One of the enduring debates in corporate law concerns whether shareholder empowerment promotes short-termism – i.e., temporary boosts in stock prices that can only be achieved at the expense of longer-term value-building projects, like research and development.  Related to this debate is the argument – championed by, among others, Margaret Blair and Lynn Stout – that directors cannot/should not be solely concerned with shareholder wealth maximization; instead, their role is to mediate among various firm stakeholders.  This is because a firm cannot thrive unless it offers a credible commitment to its employees and other corporate constituents  that they will not be ousted the moment it appears profitable to do so.  In other words, in order to induce employees and other stakeholders to invest valuable human capital in the firm, these actors must believe that the firm is committed to them – that shareholders are barred from, for example, insisting on downsizings or outsourcings or what-have-you the moment it appears that doing so will create a share price bump. 

Martijn Cremers and Simone Sepe weigh in on this debate in a new paper, Whither Delaware? Limited Commitment and the Financial Value of Corporate Law(summarized here), where they conclude that protections for incumbent management – in the form of strong antitakeover statutes – are associated with higher firm values, in firms where long-term commitment is particularly necessary for profitability.  In particular, they classify Delaware as a state where antitakeover protections are not strong, and find that incorporation in Delaware reduces firm value for companies that rely on long-term relationships, as compared to states where antitakeover protections are stronger.  The basic idea here is that when management is insulated from shareholder pressures and the market for corporate control, management can more credibly commit to longer term projects and relationships that may not be immediately profitable.

The findings are, of course, extremely interesting and merit further analysis, but I have some difficulty with the premise that underlies their study, namely, that Delaware's antitakeover protections are weaker than those in the comparator states.  Most obviously, one of the ways that the study classifies a state as "managerial" is if it has a business combination statute that prohibits transactions between an acquirer and target for 5 years.  While it's true that Delaware's antitakeover statute is not quite as draconian – Delaware prohibits combinations for only 3 years as opposed to 5, and can be avoided if the acquirer increases its holdings from under 15% of the target to 85% in a single tender offer – the reality is, as has been documented elsewhere, Delaware's antitakeover law is more than sufficient to block hostile acquisitions. 

Given that, antitakeover statutes that are even more extreme than Delaware's because they include a 5 year limitation instead of a 3 year one are gilding the lily;  it's  not clear why firms incorporated in those states should offer any more of a credible commitment to long-term stakeholders than firms incorporated in Delaware.  And by my count, the study classifies 10 states as "managerial" based solely on this criterion, including New York and New Jersey.*

Additionally, the study is based on an analysis of firm value before and after reincorporation – in and out of Delaware, or in and out of the comparator states.  But most reincorporations are associated with particular transactions that can be expected to affect firm value (a point which has been used to criticize post-reincorporation-value studies in the past, as Cremers and Sepe acknowledge in their paper).  So I have to wonder whether there are some other factors that are driving the reincorporations and the selection of jurisdiction, and those other factors are having the observed effect.

*32 states have business combination statutes along these lines, making it even more unlikely that the 10 states identified as "managerial" according to this criterion (i.e., based on the 5 year rather than 3 year limit) actually offer any special signaling value regarding management's long-term commitments.