Market segmentation: The rise of Nevada as a liability-free jurisdiction

Virginia Law Review

Volumn 98, Issue 5, 2012, Pages 935-1000

  Barzuza, Michal ^a  

^a UNIVERSITY OF VIRGINIA SCHOOL OF LAW   (United States)

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EID: 84867009078     PISSN: 00426601     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (130)

1. See, e.g., Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 212-27 (1991);
2. Roberta Romano, The Genius of American Corporate Law 14-31 (1993) [hereinafter Romano, The Genius];
3. Oren Bar-Gill, Michal Barzuza & Lucian A. Bebchuk, The Market for Corporate Law, 162 J. Institutional & Theoretical Econ. 134, 134-38 (2006);
4. Lucian A. Bebchuk & Allen Ferrell, Federalism and Corporate Law: The Race to Protect Managers from Takeovers, 99 Colum. L. Rev. 1168, 1193-99 (1999);
5. Lucian A. Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 Harv. L. Rev. 1435, 1444-46 (1992) [hereinafter Bebchuk, Desirable Limits];
6. William L. Cary, Federalism and Corporate Law: Reflections upon Delaware, 83 Yale L.J. 663, 663-68 (1974);
7. Roberta Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L. Econ. & Org. 225, 225-32 (1985) [hereinafter Romano, Law as a Product];
8. Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. Legal Stud. 251, 254-58 (1977).
9. See Lucian A. Bebchuk & Assaf Hamdani, Vigorous Race or Leisurely Walk: Reconsidering the Competition over Corporate Charters, 112 Yale L.J. 553, 563-64 (2002) (arguing that Delaware's dominant position imposes insurmountable barriers to entry);
10. Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55 Stan. L. Rev. 679, 684-85 (2002) (arguing that no state competes with Delaware);
11. see also Stephen M. Bainbridge, Dodd-Frank: Quack Federal Corporate Governance Round II, 95 Minn. L. Rev. 1779, 1790 (2011) ("Some recent evidence, however, suggests that the basic premise of both stories (i.e., that states compete actively for corporate charters) is wrong.");
12. Mark J. Roe, Delaware's Shrinking Half-Life, 62 Stan. L. Rev. 125, 125 (2009) ("A revisionist consensus among corporate law academics has begun to coalesce that, after a century of academic thinking to the contrary, states do not compete head-to-head on an ongoing basis for chartering revenues, leaving Delaware alone in the ongoing interstate charter market.");
13. See Richard A. Posner & Kenneth E. Scott, Economics of Corporation Law and Securities Regulation 111 (1980).
14. Professors Barry Baysinger and Henry Butler have argued that firms with weak controls self-select into strict legal regimes. Barry D. Baysinger & Henry N. Butler, Race for the Bottom v. Climb to the Top: The ALI Project and Uniformity in Corporate Law, 10 J. Corp. L. 431, 460 (1985) [hereinafter Baysinger & Butler, Uniformity in Corporate Law];
15. Barry D. Baysinger & Henry N. Butler, The Role of Corporate Law in the Theory of the Firm, 28 J.L. & Econ. 179, 183 (1985) [hereinafter Baysinger & Butler, The Role of Corporate Law].
16. See, e.g., Hilton Hotels Corp. v. ITT Corp., 978 F. Supp. 1342, 1346 (D. Nev. 1997);
17. Jill E. Fisch, The Peculiar Role of the Delaware Courts in the Competition for Corporate Charters, 68 U. Cin. L. Rev. 1061, 1067 (2000);
18. Ehud Kamar, A Regulatory Competition Theory of Indeterminacy in Corporate Law, 98 Colum. L. Rev. 1908, 1911 (1998);
19. Jonathan R. Macey, Federal Deference to Local Regulators and the Economic Theory of Regulation: Toward a Public-Choice Explanation of Federalism, 76 Va. L. Rev. 265, 277 n.41 (1990);
20. Kresimir Pirsl, Trends, Developments, and Mutual Influences between United States Corporate Law(s) and European Community Company Law(s), 14 Colum. J. Eur. L. 277, 317 (2008).
