Should Provinces Compete? The Case for a Competitive Corporate Law Market

Should Provinces Compete? The Case for a

Competitive Corporate Law Market

Ronald J. Daniels*

Critical reflection on Canadian corporate law,
the author argues, has long been too focussed
on the benefits and advantages of centraliza-
tion and uniformity, and insufficiently sensi-
tive
to the potential benefits of inter-
governmental diversity and competition. In
contrast to this, the author puts forward a
model of competitive corporate law produc-
tion. After examining the possible problems of
a diverse corporate and commercial legal sys-
tem, the potential benefits of the competitive
model are discussed. The impact of the Cana-
da Business Corporations Act is then exam-
ined as a case study of the effect that compet-
itive innovation can have in instigating effec-
tive reform and modernization of corporate
law regimes. The impact of the CBCA is eval-
uated in light of American studies on the effect
of competitive law formation. In the final sec-
tions of the article, the author critically
assesses the intellectual and institutional fac-
tors which may inhibit the adoption of the
competitive model in Canada.

L’analyse critique en mati~re de droit corpora-
tif canadien s’attarde trop souvent sur les
avantages de ]a centralisation et de l’uniformi-
sation, alors que l’tude des avantages que
peuvent procurer la concurrence et la diversit6
inter-gouvernementales demeure n6gligre.
L’auteur propose donc un module concurren-
tiel du processus l~gislatif sur le plan du droit
corporatif et discute des avantages et inconvd-
nients d’un tel syst~me. Une dtude de Ia Loi
sur les socidtis par actions f~ddrale ddmontre
l’influence positive de ]a concurrence entre les
regimes l6gislatifs de droit corporatif en ce
qu’elle incite 4 la rforme et A la modernisa-
tion de ces regimes. La loi f~drale est aussi
6valu~e h la lumi~re d’6tudes am~ricaines por-
tant sur l’impact de ]a concurrence lgislative.
L’auteur analyse enfin les facteurs intellectuels
et institutionnels qui pourraient faire obstacle h
l’adoption du module concurrentiel au Canada.

*B.A. (Toronto, 1982), LL.B. (Toronto, 1986), LL.M. (Yale, 1988) Assistant Professor & Direc-
tor of the International Business & Trade Law Programme, Faculty of Law, University of Toronto.
I would like to thank the following individuals for the extremely useful comments they provided
on various drafts of this article: Bruce Chapman (Toronto), Jeff MacIntosh (Toronto), Rob Prichard
(Toronto), Roberta Romano (Yale), Ralph Simmonds (Murdoch), Michael Trebilcock (Toronto),
Tony VanDuzer (Ottawa), and Jacob Ziegel (Toronto). Thanks are also owed to two anonymous
reviewers. As well, I want to express my sincere appreciation to Suzanne Papineau of the Corpo-
rations Branch, Consumer and Corporate Affairs, Ottawa and Pat Thomson, Associate Director of
Research, Canadian Federation of Independent Business, for much of the data that appears in this
article; to Giselle Champagne, Debra Forman, Frank Morrison, Steven Weisz, and, especially, Don
Collie for valuable research assistance; and to Pia Bruni, for her unremitting cheer and proficiency
in typing and compiling various drafts of this article. Finally, my greatest debt of gratitude is owed
to Joanne Rosen. Without her very considerable support, this article would never have been
written.
McGill Law Journal 1991
Revue de droit de McGill

1991]

SHOULD PROVINCES COMPETE?

Synopsis

Introduction

The Problem of Diversity
A.
B. The Effect of Diversity – A Cost-Benefit Analysis

Introduction

1. The Costs of Diversity

a. Erosion of National Identity
b. Savings fiom Duplicate Legislation Production
c. Transactions Costs
The Benefits of Diversity
A Comparison of Costs and Benefits of Diversity

2.
3.

II. Comparative, Centralized and Co-ordinated Models of Law Reform
A. Demand and Supply Side Evaluation of the Competitive versus

Centralized and Coordinated Models
1. Demand Side
2.
3.

Supply Side
Conclusion

B. The Conditions Necessary for Optimal Production of Laws in a

Competitive Framework
1.
2.
3.
4.

Jurisdictional Mobility
Large Number of Destination Jurisdictions
Jurisdictional Latitude in the Selection of Laws
Internalization of Benefits and Costs

Im. Corporate Law and the Competitive Model

A. The Unification and Modernization of Corporate Law in Canada

The Diffusion of the CBCA Model
Shareholder Mobility in Canada
Incorporation Activity and Economic Growth Factors
Endogenous Factors Driving Incorporation Trends

1. Corporate Law Diversity and Reform Efforts
2.
3.
4.
5.
Is Legislative Product Enough? The Structure of the Canadian
Corporate Law Regime in Relation to the United States
1.

The Shareholder Exploitation Hypothesis and Competitive
Corporate Law Provision

REVUE DE DROIT DE McGILL

[Vol. 36

Structural Features of the Canadian Corporate Law Regime
Undermining the Competitive Model
a.

Inability to Realize Minimum Efficient Scale in
Institutions

b. The Enhanced Prospect of Coordinated Behaviour
c. Overlapping Legal Products
d. Legal Market Failure
e. The Geographic Monopoly of Central Canadian

Governments
Role of the Supreme Court in Impairing the Integrity of
Provincial Courts

C. Conclusion

Introduction

The optimal distribution of power in a federal state is an issue which has
received considerable attention from Canadian academics.’ Building from an
“original state,” Canadian academics have harnessed the tools and insights of a
wide range of disciplines to devise elaborate methodologies for determining
how power should be divided among various levels of government in a modem
nation state.2 These efforts have imbued policy makers with an enhanced ability
to identify and measure the trade-offs implied by alternative institutional
arrangements. Unfortunately, however, they have also deflected attention from

‘For example, thirteen volumes of the background studies commissioned by the Royal Commis-
sion on the Economic Union and Development Prospects for Canada (the “MacDonald Commis-
sion”) were concerned with this issue. See the volumes under the general heading, “Federalism and
the Economic Union,” in M. Krasnick, K. Norrie & R. Simeon, Research Co-ordinators, Studies
Commissioned as Part of the Research Program of the Royal Commission on the Economic Union
and Development Prospects for Canada, [hereinafter MacDonald Studies] vols. 59-71 (Toronto:
University of Toronto Press in cooperation with Supply and Services Canada, 1986). See also R.
Simeon, ed., Confrontation and Collaboration: Intergovernmental Relations in Canada Today
(Toronto: The Institute of Public Administration of Canada, 1979).

2See M.J. Trebilcock, “Federalism and the Canadian Economic Union” in H. Bakvis & W.M.
Chandler, eds., Federalism and the Role of the State (Toronto: University of Toronto Press, 1987)
216; T.J. Courchene, “Analytical Perspectives on the Canadian Economic Union” in M.J. Trebil-
cock et al., eds., Federalism and the Canadian Economic Union (Toronto: Ontario Economic
Council and University of Toronto Press, 1983) 51; J.R.S. Prichard with J. Benedickson, “Securing
the Canadian Economic Union: Federalism and Internal Barriers to Trade” in M.J. Trebilcock et
al., eds, supra 3; A. Breton, “Supplementary Statements” in Report of the Royal Commission on
the Economic Union and Development Prospects for Canada, vol. 3 (Ottawa: Supply & Services
Canada, 1985) 483 [hereinafter MacDonald Report]; A. Breton & A. Scott, The Economic Con-
stitution of Federal States (Toronto: University of Toronto Press, 1978); E.G. West & S.L. Winer,
“The Individual, Political Tension and Canada’s Quest for a New Constitution” (1980) 6 Can. Pub.
Policy 3.

1991]

SHOULD PROVINCES COMPETE?

determining how existing institutional arrangements can be used to produce
superior policy outcomes.

The failure to work seriously within the constraints of the existing consti-
tutional order is clearly manifest in the area of corporate and commercial law
reform. A pervasive theme in the Canadian legal literature is the inability of
provinces to produce optimal corporate and commercial legal outcomes.3 In par-
ticular, the configuration of Canadian corporate and commercial law has been
criticized for its 6xcessive diversity. This diversity is viewed as a natural
by-product of the pre-eminent role played by provinces in fashioning corporate
and commercial law. Accordingly, there have been wistful and repeated calls for
institutional re-ordering aimed at reducing the scope of provincial diversity.
Generally, these proposals take the form of either increased centralization of
power in the federal government or increased co-ordination of the legislative
output of provincial governments.4

The argument for enhanced centralization or co-ordination in these areas
overlooks, however, the capacity of highly decentralized, competitive institu-
pro-
tional arrangements to produce optimal –
vincial laws. Moreover, when competitive processes are examined more closely,
it can be demonstrated that they are capable of producing surprisingly uniform
provincial laws. Indeed, it can be argued that the more vigorous the level of
inter-governmental competition in a state, the greater the likelihood that uni-

albeit, in some cases, diverse –

3See Note, “Company Law in Canada” (1927) 5 Can. Bar Rev. 733 at 733:

it seems to be reasonably clear … that the whole trouble and difficulty [in respect of
contemporary corporate law] has arisen from the framers of the B.N.A. Act having
given to the Provinces jurisdiction to constitute companies for provincial objects
instead of placing the whole subject of company law within the exclusive control of
either the Dominion or the Provinces.

See also E.E. Palmer, “Federalism and Uniformity of Laws: The Canadian Experience” (1965) 30
Law and Contemp. Probs. 250; J.S. Ziegel, “Our Neglected Commercial Law” (1988) 13 Can. Bus.
L.J. 385; P. Anisman & P.W. Hogg, “Constitutional Aspects of Federal Securities Legislation” in
Anisman et al., Proposals for a Securities Market Law for Canada, vol. 3 (Ottawa: Consumer &
Corporate Affairs Canada, 1979) 135.

4As J. Willis (“Securing Uniformity of Law in a Federal System – Canada” (1943-44) 5
U.T.L.J. 352 at 352) has noted: “There is no secret about the key to uniformity of law. It is cen-
tralization, centralization in the making of law and centralization in the administration of law.” See
also Palmer, ibid. at 250 (“by placing the vast bulk of important legislative competence in the
hands of the federal government, a relatively high degree of uniformity can be obtained”); Ziegel,
ibid; R.C.C. Cuming, Research Co-ordinator, Perspectives on the Harmonization of Law in Can-
ada, MacDonald Studies vol. 55 (Toronto: University of Toronto Press with the cooperation of
Supplies and Services Canada, 1985); J.S. Ziegel, “Harmonization of Provincial Laws, with Par-
ticular Reference to Commercial, Consumer and Corporate Law” in R.C.C. Cuming, Research
Co-ordinator, Harmonization of Business Law in Canada, MacDonald Studies vol. 56 (Toronto:
University of Toronto Press with the cooperation of Supplies and Services Canada, 1986) 1; P.
Anisman, “The Regulation of the Securities Market and the Harmonization of Provincial Laws”
in Harmonization of Business Law in Canada, supra 77.

McGILL LAW JOURNAL

[Vol. 36

form laws will be generated. Seen in this context, the finding that provincial
laws are excessively diverse may, depending on the circumstances, implicate
either insufficient competition, insufficient co-ordination, or insufficient cen-
tralization. In this respect, unless Canadian policy analysts evaluate the legal
framework in a manner devoid of political and ideological preconceptions, they
will fail to appreciate the potential gains to be realized from enhanced
competition.

In this article, I consider seriously the capacity of multi-governmental
competition to generate optimal corporate and commercial laws for Canada. I
begin in Part I by enumerating and evaluating the concerns surrounding diver-
sity of provincial laws. With some qualification, I find the widespread concern
with diversity in the corporate and commercial area to be overstated. In Part II,
I set out the virtues of the decentralized, competitive model of law production,
and identify the prerequisites for its effective functioning. In Part III, I examine
the production of corporate laws in Canada and the United States, and show
that, in sharp contrast to the conventional wisdom, competition among provin-
cial governments is clearly capable of generating responsive and, indeed, uni-
form laws. However, in contrast to the United States, the Canadian corporate
law regime lacks several of the institutions that are perceived to play an impor-
tant role in enhancing certainty. The absence of these factors implicates certain
flaws in both the intellectual and institutional environment present in Canada.
Accordingly, in the last section of the article, I enumerate and assess the impact
of these factors on corporate law production in Canada.
I.

The Problem of Diversity
A.
Canadian commentators have long been troubled by inter-provincial diver-

Introduction

sity in corporate and commercial legislation. As Hurlburt states:

[b]usiness is made less efficient if it has to conform to differing provincial laws
and regulatory requirements. This argument … is most strongly made in connec-
tion with such fields as securities regulation, corporation, personal property secu-
rity law, and insurance law.5

Whereas critics have shown some ambivalence in assessing the merits of diver-
sity in legislation designed to vindicate explicitly “social” and “political” goals,
they have appeared far less equivocal in their condemnation of diversity in the

5W.H. Hurlburt, “The Harmonization of Provincial Legislation in Canada: The Elusive Goal”
(1987) 12 Can. Bus L.L 387 at 396. In discussing the merits of uniformity of corporate laws, Ziegel
assumes that uniformity is important for the “large corporation which operates from coast to coast
and whose shares are publicly traded,” but is more equivocal regarding the merits of uniformity
for smaller, intra-provincial corporations (J.S. Ziegel, “The New Look in Canadian Corporation
Laws” in J.S. Ziegel, ed., Studies in Canadian Company Law, vol. 2 (Toronto: Butterworths, 1973)
1 at 66).

1991]

SHOULD PROVINCES COMPETE?

corporate and commercial realm. Diversity in corporate and commercial laws is
credited with impairing the realization of myriad national goals, including the
promotion and maintenance of a vital economic union.6 For the most part,
responsibility for diverse legislative patterns is traced to the decentralized insti-
tutional arrangements contemplated by the property and civil rights clause of
the Constitution Act,7 which confers jurisdiction over a vast range of corporate
and commercial matters on the provinces.

The difficulty, however, with most of the arguments made against diversity
is that they fail to articulate clearly what it is that makes diversity an unqualified
evil. Examination of the various arguments against diversity reveals that these
arguments are often overstated and tend to obscure the benefits to be derived
from diversity in certain circumstances.

B. The Effect of Diversity – A Cost-Benefit Analysis

The Costs of Diversity

a. Erosion of National Identity

A number of commentators see diversity as exerting a destructive force on
the development and flourishing of a distinctive national identity! Basically,
diversity is believed to undermine the sense of commitment to national goals
and objectives that derives from common standards and legislative schemes. As
one commentator has observed:

or even, it may be asserted, a prospective citizen –

Every time a citizen –
of
Canada notices a basic similarity between the laws and institutions of his or her
part of Canada and those of another part, the notion of Canada is strengthened.
Every time he or she notices a basic dissimilarity of laws or institutions which is
not readily explainable on rational grounds, the notion of Canada is weakened. 9

6Jacob Ziegel, for instance, argues that whereas “[l]ocal initiative and experimentation, which
may be a good reason for diversity in legislation of a social character, has little to contribute in
the business law area” (Ziegel, ibid. at 66).

7Constitution Act, 1982, being Schedule B of the Canada Act 1982 (U.K.), 1982, c. 11, s. 92

(13) [hereinafter Constitution Act].

SFor a general discussion of the corrosive effect of diversity on the formation of a distinctive
national identity, see J. Porter, The Vertical Mosaic: An Analysis of Social Class and Power in Can-
ada (Toronto: University of Toronto Press, 1965). Porter argues that the strong emphasis in the
Canadian value system on regionalism and ethnic differentiation has resulted in the fragmentation
of Canadian society, especially at the political level, and has rendered Canada incapable of dealing
with some of its major problems as an industrial society. In a similar vein, Gad Horowitz has
argued that there is a need for an “overarching” English-Canadian national community to take root
and to serve as the beacon for a national identity. He sees the mosaic ideal discussed by Porter as
poisonous, an apology or rationalization for the absence of an identity. See G. Horowitz, “Creative
Politics” (1965) 3:1 Can. Dimensions 14 and “Mosaics and Identity” (1966) 3:2 Can. Dimensions
17.

9Hurlburt, supra, note 5 at 395.

REVUE DE DROIT DE McGILL

[Vol. 36

In this vein, coast-to-coast sameness is perceived to be the very essence of
nationhood.

Arguments for uniformity tied to preservation of national identity are,
however, extremely problematic. The very term “national identity” is highly
amorphous, and is amenable to multiple meanings and interpretations. Just as
some commentators regard “sameness” as the touchstone of national identity,
others view diversity and tolerance in themselves as hallmarks of Canadian
identity.” Accordingly, the creation and maintenance of an environment sup-
portive of divergent aspirations, whether of a regional, cultural, or linguistic
nature, is seen to fulfil one of the core objectives of the Canadian nation. Argu-
ably, the validity of this set of objectives has been enhanced by the dramatic
influx of immigrants into Canada since the Second World War.” Viewed from
this perspective, a conception of Canadian identity founded on diversity attracts
greater normative force than one tied to sameness, and, consequently, is unable
to serve as a compelling rationale for expanded uniformity. 12 This means that the
argument against diversity must be made on other grounds.

b. Savings from Duplicate Legislation Production

Another argument against diversity is based on the benefits realized from
concentrating law production activities in a single government rather than hav-
ing multiple governments incurring separate costs of production for the same
basic legislative product. These savings are a function of the degree to which
individual governments in an uncoordinated model are able to benefit from the
law production activities of other governments. If, as is usually the case, suc-
cessful legislation can be easily duplicated, then the cost savings from central-
ization or coordination will be trivial. Put simply, in the absence of centraliza-
tion or coordination, governments will adopt the product of first movers,

‘(R. Breton, “Multiculturalism and Canadian Nation-Building” in A. Cairns & C. Williams,
Research Coordinators, The Politics of Gender, Ethnicity and Language in Canada, MacDonald
Studies, vol. 34 (Toronto: University of Toronto Press in cooperation with Supply and Services
Canada, 1986) 27; Ministry of the Attorney General, Ontario, Sources for the Interpretation of
Equality Rights under the Charter: A Background Paper (January, 1985) at 91; P.E. Trudeau,
in H.D. Forbes, ed., Canadian Political Thought (Toronto:
“Statement on Multiculturalism”
Oxford University Press, 1985) 349; P.E. Trudeau, Conversation with Canadians (Toronto: Univer-
sity of Toronto Press, 1972) at 32; R.L. Watts, Multicultural Societies and Federalism: Studies of
the Royal Commission on Bilingualism and Biculturalism, vol. 8 (Ottawa: Information Canada,
1970).

” ‘See Y. P~ron & C. Strohmenger, Demographic and Health Indicators: Presentation and Inter-
pretation (Ottawa: Statistics Canada, Minister of Supply & Services, 1985) at 68, for a useful sum-
mary of Canadian immigration patterns in the twentieth century.

‘2Admittedly, the distinction between “sameness” and “diversity” definitions of national identity
is somewhat artificial. Both conceptions ultimately draw on elements of the other for support. For
instance, development of a national environment conducive to diversity may require the creation
of uniform standards to ensure that legislative outcomes that impinge on rights of minority expres-
sion, although formally diverse, are not adopted.

1991]

SHOULD PROVINCES COMPETE?

perhaps with slight modification, 3 thereby avoiding duplication of law produc-
tion costs incurred elsewhere. While it is possible that another potential source
of benefit, economies of scale, 4 may be realized from concentrated law produc-
tion, as a practical matter these gains are likely to be small.

c. Transactions Costs

A stronger rationale for uniformity is found in its ability to reduce costs
incurred by transactions executed across multiple jurisdictions. Under a regime
characterized by incongruent legislation, individuals or corporations wishing to
engage in economic activity in more than one provincial jurisdiction are con-
fronted by search and compliance costs that constitute a barrier to mobility of
factors and goods across the country. Search costs involve the costs of identi-
fying and understanding the compliance requirements triggered by multi-
jurisdictional activity. Obviously, the more complex the activity, and the more
uncertain the content of the legal regime in the host jurisdiction, the higher the
level of search costs triggered.

Presumably, for complex transactions, legal costs comprise a major com-
ponent of search costs. These costs are magnified by provincial law society
restrictions on the capacity of Canadian lawyers to render opinions on the law
in extra-provincial jurisdictions.” This feature works, not surprisingly, to
increase search costs because it prevents actors from availing themselves of the
benefits of economies that would flow from dealing with one legal advisor. 6

13Consideration of the effects of free-riding on the incentive to innovate is dealt with in Part II.
14Economies of scale permit large manufacturers to produce and market their products at lower
average cost per unit than relatively small producers. See, for instance, the discussion in F.M. Sche-
rer, Industrial Market Structure and Economic Performance, 2d ed. (Chicago: Rand McNally,
1980), c. 4.

‘5A lawyer who has been called to the Bar in one province cannot give a formal legal “opinion”
on the law in another province although, of course, such a lawyer can express a qualified “view”
of the law. For instance, a member of the Ontario Bar could not opine that an entity had been val-
idly incorporated in British Columbia. There are, however, provisions in each of the provinces for
lawyers from other provinces to make “occasional” court appearances: see, e.g., Law Society Act,
R.S.O. 1980, c. 233, s. 62(1) para. 24; Law Society Act Regulations, R.R.O. 1980, Reg. 573, s. 6.
The purpose of such provisions is to enable lawyers to make one-time court appearances without
having to write the provincial Bar examinations. In practice, however, these provisions can hardly
be characterized as permissive; a great deal of discretion rests in the hands of the provincial Law
Societies. Indeed, the process is viewed by some as so uncertain and arbitrary by some lawyers
that writing the full range of bar exams necesary to qualify for practice in an extra-provincial juris-
diction is deemed to be the soundest option.

