Thursday, March 30, 2023

Delaware corporation law is dominant in America. If the effects of efficient rules are incorporated as information by an efficient capital market, the preferred choice of Delaware could evince the market’s deliberate selection of better laws. Superior law as a product of state competition is the central argument for corporate law federalism. Despite the spirited debate on the race to the bottom or the top, a recognition of a “Delaware premium” to firm value is scant. This Article conducts a longitudinal study of valuations. It analyzes the market values and stock prices of public Fortune 500 companies over the five-year period from 2015 to 2019. About one-third of public Fortune 500 companies are chartered in other states, including some of America’s largest, most important companies. This Article conclusively shows that Delaware corporations are not valued more than those chartered in other states. There is no actionable Delaware premium.

The conclusion here is counterintuitive, given the dominant orthodoxy and broad commitment to the Delaware brand by academics and elite corporate lawyers. But the conclusion must be inevitable and true. Based on the measuring rod of efficiency, the irrelevance of Delaware law is inescapable for two reasons grounded in basic concepts of economics and finance. First, the real factors of value are in the realm of business and economics. The most intuitive and best explanation for the cause of value is how well a firm executes its business strategy in the economy and the market, i.e., making and selling widgets. Second, if a Delaware trade exists, sophisticated market players—including public companies, lawyers, bankers, activist shareholders, traders, and security analysts— would not have missed the easy law-based financial arbitrage. The prevailing story that states compete for quality in our system of federalism and that Delaware has won the “race to the top” is a false narrative. Empirical confirmation of the absence of a Delaware premium would bring about a Kuhnian moment of a revelation that core ideas in corporate law—i.e., Delaware’s efficiency justifies federalism, Congress should not interfere (with Delaware), states are laboratories of innovation and compete in a race to the top, and inter-state differences in corporation law matter to efficiency—do not have empirical bases. The dominant orthodoxy is simply an article of faith among its proponents.

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