Ido Baum^[1]* & Dov Solomon^[2]**^[3]Ψ

What makes the corporate laws of some jurisdictions more attractive for entrepreneurs and investors than others in the global arena? Delaware’s well-known corporate law and its highly regarded specialized Court of Chancery attract entrepreneurs who choose the small state as their locus of incorporation. Moreover, in cross-border deals, global investors often choose to assign Delaware corporate law as the law governing their corporate investments and shareholder agreements in mergers and acquisitions (M&As). Within the United States, the competition among state laws is a popular explanation for Delaware’s prominence. However, existing literature has generally neglected Delaware’s global role. Using qualitative methods based on interviews with M&A practitioners from the United States, United Kingdom, continental Europe, and Israel, we find that Delaware faces strong competition in the global corporate arena, particularly from the United Kingdom. In fact, the laws of England are a popular choice in cross-border M&As even when the parties and the corporations involved were incorporated under civil law jurisdictions. This Article unpacks the process and the factors that drive incorporation and M&A choice-of-law decisions in the global corporate arena. Contrary to the common assumption of private international law that corporate law stimulates the interjurisdictional competition for corporate charters, our findings suggest that corporate law plays a relatively modest role in incorporation decisions; in the global arena, it is far less important than tax considerations. We also identify myriad factors driving decisions about the governing law in cross-border M&As, generating a nuanced choice-of-law narrative. This Article concludes that the popularity of certain choices of corporate laws in cross-border M&As, such as the laws of Delaware and England, is based on their being more enabling than others, less intrusive, more predictable, and, most of all, often the least uncomfortable neutral choice.

Introduction

A Russian space scientist residing in the United States, an American businessman, and an Italian navy admiral embark on a project of commercializing old Soviet satellites. Sound like the beginning of a Cold War-era joke? In fact, this is the story of a corporation formed in Delaware pursuant to a cross-border joint venture agreement. The business venture eventually produced one of the lengthiest cases in the history of the Delaware Court of Chancery in spite of the fact that the parties had agreed to settle their disputes in arbitration according to the laws of the United Kingdom.^[4] Why would parties to a cross-border venture seeking finance and involving the United States, Italy, and Russia choose the U.K.’s law as the governing law for any potential dispute? Why would they end up litigating for more than a decade under Delaware law?

If an entrepreneur is setting up a corporation and envisions approaching cross-border investors, raising capital in global capital markets, or being acquired by major transnational players in the global arena, where would this entrepreneur choose to incorporate? In the United States, one is tempted to answer, off the cuff, “Delaware.”^[5] The Delaware brand still resonates in spite of competition in the United States from other states, including New York and California. These three states seem to vie for first place as the preferred governing law in corporate mergers and acquisitions (M&A) transactions, and academic research suggests the race is ongoing.^[6] However, as this Article suggests, when considering cross-border mergers and acquisitions, Delaware, New York, and California are not the only leading competitors. The laws of the U.K. emerge as a significant favorite among practitioners in corporate M&A deals.^[7]

If an entrepreneur is setting up a globally oriented business in any other country outside the U.S., one might assume that Delaware would be considered as a locus of incorporation.^[8] This intuition builds on common wisdom in corporate law and corporate governance: the corporate law of the state of Delaware achieved superiority over other U.S. states and other jurisdictions around the world as a result of competition among jurisdictions.^[9] The nature of this competition and whether it generates better or worse corporate laws is a matter of continual dispute among corporate law scholars.^[10] Underlying the theory that corporate law changes are driven by regulatory competition is an assumption that when business decision-makers choose a locus of incorporation, corporate law matters. Another implied assumption of this theory is that, when investors choose the governing law in their investment agreements or in M&A, corporate law matters.

However, the increasingly globalized market for corporate law has, for the most part, not yet been explored by legal scholars who presuppose a U.S. interstate market.^[11] This Article seeks to fill this gap in the academic literature by using qualitative methods to observe the process of determining the place of incorporation and the choice of governing law in the transnational corporate arena.

Building on interviews with seasoned corporate and international M&A lawyers, we unpack the process and the factors that drive incorporation and choice-of-law decisions in the global corporate arena. Thus, we aim to advance a nuanced theory that Delaware and the U.K. are frequently chosen as locations of incorporation and their corporate laws are preferred choices of law in cross-border M&A transactions because they provide parties with a combination of benefits including most importantly stability, foreseeability, flexibility, and in many cases, they are the least uncomfortable choice.

The Article proceeds as follows. In Part II, we discuss the extant theory on regulatory interjurisdictional competition. We then focus on the phenomenon of the emergence of Delaware as a globally attractive locus of incorporation and popular choice as governing corporate law. Finally, we shed light on the leading competitive role of the United Kingdom in the global corporate arena. In Part III, we unravel a qualitative study designed to reveal the dynamics and factors that drive choices about where to incorporate and what jurisdiction’s law will govern cross-border M&A deals. We begin by introducing the empirical qualitative methods employed in our study. We then present our findings with regard to the process that determines governing law in an M&A transaction, and the various factors involved in selecting an applicable corporate law. In Part IV, we analyze the empirical results of the qualitative study. In Part V, we conclude the discussion.

The Global Competition over Corporate Law

Interjurisdictional Competition

The academic literature on corporate law presents a long and currently unresolved dispute about the role of competition over corporate law between jurisdictions. This interjurisdictional competition—sometimes referred to as “international regulatory competition”—is often described as a catalyst of evolution and innovation of laws as a result of the state-level laboratories of regulation.^[12] The term “regulatory competition” is often used to define a situation in which states or other smaller jurisdictions “vie with each other to retain or attract investment within their jurisdictions by adjusting their regulatory regimes, and firms engage in regulatory arbitrage” by incorporating, relocating, or moving capital.^[13]

Interjurisdictional regulatory competition often generates regulatory arbitrage or responds to it: subjects choose a privately beneficial but not necessarily social-welfare-enhancing regulatory regime by exiting from the regulating jurisdiction and migrating to the desired jurisdiction.^[14] To choose the law that best serves their interests, entrepreneurs and executives can go “shopping” around the world for the desired corporate law.^[15] In fact, regardless of whether it is good or bad, for regulatory competition to work, subjects must be able to choose between jurisdictions and also to fairly easily exit from their jurisdiction and migrate to a competing jurisdiction.^[16]

In light of this global competition, jurisdictions have an interest in shaping their corporate law in a way that will attract businesses, entrepreneurs, and executives because of a variety of reasons, including the desire to collect registration fees.^[17] Indeed, the most popular incorporation state in the world, Delaware, realizes a significant portion of its tax revenue from corporate registration fees.^[18] Thus, states, like the corporations registered in them, are exposed to incentives to shape their corporate law in a way that maximizes their private benefit even if it is undesirable from the perspective of third parties such as investors and creditors.^[19]

The jury is still out on the academic debate over whether regulatory competition creates a race to the top or the bottom.^[20] Opponents of regulatory competition base their criticism on the agency problem that exists between entrepreneurs and managers on the one hand and investors on the other.^[21] In choosing the state of incorporation, entrepreneurs and executives have incentives to maximize their private benefit at the expense of investors. Specifically, entrepreneurs and executives are likely to prefer “enabling” and lax corporate law that has few cogent provisions, giving them considerable freedom to use investors’ money without investors being given footholds in corporate governance matters. Delaware’s corporate law is considered enabling corporate law that gives company management extensive leeway to navigate company affairs as it sees fit.^[22]

Since states want to attract corporate charters, they will shape their corporate laws in ways that match the preferences of entrepreneurs and executives even if they conflict with the interests of investors. The competition among states, which strive to increase their share in the incorporation market, will incentivize them to adopt pro-management and anti-investor corporate law.^[23] If one state relaxes its corporate governance standards and allows managers to exploit investors, other states may be forced to follow suit to avoid losing their registered companies to the first state. In contrast, a state that insists on strict requirements for investor protection will find itself out of the race because its competitors will provide, in the eyes of entrepreneurs and executives, superior corporate law. The competition between jurisdictions over corporate law will result in a race to the bottom, with all states ending up with similar lax corporate governance standards, to the detriment of investors. Therefore, some scholars argue that federal or even global harmonization of laws and integrated regulation would be better than competition.^[24]

On the other hand, proponents of interjurisdictional regulatory competition take the opposite approach: they argue that the corporate law competition creates a race to the top.^[25] If states were to converge at the bottom by adopting lax corporate laws that produce systematic exploitation of investors, investors would find that the return they could expect in these states would be consistently lower than the return they could expect in states whose corporate laws are stricter, which would provide them more protection. This would lead investors to move their investments from companies registered in enabling states to companies registered in stricter states or, alternatively, demand a premium that would adequately cover their damages. Capital markets would thus discipline companies registered in enabling states. Fears of market sanctions would cause entrepreneurs and executives to internalize the implications of their choice of corporate law for investors because harms to investors would boomerang back to them. The narrative that competition between states leads to efficient development of corporate law while incentivizing socially beneficial corporate law innovations is probably the mainstream view in modern corporate law circles.^[26] Indeed, investors are flocking to enabling states like Delaware,^[27] which may show that the race is to the top.^[28]

The academic literature implicitly assumes that corporate law influences several types of decisions. First, it affects entrepreneurs’ decisions regarding where to incorporate. Consequently, it affects investors’ decisions to invest or refrain from investing in a company incorporated in a jurisdiction with superior or inferior corporate law. Finally, it influences the choice-of-law decisions of parties to multinational shareholder agreements and cross-border corporate mergers and acquisitions.

Delaware

The phenomenon of interjurisdictional regulatory competition in corporate law has emerged in the United States. It is especially associated with the ascent of Delaware as a locus of incorporation. In the United States, each state governs and enacts its own corporate law as part of their traditional authority over commercial law.^[29] Although each state can shape its corporate law according to its agenda, goals, perceptions, and views, approximation toward Delaware corporate law is the prevailing trend.^[30] Even though Delaware is a small state by any measure—population, geography, industrial or agricultural production—its corporate law has largely dominated all the rest.^[31]

Delaware’s law is considered the leading corporate law in the world: the most developed, favorable, and approachable law, and the law that has inspired other legal systems both inside and outside the United States.^[32] Arguably, the quality of corporate law is an important factor in deciding where to incorporate.^[33] Hence, most public corporations in the United States,^[34] as well as many foreign companies, choose to register in Delaware.^[35] In recent years, almost ninety percent of firms going public in the United States chose Delaware as their corporate domicile.^[36]

Delaware corporate law is predominantly made up of “enabling” default rules that leave significant discretion to private choice.^[37] Mandatory rules are limited to a few issues of utmost importance to protecting investors, such as the right to elect directors and to vote on certain major transactions.^[38] As a result, corporate stakeholders can opt out of default rules on central matters, such as economic rights and voting rights of stock,^[39] through private ordering, almost without limit.^[40] This important characteristic of Delaware corporate law has greatly increased its attractiveness because it allows stakeholders to shape the legal arrangements that will apply to them in a way that maximizes their benefits.

The superiority of Delaware corporate law is attributed not only to the excellent work of the state legislators but also to the quality of its specialized court system.^[41] Empirical studies have shown that the existence of business courts has a positive effect on the performance of companies.^[42] The Delaware Court of Chancery has exclusive jurisdiction over corporate issues.^[43] Appeals from the Court of Chancery are taken to the Delaware Supreme Court.^[44] Both courts have expert, experienced judges in the field of corporate law who are well known for the quality, efficiency, certainty, and coherence of their judgments.^[45] They have a national and global reputation in the business community and are responsible for a well-developed collection of corporate law precedents.^[46]

United Kingdom

The interjurisdictional competition over corporate law is not limited by U.S. borders. In recent decades, an international market for corporate law has emerged; consequently, foreign nations compete with Delaware to supply corporate law.^[47] However, the increasingly globalized market for corporate law has been largely unexplored by legal scholars, who presuppose a U.S. interstate market. This Article aims to fill some of this gap in the academic literature by shedding light on the international market for corporate law and the leading role of the United Kingdom in the global arena, which some scholars have described as the “European Delaware.”^[48] Furthermore, the Article lays the foundations to understanding the dominance of the laws of Delaware and the U.K. in the global market for corporate law.

The U.K. has a distinguished pedigree as an exporter of legal concepts and innovations, in part because its status as a colonial power served to ensure that the English common law system was introduced in many areas of the world.^[49] Historical developments in company law illustrate this pattern. The U.K. Companies Act 1948 has been called “the great mother of Commonwealth companies[’] law,” serving as the model and inspiration for companies acts across the Commonwealth.^[50] For instance, Australia, Canada, New Zealand, South Africa, and Hong Kong have all borrowed from English law when developing legal rules governing companies.^[51]

The U.K. government has acknowledged its desire to ensure that English company law is internationally competitive.^[52] Several key factors have made English corporate law superior and more attractive than other jurisdictions. Prior to leaving the European Union, the U.K. had the simplest incorporation procedures and the lowest incorporation costs in the Union.^[53] Its company law has comparatively more enabling rules than most continental European jurisdictions.^[54] It refrains from imposing minimum capital requirements for private companies.^[55] Unlike some continental jurisdictions, with Germany being the most famous example, it does not require employee participation in the management of a company.^[56] Moreover, the U.K. benefits from the prominence of the English language, which is the lingua franca of the business world.

The European Court of Justice’s decision in Centros made clear that the Treaty on the Functioning of the European Union (TFEU) provides for freedom of establishment,^[57] which protects the entitlement of corporate persons formed in one E.U. member state carrying on their business in another member state.^[58] Since this landmark decision, more and more entrepreneurs in continental European countries have chosen to form companies in the U.K. while still carrying on their business in their home country, which has made the U.K. a leading exporter of company law.^[59] While the rate of incorporation in the U.K. has declined markedly since the late 2000s, there remains a substantial number of English companies formed by entrepreneurs based in other member states and having their business activity wholly or mainly outside the U.K.^[60] However, the U.K.’s recent Brexit may have a negative effect on this situation in the future. After the Brexit, the ECJ’s case law that protected companies incorporated in the U.K. but that have their real seat in another member state will no longer apply to U.K. companies because the United Kingdom became a “third country,” in terms of European Union law. That is, a country not a member of the E.U.^[61] Therefore, member states will not be obliged to recognize the legal personality of U.K. companies with a real seat in their territory, nor their limited liability.^[62] As a result, these companies might not have legal standing in the E.U., and their shareholders might be personally liable for the debts of the company.

