Economics

Delaware: A State that has More Business Entities than People

“What is equity? The word of course means simply fairness.” – The Honorable Sam Glasscock III, Vice-Chancellor of the Delaware Court of Chancery

Would it surprise you that Delaware has more corporate entities than people? How about the fact that 66% of Fortune 500 companies have incorporated in Delaware? With over a million corporations, why choose Delaware? While seemingly simple, Delaware combines legal, business, historical, and many other factors to attribute to its corporate prestige.

Entering my freshman year at the University of Pittsburgh, my friends would playfully joke about Delaware’s size and supposed lack of importance. Being a Delaware native, I have heard everything from, “Delawhere” to “isn’t that next to New Hampshire?”. As a state, Delaware offers everything from luscious beaches to family fun at the Wilmington Waterfront. However, nobody stops to look at a court of equity erected when George Washington was re-elected in 1792, the Chancery Court of Delaware.

If you were like me, before I began to enjoy and pursue law, you probably had no idea that a Chancery Court existed, let alone what it actually did. At this point, you are probably wondering, what even is a Chancery Court? With a bit of history, it is simple to see the main concepts of what  a Chancery Court is and the purposes it serves.

Back in feudal England, the King’s Chapel served as an entity issuing official documents that functioned as a legal foundation. Eventually, the Chapel evolved from check marks on documents such as royal writs to a Court of Chancery that allowed for a “remedy” despite not having procedural or practical problems. Basically, if there was an issue at hand, there was now a remedy from the rigid, corrupt common law courts to provide fairness or, in a more accurate term, equity. This fairness relied upon the English Chancellor’s ethical conscience on a case by case basis in deviation from the common law, of which he relied heavily upon. For instance, while extreme, if there was an issue determining a murder, the Chancellor would not simply apprehend and punish the criminal but would take into mind the situation at hand and other factors in determining his ruling. Eventually, with increasingly complex doctrines like the trust, the English Court of Chancery developed into an intricate and rigid entity, much like the common law courts it separated itself from to establish a flexible and equitable legal structure. Due to a lack of preservation of equity, the English Parliament dismantled the High Court of Chancery in 1875. However, Delaware’s Chancellors preserved the broad, while seemingly complex, remedies that favored the equitable standpoint of the initial English Chancery Court.

 

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Front Row (Seated Left to Right): Vice Chancellor Laster, Chancellor Bouchard, Vice Chancellor Sam Glasscock III Back Row (Standing Left to Right): Vice Chancellor Tamika Montgomery-Reeves, Vice Chancellor Joseph R. Slights III

 

Delaware represents equity through the moral sense of fairness, the recognition that universal rules must be taken on a case by case basis, and that the equity is flexible in application to specific situations. With its evolution today, the Delaware Chancery Court relied upon corporate entities to build and retain its prestige among the legal world of Business. Inversely, having a corporate backbone, like the Chancery Court, provides corporations the incentive to incorporate within Delaware, thus utilizing the equitable remedies for resolving corporate litigation and other related controversies.

Out of the three Chancery Courts throughout the United States (Mississippi and Tennessee are the others), Delaware’s court is premier to the rest. As a court of equity, the Chancery Court hears cases concerning both equitable rights and equitable remedies; in layman’s terms, they are along the lines of fiduciary duties, injunctions, suits related to business entities, and corporate documents (Mergers, Bylaws, and Charters). Another determining factor of Delaware’s prominence as a Court of Chancery is the fact that case results are determined on the basis of merit and not of politics. For instance, every decision, order, and so forth is released publicly for critique, in addition to the fact that the entire Delaware legal code is provided by the state online for free, baring one’s ability to access the internet. The “judges” of the Court of Chancery, known as the Chancellor and Vice-Chancellors, uphold the duty of law above all else, hence why the outcomes of cases are not determined by a jury but instead by the sheer law. To refer back to the 2005 decision on Cox Communications, INC. v. Shareholders Litigation, Former Vice-Chancellor Strine’s Decision on the case moved to “reform and extend Lynch” (a standard of review worded in Kahn v. Lynch Communication System, INC.). Basically, the review standard

“makes it impossible for a controlling stockholder ever to structure a transaction in a manner that will enable it to obtain dismissal of a complaint challenging the transaction, each Lynch case has settlement value, not necessarily because of its merits but because it cannot be dismissed” (Strine).

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The New Castle County Courthouse: Home to the largest portion of the Delaware Chancery Court

 

Fairly expanding this concept imposes the value of equity that the Chancery Court upholds to corporations incorporated in the state of Delaware. Thus, with incorporation in Delaware comes the entitlement to litigation in the Court of Chancery. For this reason, corporations want the complexity and equity that the Delaware General Corporations Code offers.

To this day, the state of Delaware accepts these generally looser platforms of incorporation in order to provide benefits to not only the state itself, but to the market and proper functions of business within the United States. While Delaware is small in size, the corporations indirectly (through taxes and related revenues) provide 40% of the state’s budget. For instance, the only things separating me from my dream of organizing my own corporation are the fees of incorporating and putting pen to paper my details for the Articles of Incorporation of my corporate entity. This is why large companies like J.P. Morgan Chase, Alphabet (the firm that owns Google), more than 50% of publicly traded companies on the New York Stock Exchange and NASDAQ, and 66% of fortune 500 companies have chosen to incorporate in Delaware; not to mention that 75% of initial public offerings occur in Delaware as well. All this and Delaware does not even have a million citizens. However, it certainly has more than a million corporations.

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