21. See discussion infra Subsection II.B.1. The most commonly used textbooks in corporate law describe extensively how directors and officers face liability for such acts. See William T. Allen, Reinier Kraakman & Guhan Subramanian, Commentaries and Cases on the Law of Business Organization 239, 295 (3d ed. 2009);
22. William A. Klein, J. Mark Ramseyer & Stephen M. Bainbridge, Business Associations: Agency, Partnerships, and Corporations, 310-62 (7th ed. 2009).
23. See Harry First, Comment, Law for Sale: A Study of the Delaware Corporation Law of 1967, 117 U. Pa. L. Rev. 861, 861 (1969) (paraphrasing from the article that opened the literature on regulatory competition in corporate law).
24. Secretary of State Ross Miller, Lionel Sawyer and Collins Law Firm, Legal Advantages: A Comparison with Delaware, Why Nevada?, http://whynevada.com/ commercialrecordings/Why.Nevada.Legal.Comparison.pdf (last visited Apr. 7, 2012).
25. See, e.g., Nev. Corporate Planners Inc., Why Form an LLC in Nevada (or Corporation)?, http://www.nvinc.com/nservice12.htm (last visited Apr. 7, 2012).
26. Market segmentation refers to the process of dividing the market to serve distinct consumer groups with similar demand preferences. Segmentation is a lucrative strategy since it allows a producer who does not have market power visàvis the entire market to gain market power in a particular segment. See Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors 196-200 (1980). For a broader discussion of market segmentation in general and for the argument that Nevada's strategy has all components of market segmentation, see infra Section III.A.
27. See, e.g., Comment letter from Cravath, Swaine & Moore LLP et al. to SEC concerning File No. S7-10-09; Release Nos. 33-9086; 34-61161;
28. IC-29069, at 6-8 (Jan. 19, 2010), available at http://www.sec.gov/ comments/s7-10-09/s71009-619.pdf (employing a "one size does not fit all" argument to oppose a mandatory federal proxy access rule).
29. Ralph K. Winter, Jr., The "Race for the Top" Revisited: A Comment on Eisenberg, 89 Colum. L. Rev. 1526, 1526-29 (1989).
30. See, e.g., Lucian A. Bebchuk & Alma Cohen, Firms' Decisions Where to Incorporate, 46 J.L. & Econ. 383, 383 (2003);
31. Robert Daines, Does Delaware Law Improve Firm Value?, 62 J. Fin. Econ. 525, 525 (2001) [hereinafter Daines, Firm Value];
32. Robert Daines, The Incorporation Choices of IPO Firms, 77 N.Y.U. L. Rev. 1559, 1559-60 (2002);
33. Guhan Subramanian, The Influence of Antitakeover Statutes on In-corporation Choice: Evidence on the "Race" Debate and Antitakeover Overreaching, 150 U. Pa. L. Rev. 1795, 1795, 1797 (2002) [hereinafter Subramanian, Incorporation Choice].
34. The association of network externalities with Delaware law is attributed to Michael Klausner. See Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 Va. L. Rev. 757, 849-51 (1995).
35. Table 1 reports the proportion of firms that Nevada attracts out of the firms that choose to leave their home state, namely the firms that shop for law. The sample reports all publicly-traded U.S. firms reporting state-of-incorporation information in Compustat as of 2008. Standard and Poor's, Compustat Database, http://www.compustat.com/Compustat-Database/ (last visited Aug. 3, 2009) (data on file with the author).
36. The historical data was taken from Mergent. Mergent, www.mergent.com (last visited Aug. 3, 2009) (data on file with the author).
37. Warren Lowman & Dr. Paul Chalekian, Introduction, Should the Secretary of State Propose Nevada Establish a Business Portal? 1-2 (Sept. 23, 2008), http://nvsos.gov/Modules/ShowDocument.aspx?documentid=1282. This document discussed changes to Nevada incorporation taxes and reported that, as a result, Nevada revenue from incorporations increased to $83 million. This sum, however, includes fees from other entities such as limited liability companies. Nevada does not keep a separate record for fees collected from publicly-traded companies. See e-mail from Jeffery Landerfelt, Management, Analyst, Sec'y of State Ross Miller's Office, to author (Aug. 12, 2011, 14:54 EST) (on file with author).
38. see also Keith Paul Bishop, Silver Standard, L.A. Lawyer, Nov. 2008, at 34 (noting that Nevada automatically relieves directors and officers from liability unless both conditions are met).
