As of today, 67.8% of Fortune 500 companies are incorporated in Delaware. This means that Delaware, despite having less than one-third of one percent of the US population, is by far the primary place of incorporation for the most important businesses in the world. The numerical dominance would not matter if it were not for the well-known internal affairs doctrine, according to which the law of the state of incorporation determines issues relating to the internal affairs of the corporation. Thus, all disputes over corporate governance involving companies incorporated in Delaware are adjudicated using Delaware law. As a consequence, Delaware courts adjudicate so many cases on corporations that they have developed a body of legal precedents outstripping by far that of any other jurisdiction. Even in cases where Delaware corporate law does not apply, other courts are influenced by Delaware courts’ precedents.
This hegemony and the resulting pre-eminence in corporate law are a peculiar by-product of American federalism and constitute Delaware’s dominance—a dominance that has been persisting for over a century. Scholars suggest several explanations for both the rise and the staying power of Delaware. These explanations are essentially subsumed under the credible commitment theory and the network theory. According to the former, investors rely upon Delaware commitment towards the business community; the network theory emphasises how Delaware is profiting from the network externalities of the position achieved. The credible commitment theory and the network theory sometimes overlap and combine. Both predict that Delaware is hard to dethrone.
Criticism and challenges
This dominance has been regularly criticised by scholars but hardly put in serious jeopardy by challengers. Nevada is known as Delaware’s most important competitor, with an aggressive strategy that overrode the effort of any other jurisdiction. In order to attract incorporators, in 2001 Nevada broadened directors’ and officers’ protection from liability and became a truly liability-free jurisdiction. Yet, its success has been limited to a specific market segment: small firms with low institutional shareholding and high insider ownership.
In recent years, commentators have argued that Delaware’s dominance might be endangered by two different threats: the migration of cases induced by Delaware courts’ response to overlitigation and the invasive growth of federal regulation—in particular, the possible introduction of a federal incorporation. Nevertheless, criticism and predictions on Delaware’s decline, as well as challenges to its position always follow the same pattern and end, at most, with a negligible erosion of this hegemony. Unsurprisingly, the migration of cases out of Delaware turned out to be marginal and the debate on a federal incorporation was revived in conjunction with a political campaign but fizzled out afterwards.
A mounting challenge: Wyoming and blockchain companies
In a recent paper I contend that a mounting challenge to Delaware’s dominance is mostly going off the radar. Wyoming is targeting a new segment of the market for corporate charters: cryptocurrency businesses. This jurisdiction is attempting to attract these incorporators by enacting liberal legislation and providing their companies with a safe harbour.
In 2018, the state legislature passed the Utility Token Bill, pursuant to which ‘utility tokens’ are exempted from state securities laws, and a developer or seller of an open blockchain token is not considered as the issuer of a security—under some conditions. Additionally, Wyoming’s lawmakers also responded to a specific need of many blockchain and cryptocurrency innovators, who are unable to secure reliable banking services under normal conditions. Thus, in 2019 the state legislature enacted a piece of legislation introducing ‘special purpose depository institutions’ (SPDI): these institutions are allowed to receive deposits and conduct a range of other traditional banking activities (including fiduciary asset management, custody and related activities) without being required to secure insurance from the Federal Deposit Insurance Corporation (FDIC).
Wyoming also (1) enacted a statute which created a financial technology sandbox for blockchain companies to test or operate innovative financial products and services in the state; (2) exempted virtual currencies (used within this jurisdiction) from money transmitter laws and regulation; and (3), with regard to tax regimes, exempted these currencies from state property taxes. Finally, with respect to corporate law, Wyoming passed legislation authorising the maintenance of corporate records in a blockchain. More interestingly, it established a Chancery court and provided it with the jurisdiction on ‘disputes involving commercial, business, trust and similar issues’.
Comments on Wyoming’s strategy
In essence, Wyoming aims to carve out a specific share of the corporate charters market, take it away from Delaware’s control and dominate it. This market segmentation approach is the same tactic that Nevada adopted, though Wyoming is applying it to a sector that has meaningful growth potential and is pushing the differentiation to the point of involving state securities and banking regulation—not only corporate or tax law.
The application of the credible commitment theory and of the network theory indicates that Wyoming’s strategy needs a combination of factors to be successful. Above all, building a credible reputation and a network from which to benefit needs time.
Also, a competitive advantage merely based on legislation might be transient: free-ride legal innovations are easy for other jurisdictions to copy and are likely to lead only to short-term gains in the market for corporate charters. Wyoming should achieve a level of expertise that other jurisdictions could not easily replicate, such as specialised courts and a body of case law on blockchain and virtual currencies. In this respect, I argue that setting up a Chancery court dedicated to business and corporate matters is the right move. But developing said expertise and body of case law would need time too. And time can be the crucial issue.
Clearly, Wyoming’s particularly liberal laws for cryptocurrencies are reason for concern. For this, federal legislature might intervene by enacting some regulation and halt Wyoming’s ambition. In March 2020, a federal bill named Crypto-Currency Act of 2020—containing a comprehensive reform of cryptocurrency regulation— was introduced in Congress but failed to be enacted. Yet, it suggests that a federal intervention is not a remote possibility and may even be around the corner. This is why Wyoming should attempt to earn a share of the charters market before federal legislature and regulatory bodies pre-empt Wyoming’s laws for cryptocurrencies.
To the extent that Wyoming’s strategy proves to be effective, it will make this jurisdiction gain the lead only in the blockchain segment of the market, whilst Delaware will continue to dominate the rest of it. In light of this, Wyoming’s approach might look like a dare. Yet, it is also the most promising—maybe the only possible—strategy to challenge Delaware’s dominance at the present time.
Pierluigi Matera is a full professor of comparative law at the Link Campus University of Rome, and a professor of business and corporate law at LUISS – Guido Carli, Rome. He is a Visiting Fellow at Wolfson College, Cambridge.