Vigorous Race or Leisurely Walk: Reconsidering the Competition over Corporate Charters

Abstract

I. INTRODUCTION Does American corporate law work effectively to enhance shareholder value? The recent corporate governance crisis makes this time as good as any for reexamining the basic structure of this body of law. This Essay provides such a reconsideration of a defining feature of U.S. corporate law-the existence of regulatory competition among states. In the United States, most corporate law issues are left for state law, and corporations are free to choose where to incorporate and thus which state's corporate law system will govern their affairs. The dominant state in attracting the incorporations of publicly traded companies is, and for a long time has been, the small state of Delaware.' Although Delaware is home to

Is Regulatory Competition a Problem or Irrelevant for Corporate Governance?

“…Creating a specialized court is not, however, the sole strategy 13 that a state that they contend that there are no significant entry barriers (Kahan and Kamar, 2002:725-26), noting how Delaware was able to replace New Jersey as the dominant incorporation state, having adopted its code and stock of precedents, and that is why they infer a lack of competition from the absence of states' duplicating Delaware's court system. Bebchuk and Hamdani (2002) dispute their view, adopting Michael Klausner's thesis that Delaware's dominant market position is due to entry barriers associated with network externalities, and further inferring from that thesis that the output of state competition is inefficient (suboptimal). For an analysis of why state competition is not inefficient because of network externalities, see Romano (2002:83-92 (Romano, 2005b).…”

“…Although versions of the federal supremacy hypothesis have been bandied about in the corporate law literature for some time (e.g., Black, 1995: 1256;Gordon, 1991;Bebchuk and Hamdani, 2002), Roe has provided the most sustained elaboration of the position.…”

“…Highly suggestive supporting data of the push from competition to cost-effective regulation are contained in an article by William Carney (1997: 319-24). Examining the difference in content of U.S. states' 4 Bebchuk and Hamdani (2002) also contend that states do not compete for charters because firms tend to incorporate either in Delaware or in their headquarters state; in another article, one of the authors, however, relied on that incorporation pattern to suggest that state competition was a race to the bottom (Bebchuk and Cohen, 2003). As noted in Romano (2002:99-101) with respect to the inference from the data in Bebchuk and Cohen, there is a 12 corporate law and that of the nations of the European Union (EU), where jurisdictional competition has been prevented by a choice-of-law rule based on a corporation's physical presence and tax considerations, he found that the EU company law directives (which harmonize the corporate laws of member-states by containing minimum requirements) include a high proportion of mandates, most of which are not in any U.S. state's code, having been repealed many decades earlier as not conducive to modern business practices.…”

Delaware Law as Lingua Franca: Theory and Evidence

“…1 As a result, incorporation decisions are "bimodal:" public and private firms typically choose between home-state and Delaware incorporation, with most public firms and large private firms going to Delaware (Bebchuk and Hamdani, 2002;Daines, 2002;Bebchuk and Cohen, 2003;Dammann and Schündeln, 2011).…”

A Strategic Interpretation of Legal Transplants

“…For a more general discussion of competition between jurisdictions within the United States and the European Union, see Esty and Geradin (2001). the discipline introduced by market forces enhances presumptive benefits from competition, although under some conditions competitive federalism may fail to produce the socially optimal outcome (Romano 1987(Romano , 2002(Romano , 2005Bebchuk 1992;Bebchuk and Hamdani 2002;Kahan and Kamar 2002;Bebchuk and Cohen 2003;Roe 2003). Similarly, in environmental law, where the costs imposed by regulating industrial pollution could generate adequate interstate competition, there may nevertheless exist constraints that introduce resistance to the most efficient outcome (Revesz 1992(Revesz , 1996(Revesz , 2000.…”