16parenthetically, it is worth noting that, owing to endemic information problems, search costs
are unlikely to be susceptible to reduction by co-ordinated activity of similarly situated actors.
These costs arise from a number of different sources. First, information on the legality of trans-
actions in different jurisdictions is highly contingent on the underlying transaction. Slight variance
in the form of the transaction may have a profound impact on its legal status. Also, given asym-
metries in information, legal advisors are likely to exaggerate the meaning of these differences in
an effort to increase artificially the demand for their services. Second, the contingency of legal

McGILL LAW JOURNAL

[Vol. 36

Assuming that actors are able to obtain a full understanding of host prov-
ince law, they are then faced with multi-jurisdictional compliance costs. These
costs may simply require the actor to incur relatively modest costs of duplica-
ting, perhaps with slight modification, a standard compliance strategy across
different jurisdictions. However, if the standards contained in the various pro-
vincial statutes diverge from one another to the point where compliance as man-
dated in one jurisdiction will bring the actor into conflict with the standards
extant in another jurisdiction, additional investments in reconciliation activities
must be incurred. These costs may be significant, and increase substantially the
likelihood that individuals or corporations will simply refrain from engaging in
multi-jurisdictional activity. 7

The foregoing discussion on transactions costs is, however, subject to one
very crucial caveat. That is, these costs are only significant when provinces
respond to inter-provincial activity by actually attempting to regulate it. As the
corporate law case study developed in Part HI indicates, when provinces,
whether because of judicial or self-imposed restraint, refrain from regulating
activity within their borders that is already subject to regulation elsewhere,
multi-jurisdictional compliance costs are dramatically reduced.

The Benefits of Diversity

The benefits of diversity are related to the increases in voter preference sat-
isfaction that derive from having local (i.e., within provincial boundaries) con-
centrations of values and beliefs reflected in legislation. In contrast, if jurisdic-
tion over a certain subject area is conferred on the federal government, or if the
provinces retain jurisdiction but agree to adopt uniform legislation, legislation
will be much less responsive to local preferences. For the most part, this is
related to the pre-eminent role of consensus processes in the formulation of uni-

advice is exacerbated by its temporal nature. The content of the law is undoubtedly fluid, and, even
if applied to exactly similar fact situations, it may, because of the passage of time, rapidly depre-
ciate in value. At a minimum, legal advice must be updated to ensure that it is of a timely nature.
Third, even assuming perfect symmetry in the form and timing of a transaction, actors may face
insuperable difficulties in identifying partners for joint search activities. Because of the danger that
competitors will exploit prior announcements of certain transactions to their own benefit, actors are
unlikely to be willing to make contemplated transactions known in order to identify corporations
that are “similarly situated.”
17This problem has been a frequent source of complaint in the financial regulation realm. For
instance, Canadian managers have long bemoaned the multi-jurisdictional compliance costs related
to the multi-level regulation of securities activities. A comprehensive analysis of the impact of pro-
vincial regulation on the performance of this regime is found in Anisman, supra, note 4. Recently,
the issue of multi-jurisdictional compliance has come to the fore in the financial institutions area.
In particular, the adoption of the highly controversial Equals Approach by the Ontario government
has imposed costs on extra-provincially incorporated loan and trust corporations wishing to carry
on activity in Ontario. See R.J. Daniels, “Federalism and Regulation of Canadian Financial Insti-
tutions: A Prescription for an Ailing Patient” Can. Bus. L.J. (forthcoming, 1991).

1991]

SHOULD PROVINCES COMPETE?

form legislation. The issue is, then, whether via the unilateral action of the fed-
eral government or the co-ordinated action of the provinces, local concentra-
tions of preferences are likely to be subordinated to the preferences of ad hoc
national coalitions.’ s

Obviously, the benefit from allowing the provinces the scope to respond to
local preferences in their pristine form is a function of the strength and homo-
geneity of local preferences, the correspondence of local concentrations of pref-
erences with provincial geographical boundaries, and the degree of divergence
in the strength and direction of preferences across different provinces. The
widely held view that diversity is bereft of value in the corporate and commer-
cial realm can be understood in these terms. Since corporate and commercial
legislation is seen to be devoted to the realization of goals that are not believed
to vary in intensity or content across provinces, a strong presumption against the
value of diversity in this setting is seen to operate.

I believe, however, that the argument against diversity in the corporate and
commercial area that is tied to preference satisfaction is overbroad. Preferences
for corporate and commercial legislation are not necessarily uniform across the
country, and can vary in accordance with economic or geographic factors. For
instance, the content of commercial laws used to support an economy tied to
resource extraction may differ from those required to support an economy
devoted to agriculture or manufacturing.

Similarly, diversity in corporate and commercial laws may be found to be
salutary if the constituencies (and preferences) that provinces are dedicated to
are considered more expansively. It is possible that provinces may wish to “spe-
cialize” in legislation that satisfies the preferences of consumers residing in
another provincial jurisdiction. This claim has been advanced by Baysinger and
Butler in the context of American corporate law. 9 They argue that diversity in

18This phenomenon is discussed in “public-choice” literature analyzing federalism. See, e.g.,
Prichard with Benedickson, supra, note 2, where it is pointed out that interest groups that may be
minorities nationally are more likely, mathematically, to become majorities locally.

19Barry Baysinger and Henry Butler (“The Role of Corporate Law in the Theory of the Firm”
(1985) 28 J.L. & Econ. 179) contend that the corporate governance characteristics of a firm govern
the firm’s jurisdiction selection decision. Firms with dispersed share ownership will gravitate to
“liberal” corporate law regimes, while firms with concentrated share ownership will migrate to
“strict” corporate law regimes. “Liberal” regimes are characterized by minimal scope for direct
controls by shareholders, while “strict” regimes afford relatively greater scope for shareholder
activism. To substantiate their claim, the authors compare the share performance of firms in “strict”
and “liberal” regimes, and find no detectable differences in performance. In a similar vein, Richard
Posner and Kenneth Scott (Economics of Corporation Law and Securities Regulation (Boston: Lit-
tle Brown and Co., 1980) at 111) posit a relationship between jurisdiction selection and corporate
size. They suggest that Delaware has a commanding presence in the reincorporation market
because of the amenability of its regime to large corporations. Roberta Romano (“Law as Product:
Some Pieces of the Incorporation Puzzle” (1985) 1 J.L. Econ. & Org. 225) expresses reservation

REVUE DE DROIT DE McGILL

[Vol. 36

the content of American corporate statutes can best be understood as an attempt
to specialize in the regulation of different types of corporations and corporate
conduct. In these terms, diversity in legislation is akin to diversity of products
and services in private markets; in both cases, consumer welfare (in narrow eco-
nomic terms) is augmented by producer specialization.

3. A Comparison of Costs and Benefits of Diversity

Ultimately, the case against diversity in the corporate and commercial
realm is more complex than is generally acknowledged by its critics. To support
a claim for generic uniformity, it is not sufficient merely to identify some costs
from diversity. Rather, it is necessary to demonstrate that diversity’s costs
exceed its benefits. In contexts where there is no tangible benefit to be obtained
from diversity, the calculus is straightforward and supports efforts to minimize
the scope of such diversity. However, more commonly, there are both costs and
benefits to be considered in the case against diversity. Yet, comparison of diver-
sity’s costs and benefits is fraught with uncertainty, and is likely biased in
favour of rejecting diversity’s utility in most settings. This is because the costs
of diversity are relatively easy to enumerate, while the benefits are less suscep-
tible to precise quantification. The inability of policy-makers to attach determi-
nate values to the benefits of diversity drives a natural temptation to reject its
overall value.

However, even if diversity is found to be normatively undesirable in a
given isolated context, it is important to evaluate the case for reducing it in a
dynamic framework. That is, in a highly competitive setting, it is possible that
laws may at times be diverse, while at other times highly uniform. If diversity
is only a temporary phenomenon, perhaps even a necessary antecedent to uni-
formity, then perhaps policy-makers should refrain from implementing
enhanced co-ordination and centralization.

The concerns raised in this discussion cumulatively militate against the
wholesale rejection of diversity in the corporate and commercial context.
Although diversity in corporate and commercial legislation is, in many commer-
cial settings, likely to generate more costs than benefits, it is important to be
aware that there may be many exceptions to this rule. These exceptions can, of
course, be identified only with fairly rigorous analysis.

with the product differentiation argument on the basis of its inherent indeterminacy. Citing the
work of Michael Spence (“Product Selection, Fixed Costs, and Monopolistic Competition” (1976)
43 Rev. Econ. Studies 217), she questions the capacity of product differentiation to generate a sta-
ble equilibrium for the charter market. She is also dubious of the implicit assumption in the product
differentiation hypothesis that responsive states cannot accommodate the needs of diverse corpo-
rate constituencies within the same corporate regime. Finally, and most relevant to the concerns
of Canadian critics, Romano posits that diversity in the context of the American charter market is
simply a reflection of differential rates of adoption of corporate law innovations by states. Com-
petition, in this respect, exerts a centripetal, not a centrifugal, effect on product diversity.

1991]

SHOULD PROVINCES COMPETE?

H. Competitive, Centralized and Co-ordinated Models of Law Reform

Given the difficulties that confound relatively straightforward assessment
of the merits of diversity in the corporate and commercial area, the prevalence
of unequivocal support for institutional changes designed to diminish its scope
is perplexing. Moreover, the changes most frequently called for to promote uni-
formity, greater centralization or greater co-ordination,2 are problematic
because of their propensity to suppress market signals that can guide the formu-
lation of legislation. This suppression confers a near-monopoly role on govern-
mental bureaucrats in selecting the raw material for the law production process.
As a consequence, the danger of mistaken or unresponsive legislative outcomes
is increased. This includes the possibility that uniform legislation will be pro-
vided when diverse legislation is much more appropriate.

In contrast, in the competitive, decentralized model of law production,
market forces are seen to play a pre-eminent role in the generation of legislation.
Not unlike the allocation of resources in private economic markets, the produc-
tion of laws in the decentralized model is seen to be guided by the “invisible
hand” of consumer demand. In this model of law production, local governmen-
tal units are believed to compete against one another in the provision of legis-
lative product. Those governmental units providing superior products will, like
“winners” in economic markets, enjoy benefits from increased consumer
patronage.22 In this framework, the fact that gains in market share may accrue

2 That is to say, augmented federal power. See Anisman & Hogg, supra, note 3.
21Co-ordination of provincial outcomes can be achieved through a number of different mecha-
nisms. In the simplest case, co-ordination is accomplished by the actions of a central agency that
is expressly charged with the task of producing common legislation that will govern the same sub-
ject matter in all of the provinces. The Uniform Law Commission of Canada is the paradigmatic
example of this type of agency. An alternative, less formal way of co-ordinating provincial gov-
ernment legislative output is through consultative activities. These activities may culminate in the
conclusion of formal agreements (e.g., memoranda of understanding) or informal commitments
among the various governments.
22The claim that competitive provincial interaction is capable of producing superior laws owes
much to Tiebout’s model of local government. See C.M. Tiebout, “A Pure Theory of Public
Expenditures” (1956) 64 J. Pol. Econ. 416. Tiebout designs his model of local government in an
effort to show that the interaction of local governments and “consumer-voters” could overcome
daunting revealed preference problems in the provision of public goods. Specifically, Tiebout pos-
its that, under certain simplifying assumptions (i.e., perfect information, negligible mobility costs,
trivial external economies and diseconomies, and a large set of available destination jurisdictions),
the migratory decisions of “consumer-voters” among local governmental jurisdictions can manifest
honest revelations of individual preferences (supra at 420). The greater the number of choices (i.e.,
local governmental units) that a “consumer-voter” can select from, the more likely that optimal
matches between “consumer-voters” and local governments will result. If there is a hint of unre-
ality about Tiebout’s model, it is his assumption that local governments do not “adopt” the pref-
erences of “consumer-voters”; rather, local governments are only “adopted” by “consumer-voters.”
The model of federalism developed in this article corrects for this deficiency, and anticipates that

McGILL LAW JOURNAL

[Vol. 36

to one province at the expense of another is both predictable and uncontrover-
sial. Moreover, diversity in government output indicates either specialization of
provincial activity or legal innovations introduced by competitive governments
in an effort to gain market share. In any event, in this model, shifting market
share, diversity of outcome, and rivalrous behaviour are indicators of optimal
processes of law production.

In choosing among the various models, it is my submission that, provided
that certain threshold criteria are satisfied, the competitive model is an unequiv-
ocally superior mechanism for supplying legislative product. The source of the
competitive model’s superiority can be identified through comparative examina-
tion of its supply and demand features.

A. Demand and Supply Side Evaluation of the Competitive versus

Centralized and Coordinated Models
1. Demand Side

On the demand side, interested citizens in a competitive framework are
able to signal their preferences to government more effectively and, once these
preferences have been signalled, to monitor more effectively the way in which
government responds to them, than can citizens whose legislation is derived
from centralized or co-ordinated processes. 3 The ease in signalling is a function
of the greater access of citizens to governments when the ambit of government
jurisdiction is more circumscribed. Ease in signalling also reflects the height-
ened ability of citizens to register their preferences to government via voice and
exit mechanisms.’ Exit mechanisms, for instance, are very effective in the com-
petitive model. If citizens (consumers) are dissatisfied with the legal product in
a certain provincial jurisdiction, they can simply migrate to another jurisdiction
offering a superior product. Because exit entails an immediate and possibly
irreversible loss of citizen votes or revenue, it is effective in capturing the atten-
tion of government officials. Following the standard predictions of the public

provinces will consciously modify their policy “bundles” so as to enhance the appeal of residency
in their jurisdiction to mobile constituents.

23It can be argued that increased access by affected citizens to the legislation-making process
is an undesirable feature of competitive models. That is, increased access raises the prospect of
capture of the legislative process by special interest groups. Accordingly, the insulation from client
demands implied by the co-ordinated model is seen to be conducive to the generation of optimal
laws. Because, however, it is hard to construct a strategy that filters desirable from undesirable
inputs, increased insulation will effectively attenuate the voice of all voters, irrespective of the
breadth of their particular interests. As a consequence, the accountability of law-makers is reduced.
The answer to capture by narrowly defined interest groups is not wholesale exclusion of all
affected voters from the law-making process. Rather, it is the design and implementation of insti-
tutional safeguards that will ensure that all voters affected by contemplated legislation, including
those beset by collective action problems, are properly represented in the law-making process.

24The terminology is from A.O. Hirschman, Exit, Voice and Loyalty: Responses to Decline in

Firms, Organizations, and States (Cambridge: Harvard University Press, 1970).

1991)

SHOULD PROVINCES COMPETE?

choice model, any possible reduction in the size of “fiefdoms” is likely to
impact adversely on the individual welfare of senior bureaucrats and politicians
owing to their preoccupation with attaining enhanced prestige and power.’ In
contrast, co-ordinated and centralized models of law production render bureau-
crats and politicians much less responsive to signalling via direct market pres-
sures. In large part this is attributable to the lack of a credible exit option. When
all of the provincial legislation is homogeneous, or when the federal govern-
ment is the sole supplier of legislation, exit threats become less credible because
inter-provincial migration does not enable a disaffected citizen to access supe-
rior legal products.26 Indeed, in this setting, the only credible exit option avail-
able to disgruntled citizens is international migration. But, owing to a variety of
restrictions on international mobility of goods and factors (in the form of immi-
gration restrictions, investment constraints, etc.), such migration is much more
difficult than inter-provincial migration. As a result, when the sole threat of exit
is international in nature, the ability to demand favourable legislation through
direct market pressure is attenuated.

In terms of the competitive versus the co-ordinated model, another
demand-side strength of the former is the greater ease that citizens have in mon-
itoring governmental responsiveness to preferences. With one level of govern-
ment (and, in the normal case, one governmental department) responsible for
the formulation of legislation, citizens will have no difficulty determining
responsibility for tardy or misconceived legislation. In contrast, the linkage
between legislative outcome and provincial responsibility is much more oblique
in the co-ordinated model. Because, in this case, legislation is the by-product of
a process involving the interaction of multiple provincial governments, final

asSee, for example, M.J. Trebilcock, L. Waverman & J.R.S. Prichard, “Markets for Regulation:
Implications for Performance Standards and Institutional Design” in Government Regulation:
Issues and Alternatives (Toronto: Ontario Economic Council, 1978). For a discussion of the role
of bureaucratic behaviour in shaping federalist institutions, see A.C. Cairns, “The Governments
and Societies of Canadian Federalism” (1977) 10 Can. J. Pol. Sci. 695.
26It is possible, however, that exit threats may be somewhat credible in the centralized or
co-ordinated models if non-legal (i.e., administrative) factors are an important component of legal
products and the provinces have the discretion to differentiate their products along this axis. Com-
petition for market share on the basis of non-legal attributes is predicted by organizational theory.
For example, a co-ordinated legal regime can be likened to a cartel agreement among manufactur-
ers governing the price of goods. Although there is a commitment to uniform price, cartel members
regularly attempt to gain more than their allotted market share by competing on other product
dimensions, such as product quality, support services, marketing, etc. Similarly, provinces that
have committed to uniform legislation may compete for market share by offering more efficient
administration of the legislation. Significant possibilities for this sort of differentiation exist in pro-
vincial Personal Property Security legislation, with regard to the Registration System. Different
provinces may register secured properties with varying degrees of efficiency and detail, so that a
printout of secured properties provided by the government pursuant to a PPSA search may provide
very current and detailed information on the properties subject to security interests, or it may not
be very helpful at all.

REVUE DE DROIT DE McGILL

[Vol. 36

outcomes only weakly correlate with the action of particular provinces. As in
other areas where output is achieved through team production, close scrutiny of
outputs casts little or no light on the contribution of individual team members.”
In this setting, each of the provinces can be expected to deflect blame for the
generation of perverse decisions onto other members of the team. And, barring
the existence of a highly transparent process, citizens will have no way of
assessing actual responsibility.

Supply Side

From a national perspective, the most salutary supply side characteristic of
competitive law production is its encouragement of provincial experimentation.
By encouraging the provinces to serve as “laboratories” for development, pro-
duction, and adoption of innovative laws and policy, the risk of widespread
adoption of flawed laws is reduced. In contrast, because both the centralized and
co-ordinated models involve nation-wide adoption of novel legal products, the
costs entailed by the adoption and correction of misconceived laws are
increased. This point has been perceptively noted by Weiler in the labour law
context:

The events of the 1970s have demonstrated the virtues of provincial jurisdiction
and federal diversity … Individual provinces can try out serious innovations. Each
legislature responds to different characteristics of its industries; different complex-
ion of the work force and its trade union allegiance; different political spectra. If
a statutory experiment proves successful, it can and is quickly emulated elsewhere
in the country. If it proves a mistake, it can be quickly liquidated without wide-
spread damage (emphasis added).2 9
A second strength of the competitive model is based on the simplicity of
its production function. Because of the more concentrated and homogeneous
nature of preferences that are manifest in decentralized political units, govern-
ment officials are able to produce legislation without having to devote excessive
time and energy to the task of sorting, weighing, and reconciling diverse or
competing preferences. In contrast, these activities constitute a central compo-
nent of the task of legislation production in the centralized and co-ordinated

27See, for example, the discussion in A. Alchian & H. Demsetz, “Production, Information Costs,

and Economic Organization” (1972) 62 Amer. Econ. Rev. 777.

2In

such cases, the only recourse left for citizens aggrieved by the production of perverse laws
is to attempt to influence all of the provincial representatives involved in a given legislative ini-
tiative. Obviously, however, lobbying all of the officials involved in the production of co-ordinated
laws is expensive. It is also less certain, for it is not at all clear that governmental officials from
“foreign” provinces will be receptive to claims brought by citizens outside their provinces.

29p. Weiler, “The Virtues of Federalism in Canadian Labour Law” in F. Bairstow et al., eds, The
Direction of Labour Policy in Canada, 25th Annual Conference, 1977 (Montreal: Industrial Rela-
tions Centre, McGill University, 1977) 58 at 59. See also Breton, “Supplementary Statements,”
supra, note 2; Breton & Scott, supra, note 2; A. Breton, “The Growth of Competitive Govern-
ments” (1989) 22 Can. J. Econ. 717.

1991)

SHOULD PROVINCES COMPETE?

models. Indeed, in the case of the co-ordinated model, this task is rendered espe-
cially complex owing to endemic collective action problems.” That is, if, as is
conventionally the case, a rule of unanimity is relied upon as a way of ensuring
that the preferences of all provinces are enshrined in legislation, the process of
legislation production is likely to be inhospitable to the production of timely,
bold, and innovative legislation. If provinces possess divergent views on the
ideal form of legislation, considerable compromise, with attendant delay, will be
required in order to secure agreement on joint outcomes. Moreover, in an effort
to reach elusive consensus, outcomes are likely to be drawn to the lowest com-
mon denominator, thereby diluting the strength with which deeply held prefer-
ences are reflected in legislation. These problems are magnified considerably if
provinces act opportunistically by cynically exploiting differential interests in
and commitments to the production of joint outcomes by various group mem-
bers.”‘

3. Conclusion

Comparison of competitive, centralized, and co-ordinated models of legis-
lation production demonstrates the superiority of competitive models. Simply
put, in an environment characterized by decentralized, competitive interaction,
government officials are forced to respond to citizen preferences, not as a matter
of grace, but as a matter of compelling necessity. Moreover, the greater provin-
cial autonomy and accountability contemplated by this model enhances the abil-
ity of provinces to reflect these preferences in their pristine form. In contrast,
the centralized and co-ordinated models are less able to effectively satisfy cit-
izen preferences because of demand and supply-side defects.

B. The Conditions Necessary for Optimal Production of Laws in a

Competitive Framework

In view of the superior capacity of competitive law production processes
to generate optimal laws, I now consider the factors that determine the vitality
of this model across a wide range of subject areas. The literature on the econom-
ics of federalism indicates that four basic factors are necessary for optimal leg-

3 0″Public-choice” theorists stress the problems which arise with rules of unanimity. A leading
work in this area is M. Olson, The Logic of Collective Action: Public Goods and the Theory of
Groups (Cambridge: Harvard University Press, 1965). At 41 he points out, “Whenever unanimous
participation is required, any single holdout has extraordinary bargaining power, he may be able
to demand for himself most of the gain that would come from any group-oriented action …. This
incentive to holdouts makes any group-oriented action less likely than it would otherwise be.” See
also J.M. Buchanan & G. Tullock, The Calculus of Consent: Logical Foundations of Constitutional
Democracy (Ann Arbor: University of Michigan Press, 1962), c. 8 at 96.
31For instance, a province with a marginal interest in a contemplated initiative may “hold-up”
the entire production process in order to wrest concessions from “large-stake” provinces. This type
of behaviour threatens the conceptual coherence of the entire process, and increases the likelihood
of generating a legal product that is punctuated by a series of unprincipled, ad hoc compromises.