Even if the future dominance of the United Kingdom as a locus of incorporation is at risk after the Brexit, U.K. law is still a popular choice for global M&A transactions, alongside Delaware. In the next part, this Article unpacks the reasons for the dominance of these jurisdictions by pinpointing the jurisdictional characteristics that matter to decision-makers in choosing where to incorporate and which law will govern their M&A transactions.

The Qualitative Study

Methodology

Our research is based on qualitative analysis of semi-structured interviews of twenty-two practitioners specializing and currently engaged in cross-border corporate mergers and acquisitions.^[63] All interviews were conducted between June 2020 and October 2020,^[64] and all were recorded.^[65] We promised all interviewees that their identities will remain confidential to elicit candid responses and enable them to use nonpublic cases and events as examples. Each interview took forty-five to sixty minutes.^[66]

To locate and approach the interviewees, several methods were used.^[67] Some were approached on the basis of personal acquaintance with the researchers. Some were reached through “snowballing.”^[68] The snowball technique was used specifically to contact lawyers in different countries, to diversify the pool of respondents to include lawyers from continental Europe, and to increase the number of women in the pool of interviewees. We also approached lawyers who are leading practitioners in the field according to international legal rankings such as Chambers^[69] and Legal500.^[70]

The final selection of interviewees included practitioners from the United States, United Kingdom, Germany, Poland, and Israel.^[71] Collectively, they have experience with thousands of cross-border investment mergers and acquisitions.^[72]

The pool of interviewees included twenty-two practitioners: twenty-one lawyers and one economist. Nineteen are leading partners, founders, or name partners in law firms. Three work for major international private equity funds or other global institutional investors; of these, two are lawyers and one is managing the national activities of a global institutional investor.

Of our interviewees, sixteen are men and six are women. Eleven are Israeli lawyers working for top-tier Israeli law firms. Ten of the eleven Israeli lawyers have significant work experience in international law firms. Of these, nine worked in international law firms based in New York or in major U.S. law firms and were licensed by one or more of the U.S. state bars. One worked in a London-based firm. Two of the Israeli lawyers were U.S.-born and -trained and had immigrated to Israel. One Israeli lawyer is the head of an Israeli firm’s New York office and resides permanently in New York.

Five interviewees are U.S. citizens admitted to the bar in and working for major law firms based in New York. Two are based in London, U.K.; one is based in Germany; and two are based in Poland; all of these are working in their countries as partners in major international law firms.^[73]

On top of the international diversity and the global professional exposure of the interviewees, we took note of the academic education of the subjects. This type of experience may also bear on the subjects’ perspective towards jurisdictions other than the one in which they operate. Five interviewees, none from the United States, hold doctoral degrees. Three Israeli interviewees hold doctoral degrees (SJD) from Harvard University. One German lawyer holds a doctoral degree from a German university and one Polish lawyer holds a doctoral degree from a Polish university.

The interviewees were asked a set of open-ended questions adapted to their jurisdiction. They were asked in what stage of the negotiations of a corporate transaction will the issue of governing law be raised. They were then asked whether the venue of potential litigation would have an influence on the choice-of-law decision.

The interviewees were asked whether there is a difference between types of deals, such as (a) the acquisition of all the shares of the target corporation such that the target corporation is or becomes privately held by the acquiring corporation and (b) a majority or minority investment in the shares of a corporation. The underlying assumption was that the former usually requires primarily a stock purchase agreement (SPA) whereas the latter would also require a shareholder agreement (SA) or some other form of legal document that governs the rights and liabilities of shareholders.

The interviewees were asked what party raises the governing-law issue and to what extent this is an issue of concern to the client or the business-side decision-makers. The interviewees were asked whether a demand by an opposing party that a foreign jurisdiction’s law governs the M&A transaction would deter business decision makers from pursuing the corporate transaction.

Assuming that investors often have opportunities to invest in corporations that are incorporated in a foreign jurisdiction, the interviewees were asked whether investors would be deterred by the foreign law of the place of incorporation or by other aspects of an investment in a corporation incorporated in a jurisdiction that is not the investor’s home jurisdiction.

The respondents were then asked if they had observed any trends of global approximation of national corporate laws, and if the response was positive, they were asked if these trends affect the willingness of non-domestic investors to accept domestic corporate laws or an investment in corporations incorporated under a foreign corporate law.

The interviewees were also asked about the relationship between the place of incorporation and the forum of potential litigation and their effect on the choice what jurisdiction’s law would govern. Interviewees were also asked about the effect on the choice of law of the difference between common law and civil law systems.

In the following Parts, we survey the responses.

Choice of Law in Cross-Border Corporate M&A Transactions

The Tactical Battle over the Governing Law

A majority of our interviewees agreed that the choice of law is an important issue in the negotiations of a cross-border deal,^[74] though many of them also pointed out that this issue is usually brought up by lawyers and that when parties agree on most of the terms of an international transaction, the lawyers’ ability to influence the choice of governing law is limited.^[75]

The choice of governing law sets the stage for many issues that will be raised during the negotiations for a cross-border M&A transaction, and therefore it is natural to assume that the governing law would be one of the first issues discussed in the negotiations. However, the interviewees unanimously said that it is not a critical issue from the clients’ perspective.^[76]

One U.S. lawyer said, “I would not say that governing law is one of the priorities or even a top priority on the list of priorities of my clients when negotiating a deal.”^[77] He explained that “when you think about a deal, you first consider the business aspects and the taxation aspects, and only then [do] you consider the corporate law. I can’t say [governing law] is the central issue for me.”^[78] Another interviewee, a U.S. lawyer said, “Choice of law is an issue that concerns lawyers, but for the businesspeople, this is only one item in the bigger picture.”^[79] An Israeli interviewee, an M&A and high-tech lawyer said, “The governing law is not the first issue on the table when we discuss the term sheet. It’s not something that interests the investor or the CEO of the startup. It’s a lawyer’s thing.”^[80]

Even highly experienced transactional lawyers, including those involved in cross-border mergers and acquisitions of huge corporations, rarely have a structured approach or theory about how choice of law in corporate mergers and acquisitions is determined. Most interviewees referred to practical customary choices.^[81] An Israeli interviewee said, “If I represent a private equity fund, they care about the governing law. I would usually put down the buyer’s governing law. If it’s not a U.S. fund, I will ask the in-house counsel about their policy.”^[82] One continental European lawyer working for an international law firm, when asked why English law is the default choice for his firm, replied: “I can’t tell you why; there is no good justification for that . . . . This is a custom. I never thought about it; it’s natural. I started twenty-five years ago, and this was already there—I was trained that way.”^[83] An Israeli lawyer who studied and worked in the United States said, “There is no manual. When you join the law firm and do your first deal you just ask around [about] what’s the practice and someone tells you we use this governing law clause or that clause and that’s about it.”^[84]

There was a consensus among all interviewees that the governing law issue and the forum of dispute resolution will come up in every cross-border M&A transaction at a relatively early stage.^[85]

Interestingly, at least eight interviewees described a common negotiation tactic used by lawyers to secure their preferred choice of governing law.^[86] This tactic involved including the preferred governing law in the initial nonbinding documents exchanged between the parties at the first stages of a transaction, such as the letter of intent (LOI),^[87] memorandum of understanding (MoU),^[88] term sheet,^[89] or even nondisclosure agreement (NDA)—the last of which is usually sent to potential investors as a prerequisite for conducting a due diligence investigation.^[90] Although some lawyers thought this tactic was unique to their jurisdiction, it was mentioned spontaneously by lawyers from different jurisdictions.^[91]

A continental European lawyer from an international law firm said:

You will see it in the very first document, which is still nonbinding, so it’s either LOI or MoU or term sheet. Whatever you will call it—it’s still non-binding, but the choice of law is one of the things which you typically settle there . . . . Even if the document is nonbinding, you are not coming back to negotiate the choice of law in the final document.^[92]

A U.K.-based partner in an international law firm confirmed that the initial choice of law usually persists throughout the deal. He said, “Usually there’s no chance of changing the governing law after the term sheet unless there is something in that governing law that is really problematic and cannot be circumvented in any other way.”^[93]

Similarly, an Israeli founding partner with extensive experience in the United Kingdom said:

Sometimes you try to outsmart the other party in the term sheet in order to influence the choice of law in the agreement in the end. The reason is that there is an inclination to assign the same choice of law to all the agreements in the transaction. I’m talking about the corporate documents such as shareholder agreement and share purchase agreement. This is not the case with regard to additional agreements such as financing and banking agreements.^[94]

A U.S. lawyer in an international law firm representing global investors vis-à-vis Israeli entrepreneurs described the practice:

As early as the stage of the NDA, the issue comes up. At this stage, when an NDA goes out, the Israelis would usually indicate that the NDA will be subject to Israeli law. Private equity investors will usually send it back changing it to English law or Delaware law. You can usually convince the seller to waive the local law. At this stage, it’s less important because it’s very rare to have a lawsuit on a breach of an NDA, so the applicable law with respect to the NDA is not so critical. However, once you agree to the applicable law on the NDA, you basically lay the foundation for the next stages of the deal, so it will probably mean that this will be the applicable law in the deal itself.^[95]

A U.K.-based in-house counsel for an international PE fund confirmed that the governing law is determined in the initial nonbinding documents preceding the formation of the deal. He said:

It starts with the NDA. You exchange information, due diligence, and then you are negotiating, and then you go to the term sheet. That determines what the deal is going to look like. The sort of battle is more in the NDA stage. Once you lose the battle in the NDA, right in the beginning, if it has been formed in local law, it is more likely to continue in it.^[96]

A U.S. lawyer indicated that the term sheet would usually be the defining document: “The lawyers and the non-lawyers put down the key elements of the deal. It would be a two-page document and at the bottom you will have a clause on the applicable law.”^[97] This lawyer argued that the choice of the governing law in an NDA is not necessarily determinative of the final governing law and depends on the characteristics of the deal: “If you run a competition between multiple bidders, then they may not be able to contest the fact that the NDA is governed by local law, but that does not mean necessarily that the transaction itself will be governed by the same law.”^[98]

Several interviewees explained that whether a particular governing law is insisted on in the early stages is based on the perceived risk of litigation. An Israeli lawyer who represents many emerging start-ups said,

Normally I will not insist on the governing law in the NDA unless there is a risk that a competitor will be exposed to the company’s secrets in the due-diligence process. In that case, litigation is a possibility. Some international giants are merciless, and they build on that, especially when the target firm is a small start-up and the chances of being able to litigate are very small.^[99]

Another Israeli lawyer noted that from a litigation perspective, the most important items in the term sheet are the “no shop” clause,^[100] the confidentiality of information revealed by the seller during the due-diligence process, and occasionally a breakup fee to be paid if the transaction fails to materialize.^[101] He then explained the dynamics that may lead to agreeing on a different governing law in the initial stage, even if that meant the choice of law was different than the law in the place of incorporation.^[102] Describing a case of a U.S. acquirer and an Israeli target, he said:

I would sometimes agree to Delaware as the governing law of the term sheet and ask to change it when we reach final agreements. This happens when the initial negotiations are with the general counsel of the investor or with their international law firm and they intend to invest in an Israeli corporation. At the initial stage they don’t have an Israeli lawyer representing them, so I cannot require that Israeli law govern the term sheet. When they get an Israeli lawyer to advise them, we switch to Israeli law. You don’t want to have a mismatch, like an Israeli corporation below and a shareholder agreement above governed by a different law.^[103]

The picture that emerges from these interviews is that lawyers implicitly influence the choice of the governing law. Even sophisticated investors are relatively less concerned about the governing law, and they rely on the advice of lawyers in developing their perception about the suitability of the potential choice of legal regimes.^[104] One interviewee, a London-based corporate attorney for a major international PE fund with legal experience in both the United States and Asia, explained:

Governing law is important depending on the perceived risk of the jurisdiction. One thing that matters is a well-developed legal framework, and the second thing is if there is a bias by the courts or the arbitration toward the local players. A lot of this is based on perception as opposed to deep research, but often perception is in line with the reality—but not always.^[105]

This approach by the clients gives the lawyers latitude in maneuvering the choice of the governing law toward their preferred choice of law.

The Factors That Influence the Choice of Governing Law

Several dominant factors driving the choice of the governing law in M&A transactions emerged from the interviews. Determining the optimal governing law is far from an exact science. The interviewees mentioned different factors and assigned varying degrees of importance to them, depending on the type of the transaction, the nature of the party or parties, the jurisdictions involved, the dynamics of the negotiations, and the characteristics of the transactions in a particular industry (e.g., high-technology companies).

All interviewees independently agreed that choice of governing law in M&A transactions needs to be divided into two main questions. The first pertains to the jurisdiction in which the target corporation was formed.^[106] Although the formation stage usually occurs well before any merger or acquisition, it is assumed that entrepreneurs and their legal advisors take into consideration the potential consequences of choosing to incorporate in one jurisdiction rather than another. The interviewees were therefore asked to refer to the choice of the jurisdiction of incorporation.

The second major question is whether the deal represents a takeover of the entire target corporation or the acquisition of only a partial interest. The interviewees all indicated that these are different situations. The first is the acquisition or merger of a whole private firm, in which case the acquirer becomes the sole owner and therefore will be less concerned with corporate governance considerations or with the protection of minority shareholders. In such a transaction, the main legal document is the SPA, sometimes referred to as the “investment agreement.”^[107] The second situation is the acquisition of less than one hundred percent of the company, in which case an additional agreement that governs the relationship between the various investors, the SA, is standard.

This section provides a taxonomy of the various factors driving the choice of governing law based on the multidimensional picture drawn by the interviewees.

