Leveraging Corporate Law: A Broader Account of Delaware’s Competition

Delaware is widely known for providing the U.S. corporate law that governs most large, publicly traded companies.  However, the economic imperatives prompting this have also led Delaware to explore opportunities in related though distinct fields, effectively leveraging its corporate law advantage to expand and diversify the state’s revenue streams.  In a recent paper, I assess Delaware’s competitive position amidst this broader landscape.

The policy merits of the competition among states to incorporate companies remain contested. Some see a deregulatory race to the bottom where others see an efficient race to the top. U.S. charter competition in the late 19th and early 20th centuries did bear the hallmarks of a race to the bottom, with New Jersey attracting incorporations from New York through adoption of a permissive corporate statute, and Delaware taking over when New Jersey later cracked down under then-Governor Woodrow Wilson. But Delaware now has a considerably more favorable story to tell about its attractions as a jurisdiction of incorporation for U.S. public companies.  Today, Delaware fairly cites the benefits of an “enabling statute,” a legislature closely attuned to corporate law, expert judges producing considerable corporate case law, and a service-oriented Division of Corporations.

From a competitive perspective, one would expect a relatively short and limited statute combined with heavy reliance on case-by-case application of abstract fiduciary concepts to generate a body of corporate law that would be difficult for other jurisdictions to duplicate.  Consistent with this expectation, empirical studies generally conclude that Delaware no longer faces meaningful competition among U.S. states when it comes to attracting incorporations from companies based elsewhere.  Delaware’s only real domestic competition would appear to be the federal government, in so far as the Commerce Clause gives Congress authority to federalize corporate law for companies operating in interstate commerce.

Yet this account focuses solely on the domestic picture, and capital is increasingly mobile, fueling global competition in numerous areas of corporate and financial services.  In addition to Delaware’s own efforts to compete for offshore incorporations with British overseas territories such as Bermuda, the British Virgin Islands, and the Cayman Islands (opening Delaware to charges of purveying opaque shell companies susceptible to abuse), the state has increasingly faced competition from a growing number of jurisdictions abroad that aim to replicate the state’s fundamental sources of advantage – including sophisticated dispute resolution capacity, as well as the provision of charters, and accordingly corporate law, to U.S.-listed companies.  In these respects, British overseas territories, in particular, are increasingly competing for Delaware’s own bread-and-butter business.

These global dynamics suggest that, even when the frame of reference is limited to corporate law, prevailing accounts of charter competition, and Delaware’s dominance within that marketplace, are over-simplified.  As my paper explores, however, Delaware encounters meaningful competition in other ways as well.  The desire for economic development has prompted Delaware to leverage its corporate law platform in other areas, including aspects of financial services and insurance where corporate chartering and innovative entity structures represent competitive advantages.

Small, resource-constrained jurisdictions face unique economic development challenges that render development of value-added services particularly attractive – and those, like Delaware, that have been particularly successful in cross-border corporate and financial services tend to have similar characteristics and pursue similar strategies.  I have elsewhere termed them “market-dominant small jurisdictions” (MDSJs) and developed an ideal type to summarize their consequential features.  MDSJs (1) are small and poorly endowed with natural resources, limiting their economic-development options; (2) possess legislative autonomy (though not necessarily full sovereignty); (3) are culturally proximate to multiple economic powers, and favorably situated geographically vis-à-vis those powers; (4) heavily invest in human capital, professional networks, and related institutional structures; and (5) consciously balance close collaboration with and robust oversight of the financial professional community, seeking at once to convey flexibility, stability, and credibility.

Delaware closely resembles the ideal type of MDSJ, and the predictable upshot has been extraordinary reliance on servicing large corporations.  Business entity registration has, directly and indirectly, accounted for a substantial percentage of state revenues over recent years – indeed, corporate franchise taxes, the value of abandoned corporate property, and corporate income taxes together accounted for almost 40 percent of Delaware’s general fund revenues in 2014.

In this light, it is hardly surprising that Delaware would be keen to diversify. The state has aggressively pursued opportunities to leverage its corporate law advantage in areas of financial services and insurance where corporate chartering and innovative entity structures loom large – notably, credit card-issuing banks and captive insurance companies.  In such contexts, however, Delaware has typically found itself following the lead of other jurisdictions that earlier ventured into these areas in order to stake out fields of cross-border corporate and financial specialization of their own, for largely similar reasons.

In much the same way that it followed New Jersey’s lead with corporate chartering generally, Delaware followed South Dakota into the competition for chartering credit-card issuing banks.  In 1978, the U.S. Supreme Court ruled in Marquette National Bank of Minneapolis v. First of Omaha Service Corporation that, under federal banking law, permissible interest rates are governed by the law of the state where the bank is chartered. Subsequently, South Dakota and Citibank struck a deal to eliminate usury limits (which New York refused to do) and invite Citibank to establish its credit card operations there, in exchange for a jobs guarantee.  Shortly thereafter, Delaware – perceiving an opportunity to pursue this business more effectively by virtue of its proximity to New York and preexisting corporate law advantage – struck a similar deal with Chase Manhattan.  Over recent decades Delaware has built from there, and by 2018, about half of U.S. credit cards came from Delaware, and about 10 percent of Delaware’s workforce was employed in financial services.  Other competitors with accommodating banking regimes also remain strong, however, including first-mover South Dakota, as well as Nevada and Utah.

In much the same way that it followed South Dakota’s lead to build upon its strengths in financial services, Delaware followed the lead of Vermont to leverage corporate law in the related field of insurance – although in this marketplace, Delaware faces more substantial competition from both domestic and foreign jurisdictions.  Captive insurance is essentially a sophisticated form of self-insurance accomplished through a subsidiary formally organized as an insurance entity.  The perennial leaders are (in descending order) Bermuda, the Cayman Islands, and Vermont – two British overseas territories and a U.S. state.  These three jurisdictions remain at the top of the table of largest captive domiciles, followed by Utah, Delaware, Guernsey, Barbados, Anguilla, Hawaii, and North Carolina.  As this list conveys, sub-sovereign jurisdictions predominate, and Delaware – although among the top domiciles – does not remotely dominate the marketplace.

Here, again, Delaware followed earlier movers.  Bermuda entered the field first in the 1960s, followed by the Cayman Islands in the 1970s and Vermont in the 1980s.  Pursuit of cross-border corporate and financial services business was, for Vermont, an economic development imperative, and its success once again revealed an opportunity for Delaware.  Although a relative late-comer, entering the market only in 2005, Delaware has again touted the advantages that its corporate law platform provides in this related though distinct field and has developed innovative entity structures that have proven attractive in the marketplace.

As my paper explores, expanding the frame of reference to include additional fields of competition like those discussed above opens a new perspective on Delaware’s motivations and competitive position.  Notably, these developments reflect an underlying economic development imperative to branch out beyond corporate law. They reveal that, in certain markets, Delaware occupies the less familiar, and perhaps uncomfortable, posture of being a follower rather than a market leader. They also illuminate a larger and more complex competitive landscape for cross-border corporate and financial services where Delaware faces meaningful competition from other states and foreign jurisdictions.

Delaware’s long-term prospects may turn on how effectively the state navigates this broader competitive landscape.  This, in turn, requires a reconceptualization of the relevant marketplace – one that is more embracing and multi-faceted than prevailing accounts contemplate.

This post comes to us from Christopher M. Bruner, the Stembler Family Distinguished Professor in Business Law at the University of Georgia School of Law.  It is based on his recent paper, “Leveraging Corporate Law:  A Broader Account of Delaware’s Competition,” forthcoming in a symposium edition of the Maryland Law Review and available here.

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