Is there a competition for corporate charters in Europe? Corporate and comparative scholars have been discussing the similarities between the Delaware-led competition in the United States with the slowly emerging market for corporate legal forms in the European Union.

In my recent paper, Corporate Mobility in the European Union – a Flash in the Pan? An empirical study on the success of lawmaking and regulatory competition, recently made available on SSRN, I provide new empirical evidence on the development of the market for incorporations in Europe, and on the impact of national law reforms.

Since the seminal Centros case in 1999, European entrepreneurs have been allowed to select foreign legal forms to govern their affairs. While much academic effort has been spent to evaluate the early market reactions to this case-law, effectively opening up the European market, relatively little attention has been devoted to subsequent developments. This is surprising, since the various national lawmakers’ responses to the wave of entrepreneurial migration offer a rare glimpse on the effects of regulatory competition and subsequent business’ reaction, as well as on the relevance and effects of lawmaking and regulatory responses to market pressure.

…continue reading: Corporate Mobility and Regulatory Competition in Europe

The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction, and the historical development of doctrines limiting parallel state court litigation — the doctrine of forum non conveniens and the “first-filed” doctrine — this paper suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The “first-filed” rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency.

Putting Stockholders First responds to the observation that in 2011, only 5% of settlements of shareholder litigation challenging mergers and acquisitions involved an additional payout to stockholders, 84% of such settlements were based on additional disclosure only, but all of such settlements involved payment of fees for plaintiffs’ attorneys. These figures reflect a significant change from 1999 to 2000, when 52% of suits filed on behalf of shareholders produced a financial benefit for the class, and only 10% of settlements were “disclosure-only.”

…continue reading: Putting Stockholders First, Not the First-Filed Complaint

Delaware dominates the corporate chartering market in the U.S—it is the only state that attracts a significant number of out-of-state incorporations. As a result, incorporation decisions are “bimodal,” with public and private firms typically choosing between home-state and Delaware incorporation.

Much ink has been spilled in the debate over whether Delaware’s dominance arose because it offers high-quality or low-quality corporate law. Under the “race-to-the-top” view, Delaware has prevailed because its law maximizes firm value. Under the “race-to-the-bottom” view, Delaware has won by offering corporate law that favors insiders at other parties’ expense.

But a firm today may choose Delaware law not solely because of its inherent features but rather because, after decades of Delaware’s dominance, business parties—including investors and their lawyers—are now simply more familiar with Delaware law than the laws of other states. Indeed, the bimodal pattern of domiciling is itself strong evidence that business parties are familiar only with their home states’ corporate law and Delaware’s.

In our paper, Delaware Law as Lingua Franca: Evidence from VC-Backed Startups, recently made public on SSRN, Brian Broughman, Darian Ibrahim, and I show, for the first time, that familiarity does in fact affect firms’ decisions to domicile in Delaware rather in their home states.

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

Companies incorporated outside of California but with significant California contacts (so-called “quasi-California corporations”) have struggled with exactly how to comply with the long-arm statute found in Section 2115 of the California Corporations Code. The statute purports to impose a number of provisions of the California Corporations Code on quasi-California corporations, including the state’s requirement to obtain separate approval from holders of each class of capital stock on a merger “to the exclusion of the law of the jurisdiction in which [the quasi-California corporation] is incorporated.” Section 2115 has been thought to be legally infirm for some time, particularly after a decision by the Delaware Supreme Court in 2005. However, there never has been an acknowledgement by a California court that Section 2115 reaches too far. That changed earlier this year, when a California Court of Appeal stated in dicta that certain matters of internal corporate governance fall within a corporation’s internal affairs and should be governed by the laws of the corporation’s state of incorporation.

…continue reading: California Court Acknowledges “Quasi-California Corporation” Decision

In less than two years, seven states, including New York, New Jersey and California, have enacted laws creating a new hybrid type of corporation designed for businesses that want to simultaneously pursue profit and benefit society. Advocates for this new type of entity—typically called a benefit corporation, or B Corp– say that it fills a gap between traditional corporations and non-profits by giving social entrepreneurs flexibility to achieve the dual objectives of doing well and doing good. [1]

At first glance, the B Corp seems a welcome addition to the corporate governance landscape, that promises to advance the cause of socially responsible business. Indeed, B Corp proponents have been remarkably successful in making their case to lawmakers; the statutes were passed without a single dissenting vote in both houses of the New York and New Jersey legislatures last year, and similar proposals are pending in four additional states. Meanwhile, hundreds of businesses, most notably the outdoor clothing company Patagonia, have chosen to organize under the B Corp banner.

