ETH Zurich, Spring 2015
Law & Business Transactions
Regulatory Competition
Gérard Hertig
Demand & Supply / Horizontal / Vertical / Financial Centers
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
May 20, 2015
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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
May 20, 2015
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Demand & Supply / Horizontal / Vertical / Financial Centers
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
May 20, 2015
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Demand & Supply / Horizontal / Vertical / Financial Centers
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
May 20, 2015
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Demand & Supply / Horizontal / Vertical / Financial Centers
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)
May 20, 2015
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Demand & Supply / Horizontal / Vertical / Financial Centers
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
May 20, 2015
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Demand & Supply / Horizontal / Vertical / Financial Centers
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
May 20, 2015
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Demand & Supply / Horizontal / Vertical / Financial Centers
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
May 20, 2015
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Demand & Supply / Horizontal / Vertical / Financial Centers
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
May 20, 2015
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Demand & Supply / Horizontal / Vertical / Financial Centers
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
May 20, 2015
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