The Least Uncomfortable Choice: Why Delaware and England Win the Global Corporate Law Race
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What makes the corporate laws of some jurisdictions more attractive for entrepreneurs and investors than others in the global arena? Within the United States, the competition among state laws is a popular explanation for Delaware’s corporate law prominence. However, interjurisdictional competition over corporate law is not limited by US borders. In recent decades, an international market for corporate law has emerged; consequently, foreign countries compete with Delaware to supply corporate law.
In our recent paper, The Least Uncomfortable Choice: Why Delaware and England Win the Global Corporate Law Race, using qualitative methods based on interviews with mergers and acquisitions (M&A) practitioners from the United States, United Kingdom, continental Europe, and Israel, we find that Delaware faces strong competition in the global corporate arena, particularly from the United Kingdom.
Several key factors have made English corporate law superior and more attractive than the laws of other jurisdictions. The UK has simple incorporation procedures and low incorporation costs. Its company law has comparatively more enabling rules than most continental European jurisdictions. It refrains from imposing minimum capital requirements for private companies. Unlike some continental jurisdictions, with Germany being the most famous example, it does not require employee participation in the management of a company. Moreover, the UK benefits from the prominence of the English language, which is the lingua franca of the business world.
Does corporate law matter? The academic literature implicitly assumes that corporate law influences several types of decisions. First, it affects entrepreneurs’ decisions regarding where to incorporate. Consequently, it affects investors’ decisions to invest or refrain from investing in a company incorporated in a jurisdiction with superior or inferior corporate law. Finally, it influences the choice-of-law decisions of parties to cross-border corporate mergers and acquisitions.
Contrary to the common assumption of private international law that corporate law stimulates the interjurisdictional competition for corporate charters, our findings suggest that corporate law plays a relatively modest role in incorporation decisions; it is far less important than tax considerations. Therefore, competition for corporate charters exists within federal jurisdictions that provide equal tax treatment regardless of the chosen corporate law. Indeed, this is the case in the United States but not in the global arena.
In addition, we find that in common-law jurisdictions, the underlying law of incorporation will have a significant influence on the law of the related M&A agreement because of the desire to avoid a ‘mismatch’ between the rights and obligations in the shareholder agreement and those prescribed by the law governing the internal affairs of the corporation. It therefore follows that in many cases, the governing laws of cross-border M&A agreements are indirectly, but strongly, influenced by the tax paradigm of the target corporation. In contrast, in many civil-law jurisdictions, cross-border M&A deals are often governed by a neutral governing law regardless of the law of incorporation of the underlying corporation.
The frequency of exceptions to the ‘no-mismatch rule’ is the result of a variety of factors. The specific characteristics of the parties and the deal matter. For example, investors that are repeat players tend to adopt one of two strategies. One strategy is imposing a choice of law with which the investor feels most comfortable. Often this will be the domestic law of the investor. This strategy reduces the legal costs of repeat players since it reduces the need to know and handle many different laws and often reduces the costs of obtaining specialized legal advice on unfamiliar laws. Moreover, this strategy implies a choice of law that would differ from that of the underlying target corporation.
Another strategy used by repeat players is employing leading international law firms and domestic lawyers so they can accept the governing law of a corporation. Repeat players such as major private equity funds, investment banks, and some institutional investors can easily afford the services of international law firms with national branches that employ domestic lawyers with international M&A experience. The latter facilitate the use of different corporate laws.
We identify a possible trend pushing toward the common global choices of law driven by the increased use of representations and warranties insurance (RWI). This is a relatively new insurance product typically used in private M&A transactions. RWI allows the buyer of a corporation to receive indemnification in the event of a breach of representation or a warranty of the seller in the M&A deal. RWI is offered by only a few large repeat players in the insurance industry mostly located in England. As insurers prefer to avoid litigation in other countries under unfamiliar laws, large transactions that seek to be covered by RWI may be required by the insurers to apply a globally popular and accepted choice of governing law.
The tendency to agree on a domestic dispute-resolution forum when a domestic law is concerned negatively affects the adoption of a domestic governing law when the jurisdiction is considered politically unstable or when the courts are inefficient, are perceived to lack sufficient independence or to be biased against non-domestic parties.
Our observations indicate that when parties select a non-domestic corporate law for their M&A transaction, stability, predictability, and certainty matter. These considerations drive the parties to choose popular Anglo-American laws such as those of England, the states of Delaware, New York, and California, or common-law jurisdictions akin to the Anglo-American family of law such as Hong Kong and Singapore. The preference for common-law jurisdictions over civil-law jurisdictions is prevalent and attributed to the perceived uncertainties that typify civil-law courts in their interpretation of contracts. This observation was so distinct that even civil-law lawyers opined that in an M&A deal between two companies from different civil-law jurisdictions, the preferred choice of law would often be a common-law governing law.
Our research points at some specific determinants that have a strong influence on the choice of law and consequently explain the dominance of certain corporate laws. Our findings reveal a more nuanced, bi-polar, choice-of-law narrative in cross-border corporate M&A transactions. In this picture Delaware and the UK are frequently chosen as locations of incorporation and their corporate laws are preferred choices of law in cross-border M&A transactions because they provide parties with a combination of benefits including most importantly stability, foreseeability, flexibility, and in many cases, they are the least uncomfortable neutral choice.
Ido Baum is an associate professor of law (senior lecturer) at the Haim Striks Faculty of Law, College of Management-Academic Studies (Colman), and academic director of the Rina and Meir Heth Center for Competition and Regulation.
Dov Solomon is an associate professor of law (senior lecturer), head of the Commercial Law Department, and academic director of the LL.M. program at the College of Law and Business, Ramat Gan Law School.
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