Corporate Law

About Delaware’s General Corporation Law

The foundation of Delaware’s business advantage is its General Corporation Law (“DGCL”). (Delaware has also developed advanced modern statutes for business entities other than corporations. [See Delaware’s Alternatives to Corporations.] The DGCL helps entrepreneurs, corporate managers, and stockholders create wealth through the corporate form both by what it is not, and by what it is.

For starters, it is important to understand what the DGCL is not. The DGCL governs only the internal affairs of the corporation the relationship between the owners (stockholders) and the managers (directors and officers) of a corporation. In other words, the DGCL is essentially a specialized contract law governing the respective roles, duties, and relationships of those who manage corporations and those who invest in them. The DGCL does not address the varied other aspects of business law, such as competition law, labor law, or securities disclosure law, like a prescriptive civil code “company law” often does. All corporations must comply with state and federal law where they operate on these and other topics, but Delaware does not mix these areas of the law with corporate governance. Although Delaware has law governing these and other regulatory issues affecting society, its regulatory statutes only apply to corporations that conduct business operations in the State. For example, Delaware’s labor and environmental laws only apply to business activity within the physical borders of Delaware. By contrast, Delaware’s corporate law applies to all Delaware corporations no matter where they are located, whether their headquarters are in a different state or in a different country.

Federal law can play an important role in the business of a corporation, but state law plays the primary role in the internal affairs of the corporation. A corporation is created under the laws of the specific state in which it elects to incorporate. That process typically includes the filing of incorporation documents with a state agency (like the Division of Corporations in the Delaware Secretary of State’s Office). The state law then will govern issues like the corporation’s organizational documents, stockholders’ rights, and directors’ fiduciary duties. [See The Delaware Way: Deference to the Business Judgment of Directors Who Act Loyally and Carefully.]

In light of the considerable role of state law in a corporation’s affairs, and because the state corporate law applies regardless of the corporation’s physical headquarters, the decision of where to incorporate is extremely important for managers and investors. A corporation may also be sued in its state of incorporation, making the courts that will interpret that state law an important consideration. [See Litigation in the Delaware Court of Chancery and the Delaware Supreme Court.]

Among the reasons that corporations are formed under Delaware law is the DGCL’s policy to provide stockholders and corporations with maximum flexibility in ordering their affairs. Unlike in a civil-law jurisdiction, which would likely have a prescriptive corporation law with mandatory terms, the DGCL is designed to be an enabling statute that permits and facilitates company-specific procedures. The mandatory provisions of the DGCL are minimal and address only issues of utmost importance to protecting investors, such as the right to elect directors and to vote on certain major transactions. Even some of the mandatory terms of the statute may be overridden by managers and stockholders acting together to choose a different approach.

Although the law-making process around corporate governance and securities regulation issues outside Delaware is sometimes subject to partisan squabbling, hasty and scandal-driven action, and lobbying by special interests, Delaware’s statute is an island of stability, with changes being made only after careful study and reflection. Delaware’s constitution requires a super-majority vote by the legislature to amend the corporation law, protecting the DGCL from one-time amendments proposed by special-interest groups or influential corporations. This keeps the DGCL stable and predictable for all of Delaware’s corporations, which is important to managers charting a long-term course for their businesses.

Further, the Delaware legislature relies on the assistance of a group of experienced Delaware corporate lawyers to advise and recommend annual amendments. This group is drawn from a wide variety of practitioners (transactional attorneys, plaintiffs’ lawyers, and corporate litigators), each of whom has expertise in Delaware corporate law and deals with it on a daily basis, and who themselves may solicit views of experts from outside of Delaware. Each year, this group studies the DGCL and recommends for passage the crucial amendments necessary to keep the DGCL current and responsive to the needs of the managers and owners of Delaware’s corporations. Partisan divides are unheard of, because both political parties understand that trillions of dollars are invested in these corporations and respect the importance of ensuring that managers and investors can rely on a statute with real integrity, efficiency and reliability. The DGCL therefore combines the stability of its long history with the most current and advanced ideas in corporate law.

For information on the law firms and corporate service providers that authored these articles, please visit our acknowledgements page. The State of Delaware is grateful for their assistance.

Legal Disclaimer: The materials contained herein are intended to provide information in regard to the subject matter covered. The Delaware Department of State is not engaged in rendering legal, accounting, or other professional services. If legal advice or other professional assistance is required, the services of a qualified professional should be sought.

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