Delaware and the Market for LLC Law: A Theory of Contractibility and Legal Indeterminacy
Incorporating in Delaware can be expensive. Corporations pay up to $180,000 annually for this simple privilege—a figure that is substantially higher than incorporation in any other state. In their controversial article, Price Discrimination in the Market for Corporate Law, 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. Beyond simply charging a premium, however, Professors Kahan and Kamar show that Delaware further increases its profits by engaging in price discrimination—tailoring its premium according to the value each firm attributes to the privilege of incorporating in Delaware. This Article projects Professors Kahan and Kamar’s analysis onto the world of limited liability companies (“LLCs”). To assess Delaware’s market power in the jurisdictional 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. As this Article shows, Delaware’s LLC tax, unlike its corporate franchise tax, does not represent a premium and does not price discriminate. But why? The 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, the Article argues that 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, namely the network effects associated with its law and its expert judiciary. With these two competitive advantages diminished, Delaware LLC law, unlike its corporate law, is not an obviously superior product. And with several available substitutes in the market for LLC law, Delaware may be unable to command a premium.