William Moon’s thought-provoking recent paper, Delaware’s New Competition, examines whether there exists an international market for corporate law. Moon’s paper captures a trend in which certain offshore jurisdictions are emerging as corporate lawmakers and attracting publicly traded firms. Specifically, the paper analyzes how a small group of island nations, or “havens”, are developing legal infrastructures that attract public companies. It explores how and why foreign nations might compete for a market share of “American” corporations.
Paper’s Central Findings
Moon’s paper moves beyond the domestic charter competition narrative centered on Delaware to explore its international and comparative dimensions. The popular view of offshore incorporation is that it is largely driven by tax considerations. (Pp. 1417–18.) Moon considers another aspect of the jurisdictional product bundle: corporate law.
To the extent that the internal affairs doctrine applies to foreign incorporation, there is presumably an international market for corporate law. (Pp. 1418–22.) The article considers whether companies with (i) significant US-based operations that might incorporate in a foreign jurisdiction or (ii) primary operations outside of the United States but seeking to raise capital by listing on a US-based exchange shop for corporate law produced by foreign nations. (P. 1424.)
The article focuses on three jurisdictions—Bermuda, the British Virgin Islands, and the Cayman Islands—that have more in common than their location in paradise. In fact, they share several key characteristics with Delaware—(i) credible commitment due to a reliance on fees; (ii) limited interest group dynamics; and (iii) dispute settlement capabilities—but the substance of their law diverges from Delaware’s in distinct ways.
Credible Commitment and Fees
Like the small state of Delaware, these small islands are dependent on corporate fees (Pp. 1430–32), which increases their sensitivity to private-sector corporate governance preferences. For example, the British Virgin Islands generate significant government revenue from corporate registration fees—as much as 58 percent in 2017. (Pp. 1430–32.)
Limited Interest Group Dynamics
The paper provides an interesting discussion of how offshore jurisdictions make corporate law. In some ways, the process loosely resembles the dynamics in Delaware.1 The similarities may explain how these jurisdictions can easily adapt their law to attract companies. Prominent private-sector lawyers and law firms are instrumental in writing the content of corporate governance rules in leading offshore jurisdictions. In essence, they function as de facto lawmakers. Local interest groups also benefit from foreign offshore incorporations. The local private sector helps firms navigate local administrative requirements, and some jurisdictions even mandate that companies have a resident director. (Pp. 1432–37.)
Automatically creating a judicial system like Delaware’s is hard for offshore jurisdictions. To meet the challenge, they have launched specialized business courts with arbitration-like dispute settlement features, including greater privacy. (Pp. 1437–43.) Moreover, whereas Delaware judges have to be Delaware citizens, offshore jurisdictions can recruit foreign citizens who are highly regarded judges and experienced commercial lawyers.
Substantive Law Differences
Despite similarities, leading offshore jurisdictions diverge from Delaware when it comes to substantive law. Whereas Delaware relies on extensive caselaw and a litigant-driven system, offshore jurisdictions have enacted relatively clear-cut statutory laws that are more prescriptive in the absence of case volume. Their laws are also arguably more permissive, with fewer mandatory rules. Companies desiring to opt out of some mandatory rules under the US corporate law regime can incorporate offshore. These jurisdictions offer limited protections for minority shareholders; derivative suits are rare; and shareholder inspection rights are limited and, in some instances, forbidden. (Pp. 1444–50.) Corporations can even limit, opt out of, or waive certain fiduciary duties, such as the duty of loyalty. Bermuda, an extreme case, allows corporations to waive all fiduciary duty claims against directors and officers, except in the event of fraud and dishonesty. (Pp. 1444–50.)
Paper’s Implications for Scholarly Debate and Future Research
Scholars have thoroughly debated Delaware’s jurisdictional dominance and reached a point of general consensus: despite several attempts, no other states pose a significant competitive threat to Delaware’s dominance, and federal government encroachment is the only palpable domestic threat.2 A few scholars have focused on the international and comparative dynamics of incorporating in offshore jurisdictions, but most focus on tax-inversion strategies.3
A New Frontier of Competition
Moon’s paper builds upon the corporate-chartering conversation by highlighting a new frontier of competition. Even if robust US interstate competition is mostly a myth, leading offshore “havens” may compete for incorporations. Certainly, at the moment, the degree of competition between offshore jurisdictions and Delaware is limited, but the incentives and contextual factors necessary for competition are in place.
Most of the discussion concerning offshore jurisdictions presumes that taxes are the overwhelming reason that companies decide to incorporate offshore. Moon introduces more nuance. The incorporation decision loosely resembles the purchase of a bundled product composed of many features. When incorporating, companies and their advisors presumably consider such factors as corporate law, dispute settlement, taxes, and other regulations, but, in practice, these jurisdictional features can be difficult to decouple. The article underscores the need for future research to capture the deeper nuances of these considerations that may lead to offshore incorporation.
A Race to the Bottom?
Critics might assert that the emergence of offshore jurisdictions reflects a race to the bottom, with minimal standards for corporate managers and limited shareholder protections. Meanwhile, proponents can argue that significant legal variation among these jurisdictions makes this judgment too sweeping. Instead, offshore jurisdictions may offer an extended menu of corporate-law options and serve as laboratories for innovation.
Where are the other Stakeholders?
Beyond limiting minority shareholder rights, offshore incorporation may also sidestep stakeholder and third-party interests. Small offshore jurisdictions, like the small state of Delaware, are insulated from robust interest-group dynamics which, in turn, may result in corporate law that is less receptive to third-party concerns.4
In conclusion, Moon’s paper is a must-read for scholars interested in the international dimension of the incorporation debate.
- Compare Moon at 1432–37, with Marcel Kahan & Edward Rock, Symbiotic Federalism and the Structure of Corporate Law, 58 Vand. L. Rev. 1573 (2005).
- See Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55 Stan. L. Rev. 679 (2002); see also Michal Barzuza, Market Segmentation: The Rise of Nevada as a Liability-Free Jurisdiction, 98 Va. Law Rev. 935 (2012).
- See, e.g., Christopher Bruner, Re-Imagining Offshore Finance: Market Dominant Small Jurisdictions in A Globalizing Financial World 59 (2016); Jens Dammann, The Mandatory Law Puzzle: Redefining American Exceptionalism in Corporate Law, 65 Hastings L. J. 441 (2013); Omari Scott Simmons, Delaware’s Global Threat, 41 J. Corp. L. 217 (2015).
- See Kahan & Rock, supra note 2, at 1612 (describing Delaware’s corporate law as technical and apolitical because it is created by experienced appointed judges rather than through legislative and political processes).