McGILL LAW JOURNAL

[Vol. 36

islative outcomes to be generated in the competitive model: (i) a high degree of
mobility of people and resources; (ii) a large number of destination jurisdic-
tions; (iii) jurisdictional latitude in the selection of laws; and (iv) no spillover
effects.32 Each of these will be discussed in turn.

Jurisdictional Mobility

For exit threats to be credible in the competitive model, citizens must enjoy
a high degree of inter-jurisdictional mobility. There are, however, a wide range
of barriers that impede inter-jurisdictional migration. The most onerous barriers
to mobility are suffered when physical relocation in the destination jurisdiction
is a prerequisite to the consumption of superior legal products. Barring physical
relocation, it would simply be impossible for an Ontario citizen to consume
Saskatchewan’s social welfare or labour laws. However, physical relocation is
seldom accomplished without cost. At one level, these costs are derived from
explicit governmental policies. By physically relocating in another jurisdiction,
citizens may sustain significant reductions in wealth. For instance, the “home”
jurisdiction may impose restrictions on the transportability of certain employ-
ment benefits, while “destination” jurisdictions may impose certain qualifica-
tion tests on entrants that limit their ability to work or access benefits.33 At
another level, physical relocation costs emanate from non-governmental or nat-
ural sources. These include: tangible relocation costs (e.g., search costs entailed
in finding a new home or job, miscellaneous moving costs, etc.), losses in
human specific capital, and psychic losses resulting from the disruption or sev-
erance of community ties.

Another barrier that powerfully limits inter-jurisdictional mobility when
physical relocation is a prerequisite to consumption is the “bundling” of legal
products.’ Tied consumption bundles raise the possibility that, regardless of the

ism” (1983) 26 J.L. & Econ. 23 at 34.

32See Tiebout, supra, note 22 and F.H. Easterbrook, “Antitrust and the Economics of Federal-
33See, e.g., MJ. Trebilcock, M. Chandler & R. Howse, Adjusting to Trade: A Comparative Per-
spective (Ottawa: Economic Council of Canada, 1988). In this study at 227, the authors point out
that under Canada’s Unemployment Insurance system, regional differentiations in the level and
duration of benefits reinforce the concentration of temporary and unstable jobs in high unemploy-
ment and low wage regions. See also J.M. Cousineau, “Unemployment Insurance and Labour Mar-
ket Adjustments” in F Vaillancourt, Research Co-ordinator, Income Distribution and Economic
Security in Canada, MacDonald Studies, vol. 1 (Toronto: University of Toronto Press in cooper-
ation with Supply and Services Canada, 1985) at 187; T.J. Courchene, Social Policy in the 1990s:
Agenda for Reform (Toronto: C.D. Howe Institute, 1987).

34In antitrust parlance, this bundling is referred to as a “tied sale” or a “tying arrangement.” The
presumption underlying the prohibition of such arrangements is that consumers are prevented from
making optimal consumption choices. It should be noted, however, that a vociferous group of anti-
trust scholars feels that the prohibition on tying arrangements –
and the “leverage theory” which
is invoked to justify the prohibition –
cannot be supported on logical, principled grounds. See
R.H. Bork, The Antitrust Paradox: A Policy at War with Itself (New York: Basic Books, 1978) at
365; R.A. Posner, Economic Analysis of Law, 2nd ed. (Boston: Little, Brown, 1977) at 226; V.S.

1991]

SHOULD PROVINCES COMPETE?

unequivocal superiority of certain laws, consumers will not move to take advan-
tage of them because of the forced consumption of other, less optimal laws. For
instance, while a potential destination province’s corporate and commercial
laws may be valued by a consumer, its broad social laws may be viewed by that
same consumer as being antiquated and unresponsive. The lack of utility that is
occasioned by the latter may indeed eclipse any utility realized by consumption
of the former, leading the consumer to refrain from migrating. These problems
are predictably exacerbated by the inclusion of non-legal (economic, cultural,
climatic, geographic) considerations into the jurisdiction selection calculus.

Many of these problems are, of course, mitigated when physical relocation
is not a precondition to consumption of legislation offered by another jurisdic-
tion. However, there are relatively few species of legislation that are conducive
to consumption without physical relocation of citizen-consumers. And indeed,
even for the relatively few situations where this is possible, such as corporate
law, inevitable and non-trivial adjustment costs will be sustained that may mil-
itate against migration.” In any event, the foregoing discussion suggests that
consumers are unlikely to be highly responsive to relatively marginal changes
in the legal product of a potential destination jurisdiction. Rather, in order for
migration to occur, the benefits of legislation offered by a competitor jurisdic-
tion must exceed non-trivial relocation costs.

Large Number of Destination Jurisdictions

The second requirement for the production of optimal laws in the compet-
itive model is a large number of destination jurisdictions. Unless a range of des-
tination jurisdictions is available, it is unlikely that citizens will have the prod-
uct choice necessary to make meaningful migratory decisions. Partly, this
reflects a belief that a multiplicity of choices is necessary in order to satisfy the
full range of consumer preferences. Partly, it reflects concern with the prospect
of anti-competitive cartels forming when the number of destination jurisdictions
is small. That is, the likelihood that cartels will form and persist is greater the
smaller the number of goods suppliers. 6 Anti-competitive activity in the case of

Bowman, Jr., “Tying Arrangements and the Leverage Problem” (1957) 67 Yale L.J. 19. For an arti-
cle supporting leverage theory, see L. Kaplow, “Extension of Monopoly Power through Leverage”
(1985) 85 Col. L. Rev. 515. A critical discussion of this issue in a Canadian context is in B. Dunlop,
D. McQueen & M.J. Trebilcock, Canadian Competition Policy: A Legal and Economic Analysis
(Toronto: Canada Law Books, 1987) at 253.

35This point is discussed by Romano, supra, note 19 at 246.
36Scherer looks at price-fixing and collusive agreements and the studies done on them:
One prominent feature is the typically small number of sellers and the high degree of
seller concentration in the relevant product or geographic market. Evidently, agreement
e.g., ten or fewer … (supra,
is easier to achieve when the number of sellers is modest –
note 14 at 175).

REVUE DE DROIT DE McGILL

[Vol. 36

legislation production may take the form of a collusive agreement among gov-
ernments to refrain from legislative innovation in an effort to maintain stable
market shares.’

Related to the multiple destination condition is the requirement of perfect
information. That is, if the costs of obtaining and assimilating information
respecting legislative differences are prohibitively high, then citizens will be
unable to avail themselves of the information’s benefits. Accordingly, to the
extent that nuances in laws among jurisdictions are disseminated in a timely and
accessible manner, the benefits from legislative diversity are enhanced. Inter-
pretation and assimilation barriers are less easily redressed. The value of a novel
legislative initiative may not be immediately apparent to all citizens interested
in it. A costly learning process, whereby more risk-averse citizens studiously
examine the effects of novel legislation on those first subject to it, may be
inevitable.

Jurisdictional Latitude in the Selection of Laws

The third requirement, jurisdictional latitude in the selection of laws,
means that jurisdictions must not be subject to external constraint in the produc-
tion of laws. If governments are constrained in their capacity to respond to mar-
ket forces, owing to constitutional or quasi-constitutional restrictions, then their
scope for autonomous competitive action is reduced.

Internalization of Benefits and Costs

The fourth requirement of a vigorous competitive model is the full inter-
nalization of the costs and benefits of laws onto their direct suppliers and con-
sumers.3″ Less than complete internalization of the effects of legislation, as in
the case of other conventional goods, will perversely distort optimal production
and consumption decisions. In the realm of legal product manufacture, the most
serious externality results from the inability of innovating jurisdictions to limit

See also G.A. Hay & D. Kelley, “An Empirical Survey of Price-Fixing Conspiracies” (1974) 17
J.L. & Econ. 13 at 21; A.G. Fraas & D.F. Greer, “Market Structures and Price Collusion: An
Empirical Analysis” (1977) 26 J. Indust. Econ. 21.
37This argument has been made by H.N. Butler & J.R. Macey, “The Myth of Competition in the
Dual Banking System” (1988) 73 Cornell L. Rev. 677, in the context of the dual banking system
in the United States. They suggest that there is little competition among states and the federal gov-
ernment for market share in banking regulation because of tacit collusive agreement.
38lnternalization of costs and benefits and “externalities” are discussed in Posner, supra, note 34
at 51, 139, & 293 and in R. Cooter & T. Ulen, Law and Economics (Glenview: Scott, Foresman,
1988) at 45 & 169. At 170, the authors point out that

[t]he essence of the problem created by externalities is that they make the utility-
maximizing actions of consumers and the profit-maximizing actions of firms ineffi-
cient …. Efficiency can be restored by getting the externality-generator to internalize
these external effects. Thus, one of the important economic aspects of property law is
to try to induce this cost internalization when property rights are not separable.

1991]

SHOULD PROVINCES COMPETE?

competitor jurisdictions from duplicating successful innovations. In large part,
this is due to the lack of appropriate and enforceable intellectual property rights
in this area.39 Lacking a robust intellectual property regime, successful legal
innovation can be costlessly and quickly adopted by “free-riding” jurisdictions.
As a consequence, many of the expected gains from successful legal products,
in terms of enhanced market share, are denied to innovating states.4

This phenomenon poses a serious problem for the competitive model.
Essentially, the risks of innovative laws are borne asymmetrically: the benefits
of successful legal innovations are shared with non-innovating, free-riding
states, whereas the consequences of failed innovation (sunk research and devel-
opment costs, migration of constituents out of the jurisdiction, and diminished
reputation and goodwill) are shouldered by the innovating state alone.4′ This
feature of law-making in a federal state has led Rose-Ackerman to conclude that

[w]hile some policy improvements are possible, low-level governments remain
flawed mechanisms to rely on in the search for new ideas … If state and local gov-
ernments are supposed to be “laboratories,” then my model predicts that few use-
ful experiments will be carried out in them.42

Rose-Ackerman’s criticism of the competitive model is predicated on the
assumption that mere duplication of legislation will enable a free-riding govern-
ment to appropriate much of the benefit derived from the innovation. However,
if innovative legislation confers reputational benefits on the innovating jurisdic-
tion, this may confer an advantage on the innovating jurisdiction that is not eas-
ily emulated by other states. For instance, a province that consistently intro-
duces innovative and successful legislation in a certain area will develop a
reputation for expertise in that area. To some extent, reputational effects may
simply be evidence of other non-duplicatable, extra-legal attributes enjoyed by

39See Posner, ibid. at 54 & 84; Cooter & Ulen’s comments on property rights in information and

public goods are worth noting in this context:

It is extremely hard for anyone who has devoted resources to the production of infor-
mation to appropriate its value through the sale of that information. This is because the
instant the producer sells the information to one consumer, that consumer becomes a
potential competitor of the original producer, owing to the low cost of transmitting
information. Consumers desire to become “free riders” for information, paying no
more than the cost of transmission for the commodity…. In short, information has one
of the attributes of a public good, namely, that it is costly to prevent non-paying ben-
eficiaries from consuming the commodity (ibid. at 112).

Of course, the same can be said for legislative product innovations.

4″That is, there is no reason to incur the costs of relocation to another jurisdiction if the govem-

ment of the present jurisdiction adopts the innovation produced elsewhere.

41The consequences of failed policy include the direct research and development costs of the
innovation, and the indirect costs arising from migration of constituents out of the jurisdiction (and
attendant losses in revenue) and the costs from diminished reputation and goodwill.

42S. Rose-Ackerman, “Risk Taking and Reelection: Does Federalism Promote Innovation?”

(1980) 9 J. Leg. Stud. 593 at 594.

McGILL LAW JOURNAL

[Vol. 36

an innovating regime. As will be discussed in Part III, these attributes constitute
a central part of Delaware’s leading role in the American corporate law regime.
HI. Corporate Law and the Competitive Model

As the following case study demonstrates, competitive, decentralized law
production has historically played an important role in the provision of corpo-
rate law in the United States, and, more recently, in Canada. Although the
impact of competition on the production of corporate law has received consid-
erable attention from American academics, the subject has attracted only fleet-
ing attention in Canada. The inattention of Canadian commentators to compet-
itive processes reflects both normative and positive beliefs. In terms of the
former, the desirability of co-ordinated and centralized law production in the
corporate law area enjoys widespread support among practising and academic
lawyers.43 In terms of the latter, it is generally assumed that competition among
provinces is not an important feature of the Canadian legal landscape. The fol-
lowing comment is indicative of this general view:

“Province shopping” has never been in vogue in Canada. Partly this may be
because until recently the differences among the provincial Acts and between the
provincial and federal Acts were not as pronounced as were those among the var-
ious state laws in the U.S. Probably an even more important reason is the greater
conservatism of Canadian corporation lawyers and counsel’s unwillingness to
expose his client to an unfamiliar corporate law regime.4 4

The following case study, however, challenges these beliefs. It is my sub-
mission that not only is decentralized competition among provinces a laudable
normative goal, but that these processes have played a recent and important role
in shaping Canadian corporate law. Although competitive processes are not as
intense, nor have they generated a corporate law infrastructure as elaborate as
in the United States, it can be demonstrated that competitive forces were largely
responsible for the eradication of one of the most anachronistic and perplexing
features of the Canadian corporate law regime: the maintenance of two wholly
dissimilar corporate law systems within Canada –
the letters patent and the
memorandum systems.

A. The Unification and Modernization of Corporate Law in Canada

1. Corporate Law Diversity and Reform Efforts

Historically, corporate law scholarship in Canada has sounded two recur-
rent themes: the lack of uniformity among the corporate law statutes adopted by
the provinces and the federal government, and the glacial pace of corporate law

43See above, note 3.
“S.M. Beck et al., Cases and Materials on Partnerships and Canadian Business Corporations

(Toronto: Carswell, 1983) at 152.

1991]

SHOULD PROVINCES COMPETE?

innovation.45 In large part, these problems can be traced to the existence of two
distinctive corporate law systems in the same country: the letters patent and
memorandum systems. According to one commentator, the emergence of these
two systems was the result of an “historical and geographic accident.”46
Although the nomenclature by which the two systems are identified suggests
that the difference between them is rooted solely in incorporation method, as
Ziegel has astutely observed, the “differences between the two … went well
beyond the method of incorporation, since the form of incorporation also
brought in its train important conceptual differences …” The rise and persist-
ence of two corporate law systems was criticized as early as 1910 and endured
repeated criticism for well over half a century.4

Interestingly, despite sustained criticism and repeated calls for
co-ordinated resolution of the problem, it was not until the mid-1980s that a
modem and highly uniform corporate law regime emerged in Canada. What is,
of course, significant is that the emergence of this new regime occurred rela-
tively quickly and without reliance on extensive governmental co-ordination.
Rather, the triumph of this new regime resulted from the unilateral action of the
federal government when, in 1975, it introduced its new corporate statute, the
Canada Business Corporations Act.49 This innovation sparked an intense com-
petitive reaction on the part of the provinces, causing them to engage in a flurry
of legislative activity. With the notable exception of British Columbia, the result
of this activity was the rapid adoption of the core features of the CBCA. Com-
mencing with Manitoba in 1975, and concluding with Newfoundland in 1986,
the CBCA, in the words of one commentator, “swept the country.”‘5 So dramatic
was the success of the CBCA that the oft-repeated calls for enhanced uniformity
and modernization by Canadian corporate law scholars have mysteriously sub-
sided in this particular area.

45See “Company Law in Canada” supra, note 3; A. Smith, “Uniform Company Law in Canada”
46B. Welling, Corporate Law in Canada: The Governing Principles (Toronto: Butterworths,

(1938) 16 Can. Bar Rev. 701; Ziegel, supra, note 5 at 62.

1984) at 45.

47Ziegel, “Harmonization of Provincial Laws,” supra, note 4 at 33.
48See Smith, supra, note 45 at 701. For a history of initiatives designed to rectify the lack of
uniformity among Canadian provincial corporate laws, see C.S. Richardson, “Company Law:
1923-1947″ (1948) 26 Can. Bar Rev. 185; Ziegel, supra, note 5 at 62.
49R.S.C. 1985, c. C-44 [hereinafter CBCA]. In discussions I had with several officials involved
in the adoption of the CBCA, I was told that the federal government initially tried to enlist the sup-
port and involvement of all the provinces in the development of the new legislation. However,
since many of the provinces were reluctant to participate in an enterprise conducted by the federal
government, co-ordinated production of the CBCA was doomed from the start and, as a conse-
quence, the federal government decided to eschew a co-ordinated approach and proceed
unilaterally.

50Welling, supra, note 46 at 48.

152

REVUE DE DROIT DE McGILL

[Vol. 36

2. The Diffusion of the CBCA Model

To appreciate the alacrity with which the CBCA model was adopted across
Canada, I have constructed Graph 1 and Table 1. In Graph 1, I depict the inci-
dence of major corporate law reforms undertaken by the provinces following the
adoption of the CBCA. As can be observed from the Graph, some provinces,
e.g., Alberta and Quebec, undertook more than one reform initiative during this
period, whereas other provinces only introduced one major reform – which, in
most cases, was the adoption of a comprehensive new statute modelled after the
CBCA. In Table 1, the substantive nature of the reforms adopted by the prov-
inces can be observed. In particular, I show the rate of adoption of ten core
reforms that were ushered in by the CBCA:

(i) non-discretionary incorporation by articles,
(ii) the ability to operate one-director corporations,
(iii) specific provision for the adoption of pre-incorporation contracts,
(iv) the eradication of the ultra vires doctrine by endowing the corporation with the power

of natural persons,

(v) the ability of the corporation to repurchase its issued and outstanding shares,
(vi) simplified director removal provisions,
(vii) codified general standards of conduct for directors and officers,
(viii) provisions for shareholder requisition of special meetings,
(ix) the capacity of directors to convene meetings by telephone, and
(x) the introduction of the oppression remedy.5

Graph 1

Adoption (cumulative) of Major Corporate Law Reforms by Canadian Provinces

12_

10.

”

S 6-

olbQuebec

NfId.

/ P.E.I.

Nova Scotia

Ontario & Nova Scotia

Alberta & New Brunswick

Quebec

Saskatchewan

Manitoba
I – I ‘ I

‘ I ‘ I ‘ I ‘ I
1974 1976 1978 1980 1982 1984 1986 1988

Year

51Most of these reforms were identified and discussed by Ziegel, supra, note 5.

1991]

Year
1976
1977
1979
1980
1981

1982

1983
1984
1986

SHOULD PROVINCES COMPETE?

Province
Manitoba
Saskatchewan
Quebec
Quebec
Alberta
New Brunswick
Nova Scotia
Ontario
Nova Scotia
P.E.I.
Newfoundland

Legislative Reform
S.M. 1976, c. 40
S.S. 1976-77, c. 10
S.Q. 1979, c. 31
S.Q. 1980, c. 28
S.A. 1981, c. B-15
S.N.B. 1981, c. B-9.1
S.N.S. 1982, c. 17
S.O. 1982, c. 4
S.N.S. 1983, c. 19
S.P.E.I. 1984, c. 14
S.N. 1986, c. 12

DATE OF ADOPTION OF TEN KEY CBCA REFORMS

Table 1

Province

Articles of One D/O Adoption Natural Co. Share Simplified Codified 5% Shdr Telephone Oppres-
Incorp.

Gen. Dirl initiation Direct

sion

Pre-lncorp. Persons Repur-
Contracts
chase

D.
Removal Off.
Shdrs.

of
meeting

Meetings Remedy

B.C.
E* refers to S..C.
1973, c.18

–

ALTA.
Novr S
C.13″ refers to SA. (6,7.8)
1977. c.13
“Nov” refers to SA.
1981, c.B-15

E: (130)

–

E: (23 (1)) E: D

E: D

E: (141) E: (170)

E : (221)

(256-258) (153(3))

Novr VS Novr S
(97(2))

(14)

Noer. VS C.13: S
(15(1))

(41)
Noer VS
(32)

Noyr. Nove VS E: D (134) Novr. VS Novr VS
(109(9)) (234)
VS(104) (117)

Novr VS
(137)

Novr S(6, Noer VS Novr VS Noers VS Novr. VS E: D (110) Noer VS E: VS

(97 (2))

(14)

(15)

(32)

Nov
VS(104)

(117)

Novr VS Novr VS
(175) (109(9)) (234)
Noes
VS(137)

SASK.
“E- reiers to R.S S. 7.8,225)
1965, c.131
tlov” refers to
R.S S. 1978, c.B-lO

MAN.
“E” refers to 1970 (6, 7, 8)
R.S..I. c60 and
amend.
*NOn” refers to S.M.
1976. c.40

Novr VS Novr VS Noes’ VS E: (160)

(97(2))

(14)

E: D (33, E: D (79) E: D (83) E: D (184) Noer VS Noer VS
(109(9)) (234)

Novr VS Noe:. VS Novr VS
(104(1))

(117 (1))

(137)

Novr VS 34, 35)
Novr VS
(15(1))
(32)

F.: 0 (4. 5) E: 122(2) E: (20)

Novr

Noe VS

Amended: VS(115) (21)

ONTARIO
E’ refers to R.S.O. then
1970 c.53
“tWosv”
1932. c.4

refers to S.O. VS (S.O.
1979,
c.36, s.3)
Noer VS
(5.6)

Nov. (15) E: (S.O. E: (140)

E: (144)
Now: VS Noe:

E: (109) E: (S.O.
1972.

Noes.

