The idea that a corporation’s employees should elect some of the corporation’s board members, a system known as codetermination, has moved to the forefront of U.S. corporate law policy. Elizabeth Warren’s Accountable Capitalism Act calls for employees of large firms to elect forty percent of all board members. Bernie Sanders’s Corporate Accountability and Democracy Plan goes even further and states that workers should elect forty-five percent of board members.
Both Warren’s and Sanders’s plans are broadly similar to the German law on codetermination, which for many decades has allowed employees of large German corporations to elect up to half of all board members. It is therefore unsurprising that Senator Sanders points to Germany’s successful economic development as evidence that economic progress and mandatory codetermination can go hand in hand.
However, this Article argues that codetermination promises to be a poor fit for U.S. corporations. While Germany arguably reaps significant benefits from codetermination, legal, social, and institutional differences between Germany and the United States make it highly unlikely that the United States would be able to replicate those benefits. Furthermore, the costs of codetermination probably would be much higher in the United States than they are in Germany.
Exploiting a large new database, this paper explores the incorporation choices of closely held U.S. corporations. The majority of corporations in our sample incorporate in the state in which their primary place of business (PPB) is located. However, among the corporations with more than 1000 employees, only about half incorporate in their PPB state, and of those that do not, more than half are incorporated in Delaware. We find statistically significant and robust evidence that corporations from states with low quality judiciaries are more likely to incorporate outside of their PPB state. Furthermore, corporations are more likely to migrate away from states where the risk of veil piercing is perceived to be high or that offer a particularly generous level of minority shareholder protection. The study complements empirical studies of incorporation choices of public companies, and offers new empirical evidence related to several theoretical debates concerning the market for corporate law.
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