Incorporating in Nevada

Broc Romanek blogged today that Nevada ranks fourth as the state of incorporation among publicly traded firms (behind Delaware, California and New York) and third among firms that went public from 1996-2000. He cites this 2003 article from the Journal of Law and Economics as the source. I have heard murmurings in recent years that Nevada is now the state of choice for incorporation, so I decided to investigate further. According to the article, not surprisingly, Delaware dominates with 57.75% of all publicly held companies, 59.45% of the Fortune 500, and 67.86% of companies going public from 1996-2000 (note that these numbers do not include financial firms). California is at 4.33%, 5.94%,and 4.48%.; New York is at 3.46%, 5.94% and 1.09%; Nevada is at 3.32%, 0%, and 3.58%. The paper explains that California and New York are high on the list in large part because of home-state bias, i.e., various factors lead firms to disfavor out-of-state incorporation. Because of this bias, some of the firms that are headquartered in California and New York choose to incorporate in these states. Although the percentage of firms that do so is small, because a lot of firms are headquartered in California and New York it is enough to push these states towards the top of the rankings. The same cannot be said for Nevada.  Nevada ranks high in the rankings because it is the only state other than Delaware that has a significant net inflow of firms, i.e., significantly more non-Nevada firms incorporate in Nevada than Nevada firms that incorporate outside of Nevada. It appears that some out-of-state firms are heeding the murmurs and going with Nevada, but it is nothing compared to the number of out-of-state firms going with Delaware.

I also took a quick look at the Nevada corporate statute to see whether it had a lot of management friendly provisions. It does. It has numerous anti-takeover provisions (control share acquisition, fair price, freezeout, poison pill endorsement, and other constituencies). Also, NRS 78.138(7) provides that a director or officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his capacity as a director or officer unless it is proven that (a) his act or failure to act constituted a breach of his fiduciary duties as a director or officer; and (b) his breach of those duties involved intentional misconduct, fraud or a knowing violation of law. Compare this to Delaware General Corp. Law § 102(7) which does not apply to officers or with respect to creditors, has broader carve-outs (bad faith), and is only effective if an appropriate provision is included in the corporation’s certificate of incorporation.

[Bill Sjostrom]