There could be many advantages to the European Union if it were to have its own 'Delaware'.  By that I mean a legal jurisdiction in Europe which not only has some of the same business friendly attributes as Delaware but one that actively seeks to mirror the law, the court system and the insolvency regime that exist and operate in Delaware.  The advantages for business in having closely matching corporate law processes on both sides of the Atlantic will be self-evident as will the advantages to the country that plays host to that new jurisdiction.

A history of Delaware

The state government of Delaware began to recognise the attraction of corporate registrations as a policy objective in the late nineteenth century, following the early success of New Jersey in this regard. Since that time, the policy has proved a resounding success as Delaware has become without doubt the leading jurisdiction for US corporate incorporations. As of 2010, Delaware was the jurisdiction of incorporation of more than half of all US publicly traded companies and more than 60% of the Fortune 500 companies, an impressive and lucrative achievement for the second smallest state in the US.

Why Delaware is successful

The reasons for Delaware’s success are several – the First State’s low corporate tax rates are a significant attraction to businesses – but where Delaware most excels over rival jurisdictions is its flexible and commercially sensitive legal system. Delaware is unusual amongst US states in preserving a Court of Chancery, which as a court of equity does not use juries. This system has allowed the Chancellors (judges) to develop a wide and sophisticated jurisprudence, enhancing the predictability of Delaware law. In applying the law, Chancellors have often tended to give broad discretion to corporate officers in managing the affairs of the companies. Delaware’s legislature and government have also proved proactive in maintaining the business-friendly character of the jurisdiction.

Why Ireland would be suitable

The success of Delaware should provoke active consideration of whether a similar haven for corporate registrations could be created in Europe. While political pressures, particularly in the current climate, may make many European states reluctant to take forward the sort of progressive, business-friendly reforms that could create a European Delaware, there is at least one European state that has in the past shown itself capable of enacting imaginative reforms with the aim of attracting non-domestic business investment – and that is Ireland.

The International Financial Services Centre (IFSC) was set up by the Irish government in 1987 as a means of attracting international investment to Ireland’s financial services sector. Under the Irish Finance Act 1987, companies setting up within a designated enclave in the Dublin Docklands and operating in certain non-domestic financial services activities were subject to a special corporate tax rate of 10 per cent.

The competitive tax treatment of IFSC companies proved very attractive to international businesses and since 1987 more than 500 international financial services operations have been established in the IFSC, representing half of the world’s top 50 banks and half of the world’s top 20 insurance companies, according to the IFSC’s figures. The IFSC is widely seen as a significant contributing factor to Ireland’s rapid economic development during the years before the current financial crisis. The positive momentum created by enlightened policy was illustrated by the fact that the IFSC remained a significant location for foreign investment even following the abolition (under pressure from other EU member states) of the special 10 per cent tax rate and the reversion in 2006 to the standard Irish tax rate of 12.5 per cent .

What can be achieved by tax reforms

The success of the IFSC illustrates what can be achieved simply with tax reforms; imagine the positive effects on economic development and inward investment of a more substantial corporate law reform with the IFSC and the creation (as discussed further below) of a special business-friendly court designed to operate within the IFSC and for the benefit of the IFSC companies. The Department of the Taoiseach has published a Strategy for the International Financial Services Industry in Ireland 2011-2016 that aims to create significant numbers of new jobs in the financial services industry and further develop Ireland’s strong reputation in this area, largely won as a result of the IFSC. The attraction of corporate registrations through legal reform would complement and build on this policy strategy.

Chapter 11 and its advantages

With corporate law paradigms from the USA in mind, restructuring lawyers will be well aware of the advantages for business of the US Chapter 11 regime. The introduction of the reorganisation provisions of the US Bankruptcy Code Chapter 11 in 1978 (since amended) led to a revolution in the practice of corporate insolvency. The aim of Chapter 11 reorganisation is to allow for the continuation of a business as a going concern, thus preserving the economic value of the business, which is often greater than the realisation value of its constituent parts in an insolvent liquidation. The continuation of a financially troubled business as a going concern will often lead to better outcomes for all interested parties, providing a better return to creditors in the long term and protecting employees’ jobs.

Once a business files a petition with the federal bankruptcy court to be placed in Chapter 11 reorganisation, an automatic stay is imposed on all claims against the business. Unless a trustee is appointed for cause, the existing management remains in control of the business as a debtor-in-possession under the protection and supervision of the court. The business is permitted to obtain debtor-in-possession financing during the reorganisation process by granting super-priority to new lenders. Certain executory contracts may be rejected or cancelled with the court’s approval.
A reorganisation plan is presented to the creditors of the business and the court for approval. Chapter 11 allows the “cram down” of dissenting creditors; if a class of creditors votes against the plan, the plan may still be confirmed by the court if at least one class of creditors has approved the plan and the plan does not in the opinion of the court discriminate against the dissenting class.

The new legal regime

A radical and compelling vision for the development of Ireland’s role as a desirable corporate jurisdiction would therefore entail Ireland importing wholesale with the IFSC not only Delaware corporate law, but also the provisions of Chapter 11 of the US Bankruptcy Code, supported by specialist equity and bankruptcy courts. The new legal regime and courts could be located within a special IFSC jurisdiction separate from Irish domestic law, and made applicable only to IFSC companies – effectively creating an offshore jurisdiction within the Dublin Docklands. Such a development would undoubtedly lead to huge interest amongst US corporates and could lead to Ireland becoming the jurisdiction of choice for corporate registration and insolvency in Europe.

The pan-European effect

To allow pan-European corporate groups to benefit from the Chapter 11 provisions applicable to IFSC companies under the COMI rules of the EU Insolvency Regulation, the new IFSC corporate law regime could allow for companies not incorporated in the IFSC to maintain registered offices there. In such a case, groups could be structured under a IFSC-based holding company, with the different national operating companies having their registered offices in the IFSC. The rebuttable presumption of COMI in the location of the registered office under the EU Insolvency Regulation would therefore allow for an entire European group to be restructured through the IFSC Chapter 11 process.

Hurdles ahead but much to be gained

This would certainly be a bold policy and many hurdles would have to be overcome before it could be enacted. Ireland’s competitive corporate tax rates are a source of contention with other EU member states, and some of Ireland’s more dirigiste European partners would be unlikely to welcome further regulatory competition. EU state aid rules may be deployed by such parties as an attempt to block reform. Further, there may be domestic concerns relating to sovereignty and the constitutionality of the plans. But, as Ireland attempts to recover from the impact of the global financial crisis and as the interdependence of the global economy continues to mature, there is much to be gained.

Chris Mallon leads US law firm Skadden's corporate restructuring practice in Europe