INTRODUCTION II. DELAWARE'S GLOBAL BRAND A. Brands and Competitive Advantage 1. Competitive Advantage 2. Branding Effects a. Suppliers b. Consumers 3. Brand Extensions B. Theoretical Concepts Related to Delaware's Brand 1. Trust 2. Reputation 3. Credible Commitment 4. Legitimacy C. The Market for Corporate Law 1. The Internal Affairs Doctrine 2. Domestic Market Dynamics a. Firm Incorporation Decisions b. State Business Courts 3. Global Market Dynamics a. Multinational Firm Subscription of Delaware Law b. Delaware Courts as an International Dispute Forum c. Modeling Delaware-Style Adjudication and Precedents i. Adjudication ii. Precedents D. Delaware Courts 1. Two Courts and Ten Judges a. Court of Chancery b. Delaware Supreme Court 2. Structural Safeguards a. Expertise and Impartiality i. Judicial Selection Process ii. Political Balancing b. Finality and Certainty i. Unanimity Norm ii. Certified Question Procedures 3. Principled Decision Making III. GLOBAL THREAT IMPLICATIONS A. The Importance of Delaware Courts for Complex Global Business Disputes 1. Are Courts the Proper Forum? 2. Imagining a World with No Courts 3. Delaware's Courts as a Mediator Among Interest Groups B. Delaware's Contribution to United States Corporate Governance in the Face of the Common Global Threat 1. The Salience of Reputation 2. Credence Characteristics of Corporate Reform 3. Delaware's Key Contribution I. INTRODUCTION
Delaware's legal regime is akin to a global brand, and the Delaware incorporation decision resembles the purchase of a branded product. (1) In a sense, the Delaware brand is to corporate law what the Apple brand is to personal computers. Whereas the personal computer has become a commodity, Apple products, nonetheless, continue to function like luxury goods--generating profits, withstanding periods of turbulence, and securing future demand. Similarly, Delaware's ability to provide a unique branded customer experience partly explains its dominant performance within a high-end market segment composed of large, publicly traded firms. Approximately sixty percent of U.S. publicly traded corporations are incorporated in Delaware, making it the nation's corporate capital. (2) And "[f]or at least half a century the Delaware courts have been the de facto 'national' U.S. corporate law courts." (3) Despite its preeminence as a site of incorporation and corporate litigation, Delaware ranks as the forty-fifth most populous state in the United States and forty-ninth in physical size. (4) Delaware's dominance is one of the most debated topics among business law scholars. Historical and present theories of regulatory competition overwhelmingly focus on, and at times overstate, the potential domestic threats to Delaware's longstanding dominance, such as interstate competition for charters and federal preemption. A common theme in the regulatory competition literature is the tension between the respective roles of the federal government and the state of Delaware in the regulation of corporate governance. From a global perspective, this approach is shortsighted because the destinies of Delaware and the nation are intertwined in the face of the common threat of global competition. This Article fills this void by exploring the under-examined long-term threat to Delaware's dominance: global competition. (5) Although scholars have addressed the impact of globalization on securities regulation, the parallel impact on Delaware's role, as a de facto national regulator, remains largely underdeveloped. (6) Delaware's global narrative is relevant to important issues, namely (i) the importance of Delaware's courts in resolving complex business disputes with transnational implications, and (ii) the ways in which Delaware's global brand contributes to the strength of U.S. corporate governance by conferring a competitive advantage on multinational firms. Ultimately, this Article posits that Delaware's key contribution to U.S. corporate governance is the production of substantially judge-made corporate law--a public good providing dynamic guidance to multinational firms and practitioners as well as a deterrent for wayward business behavior.