1972
C.138, VS(122) (134(1)) VS(105) c148, s.33
s.60
Novr. VS
(30)

(2))
Nov VS
(126 (13))

Noer.
(247)

Chart continued on following
page

McGILL LAW JOURNAL

[Vol. 36

Table 1 (cont’d)

Province

Articles of One D/0
Incorp.

Adoption Natural Co. Share Simplified Codified 5% Shdr Telephone Oppres-
Pre-tncerp. Persons Repur- D.
Contracts

Meetingn Remedy

Gen. Dir

chase

Sion

Initiation Direct
of
meeting

Removal Off.
Shdrs.

C.31: VS C.31: VS C.28: S
(120(.7)- (120-33)

)

(123.7-.8) (120-24)

C.31: S

C.28: S
C.31: VS
(123.52- (120-38)
-.
57)

–

E: S (96) C.31: VS

(8-2)

QUEBEC
C.31 refers toS (.
1979. c.31
C.28″ refers to S.A.
1980. c.28

Nor VS Ner VS Novr VS Novr (13) Nor VS Novr. VS No=rw VS E: VD

Now: VS Now VS

(60)

(12)

(1))

(31)

(67(1))

(79(1))

N.B.
E’ refers to R.S.N.B (4.5.6)
1973. c.13
“oi” refers to
S.N.B 1981. cB-9.1

(102-(.13)) (72(8))
Novr,
S(96)

(166)

N.S.
E refers to
R.S.N.S. 1967. c.42
C.ir refers to
S..S. 1982. c.17
*C.19′ refers to
S.N.S. 1983 c.19

–

C.17: S
(s.13)
Nov2 79

0.17: VS 0.17: S
(5. 7)
Novr
(24(5 ))

(10)

–

E: D (139) E: 0 (72)

No’r. VS Novr

refers to S.1. (15-18) VS(164)

NFLD.
“towev”
1906, c.12

Nor VS Novr. VS Novr VS No:
(29)

(30(1))

(62)

Novr

Nov:

Nlo,

N1ovr

VS(175) VS(199) VS(237) VS(184) VS(366)

Novr 0
(2-11)

Novr VS
(7)

–

E: VD (30)

–

P.E.I
*E refers to
R.S.RF.I. 1974, 05

‘ttw” refers to

S.RF.L 1934. c.14

E = provision similar to or Identcal to one contained in CBCA at time of CSCA adoption.
VS = provision very similar to CCA provision.
S = provision similar to CBCA provision.
0 = provision deals with same subject matter as CBCA provision but In a different manner.
* This Chart allowis the reader to determine the year in which a provision similar in nature to the ten C6CA provisions vras first adopted by one of the pro-
vincial legislatures. The letter ‘E” indicates that the province had In place a provision similar to the one Introduced by the C6CA but before the CBCA
vras adopted. For example, the Chart indicates that several 06 the CBCA reforms were adopted by British Columbia and Ontario prior to the adoption of
the CBCA Conversely. the Chart Indicates that a number of provinces, e.g., Alberta, Saskatche;ran, Manitoba, Quebec, and Ne;loundland, adopted major
COCA inspired reforms after the adoption of the CBCA.

Review of this table shows the considerable similarity that now exists among
the corporate law statutes of the various provinces. For instance, Alberta, Sas-
katchewan, Manitoba, Ontario, Quebec, New Brunswick, and Newfoundland all
have corporate statutes that have incorporated most of the crucial innovations
contained in the CBCA. 52 Although the corporate legislation of Nova Scotia and
Prince Edward Island adopted reforms that resulted in corporate statutes less
faithful to the CBCA model, the timing of their adoption suggests that the CBCA
figured importantly in the decision to innovate. Moreover, the dearth of codified
minority shareholder protections and director removal provisions suggests that
these provinces may have been explicitly trying to capture a share of the
national incorporation market by passing legislation more lenient than the
CBCA and its progeny. British Columbia, as discussed previously, did not

521n the case of Ontario, it should be noted that many of these reforms were adopted prior to
the adoption of the CBCA. Indeed, Ontario’s Business Corporations Act, 1982, S.O. 1982, c. 4
[hereinafter OCBA]
inspired many of the reforms eventually embraced by the framers of the
CBCA.

1991]

SHOULD PROVINCES COMPETE?

undertake explicit reform in response to the CBCA, but its statute contains many
of the reforms contained in the CBCA.

It is interesting to compare the diffusion of the CBCA model with the dif-
fusion of corporate law innovations across states in the United States. 3
Romano, in a comprehensive study of the structure of the American corporate
law regime, studied the vigour of state competition by examining the pace of
statutory innovation.’ Romano examined the diffusion of four “successful” cor-
porate law reforms that were adopted in Delaware’s 1967 Corporate Code.” She
found that the indemnification provision was adopted by 43 states within 22
years, the merger vote exemption by 22 states within 18 years, the appraisal
rights exemption by 26 states within 14 years, and the anti-takeover statute by
37 states within 13 years. 6 In mapping the actual frequency of the adoption
against years since introduction, Romano was able to observe an “S shaped”
cumulative distribution pattern, which has been found in other legal innovation
contexts. 7

What is striking about Romano’s results, which are used by her in support
of a claim in favour of the competitive vitality of the American corporate law
regime, is the very similar pace of diffusion of legislative innovation observed
in Canada in relation to the adoption of the CBCA model. Within a decade, nine
out of ten provinces felt compelled to respond to the unilateral initiative of the
federal government. Moreover, of special relevance to the Canadian case, exam-
ination of the content of the reforms shows that inter-governmental competition
exerted a harmonizing rather than divisive impact on the Canadian corporate
law regime. That is, the mere adoption and marketing of an unequivocally supe-

53In the United States, the states are vested with authority over the incorporation and regulation
of corporations. The situation is somewhat different from Canada in that the American federal gov-
ernment is only empowered to incorporate corporations when “necessary and proper to such
express powers as the fiscal, war, interstate commerce, territorial, and seat of government (District
of Columbia) powers.” H.G. Henn & J.R. Alexander, Laws of Corporations and Other Business
Enterprises, 3rd ed. (St. Paul, Minn.: West Publishing Co., 1983) at 25.

54See Romano, supra, note 19. Her study was motivated by a desire to understand the impact
that Delaware, the leading supplier of corporate laws in the United States, was having on the qual-
ity of American corporate laws.
55General Corporation Law of the state of Delaware, Del. Code Ann. tit. 8 (Cum. Supp. 1968).
These reforms were: (i) the explicit elaboration of a standard for director and officer indemnifica-
tion; (ii) the exemption from stockholder vote of mergers involving a specified percentage of the
corporation’s stock; (iii) the elimination of appraisal rights in corporations whose shares trade on
a national exchange; and (iv) anti-takeover statutes.
56See Romano, supra, note 19 at 234, Figure 1.
57See Romano, ibid. at 233. For a discussion of patterns of policy innovation in other contexts,
see J. Walker, “The Diffusion of Innovations Among American States” (1969) 63 Am. Pol. Sci.
Rev. 880; V. Gray, “Innovation in the States: A Diffusion Study” (1973) 67 Am. Pol. Sci. Rev.
1174; L Walker, “Comment: Problems in Research on the Diffusion of Policy Innovations” (1973)
67 Am. Pol. Sci. Rev. 1186.

REVUE DE DROIT DE McGILL

[Vol. 36

rior corporate law product by the federal government unleashed a wave of
reform that achieved nationalist objectives without the contentious and debili-
tating negotiation that frequently characterizes other Canadian law reform ini-
tiatives that rely on co-ordinated processes.

Shareholder Mobility in Canada

Although the rapid diffusion of the CBCA model throughout the country
furnishes strong evidence of the role of competitive forces in shaping Canadian
corporate law, a complete picture of the impact that these forces have had on the
structure of Canadian corporate law requires close scrutiny of the mobility deci-
sions of shareholders (at the time of initial incorporation) and firms (at the time
of reincorporation). That is, to the extent that shareholders consistently favour
certain jurisdictions in their incorporation and reincorporation decisions, and to
the extent that these decisions are not made merely on the basis of where the
economic activity of the firm will be concentrated, then the case for competition
is established. The difficulty in Canada, however, is that comprehensive data
which would rigorously document the nature of the jurisdiction selection deci-
sions made by Canadian shareholders when incorporating and reincorporating
companies are not available. For example, documents filed with provincial and
federal corporate law officials at the time of incorporation do not include infor-
mation on the location(s) of actual economic activity or the residence of all
shareholders.5″ And, for reincorporation, i.e., continuance in another jurisdic-
tion, the ability to document the pattern of these decisions is impaired by the dif-
ferent statutory treatment accorded migration of established corporations
depending on the jurisdiction of initial incorporation.59

55Although jurisdictions may require the initial incorporators and directors of a company to indi-
cate their residence addresses, on the articles of incorporation, see, for example, OCBA, Form I,
where there is no requirement that the names and addresses of those individuals acquiring shares
after the incorporation of the company be filed with corporate regulators.

59Nine provinces contain explicit provisions dealing with both continuance and discontinuance
in the province, but Quebec only has explicit provisions dealing with continuance (see infra, note
111). Moreover, the differential rate of adoption of CBCA reforms means that a comprehensive and
consistent data set for the past decade cannot be generated. This is because many jurisdictions
adopted continuance provisions only recently, and so a consistent continuance trend can only be
generated for those jurisdictions having operative continuance provisions during the better part of
the decade. As a consequence, shareholders seeking to migrate to or from Quebec are required to
incorporate a new entity in the destination jurisdiction and then to arrange a sale of assets. How-
ever, an asset purchase, because unreported and because not always a vehicle for reincorporation,
is not an effective proxy for reincorporation. One source of data that has proven particularly val-
uable in American studies of charter market is the Moody’s manual (R.P. Hanson, ed., Moody’s
International Manual (New York: Moody’s Investor Service, 1987) at 503). I reviewed the descrip-
tions of over 800 Canadian companies listed in Moody’s 1987 International Manual to identify
instances where companies changed their incorporation jurisdiction. Unfortunately, I was able to
find only fifteen companies that had changed domicile during their life. Although the data are seri-
ously incomplete (only large, surviving Canadian companies are included in the manual and the
data may be incomplete and inaccurate), the information obtained showed that as a reincorporation

19911

SHOULD PROVINCES COMPETE?

Despite the lack of an ideal information set, it is possible to obtain some
appreciation of the demand-side characteristics of the incorporation market in
Canada through examination of other data. To begin with, Table 2 exhibits the
number of incorporations” (expressed in absolute terms and as a percentage of
total annual incorporations) for all of the provinces and the federal government
for the period 1975 to 1988.6″ Review of the table shows that the general trend
in total incorporation activity is upward. From 1975 to 1988, the volume of
incorporations increased by 80,111 –
an increase of 139%. However, the
upward trend was not consistent throughout the period. In 1982, the number of
incorporations dropped from 108,181 (in 1981) to 89,416 –
a 17.3% decrease
in total incorporation activity. Moreover, as these data indicate, the pace and
direction of change in incorporation activity was not identical for different prov-
inces and the federal government. For instance, during the 14 year period cov-
ered in the table, the market shares of the provinces and the federal government
fluctuated considerably. For the years 1975, 1979, and 1988, the market shares
of the Federal Government, British Columbia, Alberta, Ontario and Quebec
were as follows:

Federal Government:
British Columbia:
Alberta:
Ontario:
Quebec:

1975
6.2%
17.8%
17.3%
28.9%
16.3%

1979
19.5%
17.6%
20.4%
25.9%
4.7%

1988
8.7%
14.1%
10.8%
40.4%
17.8%

destination, the federal government dominates the provinces. Of fifteen migrating companies,
eleven moved to the federal government, eight of them after the adoption of the new CBCA. Of
these eight, one came from British Columbia, two from Alberta, two from Manitoba, and three
from Ontario. However, because the migration of four of the eight companies to the federal gov-
ernment occurred after CBCA inspired reforms had been adopted in the home jurisdiction, support
for the competitive model from these data is equivocal.

60It is unfortunate that robust reincorporation data could not be obtained. By focusing only on
initial incorporation data, there is a danger that the depiction of shareholder mobility that is gleaned
may be incomplete. It can be argued that the charter market in Canada is really segmented into two
distinct markets: the incorporation and the reincorporation markets. Although shareholders in both
markets are likely to be sensitive to changes in legal product, differences in the size, sophistication,
and wealth of shareholders will be reflected in differences in the nature of the demand function
of the participants in each market. Whereas shareholders in the incorporation market will most fre-
quently be forming closely held start up ventures, shareholders in the reincorporation market are
more likely to be associated with more established and successful enterprises. The former, owing
to their innate ability to contract out of the terms of the standard form contract specified in incor-
poration statutes, will be less sensitive to the content of legal product and more sensitive to the
price level of that product and to the process by which corporate status is obtained. The latter, espe-
cially if they are shareholders in a public corporation, will be less sensitive to the price and the
process by which corporate status is obtained and more sensitive to the content of legal product.
61These data were derived from annual reports of the various ministries responsible for corpo-
rations across the country and were collected principally by the Canadian Federation of Independ-
ent Business.

McGILL LAW JOURNAL

[Vol. 36

Table 2

INCORPORATIONS BY JURISDICTION OF INCORPORATION*

FOR FISCAL YEARS 1975 TO 19881

(Total Number/Percentage of Total (in Brackets))

Alta.

(9.4)

(8.9)

1985

1986

1987

1984

1982

1983

1978

1979

1980

1981

(15.4)

(17.8)

(17.6)

(19.8)

(21.6)

(18.2)

(17.8)

(15.9)

(19.5)

(17.9)

(20.7)

(20.3)

(18.6)

(13.3)

(13.4)

(14.3)

1976
5581
(8.2)

Proy. 1975
3570
FED.
(6.2)

1977
1988
8736 13574 19528 19332 16628 18510 19728 19297 15137 11652 12187 11962
(11.8)
(8.7)
B.C. 10267 12355 13209 15215 17616 21380 23368 11965 13915 14065 16180 17395 18648 19494
(17.8)
(14.1)
9964 12811 14391 18045 20395 22530 21769 10691 12392 15902 15965 17425 16712 14890
(10.8)
(17.3)
Sask. 2256
2416
(3.9)
(1.8)
Man. 1729 2316 2398 2747 3195 2546 2921 2886 2785 2625 2986 3005 3246 2450
(2.4)
(1.8)
26586 27099 28451 29173 32409 38233 43940 51824 55657
(31.8)
(24.6)
(40.4)
8708 10398 10807 17078 21768 24455 24521
6585
(17.9) (17.8)
(9.7)
(6.1)
2190
1319
1513
1740
(1.7)
(1.6)
(1.7)
(1.6)

(3.0)
(3.2)
16682 18556 20847 20929 25871
(25.9)
(28.9)
4718
9433
(16.3)
(4.7)
1579
1724
(2.7)
(1.7)

(19.4) (21.04) (20.4)
3629
2450
(3.3)
(3.6)

(28.1)
7917
(10.7)
1490
(2.0)

(25.1)
8014
(7.4)
1642
(1.5)

(27.4)
9748
(14.4)
1450
(2.1)

(24.5)
6919
(8.1)
1778
(2.1)

(12.7)
3159
(3.2)

(18.9)
2486
(3.7)

(20.8)
3639
(3.4)

(15.4)
3128
(3.0)

(14.0)
3208
(2.8)

(14.0)
3661
(2.9)

(20.1)
3454
(3.2)

(12.0)
3120
(35)

(123)
3205
(2.4)

(10.7)
1815
(1.9)

(10.4)
1921
(1.9)

(15.0)
2026
(1.8)

(17.5)
2256
(1.8)

3346
(3.9)

(14.2)

(14.0)

(13.6)

(13.7)

(30.0)

(31.3)

(33.5)

(35.3)

(38.0)

(2.7)

(3.2)

(2.5)

(2.6)

(2.4)

(3.4)

Ont.

Quo.

N.S.

(2.9)

H.B.

1155
(2.0)
11id. 812
(1.4)
P.E.I. 280

1409
(2.1)
824
(1.2)
276
(.4)

1550
(2.1)
908
(1.2)
294
(.4)

1866
(1.7)

2135
(2.0)

2347
(2.6)

1834
(1.8)

2012
1624
(1.9)
(1.4)
972 1147 1335 1128 1034 1101 1209 1180 1241 1515 1811
(1.1)
(1.3)
330
432
(.4)
(.3)

(1.0)
336
(.3)

(1.0)
320
(.3)

(1.0)
292
(3)

(1.1)
322
(.2)

(1.2)
343
(.3)

(1.2)
299
(.3)

(1.1)
272

2555
(2.6)

1880
(1.8)

1870
(1.6)

1723
(1.4)

1936
(1.4)

(1.2)
191
(.2) (.3)
97203
(100)

(1.2)
248
(.2)
103491
(99.9) (100.1) (100)

114199 124386 136369 137835

(100)

(.5)
57724 67812 74190 85479 1060 108107 188181 89416
(100)
(100)

(99.94) (99.9) (100.1)

(100)

Data derived from Canadian Federation of Independent Business flies and from annual reports of Ministries.
isal year Is April 1′ to March 31′, inclusive.

One possible explanation for discernible changes in jurisdictional incorpo-
ration activity is macro-economic in nature. Specifically, incorporation activity
can be expected to crudely track changes in the economic conditions prevailing
in each of the provinces. During times of robust economic growth, the level of
provincial incorporation activity should increase as citizens residing in the prov-
ince create new enterprises in an effort to exploit new opportunities for eco-
nomic gain. Correspondingly, when a province’s economy slows, the incorpo-
ration rate for the province can be expected to slow because the climate is less
conducive to new ventures.62 In this vein, alleging a correlation between provin-
cial incorporation activity and provincial economic conditions is supportive of
the traditional vision of the Canadian charter market: shareholders mechanisti-
cally incorporate in the jurisdiction in which shareholders plan to concentrate

62The correlation between incorporation levels and provincial economic activity is not perfect.
Incorporation applications may lag behind increases in economic activity during a recovery, while
declines in economic activity may be accompanied by slight increases in incorporation activity
reflecting initiation and incorporation of private ventures by workers suffering job losses.

1991]

SHOULD PROVINCES COMPETE?

their economic activity, and, as a consequence, changes in incorporation levels
are a function of exogenous economic factors and are wholly unrelated to
endogenous price and quality attributes of the various provincial corporate law
regimes.

Attributing changes in incorporation levels solely to changes in economic
conditions is, however, problematic. Although economic conditions could
explain variation in provincial incorporation levels, it is difficult to explain
trends in federal government incorporations in these terms. Why, for example,
did federal government incorporations increase dramatically in the period 1975
to 1979, and decline just as dramatically in the period 1979 to 1988? Although
the country endured a serious economic recession in the early part of the 1980s,
by the latter half of the decade the country in general was experiencing buoyant
economic growth, and one would have predicted, afortiori, that federal govern-
ment incorporations would have increased commensurately.

Incorporation Activity and Economic Growth Factors

To explore further the correlation between economic activity levels and
incorporation trends, I assembled annual real gross domestic product data for
each of the provinces for the period 1975 to 1988. In Table 3, these data,
expressed in both absolute and relative terms, are exhibited. Although compar-
ison with the data in Table 2 should cast light on the correspondence between
incorporation and income patterns of each of the jurisdictions, the comparability
of the tables is confounded by problems in comparing the incorporation and
income experience of the federal government. Although the federal govern-
ment’s incorporation data is, like those of the provinces, expressed as a share
of the total incorporation market, the only income measurement for the federal
government, national GDP, is the summation of the income figures of all the
provinces. As such, the statistic is not uniquely related to the federal govern-
ment, and so cannot be used for effective comparison with the incorporation
data. Nevertheless, despite their shortcomings, the data in Table 3 do at least
yield some information on the trend in provincial income levels and on the rel-
ative income shares of the provinces over the fourteen year period.63

631t should be noted that the data in Table 3 are shown for fiscal years (April 1 to March 31),
not calendar years. Accordingly, the data shown for 1975 are for the period April 1, 1975 to March
31, 1976. The fiscal year was chosen to allow easier comparison to the incorporation data exhibited
in Table 2, which are denominated by fiscal rather than calendar years.