Taxation

Perhaps the strongest and least contested statement that emerged from the interviews is that the choice of law in virtually all cross-border corporate transactions is first and foremost driven by tax considerations. Corporate law plays a lesser role and often will yield to tax considerations.^[108] This is true both at the formation stage of the enterprise and subsequently at the M&A transaction stage, which is often influenced by the underlying law of incorporation.^[109] Among the twenty-one interviewees who referred to this issue, the overwhelming consensus stressed the supremacy of tax considerations over corporate-law considerations.^[110]

A German lawyer explained: “We have the ‘big 4’ accounting firms setting up a tax structure and telling us where the companies have to be located to have the best tax structure.”^[111] An Israeli lawyer said, “Corporate lawyers are never as important as a tax lawyer in any transaction.”^[112]

The picture that emerges from the description of interviewees is that of a path-dependent choice of corporate law driven by tax considerations. An in-house counsel for an international PE fund said:

Often the tax paradigm of a company is based on where the management is located, so I think you will introduce tax complexity to the transaction if you change that. Couple this with the fact that in most of the jurisdictions in which we operate, [North America and Europe] the corporate law is broadly similar . . . . This explains why we buy the corporate law of the company. It’s very difficult if the operational aspects are heavily within the country and they have a corporate entity in the country, which I think is difficult to bypass.^[113]

A U.K.-based partner in a large international law firm said:

[The client] will not be willing to accept a situation in which legal considerations, whatever they are, will hamper the profit line. This means tax considerations come before governing corporate law. If for tax reasons you have to structure the deal in a way that goes through a certain governing law jurisdiction—then so be it.^[114]

The overwhelming deference by corporate lawyers to tax consideration is particularly interesting because in multinational companies, the two do not necessarily go hand-in-hand. Profits are usually taxed territorially.^[115] Hence, the jurisdiction of incorporation and the jurisdiction in which a corporation will be taxed may not be the same. When enterprises are taxed on the basis of the territory in which their profits are produced (which is the case for a company operating exclusively in Germany, for example), then incorporation in another jurisdiction will result in different tax and corporate laws applied to the same company.

If tax implications drive the decision on the jurisdiction in which a corporation will be incorporated, then by proxy these considerations will influence the choice of the governing law for the SA. An Israeli lawyer working for an Israeli law firm based in the United States said:

Usually, you try to avoid a mismatch between the law of incorporation and the governing law of the shareholder agreement. If the corporation is Israeli, it will be Israeli governing law. You might see a shareholder agreement governed by New York law in a case involving a Delaware corporation, but that is as far as it goes.^[116]

A Delaware lawyer said, “If you have an Israeli company, use Israeli law; if you have a Delaware company, use Delaware law.”^[117] He added that “courts in Delaware criticize hybrid agreements of governing law; for example, corporate matters are construed by Delaware law and contracts by Israeli law. Courts criticize that by saying you buy yourself a mess because there are conflicts.”^[118]

Characteristics of the Deal, the Parties, and Negotiation Dynamics

Regardless of other components of the M&A transaction, the choice of governing law is strongly influenced by the characteristics of the parties, the industry, and the particular dynamics of the deal. All interviewees agreed on the significance of this factor.^[119] In addition, interviewees with a particular experience in specific industries, such as the high-tech or pharmaceutical industry (five interviewees have particular experience in technology start-ups, two in the pharmaceutical industry, and one in renewable energy) stressed that there are customary practices with regard to the choice of law and the forum.^[120] For example, in the case of investments in seed-stage or early-stage start-ups, the investors tend to be large corporations with an advantageous position in the event of litigation vis-à-vis relatively small and cash-poor entities or entrepreneur founders. Accordingly, lawyers with expertise in this field pointed out that imposing the costs of non-domestic law and the often-associated non-domestic forum of dispute resolution would be impractical for the entrepreneurs, and therefore, the practice is to adopt the local law and forum of the company or, in the extreme case, a neutral body of law and forum.^[121]

Another important set of factors that emerged from the interviews is the dynamics of the deal, the negotiations, and the characteristics of the deal. Large global investors often have the power to impose their preferred choice of law. One U.S. lawyer from a large international law firm that represents several PE funds explained:

PE funds, especially the big ones, are used to getting things the way they want them. Some PE funds have an internal policy. Usually this is a policy guidance from their in-house counsel. They tell us, “We are obliged to use English law or Delaware law, and if you want to make an exception then you need to go back to the decision makers and convince them.”^[122]

Similarly, a Polish interviewee explained “we usually represent international big clients and we’re usually the buyers, whereas on the other side, we find a local entity. That means that we are usually in a privileged position in the negotiations, so it is easier for us to impose our preferred choice of law.”^[123]

An Israeli lawyer said, “Large sophisticated players like Intel, Cisco, [and] IBM do countless acquisitions, not only in Israel. In these cases, it’s only Delaware or New York as a matter of policy. They are very strict about this. We don’t even argue.”^[124]

However, somewhat counterintuitively, the size of the investor does not always guarantee superior ability to impose the desired governing law. A U.S.-trained lawyer working for a large international firm said:

There is a lot riding on the dynamics of the deal—for example, if you have an investor with a big appetite to close the deal, or when the investor is a strategic investor, or if there are competing investors and you need to close fast. In the latter case, for example, the investor will probably be willing to take the local law as the choice of law.^[125]

A U.S. lawyer explained the factors at play:

I work mostly with PE funds. For them, the applicable law matters because they are long-term investors. In the case of venture capital (VC) funds, there are usually several investors in one venture. One VC investor leads, and they all follow his choice. It also makes a difference if you are making a small contribution of $5 million in an investment round in which the firm raises $100 million—then you don’t really have any influence on the choice of law—compared to buying the whole company.^[126]

A New York–based in-house counsel in a large global investment bank explained that investment banks and PE funds usually have a policy about the applicable law.^[127]On the other hand, this interviewee argued that a bank has no qualms about accepting domestic law as the governing corporate law because of its access to excellent legal advice in the international and domestic arena: “We have global counsel, and we ask legal counsel whether the domestic law is like other jurisdictions that we are familiar with. They usually would say, ‘Nah, it is fine.’”^[128]

A U.K.-based partner in an international law firm voiced a similar observation:

When you make a deal with a large entity, even if this is an entity based in a specific country—for example, if you make a deal with Mercedes-Benz from Germany, they are used to English law. It’s actually the smaller parties that demand domestic law. . . . The more local the transaction, the more likely it is that the local party will insist on the domestic governing law, and then you have to consult with local lawyers.^[129]

Although eight interviewees (of the ten who addressed the issue) argued that large global investors generally exert their power in the negotiations stage in order to force domestic parties to accept a foreign choice of law,^[130] an in-house counsel in a London-based PE fund described a different experience: “First of all, the local lawyers would like to strengthen their hold on the deal. Also, the other party is sometimes suspicious that we are going to pull some stunt on them. So, they are usually very insistent on using local governing law for the investment agreement.”^[131]

Other influential characteristics include a competitive bidding process and the size of the deal.^[132] Five lawyers from various jurisdictions pointed out that when sellers manage to arrange a competitive bid, they have an influence on the choice of law.^[133] A European lawyer working for an international law firm explained, “When there are plenty of bidders, our position is not that strong.”^[134]

The value of the transaction is also a factor influencing the choice of law, according to a continental European lawyer:

[I]f the transaction value is less than 25 million Euros, then you’ll rarely see choice of foreign law and arbitration. When you look at the mid-cap transactions between 25 million Euros and 100 million Euros, it is half and half, and the bigger transactions that are above 100 million Euros will be governed by a foreign law.^[135]

Concern about home bias by domestic courts is a strong driver toward the choice of a neutral forum, and often the neutrality of the forum will be coupled with the choice of law. According to at least fourteen interviewees (approximately sixty-four percent), this is the case when the choice of the forum is a major litigation hub like London or New York.^[136] However, when dispute resolution is relegated to arbitration, the choice of law may differ from the venue’s jurisdiction.^[137]

A partner in a London-based international law firm said:

If you’re talking about a real joint venture, a deal of hundreds of millions, between, say, a French and a German corporation, neither one of them wants the other party’s law. They certainly do not want to litigate in the national court of the other party. So, what you need is a neutral law. That’s not to say that sometimes when you work in an international law firm based in London or New York you don’t have agreements with a choice of law such as German law. I had such a case recently, but the reason was that the German buyer was a huge German multinational corporation and they just said, “We want German law,” and that was it.^[138]

When the deal implicates noncorporate domestic law, that fact may influence the choice of law for the entire transaction.^[139] An Israeli partner gave the following example: “Let’s take the example of desalination projects in Israel. The government licensing and procurement will usually be subject to Israeli law. Usually, in these situations you prefer not to have two different laws apply to the same investment.”^[140]

Global passive financial investors behave differently.^[141] A U.S.-trained international lawyer explained:

For large passive financial investors, it doesn’t matter at all. They are not concerned with the ongoing management of the firm, and they are not concerned with potential litigation. They couldn’t care less about the applicable law and will have no problem accepting the applicable law of the seller or a foreign corporation.^[142]

An Israeli interviewee, a highly experienced representative of one of the largest U.S. passive financial investors in the world, agreed: “Global passive investors only care about diversifying the investment portfolio. If something goes wrong, they just sell their shares.”^[143]

Common Law Versus Civil Law

The majority of interviewees expressed a strict preference for common-law jurisdictions as the choice of governing law (seventeen of nineteen who were asked to address the issue, or approximately ninety percent), including a majority of interviewees from civil law countries.^[144] Even the few interviewees who did not have a strict preference for common-law jurisdictions did not express a preference for civil-law jurisdictions but, rather, explained that they have the capability to handle the complications of civil law as well as common law.^[145] The reason for the superiority of common-law systems was an overwhelming agreement that common-law jurisdictions tend to accept the contractual arrangements of shareholders, whereas the standards-based civil law, particularly standards such as good faith, make the corporate law of civil-law jurisdictions unpredictable.^[146] Certainty and predictability were recurring terms.^[147]

A U.K.-based partner in a major international law firm said: “Generally, we prefer to have the deals governed by a common-law system, usually English law or one of the major U.S. state laws, but sometimes we would also agree to other common-law jurisdictions as the governing law, such as Cyprus or even Israel.”^[148] He explained:

There is a huge difference between common law and civil law. In civil-law systems you can write everything in the contract, but eventually, it’s the code that has the final word. Lawyers from civil-law jurisdictions are sometimes shocked by the lengthy contracts we write. They don’t need that because, they say, the code gives an answer to every situation. This means if you want everything that you wrote in your agreement to be honored and you don’t want surprises, you have to pick a common-law system. Otherwise, you never know what you’re going into.^[149]

A Polish lawyer working for an international law firm in Poland explained his preference for English law in the same vein, giving an example of parties to a shareholder agreement deciding on the adoption of squeeze-out rights^[150] and the squeeze-out threshold at will. He said:

The SA could be contradicting the Polish corporate regulation, but because it is English law and it will not be enforced by the court but by an arbitration, you would want to decide to have it governed by a different legal system, and the only real choice is English law.^[151]

A New York-based in-house counsel for a global investment bank agreed to the statement that global investors prefer common-law jurisdictions over civil-law jurisdictions.^[152] The reason he gave was predictability in terms of interpretation: “We are worried the law will not be interpreted as written; potentially more room for discussion.”^[153]

On the other hand, an in-house counsel working for an international PE fund rejected the idea that continental-law and common-law jurisdictions differ in terms of corporate law.^[154] His observation was based on a comparison of European and U.S. jurisdictions. He said:

Everywhere we operate—Netherlands, Luxemburg, Italy, France, Poland, Israel—there may be a difference in terms of the board structure, but beyond that, all the other concepts work the same—how you get approvals from the shareholder assembly, etc. So, it hasn’t been hard for us to adopt the local corporate law.^[155]

Interestingly, even M&A deals between corporations from different civil-law jurisdictions in Europe will often be governed by a common-law governing law.^[156] A Polish lawyer explained:

This is a joint venture effectively. Above the articles of association of a domestic corporation, you would want to have a shareholder agreement—minority and majority. Quite often you’ll see that this SA is governed by English law. Why? Because it gives you far better flexibility in trying to enforce certain provisions that may not be in line with the domestic commercial code or corporate law as such.^[157]

A U.K.-based partner in an international law firm said, “If we’re talking about the long-term joint venture, I would never do that in Germany or Poland. These are jurisdictions in which a single shareholder can give you hell. The Netherlands or Luxembourg are good for a joint venture, but otherwise, I would not use [a] civil-law jurisdiction.”^[158]

A U.S. lawyer currently working as a partner in an Israeli law firm observed that “U.S. and U.K. investors usually prefer to have their own laws as the applicable law. When the investor comes from a civil-law jurisdiction, they would also prefer to have their local law as the applicable law, but in these cases the decision depends more on the power struggle between the parties.”^[159]

A German lawyer took issue with the apparent preference for common-law jurisdictions.^[160] According to this lawyer, in the more stable and strong European economies, domestic governing law still trumps Delaware or English law.^[161] This lawyer noted that she has used English law for German acquisitions only once in the last ten years, and that was because the German corporation had significant operations and subsidiaries in the United Kingdom.^[162] She added that when “less experienced U.S. investors are involved, . . . sometimes you have a lot of discussion until you convince them to use German law . . . . To be honest, eighty percent of my clients are foreign strategic investors, PE investors, but I haven’t had the discussion about whether German law applies or not if they invest in a German target within the last 10 years.”^[163]

Geography: The Interplay Between Forum and Governing Law

Aside from the general preference for common-law jurisdictions, the interviews reveal a divided world. U.S.-based investors and their lawyers tend to prefer U.S. states with major bodies of corporate law, such as Delaware, New York, and California. The rest of the world prefers English law or, when Asian corporations are involved, venues with ties to English law such as Hong Kong or Singapore, where English law can be applied or where domestic laws are common-law versions of English law. This preference seems to be driven by a tendency to align the governing law with the geographically convenient venue for dispute resolution. This observation was echoed by seventeen of the twenty interviewees who addressed this issue (eighty-five percent).^[164]

A London-based lawyer explained:

If you look at the really big transactions with the multinational corporations . . . [those] coming from the U.S. and Canada and usually also South America will have a preference for U.S. jurisdictions. The rest of the world goes to London. In Europe and Africa, it’s English law big-time. In Asia, you sometimes see the choice of Hong Kong law. This is partly because these are all common-law jurisdictions, which means they are relatively open for the parties and they are stable and usually do not have all these principles, like good faith, etc.^[165]

Another London-based lawyer said: “Let’s say you are in Dubai, and you’re thinking, ‘Do I really have to travel to New York? I’d rather go to London, which is seven hours away, or Asia, which is, I guess, 12 hours away, if we had a real dispute.’”^[166]

A continental European lawyer explained that the preference for the United Kingdom is also driven by legal fees. He said, “The most important reason is the cost. The cost of litigation in the U.S. is tremendous. U.S. lawyers are typically more expensive than English solicitors. [The] U.S. is not so popular in this part of the world.”^[167]

Another continental European interviewee confirmed that London is generally preferred over New York when non-U.S. parties are concerned.^[168] However, in some cases, even non-U.S. parties will choose New York or Delaware law.^[169] According to this European lawyer, this would be “in a very rare situation that there is a market standard to do so. For example, when the corporation expects to issue high-yield instruments to U.S. investors because they are the main market for such instruments.”^[170]

Another reason to avoid U.S. jurisdictions is the risk of being snared by U.S. regulation.^[171] Multinational corporations not based in the United States will often structure their investments to avoid being subjected to U.S. law, explained a New York–based lawyer:

People are concerned particularly vis-à-vis the U.S. about being subjected to jurisdictions in the U.S. If you are a well-known multi-national corporation and you are buying something in the U.S., a public company for instance, you will want to operate solely through a subsidiary in the U.S.; then you don’t have to be subjected—whether it’s French, Dutch, German, or Chinese—to U.S. jurisdictions.^[172]

Domestic Laws: Stability, Independence, and the Quest for Neutrality

The choice of the governing law of a popular legal hub such as England, New York, Singapore, and Delaware versus domestic law is influenced by several factors: the political stability, independence, and efficiency of domestic courts when the jurisdiction of the governing law and the forum are the same and the quest for neutral ground when the parties come from different jurisdictions, to name a few particularly compelling ones.