39. Conscious disregard of duties constitutes a breach of the duty of good faith under Delaware law. See In re The Walt Disney Co. Derivative Litig., 907 A.2d 693, 755 (Del. Ch. 2005).
40. Del. Code Ann. tit. 8, § 145(a) (2011);
41. Waltuch v. Conticommodity Servs., 88 F.3d 87, 95 (2d Cir. 1996) (holding that a corporation cannot indemnify a director who acted in bad faith despite a charter term that attempts to provide directors with un-conditional indemnification rights).
42. ISS, ISS' 2011 U.S. Proxy Voting Guidelines Summary 1, 18 (Dec. 16, 2010), http://www.issgovernance.com/files/ ISS2011USPolicySummaryGuidelines20101216.pdf ("Vote AGAINST proposals to eliminate entirely directors' and officers' liability for monetary damages for violating the duty of care."). Corporations in Nevada also have broad authority to purchase insurance and make other financial arrangements to reduce directors' and officers' potential exposure to liability such as creation of a trust fund or granting of a security interest or other lien on any assets of the corporation.
43. See Nev. Rev. Stat. Ann. § 78.752 (LexisNexis 2010).
44. See Nev. Rev. Stat. Ann. § 78.752(4)(a) (LexisNexis 2010).
45. Nev. Rev. Stat. Ann. § 78.037 (LexisNexis 2010).
46. Hearing on S.B. 277 Before the S. Comm. on Judiciary, 2001 Leg., 71st Sess. (Nev. 2001) (statement of Sen. Mark James, Chairman, S. Comm. on Judiciary), available at http://www.leg.state.nv.us/Session/71st2001/Minutes/ Senate/JUD/Final/1464.html. Senator James further explained that since "[d]irectors are the ones who decide where to incorporate,. this will be a major incentive." Id.
47. Senate Debate, S.B. No. 577, One Hundred and Eleventh Day (May 6, 2011) (statement of Sen. Terry Care), available at http://www.leg.state.nv.us/Session/ 71st2001/Journal/Senate/Final/SJ111.html.
48. See Lucian A. Bebchuk, Alma Cohen & Allen Ferrell, Does the Evidence Favor State Competition in Corporate Law?, 90 Calif. L. Rev. 1775, 1803-04 (2002).
49. See Revlon, Inc., v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) (holding when a sale or a break-up of the company is inevitable, the director's role shifts to one of an auctioneer, and he has a duty to act to maximize the sale value to shareholders);
50. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) (holding when directors use defensive tactics they are not awarded with the high deference of the business judgment rule, but rather have to show that their use constituted a proportional response to a cognizable threat);
51. Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 661 (Del. Ch. 1988) (holding that when directors act with the primary purpose of impairing shareholders' power to vote they have the burden to show that there was a compelling justification for their acts).
52. Hilton Hotels Corp. v. ITT Corp., 978 F. Supp. 1342, 1346 (D. Nev. 1997).
53. See Nev. Rev. Stat. Ann. § 78.139 (LexisNexis 2010) (replacing the Unocal and Revlon standards with the business judgment rule and replacing the Blasius standard with the standard in Unocal).
54. The legislative history of this action suggests it was a direct response to Hilton Hotels: "[T]he Executive Committee believes the decision [Hilton Hotels] contained language which could be interpreted too broadly and wish[es] to clarify Nevada law by changing NRS 78.138. If actions taken in response to takeover threats do not involve the disenfranchisement of stockholders, the directors should obtain the benefits of the business judgment rule without first having to establish (i) that management had reasonable grounds to believe a danger existed to the corporation, and (ii) that the response to the takeover danger was reasonable." Memorandum from John P. Fowler, Chair, Exec. Comm., Bus. Law Section, State Bar of Nev. to S. Judiciary Comm., State of Nev. 5 (Feb. 3, 1999), available at http://www.leg.state.nv.us/Division/Research/ Library/LegHistory/LHs/1999/SB061,1999pt1.pdf (first emphasis added).
