Advantages of Competition for Corporate Charters

1. Advantages of Competition for Corporate Charters Roberta Romano Yale Law School and National Bureau of Economic Research Yale Law School International Symposium on: Assessing Corporate Law Reform in the Transatlantic Context Paris, October 21, 2003

2. Benefits of Competition • Improved incentives for promoters • Improved incentives for regulators • Innovation and experimentation • Bottom-up vs. top-down harmonization

3. How does the U.S. corporate charter market work? • Firms choose a statutory domicile from among 50 states and District of Columbia • Statutes are enabling • Substantial uniformity in content: significant reforms diffuse across states • Delaware is the dominant choice of public corporations

4. Reasons for Delaware’s success • Responsive to corporate concerns (first or second in corporate law reform) • Credible commitment to be responsive: 17% of total tax revenues from franchise fees • Investment in corporate-law specific assets (legal capital) • Constitutional requirement of supermajority to amend corporation code

5. Is the race to the bottom or the top? • Evidence toward the top • Event studies report positive price effects on change in domicile • Higher Tobin’s Q for Delaware firms (Daines 2001) • Evidence toward the bottom • Event studies of takeover statutes report negative price effects • Successful states have takeover statutes but Delaware is the exception • Conclusion: on balance, shareholders have benefited from competition

6. Reincorporation Event Studies

7. Selected Takeover Statute Event Studies: Multiple Statutes

8. Selected Takeover Statute Event Studies: Business Combination Statutes

9. Effects of Domicile differences on Antitakeover Protection

10. Issues for Competition in the EU (raised by ECJ’s rejection of real seat rule) • Development of incentives for nation states • Franchise fees • Competition among organizational forms • Tax on cross-border domicile changes • Concentrated ownership structures • Harmonization impetus • Potential for changes in company law • Nonshareholder wealth- maximizing objectives in company laws

11. E.U. Company Law Directives compared to U.S. Corporate Codes • Of 131 directive provisions, 95 in no U.S. states; 14 in all 50 states; rest random • Higher mandatory content in directives (e.g. minimum capital) • Rules long eliminated in U.S. (e.g. legal capital rules on distributions, par value) (Source: Carney 1996)

12. Conclusion • State competition produces innovative, responsive corporation codes • Best available evidence indicates that the product, for the most part, benefits investors • Race is to the top but non-linear (takeover statutes) • Short-run deviations face self-correcting pressure from competition, which would be absent in non-competitive context • Expected changes in EU company laws (on some dimensions may come closer to US codes) in absence of harmonization efforts, should benefit shareholders