Delaware and the Market for Llc Law: A Theory of Contractibility and Legal Indeterminacy

IntroductionIncorporating in Delaware can be expensive. Just ask 60% of the companies that comprise the Fortune 500.1 These companies pay up to $180,000 annually for the simple privilege of incorporating in the state2-a figure that is substantially higher than incorporation in any other state.3 In their controversial article, Price Discrimination in the Market for Corporate Law,4 Professors Marcel Kahan and Ehud Kamar show that Delaware's ability to charge a premium for incorporations, in the form of its annual franchise tax, is evidence of Delaware's market power in the jurisdictional competition for corporate charters.5 Beyond simply charging a premium, however, Professors Kahan and Kamar argue that Delaware further increases its profits by engaging in price discrimination- that is, by tailoring its premium according to the value each firm attributes to the privilege of incorporating in Delaware.6 The ability of Delaware to charge a premium and to price discriminate leads Professors Kahan and Kamar to conclude that in the competition for corporate charters, "it is evident that Delaware possesses substantial market power."7This Article projects Professors Kahan and Kamar's analysis onto the world of limited liability companies ("LLCs"). Like corporate charters, the competition for LLC charters is an example of regulatory competition. Firms can choose to organize as an LLC under the laws of any state, regardless of whether the firm conducts any business within that state. Thus, as is the case with corporate charters, a state can compete for LLC charters by providing the best law "product" with the aim of attracting fees, taxes, and business for the state's residents.Although Delaware's dominance in the competition for corporate charters is well known and widely discussed,8 its position within the competition for LLC charters is not.9 LLCs, however, are becoming an increasingly accepted and prominent part of the business world.10 Although the LLC form is relatively new, the number of LLCs formed in the United States has in recent years dramatically outpaced corporations. 11 Today, LLCs, like corporations, can be publicly traded, multinational firms with billions of dollars of assets.12To assess Delaware's market power in the competition for LLC charters, this Article examines the LLC analog of the corporate franchise tax. Instead of a franchise tax, every Delaware LLC is charged a flat annual tax of $250, regardless of the LLC's size, income, or business conducted in the state.13 This Article shows that, unlike its corporate franchise tax, Delaware's LLC tax does not represent a premium and does not price discriminate.This observation poses a puzzle for business law scholars. In the jurisdictional competition for corporate charters, Delaware has long exploited its market power by charging premium and discriminatory prices. In the jurisdictional competition for LLCs, however, Delaware does neither. But why?This Article explores the possibility that, in the jurisdictional competition for LLC charters, Delaware lacks the kind of market power it has long enjoyed for corporate charters. To explain why this may be, this Article presents a theory based on contractibility and legal indeterminacy. Specifically, this Article shows how the high level of contractibility and the resulting reduction in legal indeterminacy available under LLC law substantially diminish two of Delaware's traditional competitive advantages.To make this claim, this Article compares Delaware's corporate law product to Delaware's LLC law product. Previous scholarship has suggested that, in the jurisdictional competition for corporate charters, Delaware commands market power because of certain key features of its corporate law product. These features-which include (1) the network and learning effects of Delaware law, (2) the expertise of the Delaware judiciary, (3) the proficiency of Delaware's administrative services, and (4) Delaware's credible commitment to corporate law-make incorporation in Delaware more valuable than incorporation in any rival state. …