REVUE DE DROIT DE McGILL

[Vol. 36

Table 3

GROSS DOMESTIC PRODUCT BY PROVINCE FOR

FISCAL YEARS 1975 TO 1988t

(Total amount in millions of $ 1981/percentage of total for all provinces (in bracket))*

1975 1976 1977 1978 1979 1980 1981 1982 19a3 1984 1985 1986 1987 1988
BC 29802.5 32048.3 32879.8 34428.3 36214.3 38357.5 38544.8 36234.8 37910 39282.3 40712 413635 43932.5 46432

(10.8)

(11.0)

(11.2)

(11.5)

(11.7)

(12.3)

(12.2)

(11.9)

(11.8)

(11.5)

(11.3)

(61.4)

(I1.5)

AL 40812 41371 41843 41746 45557 44978.8 45278 43851 43846 45946.5 47395 45958.3 48435.5 51305.3
(12.8)
SIK 11770 12425.3 12420.5 12357.3 12292.8 12438 12960 13222.3 13532.8 13660 14835.5 14067.3 14760.8 14073.8

(13.3)

(12.6)

(13.9)

(13.6)

(12.6)

(14.8)

(14.4)

(14.3)

(14.7)

(14.3)

(14.4)

(135)

(142)

(4.3)

(4.2)

(4.1)

(4.0)

(40)

(4.1)

(4.3)

(4.2)

(4.0)

(41)

(3.8)

(35)

r,111 11434.9 11977.8 12075 12204.8 12218.8 12082.8 12391.3 12103.5 12565.3 13593 14378.8 14937.8 151483 15265.3

(4.2)

(4.1)

(48)

(3.9)

(4.0)

(3.9)

(48)

(4.0)

(4.1)

(3.9)

(38)

01 101417.3 116393.5 118659.8 111370.8 113243.3 1139078 116361 112709.5 121385 131366.5 138212.3 145307.5 153925.3 161394.5

(36.9)

(37.0)

(37.1)

(36.6)

(368)

(36.9)

(37.8)

(38.6)

(39.0)

(39.8)

(39.9)

(4.1)

PQ 62619.8 66009.3 6725 69971.8 70724.5 713598 71749.5 67935.8 71547.3 75110.5 77718.5 79782.8 85269 89012.5

(22.9)

(22.8)

(21.9)
NS 6747 6896.5 7183.5 7436 7555 76658 7673 7712.8 8220.3 8704.3 9304 950.3
(2.6)

(21.9)

(22.1)

(2.4)

(2.5)

(2.6)

(2.5)

(2.4)

(2.5)

(2.4)

(22.9)

(22.7)

(22.6)

(22.3)

(22.9)

(230)

(25)

(22.1)
(22.1)
9770 10035
(2.5)
(2.5)

111 5456 5719.8 5762.5 6694.5 6057 5966.8 6046.3 6085.8 6590.3 6813 70235 7291.5 7643 86009.8
(2.0)
(2.0)
3963 4192.3 4203.5 4322.8 4642.3 4511.5 4555.5 4428 4603.3 4733.3 4888.5 4911 52395 5392
(1.4)
(1.3)

(2.0)

(1.9)

(1.4)

(1.5)

(1.4)

(1.5)

(2.0)

(2.1)

(2.0)

(1.4)

til

(1.5)
PEI 839 882.5 896.25 957 957.5 958.3

(.3)

(1.4)

(1.4)
972 997.3 1031.8 1079.5 1117.8 1175.8 1216 12B3.5
(.3)

(1.3)

(1.4)

(.3)

374869.6 287913.3 293178.9 299799.3 309479.5 311327.1 316331.4 305260.8 321287.1 340288.4 384783.9 365283.8 385337.2 402164.2

‘Fiscal year is April V to March 31′

, inclusive.

Data derived from Conference Board of Canada Provincial Forecasting Model.

Comparison of the data in Table 2 and Table 3 yields an interesting insight:
the income shares for each of the provinces are far more stable than the corre-
sponding incorporation shares for the period under examination. If, for example,
the income shares of the provinces in 1975 and 1988 are compared, only modest
change can be detected. In the case of British Columbia, Saskatchewan, Man-
itoba, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland,
a less than 1 percentage point income-share difference is observed, although the
difference in market shares for Alberta (-2 percentage points), Ontario (-3.2
percentage points), and Quebec (+1.5 percentage points) is slightly larger.’ In
contrast, comparison of the difference in the incorporation market shares for the
same two years discloses much larger variation. For example, save for the three
provinces having the smallest market share (i.e., New Brunswick, Newfound-
land, and Prince Edward Island), the differences in incorporation shares for the

64That is to say, the overall market share increased or decreased by less than 1% in absolute
terms. In the case of Quebec, for instance, the province’s income share was 22.8% in 1975 and
22.1% in 1988 –

the difference in market shares amounting to a .7% decrease.

1991]

SHOULD PROVINCES COMPETE?

remaining provinces all exceed 1 percentage point. In several cases, the differ-
ence is quite large: for example, Alberta’s share decreased by 6.5 percentage
points, while Ontario’s share increased by 11.5 percentage points.

Of course, forming conclusions as to the strength of the association
between income factors and incorporation levels solely on the basis of two sin-
gle point observations (i.e., the income and incorporation shares of the prov-
inces in 1975 and 1988) is not as convincing as conclusions predicated on anal-
ysis of the trends operating during the entire period. In Table 4, the annual
changes in income shares and incorporation levels are shown for the various
provinces for the entire period 1975 to 1988. Scrutiny of this table shows that,
for most of the provinces, incorporation levels do move in the same direction
as economic growth indices, but not with the same magnitude.65 For instance,
when, in 1982, real income declined in five provinces from the levels recorded
in 1981, incorporation levels in four of the provinces also declined.66 A simple
linear regression which tests the correlation between changes in gross domestic
product and incorporation levels confirms the lack of a strong association
between the variables. The correlation is statistically significant for only three
provinces, British Columbia, Manitoba, and Nova Scotia, with P-values of .004,
.02, and .006, respectively.67 To better appreciate the trend in these changes, in
Graph 2 the data in Table 4 is plotted for the four provinces with the largest
number of incorporations: Alberta, British Columbia, Ontario, and Quebec. The
important puzzle for proponents of the association between income and incor-
poration is, of course, the experience of the Province of Quebec. As the data in
Graph 2(d) indicate, during the period 1975 to 1979, provincial income levels
increased steadily each year (almost a 13% increase), although provincial incor-
poration levels declined dramatically (by almost 50%). Equally perplexing are
the changes in income and incorporations occurring in the period 1979 to 1988,
wherein provincial income increased by 26% and provincial incorporations
increased by 420%. These data do not support the association between income
and incorporations, and furnish strong evidence that price or quality factors
endogenous to the corporate law regimes are at least partially implicated as a
causal force in incorporation levels.

65For instance, data from Table 3 show that the income share of British Columbia, Alberta,
Ontario, and Quebec (the provinces with the most dramatic shifts in incorporation share identified
above), rarely differed by more than .75 of one percentage point from year to year. For the four
provinces, there were only five occasions where the change in provincial income from one year
to the next exceeded .75 percentage points. In contrast, the incorporation share of the provinces
varied much more frequently and to a greater extent. Over the fourteen year period documented
in Table 3, there were close to 30 occasions in which the year to year change in incorporation share
exceeded 1.5 percentage points.
66The provinces in which income declined were: British Columbia, Alberta, Manitoba, Ontario,
and Quebec. With the exception of Ontario, incorporation levels in all of the other provinces reg-
istered a decline.

67The regression study was undertaken by Professor Robert Tibshirani of the Department of Pre-

ventative Medicine and Biostatistics, University of Toronto.

McGILL LAW JOURNAL

[Vol. 36

Table 4

PERCENTAGE CHANGE (FROM PREVIOUS YEAR) IN LEVELS OF PROVINCIAL

GROSS DOMESTIC PRODUCT AND TOTAL INCORPORATIONS

FOR FISCAL YEARSt 1976 TO 1988*

(GDP Change/incorporation Change (in brackels))

1977
2.6
(6.9)
1.1
(12.3)
.04
(-1.5)
.8
(3.5)
2.1
(12.4)
1.9
(-18.8)
4.2
(2.7)
.8
(10)
.3

B.C.

1976
7.5
(20.3)
1.36
(29.6)
SASK. 5.6

ALT.

09T.

CUE.

MAN.

(10.2)
4.8
(34.0)
4.9
(11.2)
5.4
(3.3)
H.S. 2.2
(-.8)
r|.B. 4.8
(22)
NFLO. 5.8
(1.5)
5.2
(-1.4)
4.8

P.E.I.

(12.9)
7.4
(18.0)
1.9
(3.9)
3.2
SFiscal year Is April 1 to March 31′. inclusive.
* Data derived from data presented

(10.2)
1.6
(6.5)
1.8

in Tables 2 and 3

CAN.

1979
5.2
(15.8)
9.1
(13.0)
– .5
(8.5)
1.1
(16.3)
1.7
(23.6)
2.5
(-31.8)
1.6
(-3.0)

1978
4.7
(15.2)
– .2
(25.4)

(36.6)
1.1
(14.6)
2.5
(.4)
2.6
(-12.6)
3.5
(19.3)
4.2
(4.8)
2.8
(7.0)
6.8
(12.2)
2.3

1980
5.9
(21.4)
-3.2
(10.5)
1.2
(2.8)
.01
(-20.3)
5.9
(-2.8)

(39.6)
1.5
(1.)
-1.5
(16.4)
-2.8
(16.4)
-1.7
(-12.8)

1981

.5
(9.3)
2.7
(-3.4)
4.2
(-5.1)
2.6
(14.7)
2.1
(1.9)
.6

(21.7)

.1
(-5.6)
1.3
(-12.6)
1.0
(-15.5)
1.5
(-2.3)
1.6

1982
-6.0
(-48.8)
-3.1
(-50.9)
2.0
(-9.7)
-2.3
(-1.2)
-3.1
(5.0)
-9.5
(8.6)
.5

(-7.8)

(25.8)
2.8
(-9.1)
2.6
(-34.6)
-35

1983
4.6
(16.3)
– .01
(15.1)
2.4
(1.3)
3.8
(-3.5)
7.7
(2.5)
5.3
(19.4)
6.6
(20.)
8.6
(8.9)
4.1
(6.5)
3A
(42.4)
5.3

1984
3.6
(1.1)
4.8
(29.3)

.9
(1.0)
8.2
(-5.7)
8.2
(11.1)
4.9
(3.9)
5.9
(5.8)
3.4
(-26.4)
2.7
(9.8)
4.7
(-9.8)
59

1985
3.6
(15.0)
3.1
(.4)
2.7
(2.6)
5.8
(13.8)
5.2
(18.0)
3.5
(58.0)
6.9
(3.5)
3.1
(-.5)
3.3
(-2.4)

3.5
(35.5)
43

1986
1.6
(7.5)
-3.0
(9.1)
6.6
(14.1)
3.9
(6.4)
5.1
(14.9)
2.7
(27.5)
2.2
(11.4)
3.8
(-7.9)

.5
(5.2)
5.2
(-48)
2.9

1987
6.2
(7.2)
5.4
(-4.1)
-1.4
(-12.5)
1.4
(8.0)
5.9
(17.9)
6.9
(12.3)
2.8
(2.8)
4.8
(12.4)
6.7
(22)
3.5
(.6)
5.5

1989
5.7
(4.5)
5.9
(-10.9)
-47
(-2.5)
-8.0
(-24.5)
4.8
(7.4)
4.4
(.3)
2.4
(-5 6)
4.7
(3.9)
2.9
(19.5)
5.6
(342)
44

Endogenous Factors Driving Incorporation Trends

Confirnmation for the role of endogenous characteristics of the corporate
law regime in driving incorporation levels is obtained by exploring further the
case of Quebec. One of the most striking features of Table 2 is the fact that the
number of annual incorporations registered by Quebec and the federal govern-
ment appear to closely complement each other. Although, in the period 1976 to
1979, the number of incorporations in Quebec declined by 5,030, the number
of federal government incorporations leaped by 13,947. Thereafter, in the period
1979 to 1988, the number of Quebec incorporations increased by 19,803, while
the number of federal incorporations declined by 7,566.68 Are these changes
linked?

68Although the magnitude of the changes observed in Quebec and the federal government is not
perfectly complementary, given the role of macro-economic factors in increasing the aggregate
stock of incorporations, the dynamic that emerges is not zero-sum, and, consequently, the number
of incorporations in “favoured” jurisdictions should eclipse the losses sustained in “less favoured”
jurisdictions.

1991]

SHOULD PROVINCES COMPETE?

Comparison of Annual Changes in GDP and Incorporation for Four Provinces

Graph 2

Graph 2(a) – British Columbia

40-

20-

-20.

-40.i

-6

76 77 78 79 80 81 82 83 84 85 86 87 88

Year

4o~ –

Graph 2(b) – Alberta

-20-

-40-

-60.

76 77 8 79 80 81 82 83 84 85 86 87 88

Year

* % change in GDP
[ % change incorp

REVUE DE DRO1T DE McGILL

[Vol. 36

* % change in GDP
[ % change incorp

Graph 2(d) – Quebec

-20″

-AnI

76 77 78 79 80 81 82 83 84 85 86 87 88

1991]

SHOULD PROVINCES COMPETE?

In Table 5, data supplied by the Corporations Branch of Consumer and
Corporate Affairs provides strong evidence for the existence of such a linkage.
These data identify the location (by province) of federally incorporated compa-
nies formed in the period 1980 to 1987.69 Commencing in 1980, 14,964 out of
18,444 incorporations –
originated
from Quebec. In contrast, only 2,340 incorporations, or 12.7% of the total, were
derived from Ontario. By 1987, the number of incorporations originating from
Quebec contracted by 6,082 (or 40.6% from the 1980 level), yielding a 71.8%
share of total federal incorporations. 0

81.1% of total federal incorporations –

690ne interesting feature of the data on federal incorporations is that the trends in initial incor-
porations do not parallel the trends in reincorporations. This observation is significant because of
the tendency by American commentators to equate reincorporation trends with initial incorporation
trends. I reviewed data derived from the federal government on the jurisdiction of origination of
companies continuing (reincorporating) under the CBCA. These data show that the distribution of
companies, by province, that continue under the CBCA differs from the distribution of companies,
by province, that incorporate under the CBCA. For instance, 54.2% of the 299 companies that con-
tinued under the CBCA in 1986 were located in Ontario, while only 18.4% of the companies incor-
porating under the CBCA in that same year were from Ontario. An even greater disparity is exhib-
ited in Quebec’s case: in 1986, 72% of incorporating CBCA companies originated from Quebec,
while only 0.3% of continuing companies originated from that province. This disparity is puzzling
– why should the patterns of reincorporation differ so dramatically from incorporation? One
implication that follows from this disparity is that it may be appropriate to consider the charter mar-
ket in Canada as segmented into two constitutent markets: the incorporation and reincorporation
markets. In these terms, the demand side factors that fuel the incorporation market may be quite
different. At incorporation, shareholders may focus on attributes such as price, stability, and char-
tering ease. On reincorporation, more specific attention may be paid to nuances in the content of
specific statutory sections of a jurisdiction’s corporate law. This is because shareholders may rein-
corporate only when certain transactions are contemplated that increase the risk of shareholder lit-
igation. Indeed, this search for a legal environment conducive to certain transactions was found by
Romano, supra, note 19, to be an important motive for reincorporation to Delaware.
70Parenthetically, it should be noted that overall federal incorporations declined by 6,079 or 33%

in the same period.

McGILL LAW JOURNAL

[Vol. 36

Table 5

FEDERAL INCORPORATIONS – BREAKDOWN BY JUDRISDICTION

OF INCORPORATION*

(Total number of incorporations/percentage of total incorporations (in brackets))

(CALENDAR YEAR)

NFLD.

1980

1981

QUEBEC ON1f.
14,964
(81.3)
13,950
(75.8)
11.108
(74.3)
15,262
(75.5)
14.176
(75.2)
13,222
(75.4)
7,970
(71.9)
8,882
(71.8)
Source: Corporations Branch. Consumer and Corporate Affairs, Canada.

2,340
(12.7)
2.977
(16.2)
2,796
(18.7)
3,546
(17.5)
3,155
(16.7)
2.827
(16.1)
2,042
(18.4)
2,269
(18.4)

N.S.
116
(.6)
160
(.9)
149
(1.0)
204
(1.0)
228
(1.2)
160
(.9)
88
(.8)
81
(.6)

PE.I.
18
(.1)
24
(.13)
33
(.2)
57
(.3)
33
(.2)
39
(.2)
19
(.2)
23
(.2)

N.B.
42
(.2)
57
(.3)
59
(.4)
43
(.2)
65
(3)
53
(.3)
35
(.3)
37
(.3)

12
(.06)
20
(.1)
16
(.1)
32
(.2)
33
(.2)
22
(.1)
16
(.1)
10
(.1)

1982

1983

1984

1985

198

1987

MAN.
216
(1.2)
319
(1.7)
136
(.9)
184
(.9)
170
(.9)
161
(.9)
117
(1.0)
128
(1.0)

SASK. ALTA.

47
(.3)
57
(.3)
37
(.2)
81
(.4)
63
(.3)
53
(.3)
64
(.6)
65
(.5)

505
(2.7)
621
(3.4)
451
(3.0)
577
(2.9)
620
(3.3)
717
(4.1)
483
(4.3)
570
(4.6)

B.C.
184
(1.0)
219
(1.2)
168
(1.1)
225
(1.1)
298
(1.6)
311
(1.8)
255
(2.3)
300
(2.4)

TOTAL
18,444

18.404

14,953

20211

18.841

17,545

11.086

12,365

In conjunction, the trends observed in the Quebec case can be interpreted
to support the simple but powerful claim that shareholders residing in Quebec
did not mechanistically incorporate in Quebec whenever they wished to estab-
lish a limited company.7′ And, since shifts in the pattern of incorporation deci-
sions made by shareholders residing in a given jurisdiction are not easily corre-
lated with macro-economic factors, the movement of Quebec shareholders out
of and into Quebec must reflect the innate price and quality characteristics of
Quebec’s corporate law regime. In these terms, the corporate law regimes of
Quebec and the federal government can be viewed as relatively close substitutes
for one another;72 as one jurisdiction’s corporate law product became relatively
more attractive, shareholders responded by increasing their consumption of that
product at the expense of the other.

71The two most important observations in this regard are: (i) the fact that contractions in the
absolute number of Quebec incorporations coincided almost perfectly with expansion in the abso-
lute number of federal government incorporations, and vice versa; and (ii) for the period in which
data are available, federal government incorporations were overwhelmingly dominated by Quebec
and that, concurrent with the decrease in federal government incorporations and increase in Quebec
incorporations, there was a corresponding decrease in the proportion of federal government incor-
porations originating from Quebec.
72In economic terms, the cross-elasticity of demand for the Quebec and federal government cor-

porate law regimes was relatively high.

1991]

SHOULD PROVINCES COMPETE?

What accounts for the shifting attractiveness of each jurisdiction’s corpo-
rate law product? Following Romano, it is clear that the factors considered by
shareholders in making incorporation decisions extend well beyond the content
of a given jurisdiction’s legislation.73 By studying the reincorporation patterns
of American corporations, Romano found that Delaware’s continued preemi-
nence in the American corporate law market was a function of: the legislative
responsiveness of the state, the development of a large and stable body of judi-
cial precedent, the expertise of the Delaware judiciary in corporate law matters,
the familiarity of American corporate lawyers with the statutory regime extant
in Delaware, and the establishment of formalized consultative apparatus
between the state legislature and the corporate community. The benefits realized
by reincorporation were sufficiently high as to overshadow the costs entailed by
incorporation arising from shareholder notice and approval obligations. 4

In explaining the shifting preference of Quebec shareholders in the choice
between Quebec and the federal government incorporation, both narrow legal
and broad institutional factors are implicated. In terms of the former, the fact
that, until the amendments of 1979 and 1980, the Quebec Companies Act75
lacked many of the central ingredients of the CBCA, provides a reasonably per-
suasive explanation for the declining share of the total incorporation market
enjoyed by the province of Quebec in the period 1975 to 1979 (from 16.3% to
4.7%). However, commencing in 1980, Quebec’s market share steadily began
to increase, so that by 1988, it came to enjoy a 17.8% market share. Although
the gradual growth of Quebec’s market share can be construed as undermining
the significance of the 1979 and 1980 statutory amendments (because there was
not a dramatic increase in incorporation share following the adoption of these
amendments), it is arguable that the gradual increase in market share is consis-
tent with the process by which awareness and understanding of the CBCA-
inspired amendments was transmitted. That is, as shareholders and their legal
advisers became cognizant of the improvements effected by the adoption of the
legislative amendments, shareholders began, once again, to favour Quebec as an
incorporation jurisdiction.

What extra-legal or broad institutional factors accounted for the shifting
preference for Quebec and federal government incorporation by Quebec share-
holders? One possibility is that the election of the Parti Qu6b6cois on November
15, 1976, may have precipitated the movement of shareholders to federal gov-
ernment jurisdiction because of the party’s commitment to national indepen-
dence and socialist objectives. By incorporating under the federal government,

73See Romano, supra, note 19 at 273-79.
74Romano reports that the costs of reincorporation (e.g., legal fees, proxy statement preparation
fees, fees related to shareholder meetings and filing fees) may, in some cases, exceed $1 million.
On average, Romano found that these costs were $40,000 (ibid. at 246).

75R.S.Q. 1977, c. C-38.

REVUE DE DROIT DE McGILL

[Vol. 36

Quebec shareholders may have sought to immunize themselves from the insta-
bility that accompanies dramatic political and economic transitions. When, in
December, 1985, the Liberal government was elected to the National Assembly,
the value of federal incorporation as an economic and political sanctuary was
attenuated, and, consequently, Quebec shareholders were less motivated to
obtain federal incorporation.76 This explanation is consistent with the data.

Another possible explanation for the shifting preferences of Quebec share-
holders resides in the costs of incorporation. Although the costs of incorporating
a company are not nearly as large as the costs of reincorporating,’
filing fees
and corporate-based taxes can influence the incorporation decision. In Table 6,
I have assembled data on the structure and magnitude of incorporation filing
fees for each of the provinces and the federal government for the period 1975
to 1987.78 These data show that the method for calculating incorporation fees
has changed dramatically during the period. Originally, with the exception of
British Columbia and the federal government, incorporation fees were calcu-
lated in relation to the size of authorized capital, but by the end of the decade,
save for Quebec, all Canadian jurisdictions used flat-based fees. Table 6 reveals
that, by 1987, the fees charged by the provinces converged into a fairly narrow
range: from $100 to $220. 7′ However, the federal government’s incorporation
fee was considerably higher: $500. Interestingly, the federal government’s adop-
tion of a higher fee appears to have accelerated the trend of Quebec sharehold-
ers to prefer Quebec rather than federal government incorporation. The federal
fee increase was adopted on June 1, 1985 and, almost immediately, incorpora-
tion numbers dropped precipitously: from 19,297 in 1984 to 11,652 in 1986. It

760n the PQ election, see Maclean’s (15 November 1976) 20. On the elements of socialism in
the PQ platform, see “Separatism May Scare Businessmen, But It’s the Socialism that Terrifies”
Maclean’s (29 November 1976) 71; P. Valli~res, “The Left and the P.Q.” Quebec-Presse, 3:51 (19
December 1971); P. Valli~res, “The FLQ and the Lessons of the October Crisis” Can, Forum (Jan./
Feb. 1972) 12, originally published as ‘L’urgence de choisir’ Pourquoi le FLQ n’a plus de raison
d’Etre aujourd’hui” Le Devoir [de Montrial] (13 December 1971) 5 & (14 December 1971) 5.
77The costs of incorporation are considerably less than the costs of reincorporation. Because ini-
tial incorporations seldom require the assent of more than a handful of individuals, the costs of
shareholder notice and approval that are entailed by reincorporation can be avoided. Not surpris-
ingly, these costs can be quite large for reincorporation of publicly-held corporations.

