Market Segmentation: The Rise of Nevada as a Liability-Free Jurisdiction
University of Virginia School of Law
August 31, 2011
98 Va. Law Rev. 935 (2012)
Virginia Law and Economics Research Paper No. 2011-07
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.
Number of Pages in PDF File: 66
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
Date posted: August 31, 2011 ; Last revised: March 5, 2013