Race to the Top or Race from the Bottom?

The jurisdictional competition for incorporations is often framed as a “race to the top” or “race to the bottom,” depending on one’s view of Delaware. If one thinks Delaware law is generally better than that of other states, one characterizes the “race” as one to the top. If one thinks Delaware law is generally worse than that of other states, one characterizes the “race” as to the bottom. However one defines the finish line, Delaware is clearly the state to have crossed it first, and by a wide margin.

Another way of looking at the problem is whether the race is a “race from the bottom.” Instead of asking whether companies relocate to gain the benefits of Delaware, perhaps corporations incorporate out of state to escape local law. If a corporation is located in a jurisdiction with law that is already desirable, the corporation might incorporate locally. If the corporation is located in a state with undesirable law, it might look elsewhere in general, and Delaware in particular.

To examine this possibility, this post examines whether companies that are physically located in certain states are more likely to incorporate out-of-state than are corporations physically located in other states. The following table lists the top five large states in retaining companies in state and the bottom five large states at retaining corporations in state. Large states are defined as those with 100 or more corporations physically located in the state (plus Delaware, even though it has fewer than 100 corporations physically located there).

States	In-State Firms	Located and Incorp-orated In-State	As % of All Firms In-State	Located Elsewhere But Incorp-orated In-State	As % of All Out-of-State Incorp-orations
Top 5 Large States
Delaware	48	43	89.58	7507	91.31
Nevada	140	111	79.29	368	4.48
Wisconsin	102	73	71.57	1	0.01
Oregon	193	132	68.39	6	0.07
Minnesota	219	122	55.71	9	0.11
Bottom 5 Large States
California	3460	870	25.14	29	0.35
New Jersey	234	37	15.81	5	0.06
New York	975	105	10.77	8	0.1
Connecticut	182	18	9.89	1	0.01
Massachusetts	874	55	6.29	1	0.01

 

The differences between the top states and the bottom states are rather striking. As might be expected, Delaware does the best job of retaining corporations in state and attracting corporations from out-of-state. It retains about 90% of the firms physically located in Delaware and attracts about 91% of the corporations that incorporate out of their own state. Nevada also does well retaining its own corporations and attracting them from other states, although it is far below Delaware in attracting corporations from other states.

The other extreme is Massachusetts, which managed to retain only about 6% of the firms physically located in the state, and attracted virtually none. New York did only slightly better, retaining only about 11% of the corporations located in that state and attracting only a handful. California, which had the most corporations physically present in the state, only retained about 25% of those corporations.

Wisconsin is an interesting case, because it retained most of its corporations in state, yet attracted virtually no out-of-state incorporations.  Thus, the fact that a state does not repel its own corporations does not necessarily translate into attracting other states’ corporations. Indeed, the converse is also true, as we will see in a later post that one state does quite well attracting other states’ corporations, but fails to retain the most of its own.

The wide discrepancy between a state like Massachusetts, on the one hand, and a state like Wisconsin on the other hand, suggests that local state law might have an effect in driving corporations out of state. These two states attracted about the same proportion of out-of-state corporations (almost none), but Wisconsin retained about 72% of its corporations while Massachusetts lost almost all of them. Thus, it seems at least plausible that unfriendly local law drives corporations away, rather than Delaware law necessarily attracting them.

In the next few posts, we will look at similar data for LLCs.