7SThe corporate tax regime in Canada appears to render jurisdiction of incorporation irrelevant.
That is, corporate taxes are levied on the basis of the locus of economic activity (measured in terms
of assets and income generated in a given province). Corporations must pay tax on the income
earned in the province(s) where they had a permanent establishment. Where a corporation is incor-
porated in one province but carries on business in others, little if any income would be attributed
to the head office and no tax would be payable. Therefore, changes in income or capital tax rates
are unlikely to influence the choice of incorporation jurisdiction. The location in which a company
incorporates does not entail any particular tax consequence: Income Tax Regulations, C.R.C., 1978,
c. 945, ss. 400(2), 402.

79This range excludes Quebec because its fees were calculated on a graduated, rather than flat

based, scale.

19911

SHOULD PROVINCES COMPETE?

is, of course, interesting to speculate on the forces motivating the federal gov-
ernment to adopt a fee increase which, in retrospect, had the effect of undermin-
ing severely its market position. One particularly intriguing explanation is that
the federal government acquiesced to the demands of Quebec politicians who
were concerned with the inability of Quebec to regain its market share by way
of legislative amendment alone.80 if accurate, the explanation underscores the
limited capacity of legislative innovation alone to capture market share. It 41so
highlights the stake that politicians have in securing a sizeable share of the
incorporation market.

Table 6

Incorporation Fees (for provinces and the federal government)

1979
$200 f
$125 g
$58 f

$75 g
($75,000)
$135 g
($40,000)
$200 f

1981
$200 f
$175 f
$58 If

1983
$200 f
$175 f
$200 f

1985
$500 f
$175 f
$200 f

$75 f

$100 f

1987
$500 f
$175 f
$200 f

$100 f

$200 g
($40,000)
$200 f

$200 f

$220 f

$125 g
($40,000)
$125 g
($40,000)
$50 g
($40,000)
$10 g
($40,000)
$50 g
($5,000)

$200 g
($40,000)
$125 g
($40,000)
$100 g
($5,000)
$100 0
($5,000)
$100 g
($5,000)

$200 g
($40,000)
$125 g
($40,000)
$100 g
($5,000)
$200 f

$100 g
($5,000)

$200 f
($40,000)
$200 f

$300 g
($40,000)
$200 f

$200 f

$150 f

1975

Canada $200 f
$125 f
B.C.
Alta.

$40 g
($20,000)
$45 g
($40,000)

$50 g
($5,000)

Sask.

Man.

Ont.

Que.

H.S.

N.B.

Nild.

P.E.I.

1977
$200 f
$125 f
$55 g
($20,000)
$75 g
($75,000)
$135 g
($40,000)
$125 g
($40,000)
$100 g
($40,000)
$125 0
($5,000)
$50 g
($5,000)
$10 g
($40,000)
$50 g
($5,000)

f – flat based fee

g = graduated scale fee vhrere the fee level depends on amount of authorized capital.

The ceiling on authorized capital for the

minimum fee is noted in brackets.

Source: Provincial data derived from: Provincband MunicpaIRrnancm (Biannual

publication

of the Canadian Tax Foundation). Federal data derived from:

Corporations

Branch, Department of Consumer and Corporate Affairs.

Is Legislative Product Enough? The Structure of the Canadian
Corporate Law Regime in Relation to the United States

In combination, the examination of incorporation trends and legal and
extra-legal factors affecting the corporate law regimes of the federal govern-
ment and Quebec is supportive of the suggested role of competitive factors in
shaping Canadian corporate law product, especially in relation to the triumph of

80Telephone conversation with John Howard, former Deputy Minister, Department of Consumer

and Corporate Affairs.

McGILL LAW JOURNAL

[Vol. 36

the CBCA. Yet, despite evidence of shareholder mobility and legislative respon-
siveness to market share targets, it is clear that competition in a Canadian setting
has not nurtured the development of the institutions that have played a central
role in the American corporate law regime. For instance, there is no Canadian
jurisdiction that possesses the specialized court system, the highly developed
body of corporate law precedent, and the formalized consultative mechanisms
that are the hallmarks of the Delaware regime. To some extent, the failure of
Canadian governments to adopt these institutions could be reflective of a rejec-
tion of the intellectual case for the competitive model in the corporate law area
that is rooted in traditional concerns surrounding managerial opportunism. Per-
haps, at another level, the failure of these institutions to flourish in a Canadian
setting is reflective of an institutional environment that is less hospitable to the
operation of competitive forces. I will explore each of these possibilities in turn.

1. The Shareholder Exploitation Hypothesis and Competitive

Corporate Law Provision

It can be posited that one of the major reasons that an elaborate corporate
law market has not developed in Canada is the discomfort that Canadian com-
mentators have had with inter-governmental competition in the corporate law
area because of its perceived incompatibility with the goal of shareholder wel-
fare maximization.”‘ The hostility of Canadian policy-makers to competition in
the corporate law field is reminiscent of the position held by certain American
legal academics in the debate over the role of Delaware in shaping the American
corporate law regime. 2 These scholars, of whom William Cary is the most
prominent, are critical of the effect that Delaware has had on the content of
American corporate laws. Delaware, according to Cary, is the source of a
nation-wide “race to laxity” 3 in corporate law norms. This erosion in norms is
the result of a process by which states devoted to the protection of shareholder
wealth through strengthened fiduciary duties found themselves unable to resist

S’In numerous interviews I had with both federal and provincial corporate law administrators,
the claim that inter-governmental competition would result in a “race to the bottom” was made.
82William Cary’s criticism of Delaware is found in a seminal article, “Federalism and Corporate
Law: Reflections upon Delaware” (1974) 83 Yale L.J. 663. Other American scholars critical of the
American charter market and, in particular, the role of Delaware, include R. Nader, M. Green, &
J. Seligman, Taming the Giant Corporation (New York: Norton, 1976); R.W. Jennings, “Federal-
ization of Corporation Law: Part Way or All the Way” (1976) 31 Bus. Law 991; S.A. Kaplan,
“Fiduciary Responsibility in the Management of the Corporation” (1976) 31 Bus. Law 883; G.G.
Young, “Federal Corporate Law, Federalism, and the Federal Courts” (1977) 41:3 Law & Con-
temp. Probs. 146.
83This evocative metaphor traces its lineage to Justice Brandeis’ judgment in Liggett Co. v. Lee
288 U.S. 517 (1933) at 558-59, where he stated that “Companies were early formed to provide
charters for corporations in states where the cost was lowest and the laws least restrictive…. The
race was not one of diligence but of laxity.”

1991]

SHOULD PROVINCES COMPETE?

the demands of their corporate residents for more lenient legislation.’ This vul-
nerability to corporate pressure emanated from the threat of the dramatic losses
in tax revenue that were anticipated to result from shareholder migration. 5 Fear-
ing the loss of rents, both direct (incorporation and franchise fees)”6 and indirect
(legal fees, corporate service fees), states, of which Delaware was the most
prominent, responded to threatened migration by developing corporate codes
that facilitated the diversion of wealth from shareholders to managers. 7 Of
course, the calculus driving one state legislature to increase the attractiveness of
its corporate law regime by passing legislation inimical to shareholders could
just as easily apply to all states that fancied revenue from chartering activity.8

841n these terms, the production of stringent fiduciary duties suffers from many of the defects
that beset collective action in other contexts. Although, in Cary’s world, all states would prefer to
promulgate rigorous fiduciary duties, the fact that there are gains to states from defecting on com-
mitments made to other states makes it difficult to enforce high fiduciary duties. As such, the pro-
duction of stringent fiduciary duties resembles the classic prisoner’s dilemma problem. For a def-
inition and discussion of the prisoner’s dilemma, see Scherer, supra, note 14 at 162-64; T.C.
Schelling, The Strategy of Conflict (Cambridge: Harvard University Press, 1960), c. 5; R.D. Luce
& H. Raiffa, Games and Decisions: Introduction and Critical Survey (New York: Wiley, 1957) at
94-102.

85According to Cary, so potent was the corrupting influence of corporate franchise revenue that,
in Delaware’s case, its allure even managed to cast a malignant shadow across the shoals of the
Delaware judiciary:

In general, the judicial decisions [of the Delaware judiciary] can best be reconciled on
the basis of desire to foster incorporation in Delaware. It is not clear, however, that the
revenue thermometer should replace the chancellor’s foot (supra, note 82 at 670).

86Romano, supra, note 19 at 240-42 found that 15.8% of Delaware’s fiscal revenue was derived

from corporate franchise fees.

87J.R. Macey & G.P. Miller, “Toward an Interest-Group Theory of Delaware Corporate Law”
(1987) 65 Texas L. Rev. 469 develop an analysis of Delaware corporate law that is predicated on
the self-serving role of special interest groups within Delaware. These groups, of which, not sur-
prisingly, the legal profession is the most important, seek to increase the magnitude of the indirect
benefits accruing to themselves, at the expense of those direct benefits accruing to the state at large.
Ultimately, according to the authors, the corporate law regime that is produced in Delaware reflects
tradeoffs between the various interest groups endeavouring to influence the production of corporate
law. Because the legal profession has a stake in increasing the complexity, and hence undermining
the certainty of Delaware law, the authors explicitly recognize the potential for outcomes destruc-
tive of shareholder wealth to be generated. The prospect of such outcomes is increased when man-
agers share the preferences for such legislation.
88Interestingly, Cary did not confine his criticism to the Delaware legislature. He also argued that
the Delaware judiciary were willing accomplices in the effort to increase the state’s share of the
charter market. According to Cary, the Delaware courts have “contributed to shrinking the concept
of fiduciary responsibility and fairness, and indeed have followed the lead of the Delaware legis-
lature in watering down shareholders’ rights” (supra, note 82 at 696). Cary argued that the Del-
aware judiciary were amenable to the erosion of shareholder rights because they shared common
views and goals with the Wilmington Bar from which they are traditionally drawn. In contrast,
Cary found federal judges to be far more sensitive to shareholder rights.

The role of the Delaware judiciary has once again become a matter of debate. Following a series

of cases decided by the Delaware Chancery Court which had the effect of limiting the circumstan- –
ces in which the management of firms subject to a takeover could engage in defensive tactics, the

REVUE DE DRO1T DE McGILL

[Vol. 36

To safeguard or, indeed, increase one’s share of the charter market, state legis-
latures were required to increase the permissiveness of their corporate law
regime. The predictable effect of this situation was the destruction or unravel-
ling of a responsible national corporate law regime as states competed in offer-
ing greater laxity in order to attract managerial patronage. In the tradition of
other centralists, Cary’s antidote for this destructive competition was simple:
vest exclusive power over the chartering and regulation of corporations in the
national government.89

Despite the considerable surface appeal of Cary’s criticism, his argument
against the role of Delaware did not go unchallenged. In a thoughtful and cre-
ative argument, Ralph Winter” invoked economic insights to support his claim
that competition among states in their corporate law product would work to
ensure the production of laws that were distinguished not merely by their inno-
vative and responsive nature, but also by their capacity to enhance shareholder
welfare.9 Winter’s faith in the capacity of state competition to produce optimal
laws was based on a fundamentally different vision of the severity of the con-
flict between shareholder expectations and managerial performance. Whereas
Cary’s criticism is tethered to a conception of the modem corporate law regime

Delaware Supreme Court in Paramount Communications Inc. v. Time Inc. Fed. Sec. L. Rep. (CCH)
94,938 (Del. Sup. Ct. Feb. 26, 1990) aff’g 94,514 (Del. Ch. July 14, 1989) cut back considerably
the effect of judicial constraints on defensive activity. A number of commentators have argued that
the change in direction of the Delaware Supreme Court was motivated by a memo circulated by
prominent takeover defense attorney Martin Lipton to a number of the largest Delaware corpora-
tions. The memo suggested that, in view of the growing unwillingness of Delaware courts to accord
sufficient deference to managerial actions in response to a takover, clients should reconsider rein-
corporation in states like Pennsylvania, Ohio, and New Jersey which were seen to have greater
sympathy for target management. See L.P. Cohen, “Lipton Tells Clients That Delaware May Not
Be a Place to Incorporate” Wall Street Journal (11 November 1988) B7; T. Smart, “For Managers,
Delaware Isn’t the Haven It Used to Be” Business Week (19 December 1988) 33.

S9The claim that exclusive federal government control over incorporation activity will produce
legislation that overcomes many of the defects of state legislation is contentious. R. Romano (“The
Future of Hostile Takeovers: Legislation and Public Opinion” (1988) 57 U. Cincinnati L. Rev. 457)
argues that, in the case of anti-takeover legislation, there is no reason to expect that regulation at
the federal level will differ from regulation produced at the state level. This is because of the asym-
metrical bargaining power of affected interest groups at the federal level. Romano suspects that
managers and unions are better equipped than shareholders to organize themselves at the federal
level, thereby enabling them to wrest more favourable concessions from Congress.
90See R.K. Winter, Jr., “State Law, Shareholder Protection, and the Theory of the Corporation”
91As Fischel states, “Delaware’s preeminence, in short, is in all probability attributable to suc-
cess in a ‘climb to the top’ rather than to victory in a ‘race to the bottom’
(D.R. Fischel, “The
‘Race to the Bottom’ Revisited: Reflections on Recent Developments in Delaware’s Corporation
Law” (1982) 76 Nw. U.L. Rev. 913 at 920).

(1977) 6 J. Leg. Stud. 251.

1991]

SHOULD PROVINCES COMPETE?

that is, in the tradition of Berle and Means,92 predicated on endemic and uncon-
trollable managerial opportunism, Winter’s response is based on the supposition
that the gale of various market forces –
the product, capital, labour and take-
over markets93 –
operates to constrain considerably the danger of unaccount-
able managerial action. Absent the problem of unconstrained managerial con-
duct (the externality upon which Cary’s rejection of decentralized competition
is based), the vitality of decentralized corporate law production is redeemed. For
if, as Winter argues, the scope for managerial diversion is in general much more
limited than Cary envisages, there is no reason to expect that shareholders or
their market proxies will be incapable of identifying and penalizing opportun-
istic reincorporations by managers.

Distilled to its bare essentials, the debate over Delaware and the role of
decentralized corporate law provision turns on the impact of reincorporation on
shareholder wealth. Seen in this light, resolution of the debate appears to be
amenable to resolution through empirical investigation. In other words, by mak-
ing the plausible and widely accepted assumption that shareholder welfare is
embodied in share prices and, further, that market prices are the best estimation
of the intrinsic value of a company’s share value,94 financial economists are able

92See A.A. Berle & G.C. Means, The Modern Corporation and Private Property (New York:
MacMillan, 1932). Bele and Means’ thesis is discussed in “Corporations and Private Property: A
Conference Sponsored by the Hoover Institution” (1983) 26 J.L. Econ. 235.

93J.S. Ziegel et al., Cases and Materials on Partnerships and Canadian Business Corporations,

2d ed., vol. 1 (Toronto: Carswell, 1989) at 372-76. The authors define the product market as

the market in which the corporation’s goods are bought and sold. The success or failure
of a company’s goods on the product market is governed by the price, quality, and ser-
vice characteristics of the corporation’s products (supra at 374).

The capital market

is comprised of numerous bond and equity markets that are located in countries
throughout the world …. Capital markets can … play a role in detecting and signalling
unanticipated opportunism by managers when it occurs, thereby allowing shareholders
to discipline such conduct via their voting rights (supra at 373).

The labour market, or managerial market “is the market where the services of corporate managers
are traded. It is the threat of having to compete in the managerial market that encourages managers
to act in their principals’ best interests” (supra at 375). The takeover market, also known as the
market for corporate control, “operates by transferring control of mismanaged corporations (i.e.,
corporations beset by high levels of agency costs) to owners more willing or able to discipline self-
serving managers” (supra at 376).

94This is known in the parlance of corporate finance as the Efficient Capital Markets Hypothesis
(ECMH), for which there is a vast literature. Good discussions of ECMH can be found in R.J. Gil-
son & R.H. Kraakman, “The Mechanisms of Market Efficiency” (1984) 70 Virginia L. Rev. 549;
J.N. Gordon & L.A. Kornhauser, “Efficient Markets, Costly Information, and Securities Research”
(1985) 60 New York U.L. Rev. 761; C.P. Saari, “The Efficient Capital Market Hypothesis, Eco-
nomic Theory and the Regulation of the Securities Industry” (1976-77) 29 Stan. L. Rev. 1031; R.J.
Shiller, “Fashions, Fads and Bubbles in Financial Markets” in J.C. Coffee, Jr., L. Lowenstein &
S. Rose-Ackerman, eds., Knights, Raiders and Targets: The Impact of the Hostile Takeover (New
York: Oxford University Press, 1988) 56; Posner & Scott, supra, note 19, c. 7.

McGILL LAW JOURNAL

[Vol. 36

to posit what the level of share prices would have been in the absence of some
major transaction, and then to compare this hypothetical price to the actual price
of the share on a given day. If actual share prices are in excess of predicted
share prices over a given period, then the transaction can be deemed to be one
that augments shareholder wealth. Conversely, if actual share prices are below
predicted values, then the transaction can be viewed as jeopardizing shareholder
welfare.’ A strong a priori case for the suitability of invoking these techniques
to evaluate the efficacy of the charter market reflects the ease in identifying
accurate announcement dates for proposed reincorporations and the presumed
capacity of capital markets to accurately assess the impact of reincorporations
on firm wealth.96

Dodd and Leftwich, in one of the earliest econometric studies of reincor-
poration, examined the share performance of 140 New York Stock Exchange
firms that changed domicile jurisdiction in the period from 1927 to 1977, and
found that shareholders of reincorporating companies earned persistently abnor-
mal returns of an average of 30.25% in the twenty five months prior to, and
including, the month of the switch.’ Interestingly, the researchers found that
over 80% of the abnormal performance over the two year period could be traced
to one price observation of each firm. Dodd and Leftwich construed this evi-
dence as being “consistent with the hypothesis that the decision to reincorporate
is motivated by the desire to minimize the costs of the new set of activities.””8
Romano also investigated the share performance of reincorporating firms,
but refined Dodd and Leftwich’s methodology by sorting firms by reincorpora-
tion motive. She found that the abnormal returns accruing to shareholders varied
with reincorporation motive. Romano examined the performance of share prices
99 days before and after a “reincorporation event.”99 She found that cumulative
average residuals ranged from 0.6% for tax-motivated reincorporations to 8.6%
for firms engaging in mergers and acquisitions activity, with an overall average
for all firms of 4.1%.” Significantly, Romano determined that cumulative aver-

95This method, known as the Cumulative Abnormal Returns (CAR) technique, is discussed at
length in R.J. Gilson, The Law and Finance of Corporate Acquisitions (Mineola: Foundation Press,
1986) at 213-38.

9 Because information respecting the relative merits of myriad state legal regimes is easily gath-
ered and analyzed, the impact of migration (i.e., a decision to substitute one legal regime for
another) on firm wealth should not, ceteris paribus, be difficult to predict.

97See P. Dodd & R. Leftwich, “The Market for Corporate Charters: ‘Unhealthy Competition’

versus Federal Regulation” (1980) 53 J. Bus. 259.

98Ibid. at 281.
“Romano used the earliest of the following events as event dates: date of directors’ approval
of reincorporation, incorporation of a shell successor company, signing of merger agreement, proxy
mailing, the shareholders’ meeting, the effective date of reincorporation, or an article in the Wall
Street Journal (Romano, supra, note 19 at 268).

1Romano suggests that, in comparison to Dodd and Leftwich, her lower cumulative average
residuals may be attributed to temporal factors. Since the data were generated in different time
frames, global changes in the market trends may explain the disparity.

1991]

SHOULD PROVINCES COMPETE?

age residuals for shareholders in firms whose reincorporation was motivated by
the benefits of anti-takeover legislation amounted to 1.3%. These data, accord-
ing to Romano, were consistent with a transactions cost explanation for the role
of Delaware: because of the superior institutional attributes of Delaware’s cor-
porate law regime, the state was able to reduce the costs to migrating corpora-
tions of executing certain transactions and was also able to provide corporations
with greater litigation certainty.”

Yet despite the finding that reincorporations were, depending on underly-
ing motive, either positive or zero net present value decisions, Romano did not
construe her results as an unequivocal vindication of the Winter thesis. The
source of Romano’s ambivalence was the perplexing case of state anti-takeover
statutes. 2 That is, whereas there is no a priori reason to expect that reincorpo-
rations triggered by the forthcoming implementation of a mergers and acquisi-
tion program or the pursuit of favourable tax benefits should reduce shareholder
values, there is, in contrast, very considerable consensus in the mainstream law
and economics literature that providing judicial or legislative scope for defen-
sive measures in response to a takeover bid is deeply inimical to shareholder

“”1See text accompanying notes 73-74 supra on the extra-legal attributes of the Delaware

regime.

m02These statutes are designed to supplement the federal securities law regime that governs take-
overs (the “Williams Act,” 15 U.S.C. 78g, 781-78n, 78s (1976)). The “first generation” takeover
statutes adopted by the states were found, however, to encroach on the federal government’s secu-
rities law powers related to regulation of interstate commerce (Edgar v. MITE Corp. 457 U.S. 624
(1982)). In order to avoid being subject to attack on the basis of constitutional infirmities, the “sec-
ond generation” statutes regulated transactions on the basis of incorporation domicile, not mere
presence of investors as in the earlier legislation. Generally, these second generation statutes fall
into three distinct patterns. First, Control Share Acquisition laws: These statutory provisions
require a majority of disinterested shareholders to sanction the acquisition of control (defined on
the basis of some statutory threshold) by any person or group of associated persons. Second, Fair
Price laws: These laws require that any business combination between a firm and a shareholder
with some specified minimum amount of stock be subject to supermajority shareholder approval
(for instance, 80% of outstanding shares and 2/3 of the disinterested shareholders). There are a
series of exemptions that may operate to allow the combination to proceed without the vote (e.g.,
payment of a fair price, approval of disinterested board, etc.). And third, Redemption Rights laws:
These laws provide that upon some share acquisition event, e.g. acquisition of 30% of firm’s stock,
all remaining shareholders are entitled to an immediate cash payment for their shares equal to the
fair value of the stock. Recently, these statutes have become more complex, with provision being
made for target board responsibilities to non-shareholder constituencies (Indiana) disgorgement of
gains on disposition of stock after a failed control bid (Pennsylvania) and staggered boards (Mas-
sachusetts). In any event, all of these provisions have the clear effect of increasing the costs of
acquiring control, thereby increasing the ability of target management to subvert a takeover bid.
See F.H. Easterbrook & D.R. Fischel, “The Proper Role of a Target’s Management in Responding
to a Tender Offer” (1981) 94 Harv. L. Rev. 1161; G.A. Jarrell, J.A. Brickley & J.M. Netter, “The
Market for Corporate Control: The Empirical Evidence Since 1980” (1988) 2:1 J. Econ. Perspec-
tives 49. For a very recent popular account of the proliferation of state anti-takeover provisions,
see “Private Property! Keep Out! American States Raise Barriers Against Hostile Takeovers”
TIME (14 May 1990) 80.

