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Corporate Chartering and Federalism: A New Perspective on Regulatory Dualism

This paper examines the phenomenon of regulatory dualism in corporate chartering, focusing on the choices made by US firms between politically malleable home states and market-oriented Delaware. It explores the complementarity between Delaware and home states, and considers the potential for similar dynamics in Europe. The paper also discusses the factors that contribute to the emergence of regulatory dualism and questions the role of vertical competition in corporate law federalism.

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Corporate Chartering and Federalism: A New Perspective on Regulatory Dualism

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

  2. 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

  3. Happenstanceregulatorydualism: 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

  4. Happenstanceregulatorydualism: 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

  5. Happenstanceregulatorydualism: 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): • Good money to be made from becoming attractive • “Primitive” corporate laws • Time-lagged vertical constraints

  6. Intentionalregulatorydualism • 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

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