Delaware’s Dominance, Wyoming’s Dare. New Challenges, Same Outcome?
43 Pages Posted: 18 Feb 2021 Last revised: 30 Aug 2021
Date Written: August 28, 2021
Despite an increased criticism, Delaware’s dominance has not been experiencing a significant decline: as of today, 67.8% of Fortune 500 companies are still incorporated in this jurisdiction. Nevada is known as Delaware’s most important competitor, with an aggressive strategy that overrode the effort of any other jurisdiction. Yet, its success has been limited to a specific market segment: small firms with low institutional shareholding and high insider ownership.
Scholars suggest several explanations for both the rise and the staying power of Delaware. These explanations are essentially subsumed under the credible commitment theory and the network theory. According to the former, investors rely upon Delaware commitment towards the business community; whilst the latter emphasises how Delaware is profiting from the position achieved. The credible commitment theory and the network theory sometimes overlap and combine. Both predict that Delaware is hard to dethrone.
In recent years, commentators have argued that this hegemony might be endangered by two different threats: the migration of cases induced by Delaware courts’ response to overlitigation; and the invasive growth of federal regulation—in particular, the possible introduction of a federal incorporation. Yet, criticism and predictions on Delaware’s decline are recurring and always follow the same pattern. Unsurprisingly, the migration turned out to be marginal; and the debate on a federal incorporation was revived in conjunction with a political campaign but fizzled out afterwards.
I contend that a mounting challenge to Delaware’s dominance is mostly going off the radar. Wyoming is targeting a new segment of the market for corporate charters: i.e., cryptocurrency businesses. This jurisdiction is attempting to attract these incorporators by enacting liberal legislation and providing their companies with a safe harbour.
Wyoming’s aggressive stance provides the motivation to canvass causes and consequences, criticism and challenges to Delaware’s dominance. The investigation might generate insights as to why Wyoming’s strategy will succeed or fail. In fact, this market segmentation approach is the same tactic that Nevada adopted, though Wyoming is applying the strategy to a sector that has meaningful growth potential and is pushing it to the point of introducing exemptions to state securities laws and banking regulation.
The application of the credible commitment theory and of the network theory to Wyoming’s approach suggests that the strategy of building a reputation and proving a commitment to tech-incorporators is correct but is also conditioned upon a confluence of events which also needs time. Wyoming should develop an expertise that is too costly to be easily replicated by other jurisdictions and earn a share of the charters market before federal legislature and regulatory bodies pre-empts Wyoming’s law for cryptocurrencies.
To the extent that Wyoming’s strategy proves to be effective, it will gain this jurisdiction the lead only in the blockchain segment of the market, whilst Delaware will continue to dominate the rest of it.
In light of all this, Wyoming’s approach might be a dare. Yet, it is also the most promising—maybe the only possible—strategy to challenge Delaware’s dominance at the present time.
(27(1) Fordham Journal of Corporate & Financial Law forthcoming 2021)
See also https://www.law.ox.ac.uk/business-law-blog/blog/2021/03/delawares-dominance-wyomings-dare-blockchain-companies-and-market
Keywords: Delaware's dominance, corporate charters market, incorporation, Wyoming, Nevada, Vermont, Blockchain companies, Cryptocurrency, Accountable Capitalism Act, Federal incorporation
JEL Classification: G30, G38, K20, K22, N20, N21, N22
Suggested Citation: Suggested Citation