Thursday, 18 September 2014

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.

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