Delaware's shrinking half-life

Stanford Law Review

Volumn 62, Issue 1, 2009, Pages 125-155

  Roe, Mark J ^a  

^a HARVARD LAW SCHOOL   (United States)

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EID: 73449141808     PISSN: 00389765     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (93)

1. Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55 STAN. L. REV. 679, 684-85 (2002) ("The thesis of this Article is that the very notion that states compete for incorporations is a myth. Modern state competition scholars have misconstrued the incentives of states to attract incorporations, misinterpreted their actions, misunderstood the economic and political barriers that states face, and arrived at mistaken conclusions about the market for incorporations.").
2. Ronald Gilson, Professor, Columbia & Stanford Univ., Address at the Transatlantic Corporate Governance Dialogue: Regulatory Competition and Subsidiarity in Corporate Governance in a Transatlantic Perspective (July 12, 2004), available at http://www.ecgi.org/tcgd/launch/gilson_speech.php.
3. Mark J. Roe, Delaware's Politics, 118 HARV. L. REV. 2491-2498 (2005)
4. Robert B. Thompson, Delaware, the Feds, and the Stock Exchange: Challenges to the First State as First in Corporate Law, 29 DEL. J. CORP. L. 779, 779 (2004) ("[Delaware's] reign is not imperiled by the other states.")
5. Melvin Eisenberg, Professor, Univ. of Cal., Berkeley, Address at the Transatlantic Corporate Governance Dialogue: Regulatory Competition and Subsidiarity in Corporate Governance in a Transatlantic Perspective (July 12, 2004), available at http://ecgi.org/tcgd/launch/eisenberg_speech.php ("The race is over. Delaware has won."); cf. Lucian Arye Bebchuk & Assaf Hamdani, Vigorous Race or Leisurely Walk: Reconsidering the Competition over Corporate Charters, 112 YALE L.J. 553-588 (2002)
6. Bernard S. Black, Is Corporate Law Trivial?, 84 NW. U. L. REV. 542, 586 (1990) ("The chartermongering race. is essentially over.").
7. E.g., Kahan & Kamar, supra note 1, at 686 ("Delaware's potential competitors are state bureaucracies that pursue political goals and operate under political constraints.").
8. Lawrence A. Hamermesh, The Policy Foundations of Delaware Corporate Law, 106 COLUM. L. REV. 1749-1765 (2006).
9. Delaware Division of Corporations, Home Page, http://www.corp.delaware.gov/default.html (last visited Aug. 29, 2009)
10. Bebchuk & Hamdani, supra note 3, at 555-556.
11. Robert Daines, The Incorporation Choices of IPO Firms, 77 N.Y.U. L. REV. 1559-1562 (2002)
12. see also Lucian Arye Bebchuk & Alma Cohen, Firms' Decisions Where To Incorporate, 46 J.L. & ECON. 383-396 (2003)
13. Marcel Kahan, The Demand for Corporate Law: Statutory Flexibility, Judicial Quality, or Takeover Protection?, 22 J.L. ECON. & ORG. 340-352 tbl.2 (2006)
14. Kahan & Kamar, supra note 1, at 689-724
15. Randall Chase, Delaware Governor Signs $3 Billion Budget Bill, USA TODAY, July 1, 2009, available at http://content.usatoday.net/dist/custom/gci/InsidePage.aspx?cId=delmarva now&sParam=310 84559.story
16. See Ralph K. Winter, Jr., State Law, Shareholder Protection and the Theory of the Corporation, 6 J. LEGAL STUD. 251, 251-252 (1977)
17. see also Roberta Romano, THE GENIUS OF AMERICAN CORPORATE LAW 12, 16-17 (1993)
18. Daniel R. Fischel, The "Race to the Bottom" Revisited: Reflections on Recent Developments in Delaware's Corporation Law, 76 NW. U. L. REV. 913-915 (1982)
19. The iconic article is William L. Cary, Federalism and Corporate Law: Reflections upon Delaware, 83 YALE L.J. 663 (1974)
20. Updating, deepening, and expansion can be found in Lucian Arye Bebchuk, Federalism and the Corporation: The Desirable Limits on Stat Competition in Corporate Law, 105 HARV. L. REV. 1435 (1992)