Any lack of political stability and independence of the domestic legal system is a negative factor; even remote concerns about political stability or integrity of the legal system will probably drive parties away from domestic law. This point was raised spontaneously by six interviewees.^[173]

For example, a U.K.-based in-house legal counsel for an international PE fund described the reluctance of the fund to invest in Middle Eastern countries: “We looked at stuff in the Middle East, but we generally never got into doing deals because we don’t have a huge amount of confidence in how the legal paradigms work. I think, primarily, this is because we have enough to do in Europe.”^[174]

Perceptions about legal systems are also shaped by experience. The same lawyer added, “I’ve never operated in those areas. I don’t have a good sense of what [the law] is in Central America or Russia.”^[175] He described Hong Kong and Singapore, along with Eastern European countries, as jurisdictions in which “ten or twenty years ago people were a little bit more reluctant” to conduct business.^[176] His perception is that “Hong Kong law and Singapore law changed and invested in adapting their judicial systems in terms of impartiality and dispute resolution. In terms of the development of the law, [for] what they could not find locally, they used the U.K. law as a reference point.”^[177]

This interviewee explained the influence of political and economic stability by giving as an example the financial crisis in Greece:

During the Greece crisis . . . everything that was done in Greece was done under English law. People had to figure out how to secure collateral in a Greek jurisdiction. For example, people were trying to do deals with systemic banks in Greece; they had to make sure pots of money were available as collateral outside of Greece—there was the threat of nationalization hanging over the banks; there were currency controls happening in Greece in that point in time. The economy was under huge amounts of stress. So, you find sometimes that people who used to be in favor of local law move away from local law, at certain points in time, because of risk . . . . There was a risk that you will not be able to take money out of Greece because of the currency controls and the weak economy. Multinationals that wanted to do deals with Greek companies had to find ways around this. Sometimes, for example, if you had a Greek multinational with a subsidiary in some other country that had assets that could be used as collateral, you would sign the deal with the subsidiary.^[178]

A Polish lawyer working for an international law firm explained that the choice of law in cross-border deals in Poland changed because of political stability considerations: “What happened is the change in the governing party in Poland. The government hurt the justice system. It is not that independent today, so people are more and more selecting law other than Polish law, and not civil courts in Poland but arbitration somewhere abroad.”^[179]

He added:

Because we believe that the situation may become worse than it is now, we are moving more and more transactions, choice of governing law and setting up SPVs,^[180] to other countries, and foreign arbitration. You will not hear similar statements from French or German lawyers, but if you speak with Russian or Ukrainian lawyers you will hear similar statements.^[181]

A U.K.-based lawyer in an international law firm said:

Sometimes, we do make exceptions for domestic laws that are not common-law systems when domestic law [has] certain requirements. For example, if there are certain conditions for the transfer of shares or securities according to the domestic law, then we will make an exception. What we usually do in these situations is create a frame agreement that defines the relationship between the parties and that it will be subject to English law, and then have ancillary agreements on those issues that need to be subject to domestic law because of their exceptional characteristics.^[182]

A German lawyer explained that the approximation of German agreements to the United States’ style decreased the demand by U.S. investors for non-German governing law:

If the target is in Germany, the SPA, even if you are only acquiring [a] minority, is according to German law, because it is mandatory that the transfer of shares has to be according to German law. Otherwise, it is not valid. It is possible to have a separate agreement for the transfer of title according to German law and the terms of the purchase in the SPA governed by a different law. This is very rare. It was more common twenty years ago—you had strategic American buyers, and they expected American-style purchase agreements. They sent their SPA and said, “We would like to have U.S. law because we are used to it. We don’t want to engage German lawyers.” I saw this only one or twice in twenty years. German-style agreements, twenty years ago, sometimes were three pages in length and the United States had sixty pages. The market standard changed—the German-style agreements are so similar now to all the Anglo-American-style agreements, so there is no big difference from their perspective.^[183]

This lawyer attributed the approximation of M&A agreements and practices to globalization:

More foreign investors came to Germany with their standards, and they wanted to apply their standards of agreement to Germany. They weren’t happy with the short ten-page agreements and referring to the German code, which they didn’t understand, and the entire M&A market became standardized. I look at U.S. agreements or Austrian or Swiss or English SPAs now, [and] they are not that different. They have their specifics because the markets are a bit different, but they deal with the same issues.^[184]

However, this German lawyer also noted that some non-German investors demand that corporations not be German because of unique peculiarities of German corporate law, such as the board structure that requires co-determination in large corporations:

U.S. companies want to avoid the supervisory board established in Germany because then fifty percent of the board would be employee representatives, and they hate it. What we do is that we use a Dutch company, or we create an SE [a European company subject to European regulation] in which this co-determination can be avoided.^[185]

Setting political instability, lack of judicial independence and efficiency, and the peculiarities of domestic corporate law aside, domestic laws may be discarded for reasons of “neutrality.” This term came up again and again in referring to the need to choose a “neutral” governing law for international parties. Eighteen interviewees addressed this point and all of them indicated an inclination to select a “neutral” jurisdiction when the parties come from different countries.^[186]

An Israeli lawyer said: “If the deal is an acquisition [of the entire target corporation], you will usually choose a neutral law as the governing law and a neutral forum. If the deal is an acquisition of a minority stake, then it will be governed by the corporate law of the corporation.”^[187] The meaning of “neutrality” of the governing law changes in the context of the parties and the forum.^[188] What emerges from the interviews is that in deals involving international continental parties, a neutral choice would consist of a forum located in a jurisdiction different than that of any party and a choice of law different from the domestic law of any party.^[189] However, when the parties are based in the United States or England, the choice of the law of either a U.S. state with major bodies of corporate law or England as governing law would sometimes be accepted as a “neutral” choice.^[190] This implies an underlying assumption that the law of these jurisdictions does not give preferential treatment to one party or the other, even a party domiciled in the jurisdiction.

Several interviewees explained that the advantage of neutrality is that it is inconvenient for all parties. A Delaware lawyer explained the neutrality concept as follows:

If your party is from a different geographic location, if you don’t get the law you are completely comfortable with, you select the law that the other side is equally uncomfortable with . . . . Now both of us don’t know how [things turn out under this body of law].^[191]

One Israeli lawyer said:

Something that is neutral is inconvenient to everyone. It would have a chilling effect on [anyone] going there. The problem is if you ever have to use it, it’s really hard to find a neutral jurisdiction which is not super expensive—like, crazy expensive. So, for a lot of Israeli companies, [realizing that the] neutral thing is not going to work for them, it’s going to be bad.^[192]

Another Israeli lawyer described the following case:

The cost-effective solution is to match the governing law and the jurisdiction. However, I’m representing an Israeli company acquiring a company incorporated in Florida. In that case you need to find something neutral that will not give the seller an advantage. I think it would be inappropriate to propose Israeli law when you acquire a corporation in the United States. Delaware would be a good middle ground. The law there is well developed, and you have certainty and stability, which is very important for the parties.^[193]

An Israeli lawyer said: “Choosing a neutral governing law is a litigator’s way of thinking on the choice of law.”^[194] However, neutral venues are not always practical.^[195] Another Israeli lawyer explained that “choosing a neutral law and forum is hardly a solution when the acquirer is a giant U.S. company and the target that I represent is the size of a small fly.”^[196]

A Delaware lawyer responded to this argument by saying, “The deep-pocket-versus-shallow-pocket consideration is real, but it is misguided [to think] that by choosing a law which is imprecise you’re saving cost.”^[197]

Almost all interviewees (nineteen of twenty-one, or ninety percent) defined English law as a “default choice” of neutral law.^[198] A Polish lawyer said, “We are now concluding a deal with a Canadian-based private equity fund, selling an asset located in Poland to a French buyer. Polish and French law will not be the choice, so English law is a neutral choice.”^[199]

However, this lawyer added:

Sixty percent still have Polish law [when the] buyers are foreign. Forty percent will have English law, even if there is no link to the U.K. at all. Sometimes we have a different law, but this is very rare. In some specific transactions, we have New York law, and sometimes we have a choice of other EU jurisdictions, but then it has to be because of a nexus to these laws. For example, we have a joint venture, and typically in this situation when you have number of partners all together and they are selecting one jurisdiction for their SPV, it’s typically not Poland but other countries, and that will be anything from Luxembourg, Netherlands, France . . . then we typically choose that law. But sometimes you can see English law even if the founders of the SPV are not from the U.K.^[200]

An Israeli lawyer said:

English law is often a default choice. If the parties come from different countries, it’s important to have a neutral choice of law that will not give an unfair advantage to one of the parties. In that case, the tendency would be to choose an applicable law that has three hundred years of business-law tradition and case law without strange new answers like the good-faith principle. This would be the case unless one of the parties is very strong and wants something else or you have national regulatory restrictions. For example, sometimes with corporations that involve national infrastructure or national security, the local law requires a domestic corporation or that aspects of the investment to be subject to the local law. Let’s take the example of desalination projects in Israel. The government licensing and procurement will usually be subject to Israeli law. Usually in these situations you prefer not to have two different laws apply to the same investment.^[201]

An Israeli lawyer made the following observations about the combination of English law and the use of London as a litigation venue:

London is excellent. As an Israeli lawyer, I think the Israeli legal system is still somehow connected to English law, so the concepts are more familiar for us. However, dispute resolution in England is very costly, so I will only choose English law if I represent the stronger party. I will not choose London as a middle ground when dealing with U.S. investors. For them, moving from California to New York is already far enough. English law in London is maybe too far for them. It also depends on how much leverage I have in the negotiations. I recently represented [a party] in an acquisition in Vietnam. I have no idea what the Vietnamese law says. Even if I do, you have no idea what the Vietnamese judge would say. We started by asking for English law and London as the venue for dispute resolution. The Vietnamese party said, “What are the chances of me being able to sue you in London?” Eventually we settled on Singapore law and Singapore arbitration. What you would normally do is get a local lawyer and ask him to take a quick look at the agreement and make sure there are no dramatic problems.^[202]

Language is often an issue.^[203] A Polish lawyer explained why two continental European companies would choose English law:

For the same reason we speak English now: it is most common, it is the easiest language, and it is a law that anyone can work with. Of course, you need a qualified English lawyer to do it in the proper way. But if I need to draft an SPA under the English law, I will be able to do it. I would need to have someone with knowledge of English law to validate it, but it’s a very easy legal system. Whatever you write is valid and enforceable.^[204]

A German lawyer explained that the German language

[creates] a cost factor when you have to translate everything to explain [it] to your client. If you have [a] statement in English and you send it, they can read it. Otherwise, you have to translate it. However, even if you have an SPA according to German law, . . . eighty percent of the cases [are] in English even if all parties are German. Because sometimes you have [a] financing bank who wants to see the agreement, and I would say eighty percent of larger deals are in English.^[205]

Another factor that could affect the choice of the governing law is the ability to enforce obligations of the parties. A U.S. lawyer explained:

Chinese companies will buy companies in the U.S. sometimes. However, it is not clear if you can get enforcement in China, so Chinese companies will often be required to put [down] a deposit. That would be a common aspect of M&A [transactions] involving U.S. targets and Chinese companies. The enforcement is always one aspect of the ways in which uncertainty is discussed.^[206]

A New York–based lawyer argued that the choice of forum should be based on the assets of the parties and the choice of law should then be driven by the choice of the dispute resolution forum.^[207] She said:

I want to be able to enforce the judgment where you have assets. So, it really does me no good to litigate in the domestic jurisdiction if the other party doesn’t have assets here. You will have to enforce the judgement in another jurisdiction. Most arbitration awards are paid out, but most is not all, and so you need to have enforceable judgements.^[208]

She added: “Some lawyers think that if the dispute resolution is taking place in Miami, you’ll actually have to have the hearing in Miami. The truth is the seat of the corporation, and the governing law can be in Miami, and you can have the hearings in Paris or London.”^[209]

To sum, the political stability of the jurisdiction and the often-related independence of the court system are factors considered by the parties, and these factors may eventually drive parties to choose the law of a neutral jurisdiction because-among other benefits-it provides a stable regime and independent tribunals.

The Interests of the Lawyers

Although the interests of the lawyers may not be the most influential factor affecting the decision on the governing law in transnational M&A deals, the interviews uncover the significant role played by practitioners as well as the dynamics of the interaction that yields the final choice of law.

