Berle and Means’s view that managers rather than shareholders control our largest corporations finds important expression in William Cary’s famous article arguing that managers have led shareholders on a “race to the bottom” whose finish line is Delaware. These views, in turn, support supplanting state corporation law with federal regulation of corporate governance. Concerns about a race to the bottom lately focus on Nevada, which seeks to be Delaware’s first real competitor for out-of-state firms in the national incorporation market. Evidence suggests that Nevada’s strategy is to raise tax revenues by offering a significantly laxer corporate law than Delaware. We examine Nevada’s strategy and incorporation history to show that there is an alternative explanation for Nevada law that does not raise concerns about a race to the bottom. Specifically, we argue Nevada corporation law may actually reduce some firms’ total agency costs by reducing the costs of judicial monitoring. This analysis has implications as to the need for federal regulation of corporate governance.
Bruce H. Kobayashi and Larry E. Ribstein, Nevada and the Market for Corporate Law, 35 SEATTLE U. L. REV. 1165 (2012).