Academic journal article Vanderbilt Law Review

Ex Ante Choices of Law and Forum: An Empirical Analysis of Corporate Merger Agreements

Academic journal article Vanderbilt Law Review

Ex Ante Choices of Law and Forum: An Empirical Analysis of Corporate Merger Agreements

Article excerpt

Legal scholars have focused much attention on the incorporation puzzle-why business corporations so heavily favor Delaware as the site of incorporation. This paper suggests that the focus on the incorporation decision overlooks a broader but intimately related set of questions. The choice of Delaware as a situs of incorporation is, effectively, a choice of law decision. A company electing to charter in Delaware selects Delaware law (and authorizes Delaware courts to adjudicate legal disputes) regarding the allocation of governance authority within the firm. In this sense, the incorporation decision is fundamentally similar to any setting in which a company selects a law and authorizes (or selects) a forum in which disputes are to be resolved.

We study a data set of 412 merger and acquisition contracts contained as exhibits in SEC Form 8-K filings by reporting corporations over a seven month period in 2002 in order to assess the decisions the parties have made regarding choice of law and choice of forum. We find that, although these contracts frequently select Delaware law and forum, there is a relative "flight" from Delaware in the contractual setting. Delaware corporations tend to choose Delaware law less than other corporations choose the law of their states of incorporation. Furthermore, in those contracts specifying Delaware law, many firms do not specify Delaware as the litigation forum. Corporations that choose Delaware law tend to choose Delaware as a litigation forum less than corporations that choose other states' laws tend to choose such states as a litigation forum. Delaware was the place of incorporation for 189 merger contracts; it was the choice of law for 132. With respect to forum selection, 115 contracts that designated a forum had Delaware corporate acquirers. Yet only sixty-four contracts specified Delaware as the litigation forum. In contrast, for example, New York had eight corporate acquirers and forty-five contracts specifying that New York law governed. We investigate the determinants underlying these decisions about choice of law and forum selection. Regression results confirm the flight from Delaware law and forum, conditional on Delaware being the acquiring firm's place of incorporation.

I. INTRODUCTION

A leading question in American corporate law is why such a large percentage of large firms choose Delaware as their state of incorporation. An early view saw Delaware as leading a "race to the bottom" by providing charter terms that favored corporate managers at the expense of shareholders and the public at large.1 Later theorists postulated that Delaware might rather be providing terms that benefited all parties to the corporate contract ex ante-the "race to the top" view.2 Some have suggested that Delaware incorporation may represent neither a race to the top nor to the bottom, but rather a race to somewhere in the middle, because the interests of corporate managers and other influential parties align only partially with the interests of the public.3 More recently, the notion of beneficial competition among the states for corporate charters has been challenged on the grounds either that state competition may not produce value-increasing rules;4 that Delaware's dominance is so great that effective competition does not exist,5 at least with any state other than the firm's principal place of business;6 or that the most salient competition is not between states but rather between states and the federal government.7 Others have examined the role of attorneys in the process, arguing that the self-interest of transactional attorneys influences the selection of Delaware as a chartering state,8 as well as the nature of the contractual clauses that are included in the charters.9 Studies also have used empirical methods to investigate the advantages of Delaware incorporation, with some finding advantages to incorporating in Delaware10 and others casting doubt on the robustness of these results. …

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