A study by two Harvard Law School researchers provides evidence that the vigorous competition among states over corporate charters – competition that many believe prompts rules that benefit shareholders – is largely a myth. This evidence has led the researchers to call for federal law to provide a federal incorporation option, as well as to enable shareholders to initiate and vote to approve corporate reincorporation to a different jurisdiction. The study – by Professor Lucian Bebchuk and Olin Fellow Assaf Hamdani – will soon appear in the Yale Law Journal.
The dominant state attracting incorporations of publicly traded companies is, and has long been, the small state of Delaware. Although Delaware is home to less than one-third of 1 percent of the U.S. population, it plays a central role in setting corporate governance rules for the nation’s publicly traded companies.
“The widely accepted justification for the existing state of affairs is that Delaware’s dominant role is a product of its winning a competition among states for providing desirable corporate law rules,” says Bebchuk.
Challenging the conventional wisdom, the new study questions the widely held belief that states vigorously compete for incorporations. Although roughly half of the publicly traded companies are incorporated outside Delaware, the study documents that Delaware does not face any significant competitors in the business of attracting and serving out-of-state incorporations. The vast majority of corporations that do not incorporate in Delaware do not go to any other player in the out-of-state incorporation market but simply remain incorporated in the state where they are headquartered.
Bebchuk and Hamdani argue that, given the weakness of existing competition, state competition could in all likelihood be improved by using “choice-enhancing” federal intervention. In particular, they argue, it would be desirable for federal law to provide a federal incorporation option, as Canada’s federal law does. It also would be advantageous to enable shareholders to initiate and approve via a vote reincorporation to another state. Such federal intervention, they conclude, could introduce substantial and healthy competition in this market to the benefit of investors.