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Why Corporations Choose Delaware

4 April 2013 - Mountain View, CA

One of the first questions that an early stage startup lawyer encounters when engaging a new company is where to incorporate. There's been a robust discussion on the topic, with commentators like George Grellas, Ryan Roberts and Yokum Taku all chiming in with varying degrees of support for Delaware.

In the course of fielding this question from a startup myself recently, I came across a relatively obscure pamphlet from the Delaware Department of State that makes some great points worth putting down in a more concise form. While the tone of the pamphlet itself is a little over the top, at its core is a relatively good summary of the key things to know about Delaware incorporations.

So without further ado, here are the highlights from the much longer Why Corporations Choose Delaware:

Delaware General Corporation Law

"The statute itself is an enabling statute intended to permit corporations and their shareholders the maximum flexibility in ordering their affairs. As such, it does not purport to be a code of conduct. Indeed, it is written with a bias against regulation. When compared to some corporation laws where the drafters have attempted to regulate every nuance of corporate behavior or deal with every conceivable eventuality, the Delaware statute has a spare, almost open quality. Every effort is made to simplify drafting and to avoid complexity."

The Legislature

"The Delaware General Corporation Law is the great beneficiary of an unwritten compact between the bar and the state legislature. In broad outline, its terms recognize that the legislature will call upon the expertise of the Corporation Law Section of the Delaware Bar Association to recommend, review and draft almost all amendments to the statute. It is understood that the bar is obligated to leave parochial client interests behind when proposing corporate legislation, to present issues fairly and in an even-handed fashion, and always to deal candidly with the legislature on matters involving the corporation law. This understanding is greatly helped by the fact that Delaware is such a small state. The old maxim that one’s word is one’s bond works better in an environment where the people involved interact regularly. Because of this arrangement, the Delaware legislature, in exercising its legislative function, is able to utilize the sophistication of people who deal with corporation law matters on a daily basis and, through them, to tap into the network of lawyers throughout the country who regularly pass along constructive ideas and suggestions to the Delaware bar."

The Courts

"Delaware’s Court of Chancery dates to 1792. The roots of separate chancery courts to deal with matters of equity, as distinct from matters of law, go back much farther, to the ecclesiastic courts of Norman England. The reasons why a separate equity court was created in Delaware are obscure. The important fact is that cases involving corporation law issues came to be concentrated in a separate court in Delaware where there were no juries and where judges were called upon, on a regular basis, to explain the reasons for their decisions in written opinions. Over time, this body of decisional law, and the reputation for expertise in corporate matters which followed, caused more and more jurisdiction over business issues to be centered in the Court of Chancery. In effect, the same kind of symbiosis occurred—and continues—in the court system as in the development of statutory law. The Court of Chancery developed expertise in corporation law matters. Its reputation for expertise led, in turn, to more cases being brought to the Court and, over time, more expertise."

The Secretary of State's Office

"The personnel of the Division of Corporations think of their agency as a business. And, indeed, the Division is that rarest of state agencies—one that makes a profit. This entrepreneurial attitude is in marked contrast to the bureaucracy that bedevils the private sector in dealing with the Secretary of State’s counterparts in some other states. The personnel of the Delaware Secretary of State’s Office think of themselves as employees of a service business. Their attitude has won friends for Delaware among users of the Secretary of State’s Office and contributes to Delaware’s success in attracting new incorporations."

Conclusion

"It is also likely that Delaware will continue to enjoy its enviable position. Bayless Manning, the former Dean of Stanford Law School, stated it perfectly when he described the synergies that cause him to recommend Delaware to his clients. After saying some nice things about Delaware lawyers, he went on to say, in words that describe Delaware’s attraction almost as a force of nature: 'Further, my Delaware counsel and I will have a wide ranging and sophisticated body of corporation law—a jurisprudence if you will—to bring to bear on almost any problem that will arise. No other jurisdiction can provide so much. And that is why Delaware is national and why its own gravitational pull tends to attract more companies each year and thereby, further reinforces its preeminence.'"

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