Corporate Law

Why Businesses Choose Delaware

The question is often asked—why Delaware? Why does this small state (the second smallest in the United States) occupy such a large place in the world of business entities? The question has several answers, but most of the answers are not what people think. For example, Delaware is not a tax haven, Delaware does not charter secret corporations exempt from public knowledge and inquiry, and Delaware is usually not the cheapest option for incorporation. We are far more like Bergdorf Goodman or Tiffany than we are like the Dollar Store. You pay for quality and service.

Delaware is neither “management-friendly” nor “stockholder-friendly”; its aim is to provide both managers and investors with laws optimal for engaging in ethical and profitable business, by balancing the need for managerial flexibility with strong tools to hold managers accountable for using that flexibility to advance the best interest of investors. Delaware’s judges are impartial and not beholden to special-interest donors or shifting political winds. Unlike in many other states, Delaware corporate law cases are tried exclusively by professional judges, and not by juries.

Delaware has been the premier state of formation for business entities since the early 1900s. Today, more than two million business entities have made Delaware their legal home. Although the number of entities organized in Delaware is impressive, even more important is the fact that so many large and important corporations whose shares are listed on major stock exchanges are incorporated in Delaware. Indeed, more than 67.6 percent of the Fortune 500 companies are incorporated in Delaware. But organization in Delaware is not only for U.S. entities—companies around the world can take advantage of Delaware’s benefits. [See Beyond the Borders: Delaware’s Benefits for International Business.]

A number of factors have led to Delaware’s dominance in business formation.

First, the statute—the Delaware General Corporation Law (“DGCL”) is the foundation on which Delaware corporate law rests. [See Delaware’s Sound and Enabling Statute.] The DGCL offers predictability and stability. It is shaped by corporate-law experts and protected from influence by special-interest groups. The Delaware legislature every year reviews the DGCL to ensure its ability to address current issues.

The DGCL is also an enabling statute. Delaware’s corporate statute is not a detailed, prescriptive “company law” such as exists in many nations. Instead, the DGCL includes a few important mandatory requirements to protect investors and otherwise provides flexibility for corporations to carry out their business. Delaware has also applied the principles of the DCGL to create leading statutes for business entities other than corporations. [See Delaware’s Alternatives to Corporations.]

Second, the courts—as important as the statute itself are the courts that interpret it. Delaware is known worldwide for its judicial system and the expert and impartial judges that decide its corporate cases. [See Litigation in the Delaware Court of Chancery and the Delaware Supreme Court.] The Delaware Court of Chancery is a specialized court of equity with specific jurisdiction over corporate disputes. Without juries, and with only seven expert jurists selected through a bipartisan, merit-based selection process, the Court of Chancery is flexible, responsive, focused and efficient. Cases from the Court of Chancery are appealed directly to the Delaware Supreme Court, which is the ultimate word on Delaware law. The Supreme Court has five justices, each of whom has considerable experience with Delaware’s business law. Delaware’s courts also offer a number of options for dispute resolution outside of litigation. [See Delaware’s Options for Alternative Dispute Resolution.]

Third, the case law—the Court of Chancery and the Delaware Supreme Court both have a historical tradition of issuing reasoned written opinions supporting their decisions, thus allowing a significant body of precedent to accumulate over many decades. Judges, not juries, decide all corporate cases and must give reasons for their rulings. The resulting body of case law provides detailed and substantive guidance to corporations and their advisors.

One of the key concepts embodied in Delaware case law is the “business judgment rule,” which is a judicial recognition that law-trained judges should not second-guess business decisions made by directors in good faith and with due care— even if the decisions turn out badly. Along with the business judgment rule, the case law includes guidelines for directors in upholding their fiduciary duties of loyalty and care. [See The Delaware Way: Deference to the Business Judgment of Directors Who Act Loyally and Carefully.]

Fourth, the legal tradition—along with a sophisticated judiciary, Delaware has an ample supply of lawyers expert in Delaware corporate law. Delaware’s statutes and case law provide a base of knowledge for attorneys who specialize in Delaware transactional matters and who practice in front of Delaware’s courts. These professionals also help the legislature by continually reviewing the business statutes and annually recommending changes to keep Delaware’s law current. [See Delaware’s Sound and Enabling Statute.] No matter where a Delaware entity is headquartered, it can find expert attorneys in Delaware to help it navigate issues of Delaware law.

Fifth, the Delaware Secretary of State—the Division of Corporations of the Delaware Secretary of State’s Office exists to provide corporations and their advisors with prompt and efficient service. Incorporations provide a major portion of the State’s revenue, so Delaware takes its role seriously. The personnel of the Division of Corporations view themselves as employees of a service business, and the Division meets worldwide quality standards as evidenced by its ISO 9001 certification.

Delaware’s Division of Corporations is open 15 hours a day to accommodate requests for filings from around the world; it offers specialized and expedited services (“(including 30-minute, one-hour, two-hour, same day, and 24-hour service) for urgent and time-sensitive matters. [See Forming a Delaware Corporation.] The Division of Corporations, in conjunction with expert Delaware lawyers and experienced supporting businesses such as Delaware registered agents, can handle nearly any situation.

Find out why foreign investors select Delaware as the home of their U.S. operations.

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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