The choice of governing law is often of particular interest to the lawyers involved in the deal, but their interests are sometimes at odds with the interests of clients.^[210] The lawyers will generally prefer the choice of law that will enable them to be the leaders of the deal and also increase the probability that they will represent the client if a dispute arises. This point was raised spontaneously by one interviewee^[211] and confirmed by nine interviewees^[212] who addressed the issue. However, only two interviewees conceded that the implication of this consideration is that sometimes clients would be better off with a different governing law than the one chosen.^[213]

One U.S. lawyer working for an international law firm conceded:

The choice of law and forum of litigation is the one thing that we as lawyers can have an interest in. If you think the deal may break down at a certain stage and there may be a litigation, you don’t want it to be in the local [foreign] court because if you are an international law firm it means that you will not lead the litigation. The local lawyers will usually push for the domestic court because they want to make sure that they get this work. The international firm will push for a choice of law and forum that fits their interest. This means that sometimes the interest of the lawyers diverges from the interest of the client. I wouldn’t say this is a critical driver in the choice of law—it is actually more important with respect to the choice of the forum—but it might be in the back of our mind.^[214]

An Israeli lawyer said:

Considering the fact that these types of transactions are generally managed by international law firms based in New York or California, we suspect that the choice of law is driven by the potential location of future dispute resolution in court . . . . In international M&A, even if the deal is between a German and a French corporation it will usually be managed by an international law firm based in London or New York. The local lawyers are often “satellite” law firms collaborating with the international law firm. The international law firms will usually push for a choice of law that would be convenient to them.^[215]

Another Israeli lawyer echoed this observation and added: “If you have an international transaction and the applicable law is the domestic law, the local lawyers will be leading the deal and doing most of the work, so they will reap a bigger share of the fees.”^[216]

A Polish lawyer working for an international London based-law firm explained that the spectrum of choice-of-law possibilities is predetermined by the client’s choice of the lawyer: “When a client engages us as lawyers, we would say, ‘We would advise you on Polish law and English law only . . . . At that time, the client knows that my SPA, which is a key document for an M&A transaction, would be governed by one of these laws.”^[217]

Representations and Warranties Insurance

An additional factor came up less frequently but was underlined by some interviewees as significant. Five lawyers pointed to the role of global insurance companies in influencing the governing law in large mergers and acquisitions through the increased trend of using representations and warranties insurance (RWI).^[218]

One Israeli lawyer said:

In the last decade there has been an increasing use of representations and warranties insurance. There is a small number of insurance companies around the world that offer this type of insurance. Most of them work from London and they have a preference for English law. The insurance contract itself would certainly be governed by English law. These insurance companies would regularly prefer that the underlying agreement also be subject to English or a familiar U.S. state law. Israeli law, for example, would be somewhat exotic for them. They will pressure the parties to use English law for the underlying contract.^[219]

Interviewees noted that this factor would normally apply to acquisitions of an entire company, through SPAs, because these are the types of agreements in which a seller is often required to make representations and warranties to the buyer.^[220]

Analysis and Discussion

The responses elicited from our interviewees indicate that three main private choices of law dominate the field of corporate mergers and acquisitions. The first is the choice regarding the jurisdiction in which a corporation will be incorporated. In common-law jurisdictions, this decision will affect the corporate law that will govern the internal affairs of the corporation. Consequently, our research indicates that the choice of jurisdiction will have a significant impact on the second important choice, the choice of the governing law in any future shareholder agreement. The third main choice of law occurs in the SPA. From the responses elicited from our interviewees, it is clear that the SPA, especially when a corporation is acquired as a whole, is essentially a sale contract in which the specific underlying asset is a corporation. In this Part, we discuss the findings that emerge from the interviews regarding the three choices of governing law in transnational mergers and acquisitions.

Incorporation

Clearly, our research supports and even underscores the fact that interjurisdictional competition over incorporation of enterprises exists. However, it seems that this competition is not driven by corporate laws racing to the top or to the bottom but rather by tax law. Perhaps the most important observation emerging from the interviews is that the role of corporate law is much more modest than the role it is assigned in the existing literature.

For example, changes in tax law have immediate implications for incorporation decisions. At least five respondents described tax reforms in the United States as policies that had an immediate impact on the decision of their clients with respect to the location of incorporation.^[221] These respondents also noted that they would expect changes in the jurisdiction-of-incorporation choice if new tax reforms were to be introduced. None of our respondents said that significant changes in corporate law would have such an immediate impact on the decision of entrepreneurs regarding the jurisdiction of incorporation. In fact, the responses in the interviews indicate that tax benefits may even draw entrepreneurs to set up corporations in jurisdictions that have less than “optimal” corporate law.^[222]

In the field of corporate law, jurisdictions are divided regarding the method of deciding what law governs the internal affairs of a corporation. Private international law offers two doctrines to answer this question. Some jurisdictions adopt the “place of registration” theory, according to which a corporation will be governed by the corporate law of the jurisdiction in which it was incorporated regardless of the location of management of the corporation or of its main activities.^[223] This theory is mainly associated with Anglo-American and other common-law jurisdictions.^[224] In contrast, the “real seat” theory prescribes that a corporation’s applicable corporate law would be that of the jurisdiction in which one can identify the corporation’s “real seat.” This approach is usually associated with major civil-law jurisdictions such as Germany and France.^[225]

Somewhat surprisingly, none of our interviewees mentioned the incorporation doctrine of private international law as a factor in deciding where to incorporate. This observation can be explained by the fact that incorporation decisions are driven mostly by tax considerations. Once the corporate structure that optimizes tax benefits is in place, future mergers and acquisitions rarely change what one of our respondents called “the tax paradigm” of the target corporation.

These findings suggest that interjurisdictional competition for corporate charters exists within federal jurisdictions that provide equal tax treatment regardless of the chosen corporate law. Indeed, this is the case in the United States but not in the global arena.

The Law Governing M&A Agreements

The assumption that parties choose to apply the law of a particularly successful jurisdiction, such as Delaware corporate law, as the governing law of a shareholder agreement is disproven by an analysis of the responses provided in the interviews. A more nuanced theory of choice of law emerges.

We find that in common-law jurisdictions, the underlying law of incorporation will have a significant influence on the law of the related M&A agreement because of the desire to avoid a “mismatch” between the rights and obligations in the shareholder agreement and those prescribed by the law governing the internal affairs of the corporation.^[226] It therefore follows that in many cases, the governing laws of cross-border M&A agreements are indirectly, but strongly, influenced by the tax paradigm of the target corporation. In contrast, in many civil-law jurisdictions, cross-border M&A deals are often governed by a neutral governing law regardless of the law of incorporation of the underlying corporation.

The no-mismatch rule applies to SPAs as well. The responses indicate that all the M&A agreements referring to the corporate part of the transaction will be governed by the same governing law. According to the interviewees, making an exception to this rule will depend on issues that lie outside the scope of corporate law.^[227] For example, when the seller of the target corporation needs to include in the SPA warranties and representations regarding assets, contracts, and property and intellectual property rights of the corporation that are governed by a specific domestic law, often the governing law will be adapted to match the law that governs these warranties and representations; otherwise, a neutral law will be chosen.

We identify a possible trend pushing SPAs toward the common global choices of law driven by the increased use of representations and warranties insurance (RWI). This is a relatively new insurance product typically used in private M&A transactions. RWI allows the buyer of a corporation to receive indemnification in the event of a breach of representation or a warranty of the seller in the M&A deal. This product is gaining traction because by reducing the buyers’ indemnification concerns it allows buyers to make more attractive bids, and it allows sellers to distribute their earnings without the need to set aside some of the proceeds for potential future indemnification.^[228] RWI is offered by only a few large repeat players in the insurance industry mostly located in England. As insurers prefer to avoid litigation in other countries under unfamiliar laws, large transactions that seek to be covered by RWI may be required by the insurers to apply a globally popular and accepted choice of governing law.

The frequency of exceptions to the no-mismatch rule is the result of a variety of factors. The specific characteristics of the parties and the deal matter. For example, investors that are repeat players tend to adopt one of two strategies. One strategy is imposing a choice of law with which the investor feels most comfortable. Often this will be the domestic law of the investor. This strategy reduces the legal costs of repeat players since it reduces the need to know and handle many different laws and often reduces the costs of obtaining specialized legal advice on unfamiliar laws. Moreover, this strategy implies a choice of law that would differ from that of the underlying target corporation. Another strategy used by repeat players is employing leading international law firms and domestic lawyers so they can accept the governing law of a corporation. Repeat players such as major private equity funds, investment banks, and some institutional investors can easily afford the services of international law firms with national branches that employ domestic lawyers with international M&A experience. The latter facilitate the use of different corporate laws.

We theorize that these considerations correspond with minority shareholder protection in the local corporate law. To explain this, we need to refer to the different types of M&A transactions. Respondents mostly referred to deals in which the investor either acquired a controlling block or the entire corporation. Minority equity investments were mentioned either in the context of large global institutional investors buying shares in large public corporations or venture capital funds taking part in investment “rounds,” mostly for start-ups. The responses elicited from decision-makers in PE funds and institutional investors lend credence to the theory that the structure of an M&A deal is driven by willingness to accept the law of a domestic corporation. It therefore follows that cross-border investors avoid the uncertainties of domestic minority shareholder protection by acquiring one hundred percent of the shares; alternatively, when they acquire a minority position, these investors rely on the “market rule”—exit rather than voice^[229]—or on diversification of their investment to a degree that makes them less concerned about the level of protection provided by the local law to minority shareholders. In contrast, respondents noted that when strong repeat players acquire majority stakes in corporations governed by a law different than their own, they will regularly require a legal solution that does away with minority shareholder protections with which they are not familiar.^[230]

The tendency to agree on a domestic dispute-resolution forum when a domestic law is concerned negatively affects the adoption of a domestic governing law when the jurisdiction is considered politically unstable, when the courts are inefficient, when the courts are perceived to not be independent, or when there is a concern about bias against non-domestic parties.

Our observations indicate that when parties select a non-domestic corporate law for their M&A transaction, stability, predictability, and certainty matter. These considerations drive the parties to choose popular Anglo-American laws such as those of England, the states of New York, Delaware, and California, or common-law jurisdictions akin to the Anglo-American family of law such as Hong Kong and Singapore. The preference for common-law jurisdictions over civil-law jurisdictions is prevalent and attributed to the perceived uncertainties that typify civil-law courts in their interpretation of contracts.

Interestingly, the laws of jurisdictions like Delaware, New York, and England are not chosen because they are the optimal laws for the underlying corporate transaction. In fact, the contrary is true. The respondents explained that the laws of popular jurisdictions are chosen for the sake of neutrality. In other words, these laws represent the least uncomfortable choice of law that the parties could agree upon.^[231]

Conclusion

Does corporate law matter? This article suggests that at least with regard to the choice of the locus of incorporation, the answer is far less important than one might have expected. Contrary to the common assumption of private international law that corporate law stimulates the interjurisdictional competition for corporate charters, our findings suggest that corporate law plays a relatively modest role in the incorporation decision; it is far less important than tax considerations, although a company’s tax paradigm and its law paradigm do not have to be identical. Indeed, these findings suggest that interjurisdictional competition exists within federal jurisdictions such as the United States that provide equal tax treatment, regardless of the chosen corporate law.

Furthermore, when it comes to decisions about the governing law in cross-border M&A deals, a more nuanced choice-of-law narrative emerges from our observations. The article outlines the various factors that drive choice-of-law decisions in these transactions, specifically the governing law of shareholder agreements and share purchase agreements, and uncovers the diverse factors considered by corporations and investors in the global corporate arena. Our findings suggest that the popularity of certain choices of governing corporate laws in cross-border M&A transactions, such as the laws of Delaware and England, is driven by the fact that they are more enabling than others, less intrusive, more predictable, and, most of all, often the least uncomfortable neutral choice.

