Price Discrimination in the Market for Corporate Law

This Article shows how Delaware uses its power in the market for incorporations to increase its profits through price discrimination. Price discrimination entails charging different prices to different consumers according to their willingness to pay. Two features of Delaware law constitute price discrimination. First, Delaware's uniquely structured franchise tax schedule assesses a higher tax to public than to nonpublic firms and, among public firms, to larger firms and firms more likely to be involved in future acquisitions. Second, Delaware's litigation-intensive corporate law effectively price discriminates between firms according to the level of their involvement in corporate disputes. From the perspective of social welfare, price discrimination between public and nonpublic firms is likely to enhance efficiency (although the efficiency effect of franchise tax price discrimination among public firms is indeterminate). By contrast, price discrimination through litigation-intensive corporate law is likely to reduce efficiency

Beyond Competition for Incorporation

This Article documents and analyzes a powerful form of regulatory competition - competition for investments - that has transformed national corporate laws in the European Union in recent years. Unlike the competition for incorporations that shapes Delaware corporate law and, by some accounts, the corporate laws of other American states as well, competition for investments sparks innovation in corporate law when firms cannot incorporate outside the jurisdiction in which they operate, and is designed to attract investments in local businesses rather than incorporations by foreign businesses. The high political payoffs that await successful participants in the competition for investments enable them to overcome opposition that could stifle competition for incorporations. And, together with the fact that no single jurisdiction in the European Union can dominate the market for investments, these payoffs drive multiple jurisdictions, including large ones, to compete. Allowing firms to incorporate outside the jurisdiction in which they operate, as a recent series of European Court of Justice rulings requires, may or may not breed competition for incorporations. Either way, however, as long as the competition for investments does not lose its steam, the effect on firms will be quite the same. Judging from the reforms that the competition for investments has fueled so far, the effect will be positive

The Myth of State Competition in Corporate Law

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Bundling and Entrenchment

Because corporate charters can be amended only with shareholder approval, it is widely believed that new charter provisions appear in midstream only if shareholders favor them. However, the approval requirement may fail to prevent the adoption of charter provisions disfavored by shareholders if management bundles them with measures enjoying shareholder support. This Article provides the first systematic evidence that managements have been using bundling to introduce antitakeover defenses that shareholders would likely reject if they were to vote on them separately. We study a hand-collected dataset of 393 public mergers announced during the period from 1995 through 2007. While shareholders were strongly opposed to staggered boards during this period and generally unwilling to approve charter amendments introducing a staggered board on a stand-alone basis, the deal planners often bundled the mergers we study with a move to a staggered-board structure. In mergers in which the combined firm was one of the parties, a party’s odds of being chosen to survive as the combined firm were significantly higher if it had a staggered board and the other party did not. Similarly, in mergers that combined the parties into a new firm, the new firm was significantly more likely to have a staggered board than the merging parties. Overall, we demonstrate that management has the practical ability to use bundling to obtain shareholder approval for pro-management arrangements that shareholders would not support on a stand-alone basis. We discuss the significant implications our findings have for corporate law theory and policy