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Item # 06 SEMINAR IN LAW AND ECONOMICS Professors Louis Kaplow

After a century of academic thinking that states compete for corporate chartering revenues, a revisionist perspective has emerged in which states do not compete for chartering revenues, leaving Delaware alone in the interstate charter market. Firms either stay incorporated in their home state or reincorporate to Delaware, but rarely go elsewhere. Delaware has a monopoly, one that goes unchallenged. I here use industrial organization concepts to better illuminate this competitive setting. Even if no other state challenges Delaware for the reincorporation business, it still must operate in three key competitive arenas. First, it must attract firms to reincorporate away from their home states. The dynamism of American business interacts with even a lackluster state-based corporate chartering market to create a broad avenue of chartering competition. Second, a once-and-for-all exit of corporate America to another state or the awakening of a dormant competitor is not impossible. I outline what might motivate one or the other. The one instance we have of serious state-to-state competition — New Jersey’s demise as the corporate capital at the beginning of the 20 century — was just that. Similarly, and third, Delaware has reason to fear federalization of core elements of its corporate law even if no other state actively competes for charters. A reputation for bad decisionmaking (or bad decisionmakers) could impel Congress to displace Delaware, in whole or in part, perhaps as an excuse during an economic downturn. While the odds of full displacement are low, Sarbanes-Oxley shows us that the odds of substantial partial displacement are not. These ideas have parallels in the industrial organization, antitrust literature on contestable markets: a single producer can dominate a market, but, depending on the nature of its technology and its market, it could lose its market share overnight or suddenly face a new entrant if the incumbent missteps badly. Hence, it has incentives to act like a competitor on some issues, or knows it must provide a package that overall is attractive to its primary customers. Delaware could face this kind of catastrophic loss in two dimensions: the traditional horizontal one of a competing state, and the vertical one of federal displacement. Does Delaware Compete?