Ex Ante Choices of Law and Forum: An Empirical Analysis of Corporate Merger Agreements

Legal scholars have focused much attention on the incorporation puzzle—why business corporations so heavily favor Delaware as the site of incorporation. This paper suggests that the focus on the incorporation decision overlooks a broader but intimately related set of questions. The choice of Delaware as a situs of incorporation is, effectively, a choice of law decision. A company electing to charter in Delaware selects Delaware law (and authorizes Delaware courts to adjudicate legal disputes) regarding the allocation of governance authority within the firm. In this sense, the incorporation decision is fundamentally similar to any setting in which a company selects a law and authorizes (or selects) a forum in which disputes are to be resolved. We study a data set of 412 merger and acquisition contracts contained as exhibits in SEC Form 8-K filings by reporting corporations over a seven month period in 2002 in order to assess the decisions the parties have made regarding choice of law and choice of forum. We find that, although these contracts frequently select Delaware law and forum, there is a relative flight from Delaware in the contractual setting. Delaware corporations tend to choose Delaware law less than other corporations choose the law of their states of incorporation. Furthermore, in those contracts specifying Delaware law, many firms do not specify Delaware as the litigation forum. Corporations that choose Delaware law tend to choose Delaware as a litigation forum less than corporations that choose other states\u27 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 sixty-four contracts specified Delaware as the litigation forum. In contrast, for example, New York had eight corporate acquirers and forty-five 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, conditional on Delaware being the acquiring firm\u27s place of incorporation