Delaware's Dominance and the Future of Organizational Law
60 Pages Posted: 6 Apr 2020 Last revised: 5 Aug 2020
Date Written: March 11, 2020
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 a state already dominates. Yet other than continued observation of Delaware’s dominance, there has been little empirical support for either theory.
This Article empirically tests entrepreneurs’, investors’, and lawyers’ appetite for Delaware’s credible commitment. I use the state’s recent 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 the Gatz decision: a significant and persistent decrease in the value of publicly traded Delaware LLCs, and 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