Corporate Charter Competition
102 Minnesota Law Review (Forthcoming)
60 Pages Posted: 22 Feb 2017
Date Written: February 21, 2017
The corporate charter competition has dominated the corporate law literature for four decades. This Article draws on the theoretical and empirical insights from that vast literature to present a systems analysis of the competition. The analysis shows the competition to be a system composed of three subsystems, joined by the internal affairs doctrine. The subsystems are those by which (1) corporations choose incorporation states, (2) states decide what packages to offer, and (3) states and stakeholders choose the courts that interpret and enforce corporate law. The analysis suggests that the standard account of charter competition should be revised in five major respects. First, the charter competition is neither dormant nor merely a competition between Delaware and the corporations’ home states. Other states not only compete, but have captured nineteen percent of the public company charter market. Second, charter competition should be modeled not as an attempt to strike the right balance between managers and shareholders, but as a delegation of power to managers who then strike that balance through implicit contracting. That reconceptualization leads to the insight that states do not need corporate law expertise to compete for incorporations. Third, corporate charter competition as a system is neither a race to the top or the bottom. It is capable of generating only one result: deregulation. What remains of corporate law is not regulation, but mere obfuscation. Fourth, Delaware employs a principally judicial strategy in the competition. That strategy, which requires Delaware to attract litigation as well as incorporations, is faltering. The shift to arbitration of shareholder litigation that is already in progress may strip Delaware of its competitive advantage and eliminate its monopoly. Fifth, regardless of what happens to Delaware, for the foreseeable future charter competition will remain a highly stable system that is effectively beyond democratic control.
Keywords: corporations, Delaware, charter competition, internal affairs doctrine, business associations, systems analysis, externalization
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