1. * Associate Professor of Law, the Haim Striks Faculty of Law, College of Management-Academic Studies (Colman), and Director of the Rina and Meir Heth Center for Competition and Regulation. Dr. Baum has also been a visiting professor at Peking University School of Transnational Law, the Georgetown Center for Transnational Legal Studies, the University of Hamburg European Master Program in Law and Economics, and the Warsaw School of Economics. ↑
2. ** Associate Professor of Law, Chair of the Commercial Law Department, and Academic Director of the LL.M. program at the College of Law and Business, Ramat Gan Law School. Dr. Solomon has also served as a visiting scholar at the Harvard Law School Program on Corporate Governance and the University of Michigan Law School. ↑
3. Ψ The authors would like to thank Boudewijn Bouckaert, Fernando Gomez-Pomar, Maria Grigoropoulou, Ehud Kamar, Josef Montag, and Georg Ringe, as well as the participants at the 38th Annual Conference of the European Law and Economics Association, the European Master in Law and Economics Midterm Meeting, and the Research Workshop at the College of Management for their insightful comments and discussions. The authors also wish to thank the editors of the South Carolina Law Review for their meticulous edits, as well as Lior Alona Goldman and Or Sidlik for excellent research assistance. ↑
4. . Reid v. Siniscalchi, No. 2874, 2018 WL 620475, at *1–2 (Del. Ch. Jan. 30, 2018) (alluding to the fictional lengthy case of Jardyce v. Jarndyce in Charles Dickens’s novel Bleak House, Vice Chancellor Slights noted that “[a]s we approach the eleven-year anniversary of the initiation of this action, Reid v. Siniscalchi has readily secured its place as a candidate for the Jarndyce award for interminable legal proceedings.”). ↑
5. . Delaware corporate law has significant network benefits. See Marcel Kahan, The State of State Competition for Incorporations, in The Oxford Handbook of Corporate Law and Governance 106, 116 (Jeffrey N. Gordon & Wolf-Georg Ringe eds., 2018) (“[L]egal rules in general (and Delaware corporate law in particular) generate possible network benefits since the market is more familiar with Delaware law (making the law easier to price); lawyers are more familiar with Delaware law (and it is therefore easier to obtain legal advice); and there are more judicial precedents (clarifying Delaware law).”).  ↑
6. . Theodore Eisenberg & Geoffrey P. Miller, Ex Ante Choices of Law and Forum: An Empirical Analysis of Corporate Merger Agreements, 59 Vand. L. Rev. 1975, 1982 (2006) (finding that Delaware leads the choice-of-law competition in M&A deals in the United States, but New York and California are closing in).  ↑
7. . See infra Part II.C. ↑
8. . See Why Businesses Choose Delaware, Del. Corp. L., https://corplaw.delaware.gov/why-businesses-choose-delaware/ [https://perma.cc/8Q4C-UCP5] (“Delaware has been the premier state of formation for business entities since the early 1900s. Today, more than one million business entities have made Delaware their legal home. Although the number of entities organized in Delaware is impressive, even more important is the fact that so many large and important corporations whose shares are listed on major stock exchanges are incorporated in Delaware. Indeed, more than 60 percent of the Fortune 500 companies are incorporated in Delaware. But organization in Delaware is not only for U.S. entities—companies around the world can take advantage of Delaware’s benefits.”).  ↑
9. . The superiority of Delaware corporate law is based on, among other things, its enabling default rules that leave significant discretion to private choice and the quality of its specialized court system. See infra Part ‎II.B.  ↑
10. . See infra Part ‎II.A.  ↑
11. . Another challenge to the traditional interstate competition theory was presented by Professor Mark Roe, who identifies the federal government in Washington, D.C., as Delaware’s real competition. See Mark J. Roe, Delaware’s Competition, 117 Harv. L. Rev. 588, 593 (2003).  ↑
12. . This perception is an offspring of the famous metaphor of states as laboratories of democracy, which derives from the dissenting opinion of Justice Louis Brandeis in New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (“It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”). ↑
13. . Thomas Gibbons, The Impact of Regulatory Competition on Measures to Promote Pluralism and Cultural Diversity in the Audiovisual Sector, 9 Cambridge Y.B. on Eur. Legal Stud. 239, 240-41 (2006). See also Robert Baldwin et al., Understanding Regulation: Theory, Strategy and Practice 356 (2nd ed. 2012) (“Regulatory competition involves the competitive adjustment of regulatory regimes in order to secure some advantage.”).  ↑
14. . See generally Victor Fleischer, Regulatory Arbitrage, 89 Tex. L. Rev. 227 (2010) (defining regulatory arbitrage and explaining how this phenomenon undermines the rule of law). ↑
15. . See Kahan, supra note 2, at 106 (“In the US, a firm can incorporate in any state (or, for that matter, in a foreign country) regardless of where it is headquartered and have its “internal affairs” governed by the laws of its state of incorporation. An existing firm can also change its state of incorporation with the approval of the board and its shareholders without triggering major consequences other than the change in governing law.”).  ↑
16. . See Baldwin et al., supra note 10, at 359. ↑
17. . See William J. Moon, Delaware’s New Competition, 114 N.W. U. L. Rev. 1403, 1431 (2020) (suggesting that heavy governmental reliance on incorporation fees influences legislative behavior by making lawmakers highly sensitive to private sector preferences regarding corporate governance rules).  ↑
18. . Roberta Romano, The States as a Laboratory: Legal Innovation and State Competition for Corporate Charters, 23 Yale J. on Reg. 209, 212 (2006) (“A substantial portion of Delaware’s tax revenue—an average of 17% over the past several decades—is derived from incorporation fees.”).  ↑
19. . See Kahan, supra note 2, at 115 (“Delaware makes significant efforts to attract incorporations.”).  But see Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55 Stan. L. Rev. 679, 684 (2002) (“[T]he very notion that states compete for incorporation is a myth. Other than Delaware, no state is engaged in significant efforts to attract incorporations of public companies.”).  ↑
20. . See Baldwin et al., supra note 10, at 362–66.  ↑
21. . See, e.g., Lucian Arye Bebchuk, Federalism and the Corporation: The Desirable Limits of State Competition in Corporate Law, 105 Harv. L. Rev. 1435, 1458 (1992); Lucian Arye Bebchuk & Allen Ferrell, A New Approach to Takeover Law and Regulatory Competition, 87 Va. L. Rev. 111, 116 (2001); Lucian Arye Bebchuk & Allen Ferrell, Federalism and Corporate Law: The Race to Protect Managers from Takeovers, 99 Colum. L. Rev. 1168, 1171 (1999); Lucian Bebchuk et al., Does the Evidence Favor State Competition in Corporate Law?, 90 Cal. L. Rev. 1775, 1781 (2002);  William W. Bratton, Corporate Law’s Race to Nowhere in Particular, 44 Univ. Toronto L.J. 401, 403 (1994).  ↑
22. . See Melvin Aron Eisenberg, The Structure of Corporation Law, 89 Colum. L. Rev. 1461, 1505-14 (1989) (arguing that competition for corporate charters has led Delaware to sacrifice optimality for pro-management rules). See also infra Part ‎II.B. ↑
23. . See William M. Cary, Federalism and Corporate Law: Reflections upon Delaware, 83 Yale L.J. 663, 663, 665, 666 (1974) (arguing that Delaware corporate law attracts corporate charters because it has historically favored managers at the expense of shareholders).  ↑
24. . See, e.g., id. at 701-03 (proposing Federal Corporate Uniformity Act that will apply to major corporations and set general standards for corporations, thus reducing the incentive to incorporate specifically in Delaware); George W. Dent, For Optional Federal Incorporation, 35 J. Corp. L. 499, 517 (2010); Luis Garicano & Rosa M. Lastra, Towards a New Architecture for Financial Stability: Seven Principles, 13 J. Int’l Econ. L. 597, 606-08 (2010) (arguing in favor of integrated supervision of financial markets, securities, banking, and insurance because synergy and coordination are more important than creativity and innovation).  ↑
25. . See, e.g., Roberta Romano, The Genius of American Corporate Law 14–16 (1993); Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 Yale L.J. 2359, 2361 (1998); Roberta Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L. Econ. & Org. 225, 227–32 (1985); Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. Legal Stud. 251, 289–92 (1977); Mathis Koenig-Archibugi, Global Regulation, in The Oxford Handbook of Regulation 407, 414 (Robert Baldwin et al. eds., 2010) (arguing that the empirical evidence to support the hypothesis that international competition creates a race to the bottom is scarce); Ofer Eldar & Lorenzo Magnolfi, Regulatory Competition and the Market for Corporate Law, 12 Am. Econ. J.: Microeconomics 60, 62 (2020) (showing that most firms dislike protectionist laws, such as anti-takeover statutes and liability protections for officers, and thus the race-to-the-bottom view that regulatory competition benefits managers at the expense of shareholders is doubtful).  ↑
26. . See Moon, supra note 14 at 1413–14. ↑
27. . See infra Part ‎II.B.  ↑
28. . See Why Businesses Choose Delaware, supra note 5 (“Delaware is neither ‘management-friendly’ nor ‘stockholder-friendly’; its aim is to provide both managers and investors with laws optimal for engaging in ethical and profitable business, by balancing the need for managerial flexibility with strong tools to hold managers accountable for using that flexibility to advance the best interest of investors.”).  ↑
29. . See Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, supra note 22; Stephen M. Bainbridge, The Creeping Federalization of Corporate Law, 26 Regulation 26, 26 (2003) (“For over 200 years, corporate governance has been a matter for state law.”). ↑
30. . See Jens Dammann, Deference to Delaware Corporate Law Precedents and Shareholder Wealth: An Empirical Analysis 1 (2008), https://ssrn.com/abstract=3384446 [http://perma.cc/WA64-7B3D] (analyzing empirically the deference to Delaware corporate law precedents by many courts in other U.S. states). ↑
31. . See Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, supra note 22, at 226. ↑
32. . See Lewis S. Black, Jr., Why Corporations Choose Delaware 2, 3, 7 (2007); Demetrios G. Kaouris, Is Delaware Still a Haven for Incorporation?, 20 Del. J. Corp. L. 965, 1004, 1011 (1995). ↑
33. . See Marcel Kahan, The Demand for Corporate Law: Statutory Flexibility, Judicial Quality, or Takeover Protection?, 22 J.L. Econ. & Org. 340, 340 (2006). ↑
34. . See Lucian Arye Bebchuk & Assaf Hamdani, Vigorous Race or Leisurely Walk: Reconsidering Competition over Corporate Charters, 112 Yale L.J. 553, 553–54 (2002) (“Although Delaware is home to less than one-third of a percent of the U.S. population, it is the incorporation jurisdiction of half of the publicly traded companies in the United States and of an even greater fraction of the larger publicly traded companies.”); Robert Daines, Does Delaware Law Improve Firm Value?, 62 J. Fin. Econ. 525, 526 (2001) (“More than 50% of all public firms are incorporated in Delaware, while New York, the state with the second highest share, attracts fewer than 5% of public firms.”); Anne Tucker Nees, Making a Case for Business Courts: A Survey of and Proposed Framework to Evaluate Business Courts, 24 Ga. St. U. L. Rev. 447, 481 (2007) (“Delaware is the corporate home to 61% of all Fortune 500 companies and more than half of all firms traded on the New York Stock Exchange and NASDAQ . . . .”). ↑
35. . See About the Division of Corporations, Del. Div. Corps., https://corp.delaware.gov/aboutagency/ [https://perma.cc/RW7X-LX6L] (“The State of Delaware is a leading domicile for U.S. and international corporations. More than 1,000,000 business entities have made Delaware their legal home. More than 66% of the Fortune 500 have chosen Delaware as their legal home.”). On Delaware’s dominance, see also Kent Greenfield, Democracy and the Dominance of Delaware in Corporate Law, 67 L. & Contemp. Probs. 135, 136 (2004) (advocating abolishing the “internal affairs” doctrine that enables a corporation to choose which corporate governance laws will apply to it, regardless of whether it has any contacts with the state it chooses). ↑
36. . See Jens Dammann & Matthias Schlundeln, The Incorporation Choices of Privately Held Corporations, 27 J.L., Econ & Org. 79, 87 (2011) (finding that 237 of 270 U.S. corporations that went public in the years of 2006 and 2007 were incorporated in Delaware at the time of their IPO). ↑
37. . See Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 2 (1991) (“An enabling statute allows managers and investors to write their own tickets, to establish systems of governance without substantive scrutiny from a regulator.”). ↑
38. . See About Delaware’s General Corporation Law, Del. Corp. L., https://corplaw.delaware.gov/delawares-general-corporation-law/ [https://perma.cc/CKH7-7LTX] (“Among the reasons that corporations are formed under Delaware law is the DGCL’s [Delaware General Corporation Law’s] policy to provide stockholders and corporations with maximum flexibility in ordering their affairs. Unlike in a civil-law jurisdiction, which would likely have a prescriptive corporation law with mandatory terms, the DGCL is designed to be an enabling statute that permits and facilitates company-specific procedures. The mandatory provisions of the DGCL are minimal and address only issues of utmost importance to protecting investors, such as the right to elect directors and to vote on certain major transactions. Even some of the mandatory terms of the statute may be overridden by managers and stockholders acting together to choose a different approach.”). ↑
39. . See, e.g., Del. Code Ann. tit. 8, § 151(c) (2021) (providing flexibility in granting special or preferential dividend rights through the certificate of incorporation); § 212(a) (providing flexibility in overriding the one-share-one-vote default rule by the certificate of incorporation). In recent years an increasing number of corporations have raised capital in U.S. stock markets using a dual-class capital structure, which allocate superior voting rights to insiders and inferior voting rights or no voting rights at all to public shareholders. See Dov Solomon, The Importance of Inferior Voting Rights in Dual-Class Firms, 2019 BYU L. Rev. 533, 539–42 (2020) (describing the rise of dual-class capital structures and the issuance of nonvoting common stock). ↑
40. . See Lawrence A. Hamermesh, The Policy Foundations of Delaware Corporate Law, 106 Colum. L. Rev. 1749, 1782–83 (2006). ↑
41. . See Jill E. Fisch, The Peculiar Role of the Delaware Courts in the Competition for Corporate Charters, 68 U. Cincinnati L. Rev. 1061, 1064 (2000) (attributing Delaware’s success in attracting corporate charters to “the unique lawmaking function of the Delaware courts”); Curtis Alva, Delaware and the Market for Corporate Charters: History and Agency, 15 Del. J. Corp. L. 885, 918 (1990) (describing the benefits of Delaware’s specialized judiciary system). ↑
42. . See, e.g., Jens Dammann, Business Courts and Firm Performance 1, 17 (2017), https://ssrn.com/abstract=2889898 [https://perma.cc/Y52Y-T6DL]. ↑
43. . Del. Code Ann. tit. 10 § 341 (2021). ↑
44. . Del. Const. art. IV § 11(4). ↑
45. . See Bernard S. Black, Is Corporate Law Trivial?: A Political and Economic Analysis, 84 N.W. U.L. Rev. 542, 589–90 (1990) (arguing that Delaware’s prominence is due to the expertise of its judiciary). ↑
46. . See Litigation in the Delaware Court of Chancery and the Delaware Supreme Court, Del. Corp. L., https://corplaw.delaware.gov/delaware-court-chancery-supreme-court/ [https://perma.cc/6FYQ-KN5U] (“Delaware is world-renowned for its efficient and professional court system, which is particularly prominent in the areas of corporate, business, and commercial law. For many experienced lawyers throughout the world, the principal reasons to recommend organizing in Delaware are the Delaware courts and the body of case law developed by those courts.”). ↑
