Delaware General Corporation Law

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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[2] (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, 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.

Delaware has also attracted some major credit card banks because of its relaxed rules regarding interest. Many U.S. states have usury laws limiting the amount of interest a lender can charge. Federal law allows a national bank to "import" these laws from the state in which its principal office is located.[3] Delaware (amongst others) has relatively relaxed interest laws. So several national banks have decided to locate their principal office in Delaware. National banks are, however, corporations formed under federal law, not Delaware law. A corporation formed under Delaware state law benefits from the relaxed interest rules to the extent it conducts business in Delaware, but is subject to restrictions of other states' laws if it conducts business in other states.

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 with regard to the regulation of the internal affairs of the corporation.[4]

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. Under this rule, the states have an incentive 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 U.S. corporations is because it has made itself the most attractive in this respect.[5] 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.

While most states require a for-profit corporation to have at least one director and two officers, Delaware laws do not have this restriction. All offices may be held by a single person who also can be the sole shareholder. The person, who does not need to be US citizen or resident, may also operate anonymously.

Tax benefits and burdens

Delaware charges no income tax on corporations not operating within the state, so taking advantage of Delaware's other benefits does not result in an income tax cost. That said, Delaware has a particularly aggressive tax on banks that locate in the state. However, in general, the state is viewed as a positive location for corporate tax purposes because favorable laws of incorporation allow companies to minimize the corporate expenditures (achieved through legal standardization of corporate legal processes), creating a nucleus in Delaware with operating companies often in other states.[6]

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