Incorporating a Company in Delaware

Corporate law is regulated by each state, in the United States. This means that while there is no ‘federal corporations law’, each state has its own corporate law code (many modeled upon the Model General Commercial Code).

What is the significance of the state of incorporation?

A company can establish its headquarters, and do business in any state (not restricted to the state of incorporation). The importance of the state of incorporation lies in the fact that it establishes the legal domicile of the corporation. Based on the ‘internal affairs doctrine’, the law of the state of incorporation generally governs how disputes between directors/officers of the Corporation and shareholders are resolved.

Delaware as the first choice

Delaware is neither a populous nor geographically large state. However, it is the state of incorporation for fifty-seven percent of U.S. public companies and for fifty-nine percent of Fortune 500 companies. Delaware began to acquire its present status in the early 20th century, by adopting a corporate law code aimed at attracting and retaining more incorporations. Due to the large number of companies incorporated in Delaware, and the consequent litigation generated by them, Delaware’s corporate law plays a central role in establishing corporate governance norms for publicly traded corporations in the US.

Why incorporate in Delaware?

Established system of judge-made law:

The corporate law of Delaware is known as the Delaware General Corporate Law or ‘DGCL’ and contains extensive provisions regarding the formation, conduct and dissolution of a corporation. However, even the DGCL is limited in its provisions and interpretations. Several vital concepts in corporate law are governed by common law, i.e., judge-made law. These include fiduciary duties of directors, officers and controlling shareholders of the corporation both in conducting the daily business of the corporation, as well as in dealing with particular circumstances like mergers or proxy contests. Delaware courts deal with a massive amount of corporate litigation on a daily basis, which has led to the establishment of a sound corporate jurisprudence. Outside of Delaware, corporate law cases generally constitute only a tiny portion of a judge’s typical case-load.

A sound court system:

The Delaware Chancery court is a uniquely established court with limited jurisdiction. It has a docket of primarily corporate cases. These cases are heard by judges who are experts in corporate law, as opposed to juries. Court decisions are published in case-law reporters and are commercially available, providing valuable guidance to practitioners.

Reduced transaction costs:

Corporate lawyers develop an early familiarity with the extensive corporate case law laid down by the courts of Delaware. This reduces transactional costs and enables corporations incorporated in Delaware to plan with some foresight and knowledge. Delaware does not charge income tax to corporations incorporated within the State, which have their business/headquarters and operations outside the state.

There is some argument among scholars and practitioners that Delaware is losing its sheen as the corporate law giant. However, for the foreseeable future, it is unlikely that any other state will overtake Delaware as the favored place of incorporation for sizable companies.

Arbitration as an Alternative Dispute Resolution Mechanism

Soaring litigation costs, possible delays and the dangers and disadvantages in dealing with an unfamiliar jurisdiction are some of the reasons that have led to the development of innovative dispute resolution mechanisms in commercial contracts. 

Arbitration has evolved as one of the most popular along the various alternate dispute resolution mechanisms for several reasons. Arbitration clauses are generally favored by courts – in the sense that courts usually give effect to arbitration clauses, unless there are good reasons for another interpretation. Unlike court proceedings, arbitral proceedings can be concluded behind closed walls. This benefit of confidentiality is important to parties, especially in cases where IP secrets or a great deal of monetary damages are involved, and the parties to the dispute would prefer to keep it out of media glare. But perhaps the most important advantage offered by arbitration is the use of technically-qualified arbitrators. Commercial disputes today require the services of experts in the field, and it is a massive advantage if the dispute resolving authority is itself composed of experts. 

Self-executing arbitral agreements are the most popular version of arbitral agreements. These agreements contain an arbitral clause that takes effect automatically once a dispute arises. In these circumstances, the statute that applies to the dispute on hand is ‘stayed from operating’ and the arbitral proceedings are considered a trial. The decision reached by the arbitrator is final and binding upon the parties. Another type of arbitral clause is where the arbitral clauses are not contained in the primary agreement between the parties, but are contained in a supplementary agreement or a set of by-laws that the parties agree to abide by. Here the parties would begin arbitration by resorting to the particular instrument that contains that provision for arbitration.

However, parties should take care to ensure that all disputes intended to be decided by arbitration are clearly set out in the arbitral clause. Courts cannot go outside the language of the arbitral clause, without further agreement of the parties. Ideally, an agreement intending to refer disputes arising under it to arbitration should also contain a clause stating that arbitrators have power to decide their own jurisdiction. In the absence of such a clause, and assuming the parties disagree as whether a particular dispute is ‘arbitrable’, then it would be referred to court which would have to decide as to whether the arbitrators have jurisdiction to deal with that particular dispute.

In case of arbitral proceedings involving more than one country, a host of other factors come into play. Enforcement of a foreign arbitral award is more complicated and is subject to either the Geneva Convention on the Execution of Foreign Arbitral Awards 1927, or the more popular Convention on the Recognition and Enforcement of Foreign Arbitral Awards, better known as the New York Convention. The ease/difficulty of enforcing foreign arbitral awards differs from one jurisdiction to another and could be another article in itself!

Taken as whole, arbitration as a dispute resolution mechanism can be an effective tool in avoiding exorbinant court costs and obtaining expedited resolution of disputes.  It is well-worth getting familiar with it.