Delaware Law as Lingua Franca: Theory and Evidence
Brian J. Broughman
Indiana University Maurer School of Law
Jesse M. Fried
Harvard Law School; European Corporate Governance Institute (ECGI)
Darian M. Ibrahim
University of Wisconsin Law School
January 1, 2014
Harvard Public Law Working Paper No. 12-38
Why would a firm incorporate in Delaware rather than in its home state? Most explanations focus on the inherent features of Delaware corporate law that can make it more attractive than home-state law for shareholders (or insiders). We offer an alternative account: a firm may choose Delaware law simply because it is familiar to, and thus can serve as a “lingua franca” for, both in-state and out-of-state investors. Analyzing the incorporation decisions of 1,850 VC-backed startups, we find evidence that firms often choose Delaware corporate law as a lingua franca. Indeed, this lingua-franca effect appears to be more important than other factors influencing domicile, such as corporate-law flexibility and the quality of a state’s judiciary. Our study contributes to the literature on the market for corporate charters by providing evidence that Delaware’s continued dominance is partially driven by familiarity effects rather than entirely due to the inherent features of its law.
Number of Pages in PDF File: 31
Keywords: incorporation, domicile, Delaware, corporate governance, entrepreneurs, founders, startups, corporation, corporate law, charters, venture capital
JEL Classification: K22, G24, G34working papers series
Date posted: November 4, 2012 ; Last revised: January 3, 2014
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