Research review: The international market for competing corporate legal regimes

While most academic papers and media reports focus almost exclusively on low tax rates as the main competitive attribute of offshore financial centres, a January 2024 paper by University of Maryland law professor William Moon is outlining the emerging international market for corporate charters – in other words how firms take advantage of different corporate legal regimes globally.

The study finds that prominent offshore jurisdictions, including the Cayman Islands, are competing to attract corporations headquartered outside of those jurisdictions in part by offering “cutting-edge” corporate governance rules, low tax rates, stable legal systems and sophisticated business courts.

Moon says legal regime shopping enabled by entrepreneurial foreign nations “can strip away parochial local rules and spur legal innovation”, while it could also “undermine mandatory domestic rules designed to effectuate important social policy”.

“Judges in the United States have enabled American firms to shop for corporate law globally by routinely – albeit not uniformly – deferring to the place of incorporation to determine applicable corporate governance rules for American companies incorporated in foreign nations,” Moon writes.

“For instance, the hundreds of Chinese firms that are listed in American securities markets predominantly are incorporated not in China or Delaware, but in the Cayman Islands and the British Virgin Islands,” the paper says.

Meanwhile, Israeli firm G Med Devices, Singaporean e-commerce giant Sea Limited and Brazilian fintech companies PagSeguro and Nu Bank made their debut to American investors as Cayman Islands entities.

Moon highlights that the Cayman Islands, Bermuda and the British Virgin Islands now account for more than 70% of companies whose shares are listed on the Hong Kong Stock Exchange, as well as the role of offshore jurisdictions in the market for special purpose acquisition companies (SPACs).

The paper cites a study, that found 94 out of the 248 SPACs listed in the United States in 2020 were incorporated in either the BVI or Cayman.

Reportedly, the popularity of the Cayman Islands when it comes to SPACs is in part to the result of statutory merger provisions in Cayman Islands company law that allow this form of transaction to be accomplished with ease, Moon says.

He notes that some offshore jurisdictions have simply copied and pasted Delaware corporate law, while some of the most successful “corporate law havens” have adopted differentiated corporate governance regimes.

The paper argues that in broad terms, offshore corporate law havens generally have adopted permissive corporate governance rules. For instance, Bermuda, the Cayman Islands and the BVI all enable corporations to restrict shareholder access to corporate books and records and severely limit the possibility of shareholder derivative suits.

In the Cayman Islands, rules that limit the possibility of shareholder derivative suits have been implemented in part to protect corporations from vexatious or unfounded litigation. “It remains to be seen if curtailing certain shareholder rights – even the ones that are taken for granted in established domestic legal systems – might benefit the corporate governance ecosystem,” the paper says.

“However, not all governance rules in offshore corporate law havens appear to be ‘lax’ rules that might remind American readers of Nevada’s famous ‘near liability free’ regime,” Moon says.

One example is the appraisal rights regime in the Cayman Islands, which has “vast practical importance given the uptick in the number of Cayman-incorporated Chinese companies listed in the United States that are going private amidst brewing political tensions between Beijing and Washington”.

While Cayman courts often refer to Delaware’s refined body of appraisal rights case law, the Cayman Islands has opted to differentiate its regime, he writes.

“Indeed, in some respects, Cayman law may offer better protection for shareholders than Delaware law when it comes to appraisal rights – the latter, which is said to treat deal price as the primary method of determining valuation in the absence of the deal process has been shown to be defective. The Cayman Islands, on the other hand, has adopted blended approaches that weigh not just deal price, but discounted cash flow and market price. Under Cayman law, minority shareholders also have a right to have their experts hold meetings with management and a right to demand an interim payment – features unheard of in Delaware.”

The paper describes how offshore jurisdictions “have embraced cutting-edge dispute resolution mechanisms”, including specialised business and financial services courts, as well as arbitration, to resolve complex corporate law disputes.

The offering of sophisticated solutions by offshore jurisdictions also extends to insolvency law. Moon states that this “may be an important conduit to access quality law for stakeholders who would otherwise be bound to antiquated domestic insolvency regimes.”

He says the insolvency regime in the Cayman Islands, for instance, has catered to firms principally operating in China. “In Suntech, a corporate representative testified that despite the substantial Chinese nexus, the firm had flatly rejected the possibility of restructuring in China because ‘China has different concepts of the rules of law and creditors’ rights compared to those found in the Cayman Islands and the United States; it is the last place that one would go.’”

“Viewed in a favourable light, offshore jurisdictions may have become sovereign vehicles through which firms operating in ‘unstable’ legal regimes opt into predictable and efficient legal proceedings where certain financial contracting can be enforced effectively outside of the ‘home’ legal system. That would presumably mean efficiency gains, but perhaps ones that come with the cost of undermining local bankruptcy policy,” Moon concludes.

The paper outlines areas for further research of global corporate charter competition and how it will impact the current market leader Delaware.

Despite SpaceX’s recent high-profile move from Delaware to Texas for corporate governance reasons, after a state court struck down a $56 billion pay package for founder Elon Musk, the paper suggests Delaware faces only limited competition from other US states.

Instead it argues, “the new breed of small offshore jurisdictions that have emerged to supply corporate charters may inject a robustness to the charter market that is not feasible in the inter-state context”.

With the growing prominence of offshore jurisdictions, “it would be fascinating to see whether current market leaders like Delaware will look to foreign jurisdictions to import successful procedural and substantive governance rules,” Moon states.

The paper ‘Global Corporate Charter Competition’ by William J Moon appears as a chapter in the book ‘A Research Agenda in Corporate Law’ (Christopher Bruner & Marc Moore eds., 2024).

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