47. . See Moon, supra note 14, at 1403 (“introducing foreign nations as emerging lawmakers that compete with American states in the increasingly globalized market for corporate law”). ↑
48. . See Joseph A. McCahery & Erik P. M. Vermeulen, High-Tech Start-Ups in Europe: The Effect of Regulatory Competition on the Emergence of New Business Forms, 7 Eur. L. J. 459, 463 (2001); Kresimir Pirsl, Trends, Developments, and Mutual Influences Between United States Corporate Law(s) and European Community Company Law(s), 14 Colum. J. Eur. L. 277, 355 (2008). ↑
49. . See Brian R. Cheffins, Our Common Legal Heritage: Fragmentation and Renewal, 30 L. Librarian 3, 4–6 (1999). ↑
50. . Cally Jordan, An International Survey of Companies Law in the Commonwealth, North America, Asia and Europe 2 (2009) https://ssrn.com/abstract=1141874 [https://perma.cc/KWT6-6ANB]. ↑
51. . Brian R. Cheffins, Corporate Governance Reform: Britain as an Exporter, 8 Hume Papers on Pub. Pol’y, 10, 11 (2000). ↑
52. . John Armour, Who Should Make Corporate Law? EC Legislation Versus Regulatory Competition, 58 Current Legal Probs. 369, 394 (2005). ↑
53. . Marco Becht et al., Where Do Firms Incorporate? Deregulation and the Cost of Entry, 14 J. Corp. Fin. 241, 242 (2008). ↑
54. . See Armour, supra note 49, at 385. ↑
55. . In the Centros case, the decision to incorporate a Danish business as a U.K. company was driven by high Danish Companies Law capitalization requirements as compared to the low requirements in the United Kingdom. Case C-212/97, Centros Ltd. v. Erhvervs-og Selskabsstyrelsen, 1999 E.C.R. I-01459. This seminal case led to a regulatory competition to the bottom over capitalization requirements. France, Spain, Germany, and the Netherlands have eliminated or reduced minimum capital requirements or are in the process of doing so to compete with the more attractive U.K. company law, which does not include minimum capital requirements for establishing a private company. See Becht et al., supra 50, at 243; Armour, supra note 49, at 394; Martin Gelter, Centros, the Freedom of Establishment for Companies, and the Court’s Accidental Vision for Corporate Law 24 (ECGI – Law Working Paper No. 287, 2015), https://ssrn.com/abstract=2564765 [https://perma.cc/KA8W-XYC7]. ↑
56. . Pirsl, supra note 45, at 355. ↑
57. . Article 49 of the TFEU provides that “restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited.” Article 54 of the TFEU makes clear that freedom of establishment may be relied upon by corporate as well as natural persons. See Consolidated Version of the Treaty on the Functioning of the European Union arts. 49, 54, Sept. 5, 2008, 2008 O.J. (C 115). ↑
58. . Centros, 1999 E.C.R. I-1459. ↑
59. . See Wolf-Georg Ringe, Corporate Mobility in the European Union – A Flash in the Pan? An Empirical Study on the Success of Lawmaking and Regulatory Competition 53 (Carolina Cauffman & Jan M. Smits eds., 2016) (“It is generally accepted that in this battle, English company law has proved to be the most competitive company law jurisdiction in the EU.”). However, Ringe’s research offers data that indicates other European jurisdictions are reacting to the success of the U.K.’s corporate law. Id. See also Eva Micheler, The Impact of the Centros Case on Europe’s Company Laws, 21 Co. L. 179, 182 (2000) (discussing how the Centros case made the establishment of a private company under English law enticing to other European nationals). ↑
60. . John Armour et al., Brexit and Corporate Citizenship, 18 Eur. Bus. Org. L. Rev. 225, 230–32 (2017) (finding that 335,741 U.K. companies are operated by entrepreneurs based in other E.U. member states). Among the 27 member states, it appears that Germany has the largest single population of such U.K.-incorporated companies. Id. at 230. ↑
61. . Directorate-General Justice and Consumers, Directorate-General Internal Market, Industry, Entrepreneurship and SME’s (EC) Notice to Stakeholders: Withdrawal of the United Kingdom and EU Rules on Company Law 2. ↑
62. . U.K.-incorporated companies may be recognized in accordance with each member state’s national law (private international law rules concerning companies and the subsequently applicable substantive company law) or international law treaties. Id. ↑
63. . Regarding the increasing use and prevalence of qualitative methods in legal research, see generally Norman K. Denzin & Yvonna S. Lincoln, Preface to Strategies of Qualitative Inquiry (Norman K. Denzin & Yvonna S. Lincoln eds., 3d ed. 2008); Lisa Webley, Qualitative Approaches to Empirical Legal Research, in Oxford Handbook of Empirical Legal Research 926 (Peter Cane & Herbert Kritzer eds., 2010). ↑
64. . We are aware that during this period, the Covid-19 pandemic imposed significant travel limitations on a national and global level and also inflicted national and global financial distress on a widespread scale and in particular in certain economic sectors, such as tourism and aviation. Our interviewees indicated that in spite of the pandemic, their business activities did not change in any material way. Most of them were interviewed in their offices and all of them reported that they were busy and felt no significant change in their workload during the pandemic. None of them thought that the pandemic should have an effect on the choice-of-law issue discussed in this article. ↑
65. . All the interviews are on file with the authors. ↑
66. . Semi-structured interviews are generally used to allow respondents to describe the field of research in their own words. This technique enables the researchers to accumulate more information and develop a complex and nuanced understanding of the field. See generally Annie Irvine et al., Am I Not Answering Your Questions Properly?: Adequacy and Responsiveness in Semi-Structured Telephone and Face-to-Face Interviews, 13 Qualitative Rsch. 87 (2013) (evaluating the difference between semi-structured interviews conducted by telephone or face-to-face); Michele J. Mcltosh & Janice M. Morse, Situating and Constructing Diversity in Semi-Structured Interviews, Glob. Qualitative Nursing Rsch. 1 (2015) (analyzing semi-structured interviews as methods for data collection and research); Kathleen M. Blee & Verta Taylor, Semi-Structured Interviewing in Social Movement Research, in Methods of Social Movement Research 92, 92–113 (Bert Klandermans & Suzanne Staggenborg eds., 2002) (discussing the advantages of semi-structured interviews). ↑
67. . Regarding sampling techniques in qualitative research, see Webley, supra note 60, at 932. ↑
68. . Snowball sampling uses a small number of initial subjects who are then asked to nominate other potential subjects who meet the criteria of the study. The “snowballing” technique is often used in qualitative empirical studies when the traits of the sampled subjects are rare and obtaining additional participants in a subject pool is difficult without referrals from existing subjects. See Webley, supra note 60, at 932. In this study, the non-probabilistic nature of the snowballing technique is somewhat mitigated by the fact that the subjects were drawn from chains of referrals starting from several unrelated interviewees, located in different countries. Id. ↑
69. . The Chambers Global Guide ranks the top lawyers and law firms in over 200 jurisdictions around the world. See About Chambers Global, Chambers and Partners, https://chambers.com/legal-guide/global-2 [https://perma.cc/AG3A-MGLW]. ↑
70. . The Legal 500 assesses the strengths of law firms in over 150 jurisdictions around the world. The Legal 500 Series, The Legal 500, https://www.legal500.com/about-us/ [https://perma.cc/B7DR-BKFX]. ↑
71. . We experienced almost no rejections when we approached the potential interviewees. We approached a leading female partner in a law firm, who, due to the significant workload and major deals she was managing, explained that she would be unavailable and referred us to another partner in the firm, a man. One New York practitioner was too busy to be interviewed and one California lawyer did not respond to our approach. ↑
72. . One practitioner based in New York estimated that he had concluded 600 deals in his career. Another lawyer based in London estimated that his team handled an average of 50 deals per year. ↑
73. . We note two potential biases of the pool of the interviewees. The first is geographical. The vast majority of our interviewees come from the United States, Europe, and the Near East. Only one of our interviewees comes from the Far East (born in Singapore) and he has practiced most of his professional life in the United States and England. Zoom Interview with Source 13 (Aug. 13, 2020). However, as a pool, our interviewees have cumulative experience conducting thousands of M&As all around the world, including in Far East Asian countries, Australia and Africa. Another potential bias has to do with the fact that most legal practitioners interviewed for this research, come from international law firms or very large law firms. This bias is tempered by the fact that some of the Israeli interviewees work for local major law firms and do not belong to international networks. The small number of interviewees that work for small law firms is explained by the fact that our research focuses on cross-border M&A transactions, these rarely involve small or medium law firms. ↑
74. . Only one of twenty-one interviewees (less than five percent) who addressed this question thought the issue was not of significant importance. Zoom Interview with Source 12 (Aug. 17, 2020). Source 22 did not address this question. ↑
75. . This observation was raised or mentioned indirectly by at least eight interviewees. Zoom Interview with Source 2 (Oct. 30, 2020); Telephone Interview with Source 9 (Sept. 3, 2020); Zoom Interview with Source 10 (Sept. 3, 2020); Telephone Interview with Source 11 (Aug. 23, 2020); Zoom Interview with Source 12, supra note 71; Telephone Interview with Source 15 (Aug. 4, 2020); Telephone Interview with Source 18 (July 26, 2020); Telephone Interview with Source 19 (Aug. 20, 2020). ↑
76. . Zoom Interview with Source 1 (Nov. 2, 2020); Zoom Interview with Source 3 (Oct. 20, 2020); Zoom Interview with Source 4 (Oct. 20, 2020); Zoom Interview with Source 5 (Oct. 20, 2020); Zoom Interview with Source 6 (October 18, 2020); Zoom Interview with Source 7 (October 18, 2020); Telephone Interview with Source 8 (Sept. 23, 2020); Zoom Interview with Source 13 (Aug. 13, 2020); Zoom Interview with Source 14 (Aug. 8, 2020); Zoom Interview with Source 16 (July 29, 2020); Telephone Interview with Source 17 (July 26, 2020); Telephone Interview with Source 20 (Aug. 15, 2020); Zoom Interview with Source 21 (Aug. 15, 2020); interviews cited supra note 72 [collectively hereinafter All Interviews Except Source 22]. ↑
77. . Telephone Interview with Source 15, supra note 72. ↑
78. . Id. ↑
79. . Telephone Interview with Source 19, supra note 72. ↑
80. . Telephone Interview with Source 11, supra note 72. ↑
81. . Zoom Interview with Source 1, supra note 73; Zoom Interview with Source 3, supra note 73; Zoom Interview with Source 5, supra note 73; Zoom Interview with Source 6, supra note 73; Zoom interview with Source 7, supra note 73; Telephone Interview with Source 8, supra note 73; Zoom Interview with Source 10, supra note 72; Zoom Interview with Source 14, supra note 73; Telephone Interview with Source 15, supra note 72; Telephone Interview with Source 17, supra note 73; Telephone Interview with Source 18, supra note 72; Telephone Interview with Source 19, supra note 72. ↑
82. . Zoom Interview with Source 5, supra note 73. ↑
83. . Zoom Interview with Source 10, supra note 72. ↑
84. . Telephone Interview with Source 20, supra note 73. ↑
85. . All Interviews Except Source 22, supra note 73. ↑
86. . Zoom Interview with Source 1, supra note 73; Zoom Interview with Source 5, supra note 73; Zoom Interview with Source 6, supra note 73; Telephone Interview with Source 8, supra note 73; Telephone Interview with Source 9, supra note 72; Zoom Interview with Source 10, supra note 72; Zoom Interview with Source 12, supra note 71; Telephone Interview with Source 19, supra note 72. ↑
87. . A letter of intent is a nonbinding document declaring the preliminary commitment of one party to do business with another. It outlines the chief terms of a prospective deal. ↑
88. . A memorandum of understanding is an agreement between two or more parties outlined in a formal document. It is not legally binding but signals the willingness of the parties to move forward with a contract. ↑
89. . A term sheet is a nonbinding agreement that shows the basic terms and conditions of an investment. It serves as a template and basis for more detailed, legally binding documents. ↑
90. . Telephone Interview with Source 19, supra note 72. ↑
91. . Interviews cited supra note 83. ↑
92. . Telephone Interview with Source 10, supra note 72. ↑
93. . Zoom Interview with Source 12, supra note 71. ↑
94. . Telephone Interview with Source 9, supra note 72. ↑
95. . Telephone Interview with Source 19, supra note 72. ↑
96. . Zoom Interview with Source 13, supra note 73. ↑
97. . Telephone Interview with Source 19, supra note 72. ↑
98. . Id. ↑
99. . Telephone Interview with Source 11, supra note 72. ↑
100. . This clause guarantees that the parties are engaged in an exclusive negotiation. ↑
101. . Zoom Interview with Source 1, supra note 73. ↑
102. . Id. ↑
103. . Id. ↑
104. . These findings are consistent with the findings of Kostritsky. See Juliet P. Kostritsky, Context Matter –What Lawyers Say About Choice of Law Decisions in Merger Agreements, 13 DePaul Bus. & Com. L.J. 211, 222 (2015) (finding that lawyers are making the determination about choice of law in merger agreements, not the clients). ↑
105. . Zoom Interview with Source 13, supra note 73. ↑
106. . All Interviews except Source 22, supra note 73. ↑
107. . One interviewee said, “In private deals if there are no earn-out claims, I couldn’t care less about the governing law. There is no litigation, so it doesn’t matter. When you have earn-out you always have litigation.” Zoom interview with Source 7, supra note 73. Earn-out clauses condition some of the payment to the seller on future performance of the corporation. ↑
108. . In fact, many cases among the string of famous decisions on the creation of freedom of incorporation and movement of corporations in the European Union were driven by the desire of corporate decision-makers to change the location of the corporate seat for tax purposes. The first case of the European Court of Justice (ECJ) to discuss possible movement of a corporation from one jurisdiction to another was the Daily Mail case. The company in that case wanted to move its locus of incorporation from the United Kingdom to the Netherlands for tax reasons. The ECJ held that companies were “creatures of national law” that existed “only by virtue of the varying national legislation which determines their incorporation and functioning” and therefore rejected the possibility of corporate emigration through the transfer of the corporation’s “real seat.” Case 81/87, The Queen v. H.M. Treasury and Comm’rs of Inland Revenue, 1988 E.C.R. 05483. This approach by the ECJ changed in the famous Centros case, in which the decision to incorporate a Danish business as a U.K. company was driven by the high Danish Companies Law capitalization requirements as compared to the low requirements in the United Kingdom. Case C-212/97, Centros Ltd. v. Erhvervs-og Selskabsstyrelsen, 1999 E.C.R. I-01459. While this seminal case was driven by a regulatory competition to the bottom over capitalization requirements, it paved the way for tax-driven cases. See, e.g., C-208/00, Überseering BV v. Nordic Construction Company, 2002 E.C.R. I-09919 (discussing the German recognition of a company with a seat in Germany but registered in the Netherlands for tax benefits); Case C-167/01, Kamer v. Inspire Art Ltd., 2003 E.C.R. I-10155 (enabling the emigration of a U.K.-registered company to the Netherlands, driven by tax benefits, without imposing additional national Dutch Companies Law obligations). Case C-106/16, Polbud, ECLI:EU:C:2017:351 (involving a Polish company deregistering from Poland and reestablishing itself as a Luxemburg company) is also motivated by the favorable tax regime in the destination jurisdiction. ↑