21. See sources cited supra note 3.
22. See Kahan & Kamar, supra note 1, at 724-735.
23. See id. at 724. Roughly contemporaneously, Lucian Bebchuk and Assaf Hamdani came to a similar conclusion through a complementary route
24. Bebchuk & Hamdani, supra note 3, at 585-595 (finding that other states face economic and structural barriers to entry). Melvin Eisenberg briefly made a similar observation years ago. Melvin Aron Eisenberg, The Structure of Corporation Law, 89 COLUM. L. REV. 1461, 1511-1512 (1989)
25. Bebchuk & Hamdani, supra note 3, at 584.
26. Bebchuk &Hamdani, supra note 3, at 594-595
27. INT'L ASS'N OF COMMERCIAL ADM'RS, ANNUAL REPORT OF THE JURISDICTIONS 39 (2006), http://www.iaca.org/node/80.
28. Kahan, supra note 9, at 352 tbl.2. Delaware charters approximately 3700 publicly traded companies. Bebchuk & Cohen, supra note 8, at 391 tbl.2
29. Feng Chen, Kenton K. Yee, & Yong Keun Yoo, Are Delaware Firms Oranges? Fundamental Attributes and the Delaware Effect 1 (Dec. 18, 2006) (unpublished manuscript), available at http://www.ssrn.com/abstract=912942
30. The information included in Table 1 is drawn from the International Association of Commercial Administrators. The data for years 1997-2007 is derived from the Association's Annual Report of the Jurisdictions. The 2003-2007 reports are available at http://www.iaca.org/node/80. The 1999-2002 reports are on file with the author. For the 2008 data, see INT'L ASS'N OF COMMERCIAL ADM'RS, ANNUAL REPORT OF DELAWARE (2008), http://www.gavinm.com/iaca/?country=USA&state=DE§ion= BOS&print=true.Entry includes all firms receiving a Delaware charter, whether by incorporation, reincorporation, spin-off, or new formation.
31. Delaware Secretary of State's Office, Spreadsheet calculations, available from the author
32. Information in Table 2 is drawn from annual Form 10-K reports submitted to the SEC. See for example, Northrop Grumman Corp., Annual Report (Form 10-K) (Mar. 24, 2003), available at http://sec.edgar-online.com/northrop-grumman-systems-corp/10-kannual-rep ort/2003/03/24/Section2.aspx
33. Theodore Eisenberg &Geoffrey Miller, Ex Ante Choices of Law and Forum: An Empirical Analysis of Corporate Merger Agreements, 59 VAND. L. REV. 1975-1982 (2006) ("The outflow [of merger contract choice of forum] from Delaware is not trivial. only [a fraction of Delaware-oriented merger contracts] specified Delaware as the litigation forum."); Matthew Cain & Steven M. Davidoff, Delaware's Competitive Reach: An Empirical Analysis of Public Company Merger Agreements 4 (Aug. 18, 2009) (unpublished manuscript), available at http://ssrn.com/abstract=1431625 (finding "flight to both Delaware and New York from other jurisdictions" but without the Delaware outflow that Eisenberg and Miller found for a differing period)
34. The merger of two Delaware firms paying the maximum franchise tax rate reduces Delaware's revenue, creating an interesting incentive for the state's corporate apparatus
35. That is, the approving shareholders have reason to put the state of incorporation into the decision-making mix as long as they will not be cashed out. Some mechanics on the Delaware Secretary of State's office coding for mergers: The office codes each company in the data underlying Tables 3, 4, 5, and 6 with a unique number upon incorporation. If a Delaware firm is the survivor in a merger, the office does not record the resulting firm as a new Delaware entity. Similarly, a name change for a corporation does not yield a new entity for tax-data tracking purposes, as the identification number remains constant. Hence, the data underlying the tables should not be picking up simple mergers of Delaware firms
36. About one-third of Fortune 500 firms received takeover bids during the 1980s
37. See John C. Coates IV, Measuring the Domain of Mediating Hierarchy: How Contestable Are U.S. Public Corporations?, 24 J. CORP. L. 837-851 (1999)
38. Gerald F. Davis &Suzanne K. Stout, Organization Theory and the Market for Corporate Control: A Dynamic Analysis of the Characteristics of Large Takeover Targets, 1980-1990, 37 ADMIN. SCI. Q. 605, 608 (1992)
39. ADVANCED VENTURE CAPITAL 14 (Dror Futter & Curtis L. Mo eds., 2007)
40. If no state protects shareholders, then Delaware need only provide shareholders a little extra value-from, say, network advantages-to win reincorporation business. Cf
41. Michal Barzuza, Price Considerations in the Market for Corporate Law, 26 CARDOZO L. REV. 127, 135-136 (2004)
42. Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 VA. L. REV. 757, 843-847 (1995) (analyzing Delaware's network advantages).