REVUE DE DROIT DE McGILL

[Vol. 36

‘3 Accordingly, legislation aimed at increasing the ability of target man-
welfare.
agement to defend against a hostile takeover bid should, ceteris paribus, reduce
the value of a corporation’s equity. Viewed from this perspective, reincorpora-
tions motivated by a desire to take advantage of state anti-takeover legislation
should have generated negative, not positive, returns.

Obviously, one way of resolving the incompatibility of the empirical data
on reincorporations motivated by anti-takeover measures with the thesis predict-
ing gains from state competition is to modify or reject the “strong form””
assertions of the law and economics community respecting the desirability of
defensive tactics from a shareholder welfare perspective. 5 This line of argu-

1t0See Jarrell, Brickley & Netter, ibid.; R.J. Gilson, “A Structural Approach to Corporations: The
Case Against Defensive Tactics in Tender Offers” (1981) 33 Stan. L. Rev. 819; Gilson, “The Case
Against Shark Repellent Amendments: Structural Limitations on the Enabling Concept” (1982) 34
Stan. L. Rev. 775; M.C. Jensen & R.S. Ruback, “The Market for Corporate Control: The Scientific
Evidence” (1983) 11 J. Fin. Econ. 5; G.A. Jarrell & A.B. Poulsen, “Shark Repellents and Stock
Prices: The Effects of Antitakeover Amendments Since 1980” (1987) 19 J. Fin. Econ. 127; F.H.
Easterbrook & G.A. Jarrell, “Do Targets Gain from Defeating Tender Offers?” (1984) 59 New York
U. L. Rev. 277.

1″4For definitions of “weak form,” “semi-strong form” and “strong form” assertions of market
efficiency, see Gilson & Kraakman, supra, note 94 at 554-65. The terms were coined in Eugene
Fama’s seminal study, “Efficient Capital Markets: A Review of Theory and Empirical Work”
(1970) 25 J. Fin. 383. A market is weak-form efficient if it impounds all historical information;
it is semi-strong form efficient if it impounds historical and current publicly available information;
finally, it is strong-form efficient if it impounds not only historical and publicly available informa-
tion, but also information that is “available only to particular groups of privileged investors” (Gil-
son & Kraakman, supra at 555-56).

101t is interesting that the debate over the role of Delaware has recently focused so closely on
the perplexing case of anti-takeover inspired reincorporations. Underlying the debate is the
assumption that anti-takeover inspired reincorporations are qualitatively different in terms of their
potentially negative impact on shareholder wealth. My own view is that virtually all transaction-
inspired reincorporations pose opportunities for managers to divert wealth from shareholders.
Since many of the cost savings experienced by firms from a shift to Delaware involve the suppres-
sion of shareholder voice, it seems that the move to Delaware enlarges the domain for present or
future opportunistic behaviour by managers. The fact that reincorporations to Delaware were either
positive or zero net present value events is not inconsistent with this finding. By considering the
effects of reincorporation as the byproduct of two distinct decisions –
the decision to engage in
a certain transaction and the decision to reincorporate in Delaware –
it is possible to imagine that,
although aggregating to a positive or zero sum event, the direction (positive or negative) of each
of the constituent components may be different. If an event study based on a similar sample of
transactions as those studied by Romano could be undertaken, but confined to firms not undergoing
reincorporation, it would be interesting to compare the share price effects. Stated simply, the fact
that reincorporations are entangled with certain motivating transactions raises, at least, the prospect
that Delaware reincorporations may lower the level of benefits accruing to shareholders from cer-
tain transactions. Of course, even with this caveat in mind, the case for state competition can still
be made; for even if Delaware reincorporation may impair shareholder interests in some circum-
stances, it is possible that, but for reincorporation to that state, the transaction would not have been
consummated. Viewed from this perspective, reincorporation to Delaware may, in some circum-
stances, be a “bribe” that shareholders must pay in order for their managers to agree to engage in

1991]

SHOULD PROVINCES COMPETE?

ment has been pursued recently by a number of corporate theorists.” Romano
too has argued for the possibility that some forms of state anti-takeover legis-
lation, i.e., fair price provisions, can increase the welfare of shareholders
because they reduce the transactions costs of adopting provisions that would
have been adopted through shareholder voting in the absence of legislation. 7
These provisions are valued by shareholders because of their desirable distribu-
tional effects.’ Nevertheless, empirical support for her thesis is equivocal, and
Romano was unable to discount the possibility that reincorporations motivated
by the benefits of anti-takeover protections were designed to vindicate manage-
rial rather than shareholder welfare objectives. This finding has led Romano to
adopt a “middle ground” between Cary and Winter insofar as the welfare effects
of state competition are concerned. According to her, “such a view recognizes
that, on occasion, (state) competition may well produce laws that shareholders

positive net present value decisions. This argument is consistent with the work of those scholars
who argue that because of implicit forms of regulation, managers are systematically undercompen-
sated (M. Jensen & K. Murphy, “Performance Pay and Top Management Incentives” Harvard Busi-
ness School Working Paper No. 88-059, May 1988). Accordingly, other, less obvious mechanisms
for motivating managers to overcome their innate risk aversion, so that they seek out and execute
positive net present value decisions for the corporation, must be devised. In this respect, allowing
reincorporation to Delaware may be viewed as a form of gain sharing. (The virtues of gain sharing
are discussed by F.H. Easterbrook and D.R. Fischel in “Corporate Control Transactions” (1982)
91 Yale L.J. 698.)
1’0 See, for instance, R.A. Booth, “The Promise of State Takeover Statutes” (1988) 86 Mich. L.
Rev. 1635. Booth argues that state anti-takeover laws can limit the scope for coercive tactics that
exists under federal legislation. An alternative analysis has been advanced by Macey and Miller,
supra, note 87. Invoking the insights of public choice theory, they argue that most outcomes pro-
duced through state provision of corporate law are conducive to shareholder welfare maximization,
but allow for some outcomes, e.g., anti-takeover legislation, to be generated which are corrosive
of shareholder welfare. See also E. Berkovitch & N. Khanna, “How Target Shareholders Benefit
from Value-Reducing Defensive Strategies in Takeovers” (1990) 45 J. Fin. 137.

107See R. Romano, “The State Competition Debate in Corporate Law” (1987) 8 Cardozo L. Rev.
709; “The Political Economy of Takeover Statutes” (1987) 73 Virg. L. Rev. 111; and “The Future
of Hostile Takeovers: Legislation and Public Opinion,” supra, note 89. Romano’s view is consist-
ent with the vision of corporate law as standard form contract that has been espoused by a number
of law and economics scholars. See, for instance, the papers collected in “Contractual Freedom in
Corporate Law” (1989) 89 Columbia L. Rev. 1395. For a critical assessment of this framework,
see V. Brudeny, “Corporate Governance, Agency Costs, and the Rhetoric of Contract” (1985) 85
Columbia L. Rev. 1403.

‘0SHer argument is that fair price provisions can ensure that the gains from a control transaction
do not accrue disproportionately to institutional investors. Romano argues that, in the context of
a two tiered bid, smaller investors are less able to sell their shares to an acquiror in the pre-bid
period, and, owing to informational difficulties, are more likely to experience the lower bid prices
often offered in the second tier of a two tier bid. Fair price provisions have the effect of levelling
the prices offered in multi-tiered bids, and, therefore, can be viewed as protecting smaller share-
holders from having their pro-rata share of the control premia compromised. See Romano, “The
Political Economy of Takeover Statutes” ibid. at 145-89.

McGILL LAW JOURNAL

[Vol. 36

in some firms would not choose to adopt voluntarily.”‘”

Given the difficulties in assembling unequivocal empirical support for the
competitive model from the American corporate law experience, should, on the
grounds of shareholder welfare, the competitive model of law reform be
rejected for Canada? Despite the difficulties in providing plausible first princi-
ples efficiency rationales for all of the outcomes generated by state competition
in the United States, my view is that, on balance, the gains from competitive law
production in terms of its innovative and dynamic outcomes, are likely to out-
weigh the costs generated by externalities, such as those arising from sharehol-
ders’ inability to control managerial conduct. This position reflects my belief
that, although managerial opportunism is by no means a trivial problem, a vari-
ety of both legal and market instruments clearly limit the scope for it in Canada.
And although some of the mechanisms deployed in Canada to control manage-
rial opportunism may not be as vigorous as those in the United States –
owing
to the existence of certain defects in the Canadian corporate control, product,
managerial and capital markets –
the deleterious impact of these defects on
shareholder welfare are likely balanced or even eclipsed by other distinctive fea-
tures of the Canadian regime.”‘ These features include the various statutory
devices triggered by continuance to another jurisdiction –
appraisal rights and
shareholder approval requirements –
that increase the strength of shareholder
voice and exit instruments at the time that a domicile change is proposed.”‘

’09Romano, “The State Competition Debate in Corporate Law,” supra, note 107 at 752. It
should, however, be noted that Romano has declared, at 753, her position to be closer to Winter
than to Cary.

“The distinctive features of Canadian capital markets and their impact on corporate and secu-
rities regulation are canvassed in R.J. Daniels & J. MacIntosh, “Toward A Distinctive Canadian
Corporate and Securities Law Regime” (unpublished manuscript on file with the author).

l”These provisions permit corporations to continue in another Canadian jurisdiction provided
certain conditions are fulfilled. These statutory continuance provisions require migrating corpora-
tions to secure supra-majority shareholder approval, to obtain a certificate from a corporate law
administrator, and to give dissenting shareholders the right to tender their shares to the corporation
for “fair value” before a domicile shift out of the originating jurisdiction is permitted to take effect.
Currently, ten Canadian jurisdictions have adopted statutory continuance and discontinuance
devices into their corporate law statutes (Quebec is the exception, lacking a discontinuance device;
instead it requires a voluntary dissolution). See CBCA, ss. 187-188; OCBA, ss. 179-180; Company
Act, R.S.B.C. 1979, c. 59, ss. 36-37; Business Corporations Act, S.A. 1981, c. B-15, ss. 181-182;
The Business Corporations Act, R.S.S. 1978, c. B-10, ss. 181-182; Corporations Act, R.S.M. 1987,
c. C-225, ss. 181-182; Companies Act, supra, note 75, as am. S.Q. 1980, c. 28, ss.
123.131-123.133; Business Corporations Act, S.N.B. 1981, c. B-9.1, ss. 126-127; Companies Act,
R.S.N.S. 1967, c. 42, as am. S.N.S. 1978-79, c. 12, s. 119B; Companies Act, R.S.P.E.I. 1974, c.
C-15, as am. S.P.E.I. 1984, c. 14, ss. 84-84.1; The Corporations Act, S.N. 1986, c. 12, ss. 295-296.
In contrast, domicile changes in the United States are usually effected by a reverse triangular
merger that requires only bare majority shareholder approval without any accompanying discre-
tionary administrative approval. See Romano, “Law as Product,” supra, note 19 at 248. The reverse
triangular merger is described by R.C. Clark, Corporate Law (Boston: Little, Brown, 1986) at
426-33. See also L. Loss & J. Seligman, Securities Regulation, 3d ed. (Boston: Little, Brown,

1991]

SHOULD PROVINCES COMPETE?

179

Also important in this respect is the much higher level of share ownership con-
centration in Canada that enables Canadian shareholders to overcome endemic
collective action problems, thereby reducing significantly the problems wrought
by the separation of ownership and control.”1
In these terms, the spectre of
opportunistic management cynically exploiting competition between Canadian
governments for their own ends is diminished. Intergovernmental competition
should be lauded, rather than condemned, by Canadian commentators.

Structural Features of the Canadian Corporate Law Regime
Undermining the Competitive Model

Apart from the dubious case against the competitive model on grounds of
shareholder welfare, there are a variety of distinctive structural features of the

1989) at 1255-56; E.-L. Folk, I, R. Word, Jr. & E.P. Welch, Folk on the Delaware General Cor-
poration Law, 2d ed. (Boston: Little, Brown, 1989), ss. 251.2.1, 251.2.5. It is essentially a “dressed
up” variation on the standard stock for stock merger. In the transaction, a shell company is inter-
posed between the existing corporation and a corporation incorporated in the destination jurisdic-
tion. Through a series of transactions, the shares of the existing corporation are transferred to the
new corporation via the shell company in exchange for shares in the new corporation. For most
states, 50% approval is sufficient to support migration. A pivotal development in these transactions
occurred in 1969, when amendments to Delaware’s Corporation Law dropped the 2/3 approval
requirement for mergers of this sort to a bare majority. Another consideration in structuring these
transactions in the United States is federal securities law. SEC Rule 145 extends the disclosure
requirements of the 1933 Act to mergers and acquisitions; however, Rule 145(a)(2) excepts merg-
ers effected solely to change corporate dom!ii&e 2 Fox & Fox, Corporate Acquisitions and
Mergers, 28.06 [1][b][ii].
” 2D.A. Demott, “Comparative Dimensions of Takeover Regulation” (1987) 65 Wash. U. L.Q.
69 at 74: “Unlike publicly traded companies in the United States, a majority of large, publicly
traded Canadian corporations are legally or effectively controlled by an identifiable shareholder or
group of shareholders.” Demott gives the following breakdown, derived from the Standard and
Poor’s Index and the TSE 300 Compo-te Index, respectively at 73 n. 12 and 74 n. 13:

Shareholder with legal

control (50% or more)
Shareholder with effective

control (20%-49.9%)

Widely held shares

Total

Shareholder with legal

control (50% or more)
Shareholder with effective

control (20%-49.9%)

Widely held shares

Total

Number of
American
Companies

Percentage
of American
Companies

68
426
500

1.2

13.16
85.2
100 % [sic]

Number of
Canadian
Companies

Percentage
of Canadian
Companies

137

85
61
283

48.4

30.0
21.6
100%

REVUE DE DROIT DE McGILL

[Vol. 36

Canadian regime which may have impeded the rise of a competitive and com-
prehensive corporate law regime. The role of each of these features will be
assessed in turn.

Inability to Realize Minimum Efficient Scale in
Institutions

The lack of a well-developed corporate law infrastructure could reflect the
relatively fragmented state of the Canadian corporate law market. Owing to the
multiplicity of jurisdictions offering corporate law product and the relatively
small size of the Canadian market, it can be argued that no one jurisdiction will
be able to capture a share of the total corporate law market necessary to justify
the start-up investment in corporate law infrastructure. This argument assumes
that governments will be unable to overcome minimum efficient size constraints
and will refrain from expending effort in the development of an infrastructure
necessary for effective competition. This argument is flawed by its failure to
delineate between initial and end states. While it is possible, though unlikely,
that the existing level of incorporations may not allow any one of the eleven
jurisdictions to earn a positive return on its investment, there is no reason to
expect that a jurisdiction making institution-based investments will not enjoy a
shift in the demand for its corporate law product. Assuming that the demand for
corporate law product is downward sloping, it is reasonable to predict increases
in the future volume and price of supplied product from a shift in demand. Such
increases should enable the innovating jurisdiction to earn an economic rate of
return on its investment. Is it reasonable to predict demand increases for corpo-
rate law innovation? On the basis of the CBCA case study above, it is fair to
assume that even relatively limited corporate law reforms can induce quite sig-
nificant demand-side effects. And, as the stellar success of Delaware in the
United States demonstrates, it is possible even for a jurisdiction lacking any par-
ticular natural endowments, other than physical proximity to a major financial
centre, to obtain a dominant market position through the provision of a desired
product. In sum, there is no reason to doubt the capacity of at least one Canadian
jurisdiction to capture more than its “natural” share of the corporate law market
by offering a superior product. Consequently, economies of scale must be
rejected as a reason for stunted institutional development in Canada.

b. The Enhanced Prospect of Coordinated Behaviour

An alternative explanation for the failure of an elaborate institutional
framework to evolve in Canada lies in the greater scope for co-ordinated behav-
iour by government competitors that is aimed at limiting competition in the pro-
vision of corporate law product.” 3 The scope for such behaviour emanates from
the smaller number of jurisdictions offering corporate law product in Canada

113See Breton, “Supplementary Statements,” supra, note 2.

1991]

SHOULD PROVINCES COMPETE?

(11) 114 in comparison to the United States (50). The consequence of having
fewer suppliers is that the costs of negotiating, executing and enforcing anti-
competitive agreements or understandings” 5 is reduced, thereby facilitating the
consummation and maintenance of such commitments, even in the face of
strong incentives to defect.” 6

Why would Canadian governments prefer not to compete on the basis of
corporate law product? Two principal explanations may be advanced. First,
agreements restricting competition may be perceived as producing outcomes
that are compatible with widely held views of regional or inter-provincial fair-
ness. Because constrained competition minimizes the gains from “charter shop-
ping,” the ability of any one province to capture more than its pro-rata share of
the total market is fettered. Since the distribution of outcomes is equalized
across all jurisdictions by this process, it may be loosely supported on grounds

114Indeed, in view of the relatively small number of Canadian governments that are seriously
committed to establishing a reputation in the corporate law field, the actual number of competitor
jurisdictions may be even smaller, perhaps only 5 (the federal government, Ontario, Quebec,
Alberta, and British Columbia).
5These agreements or understandings need not be explicit. As the industrial organizations lit-
1
erature has shown, co-ordinated behaviour among rivals can occur even in the absence of actual
contact. See Scherer, supra, note 14 at 155-56. Scherer cites E.H. Chamberlin, “Duopoly: Value
Where Sellers Are Few” (1929) 43 Q.J. Econ. 63, later incorporated with revisions in The Theory
of Monopolistic Competition (Cambridge: Harvard University Press, 1933), c. 3. Chamberlin
argued that when the number of sellers is small and products are standardized, oligopolists can
scarcely avoid full recognition of their interdependence. The result follows from the structure of
no formal collusion or agreement is necessary. “For the monopoly price to emerge,
the market –
it is essential only that the firms recognize their mutual interdependence and their mutual interest
in a high price” (Scherer, supra at 155). The problem of “conscious parallelism” in oligopolistic
industries is also discussed in Dunlop, McQueen & Trebilcock, supra, note 34 at 119-21. The
authors examine the validity of the premise that firms in oligopolistic markets will find it rational
to resist competitive pricing bahaviour. See also D.F. Turner, “The Definition of Agreement Under
the Sherman Act: Conscious Parallelism and Refusals to Deal” (1962) 75 Harv. L. Rev. 655; R.A.
Posner, “Oligopoly and the Antitrust Laws: A Suggested Approach” (1969) 21 Stan. L. Rev. 1562;
D.R. Kamerschen, “An Economic Approach to the Detection and Proof of Collusion” (1979) 17
Am. Bus. L.J. 193.

116public-choice theorists tend to argue that the ability to maintain and enforce welfare-
enhancing agreements increases as the number of players decreases. See Olson, supra, note 30 at
29-36; D.C. Mueller, Public Choice II (Cambridge: Cambridge University Press, 1989) at 13-15.
Mueller maintains that

one can expect the voluntary provision of public goods and cooperative behavioural
constraints to be greater in small, stable communities of homogeneous behaviour pat-
tems (supra at 13).

In contrast, “[lI]arger, more impersonal communities must typically establish formal penalties
against asocial behaviour (like stealing), levy taxes to provide for public goods, and employ a
police force to ensure compliance” (supra at 14) and “[rieliance on voluntary compliance in large
communities or groups leads to free riding and the under or non-provision of the public good”
(supra at 13). See also R.H. Coase, “The Problem of Social Cost” (1960) 3 J.L. Econ. 1; J.M.
Buchanan, “Ethical Rules, Expected Values, and Large Numbers” (1965) 76 Ethics 1.

McGILL LAW JOURNAL

[Vol. 36

of horizontal equity. However, it is not clear that equality of outcome is the only,
or in fact the most, important concept of fairness embedded in the compact
underlying Canadian federalism. Arguably, equality of opportunity, subject to
some minimum level of common services, is just as, if not more, compatible
with that compact. Of course, assuming that all provinces have an equal capac-
ity to win a disproportionate share of the corporate law market, under the latter
vision of equality there is no basis in principle for restricting competition.

