ETH Zurich, Spring 2015 Law & Business Transactions Regulatory Competition Gérard Hertig

May 20, 2015G. Hertig2 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

May 20, 2015G. Hertig3 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 Demand & Supply / Horizontal / Vertical / Financial Centers

May 20, 2015G. Hertig4 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 Demand & Supply / Horizontal / Vertical / Financial Centers

May 20, 2015G. Hertig5 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 Demand & Supply / Horizontal / Vertical / Financial Centers

May 20, 2015G. Hertig6 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) Demand & Supply / Horizontal / Vertical / Financial Centers

May 20, 2015G. Hertig7 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 Demand & Supply / Horizontal / Vertical / Financial Centers

May 20, 2015G. Hertig8 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 Demand & Supply / Horizontal / Vertical / Financial Centers

May 20, 2015G. Hertig9 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 Demand & Supply / Horizontal / Vertical / Financial Centers

May 20, 2015G. Hertig10 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 Demand & Supply / Horizontal / Vertical / Financial Centers

May 20, 2015G. Hertig11 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 Demand & Supply / Horizontal / Vertical / Financial Centers