor can it be expected to achieve either a substantive increase in positive externalities or a significant reduction in negative externalities. Finally, it cannot even be justified persuasively on fairness grounds.

CORPORATE CHARTERING: AN EXPLORATION IN THE ECONOMICS OF LEGAL CHANGE

During the nineteenth and early twentieth centuries, the market for corporate charters was deregulated as states replaced special chartering with incorporation under general laws. This paper explores the pattern of deregulation across states within the context of the interest‐group theory of government. The empirical results show that legal change tended to occur first in states where the stake in deregulation was greatest, and where the costs of lobbying for “liberal” corporation codes were low. Innovations in law can thus be explained by the same benefit‐cost calculus that describes economic innovation.

The Market for Corporate Charters: "Unhealthy Competition" Versus Federal Regulation

The Market for Corporate Charters: "Unhealthy Competition" Versus Federal Regulation