55. ITIS Inc., Definitive Information Statement (Form DEF 14C) 11 (Sept. 18, 2002), available at http://www.sec.gov/Archives/edgar/data/3959/ 000091205702035583/a2089350zdef14c.htm;
56. see also ATSI Commc'ns, Inc., Definitive Proxy Statement (Form DEF 14A), at 18 (Mar. 26, 2004), available at http://www.sec.gov/Archives/edgar/data/ 1014052/000101540204001156/0001015402-04-001156.txt (noting the lack of liability for breach of duty of loyalty under Nevada law);
57. Daleco Resources Corp., Definitive Proxy Statement (Form DEF 14A) E-3 (Feb. 6, 2002), available at http://www.sec.gov/Archives/edgar/data/746967/ 000095011602000159/def14a.txt.
58. Alice M. Tybout & Kent Grayson, Kellogg on Marketing 27 (Alice M. Tybout & Bobby J. Calder eds., 2d ed. 2010);
59. Michel Wedel & Wagner A. Kamakura, Market Segmentation, Conceptual and Methodological Foundations 3-4 (2d ed. 2000).
60. Positioning is a term of art from marketing literature that describes the process of creating an image of a product or a brand in consumers' minds. See, e.g., Al Ries & Jack Trout, Positioning: The Battle for Your Mind 2-3 (1981).
61. Data collected from Compustat. Standard and Poor's, Compustat Database, http://www.compustat.com/Compustat-Database/ (last visited Aug. 3, 2009).
62. See Schoon v. Troy Corp., 948 A.2d 1157, 1165-66 (Del. Ch. 2008).
63. The overall proportions of firms with protection and indemnification clauses, which are surprisingly low, are consistent with previous findings. See Lucian A. Bebchuk, Alma Cohen & Allen Ferrell, What Matters in Corporate Governance?, 22 Rev. Fin. Stud. 783, 797 (2009) (reporting the following average proportions across states for 2002
64. Director Indemnification 19.1%; Director Indemnification Contracts 8.1%; Director Liability 33.9%). These proportions used to be higher in the 1990s, but they decreased significantly over time. See Paul Gompers, Joy Ishii & Andrew Metrick, Corporate Governance and Equity Prices, 118 Q.J. Econ. 107, 112 (2003) (reporting the following proportions: indemnification clauses and contracts (they bundle together two IRRC variables) 40.9% in 1990 and 24.4% in 1998;
65. Celli G. GianLuca, Model of Export Specialization: Market Segmentation, The Case of Italy, Ministero dell'Economia e delle Finanze, Dipartimento del Tesoro, Note Tematiche No. 1, at 10 (2008), available at http://www. fondazionemasi.it.isiportal.com/UploadDocs/234-Celli.pdf.
66. See id. It is helpful to think of Nevada and Delaware as possessing separate, local monopolies. Nevada's monopoly may be smaller, but through it Nevada is still able to charge supra-competitive prices. For a model of several local monopolies, see, e.g., Steven C. Salop, Monopolistic Competition with Outside Goods, 10 Bell J. Econ. 141, 141-45 (1979).
67. See A. Banerji & Bhaskar Dutta, Local Network Externalities and Market Segmentation, 27 Int'l J. Indus. Org. 605, 606-07 (2009) (constructing a model of and finding the conditions for market segmentation with local network externalities when firms compete on price). One shortcoming, however, is that only the Nevada Supreme Court officially publishes its cases.
68. Yet, some business court cases are accessible (though not easily), and corporate actors in Nevada are promoting wider access to these cases. See Rachel J. Anderson, Researching Nevada Business Cases, Rachel Anderson's Law Blog (Nov. 3, 2009), http://rachelandersonsblog.blogspot.com/2009/11/researching- nevada-business-cases.html.
69. See Mark J. Roe, Delaware's Competition, 117 Harv. L. Rev. 588, 636 (2003).
70. Federal intervention typically kicks in during times of crisis and historically has been primarily designed to protect shareholders. See Lucian A. Bebchuk & Assaf Hamdani, Federal Corporate Law: Lessons From History, 106 Colum. L. Rev. 1793, 1798-99 (2006).
71. See Michal Barzuza, Price Considerations in the Market for Corporate Law, 26 Cardozo L. Rev. 127, 163 (2004).
72. See, e.g., Del. Intercorp., Inc., Why Incorporate in Delaware?, http://www.delawareintercorp.com/t-WhyIncorporateinDelaware.aspx (last visited Mar. 7, 2012).
