Wednesday, August 14, 2002

race to the bottom

Late last night (or early this morning, depending upon your perspective) I wrote about a New Republic article written by Jonathan Chait for the cover story of August 19th's New Republic (link below). The article appeared to be a plea for President Bush to add Delaware to the "axis of evil."

I had considered working my way through Chait's article, pointing out places where his work might have been helped by a fact checker, however, Delaware's blogging deputy attorney general, and representative of the Delaware Department of Transportation, Fritz Schrank, had enough of the facts at his fingertips to do that eloquently and efficiently. But our Sneaking Suspicions author really only addressed the issues Jonathan Chait raised regarding Delaware's revenues from tolls.

Rather than attack Mr. Chait, I'd rather point to a couple of positive writings about Delaware by other authors. The first, by the Honorable William T. Quillen and Michael Hanrahan is A Short History of the Delaware Court of Chancery--1792-1992.

I suspect that if Mr. Chait had the pleasure of meeting William T. Quillen, and spending some time with him, he might come away with a completely different impression of Delaware. A former Secretary of State, Superior Court Judge (twice), Chancellor of Chancery Court, and Delaware Supreme Court Justice; he is one of Delaware's most liked and respected citizens. When you read that the selection of judicial officers for Chancery Court is based upon merit, it's one thing. When you meet a former Chancellor like William Quillen, you understand what the word "merit" actually means. And, his History of the Delaware Court of Chancery reflects an understanding that there are people who might misunderstand Delaware's role as an often favored place for people to create corporations:
After years of effort, a new Constitution was promulgated by a Constitutional Convention in 1897. The Constitution of 1897 eliminated the time honored and highly political process of creating corporations by special legislative act and provided for incorporation only under general law.(48) Pursuant to this constitutional provision, a new general corporation law was enacted in 1899.(49) The new law took full advantage of liberal enabling breadth offered by the Constitution: perpetual corporate existence and broadly stated general powers became the corporate norms. In essence, Delaware law recognized that the American corporation had been largely transformed to a decidedly free wheeling, private enterprise mode; it had lost its original prime character as a state instrument for public improvement. Indeed, the passage of the law itself was generally attributed to the prospect of a new private enterprise, the corporation service company.(50) The business and legal change was not lost upon commentators and, in an inkling of things to come, Delaware was promptly criticized as a "little community of truck-farmers and clam-diggers ... determined to get her little, tiny, sweet, round, baby hand into the grab-bag of sweet things before it is too late."(51) Thus, even as the starter's gun went off, Delaware was already being accused of participating in a "race to the bottom."
A number of commentators have accused Delaware of such a race to the bottom. In that, Jonathan Chait was echoing the words of others.

But, is there a race to the bottom? Is that too simplistic an approach to take? Here's another view:
Although some EC company lawyers have supported harmonisation precisely in order to avoid a Delaware style "race to the bottom", the idea that Delaware law represents a lowest common denominator has been challenged by accounts which argue that any attempt by managers to downgrade shareholder interests would, over time, lead to a hostile response by the capital markets. Managers therefore have an incentive to incorporate under the law of a state which favour shareholder interests since "[s]tates that enact laws that are harmful to investors will cause entrepreneurs to incorporate elsewhere". If this is the case, "Delaware attracts incorporations not because its laws are lax, but because they are efficient". Thus, some commentators argue that Delaware has so perfected the art of matching its laws to the demands of the users of those laws that it has won the race to the top. In general, while the claim that Delaware company law is efficient remains much disputed, it is generally agreed that regulatory competition need not, necessarily, imply a degradation of standards.
As for Mr. Chait's statements that Enron, and other corporations may have chosen Delaware as a place to create companies for seemingly fraudulent purposes, I'm compelled to point out that Delaware requires, at the very least, a statement in a corporation's certificate of formation that it is being created for "any lawful act or activity under which corporations may be organized under the General Corporation Law of Delaware." (Title 8, section 102) As we know from 1913 case law in Delaware (Martin v. D.B. Martin Co., 10 Del.Ch. 211, 88 A. 612):
The fiction of a legal corporate entity should be ignored when it has been used as a shield for fradulent or other illegal acts.
Regardless, I believe that if Mr. Chait had the chance to visit more than just Delaware's interstate, he might come away with a different feeling about Delaware.

Though, I'm beginning to wonder if Mr. Chait even travelled down Delaware's interstate to begin with. He stated that he had to pay a toll upon entering Delaware. He then complains about having to pay a three dollar toll to cross over the Delaware Memorial Bridge into New Jersey.
And even after you've crawled through their turnpike and handed them your toll, the citizens of Delaware still haven't finished with you. There's still a $3 fare for the Delaware Memorial Bridge, which is run jointly by Delaware and New Jersey and whose proceeds--which far outstrip the bridge's maintenance costs--benefit both states about equally.
The fare is three dollars. That's true. But, it's not imposed when travelling from Delaware to New Jersey. The toll only applies on the trip from New Jersey to Delaware. (And, yes, there are problems with the federally authorized agency that administrates the tolls across the river. Prosecutors and other investigators are looking at those carefully)

The more I think about the article written by Jonathan Chait the more I realize that perhaps I should stop here, ending this particular race to the bottom.

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