43. Bebchuk forcefully makes this point. Bebchuk, supra note 12, at 1460.
44. Bebchuk forcefully makes this point. Bebchuk, supra note 12, at 1459-1460.
45. Based on 1996 and 2006 data. See supra Tables 3 and 4.
46. Barzuza, supra note 29, at 186-187. Delaware recently raised the annual fee to $180,000
47. Cf. id. at 187-88 (explaining that although the larger firms would likely be willing to pay more, Delaware retains this taxing formula because of a trade-off between prices charged and the quantity of firms willing to incorporate in Delaware). For Datameg, see SEC Info, Datameg, http://www.secinfo.com/d11A75.1Aa.d.htm (last visited Aug. 29, 2009)
48. The bracket creep apparent in Table 6 deepens this effect, making Delaware somewhat more dependent today than before on midcap firms.
49. WILLIAM J. BAUMOL, JOHN C. PANZAR & ROBERT D. WILLIG, CONTESTABLE MARKETS AND THE THEORY OF INDUSTRY STRUCTURE 5 (rev. ed. 1988)
50. WILLIAM J. BAUMOL, THE FREE-MARKET INNOVATION MACHINE 163-165 (2002)
51. ROBERTA ROMANO, THE ADVANTAGE OF COMPETITIVE FEDERALISM FOR SECURITIES REGULATION 82-83 (2002)
52. F.M. SCHERER &DAVID ROSS, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 375-376 (3d ed. 1990) (footnotes omitted)
53. Delaware's response capability corresponds to the stalking horse impediment to state competition that Bebchuk and Hamdani demonstrate. Bebchuk & Hamdani, supra note 3, at 593-595
54. Delaware's response capability corresponds to the stalking horse impediment to state competition that Bebchuk and Hamdani demonstrate. Bebchuk & Hamdani, supra note 3 595.
55. Cf. ROMANO, supra note 36, at 82-83
56. Or imagine something more threatening to Delaware: Business changes in some way that half of the firms prefer rule X, and the other half not X, and there's no good way tocompromise. Delaware, no matter what it does in the competency arena, could find itself facing unrest from half of its installed base.
57. Bebchuk & Hamdani, supra note 3, at 594-595
58. City Capital Assocs. v. Interco, Inc., 551 A.2d 787-797 (Del. Ch. 1988)
59. Letter from Martin Lipton, Partner, Wachtell, Lipton, Rosen & Katz, To Our Clients: The Interco Case (Nov. 3, 1988) (on file with author); see also Tim Smart, For Managers, Delaware Isn't the Haven It Used to Be, BUS. WK., Dec. 19, 1988, at 33 ("[L]egal advisers to worried managers already are suggesting that companies should consider playing elsewhere."); Charles Storch, As Company, Time Focusing on 1 Newsmaker, CHI. TRIB., July 9, 1989, at 8 (Delaware's blocking Interco management from using the pill "so enraged Martin Lipton, the lawyer. credited with inventing the poison pill defense, that he urged his Delaware-incorporated clients to consider reincorporating elsewhere")
60. Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140-1142 (Del. 1989)
61. LYNN M. LOPUCKI, COURTING FAILURE: HOW COMPETITION FOR BIG CASES IS CORRUPTING THE BANKRUPTCY COURTS 53-54 (2005).
62. Publicly Traded Corporations Act, ch. 102, 2007 N.D. Laws 497 (codified at N.D. CENT. CODE § 10-35-01 (2007))
63. Elizabeth Lopatto, "Virgin' North Dakota Draws Billionaire Icahn in Raider Quest, BLOOMBERG.COM, Feb. 20, 2009, http://www.bloomberg.com/apps/news?pid=20601109&sid=aXgfseyKwJmI ("The legislation came into being after Icahn rounded up a group of like-minded investors, including New York-based hedge funds Jana Partners LLC and Steel Partners II LP, and hired Philadelphia attorney William H. Clark Jr. to draft a bill.").
64. Martha Graybow, Delaware Beware: North Dakota Wants Your Business, REUTERS, Apr. 25, 2007, available at http://www.reuters.com/article/domesticNews/idUSN2543618020070425
65. Maureen Milford, Del. Legal Academic Sees Time for a Change, THE NEWS J., Mar. 2, 2008, available at http://www.delawareonline.com/apps/pbcs.dll/article?AID=/20080302/BUSINE SS/803020379/1003 (reporting a Delaware meeting on the impact of North Dakota's new statute). For North Dakota to compete seriously, it must provide a strong commercial court or a viable dispute resolution process, which it has not yet tried to do. It could finesse the judicial problem by facilitating dispute resolution of internal corporate affairs via arbitration panels of three members chosen, say (since the North Dakota pitch is a proshareholder one), from the Council of Institutional Investors.