73. John Chevedden, a shareholder activist, has submitted precatory proposals to move at least fifteen companies, among them Oshkosh, Whole Foods, PG&E, and Hains Celestial, to North Dakota. See Carol Icahn, More Rights for Shareholders in North Dakota, The Icahn Report (Dec. 7, 2008, 1:11 PM), http://www.icahnreport.com/report/2008/12/more-rights-for.html;
74. see also Cari Tuna, Shareholders Ponder North Dakota Law, Wall St. J., Dec. 8, 2008, at B6. The proposals were not successful.
75. Corporate Board Member, a widely read magazine among directors and practitioners, has featured a long article on the pluses and minuses of incorporating in Nevada. See Craig Mellow, Taking a Chance on Nevada, Corporate Board Member, Second Quarter 2011, available at https://www.boardmember.com/ Print.aspx?id=6237.
76. See John Armour, Bernard Black & Brian Cheffins, Is Delaware Losing its Cases? 1 (Nw. Univ. Law Sch. Law & Econ. Research Paper No. 10-03, 2010), available at http://ssrn.com/abstract=1578404 (showing that Delaware is losing its cases to other states' courts and hypothesizing that shareholders' interests are driving this trend);
77. see also Theodore Eisenberg & Geoffrey P. Miller, Ex Ante Choices of Law and Forum: An Empirical Analysis of Corporate Merger Agreements, 59 Vand. L. Rev. 1975, 1975 (2006);
78. Theodore Eisenberg & Geoffrey P. Miller, The Flight to New York: An Empirical Study of Choice of Law and Choice of Forum Clauses in Publicly-Held Companies' Contracts, 30 Cardozo L. Rev. 1475, 1475-76 (2009).
79. Data collected from Thomson Reuters. Thomson Reuters, SDC Platinum,http://thomsonreuters.com/products-services/financial/ financial-products/a-z/sdc/ (last visited Oct. 11, 2010) (Data on file with the author).
80. See Michal Barzuza, Lemon Signaling in Cross-Listing 1 (Mar. 14, 2012) (unpublished manuscript, available at http://ssrn.com/abstract=1022282) (developing a model that shows that only insiders that extract relatively low private benefits will crosslist on U.S. exchanges).
81. Reincorporation requires managers' initiation and shareholder approval since it is done by merging into a shell corporation. See Del. Code Ann. tit. 8, § 253 (2011).
82. See Lucian A. Bebchuk, Why Firms Adopt Antitakeover Arrangements, 152 U. Pa. L. Rev. 713, 729, 735-36 (2003) (suggesting agency costs as one possible explanation for variations in antitakeover defenses at the IPO stage).
83. Professors Laura Field and Jonathan Karpoff have specifically investigated whether the companies that adopt antitakeover protections have higher agency costs. They found that managers that adopt takeover defenses at the IPO stage have fewer pre-IPO shares, higher compensation, and are relatively free from shareholders' monitoring. They also found that the size of the board and the presence of the CEO on the board are associated with antitakeover defenses, suggesting defenses arise when there is less monitoring by the board. See Laura C. Field & Jonathan M. Karpoff, Takeover Defenses of IPO Firms, 57 J. Fin. 1857, 1867-73 (2002).
84. Michael Klausner provides an explanation as to why even in firms that are backed by venture capitalists ("VCs"), agency costs may affect IPO legal arrangements. Since VCs need to compete with respect to investments and management, they may accommodate managers' preferences to avoid a reputation of being tough on managers. See Michael Klausner, Institutional Shareholders, Private Equity, and Antitakeover Provisions at the IPO Stage, 152 U. Pa. L. Rev. 755, 770-71 (2003).
85. That Nevada chooses not to compete with Delaware across all possible dimensions of its product offering is consistent with successful differentiation strategies. See generally Edward Hastings Chamberlin, The Theory of Monopolistic Competition: A Reorientation of the Theory of Value 71-72 (8th ed. 1962).
86. Robert Daines & Michael Klausner, Do IPO Charters Maximize Firm Value? Antitakeover Protection in IPOs, 17 J.L. Econ. & Org. 83, 113 (2001);
87. See Marcel Kahan & Edward Rock, The Insignificance of Proxy Access, 97 Va. L. Rev. 1347, 1369-70 (2011) (stating that for companies below $300 million market cap it is uncommon to attract analyst coverage).
