Race to the Bottom vs. Race to the Top: Implications of Shareholder Rights

There are many decisions to be made when incorporating. Chief among them is what state to incorporate in. While there are many considerations that go into deciding which state to incorporate in, there is a very interesting debate to be made as to which state is best for corporations. This debate centers around one question: when deciding where to incorporate, are corporations engaging in a race to the bottom or a race to the top?

When debating where to incorporate, some corporations believe it is best to take away rights from the shareholders. In turn, the board of directors will want to incorporate in that state because it ensures they have more power. This is known as the race to the bottom. On the one hand, it may shy away some investors. However, it may attract better-suited directors to work for the corporation because they have more power.

Yet, some others believe taking away rights is detrimental to the corporation. Because investors will decide not to invest in such corporations, incorporating in such a state harms the corporation. This view is known as the race to the top. Because investors will be turned away by their lack of rights, the fear is that it is not as smart to invest in these particular states.

What state you decide to incorporate in can have huge ramifications. Many states emphasize shareholder rights, while others do not. Whether or not this is in a corporation’s best interests is debatable, as it has both its drawbacks and benefits. Consulting with the right legal team can help you decide where it is best to incorporate. Call the Trembly Law Firm at (305) 431-5678 today to schedule your consultation.