Delaware corporate law is the de facto national law for publicly traded corporations. But whereas its importance is beyond dispute, its efficiency is not. In particular, prominent voices in the literature assert that regulatory competition between states has made Delaware law excessively vague and indeterminate.
However, little evidence has been offered to either support or refute the alleged impact of regulatory competition on legal determinacy. To an extent, this is unsurprising. To show that regulatory competition makes--or does not make--corporate law less determinate, one has to demonstrate how corporate law would look in the absence of regulatory competition--hardly an easy task.
To overcome this problem of evaluation and shed some empirical light on the matter, I use a comparative perspective and contrast Delaware law with the corporate law systems of two other major Western jurisdictions: Germany and the United Kingdom. Due to the peculiar characteristics of Europe's nascent market for corporate charters, regulatory competition cannot be blamed for any indeterminacy that may plague U.K. or German corporate law. However, as I show, both legal systems rely at least as strongly on indeterminate standards as Delaware does. The most obvious explanation for this finding is that regulatory competition may not have the deleterious impact on legal determinacy that its critics allege.
INTRODUCTION II. POTENTIAL REASONS FOR EXCESSIVE INDETERMINACY A. Cementing Market Power B. Price Discrimination C. Warding off Federalization III. VERIFYING THE INDETERMINACY CLAIM A. The Efficiency of Individual Norms B. The Law of Other States as a Benchmark 1. Overall Levels of Determinacy 2. Specific Provisions C. Federal Law as a Benchmark IV.FOREIGN LAW AS A BENCHMARK A. The Absence of Regulatory Competition B. The Irrelevance of Regulatory Competition 1. Cementing Market Power 2. Price Discrimination 3. Warding off Federalization V. FIDUCIARY DUTIES OF DIRECTORS A. Liability for Bad Business Judgments B. 1. Delaware 2. United Kingdom 3. Germany B. Manifestly Unreasonable Decisions 1. Delaware 2. United Kingdom 3. Germany C. Self-Dealing by Corporate Directors 1. Delaware 2. United Kingdom 3. Germany D. Managerial Compensation 1. Delaware 2. United Kingdom 3. Germany E. Corporate Opportunities 1. Delaware 2. United Kingdom 3. Germany F. Hostile Takeovers 1. Delaware 2. United Kingdom 3. Germany G. Derivative Suits 1. Delaware 2. United Kingdom 3. Germany H. Summary VI. IMPLICATIONS FOR THE ROLE OF REGULATORY COMPETITION A. Selection Bias B. Unobserved Factors VII. IMPLICATIONS FOR THE CONVERGENCE DEBATE VIII. CONCLUSION I. INTRODUCTION
Delaware completely dominates the law governing public corporations: It is home to more than half of all existing public corporations (1) and almost ninety percent of corporations that have gone public in recent years. (2) However, the efficiency of Delaware law is often questioned. One of the most central criticisms today concerns the issue of legal certainty: Prominent voices in the literature argue that regulatory competition has made Delaware law inefficiently indeterminate. (3)
This charge builds on Kaplow's classic distinction between rules and standards: Rules are norms whose content is determined ex ante. By contrast, standards are norms whose content is determined ex post by the courts. (4) Thus, when Delaware law is accused of being excessively "indeterminate" or "vague," it is criticized for using too many standards and too few rules. Accordingly, this Article uses these expressions interchangeably. (5)
In its most elegant form, the claim that regulatory competition has made Delaware excessively indeterminate has two components. First, the relevant scholars allege that Delaware corporate law, due to its heavy use of vague, fact intensive standards, is much less determinate than it could be. (6) Of course, this claim alone is of limited relevance to legal policy, since indeterminate law is not necessarily inefficient. (7) To the contrary, it is well established that the use of indeterminate standards can have important benefits and that it can therefore be efficient for courts and lawmakers to adopt indeterminate standards rather than precise rules. (8)
For that reason, those who criticize the indeterminacy of Delaware law typically add a second component to their argument. Regulatory competition, they allege, creates incentives for Delaware to produce law that is inefficiently vague. For example, it has been suggested that Delaware's use of vague standards makes it harder for other states to copy Delaware's law, which allows Delaware to cement its leading position in the market for corporate charters. (9) Because Delaware has incentives to produce inefficiently vague law, the argument runs, it is likely that the observed indeterminacy of Delaware law is, in fact, inefficient. (10)
This two-step argument has proven remarkably resilient, in part because it cannot easily be verified. Delaware's defenders argue that Delaware law is relatively predictable overall, (11) and that corporate practitioners choose Delaware corporate law precisely for the legal certainty that it offers. (12) But the above critique of Delaware law is designed carefully enough to sidestep this objection: After all, the fact that Delaware law is more predictable than the law of other states does not prove that Delaware law is as determinate as it could be.