Despite two economic disasters since the new millennium and resultant federal legislation (i.e., Sarbanes-Oxley and Dodd-Frank), Delaware's brand equity remains intact. Delaware's market share has arguably grown during the most recent period of economic turbulence. (7) Chief Justice Leo Strine of the Delaware Supreme Court asserts that "Delaware's comparative stability has made it even more attractive to those who form entities in the United States, as shown by the fact that 83[%] of domestic initial public offerings (IPOs) last year involved Delaware entities." (8) Notwithstanding, Chief Justice Strine also acknowledges "increasing globalization of the economy and the perception that the United States is a high-cost and slow place to resolve business disputes present two of the most important challenges Delaware must address." (9)
Delaware's unique specialized court system is perhaps the key factor contributing to the strength of its global reputation. Globally, multinational corporations present courts with a range of challenging legal issues: corporate governance, mergers and acquisitions, finance, compliance, risk management, and other commercial matters. By routinely deciding these business disputes, Delaware courts--through well-established precedents--influence domestic and foreign courts as well as corporate stakeholders worldwide. (10) In today's competitive global business environment, however, multinational firms and investors have more alternatives when considering where to entrust investments, raise capital, and adjudicate disputes.
More transactions and capital are moving offshore. Notably, emerging markets "have developed sophisticated and highly liquid financial centers that now finance many of the world's largest transactions and attract the participation of U.S. [and foreign] investors." (11) Meanwhile, corporate tax-inversion strategies encourage foreign incorporations as a mechanism to reduce the tax burden on income earned abroad. (12) A future decline in U.S. capital markets could hasten this trend. In this environment, international firms and investors may decide to bypass U.S. incorporation or listing on a U.S.-based exchange altogether. (13) They are also more likely to eschew litigation in Delaware's courts for litigation and especially alternative dispute resolution in foreign jurisdictions. (14) This pattern could weaken the overall impact and reputation of U.S. corporate governance. The threat to Delaware's dominance is no longer a story about corporate migration to other states or federal preemption. The new narrative concerns global competition from nascent foreign jurisdictions and markets. Delaware's global threat is a confluence of factors, some of which fall outside the control of government actors.
Global forces threaten two separate but related aspects of Delaware's dominance--incorporations and corporate litigation that both contribute to the creation of Delaware's chief product, corporate law. Incorporation is company driven. Meanwhile, plaintiffs drive litigation. In the standard private contractual context, arms-length parties can use an array of devices--forum selection clauses, choice of law provisions, arbitration provisions, and fee-shifting provisions--to influence litigation. Presumably, management in publicly traded firms can also make use of these devices for intra-corporate disputes through charter and bylaw amendments to address issues such as multi-jurisdictional litigation, strike suits, and costs. (15) In the intra-corporate dispute context, however, shareholder consent is not a direct analog to arms-length contractual consent because it may be weakened by collective action problems and procedural hurdles. (16) According to some commentators, management's use of such devices, such as intra-corporate forum selection clauses and especially mandatory arbitration clauses, "implicate the relationship between shareholders and managers" and theoretically may "disadvantage shareholder efforts to engage in a rigorous monitoring of management agency costs [through class action and derivate litigation]." (17) Widespread use of these devices may also potentially impact Delaware's reputation and legitimacy among various corporate constituents.
Given the increased competition for capital in the global economy, Delaware's global brand is especially important to the overall strength of U.S. corporate governance and the United States' jurisdictional preeminence. (18) In a global context, Delaware's and the nation's destinies are intertwined. (19) A weak Delaware brand could reduce incentives for foreign firms to invest and resolve their corporate disputes in the United States. (20) The U. S. corporate governance system is a mixed system characterized by the interaction of state law competition with federal intervention. (21) Despite differences in scope (i.e., external trading and disclosure versus internal affairs), federal securities laws and state corporate law share a common core concern for investor protection. 22 This relationship is not as fragmented and adversarial as some legal scholars suggest, but rather "symbiotic" and complementary. (23)
From a demand-side perspective, large, publicly traded multinational firms that incorporate in the United States, in essence, purchase a package that most likely includes Delaware corporate law, federal securities laws, and other types of business regulation (e.g., tax, anti-corruption, etc.). (24) Traditional economic theory asserts that consumers will migrate to jurisdictions providing regulations "most consonant with their preferences." (25) On the supply-side, Delaware functions as a de facto national regulator that, like the Securities and Exchange Commission (SEC), supplies law to increasingly mobile firms...
Delaware's global threat.
|Author:||Simmons, Omari Scott|
|Position:||Corporate law model dominance|
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