eth zurich, spring 2015 law & business transactions regulatory competition gérard hertig

ETH Zurich, Spring 2015

Law & Business TransactionsRegulatory Competition

Gérard Hertig

G. Hertig 2May 20, 2015

I. Demand and Supply• Regulatory arbitrage and competition

– Firm regulatory choices• No headquarters or main place of business• Preference for legal institutions or substantive law

– State competition for incorporations, reorganizations, listings• Corporate statutes and case law• Self-regulated or court-dominated insolvency institutions• Issuer disclosure and market transparency requirements

• Horizontal and vertical competition– Competition among equals

• U.S. states and EU Member States• U.S., EU and Japan

– Competition within hierarchic system• U.S. states vs. U.S.• Member States vs. EU

Demand & Supply / Horizontal / Vertical / Financial Centers


What can we see?

• Corporate law– Delaware has a dominant position for public firms, but:

• Empirical data is murky about what this means• Delaware is facing federal intervention and choice of forum threats

– Smaller EU firms have incorporated in the UK, but:• Many failed• Larger EU firms have yet to engage into cross-border reincorporation

• Insolvency law– Delaware used to attract New York firms (murky data)– UK seemed to be attracting some German firms (scarce data)

• Securities regulation– Essentially no regulatory competition for primary listing

• Centralized in Japan and U.S.• MS of incorporation in EU

– More active competition for dual listings– Uncertain future of arbitrage and competition



Open Issues• What is the impact of arbitrage?– Will firm choose efficient jurisdictions or those favoring specific

stakeholders– Will firms list in efficient financial centers or favor

protectionist/lax ones?• Do jurisdictions truly compete?– Do U.S. states compete and, if so, is this a race to the top or to

the bottom?– Is the UK the most attractive EU jurisdiction?– Are Japan, the UK and the U.S. truly competing for non-domestic

listings?• Fine-tuning arbitrage and competition– Horizontal vs. vertical competition– Corporate governance vs. tax incentives– All or nothing vs. legal options



II. Horizontal Competition: US States

• For which firms?– Public corporations (Damman 2009)

• > 50% of all public corporations in Delaware• > 90% IPO in Delaware

– Closely-held corporations (Damman and Schündeln 2009)• Majority in primary place of business state• Firms with > 1’000 employees

– 50% incorporated in another state– 25% in Delaware

• Corporate forms or individual provisions?– Incorporation as well as re-incorporation – Individual provisions are important determinant– Delaware as a first or second mover



States’ Incentives and Efficiency• Incentives?

– Franchise fees (18% of Delaware revenues) and local bar– Do other states still compete?

• Race to the top or to the bottom?– Delaware law maximizes shareholder wealth?– Delaware is management-friendly?

• Recent empirical evidence– Delaware may be losing cases (Armour et al 2010)

• Putting judicial expertise, taste and coherence at risk• Suing directors of public firms: Delaware share

80% (1995) ↘ 65% (2000) ↘ 21% (2009)– Delaware law is not >> indeterminate (Damman 2009)

• Delaware generally relies on standards• Germany and UK rely as much without a race (yet)



Horizontal Competition: EU MS

• For which firms?– For start-up rather than public firms

• Statutory facilitation of cross-border moves is recent• Tax obstacles remain

– Post-Centros UK domination for start-ups (Becht et. al 2007)

• From 4’400 foreign incorporation per year to 28’000 (+560%)• 48’000 ‘German’ firms from 1997 to 2006• Low survival rate: 30% of ‘Dutch’ firms in 2007 (Bratton et al.

2008)• Corporate forms or individual provisions?

– Incorporation rather than re-incorporation – Forms seem as important as individual provisions– Second mover defense: France, Germany and NL



MS Incentives and Efficiency

• Incentives

– Franchise tax prohibited in EU– Fostering the local bar and financial

services-related industry• Race to the top or to the bottom?

– Lower incorporation costs– Eliminating minimum capital requirements

• No clear empirical evidence yet



3. Vertical intervention: U.S.

• Washington as Delaware‘s main competitor– Disclosure and quasi-fiduciary duties– Shareholder voice and voting– Gate-keeping and whistle blowing– Insider trading

• Top-down approach– Mandatory– No federal charter alternative



Vertical Intervention: EU

• Brussels as the MS’s (future) competitor?– Societas Europeas (Eidenmüller 2009)• 21 in 2005, 40 in 2006, 85 in 2007• Germany and the Czech republic dominance

– Takeovers: Opting out/into board neutrality and break through rules

• Bottom-up approach– SE as an alternative to MS forms– Opting into specific EC provisions



IV. Financial Center Competition

• Major financial centers– London and New York– Paris, Frankfurt, Hong Kong/Shanghai, Singapore, and Tokyo

• Critical components– Clustering financial and related expertise– Liquidity– Legal and political environment

• Products and services– Financial products: Repackaging risk– Financial services: Access to finance (domestic and international)

• Regulatory competition– Minimizing transaction costs– Reducing cost of capital: Signaling and bonding– Post-credit crisis environment

• Racing to the top?• Favoring statutory prescription over supervisory discretion


eth zurich, spring 2015 law & business transactions regulatory competition gérard hertig

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