How, then, can one hope to verify the indeterminacy claim at all? The challenge is to answer a hypothetical question: Would corporate law be more determinate in the absence of regulatory competition?
To shed some light on this question, I rely on a comparative approach: I examine whether the corporate laws of the United Kingdom and Germany--two major corporate law jurisdictions outside the United States--are more determinate and predictable than Delaware law.
These two countries provide an appropriate benchmark because any indeterminacy found in their legal systems cannot be attributed to regulatory competition. This is true for two reasons. First, neither country's law on public corporations has been shaped by regulatory competition. While the European Union has recently made steps toward a European market for corporate charters, (13) corporate mobility in Europe has so far been limited to very small, privately held firms, and even there it has achieved only limited--and apparently fading-importance. (14) A charter market for publicly traded firms has yet to develop. (15)
Second, and just as significant, even if regulatory competition had shaped corporate laws in Europe, any excessive degree of indeterminacy still could not be blamed on such competition: As I will show below, the various theories that claim a causal relationship between regulatory competition and excessive indeterminacy in the United States are inapplicable in Europe because the nascent European charter market lacks the crucial requirements that the relevant theories postulate. In sum, any indeterminacy that may plague German and U.K. law on public corporations cannot be attributed to regulatory competition.
To measure determinacy, I rely on the same criterion that Delaware's critics use to bolster their claims that Delaware law is unpredictable: the extent to which the law relies on vague, fact intensive standards rather than precise rules. Obviously, this entails looking at more than just the letter of the law. It follows from the very definition of standards that they can be converted into rules over time if precedents clarify their meaning. (16) Therefore, case law that elucidates vague concepts found in a statutory provision has to be taken into account, and the same is true where subsequent judicial practice illuminates the meaning of a vague holding.
Based on this approach, I do not find that Delaware law is more indeterminate than German or U.K. law. To the contrary, German and U.K. law rely at least as heavily on vague and indeterminate standards as Delaware law does. In fact, German law in particular is even more prone to using vague standards than Delaware law.
My findings have considerable importance for the debate on legal determinacy in corporate law. The claim that regulatory competition has made Delaware law excessively indeterminate is much less plausible in light of the fact that the corporate laws of countries like the United Kingdom and Germany--where legal indeterminacy cannot be attributed to regulatory competition--are equally prone to rely on fact intensive standards.
To be sure, my analysis does not conclusively prove the lack of a causal link between regulatory competition and indeterminacy. Theoretically, it is possible that the indeterminacy found in the U.K. and German corporate law systems is due to factors that, while not present in the United States, are completely unrelated to regulatory competition. (17) However, as explained in more detail below, it is not clear what these factors might be. (18) The most obvious explanation for the comparable levels of vagueness in Delaware, Germany, and the United Kingdom, therefore, is that regulatory competition may not, in fact, have the deleterious impact on legal determinacy that its critics claim and that the legal systems at issue end up using standards in similar situations simply because such standards are the most reasonable answers to shared regulatory challenges.
Setting aside the relationship between regulatory competition and legal determinacy, the analysis undertaken in this Article also contributes to a second major theoretical controversy--namely the so-called convergence debate. Corporate law scholars have long been debating whether and why corporate law systems around the world are in the process of becoming more alike. The findings presented in this article suggest that practical exigencies will drive states to adopt similar solutions to similar practical problems--in this case similar...