But viewed from a broader corporate governance perspective, the B Corp initiative—however well-intentioned–has troubling implications. The problem is that its primary rationale rests on the mistaken, though widely-held, premise that existing law prevents boards of directors from considering the impact of corporate decisions on other stakeholders, the environment or society at large. This crabbed view of directorial fiduciary duties perpetuates the unfortunate misconception that existing law compels companies to single-mindedly maximize profits and share price, and in so doing undermines the very values that corporate governance advocates should seek to promote: responsible, sustainable corporate decision-making by companies of any stripe.

…continue reading: Benefit Corporations vs. “Regular” Corporations: A Harmful Dichotomy

In the paper Delaware’s Balancing Act, which was recently made publicly available on SSRN, we examine the decline in Delaware’s popularity as a venue for corporate litigation. The Delaware court system has functioned to a significant degree as a de facto “national” court for U.S. corporate law. Corporate disputes arising in Delaware courts frequently generate extensive press coverage. Delaware law is a central part of the business law curriculum in U.S. law schools and law students learning corporate law are exposed to a steady diet of Delaware case law. Official comments accompanying the Model Business Corporations Act (M.B.C.A.), a model set of laws prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association followed by 24 states, frequently refer to Delaware cases to provide examples or as a source of further explanation. Courts in M.B.C.A. states often rely on Delaware case law to clarify gaps in the M.B.C.A. and sometimes even cite Delaware jurisprudence in preference to M.B.C.A. court decisions.

…continue reading: Delaware’s Balancing Act

In my working paper Revisiting Corporate Governance Regulation: Firm Heterogeneity and the Market for Corporate Domicile, which I recently presented at the Law, Economics and Organizations Workshop here at Harvard Law School, I use a discrete choice framework to analyze state design and firm choice of the implications of incorporation: corporate governance laws, corporate taxes and court structure.

In order to exploit the information revealed in the preferences displayed by the different firms, a novel dataset with firm and incorporation characteristics is assembled and then a random coefficient discrete choice model is specified. In the model, incorporation is treated as a “product” that the states design, differentiated along all of the dimensions of the implications of incorporation, including the discrete “price”—the tax implications incorporation imposes on each firm. In every one year period, each heterogeneous firm chooses its preferred “product” by choosing to incorporate, to remain incorporated, or to reincorporate in one of the 51 US jurisdictions. Firms are decomposed into their ownership patterns, director characteristics, industry concentration, financial profiles, the geographical location of their headquarter states, and the residual unobservable dimensions of heterogeneity within them. The choice of incorporation state is seen to be made based on the preferences—resulting from these dimensions of firm heterogeneity—for the laws, court characteristics and taxes that makeup the incorporation implications.

I find that all incorporation implications, the laws, the court characteristics and the incorporation taxes matter. I find that firms are very responsive to incorporation and franchise taxes. In addition, on average, firms like antitakeover statues, but, consistent with an agency story, firms with an institutional shareholder block and venture capital backed firms dislike them. On average, firms dislike mandatory governance statutes restricting managerial power and facilitating the representation of minority shareholders, but these laws are not as restrictive for the choice of firms in concentrated industries. All firms dislike well functioning courts, consistent with a litigation deterrence motive. The recovered firm preferences are then taken to the simulation of recently proposed federal reforms aimed at centralizing the domicile implications and restricting firm choice. They are also related to the documented differential returns earned by firms with better internal governance in the 1990s, as well as to other trading strategies that would have yielded abnormal returns in the 2000s.

The full paper is available for download here.

I have recently completed a paper, entitled “The Shifting Balance of Power Between Shareholders and the Board: News Corp’s Exodus to Delaware and Other Antipodean Tales”. The paper is posted on SSRN here.

The abstract to the paper is as follows:

The balance of power between shareholders and the board of directors is a contentious issue in current corporate law debate. It also lay at the heart of a controversy concerning the re-incorporation of News Corporation (News Corp) in Delaware. News Corp has recently been the subject of intense media attention due its successful bid to acquire Dow Jones & Company. Nonetheless, News Corp’s move to the US, which paved the way for this victory, was neither smooth nor a fait accompli. Rather, the original 2004 re-incorporation proposal prompted a revolt by a number of institutional investors, on the basis that a move to Delaware would strengthen managerial power vis-à-vis shareholder power. The institutional investors were particularly concerned about the effect of the re-incorporation on shareholder participatory rights, and the ability of the board of directors to adopt anti-takeover mechanisms, such as poison pills, which are not permissible under Australian law. It was this latter concern, which ultimately led a group of institutional investors to commence legal proceedings in the Delaware Chancery Court in UniSuper Ltd v News Corporation (2005 WL 3529317 (Del Ch)).