88. See Larry Ribstein, Nevada and the Market for Corporate Law, Truth on the Market (May 27, 2011, 7:15 AM), http://truthonthemarket.com/2011/05/27/nevada- and-the-market-for-corporate-law/ (replying to an earlier version of this Article).
89. See, e.g., Roberta Romano, The Shareholder Suit: Litigation without Foundation?, 7 J.L. Econ. & Org. 55, 57 (1991);
90. see also James Bohn & Stephen Choi, Fraud in the New-Issues Market: Empirical Evidence on Securities Class Actions, 144 U. Pa. L. Rev. 903, 979-81 (1996) (presenting evidence of frivolous suits in securities class actions).
91. See Barry D. Baysinger & Henry N. Butler, Race for the Bottom v. Climb to the Top: The ALI Project and Uniformity in Corporate Law, 10 J. Corp. L. 431, 459 (1985).
92. Delaware courts award significant deference to independent directors in different contexts. See, e.g., Cooke v. Oolie, 2000 Del. Ch. Lexis 89, at z.ast;44 (Del. Ch. May 24, 2000) (majority approval of disinterested directors provides business judgment rule protection for a self-dealing transaction).
93. It is also possible that both are happening, that some Nevada firms have higher agency costs and seek lax law to extract private benefits, while for others having lax law is optimal. Lastly, it could even be true that the lax law is optimal for firms with high agency costs if restricting those firms would lead to adoption of more harmful devices by managers. Professors Jennifer Arlen and Eric Talley have persuasively shown that this has happened with respect to antitakeover devices. See Jennifer Arlen & Eric Talley, Unregulable Defenses and the Perils of Shareholder Choice, 152 U. Pa. L. Rev. 577, 582 (2003).
94. See Robert B. Thompson & Randall S. Thomas, The New Look of Shareholder Litigation: Acquisition-Orientated Class Actions, 57 Vand. L. Rev. 133, 207-08 (2004).
95. Id. at 208. Professors Thompson and Thomas also found that more than 70% of the cases were class actions challenging acquisitions. Id. at 169. Settlements leading to relief were concentrated in freeze-out transactions, and specifically in freeze-out transactions in which the price paid to minority shareholders was substantially lower than the average price paid in similar transactions. Id. at 199-202. Furthermore, in a recent paper these authors show that this litigation is associated with fewer completed transactions but with higher premiums that compensate shareholders for the higher offers. See C.N.V. Krishhan et al., Litigation in Mergers and Acquisitions 44 (Van-derbilt Law and Economics, Research Paper No. 10-37, 2011), (unpublished manuscript, available at http://ssrn.com/abstract=1722227).
96. See, e.g., Medical Solutions Management Inc., Definitive Proxy Information Statement (Form DEF 14C) 4-5 (Nov. 16, 2004), available at http://www.secinfo.com/d17Wxn.13e.htm ("In recent years, Nevada has adopted a policy of encouraging in-corporation in that state and has been a leader in adopting, construing and implementing comprehensive, flexible corporate laws responsive to the legal and business needs of corporations organized under its laws.").
97. ATSI Commc'ns, Inc., Definitive Proxy Solicitation Material (Form DEF 14A), at 14 (Mar. 26, 2004), available at http://www.secinfo.com/duvJ5.114b.htm ("We believe that the reincorporation in Nevada will provide a greater measure of flexibility and simplicity in corporate governance than is available under Delaware law. .").
98. See Digerati Technologies, Inc., Yahoo! Finance, http://finance.yahoo. com/q?s=DTGI.OB (last visited Apr. 15, 2012).
99. See Digerati Techs., Inc., Annual Report (Form 10-K) 38 (Oct. 31, 2011), available at http://www.sec.gov/Archives/edgar/data/1014052/000114420411060308/ v238581-10k.htm (reporting total compensation in 2011 of $305,276 for the CEO).
100. Digerati Technologies, Inc., Yahoo! Message Bd. (Jan. 27, 2011, 6:21 PM), available at http://messages.finance.yahoo.com/Stocks-%28A-to-Z%29/Stocks-D/ threadview?m=tm&bn=38645&tid=701&mid=701&tof=34&frt=1 ("Ceo. I don't know how to run a company, what should I do. Have a reverse split? No. Let's change the name of the company. No one will notice hell [sic] this company will never move up anyway. We'll keep our jobs and get paid every week." (spacing adjusted));
101. Digerati Technologies, Inc., Yahoo! Message Bd., (Jan. 16, 2011, 11:12 AM), available at http://messages.finance.yahoo.com/Stocks-%28A-to-Z%29/Stocks- D/threadview?m=tm&bn=38645&tid=699&mid=699&tof=36&frt=1 ("Another payday goes by, ceo [sic] gets his paycheck. Stock still at 4 pennies.").