109. . In some cases, the main purpose of an M&A transaction is tax savings. See Jeffrey N. Gordon, Convergence and Persistence in Corporate Law and Governance, in The Oxford Handbook of Corporate Law and Governance 28, 40–41 (Jeffrey N. Gordon & Wolf-Georg Ringe eds., 2018) (“The motivation is tax minimization.”). ↑
110. . This was the opinion of all sources except Source 22 who was not asked about this issue and Source 4, who was the single exception. Source 4, a Delaware lawyer, held the opinion that in the context of venture capital investments aimed at exiting by a sale of the shares rather than by receiving dividends: “There is a mistaken assumption that the corporate income tax matters, [but] most of these companies don’t make profit; the money is made in an exit. So whatever the income tax of the corporation itself, it is a lot less important than having an entity that would create a huge value out of stock holdings. . . . In Israel the founder meets with the accountant before they meet with the lawyer, and that’s why it is the tax considerations that [are] driving. In the U.S. you don’t start with a tax structure because you are creating a very inefficient corporate structure and it will drain out the value.” Zoom Interview with Source 4, supra note 73. ↑
111. . Zoom Interview with Source 2, supra note 72. ↑
112. . Zoom Interview with Source 21, supra note 73. ↑
113. . Zoom Interview with Source 13, supra note 73. ↑
114. . Zoom Interview with Source 12, supra note 71. ↑
115. . On the prevalence of the territorial tax system see, for example, Thomas Locher, Territoriality of Tax Systems in Europe, Tax Foundation (July 22, 2021), https://taxfoundation.org/territoriality-tax-systems-europe-2021/ [https://perma.cc/T5TA-W42C]. ↑
116. . Zoom Interview with Source 3, supra note 73. ↑
117. . Zoom Interview with Source 4, supra note 73. ↑
118. . Id. ↑
119. . All Interviews except Source 22, supra note 73; Interview with Source 22 in Isr. (July 23, 2020). ↑
120. . Sources 3 and 11 specialize in the start-up industry, Sources 7 and 20 specialize in the pharmaceutical industry, and Source 10 has expertise in renewable energy. Zoom Interview with Source 3, supra note 73; Zoom interview with Source 7, supra note 73; Zoom Interview with Source 10, supra note 72; Telephone Interview with Source 11, supra note 72; Telephone Interview with Source 20, supra note 73. ↑
121. . Zoom interviewInterview with Source 7, supra note 73.. ↑
122. . Telephone Interview with Source 19, supra note 72. ↑
123. . Telephone Interview with Source 8, supra note 73. ↑
124. . Telephone Interview with Source 5, supra note 73. ↑
125. . Telephone Interview with Source 19, supra note 72. ↑
126. . Telephone Interview with Source 15, supra note 72. ↑
127. . Zoom Interview with Source 16, supra note 73. ↑
128. . Id. ↑
129. . Zoom Interview with Source 12, supra note 71. ↑
130. . Zoom Interview with Source 1, supra note 73; Zoom Interview with Source 5, supra note 73; Zoom Interview with Source 6, supra note 73; Zoom interview with Source 7, supra note 73; Telephone Interview with Source 8, supra note 73; Zoom Interview with Source 10, supra note 72; Telephone Interview with Source 11, supra note 72; Telephone Interview with Source 19, supra note 72. ↑
131. . Zoom Interview with Source 13, supra note 73. ↑
132. . Sources 8 and 11 Telephone Interview with Source 8, supra note 73; Telephone Interview with Source 11, supra note 72. ↑
133. . Zoom Interview with Source 1, supra note 73; Zoom Interview with Source 3, supra note 73; Telephone Interview with Source 8, supra note 73; Telephone Interview with Source 9, supra note 72; Telephone Interview with Source 19, supra note 72. ↑
134. . Zoom Interview with Source 8, supra note 73. ↑
135. . Id. ↑
136. . Zoom Interview with Source 1, supra note 73; Zoom Interview with Source 3, supra note 73; Zoom Interview with Source 4, supra note 73; Zoom Interview with Source 6, supra note 73; Telephone Interview with Source 8, supra note 73; Telephone Interview with Source 9, supra note 72; Zoom Interview with Source 10, supra note 72; Telephone Interview with Source 11, supra note 72; Zoom Interview with Source 12, supra note 71; Zoom Interview with Source 13, supra note 73; Telephone Interview with Source 17, supra note 73; Telephone Interview with Source 18, supra note 72; Telephone Interview with Source 19, supra note 72; Telephone Interview with Source 20, supra note 73. ↑
137. . Zoom Interview with Source 14, supra note 73. ↑
138. . Zoom Interview with Source 12, supra note 71. ↑
139. . Telephone Interview with Source 9, supra note 72. ↑
140. . Id. ↑
141. . Telephone Interview with Source 19, supra note 73. ↑
142. . Id. ↑
143. . Interview with Source 22 in Isr., supra note 116. ↑
144. . Sources 2 and 12 were the only sources that did not have a strict preference to common law. Zoom Interview with Source 2, supra note 72; Zoom Interview with Source 12, supra note 71. ↑
145. . Zoom Interview with Source 12, supra note 71. ↑
146. . Zoom Interview with Source 1, supra note 73; Zoom Interview with Source 2, supra note 72; Zoom Interview with Source 3, supra note 73; Zoom Interview with Source 5, supra note 73; Zoom Interview with Source 6, supra note 73; Zoom interview with Source 7, supra note 73; Telephone Interview with Source 8, supra note 73; Telephone Interview with Source 9, supra note 72; Zoom Interview with Source 10, supra note 72; Telephone Interview with Source 11, supra note 72; Zoom Interview with Source 12, supra note 71; Zoom Interview with Source 13, supra note 73; Zoom Interview with Source 14, supra note 73; Telephone Interview with Source 15, supra note 72; Zoom Interview with Source 16, supra note 73; Telephone Interview with Source 17, supra note 73; Telephone Interview with Source 18, supra note 72; Telephone Interview with Source 19, supra note 72; Telephone Interview with Source 20, supra note 73. ↑
147. . Id. ↑
148. . Zoom Interview with Source 12, supra note 71. ↑
149. . Id. ↑
150. . Squeeze-out rights allow a controlling shareholder to force the remaining minority shareholders to sell their shares such that the controlling shareholder becomes the sole shareholder. In public corporations, squeeze-out rights may require the controlling shareholder to reach a certain threshold before the rights can be exercised. For example, section 979 of the U.K. Companies Act 2006 requires the controlling shareholder to reach ninety percent of the shares in order to initiate a compulsory buyout. Similar arrangement may be privately agreed upon in shareholder agreements in nonpublic corporations. ↑
151. . Zoom Interview with Source 10, supra note 72. ↑
152. . Zoom Interview with Source 16, supra note 73. ↑
153. . Id. ↑
154. . Zoom Interview with Source 13, supra note 73. ↑
155. . Id. ↑
156. . Zoom Interview with Source 10, supra note 72. ↑
157. . Id. ↑
158. . Zoom Interview with Source 12, supra note 71. ↑
159. . Telephone Interview with Source 17, supra note 73. ↑
160. . Zoom Interview with Source 2, supra note 72. ↑
161. . Id. ↑
162. . Id. ↑
163. . Id. ↑
164. . Zoom Interview with Source 1, supra note 73; Zoom Interview with Source 3, supra note 73; Zoom Interview with Source 4, supra note 73; Zoom Interview with Source 6, supra note 73; Zoom interview with Source 7, supra note 73; Telephone Interview with Source 8, supra note 73; Telephone Interview with Source 9, supra note 72; Zoom Interview with Source 10, supra note 72; Telephone Interview with Source 11, supra note 72; Zoom Interview with Source 12, supra note 71; Zoom Interview with Source 13, supra note 73; Telephone Interview with Source 15, supra note 72; Zoom Interview with Source 16, supra note 73; Telephone Interview with Source 17, supra note 73; Telephone Interview with Source 18, supra note 72; Telephone Interview with Source 19, supra note 72; Telephone Interview with Source 20, supra note 73. ↑
165. . Zoom Interview with Source 12, supra note 71. ↑
166. . Zoom Interview with Source 13, supra note 73. ↑
167. . Zoom Interview with Source 10, supra note 72. ↑
168. . Zoom Interview with Source 8, supra note 73. ↑
169. . Id. ↑
170. . Id. ↑
171. . Zoom Interview with Source 14, supra note 73. ↑
172. . Id. ↑
173. . Telephone Interview with Source 8, supra note 73; Zoom Interview with Source 10, supra note 72; Zoom Interview with Source 13, supra note 73; Telephone Interview with Source 15, supra note 72; Zoom Interview with Source 16, supra note 73; Telephone Interview with Source 19, supra note 72. ↑
174. . Zoom Interview with Source 13, supra note 73. ↑
175. . Id. ↑
176. . Id. ↑
177. . Id. ↑
178. . Id. ↑
179. . Zoom Interview with Source 10, supra note 72. ↑
180. . “Special purpose vehicle (SPV)” often refers to a corporation set up as part of the corporate structure of an M&A transaction. ↑
181. . Zoom Interview with Source 10, supra note 72. ↑
182. . Zoom Interview with Source 12, supra note 71. ↑
183. . Zoom Interview with Source 2, supra note 72. ↑
184. . Id. ↑
185. . Id. ↑
186. . Zoom Interview with Source 1, supra note 73; Zoom Interview with Source 3, supra note 73; Zoom Interview with Source 4, supra note 73; Zoom Interview with Source 5, supra note 73; Zoom Interview with Source 6, supra note 73; Zoom interview with Source 7, supra note 73; Telephone Interview with Source 8, supra note 73; Telephone Interview with Source 9, supra note 72; Zoom Interview with Source 10, supra note 72; Telephone Interview with Source 11, supra note 72; Zoom Interview with Source 13, supra note 73; Zoom Interview with Source 14, supra note 73; Telephone Interview with Source 15, supra note 72; Zoom Interview with Source 16, supra note 73; Telephone Interview with Source 17, supra note 73; Telephone Interview with Source 18, supra note 72; Telephone Interview with Source 19, supra note 72; Telephone Interview with Source 20, supra note 73. ↑
187. . Zoom Interview with Source 1, supra note 73. ↑
188. . Id. ↑
189. . Zoom Interview with Source 1, supra note 73; Telephone Interview with Source 8, supra note 73; Zoom Interview with Source 10, supra note 72. ↑
190. . All Interviews Except Source 22, supra note 73. ↑
191. . Zoom Interview with Source 4, supra note 73. ↑
192. . Telephone Interview with Source 11, supra note 72. ↑
193. . Zoom Interview with Source 1, supra note 73. ↑
194. . Zoom Interview with Source 3, supra note 73. ↑
195. . Zoom Interview with Source 7, supra note 73. ↑
196. . Id. ↑
197. . Zoom Interview with Source 4, supra note 73. ↑
198. . Zoom Interview with Source 1, supra note 73; Zoom Interview with Source 3, supra note 73; Zoom Interview with Source 5, supra note 73; Zoom Interview with Source 6, supra note 73; Zoom interview with Source 7, supra note 73; Telephone Interview with Source 8, supra note 73; Telephone Interview with Source 9, supra note 72; Zoom Interview with Source 10, supra note 72; Telephone Interview with Source 11, supra note 72; Zoom Interview with Source 12, supra note 71; Zoom Interview with Source 13, supra note 73; Zoom Interview with Source 14, supra note 73; Telephone Interview with Source 15, supra note 72; Zoom Interview with Source 16, supra note 73; Telephone Interview with Source 17, supra note 73; Telephone Interview with Source 18, supra note 72; Telephone Interview with Source 19, supra note 72; Telephone Interview with Source 20, supra note 73; Zoom Interview with Source 21, supra note 73. ↑
199. . Zoom Interview with Source 8, supra note 73. ↑
200. . Id. ↑
201. . Telephone Interview with Source 9, supra note 72. ↑
202. . Zoom Interview with Source 1, supra note 73. ↑
203. . Zoom Interview with Source 10, supra note 72. ↑
204. . Id. ↑
205. . Zoom Interview with Source 2, supra note 72. ↑
206. . Telephone Interview with Source 15, supra note 72. ↑
207. . Zoom Interview with Source 14, supra note 73. ↑
208. . Id. ↑
209. . Id. ↑
210. . See Kostritsky, supra note 101, at 222–23 (illustrating the potential conflicts of interest in the principal-agent relationship between corporations and their lawyers in the context of choice of law provisions in merger agreements). ↑
211. . Telephone Interview with Source 9, supra note 72. ↑
212. . Zoom Interview with Source 1, supra note 73; Zoom Interview with Source 2, supra note 72; Zoom Interview with Source 3, supra note 73; Zoom Interview with Source 4, supra note 73; Zoom Interview with Source 5, supra note 73; Zoom Interview with Source 6, supra note 73; Zoom interview with Source 7, supra note 73; Telephone Interview with Source 8, supra note 73; Zoom Interview with Source 10, supra note 72. ↑
213. . Zoom Interview with Source 3, supra note 73; Telephone Interview with Source 9, supra note 72. ↑
214. . Telephone Interview with Source 19, supra note 72. ↑
215. . Telephone Interview with Source 9, supra note 72. ↑
216. . Zoom Interview with Source 21, supra note 73. ↑
217. . Zoom Interview with Source 10, supra note 72. ↑
218. . Zoom Interview with Source 1, supra note 73; Zoom Interview with Source 5, supra note 73; Telephone Interview with Source 11, supra note 72; Telephone Interview with Source 17, supra note 73; Telephone Interview with Source 18, supra note 72. ↑
219. . Telephone Interview with Source 17, supra note 73. ↑
220. . Zoom Interview with Source 5, supra note 73; Telephone Interview with Source 17, supra note 73. ↑
221. . Zoom Interview with Source 3, supra note 73; Zoom Interview with Source 4, supra note 73; Zoom Interview with Source 6, supra note 73; Telephone Interview with Source 11, supra note 72; Zoom Interview with Source 12, supra note 71. These respondents mentioned the global intangible low-taxed income reform as a significant influence on the location of incorporation. ↑
222. . All Interviews except Source 22, supra note 73. ↑
223. . See The Internal Affairs Doctrine: Theoretical Justifications and Tentative Explanations for its Continued Primacy, 115 Harv. L. Rev. 1480, 1480 (2002). ↑
224. . See, e.g., Restatement (Second) of Conflict of Laws § 302(2) (Am. L. Inst. 1971). ↑
225. . See Werner Ebke, The “Real Seat” Doctrine in the Conflict of Corporate Laws, 36 Int’l L. 1015, 1021 (2002); Eddy Wymeersch, The Transfer of the Company’s Seat in European Company Law, 40 Common Mkt. L. Rev. 661, 668 (2003). See also cases cited supra note 105. ↑
226. . These findings are consistent with the findings of Eisenberg and Miller. See Eisenberg & Miller, supra note 3, at 1988–90 tbls. 3A, 3B (finding positive, significant associations between the states of incorporation of the acquired and acquiring firms and the chosen law in M&A agreements). ↑
227. . Zoom Interview with Source 2, supra note 72; Telephone Interview with Source 9, supra note 72. ↑
228. . See generally Representations and Warranties Insurance Claim Study: An Analysis of Claims Trends, Data, and Recoveries, Aon (2021), https://www.aon.com/risk-services/amats/2019rwclaims [https://perma.cc/45YU-Q9J7] (explaining the attributes that have increased RWI’s popularity). ↑
229. . See Albert O. Hirschman, Exit, Voice, and Loyalty 4 (1970) (describing the “exit” and “voice” options). See also Dov Solomon, The Voice: The Minority Shareholder’s Perspective, 17 Nev. L.J. 739, 755–57 (2017) (describing minority shareholders’ preference to express their dissatisfaction with how the company is being managed by selling their shares rather than by expressing their voice). ↑
230. . Zoom Interview with Source 5, supra note 73; Sources 5, Telephone Interview with Source 11, supra note 72. In Israel, for example, a respondent described that U.S. investors require changes in the corporate articles of association to allow for quick shareholder assembly resolutions in writing, even when only a majority supports the resolution. Zoom Interview with Source 21, supra note 73. The Israeli corporate law otherwise requires that resolutions in writing be unanimous, giving significant power to dissenting minority shareholders. § 76, Companies Law, 5759–1999, LSI 44 119 (1999). ↑
231. . In Rawlsian philosophy, this would be the result of applying the maximin criterion under a veil of ignorance. Therefore, this is a good choice in terms of fairness. See generally John Rawls, A Theory of Justice 136–37, 152–61 (1971). ↑