New research questions competition in corporate charters

The dominant state in attracting the incorporations of publicly traded companies is, and has long been, the state of Delaware. Although home to less than one-third of one percent of the U.S. population, Delaware plays a central role in setting corporate governance rules for the nation’s publicly traded companies. “The widely accepted justification for the existing state of affairs is that Delaware’s dominant role is a product of its winning a competition among states for providing desirable corporate law rules,” says Harvard Law Professor Lucian Bebchuk. “Harnessing competition among states racing to attract incorporations with rules that benefit shareholders — the perceived ‘race to the top’ — has been even termed the ‘genius’ of American corporate law by one prominent supporter.” Challenging the conventional wisdom, a study questioned the widely held belief that states vigorously compete for incorporations. Although roughly half of the publicly traded companies are incorporated outside Delaware, the study documents that Delaware does not face any significant competitors in the business of attracting and serving out-of-state incorporations. Corporations that do not incorporate in Delaware do not go to any other player in the out-of-state incorporation market but simply remain incorporated in the state where they are headquartered.