Eisenberg & Miller on choice of law and forum

Eisenberg & Miller, Ex Ante Choices of Law and Forum: An Empirical Analysis of Corporate Merger Agreements has some interesting data on the relationship between choice of incorporating state and choice of law and forum in merger agreements.  I have a summary and analysis below the fold.

First, the abstract:

Legal scholars devote much attention to the incorporation puzzle - why corporations so frequently incorporate in Delaware. This paper suggests that focusing on the incorporation decision overlooks a broader but intimately related set of questions. Choosing Delaware as the incorporation situs is, effectively, a choice-of-law decision. Incorporating in Delaware selects Delaware law for (and authorizes Delaware courts to adjudicate) legal disputes about the allocation of a firm's governance authority. In this sense, the incorporation decision is similar to any setting in which a company selects a law or authorizes a dispute resolution forum. We study a data set of 412 merger and acquisition contracts contained as exhibits in SEC Form 8-K filings over a seven month period in 2002 to assess the decisions the parties have made regarding choice-of-law and choice-of-forum. Although these contracts frequently select Delaware law and Delaware as a forum, there is a relative "flight" from Delaware in this contractual setting. Delaware corporations choose Delaware law less than other corporations choose the law of their state of incorporation. Furthermore, many contracts specifying Delaware law did not specify Delaware as the litigation forum. Contracts designating Delaware law tend to choose Delaware as a litigation forum less than contracts that designate other states' laws tend to choose such states as a litigation forum. Delaware was the place of incorporation for 189 merger contracts; it was the choice of law for 132. With respect to forum selection, 115 contracts that designated a forum had Delaware corporate acquirers. Yet only 64 contracts specified Delaware as the litigation forum. In contrast, for example, New York had eight corporate acquirers and 45 contracts specifying that New York law governed. We investigate the determinants underlying these decisions about choice-of-law and forum selection. Regression results confirm the flight from Delaware law and forum.

The authors further explain:

The results probably should be interpreted less to suggest that Delaware has unattractive features than that factors other than general law or forum drive corporate choice-of-law and forum. Some factors are suggested by this study’s findings of associations between places of business and attorney locale and choice-of-law and forum. . . . Another is clearly shown by the finding that mergers involving public acquired firms tend to choose Delaware law. Delaware’s corporate governance features likely drive this result. For any particular set of merger partners, factors not readily observable in our data likely drive the choice of law and forum.

This article interests me especially because I've written or co-authored several articles dealing with the relationship between the corporate internal affairs rule and contractual choice of law. See particularly Choosing Law By Contract, 18 J. Corp. L. 245 (1993), Delaware, Lawyers and Choice of Law, 19 Delaware Journal of Corporate Law 999 (1994), From Efficiency to Politics in Contractual Choice of Law, 37 Ga. L. Rev. 363 (2003).

The data on the "flow away" from Delaware as a law and forum choice for merger agreements is not surprising for several reasons. First, there is no reason to expect Delaware law and courts to be as good on non-corporate as on corporate issues, given the bar's heavy involvement in the latter, but not necessarily the former.

More importantly, as discussed in my Georgia article, courts probably won't hold that the state of incorporation outweighs the regulatory interest of another state that has almost any other kind of contact. If the parties know that, for one reason or another, a court is unlikely to apply Delaware law, they might choose another state - usually New York - even if they think Delaware is better. Taking that into account, the data actually indicates a marked pro-Delaware tilt, with the parties choosing Delaware in a lot of cases despite the absence of Delaware connections and therefore the risk that courts may not enforce the clause.

Note also that the choice of non-Delaware incorporation for publicly held firms may have special implications that carry over to choice of law for contracts. For example, both Enron and WorldCom were non-Delaware corporations for idiosyncratic regulatory reasons. One might expect at least some non-Delaware corporations to be more attracted to the incorporation state for non-internal-affairs reasons than Delaware corporations, which seek only Delaware's internal affairs laws. These considerations might drive their choice of law for other contracts.

In general, I think the data shows less about parties' judgments about Delaware as an incorporating jurisdiction than it does about the market for law more generally – i.e., that the parties are making nuanced choices in contractual choice-of-law clauses. It is an area worthy of further study. In particular, note that the authors used only 8ks and merger agreements.  It might be interesting to do a broader project based on the contract data available on CORI.