In our paper “Delaware’s Competitive Reach: An Empirical Analysis of Public Company Merger Agreements” recently posted to the SSRN my co-author Matthew Cain of the Notre Dame Mendoza College of Business and I evaluate the selection of governing law and forum clauses in merger agreements between public firms from 2004-2008.
In contrast to prior research, we find that Delaware is the dominant choice among merging parties. During the sample period approximately 66.4% of agreements select Delaware for their governing law and 60% of agreements select Delaware as their choice of forum. This compares to 61.8% of targets during this time that are incorporated in Delaware, and 54.8% of acquirers that are similarly incorporated.
We find that Delaware’s attractiveness has increased in recent years in response to exogenous events, namely the financial crisis and the Second Circuit’s decision in Consolidated Edison, Inc. v. Northeast Utilities. The latter court ruling was perceived by practitioners as creating an unfriendly merger precedent under New York law. We find that the opinion made the Delaware forum a more attractive one vis-à-vis New York.
Delaware’s attractiveness is also evidenced by the fact that top-tier legal advisors, foreign acquirers, transactions surrounded by greater financial uncertainty, and larger transactions tend to select Delaware’s forum over other venues. Our results are robust to controls for simultaneity and endogeneity.
Our results also provide support for the theory that Delaware competes by providing quality governing law, and particularly, adjudicative services. They also highlight the contestability of Delaware’s dominance; parties adjust their choices of law and forum during our sample time period in response to legal and other events.
Prior empirical work on the race-to-the-bottom/race-to-the-top debate has focused on Delaware’s primary product, the public company charter. We posit that Delaware is more than a single-product provider but rather a supermarket offering complementary and differentiated products beyond the public company charter. For example, the law governing, and adjudication of, merger agreements is one such complementary product while the law governing real estate investment trusts is a differentiated one (and one where Delaware does not compete). By studying this former product we hope to further inform the debate over how and when Delaware competes.
Our results ultimately support the conclusion that Delaware competes strongly in other legal products beyond its primary one, the public company charter. They also show that attorneys and their clients are responsive to unfavorable legal rulings and the quality of adjudication.