Brian J. Broughman

Delaware Law as Lingua Franca: Theory and Evidence

Why does Delaware dominate the market for corporate charters? Analyzing the incorporation and reincorporation decisions of 1,850 VC-backed startups, we show that firms often choose Delaware corporate law because it is the only law “spoken” by both instate and out-of-state investors. Indeed, this “lingua-franca” effect is just as important as other factors that have been found to influence domicile decisions, such as corporate-law flexibility and the quality of a state’s judiciary. Our study provides further evidence that Delaware’s dominance is not necessarily due to the intrinsic quality of its corporate law. JEL Classifications: K22, G24, G34

Shareholder Decision Rights in Acquisitions: Evidence from Tender Offers.

Using a 2013 Delaware law that reduces the approval threshold from 90% to 50% to conduct a short-form merger after a tender offer, we investigate whether variation in the required level of shareholder support affects acquisition outcomes. We find that lower authorization requirements increase the use of tender offers relative to mergers for Delaware targets. Further, Delaware targets collectively receive greater acquisition premiums and returns after the passage of the new law relative to target firms incorporated other states. We do not find evidence that managers use the lower threshold to extract private benefits. Our results suggest that supermajority shareholder approval is unnecessary for tender offers and can increase the risk of holdup by activist investors.Using a 2013 Delaware law that reduces the authorization threshold for two-step tender-offers from 90% to 50%, we investigate whether variation in the required level of shareholder support affects acquisition outcomes. We find that lower authorization requirements increase the use of tender offers relative to mergers for Delaware targets. Though the new law removes target shareholders’ right to vote on certain deals, they do not appear to be harmed by the change. Indeed, Delaware targets received greater acquisition premiums and target cumulative abnormal returns after the passage of the new law relative to target firms incorporated in another state. Our results suggest that the supply of equity is not perfectly elastic and caution that supermajority approval requirements can increase the risk of shareholder holdup and lead to inefficient choice of deal structure.

Independent Directors and Shared Board Control in Venture Finance

In most startup firms neither the entrepreneurs nor the investors control the board. Instead control is typically shared with a mutually appointed independent director holding the tie-breaking seat. Contract theory, which treats control as an indivisible right held by one party, does not have a good explanation for this practice. Using a bargaining game similar to final offer arbitration, I show that an independent director as tiebreaker can reduce holdup by moderating each party’s ex post threat position, potentially expanding the range of firms which receive external financing. This project contributes to the literature on incomplete contracting and holdup and improves our understanding of governance arrangements in startup firms.

Law and Economics: Empirical Dimensions

This article surveys the importance of empirical work in the economic analysis of law. It describes the history of economics as a positive science and then explains how the positivist approach has in recent years led to an increased emphasis on empirical scholarship within the field of law and economics.

A License to Grow: Ending State, Local, and Some Federal Barriers to Innovation and Growth in Key Sectors of the U.S. Economy

This white paper outlines some of the remaining state barriers and a few federal ones and how they prevent disruptive innovations by entrepreneurs and established firms alike that potentially could bring new and more efficient business models to the market. In the case of the legal sector, the barriers we identify not only adversely affect legal innovation, but also impede innovation in other sectors of the economy. Similarly, in health care, pharmaceuticals, K-12 education, the financing of growth businesses, and many consumer services, legal obstructions hinder innovation and the provision of efficient, affordable, high-quality services and products. We conclude by surveying the main options for reducing or eliminating these impediments, proposing, in effect, ways to provide a “license to grow.” Although most of the ideas we list are relevant only to state and local governments, we do not recommend, however tempting it may be, federal preemption as the means to their abolition. Apart from the political difficulty of gaining consensus on a sensible preemption approach in a time of deep partisanship with the Congress, it is not necessary for citizens to look to Washington to solve all problems. This white paper is an extension of the Startup Act in which the Kauffman Foundation outlined ways the federal government can stimulate new company formation and growth, encouraging economic growth across the economy. In a companion to this report, the Foundation also will publish a separate template for state and local “Startup Acts” - in reality, both executive and legislative measures - that would reinforce and amplify the impact of startup-friendly policies at the federal level. This particular white paper focuses primarily on removing state and local impediments to entrepreneurial growth and thus, we hope, will make an important contribution to the public policy debate in its own right. Many of the ideas outlined here also will be included in a summary fashion in the companion Kauffman report on a broader startup agenda for state and local governments. As prior Kauffman research has made clear, new firm formation and growth are critical to job creation and economic growth in general. The persistently high rates of unemployment since the financial crisis of 2007-2008 and the decline in formation rate of new employer firms in recent years make a startup agenda at all levels of government more urgent than ever. Written by the Kauffman Foundation Task Force on Entrepreneurial Growth.