In the Noughties, Nevada arose as the place in the US for companies seeking a protective environment for directors, officers and members to incorporate. Nevada made a conscious decision to try to attract incorporations and, in fact, succeeded, although only in one specific segment of the market for incorporations, that of companies with high agency costs or, according to another view, that want to save on litigation costs. The general market for incorporations remains dominated by Delaware.
No European Delaware is in sight, notwithstanding the fact that regulatory arbitrage is now possible, after Centros (1999) and its progeny, and is now a feature of European company law, as the Fiat Chrysler Automobile case showed. In my paper, however, I wonder whether a European Nevada, rather than a European Delaware, could develop; a state in which directors, officers, members and the company itself are protected from liability and, more generally, from lawsuits.
It is highly improbable that any European state will make an explicit move, as Nevada did, to attract incorporations on the basis of “laxer” liability rules or rules discouraging lawsuits. States could, however, capitalise on the inefficiency of their judiciary and seek to make the most of it. Slow trials are a major and notorious issue in many countries, from India to Italy. The importance of the efficiency of civil justice for the economy has by now become a staple in specialised literature as well as in political discourse. Italy has one of the slowest judicial systems in Europe, alongside other states, such as Greece and Cyprus.
Since enforcement is key to any law, and company law is no exception, I argue that states could compete by offering directors and members the protection that originates from a lack of enforcement –due to the inefficiency of their courts– rather than by changing the law on the books, which would be politically unfeasible (a reform like the one in Nevada would require a deviation from established principles of law in many European states).
One major objection to the idea of a European Delaware developing is that, given that no European state other than the state where the company is headquartered can levy franchise taxes (and even these are being phased out), European states lack one of the main incentives to compete that exists for states in the US. In my model of competition, based on enforcement so slow that it fades into no enforcement, the incentives of states to compete would be different: only a very small incentive is needed, if the costs are negligible. On the other hand, attracting incorporations could be a politically expendable move, because while the advantages are easy to perceive (more business for local lawyers and accountants), the costs (such as those of additional lawsuits filed in the courts of the state of incorporation) are not.
If one state embarked on the enterprise of attracting incorporation by promising a lenient approach to directors’ and members’ liability, other states could do very little about it. No sweeping measure to avoid reincorporation in one specific state (either via direct seat transfer or with a cross-border merger) would be likely to pass the Gebhard test, nor would converting the relevant company law rules into rules that apply to any business carried out in the state be an option.
The paper is available here.
Andrea Zorzi is an assistant professor of business law at the University of Venice Ca’ Foscari and an attorney specialising in company and insolvency litigation.