The second, and less principled, basis for governments attempting to limit
competitive interaction relates once again to concerns over non-recoverable
investments in highly specific institutional assets. Assuming that migration
between jurisdictions is relatively rapid and inexpensive, an innovating govern-
ment will fear that its investment in corporate law institutions is vulnerable to
massive outflows of corporate residents in response to relatively minor innova-
tions introduced by competitor governments. If all jurisdictions believe that
asset-specific investments are vulnerable to shifts in consumer preferences, they
will refrain from investing in institutions supportive of its corporate law. How-
ever, this situation has prisoner’s dilemma properties; each government will fear
that its pro-rata share of the market may be prone to contraction in the event of
innovation elsewhere. 7 An obvious solution to the concern over innovation
elsewhere is to conclude “hands tying” understandings by which potential com-
petitors agree not to introduce innovations which will upset existing market
shares. These understandings mitigate the risk of a first mover jurisdiction being
saddled with non-recoverable investments. The difficulty, however, with this
rationale is its dependence on a view of corporate law market that has been
powerfully discredited by Romano’s -work. Romano’s results indicate that a
variety of factors (e.g., transactions costs, jurisdiction-specific investments by
corporate managers and their lawyers, and the widespread desire for business
certainty) impede the mobility of corporations and protect innovating jurisdic-
tions from precipitous declines in their corporate base. Because the presence of
mobility rigidities in the corporate law market reduces the vulnerability of juris-
dictions undertaking innovative investments, the suitablity of competition-
suppressing agreements is rendered highly suspect.

Together, these arguments suggest that the normative desirability and the
actual likelihood of provinces engaging in co-ordinated behaviour in an effort
to protect market share is limited. Indeed, the rapid diffusion of the CBCA
model suggests that the source of competitive restraints must reside elsewhere.

c. Overlapping Legal Products

The overlap between Canadian corporate and securities law is a subject
that has received considerable attention by corporate law scholars.”‘ As the

117On the prisoner’s dilemma, see above, note 84.
n8See P. Anisman, “The Commission as Protector of Minority Shareholders” in Securities Law
in the Modern Financial Marketplace, Law Society of Upper Canada Special Lectures [hereinafter
LSUC Lectures] (Toronto: De Boo, 1989) 451; S.M. Beck, “Minority Shareholders’ Rights in the

1991]

SHOULD PROVINCES COMPETE?

recent Canadian Tire case so vividly demonstrates,” 9 Canadian securities reg-
ulators have frequently encroached on the domain of the courts in deciding cor-
porate governance disputes. 2 The existence of overlapping securities and cor-
porate laws in Canada means that the benefits of a province’s corporate law
regime may be undermined by the operation of provincial securities law admin-
istrators located in the incorporating province or, more significantly, in other
provinces. The prospect of intervention by extra-provincial securities adminis-
trators is facilitated by the fact that securities law jurisdiction is not based on
location of corporate domicile (as in the corporate law case), but on the basis
of investor residence.’ 2 ‘ As a consequence, a firm with investors dispersed
throughout the country may find that the putative benefits of a shift in corporate
law domicile are jeopardized by the role of securities administrators located in
the originating jurisdiction or elsewhere in the country. For instance, a public
corporation contemplating “going private,”‘” may find that the benefits of
migration (in terms of more lenient or certain fiduciary duties in the destination

1980s” in Corporate Law in the 80s, LSUC Lectures (Don Mills, Ont.: De Boo, 1982) 311 at
342-47; J.C. Baillie, “Shareholders’ Remedies” in New Developments in the Law of Remedies,
LSUC Lectures (Don Mills, Ont.: De Boo, 1981) 21 at 26-34.

“191n Re Canadian Tire Corp. (1987), 10 O.S.C.B. 857, 35 B.L.R. 56 (O.S.C.), aff’d (1987), 10
O.S.C.B. 1771, 35 B.L.R. 117 (sub nom. C.T.C. Dealer Holdings Ltd. v. Ontario (Ont. Securities
Comm.)) 59 O.R. (2d) 79, 37 D.L.R. (4th) 94 (Ont. Div. Ct.), leave to appeal denied (1987), 35
B.L.R. xx (Ont. C.A.), the Ontario Securities Commission relied on its “public interest” powers
to impose quasi-fiduciary obligations on majority shareholders (Securities Act, R.S.O. 1980, c.
466, s. 123). Per Beck, Chairman, at B.L.R. 105-106:

A transaction such as is proposed here is bound to have an effect on public confidence
in the integrity of our capital markets and on public confidence in those who are the
controllers of our major corporations. If abusive transactions such as the one in issue
here, and this is as grossly abusive a transaction as the Commission has had before it
in recent years, are allowed to proceed, confidence in our capital markets will inevi-
tably suffer and individuals will be less willing to place funds in the equity markets.
That can only have a deleterious effect on our capital markets and, in that sense, it is
in the public interest that this Offer be cease-traded…

Such quasi-fiduciary obligations as were found here are, of course, part of the traditional domain
of corporate law.
1201n large part, overlap is indicative of the normative difficulties inherent in constructing water-
tight boundaries between corporate and securities laws. Investor protection –
the oft-cited central
the oft-cited cen-
objective of securities law –
are, to say the least, very closely related. With closely related,
tral objective of corporate law –
if not similar, objectives governing both bodies of law, the prospect of overlap in application of
laws is not surprising.

and managerial and shareholder accountability –

121See Anisman & Hogg, supra, note 3, c. II.
122In a “going private” transaction, the public shareholders are forced out of the company, with
the result that a small group of persons (or corporations) ends up owning all the equity of the firm.
Its shares cease to trade on public markets. A going private transaction can be effected in a number
of ways. These include (but are not limited to) the following: freezeout (or squeezeout) amalga-
mation; compulsory acquisition; reverse stock split (or “consolidation freezeout”); sale of assets;
redemption flip-flop; arrangement (e.g., under CBCA, s. 192); statutory going private provisions
(e.g., OBCA, s. 189).

REVUE DE DROIT DE McGILL

[Vol. 36

jurisdiction’s corporate law) are eroded by substantive security legislation such
as Policy 9.1 of the Ontario Securities Commission which requires regulators to
comply with a comprehensive investor protection regime.” To the extent that
securities regulators are able to impinge on the scope traditionally accorded cor-
porate law, the integrity of each government’s corporate law product is compro-
mised. Seen in this light, the parallel operation of the securities law regime is
likely to undermine competitive activity in the corporate law market.

d. Legal Market Failure

Some analysts have argued that the lack of competition in the provision of
Canadian corporate law reflects the innate conservatism of Canadian lawyers
and the “unwillingness [of counsel] to expose his client to an unfamiliar corpo-
rate law regime.”‘2 Why would Canadian lawyers fail to advise their clients to
move jurisdictions? An obvious reason centers on the risk of losing clients to
competitor law firms located in the destination jurisdiction. Although a lawyer
residing in one provincial jurisdiction may be familiar with the content of
another jurisdiction’s corporate law statute, provincial law society practise
codes restrict the capacity of non-resident lawyers to render opinions on the
state of the law in that jurisdiction. For a finrn contemplating a domicile change
that may give rise to future litigation, law fims in the originating jurisdiction
will foresee losses in future service revenue owing to their inability to render
further advice on the transaction. And, to the extent that there are economies in
having all of the migrating firm’s legal matters handled by one firm, law firms
in the originating jurisdiction will fear losing the entire account on migration.
Finally, even if the law firm in the originating jurisdiction were given some
scope to act in the destination jurisdiction,”
these firms would be required to
make additional investments in their human capital so that they could become
proficient in the destination jurisdiction’s corporate law regime.

Despite the surface plausibility of these arguments, there are a number of
reasons for suspecting that the legal market failure explanation for lacklustre
corporate law competition is greatly overstated. The elaborate network of
national law fim associations that has grown up over the last five years reduces
considerably the danger that revenue losses will be sustained by member firms
from domicile changes by corporate clients. Even for those finns not associated
with one of the national partnerships, it is still possible to retain corporate cli-
ents after migration by referring the client to agent law firms in the destination
jurisdiction. Given that these firms may be involved in long term relationships
with the firn
in the originating jurisdiction, there will be little incentive to
“cheat” the law firm in the originating jurisdiction by trying to secure all of the

12O.S.C. Policies, s. 9.1 – Going Private Transactions, Issuer Bids, and Insider Bids.
124Beck et al., supra, note 44 at 152.
125See supra, note 15.

1991]

SHOULD PROVINCES COMPETE?

reincorporating firm’s legal work.’2 6 The fact that reincorporation need not
threaten traditional relationships between law firms and their corporate clients
means that firms can counsel clients to reincorporate elsewhere in Canada with-
out fearing revenue consequences.

Even if the claim that law firms can counsel reincorporation without fear
of compromising traditional client relationships rings hollow, there is a further
reason to doubt that lawyers are responsible for less vibrant corporate law com-
petition in Canada. Simply, the claim that lawyers are responsible for lacklustre
corporate law competition is tethered to the assumption that the market for legal
services is plagued by serious failures; otherwise, it is difficult to explain the
ability of legal service suppliers to withhold value-maximizing advice from cli-
ents without suffering the discipline of the market. Examination of the structure
of the legal market yields little evidence of structural characteristics consonant
with high levels of supplier concentration. 27 Indeed, it can be argued that in a
number of different segments, the legal market appears to be a highly compet-
itive industry. Absent the possession of significant market power, it is unlikely
that firms would be able to exploit corporate consumers indefinitely without
inviting entry from competitors willing to offer more responsible legal advice. 8
This entry can be expected to occur even in the face of the informational asym-
metries that inhere in the lawyer-client relationship. 9 After all, by publicizing
the failure of a corporation’s current advisors to render value-maximizing
advice to their clients, an entrant could be expected to be rewarded by increased
patronage. The prospect of just desserts can be expected to increase the propen-

126See O.E. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational
Contracting (New York: Free Press, 1985), c. 3, 7 & 8, where the author discusses the use of bond-
ing mechanisms in a contractual context to deter cheating on long-term relationships.

127See S. Colvin et al., The Market for Legal Services, Working Paper No. 10 Prepared for the
Professional Organizations Committee (Toronto: Ministry of the Attorney General of Ontario,
1978), c. 5 & 7. The authors found that “despite the apparent lack of similarity of service charac-
teristics among firms of different sizes, there is sufficient overlap to ensure a low level of concen-
tration and a large number of suppliers in most segments” (supra at 168). In particular, the authors
found the Ontario market “highly unconcentrated” (supra at 169).
128In these terms, the denial of value-maximizing legal advice is akin to the appropriation of
supra-competitive rents. In the absence of effective barriers to entry, it is unlikely that a firm or
group of firms could enjoy these rents for long. Classic micro-economic theory posits that new
that will dissipate
entrants will offer a more attractive product –
the economic rents. For representative literature on barriers to entry, see A. MacMillan, Microeco-
nomics: The Canadian Context (Scarborough, Ont.: Prentice-Hall, 1980) at 242-43; C.C. v. Weiz-
sacker, Barriers to Entry: A Theoretical Treatment (Berlin: Springer-Verlag, 1980); M.J. Trebil-
cock & J. Quinn, “The Canadian Antidumping Act: A Reaction to Professor Slayton” (1979) 2
Can.-U.S. L.J. 101 at 105-106.

either in price or quality terms –

’29On these information problems, see M.J. Trebilcock, C.J. Tuohy & A.D. Wolfson, Profes-
sional Regulation: A Staff Study of Accountancy, Architecture, Engineering and Law in Ontario
Prepared for the Professional Organizations Committee (Toronto: Ministry of the Attorney Gen-
eral for Ontario, 1979) at 50-56.

McGILL LAW JOURNAL

[Vol. 36

sity of competitors to generate and distribute information that will reduce the
importance of asymmetries in this area.

e. The Geographic Monopoly of Central Canadian

Governments

Another variable that can be advanced to explain the lack of vigorous cor-
porate law competition in Canada turns on the proximity of central Canadian
governments to the locus of commercial and corporate activity in the country.
According to this argument, this geographic proximity confers monopoly pow-
ers on these governments, and impairs the ability of more remote governments
to compete effectively for corporate patronage. Whereas in the United States,
the concentration of corporate/commercial activity in the eastern seaboard
allows any of a number of states to capture a dominant market share, the con-
centration of commercial and corporate activity in central Canada limits the set
of alternative domiciles that shareholders desirous of reincorporating could
choose. According to this argument, it is difficult to imagine corporate execu-
tives and their lawyers willing to incur the time and cost of having to commute
to locations distant from the industrial and financial heartland of the country in
the event of a dispute arising under corporate law. Therefore, shareholders and
their managers face two principal incorporation domiciles in Canada –
either
Ontario or Canada.

There are several reasons for rejecting this argument. First, Delaware’s
success shows that a jurisdiction can capture a dominant market position, even
though it is not a centre of financial or corporate/commercial activity. Second,
the availability of low cost communications devices, e.g., facsimile machines,
video-conferencing and designated computer lines, diminishes the importance
of a corporation having its centre of operations located in the same place as its
legal head office. These new forms of technology permit corporate executives
and their lawyers to make decisions without having to meet face to face. Finally,
to the extent that proximity to underlying financial and commercial activity is
important, the rise of a number of regional centres of economic activity in Can-
ada, e.g., Vancouver, Calgary, Montreal and Halifax, means that there is an
infrastructure that supports the attractiveness of these cities as corporate
domiciles.

Role of the Supreme Court in Impairing the Integrity of
Provincial Courts

Similar to the challenges to the integrity of a province’s corporate law
regime that are posed by overlapping securities regulation, the structure of judi-
cial review in Canada may also contribute to enervated levels of competition.
Because of the Supreme Court of Canada’s exercising judicial review over deci-
sions made by provincial appeal courts, the ability of a province to craft a dis-

1991]

SHOULD PROVINCES COMPETE?

tinctive approach to corporate law adjudication may be impaired. 130 This feature
of the institutional context may explain the failure of provincial governments to
respond positively to calls for a specialized corporate-commercial court that
have been frequently made in Canada.’3′ The reality, however, is that the
Supreme Court has paid less and less attention over the last decade to corporate/
commercial matters, in effect allowing provincial appellate courts to have the
final say in interpreting contentious statutory provisions.’32 The relatively mar-
ginal role of the Supreme Court in corporate/commercial disputes can be traced
to two factors: (i) the removal in 1974 of an automatic right of appeal to the
Supreme Court for cases in which the value of the matter in controversy exceeds
and (ii) the growing “constitutionalization” of the Court’s docket
$10,000;’
ever since the adoption of the Canadian Charter of Rights and FreedomsM in
1982.’
In tandem, these two factors mean that the scope for nettlesome inter-
ference in lower court corporate/commercial decisions by the Court is fairly
small indeed.

130In contrast, the appellate jurisdiction of the U.S. Supreme Court over decisions made by the
Delaware Supreme Court is extremely circumscribed. Decisions made by the Delaware Court can
only be appealed to the U.S. Supreme Court in the following circumstances: (1) cases arising under
the Constitution, U.S. laws and treaties; (2) cases affecting ambassadors, consuls, etc.; (3) cases
involving admiralty jurisdiction; (4) cases to which the U.S. is a party; and (5) cases arising
between two or more states, or between a state and a citizen of another state, or between citizens
of different states, or between a state (or citizens thereof) and foreign states, citizens, etc. See U.S.
Const., art. IM, 1 & 2. The basic appellate principle is: “Of cases originating in the course of
the states, only those presenting questions of federal law –
statutory, constitutional or otherwise
– may be considered by the [U.S.] Supreme Court. Its consideration of such a case is limited to
the federal issues involved” (D.W. Louisell, G.C. Hazard, Jr. & C.C. Tait, Cases and Materials on
Pleading and Procedure, 5th ed. (Mineola, N.Y.: Foundation Press, 1983) at 17). A key limiting
provision on the U.S. Supreme Court’s appellate jurisdiction over state court decisions is s. 25 of
the Judiciary Act of 1789 (1 Stat. 73, 85), limiting Supreme Court review of state courts to final
judgments or decrees in the higher court in which the suit could be had. See P.M. Bator et al., Hart
and Wechsler’s The Federal Courts and the Federal System, 3d ed. (Westbury, N.Y.: Foundation
Press, 1988), c. 5. Note the rule in Fox Film Corp. v. Muller 296 U.S. 207 (1935): the Supreme
Court’s jurisdiction to review a federal question falls if the state court’s judgment also rested on
a non-federal ground that is itself independent of the federal ground and adequate to support the
judgment.
131See Ontario, Interim Report of the Select Committee on Company Law (Toronto: Queen’s
132For instance, of the 304 cases heard by the Supreme Court in the period 1986-89, only 14
were classified by the Court as dealing with corporate/commercial matters. Supreme Court of Can-
ada Annual Report 1988-89.
133The automatic appeal was repealed by S.C. 1974-75-76, c. 18, s. 3. Presently, a matter may
only be appealed to the Supreme Court with leave pursuant to the public importance test set out
in s. 40 of the Supreme Court Act, R.S.C. 1985, c. S-26.

Printer, 1967) at 115-16.

134Part I of the Constitution Act.
135See Panel Discussion, “The Future of the Supreme Court of Canada as the Final Appellate
Tribunal in Private Law Litigation” (1982-83) 7 Can. Bus. L.J. 389, especially the results of the
docket study at 449.

REVUE DE DROIT DE McGILL

[Vol. 36

In sum, this discussion suggests that, save for the problems occasioned by
overlapping legal products and, to a lesser extent, the centralizing role of the
Supreme Court, there is no institutional constraint in Canada on the generation
of a comprehensive corporate law regime. Consequently, the failure of this
regime to evolve can be largely credited to intellectual discomfort with the case
for competitive provision of legal product in Canada which, as I have argued,
is without foundation.

C. Conclusion
In this article, I have attempted to develop an argument in favour of greater
reliance on competitive production of laws and supporting institutions in the
realm of Canadian commercial and corporate law. As the corporate law case
study shows, these processes are capable of serving a catalytic role in encour-
aging Canadian governments to adopt laws and institutions that are highly
responsive and innovative in nature. It is ironic that the competitive model is
generally eschewed by Canadian commentators in favour of the centralized
model, given the particularly decentralized nature of the Canadian federation.
Arguably, the former model is more compatible with the powerful role played
by regional and local interests in Canada. In these terms, apart from the model’s
value in producing superior laws, it can be further defended for its role in fos-
tering workable approaches to Canadian federalism.

A second and less obvious implication of this article is the light it casts on
the role of the federal government in the competitive model. Typically, com-
mentators advocating heavier reliance on competitive, decentralized models of
law production focus exclusively on the virtues of lower level governments,
thereby relegating national governments to a relatively marginal position of
importance. Given the expansive terrain shared between federal and provincial
governments under the Constitution Act, this indifference or, in some cases,
antipathy to federal government activity is especially perplexing in the Cana-
dian case. But the corporate law case study developed in this article offers some
insight into both the rationale for and the ambit of higher government activity.
First, it is clear that the corporate law market in both the United States and Can-
ada would not have been able to develop as effectively as it has in the absence
of rules that conferred on incorporating jurisdictions the power to have their
statutory regime govern all corporate governance disputes, irrespective of the
location of the disputing parties. Had the courts failed to impose this rule (as the
Privy Council did in the Bonanza Creek case’36), the only remaining way to
implement such a rule would have been by way of shared agreement. Because
of endemic collective action problems, the provinces may not be able to reach
this agreement themselves. An obvious candidate for leading and supporting
initiatives aimed at developing the institutional infrastructure necessary for

136Bonanza Creek Gold Mining Co. v. The King, [1916] 1 A.C. 566, 26 D.L.R. 273 (P.C.).

1991]

SHOULD PROVINCES COMPETE?

effective competition is the federal government. For instance, to the extent that
overlapping legal products and Supreme Court appellate jurisdiction impair the
flourishing of competitive processes of corporate law production, some
co-ordinated activity is necessary to correct these problems, and should be led
by the federal government. In this respect, it is important to acknowledge the
intimate relationship between competitive and co-ordinated forms of law pro-
duction; in order to promote efficient competition, some threshold level of
co-ordination will be necessary.

A second teaching of the corporate law case study for the federal govern-
ment concerns the capacity of the competitive model to vindicate goals and val-
ues cherished by federal politicians and bureaucrats. In the corporate law case,
the federal government was able to create a modern national corporate law
regime with little of the acrimony and antagonism that tends to characterize
other federal initiatives involving co-ordinated processes. Why was the federal
government so successful? At one level, the corporate law market in Canada
possesses many of the underlying features that are necessary for efficient com-
petition. 37 But this only explains the greater likelihood of success of competi-
tion, not the success of any particular competing government. However, when
the Canadian corporate law market is examined closely, it is clear that the fed-
eral government possesses a comparative advantage in determining or, at least,
influencing outcomes produced in this setting. Among other factors, the fact
that shareholders believe that the federal government incorporations are more
prestigious than provincial incorporations or that migration to the federal gov-
ernment in no way severs lawyer-client relationships (because provincial law
society practise codes do not restrict the capacity of resident lawyers to render
opinions on federal statutes and regulations 3 ‘) means that the federal govern-
ment will be favoured as a destination jurisdiction.

In the past few years, the corporate community and the legal profession
have grown increasingly disenchanted with the federal government’s treatment
of the CBCA. What was a few short years ago one of the shining jewels in the
federal government’s policy chest is today tarnished by neglect and abuse suf-
fered through sporadic and incoherent enforcement, relatively undeveloped
institutional linkages between policymakers and their constituents, and glacial
legislative reform. Like Dorothy in Oz, the sooner the federal government awa-
kens to the power and the possibilities of its slippers –
competitive law produc-
tion in general and the corporate law instrument in particular –
the more ratio-
nal and effective will its own policy-making agenda become. Moreover, by

137See the discussion above, in Part II, on the four conditions for efficient competitive model
outcomes: jurisdictional mobility, large number of destination jurisdictions, jurisdictional latitude
in selection of laws, and internalization of benefits and costs.
138For example, a member of the Newfoundland Bar can opine on federal law because that law

is, in the eyes of the Law Society, “Newfoundland law” as well.

190

McGILL LAW JOURNAL

[Vol. 36

assuming a leadership mantle in championing institutional modifications
designed to engender competitive activity, the core objective of the federal gov-
ernment –
the maintenance and promotion of a harmonious and lively feder-
ation – will be realized.

Should Provinces Compete? The Case for a Competitive Corporate Law Market

Table of Contents

Subscribe to our Newsletter

Thank you to our sponsors