Despite recent legislative and administrative efforts, U.S. corporations continue to engage in a controversial business strategy known as a “corporate inversion.” A U.S. corporation performing an inversion acquires a foreign corporation and then, through a series of complex transactions, restructures in the foreign corporation’s country. In light of the United States’ burdensome corporate tax code, the inversion process allows formally American corporations to become taxable as a foreign entity, generating sizeable tax savings.

It is seldom noticed, however, that the inversion trend raises a significant corporate law puzzle regarding the misaligned incentives dividing directors and shareholders. From a corporate director’s point of view, inversions are particularly attractive. This is because the process can be structured to reduce a company’s tax rate while also lessening management’s duty to comply with costly regulatory frameworks. For instance, inverted companies often reincorporate in countries with more management-friendly corporate governance statutes. Likewise, since U.S. exchanges subject foreign incorporated companies to less scrutinizing securities regulations, the inversion process can allow publicly traded companies to minimize costly disclosure, auditing, and corporate governance requirements.

But critically, inversions are puzzling from an investor’s or shareholder’s perspective. Since corporate regulations are generally thought to protect investors, why would an individual invest in a company that has deliberately sought out and reincorporated in a country that provides minimal shareholder protections? In fact, shareholders often vote in favor of, and thus authorize, the very transactions that limit their ability to acquire information and enforce other shareholder rights. So why is the corporate migration trend booming if individuals should disfavor investing in inverted companies and shareholders should refuse to authorize them? Do individuals value the law? Using an original dataset and empirical analysis, this Article explores why individuals appear to ignore something as important—and as valuable—as the law.

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