A ‘Delaware Trap’ for Companies – WSJ

A new study by Robert Anderson IV finds that choice of law firm plays a significant role in the decision to incorporate in Delaware.

Dr. Anderson examined regulatory filings related to raising private capital, and concluded that it is all about the company’s choice of law firm near the time of founding.He found that some larger, elite law firms may steer businesses toward a Delaware incorporation with their own needs in mind, rather than because of any superior quality of the state’s legal system or the companies’ needs. Perhaps, he speculates, it is easier and less expensive for them to focus on Delaware, rather than having to master the laws of many states.In contrast, other firms—such as smaller, regional firms—are likely inherently focused on their state’s law, and therefore might be expected to disproportionately recommend in-state incorporation, he says.

Because it is difficult for companies to reincorporate, there is little incentive for states to compete for incorporation business and the franchise fees it generates by offering robust alternatives to Delaware law, Dr. Anderson says.

“The consequence is a stagnant menu of relatively homogeneous state corporate law with little innovation, even though innovation might benefit shareholders,” he says.

Dr. Anderson’s research doesn’t take into account various factors that prior research has shown to influence incorporation decisions, such as the antitakeover statutes of a business’s state of headquarters, says Lucian Bebchuk, the James Barr professor of law, economics and finance at Harvard Law School and the director of its program on corporate governance.Delaware manages to snare more than half of the incorporations of U.S. public companies.

A study by Dr. Bebchuk and Alma Cohen, a professor of empirical practice at Harvard Law School, found that companies are more likely to incorporate in Delaware rather than their state of headquarters when they have more employees or sales, when they’re based in the Northeast or South or when their state of headquarters has fewer antitakeover statutes.But Dr. Anderson says he’s confident that weighing states’ antitakeover statutes wouldn’t undermine his results.

Source: A ‘Delaware Trap’ for Companies – WSJ

Dole CEO liable for $148 million over unfair buyout: Delaware judge | Reuters

The billionaire chief executive of Dole Food Co and his top lieutenant must pay $148.2 million of damages to shareholders they shortchanged when the produce company went private in 2013, a Delaware judge ruled on Thursday….Shareholders accused Murdock and Carter of driving down Dole’s share price by downplaying the Westlake Village, California-based company’s ability to boost profit by cutting costs and buying farms, and canceling a stock buyback.

In his 106-page decision, [Vice Chancellor Travis] Laster saw Carter as the main engineer of the scheme, calling him Murdock’s “right-hand man” and saying Carter “actually engaged” in fraud.

“Although facially large, the award is conservative to what the evidence could support,” Laster wrote.

In a decision that may cast a pall on management-led buyouts, Vice Chancellor Travis Laster said Dole Chief Executive David Murdock, 92, and former Chief Operating Officer C. Michael Carter were liable for depressing the stock so that Murdock, who owned 40 percent of Dole, could buy the rest at a lowball price.

via Dole CEO liable for $148 million over unfair buyout: Delaware judge | Reuters.

Delaware has Won the Corporate Race to the Bottom: Time for an Overhaul

Why does this matter to the average U.S. investor? Because jurisdiction and terms of the litigation for the business-related lawsuits are often decided by the place of incorporation or the companies own by-laws. Companies like Wal-Mart, Chevron, General Motors, Ford, Dole, all opt to incorporate in Delaware to minimize the pesky lawsuits that demand investors be paid market price for their shares or just to be treated fairly.

At the expense of main street, Delaware generates a billion dollars in fees year after year with almost no oversight. There is simply no motivation for Delaware to balance shareholder rights with corporate governance rules. Instead, Delaware has actively lobbied federal officials to ensure acts like the Dodd-Frank financial overhaul didn’t tread on its state court system or its rules.  Delaware has been successful protecting its turf, and it is way past time to ensure that one state cannot single handily protect corporate America while lining its own pockets.

via Delaware has Won the Corporate Race to the Bottom: Time for an Overhaul.