The News Corp re-incorporation saga highlights a number of important differences between US, UK and Australian corporate law rules relating to shareholder rights, and provides a valuable comparative law counterpoint to the recent US shareholder empowerment debate. Other recent Australian commercial developments discussed in the article show a tension between legal rules designed to enhance shareholder power, and commercial practices designed to readjust power in favor of the board of directors. These developments are interesting because they demonstrate how some Australian companies have tried to create a de facto corporate governance regime, which mimics certain aspects of Delaware law.

This Friday in Wilmington, Delaware, Professor Mark Roe (who has previously posted on our Blog here) will deliver the Francis G. Pileggi Distinguished Lecture in Law.  Professor Roe’s talk, Does Delaware Compete?, will describe the competitive setting in which Delaware sets corporate-law standards.  The Abstract of Professor Roe’s lecture follows:

After a century of academic thinking that states compete for corporate chartering revenues, a revisionist perspective has emerged in which states do not compete for chartering revenues, leaving Delaware all alone in the interstate charter market.  Firms either stay incorporated in their home state or reincorporate in Delaware, but rarely go elsewhere.  What’s more, other states don’t even try to provide the services Delaware provides.  Delaware has a monopoly, one that goes unchallenged.

I here use industrial organization concepts to better illuminate this competitive setting.  Even if no other state seriously challenges Delaware for the reincorporation business, it still must operate in three key competitive arenas.  First, it must attract firms to reincorporate away from their home state.  The dynamism of American business interacts with the corporate chartering structure to create a broad avenue of chartering competition, even if no state actively seeks to take chartering revenue away from Delaware.  Second, Delaware has reason to fear a once-and-for-all exit of corporate America to another state.  It’s a slim risk, but it would be catastrophic for Delaware’s budget and the once instance we have of serious state-to-state competition–New Jersey’s demise as the corporate capital at the beginning of the twentieth century–was just that: rapid exit and a new winner, not long-term hand-to-hand combat.  Similarly, and third, Delaware has reason to fear federalization of core elements of its corporate law even if no other state actively competes for charters.  A reputation for bad decision making (or bad decision makers) could impel Congress to displace Delaware, in whole or in part, perhaps as an excuse during an economic downturn.  While the odds of full displacement are quite low, Sarbanes-Oxley shows us that the odds of substantial partial displacement are not.

These ideas have parallels in the industrial organization, antitrust literature on contestable markets: a single producer can dominate a market, but, depending on the nature of its technology and the market, it could lose its market share overnight.  Hence, it acts like a competitor on some issues, or knows it must provide a package that overall is attractive to the primary users of corporate law.  Delaware could face this kind of catastrophic loss in two dimensions: the traditional horizontal one of a competing state, and the vertical one of federal displacement.

Further details on Professor Roe’s upcoming talk are available here.

With the able assistance of Bill Clark (one of the finest business legislation drafters around), North Dakota has adopted legislation that permits public companies to opt into a legislative scheme that includes a whole bunch of rules that are reported to be “shareholder friendly.”  Mark Roe says (and I think he’s right) that we shouldn’t expect to see companies reincorporating in North Dakota; more likely, he says, is the possibility that IPO companies will use the new North Dakota option (although Mark wisely doesn’t put money down on this either).  Some say, in any event, that this puts a whole lot of pressure on us in Delaware to do something similarly “shareholder friendly.”

The logic of this escapes me.  I’m pretty confident that if anyone thought that this North Dakota package of rules was really a good thing for a public company, they could create the same package by incorporating in Delaware (or lots of other states, for that matter) under a Certificate of Incorporation that adopted all of the North Dakota provisions.  (Section 102(b)(1) of the Delaware General Corporation Law would permit any company incorporated there to do so.)  Or, if you thought that one or two of these provisions was a bad idea, you could simply leave them out.  Some people, for example, don’t think it’s a good idea to have a permanent statutory compulsion to separate the Chairman and Chief Executive Officer positions; others might want a threshold lower than 5% (the North Dakota rule) to qualify as a shareholder eligible to get access to management’s proxy statement.

As far as I can tell, however, it’s not clear that you can pick and choose pieces you like and throw out the ones you don’t like if you adopt a corporate charter that elects to be governed by the “shareholder friendly” North Dakota statutory package.  In terms of freedom of choice, this is pretty thin soup.  Can you imagine how a good shareholder activist would respond to a board-proposed charter amendment that provided for proxy access and mandated majority voting, but at the same time created a staggered board?  You’d hear howls of unfair bundling so fast it would make your head spin.  (Unless, of course, the SEC shot it down first under Rule 14a-4 for just that reason.)  Why should bundling accomplished by the North Dakota act be viewed as more benign?

…continue reading: The North Dakota Experiment: Bundle Up!