United States law famously allows corporations to choose the applicable corporate law by incorporating in the state of their choice. In theory, this allows states to compete for corporate charters. But to what extent do states actually compete?
Delaware clearly makes substantial efforts to attract corporations. It is debated, however, whether this is true for other states. Prominent corporate law scholars such as Professors Lucian Bebchuk, Assaf Hamdani, Marcel Kahan, and Ehud Kamar have argued that states other than Delaware have not made significant efforts to entice incorporations. By contrast, Professor Roberta Romano has asserted that competition in the charter market is alive and well as evidenced, inter alia, by Nevada’s efforts to become the “Delaware of the West.”
In Market Segmentation: The Rise of Nevada as a Liability-Free Jurisdiction, Professor Michal Barzuza makes an important contribution to this debate. She undertakes the first in-depth study of Nevada’s role in the charter market and offers a number of novel, interesting, and provocative conclusions.
Her analysis has three main components. To begin, Professor Barzuza shows—very persuasively—that over the last decade or so Nevada has actively competed for corporate charters, managing to gain a non-trivial 6.66% share in the market for out-of-state incorporations in 2008.
Moreover, Professor Barzuza offers a simple explanation for how Nevada has achieved this success; namely, by offering extremely lax law. Of course, Nevada has long enjoyed a reputation for offering pro-managerial norms. Professor Barzuza’s assessment is much more drastic. According to her, Nevada has adopted “a no-liability corporate law.”
Finally, Professor Barzuza’s article analyzes the implications that her analysis has for the debate on regulatory competition. Most importantly, she argues that the rise of Nevada as a liability-free jurisdiction implies a previously unrecognized cost of regulatory competition: such competition allows those firms most in need of strict norms—the scoundrels of corporate America—to find refuge in Nevada, where the law is particularly lax, letting them exploit minority shareholders and impose costs on society as a whole.
There is much in Professor Barzuza’s rich analysis that is convincing, including many aspects to which this brief Essay cannot respond. In particular, I am wholly persuaded that Nevada is making active efforts to compete in the charter market. By contrast, I am not convinced that Nevada’s law on director and officer liability is shockingly lax and that this implies a substantial drawback of regulatory competition.