Regulatory Dualism as a Development Strategy

Transcription

1 Regulatory Dualism as a Development Strategy C O R P O R A T E R E F O R M I N B R A Z I L, T H E U N I T E D S T A T E S, A N D T H E E U R O P E A N U N I O N P A G E S Kathryn Mahaffey Kayla Lusby

2 Brief Overview Historical relevance of investor protection legislation State-level corporate chartering Incorporation Options Why Delaware is significant Motivation to incorporate in 49 other states Olsonian Theory Law firm theory Antitakeover statutes

3 Investor Protection Legislation Securities Act of 1933 Securities issued in primary market Greater investor confidence Information that is: Complete Accurate Due diligence Liable for inaccuracies Securities Exchange Act of 1934 Securities issued in secondary market Established the Securities and Exchange Commission Unlawful to employ Deceptive devices Any manipulative

4 U.S. System of State-Level Corporate Chartering C H A R T E R Corporations are created by a written instrument that defines the corporations known as a charter Historically granted by the government R E G I S T R A T I O N Registration with state or government Freedom of choice of state of incorporation despite operations Regulated by laws enacted by the state of incorporation

5 Internal Affairs Doctrine Laws from the state of incorporation govern relationships among: Managers Creditors Directors Shareholders regardless of the location of their operations

6 Regulatory Dualism: Charter location HQ State 50% Delaware 50%

7 Regulatory Dualism HQ State Delaware Regime of Corporate Law Greater personal interest protection Use local political influence Less non-controlling shareholder protection Protection from takeover Reformist Regime Greater shareholder protection Higher market value Better overall efficiency Less personal interest protection

8 DELAWARE ADVANTAGES: Collects substantial franchise fees Free from pressure to tailor its law to special interests which have no presence, like: suppliers creditors local businesses local governments Operations elsewhere Delaware

9 REASONS TO INCORPORATE OUTSIDE OF DELAWARE: Transaction costs of incorporating in Delaware is expensive Litigating out of state would be expensive Serve the needs of local politically influential interest groups Use influence to mold corporate law / case decisions Every other State v. Delaware

10 Olsonian Theory Small State Managers and shareholders are politically influential Litigation on home turf sensitive to local businesses Local legal representation Alliances with others with adverse consequences from takeovers Suppliers / Merchants Unions Potential Employees Large State Size of jurisdiction inversely related to influence on local corporate law Seek national law firm Directed to incorporate in Delaware

11 Legal Counsel Influences Local National Companies in small states more likely to inc. locally than companies in large states Seek advice from local law firms Local lawyers will advise companies to incorporate in their HQ state Seek advice from national law firms National lawyers will advise companies to incorporate in Delaware

12 Antitakeover Statutes HQ State Delaware Legislatures willing to grant requests to shield a company from takeover Must be favored by a majority of shareholders Judge-made decisions Interest of lawyers and the judiciary Protective interests of noncontrolling shareholders

13 Antitakeover Statutes F I R S T - G E N E R A T I O N S T A T U T E S Adopted in some form by 37 states, but not by Delaware Gave Secretary of State discretion to block acquisition of a targeted company Appeals would have to be made by managers, shareholders, employees, or local interest groups that were concerned the acquisition would disadvantage them Supreme Court abandoned first-generation statutes S E C O N D - A N D T H I R D - G E N E R A T I O N S T A T U T E S Limited to companies incorporated within the state Give substantially less discretion to state officials

14 Conclusion Regulatory Dualism provides consistency for corporations States can let DE be shareholder-oriented Delaware is complimentary to other state s corporate law Without DE more pressure for national corporate chartering DE is escape valve that need efficient capital markets regime DE allows other states to be more protectionist

15 Test Yourself 1. W H A T I S A M A J O R R E A S O N ( S ) W H Y R O U G H L Y H A L F O F A L L P U B L I C A L L Y T R A D E D U. S. C O R P O R A T I O N S A R E I N C O R P O R A T E D I N D E L A W A R E? a. B E T T E R S H A R E H O L D E R P R O T E C T I O N S b. N O O L S O N P R O B L E M c. C O L L E C T S F R A N C H I S E F E E S F O R C O R P O R A T I O N S d. A L L O F T H E A B O V E e. A & C O N L Y

16 Test Yourself 2. W H A T I S A N A D V A N T A G E O F I N C O R P O R A T I N G I N Y O U R H E A D Q U A R T E R S T A T E? a. G R E A T E R L O C A L P O L I T I C A L I N F L U E N C E T O W A R D S Y O U R P E R S O N A L G O A L S b. O L S O N P R O B L E M c. N A T I O N A L L Y T R A I N E D L E G A L C O U N S E L d. A L L O F T H E A B O V E e. A & C O N L Y

17 Questions? THANKS!