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Posted May 3, 2013

UVA Law Professor Michal Barzuza's Article Named Among Top 10 in Corporate Law

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University of Virginia law professor Michal Barzuza's paper, "Market Segmentation: The Rise of Nevada as a Liability-Free Jurisdiction,' has been named one of the 10 best corporate and securities law articles published in 2012.

University of Virginia law professor Michal Barzuza's article exploring how businesses incorporated in Nevada face little liability was named among the 10 best corporate and securities law articles published in 2012, according to a list compiled by Corporate Practice Commentator.

Contact: Mary Wood

Barzuza's article, "Market Segmentation: The Rise of Nevada as a Liability-Free Jurisdiction," published in the Virginia Law Review, was named among the best in the journal's 19th annual poll of teachers in the corporate and securities law field. More than 550 articles were considered for the honor.

Barzuza is one of several UVA law professors whose works have been recognized in the poll over the years — the others are Albert Choi (2010), Edward Kitch (2005) and Dean Paul G. Mahoney (2001, 1997 and 1995).

An expert in corporate law and governance, law and economics, and securities law, Barzuza is the Caddell & Chapman Professor of Law at UVA.

Barzuza's article finds that Nevada has moved to offer an alternative to Delaware through a corporate law regime with significantly less exposure to liability for directors and officers.

If a firm incorporates in Nevada, Barzuza explained in the paper, by default its directors and officers are protected from liability for breaches of duty of care, loyalty and good faith, and even for improper personal benefits. The only category that they could face liability for is intentional misconduct, fraud or a knowing violation of law. Nevada has marketed its unique low-liability regime as a reason to incorporate in the state rather than in Delaware, Barzuza found.

"Given Delaware's dominant position in this market, Nevada could not derive revenues from competing head-to-head with Delaware by offering the same law," Barzuza said in a recent Q&A. "So instead, Nevada chose to offer a different product than Delaware. This product caters to a subset of firms that are interested in lax law." Furthermore, in offering this law Nevada builds on its competitive advantage, its reputation of provider of lax law in other fields, such as marriage or gambling.  
Barzuza said the consequences for shareholders and businesses were unclear, but "there could be reasons for concern." "First, duty of loyalty covers significant issues, most notably conflicts of interests and self-dealing transactions. Not scrutinizing these transactions could result in significant harm to shareholders," she said. "Second, since firms choose where to incorporate, the concern is that this law attracts some bad apples. This does not meant that only crooks choose Nevada, but rather that Nevada may disproportionally attract problematic firms. Put differently, if there are insiders that are interested in extracting significant value from shareholders, they have a place to go now."

Barzuza examined the kinds of companies the state attracts in a concurrent paper co-authored with David Smith from the University of Virginia's McIntire School of Business, “What Happens in Nevada: Self-Selecting into Lax Law?”  One of their main findings is that these companies have a high ratio of accounting restatements.

So in addition to having potentially important implications for shareholders and businesses, examining Nevada's corporations provides an opportunity to shed light on important research questions, Barzuza said, such as what kind of companies would be attracted to lax law.