Adjudicative Jurisdiction and the Market for Corporate Charters

Abstract

A majority of scholars seem to believe that at least on balance, state competition for corporate charters benefits rather than harms investors. Once one embraces free choice as beneficial, however, it is logical to ask whether the federal legal framework can be modified in a way that enhances charter competition and hence increases the relevant benefits. Curiously, that issue has attracted comparatively little attention. In particular, the existing literature all but ignores the question of whether the federal rules governing the allocation of adjudicative jurisdiction are efficient against the background of charter competition. That is all the more surprising, because it has long been known that the need to litigate in the state of incorporation may well discourage smaller corporations from choosing the state corporate law they find most efficient. The obvious question, therefore, is whether federal law should intervene in order to reduce that exposure. This article argues that the answer has to be a positive one. Indeed, the federal legislator would be well advised to take two steps with the aim of reducing the need for corporations to litigate in the state of incorporation: First, federal law should ensure that corporations are not exposed to suits brought by third party plaintiffs in the state of incorporation, if the corporation's statutory domicile and perhaps the residence of the plaintiff are the only factors connecting the case with that state. Second, federal law ought to prevent the real seat state from closing its courts to litigation concerning the internal affairs of pseudo-foreign corporations.

Keywords: charter competition, regulatory competition, choice of forum, forum selection clause, jurisdiction, race to the top, race to the bottom, pseudo-foreign corporation, state competition, exposure to litigation, litigation, close corporations, full faith and credit clause

JEL Classification: K0, K00, K34, K4, K40, K41, H70, H71, H77, K2