Federalism in Corporate Chartering: A Comparative Analysis

RJ Gilson, H Hansmann & M Pargendler Corporate Chartering and Federalism: A New View Comments by Luca Luca Enriques Enriques University of Oxford Faculty of Law University of Oxford Faculty of Law ECGI ECGI

Summary of the paper Mkt for corp. law as a case of happenstance reg. dualism US firms choose politically malleable home state or market-oriented Delaware They choose home state if they prefer to retain political clout; DE if they prefer to commit to shareholder interests DE and home states are complementary, not in competition: [Competition is only at the margin] DE can be more market-oriented, home state more politically malleable than if no freedom of incorporation In Europe, Centros, SE may give way to same dynamics But no market-oriented member state has emerged so far and the little tiny action we ve seen is around (cost of formation and) co- determination

Happenstance regulatory dualism: US Firms choose politically malleable home state or market-oriented Delaware Predictions: Firms carrying more political clout (e.g. size, number of in-state employees) should disproportionately incorporate in home state Firms whose success depends more heavily on state- level policies should similarly do so (state-regulated industries?) Same for firms where private benefits are higher (again, by industry? Media? Oligopolistic industries?) But, is control really more contestable in Delaware (IPO companies v. installed base?)? Is tunneling so easier to get away with at non-DE corporations, given federal laws (cf. Yafeh et al.)? Excessive compensation is unchecked for in DE as well

Happenstance regulatory dualism: US DE and home states are complementary, not in competition: Does it allow for the prediction that this would be the outcome elsewhere? What is the role of vertical competition in the outcome of federalism in corporate law? There was little complementarity when it all began It all started with clearly more laissez-faire rules, that would allow incumbents more power (and tunneling opportunities), not less Holding shares in another company was key for NJ In other words, impossible to tell whether DE would have emerged as market friendly without federal players

Happenstance regulatory dualism: EU Centros, SE may lead to same dynamics And we have seen some action, but not much anyway Most importantly, no market-oriented member state has emerged so far So what we have is just regulatory arbitrage without regulatory (competition or) dualism Which raises the question of what the preconditions are for regulatory dualism to emerge as an outcome of leaving free choice of incorporation. E.g. (Enriques 2005): 1. Good money to be made from becoming attractive 2. Primitive corporate laws 3. Time-lagged vertical constraints

Intentional regulatory dualism DE dominance explains why little intrastate regulatory dualism (other than quixotic ND attempt): Easy for DE to react Harder to credibly commit for the home state? In DE (Hansmann 2006): via other business forms and via menus (Blasius > but dual class shares; duty of loyalty mandatory > but possibly not so important given fed law; BUT: litigation). But can t compete on special ex post ad hoc solutions Why no intra-state Delaware within the EU? Other than for startups (formation costs) Very hard (and costly) to design if enforcement is key