Delaware Law as Lingua Franca: Evidence from VC-Backed Startups

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2013-01-08

Summary:

Editor’s Note: Jesse Fried is a Professor of Law at Harvard Law School. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Delaware dominates the corporate chartering market in the U.S—it is the only state that attracts a significant number of out-of-state incorporations. As a result, incorporation decisions are “bimodal,” with public and private firms typically choosing between home-state and Delaware incorporation.

Much ink has been spilled in the debate over whether Delaware’s dominance arose because it offers high-quality or low-quality corporate law. Under the “race-to-the-top” view, Delaware has prevailed because its law maximizes firm value. Under the “race-to-the-bottom” view, Delaware has won by offering corporate law that favors insiders at other parties’ expense.

But a firm today may choose Delaware law not solely because of its inherent features but rather because, after decades of Delaware’s dominance, business parties—including investors and their lawyers—are now simply more familiar with Delaware law than the laws of other states. Indeed, the bimodal pattern of domiciling is itself strong evidence that business parties are familiar only with their home states’ corporate law and Delaware’s.

In our paper, Delaware Law as Lingua Franca: Evidence from VC-Backed Startups, recently made public on SSRN, Brian Broughman, Darian Ibrahim, and I show, for the first time, that familiarity does in fact affect firms’ decisions to domicile in Delaware rather in their home states.

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Link:

http://blogs.law.harvard.edu/corpgov/2013/01/08/delaware-law-as-lingua-franca-evidence-from-vc-backed-startups/

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academic research empirical research delaware law venture capital firms incorporations jesse fried entrepreneurs

Authors:

Jesse Fried, Harvard Law School,

Date tagged:

01/08/2013, 14:46

Date published:

01/08/2013, 08:57