102. The median-sized firm in Nevada is about $18 million (= e2.88), compared with median assets values of $311 million for Delaware firms and $189 million for firms in other states. See Michal Barzuza & David C. Smith, What Happens in Nevada? Self-Selecting into Lax Law 15-16 (Va. Law and Econ., Research Paper No. 2011-08, Dec. 26, 2011), available at http://ssrn.com/abstract=1644974.
103. A family firm in the corporate library dataset is defined as: "A company where family ties, most often going back a generation or two to a founder, play a key role in both ownership and board membership. Family members may not have full control of the shareholder vote (greater than 50%), but will generally hold at least 20%." Annalisa Barrett et al., The Corporate Library's 2006 Governance Practices Report - Executive Summary 2 (Dec. 2006), available at http://www.complianceweek.com/s/documents/Compliance%20Week%202007/ Resource%20Materials/Minow,%20Nell%20%20The%20Corporate%20Library/ GovPrac2006-ExecSumm.pdf.
104. For a summary of the evidence on restatements, their effects, and motivations, see John C. Coffee, Jr., A Theory of Corporate Scandals: Why the USA and Europe Differ, 21 Oxford Rev. Econ. Pol'y 198 (2005).
105. Kirsten L. Anderson & Teri Lombardi Yohn, The Effect of 10K Restatements on Firm Value, Information Asymmetries, and Investors' Reliance on Earnings 25 (Sep. 2002) (unpublished manuscript, available at http://ssrn.com/abstract=332380) (showing that restatements result in an average negative effect of 10% of firm value);
106. U.S. Gen. Accounting Office, GAO-03-138, Report to the Chairman, Committee on Banking, Housing, and Urban Affairs, U.S. Sen., Financial Statement Restatements: Trends, Market Impacts, Regulatory Responses and Remaining Challenges 24 (2002).
107. See Jennifer H. Arlen & William J. Carney, Vicarious Liability for Fraud on Securities Market: Theory and Evidence, 1992 U. Ill. L. Rev. 691, 701 (1992);
108. Jeffrey N. Gordon, Governance Failures of the Enron Board and the New Information Order of Sarbanes-Oxley, 35 Conn. L. Rev. 1125, 1130-31 (2003);
109. see also Oren Bar-Gill & Lucian A. Bebchuk, Misreporting Corporate Performance 2-3 (Harvard Law and Econ. Discussion Paper No. 400, 2002, revised 2003), available at http://ssrn.com/abstract=354141. A second reason for using restatements is that, unlike other measures, restatements are regulated primarily by federal law and thus can serve as a basis for comparison across states. Since they are regulated by federal law, restatements could be symptomatic of firms' specific characteristics rather than state law. If restatements were regulated by state law, we could not determine whether a high restatement ratio in Nevada was the result of individual firm characteristics or Nevada's lax law. To be sure, liability for reporting is not completely neutral to state law. For instance, corporations have some limited power to indemnify for class actions. Yet, liability is mostly established by federal law. Corporations are not allowed to indemnify executives for losses that result from a Sarbanes-Oxley 304 clawback provision.
110. See Cohen v. Viray, 622 F.3d 188, 194-96 (2d Cir. 2010).
111. See Michael Ettredge et al., How Do Restatements Begin? Evidence of Earnings Management Preceding Restated Financial Reports, 37 J. Bus. Fin. & Acct. 332, 334, 351 (2010) (showing that restatements are preceded by balance-sheet bloating especially, but not only, when fraud is involved).
112. See Jap Efendi et al., Why do Corporate Managers Misstate Financial Statements? The Role of Option Compensation and Other Factors, 85 J. Fin. Econ. 667, 670, 700, 703 (2007);
113. See William R. Baber et al., Shareholder Rights, Corporate Governance and Ac-counting Restatement 4, 33-34, (Feb. 1, 2009) (unpublished manuscript, available at http://ssrn.com/abstract=760324).
