In 2014, approximately 169,000 new business entities were formed in Delaware, a new state record. Corporate formations have rebounded from a lull following the financial collapse of 2008, and in recent years a growing number of international entities have chosen Delaware as a legal domicile. At last count, 65% of all Fortune 500® companies were incorporated in Delaware. During the last 10 years, 85% of all initial public offerings involved companies that were formed here.1
Why do so many companies decide to incorporate in Delaware? It’s the second smallest state in the US with one of the smallest population wise too. Yet Delaware continues to be the heavyweight when it comes to corporate formation.
There are four factors that can basically explain this phenomenon.
- Theory and philosophy of law
- Division of courts – Law and Equity
- Judicial culture
- Revenue to Delaware
Throughout much of early U.S. history, corporations existed strictly as entities for the public benefit. To form a corporation, an organization had to demonstrate some kind of public purpose (think universities, hospitals, or companies charged with improving infrastructure such as roads, bridges, and canals). Starting in the 19th century came the age of the railroad, oil and steel barons that required new business entities that were not just for the public benefit.
New Jersey was the first state to create business law to allow incorporation for any lawful business or purpose. Many states followed New Jersey’s lead and adopted its corporate laws. In 1899, Delaware adopted the New Jersey law and way undercut the fee to incorporate. While some states charged as much as $3,000, Delaware charged a mere $150.
Factor 1: Theory and Philosophy of Law
As one of the first U.S. states to adopt a General Corporation Law, from a legal standpoint Delaware enjoyed a distinct advantage. Every business matter that was litigated under the Delaware statute served to build a body of law that made it clear to all who followed what the outcomes of any business-related legal actions would likely be. From a business owner’s perspective, certainty and understanding risk is a key concern.
Factor 2: Division of Courts – Law and Equity
In most US states, the criminal and civil cases are tried by a jury in a single court system. Delaware is different. Here the court system is divided into two distinct parts: a court of law and a court of equity. Under this system, criminal and most civil statutory and contractual matters are heard in the court of law, which has a jury system and a presiding judge.
Matters of fiduciary duty and corporate governance, on the other hand, are heard in the court of equity, which in Delaware is called the Court of Chancery. The Delaware Court of Chancery has no jury—only a judge.
So speed makes Delaware’s divided court system so attractive to businesses. In most U.S. states criminal cases are heard before civil cases, which can push corporate matters well to the back burner. For example, in many states, if you sue someone for breach of a business agreement, it could take as long as three years before you even see a jury.
Delaware is faster! A survey of 200 cases brought before the Court of Chancery between 2009 and 2011 found that in cases where the court ruled on a motion for temporary restraining order, on average it decided the motion a brisk seven days after it was filed. For cases where the court ruled on a motion for preliminary injunction, on average it decided the motion just 26 days after filing.2
Factor 3: Judicial Culture
Delaware judges aren’t elected. They’re vetted by well-respected members of the state bar and are then appointed by the governor based in large part on those attorneys’ recommendations. The result is a very skillful, focused, and motivated judiciary. Simply put, if you want a business matter decided quickly, reasonably, and dispassionately, you won’t find a better place than the Delaware Court of Chancery
Factor 4: Revenue to Delaware
Corporate franchise taxes are a huge revenue source to our second smallest state. In fiscal year 2014, corporate franchise taxes and fees added $928 million to Delaware’s state account, more than one quarter of our annual state budget.
Based on the four factors above, Delaware will continue to be the domicile of choice for US and international businesses.
1 Delaware sets record for new businesses,” News Journal, Jan. 6, 2015.
2 “The Delaware Court Of Chancery: Forum for Enforcement of Trade Secret Rights,” by Adam W. Poff and Gregory J. Brodzik, BNA’s Patent, Trademark & Copyright Journal, 87 PTCJ 478, Jan. 3, 2014.