At his new Venturpreneur site, Gordon Smith chimes in on the Delaware v. California discussion Mike O'Sullivan of Corp Law Blog and I have been having. (HERE for Smith; Here for O'Sullivan; Here for me):
Steve Bainbridge offers another content-driven explanation for Delaware. His purpose is not so much to explain Delaware as to explain why not California (as if the recent recall election isn't reason enough!), but his argument rests on assumptions about the importance of content. He writes provacatively: "California can indulge the luxury of allowing its corporation laws to reflect the overall anti-business/anti-capitalist leanings of the state's dominant left-liberal political elites. In other words, California doesn't retain so few incorporations because it has no antitakeover statute; California has no antitakeover statute because it retains so few incorporations ... and doesn't care." One problem with this argument is that takeover laws do not seem to be an important determinant in the incorporation decision. (See Rob Daines' recent work on this.) Another, more serious, problem is that it does not explain the relative lack of success of all 48 other states in the hunt for corporate charters. Most of those states have anti-takeover statutes -- indeed, most have statutes much more protective of managers than Delaware's -- and still they fail to attract firms from outside their state.
I don't agree with Gordon's assessment of the empirical evidence. The most recent empirical study is Bebchuk and Cohen's paper Firms' Decisions Where to Incorporate. Bebchuk and Cohen find that "the fraction of local firms that each state retains is correlated with the number of antitakeover statutes that the state has." (21). A finding even more pertinent to Smith's argument is Bebchuk and Cohen's result "that offering a stronger antitakeover protection is also helpful in attracting out-of-state incorporations." States that do so do not do as well as Delaware, but they do better at attracting out-of-state firms than states with no antitakeover law. I will have some critical things to say about Bebchuk and Cohen's paper when I post my comments from the Vanderbilt conference (probably on Saturday), but these findings strike me as persuasive evidence that content matters a lot. Content is not all that matters -- other factors were suggested by the Coors reincorporation proxy blawgged a while back and there is a trumping factor I'll identify in my post this weekend -- but it does matter.
