This Article shows how Delaware uses its power in the market for incorporations to increase its profits through price discrimination. Price discrimination entails charging different prices to different consumers according to their willingness to pay. Two features of Delaware law constitute price discrimination. First, Delaware's uniquely structured franchise tax schedule assesses a higher tax to public than to nonpublic firms and, among public firms, to larger firms and firms more likely to be involved in future acquisitions. Second, Delaware's litigation-intensive corporate law effectively price discriminates between firms according to the level of their involvement in corporate disputes. From the perspective of social welfare, price discrimination between public and nonpublic firms is likely to enhance efficiency (although the efficiency effect of franchise tax price discrimination among public firms is indeterminate). By contrast, price discrimination through litigation-intensive corporate law is likely to reduce efficiency.

This paper compares the terms of 63 privately-placed debt agreements with those found in public bond indentures. The main results of the analysis are as follows: 1) Private agreements more aggressively control the actions of equity holders by setting various covenants more tightly, by contrasting on quantities that are volatile and not under the direct control of managers, and by using relatively vague terminology. This finding does not rely on credit quality differences between the public and private debt markets. Furthermore, covenant differences between investment grade and junk issues are less pronounced in the private market than in the public market. 2) Private agreements provide lenders with the means to monitor borrowers more carefully. 3) Private agreements attempt to control intra-claim conflicts, i.e. those arising between holders of the same bond issue. 4) Private agreements payment terms are tailored to suit lenders by avoiding embedded interest rate options.

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This paper documents that firms can and do change the convenants of their public debt indentures through consent solicitations. A game theoretic model of these solicitations shows that they can coercive, i.e. bondholders who cannot coordinate their actions may consent to convenant changes even when it is not in their collective interest to do so. Despite this theoretical finding, abnomral bondholder returns around the announcements of consent solicitations are significantly positive. Further analysis of the data indicates that bondholders can, in fact, coordinate their actions to modify or defeat disadvantageous proposals. As a result, bondholders obtain a portion of the gains resulting from convenant modifications. The public policy implication of these findings is that bondholders do not need additional regulatory or judicial protection in the solicitation process.