Delaware’s Copycat: Can Delaware Corporate Law Be Emulated?

Ido Baum is an Associate Professor at the Haim Striks Faculty of Law at the College of Management-Academic Studies (Colman); and Dov Solomon is an Associate Professor of Law at Ramat Gan Law School. This post is based on their recent paper, and is part of the Delaware law series; links to other posts in the series are available here.

Delaware’s famous corporate law and its highly respected specialized Court of Chancery attract entrepreneurs from all over the world, who choose the state as their locus of incorporation and litigation forum, and global investors who choose Delaware law as the law governing their corporate investments and mergers and acquisitions (M&A). The accepted wisdom is that the superiority of Delaware’s corporate law is the result of an interstate competition between corporate laws in the United States and that the Court of Chancery’s contribution to Delaware’s advantage in the competition for the hearts, minds, and pockets of incorporation decision-makers is paramount.

Corporate law scholars argue that competition exists not only within the United States but also on the global playing field, with jurisdictions vying to attract entrepreneurs to incorporate domestically and global investors to adopt domestic corporate laws as the laws governing investment agreements. Other scholars argue that this phenomenon is not a result of competition but rather a process of global convergence of laws. This interjurisdictional process makes Delaware a significant global norm-exporter in the field of corporate law because jurisdictions emulate some of its corporate law. The nature of this competition, or convergence, and whether it generates better or worse corporate laws is a matter of continual debate.

Israel leads the global pack. Israel’s corporate law represents a unique case study for an evaluation of the assumptions underlying the theory of interjurisdictional competition or convergence between corporate laws. Israel has invested significant effort, over two decades, into approximating its corporate law to the corporate law of Delaware. Furthermore, Israel established a specialized court dedicated to corporate law disputes, shamelessly copycatting the Delaware Court of Chancery. The declared objectives of this tremendous legal effort were twofold: first, to daw domestic entrepreneurs away from choosing Delaware over Israel as the locus of incorporation, and second, to increase the willingness of foreign investors—especially U.S. and global investors—to choose or accept Israeli corporate law as the governing law in cross-border M&A transactions involving Israeli target corporations. The Israeli case therefore provides an opportunity to evaluate whether an approximation of corporate laws is at all possible and whether it eventually influences choices in the realm of private international law.

In our recent paper, Delaware’s Copycat: Can Delaware Corporate Law Be Emulated?, we employ qualitative methods—interviews with M&A practitioners (lawyers and in-house counsels in global institutional investors) from the United States, the United Kingdom, and Israel—to examine these issues. We use the interviews to assess whether the project of approximating Delaware corporate law has succeeded in shifting incorporation decision preferences away from Delaware to Israel and watering down the natural reluctance of global investors to accepting an unfamiliar corporate law when engaging in cross-border corporate M&A transactions involving an Israeli party.

Our findings indicate that U.S.-based practitioners are skeptical about the possibility of other jurisdictions emulating Delaware, and Israel is no exception. A leading Delaware lawyer rejected the Israeli approximation narrative as “totally nonsense” and explained that “Israeli courts do look to Delaware, but that’s where it ends. They take the terms and bring them home and create some Israeli version of it.”

Counterintuitively, practitioners in Israel are ambivalent regarding the success of the approximation project but nevertheless use it as a “selling argument” when market actors are reluctant to buy into an unfamiliar governing law. One Israeli lawyer explained that U.S. investors will always prefer their national law and cautiously suggested that “the developments in the Israeli corporate law enable us to say to U.S. investors that if all other issues have been resolved and this is the only remaining issue, it is not a problem to select Israeli law as the governing law.”

A surprising consensus emerged between lawyers from Delaware, Israel, and the U.K. regarding the emulation of the Delaware Court of Chancery. A Delaware lawyer told the following story: “A few years ago the Israeli judges from the specialized economic court met the chief justice of Delaware and they told him that they rule as a court [by] adopting the Delaware corporate law but make it adaptable to the Israeli environment. The chief justice said, ‘You can’t do that.’”. An Israeli lawyer argued: “The specialized Israeli courts are not as sophisticated as the Delaware courts. [For example,] they hardly deal with cases regarding start-ups.” Moreover, a U.K. lawyer criticized the specialized Israeli courts for not providing the legal stability and predictability of English courts or of Delaware’s Chancery because of the uncertainty of their corporate case law.

The findings of the qualitative study provide important insights for judges, policymakers, academics, and practitioners regarding the approximation project. They cast doubt on whether the mere approximation of a jurisdiction’s corporate law to that of a popular jurisdiction can have more than a marginal effect on decisions of entrepreneurs regarding the location of incorporation and on the willingness of investors to accept an unfamiliar law.

The study reveals a potential interplay in global interjurisdictional competition between several fields of law. Approximation of laws in one field may result in increased competition in another field. For example, if the process of approximating corporate laws is perceived to have leveled the playing field, making entrepreneurs and investors indifferent between corporate laws, jurisdictions will turn to tax regimes in order to attract businesses.

Our analysis of the responses elicited from the interviewed practitioners also indicates that an approximation project can have countervailing effects on practitioners in the emulating jurisdiction. On one hand, Israeli lawyers reported that they found it easier to convince global investors to accept an unfamiliar local law in their M&A transactions, but on the other hand Israeli lawyers become more familiar and comfortable with the emulated law, Delaware’s law in this case, and consequently the foreign law becomes easier to implement and more likely to be used.

The complete paper is available for download here.

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  1. Jeffrey Larson
    Posted Wednesday, February 9, 2022 at 10:39 am | Permalink

    I have a very vague recollection of a professor in law school stating that Japan had basically done the same thing in the mid-80s. Something like, the Delaware corporate common law as of January 1, 1985 was adopted as Japanese corporate law. Not sure how that would intermesh with a civil law system, but I am undoubtedly misremembering important aspect of that particular lecture.

  2. Kenju Watanabe
    Posted Friday, February 18, 2022 at 1:58 am | Permalink

    In 2005, Japan enacted a new company act, which is based on an enabling model. Among others, it permitted cash freezeouts.  Under the new companies act, therefore, the role of the Japanese judiciary increased and Delaware cases have a lot to offer to the Japanese judiciary. But, Japan is essentially a civil law jurisdiction. Japan has not created a specialized business court. Discovery is weak and no opt-out class action system exists. Further, its official language is Japanese. I have seen twists and turns and setbacks. Several years ago, I analyzed why.  Here is the paper: In my view, however, overall the changes have been for the better.