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Delaware General Corporation Law is the statute governing corporate law in the state of Delaware. Delaware is well known as a corporate haven. Over 50% of US publicly-traded corporations and 60% of the Fortune 500 companies are incorporated in the state.[1]
[edit] Legal benefits
Delaware began to stand out as a corporate haven when its laws began to give corporate management notable latitude in its powers to operate and control the corporation. This latitude has frequently come at the expense of the shareholders' ability to control the corporation. As the popularity of Delaware as a corporate home grew, Delaware also became known for the professionalism of its corporate governance lawyers and courts. Because of the extensive experience of the Delaware courts, Delaware has a more well-developed body of case law than other states, which serves to give corporations and their counsel greater guidance on matters of corporate governance and transaction liability issues. Disputes over the internal affairs of Delaware corporations are usually filed in the Delaware Court of Chancery, which is a separate court of equity (as opposed to a court of law). Because it is a court of equity, there are no juries, and its cases are heard by the judges, called chancellors. As of 2008[update], there are one Chancellor and four Vice Chancellors. The court is a trial court, with one chancellor hearing each case. Litigants may appeal final decisions of the Court of Chancery to the Delaware Supreme Court. The status of Delaware as a corporate haven is not recent: following the example of New Jersey, which enacted corporate-friendly laws at the end of the 19th century to attract businesses from New York, Delaware played the game of fiscal competition by adopting in 1899 a general incorporation act aimed at attracting more businesses. More broadly, many U.S. states have usury laws limiting the amount of interest a lender can charge, but Federal law allows corporations to "import" these laws from their home state.[2] Delaware (amongst others) has relatively relaxed interest laws, in effect allowing banks to charge as much as they want, hence the preponderance of credit card companies and other lenders in the state. However, other states—such as Nevada—are more friendly to corporations in certain respects, especially in offering protection from hostile takeovers.[citation needed] Delaware's lax corporate laws are important because the United States has an important corporate law doctrine called the "internal affairs doctrine." Pursuant to this rule, corporations which act in more than one state are subject only to the laws of their state of incorporation. As a result, Delaware corporations are subject almost exclusively to Delaware law - even when they do business in many (or even all fifty) states. Without this rule, national corporations would be subject to the varying (and potentially inconsistent) laws of each state. With this rule, the states are incentivized to have the most relaxed corporate laws to encourage corporate formation (because this results in increased revenues and fees for the state). The reason Delaware is the home of most US corporations is because it has made itself the most attractive on this count. Whether this was a "race to the bottom" or a "race to the top" - that is, whether this incentive created positive or negative externalities - is a matter of vigorous debate in the academic literature. This is especially relevant because even when a corporation is sued out-of-state, the laws of the state of incorporation apply under the internal affairs doctrine. For example, if a corporation is chartered in Delaware, but they do business in California and as a result they are sued in California, the California court still must apply Delaware law. This is true even if the corporation only operates in California and has never had any other contact with Delaware aside from incorporating there. Because states like California have many consumer protection laws that states like Delaware have chosen not to enact, incorporation in Delaware shields these corporations from such potentially overzealous legislation. [edit] Tax benefitsA major factor of Delaware's preeminence is related to the fact that Delaware charges no income tax on corporations not operating within the state. A state may levy, however, a franchise tax on the corporations incorporated in it. Franchise taxes in Delaware are actually far higher than in most other states which typically charge little or nothing beyond corporate income taxes on the portion of the corporation's business done in that state. Delaware's franchise taxes supply about one-fifth of its state revenue.[3] [edit] See also
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