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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. Benefits of Competition.

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Advantages of Competition for Corporate Charters

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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


Benefits of Competition

  • Improved incentives for promoters

  • Improved incentives for regulators

  • Innovation and experimentation

  • Bottom-up vs. top-down harmonization


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


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


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


Reincorporation Event Studies


Selected Takeover Statute Event Studies: Multiple Statutes


Selected Takeover Statute Event Studies: Business Combination Statutes


Effects of Domicile differences on Antitakeover Protection


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


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)


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


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