66. Rachel Beck, Goal of North Dakota's New Shareholder Law Could Be to Soften Delaware Law, The Associated Press, Apr. 24, 2007
67. Cari Tuna, Shareholders Ponder North Dakota Law, WALL ST. J., Dec. 8, 2008, at B6 ("A new front in the battle over corporate governance is emerging in an unlikely place: North Dakota." And: "The North Dakota law is part of an effort by shareholder advocates to generate competition among states for company incorporations based on governance rules."); cf. Robert Daniel, Amylin: 2 Holders to Propose Director Nominees, MARKETWATCH, Feb. 1, 2009, http://www.marketwatch.com/story/amylin-pharma-icahnblack-bear-fund-to-p ropose-directors ("[Icahn] also plans to propose that the company reincorporate in North Dakota, Amylin said. The company currently is incorporated in Delaware."); Selena Maranjian, Should We All Move to North Dakota?, THE MOTLEY FOOL, May 29, 2009, http://www.fool.com/investing/general/2009/05/29/should-we-all-move-tono rth-dakota.aspx?source=iseitlnk0000001&mrr=1.00 ("[P]ublic companies like. Delaware. [but] North Dakota is now offering an intriguing alternative."). As a formal matter of corporate law, reincorporating to North Dakota is no easier than winning a proxy contest to replace a target firm's board or to change a Delaware firm's bylaws to embed the substance of North Dakota's corporate law. Activists upset with a firm would go for the latter. Delaware, though, may worry that North Dakota could get the "brand" name for being proshareholder; shorthand decisionmaking from investors who aren't lawyers could lead them to prefer North Dakota because they don't want to, or cannot, read bylaws to see how they allocate authority inside the firm. North Dakota also promises to update its laws to stay proshareholder in the face of new transactional developments.
68. See Larry E. Ribstein, Why Corporations?, 1 BERKELEY BUS. L.J. 183-85 (2004)
69. See Geoffrey P. Miller &Theodore Eisenberg, The Market for Contracts, 30 CARDOZO L. REV. 2073-2073 (2009)
70. Mark J. Roe, Delaware's Competition, 117 HARV. L. REV. 588-590 (2003)
71. Cf. Roberta S. Karmel, Realizing the Dream of William O. Douglas-The Securities and Exchange Commission Takes Charge of Corporate Governance, 30 DEL. J. CORP. L. 79-79 (2005)
72. Leo E. Strine, Jr., Delaware's Corporate-Law System: Is Corporate America Buying an Exquisite Jewel or a Diamond in the Rough?, 86 CORNELL L. REV. 1257, 1268-1270
73. Proposed Rule: Security Holder Director Nominations, Exchange Act Release No. 34-48626, 68 Fed. Reg. 60,783 (proposed Oct. 14, 2003), available at http://sec.gov/rules/proposed/34-48626.htm
74. SEC To Consider Changes to Director Nominations Rules, CORP. COUNS. WKLY. (BNA), Sept. 13, 2006, at 276; Deborah Solomon & John D. McKinnon, Donaldson Ends an SEC Tenure Marked by Active Regulation, WALL ST. J., June 2, 2005, at A1.
