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Professor Bainbridge on: North Dakota v. Delaware

By Francis G. X. Pileggi, Esq.

 For those who carelessly repeat the rumor that Delaware corporate law is "pro-management" and for those who argue that the recent change in the North Dakota corporate statute offers a superior governance model for shareholders in public companies, Professor Bainbridge has written an article that provides a more nuanced and scholarly analysis. His article was excerpted by The Financial Times, with an introduction, as follows:

[J]ust because North Dakota is appealing to shareholders via strengthened corporate governance and Delaware tends to appeal to management because of its company-friendly policies and bottom line-friendly tax exemptions, doesn't mean this is a clear-cut shareholder vs management conflict.

University of California law professor Stephen Bainbridge, for instance, offers a nuanced discussion of the subject in relation to the North Dakota/Delaware competition, in the form of this paper. Selected extract (emphasis ours):

Those who believe that state competition results in a race to the bottom believe that Delaware's corporate statute is skewed to favor the interests of corporate managers rather than those of investors. As the story goes, because it is corporate managers who decide on the state of incorporation, Delaware caters to management, allowing them to exploit shareholders.

An alternative view claims that state competition leads to a race to the top. According to this account, investors will not purchase, or at least not pay as much for, securities of firms incorporated in states that cater excessively to management. Likewise, lenders will not lend to such firms without compensation for the risks posed by management's lack of accountability. As a result, those firms' cost of capital will rise, while their earnings will fall. Among other things, such firms thereby become more vulnerable to a hostile takeover and subsequent management purges. Corporate managers therefore have strong incentives to incorporate the business in a state offering rules preferred by investors and, as a result, competition for corporate charters should lead to statutes that maximize shareholder wealth. …
 

Here is a link to the actual article by Professor Bainbridge, predicting that the North Dakota experiment will fail.

Full post as published by Delaware Corporate and Commercial Litigation Blog on April 27, 2009 (boomark / email).