In a system of federated states such as the United States and the European Union, there are, in general, three alternative approaches to chartering business corporations. The first is the real seat doctrine, under which corporations are required to be chartered in – and hence their governance is determined by the law of – the member state where they have their principal place of business. The second is free incorporation (or, as it is labeled in the United States, the internal affairs rule), under which a corporation is free to obtain its charter from, and be subject to the governance rules of, any member state in the federation, whether or not the corporation does business in that state. The third approach, in turn, is federal chartering, under which a corporation receives its charter, not from an individual member state, but from the federal government that oversees the federation as a whole.
For more than 40 years, academic debate about the choice among these three regimes in the U.S. and the EU has focused intensely on what has come to be called regulatory competition. The familiar idea is that if – as has long been the case in the U.S. and only more recently in the EU – the prevailing choice-of-law regime provides for free incorporation, the result will be competition among the member states to induce business firms to choose them as the firm’s state of incorporation.
Professor of Finance/FIRN director, Commonwealth Bank Chair in Finance
University of New South Wales
Professor of Finance / London Business School