Michal Barzuza

This paper exposes and analyzes the rise of Nevada as an almost liability-free jurisdiction. Contrary to conventional wisdom – that Nevada imitates Delaware law but does not make any profits from competing with it – Nevada has embarked on a lucrative strategy of market segmentation with a differentiated product – a shockingly lax corporate law.

Market segmentation with lax law has allowed Nevada to overcome significant barriers to entry. By tailoring its product to a particular subset of the market, Nevada gained market power in a segment that is not served by Delaware. Nevada’s clear, no-liability law makes Delaware’s competitive advantages less significant and leaves it unable to effectively respond.

Firms may incorporate in Nevada for a variety of reasons that include extracting private benefits, saving on incorporation taxes, and minimizing litigation costs. The data, however, suggest that at least some firms choose Nevada for the first, less benign reason.

Normatively, policy makers should find it worrisome that high agency costs firms, which would benefit the most from regulation, disproportionally choose Nevada’s lax law. Another reason for concern is that Nevada, by creating a competitive pressure towards the bottom, may be dragging Delaware down.

This Article is the first to examine systematically state antitakeover law outside Delaware. It conducts a research of all available cases to find whether states with pill endorsement and other constituency statutes follow Delaware’s enhanced fiduciary duties or replace them with weaker standards. It finds substantial variations from Delaware’s law. 

Unlike Delaware, most of the states with relatively strong other constituency and pill endorsement statutes do not impose enhanced fiduciary duties on managers in change-of-control situations. Instead, they apply only the ordinary business judgment rule to management’s use of antitakeover tactics.

This Article has implications for antitakeover law, the market for corporate law, and the desirability of federal intervention. In particular, it provides support for adopting Delaware’s enhanced fiduciary duties—Unocal, Revlon, and Blasius—as federally imposed minimum standards. This would not only improve state antitakeover law outside Delaware, but may also result in improvements to Delaware law since Delaware is currently dragged down by other states.

This Article illuminates the interdependence between the structure of Delaware’s franchise tax and Delaware’s corporate law. It makes three major arguments. First, different franchise tax structures would create different regulatory incentives for Delaware. Second, the current structure of Delaware’s franchise tax law is suboptimal. A franchise tax that is sensitive to firm performance would be superior to Delaware’s current franchise tax. It would align Delaware’s incentives with those of shareholders and induce Delaware to offer corporate law that maximizes shareholder value. It will have this effect even if Delaware faces no competition from other states over incorporations and even if shareholders are passive. Third, Delaware may not have sufficient incentives to reform its franchise tax law. The Article derives policy implications.