Democracy and Delaware: The Mysterious Race to the Top/Bottom

Abstract:     
Unlike ordinary human citizens, corporations may choose the law that governs their most fundamental acts of self-governance. Corporate law scholars have devoted many pages to debating whether the surrender of corporate law to a market for corporate reincorporation generates substantively good or bad results - a race to the top or a race to the bottom. Recently, however, scholarship has begun to consider more seriously the underpinnings to the race, with some doubting whether the market for law is as competitive as the standard models presume.

This article suggests a different problem with the standard model: states, unlike producers in a competitive market, are not price takers. States can determine the legal framework within which the competition takes place; if their production of corporate law was largely a search for corporate tax revenue, the large commercial states could long ago have ended Delaware's dominance and the race by abandoning the internal affairs doctrine.

If the race is not inevitable, it is neither to the top nor the bottom. Instead, it is a voluntary surrender of self-government to unelected corporate officials who are bound by the norms of their office - norms themselves created by the race system - to use the race in particular, and often unattractive, ways. Re-politicizing corporate law would allow us to see a series of difficult value choices that are currently concealed but ought to be the subject of political debate.

Keywords: corporate, race, Delaware, top, bottom, lemons, choice of law, self-governance, democratic theory

JEL Classifications: D72, H74, G34, K23

Accepted Paper Series