Download This PaperDelaware's Dominance and the Future of Organizational Law
55 Ga. L. Rev. (forthcoming 2021)
University of Florida Levin College of Law Research Paper No. 20-24
82 Pages Posted: 6 Apr 2020 Last revised: 5 May 2021
Date Written: March 11, 2020
Abstract
Delaware dominates the market for business formations. Two main theoretical explanations have been offered to justify Delaware’s continued success. One focuses on the state’s credible commitment to producing responsive organizational law in the future. The other looks to the network effects that continue to encourage new formations once Delaware already dominates. Yet, other than continued observation of Delaware’s dominance, little empirical support exists for either theory.
This Article empirically tests entrepreneurs’, investors’, and lawyers’ appetite for Delaware’s credible commitment. I use the recent Delaware Supreme Court decision of Gatz Properties v. Auriga Capital Corp., which was a negative shock to Delaware’s credible commitment to responsive LLC organizational law, to analyze the demand for Delaware’s credible commitment to responsive organizational law. I find two major shifts following Gatz: (1) a significant and persistent decrease in the value of publicly traded Delaware LLCs and (2) a lower rate of private LLC formation in Delaware relative to other states. Notably, these decreases do not reverse despite prompt reparative action from the Delaware legislature. In addition to providing empirical support for the credible commitment theory, these results offer important policy implications for the present condition of organizational law and the future of state competition for business formations.
Keywords: Delaware, corporate law, state competition, network theory
JEL Classification: k22
Suggested Citation: Suggested Citation
Peter Molk (Contact Author)
University of Florida Levin College of Law ( email )
P.O. Box 117625
Gainesville, FL 32611-7625
United States