Delaware’s Dominance and the Future of Organizational Law

Delaware dominates the market for business formations.Two main theoretical explanations have been offered to justifyDelaware’s continued success. One focuses on the state’scredible commitment to producing responsive organizationallaw in the future. The other looks to the network effects thatcontinue to encourage new formations once Delaware alreadydominates. Yet, other than continued observation of Delaware’sdominance, little empirical support exists for either theory.This Article empirically tests entrepreneurs’, investors’, andlawyers’ appetite for Delaware’s credible commitment.

I use therecent Delaware Supreme Court decision of Gatz Properties v.Auriga Capital Corp., which was a negative shock toDelaware’s credible commitment to responsive LLCorganizational law, to analyze the demand for Delaware’scredible commitment to responsive organizational law. I findtwo major shifts following Gatz: (1) a significant and persistentdecrease in the value of publicly traded Delaware LLCs and(2) a lower rate of private LLC formation in Delaware relativeto other states. Notably, these decreases do not reverse despiteprompt reparative action from the Delaware legislature. Inaddition to providing empirical support for the crediblecommitment theory, these results offer important policyimplications for the present condition of organizational lawand the future of state competition for business formations.