Market Segmentation: The Rise of Nevada as a Liability-Free Jurisdiction

66 Pages Posted: 31 Aug 2011 Last revised: 5 Mar 2013

See all articles by Michal Barzuza

Michal Barzuza

University of Virginia School of Law; ECGI

Date Written: August 31, 2011

Abstract

This Article exposes and analyzes the rise of Nevada as an almost liability-free jurisdiction. Without much public attention, Nevada has embarked on a strategy of market segmentation with a differentiated product — a shockingly lax corporate law. Nevada law generally protects directors and officers from liability for breaches of the duties of loyalty, good faith, and care that are widely believed to be staples of U.S. corporate law. Nevada highlights these broad protections as a reason to incorporate there rather than in Delaware, the dominant state in the interstate market for incorporations. Market segmentation with lax law has allowed Nevada to overcome significant barriers to entry. By tailoring its product to a particular subset of the market, Nevada gained market power in a segment that is not served by Delaware. Nevada’s clear, no-liability law makes Delaware’s competitive advantages less significant and leaves it unable to respond effectively. In offering lax corporate law, Nevada capitalizes on its reputation as a lax regulator. Firms may incorporate in Nevada for a variety of reasons that include extracting private benefits, saving on incorporation taxes, and minimizing litigation costs. The data, however, is consistent with some firms choosing Nevada for the first, less benign reason.

Normatively, policymakers should find it worrisome if high agency cost firms, which would benefit the most from legal oversight, disproportionally choose Nevada’s lax law. Another reason for concern is that Nevada may create competitive pressures towards the bottom.

Keywords: Corporate Law, Nevada, State Competition, Duty of Loyalty, Duty of Good Faith, Race to the Top, Race to the Bottom, Delaware, Market Segmentation

JEL Classification: G30, G34, K22, K20

Suggested Citation

Barzuza, Michal, Market Segmentation: The Rise of Nevada as a Liability-Free Jurisdiction (August 31, 2011). 98 Va. Law Rev. 935 (2012), Virginia Law and Economics Research Paper No. 2011-07, Available at SSRN: https://ssrn.com/abstract=1920538 or http://dx.doi.org/10.2139/ssrn.1920538

Michal Barzuza (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

HOME PAGE: http://https://www.law.virginia.edu/faculty/profile/mb9fg/1144316

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://https://ecgi.global/users/michal-barzuza

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,198
Abstract Views
8,533
Rank
32,308
PlumX Metrics