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

What Bank Regulation Tells Us About Corporate Governance

An excellent new draft paper by Robert Hockett and Saule T. Omarova has some important insights and context for corporate governance.  Like ontogeny recapitulating phylogeny or like the impressions left by the tiny veins of a leaf thousands of years ago, the vestigial evidence of the earliest stages of development provide important information about the history of the corporate structure and where, how, and why some of the original elements were outgrown or discarded.

Commercial banks are unlike most other American business firms: they are privately owned corporations in a market-capitalist economy, and yet they are explicitly backed, intrusively regulated, and, when they nevertheless fail, expeditiously liquidated by the federal government. In these important respects, banks are undeniably “special,” and widely recognized to be so. But banks also are “special” in a deeper, more far-reaching and constitutive sense, as the most salient living embodiment of a particular understanding of the business corporation. They amount to a vestige of what might be called the original American corporate settlement that established the boundary between private and public interests in the management of large-scale productive enterprise.

In describing how government oversight of non-bank corporations was reduced and the level of control of bank and non-bank enterprises diverged, the authors are frank about the incentives to remove state controls from private enterprise.

Combining with all of these good faith reasons for loosening corporate requirements, of course, would have been less noble ones. Corporate privilege in general, and unconditional limited liability in particular, constituted a grand invitation to externalize costs upon others, and those actuated by such temptations would have found
nobler-ringing rationalizations of their demands for corporate status ready at hand in the developments just described. It is difficult to quantify precisely how prevalent responsibility-ducking motives were among even those clamoring for “free incorporation” on plausible political and economic grounds, but the literature suggests that the “market for incorporation” had become rife, by the late 19th century, with “stock-watering,” creditor swindling, and other scams. [footnotes omitted]

There has been a lot of pressure to treat banks more like non-bank corporations and significant movement in that direction, as the authors note. But they suggest some small steps to the contrary, possibly beginning with (or, rather, returning to) the notion that enterprises justify the enormous benefits and subsidies they get from incorporation by “taking a clue from the bank chartering process and requiring each business entity seeking incorporation to provide to the chartering authorities (1) a more specific description of the business activities it plans to conduct (a statement of “business purpose”), and (2) a separate description of how exactly its business activities would benefit the national, regional, or local economy or community (a statement of “public purpose”).”

This is an important paper and we look forward to seeing the final version.