75. Schapiro, Carrying Through on Promises, Directs Staff to Draft Proxy Access Proposals, SEC. REG. & L. REP. (BNA), Mar. 16, 2009, at 448. The SEC formally proposed shareholder access in May 2009
76. See lawyers' opinions filed in connection with 14a-8 applications for no-action letters. The letters are summarized in Brett H. McDonnell, Shareholder Bylaws, Shareholder Nominations, and Poison Pills, 3 BERKELEY BUS. L.J. 205-260 (2005)
77. Publicly Traded Corporations Act, ch. 102, 2007 N.D. Laws 497 (codified at N.D. CENT. CODE § 10-35-01 (2007))
78. Id. (requiring access in North Dakota); Ronald Grover, Icahn Is on the Attack, BUS. WK., Mar. 9, 2009, at 32 (reporting that activists seek reincorporation to North Dakota); Lopatto, supra note 48 (reporting similar activist efforts)
79. Act of Apr. 10, 2009, 77 Del. Laws ch. 14 § 1 (to be codified at DEL. CODE tit. 8, § 112), available at http://delcode.delaware.gov/sessionlaws/ga145/chp014.shtml
80. Joseph A. Giannone, Proposed Delaware Law Changes Expand Proxy Access, REUTERS, Feb. 27, 2009, http://www.reuters.com/article/reutersINCOnlineReport/idUSTRE51Q5RT20090 227. The press sees Delaware as acting positively in enacting shareholder access, with its proposal resonating with the SEC's agenda and North Dakota's required access. But I see Delaware in the text above as positioning itself a big step short of that, because the statute only authorizes Delaware firms to allow bylaws that permit stockholder nominees in the company's proxy solicitation. To get the bylaw, shareholders seeking access to the company's proxy statement must first convince managers to add the bylaw or get an approving vote, which itself would require proxy access to be viable. In other words, for shareholders to avoid a full-scale proxy solicitation to elect a short slate, they must first engage in a full-scale proxy solicitation for a new bylaw. But, regardless of whether this is strategic, Delaware is reacting and competing, even if not replicating its competition. Delaware players may be setting up to battle the SEC. If the SEC promulgates wider shareholder access regulation than Delaware's statute, then, with Delaware having acted, the federal displacement of state law would be made more vivid
81. See 77 Del. Laws ch. 14 § 1.
82. ALBERT O. HIRSCHMAN, EXIT, VOICE, AND LOYALTY: RESPONSES TO DECLINE IN FIRMS, ORGANIZATIONS, AND STATES 30 (1970)
83. Timothy Besley &Anne Case, Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition, 85 AM. ECON. REV. 25-25 (1995); Pierre Salmon, Assigning Powers in the European Union in the Light of Yardstick Competition Among Governments, in 22 JAHRBUCH FÜR NEUE POLITISCHE ÖKONOMIE, EUROPEAN GOVERNANCE 197, 197 (Manfred J. Holler et al. eds., 2003); Jack L. Walker, The Diffusion of Innovations Among the American States, 63 AM. POL. SCI. REV. 880 (1969); cf. Andrei Shleifer, A Theory of Yardstick Competition, 16 RAND J. ECON. 319, 319-20 (1985)
84. Cf. Larry E. Ribstein, Cross-Listing and Regulatory Competition, 1 REV. L. & ECON. 97-128 (2005) (focusing, though, on loss of business, not just feedback from voice).
85. Donald Langevoort made this point when commenting on a related paper.
86. WILLIAM A. NISKANEN, JR., BUREAUCRACY AND REPRESENTATIVE GOVERNMENT 28-29 (1971)
87. Cf. Peter Bernholz &Roland Vaubel, The Effect of Interjurisdictional Competition on Regulation: Theory and Overview, in POLITICAL COMPETITION AND ECONOMIC REGULATION 1, 2-3 (Peter Bernholz & Roland Vaubel eds., 2007); Pierre Salmon, How Can a Country Like Canada Be Inhospitable to an Influence of Yardstick Competition on Regulation?, in POLITICAL COMPETITION AND ECONOMIC REGULATION, supra, at 103-104
88. LOPUCKI, supra note 46, at 16-17, 254-55. There's been an analogous competition for trust business, which franchise fees cannot drive, since the tax rate there is zero. Robert H. Sitkoff & Max M. Schanzenbach, Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes, 115 YALE L.J. 356, 416 (2005). True, lawyers' and processors' fee-based goals (instead of officeholders' professionalism or bureaucracies' drive for relevance) could drive that competition
89. See William D. Berry & Brady Baybeck, Using Geographic Information Systems to Study Interstate Competition, 99 AM. POL. SCI. REV. 505-505 (2005)
90. Chang Kil Lee &David Strang, The International Diffusion of Public-Sector Downsizing: Network Emulation and Theory-Driven Learning, 60 INT'L ORG. 883-883 (2006)
91. Kurt Weyland, Theories of Policy Diffusion, 57 WORLD POL. 262-262 (2005)
92. Katerina Linos, Social Learning and the Development of Corporate Law 1 (Apr. 24, 2006) (unpublished paper on file with The Harvard Law School Program on Corporate Governance), available at http://www.law.harvard.edu/programs/olin_center/corporate_governance/pap ers/Brudney2006_Linos.pdf
93. Gerald F. Davis &Henrich R. Greve, Corporate Elite Networks and Governance Changes in the 1980s, 103 AM. J. SOC. 1-1 (1997)