114. See Simi Kedia & Thomas Philippon, The Economics of Fraudulent Accounting, 22 Rev. Fin. Stud. 2169, 2187-90 (2009);
115. See Ya Fang Wang & Hung-Chao Yu, Do Restatements Really Increase Substantially after the SOX? How Does the Stock Market React to Them? 31-32 (Jan. 23, 2008) (unpublished manuscript, available at http://ssrn.com/abstract= 1087083) (re-searching a sample of voluntary restatements and finding that the increase in restate-ments after SOX results from misstatements that occurred prior to SOX).
116. An Audit Analytics report attributes the decline in restatements to improvements in internal controls following SOX Section 404 and a 2008 recommendation by an SEC committee that the SEC relax its requirements for the type of errors that trigger restatements. See Audit Analytics, Restatements Disclosed by the Two Types of SOX 404 Issuers: (1) Auditor Attestation Filers and (2) Management-Only Report Filers 1, 4 (Nov. 2009), available at http://www.alacrastore.com/storecontent/Audit-Analytics-Trend-Reports- Restatements-By-SOX-404-Issuers-2033-14.
117. Though SOX clawback provisions may have contributed to the decrease in restatements and related agency costs, they are highly unlikely to have eliminated them entirely. These provisions have considerable limitations. Section 304, for example, does not provide a private right of action. See Neer v. Pelino, 389 F. Supp. 2d 648, 657 (E.D. Pa. 2005).
118. Id. at 699-700; John C. Coffee Jr., Reforming the Securities Class Action: An Essay on Deterrence and Its Implementations, 106 Colum. L. Rev. 1534, 1536-37 (2006).
119. See, e.g., Michael Klausner, Are Securities Class Actions "Supplemental" to SEC Enforcement? An Empirical Analysis 2-4, 9, 35 (Feb. 23, 2010) (unpublished manuscript, on file with the Virginia Law Review Association).
120. But see Guhan Subramanian, The Disappearing Delaware Effect, 20 J.L. Econ. & Org. 32, 33 (2004) (finding that between 1997 and 2002
121. See Lucian A. Bebchuk et al., Learning and the Disappearing Association Between Governance and Return 10, 35 (forthcoming J. Fin. Econ.), available at http://ssrn.com/abstract=1589731.
122. See Michal Barzuza, Self-Selection in the Market for Corporate Law (Oct. 20, 2011) (unpublished manuscript, on file with the Virginia Law Review Association).
123. Some statutes were enacted in response to pending threats of a hostile takeover of a local company. See, e.g., Roberta Romano, The Political Economy of Takeover Statutes, 73 Va. L. Rev. 111, 122-32 (1987) (describing two such occasions in the state of Connecticut). Delaware, on the other hand, adopted only one, relatively mild anti-takeover statute.
124. See Del. Code Ann. tit. 8, § 203 (2011).
125. cf. Lucian Arye Bebchuk & Allen Ferrell, A New Approach to Takeover Law and Regulatory Competition, 87 Va. L. Rev. 111, 162-64 (2001) (suggesting federal intervention in the switching rules among states).
126. See Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 Yale L.J. 2359, 2383-87 (1998) (arguing for replacing federal securities regulation with state competition);
127. Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 Yale L.J. 1521, 1526-29 (2005) (criticizing SOX as an unsuccessful intervention in corporate law).
128. Another consideration to take into account is that even if, theoretically, federal law could have done better, it is possible that practically it would not. Federal law can be influenced by lobbying in the same way some states' law is, and it is possible that currently this lobbying is less vigorous because firms now have lax law options. See Ronald J. Gilson et al., Regulatory Dualism as a Development Strategy: Corporate Reform in Brazil, the U.S., and the EU 4-5, 54 (Stanford Law and Econ, Olin Working Paper No. 390), available at http://ssrn.com/abstract=1541226 (arguing that regulatory dualism can be a solution to the "Olson problem" since it allows strong groups to have protective law without imposing it on all other firms).
129. See, e.g., Del. Code Ann. tit. 8, § 141(d) (2011).
130. See, e.g., Moran v. Household Int'l, 500 A.2d 1346, 1348, 1357 (Del. 1985) (up-holding under Delaware law the Shareholder Rights Plan).