On Friday, September 28, on the occasion of the Annual Francis G. Pileggi Distinguished Lecture in Law, sponsored by Widener University Law School’s Delaware Journal of Corporate Law, Harvard Law Professor Mark Roe presented his paper Does Delaware Compete?. The audience included leading Delaware lawyers and judges–both sitting and retired–eager to hear about the state of interstate corporate chartering competition. Yet, describing what he calls a “revisionist perspective,” Professor Roe argued that such competition no longer meaningfully exists: Delaware has won, and no other state is bothering to compete.
Giving his customary attention to reality, however, Professor Roe questioned this revisionist perspective. (Indeed, he might have asked himself: Why have all these folks in Delaware showed up to hear my presentation about chartering competition if the race is truly over?) Roe suggested, however, that there are three remaining aspects of chartering competition that are harder to observe than traditional competition, in which market shares fluctuate continuously.
First, Roe argues, Delaware needs to replenish its stable of large corporate franchise taxpayers: those horses are always leaving the stable due primarily to acquisitions. He supports this analysis with provocative data indicating that the “half life” of Delaware’s stable of maximum-franchise-tax payers has declined to around 10 years–meaning that, to continue its flow of franchise tax revenues at customary levels, Delaware needs to keep attracting large firms (by way of IPO reincorporations, for example). There may be no other state actively seeking that “business,” but Delaware must at least avoid becoming unattractive to new public companies.
Roe also argues that there is another form of preemptive competition: Delaware must be attentive to the possibility, however remote it may currently appear, that a group of major corporations and their lawyers might become discontent with Delaware law and “coach” another state to become a preferred haven for incorporation. Impossible? No: it happened to New Jersey in the early 1900’s, when there was a massive exodus to Delaware. This second aspect of competition, then, also requires attention by Delaware to prevent corporate discontent from reaching a critical mass.
Finally, and more familiar for those who follow Roe’s scholarship, is the notion of competition with the federal government. Again, Delaware must be attentive to avoid developing its corporate law in ways that would invite federal action–which could either preempt state corporate law altogether or, more realistically, render state law essentially inconsequential.
In my opinion, Professor Roe’s analysis accurately captures the big picture. As I have stated in a recent article, The Policy Foundations of Delaware Corporate Law, we in Delaware don’t think and act as if there’s no competition for corporate charters; to the contrary, we pay attention to just the sort of potential forms of competition he talks about.
A deeper question–nicely formulated by one of our students, I’m proud to say–is this: precisely how should Delaware engage in this competition? What should the legislature do? What should the judges do? On this score, Roe is understandably less specific, although he is, to use his terminology, warmly “avuncular.” To the Delaware judges, he counsels that they behave as if they sit on a high federal appellate court with a national jurisdiction. He acknowledges, in fact, that the Delaware judges largely do so already.
In my article, I point out what everyone already knows: these judges actively participate in conferences all over the country and the world on the subject of corporate governance. They’re acutely aware of the need to learn from an interact with a global corporate constituency. Delaware judges’ active engagement outside the courtroom is a critical component of Delaware’s participation in the kind of competition that Roe describes.
What the Delaware legislature, in cooperation with the Delaware bar, should do about preemptive competition is less clear. My article points out that corporate legislation in Delaware is highly conservative (in the sense of preserving the status quo); aggressive change, even in the name of preemptive charter competition, is thoroughly out of character. But that doesn’t mean that Delaware lawyers themselves don’t engage in Roe-style competition.
It’s no accident, for example, that the participants on this blog include quite a few Delaware lawyers. It’s no accident that Delaware lawyers are represented–in huge disproportion to their state’s population as a whole–in ABA business law activities. The motive of attracting referrals undoubtedly propels some of this engagement, but I don’t think it accounts for the entire phenomenon. The residual but very strong motivation is the desire to compete–in other words, to preserve the continued viability of the Delaware corporate system in the face of the competitive threats that Roe identifies.
In short, Roe’s analysis nicely illuminates the motivations for a lot of the notable behaviors of the players in the Delaware corporate community. The abstract of Professor Roe’s talk is available for download here.