Delaware runs Corporate America: The History of Why

In undergraduate business school law courses, and law school corporate classes, everybody is taught Delaware corporate law. One would otherwise assume these students would be taught the law in innovation hubs like Silicon Valley. Let’s examine why this is.

FedEx, Disney, and Netflix share one common business practice, as with 64% of other Fortune 500 companies. These businesses are all incorporated in Delaware, due to the power of the state’s judicial system. Delaware’s Court of Chancery is undeniably the most powerful business court in the United States, serving landmark precedents that reshape American business practice.

The Delaware Court of Chancery is one of the oldest courts in American history, dating back to 1792 as a Court of Equity.[1] Originally, all of the 13 colonies had this sort of court, but they merged their Equity and Common Law courts after independence to broaden one judge’s pallet. However, Delaware kept a two-court system to reflect the state’s uniqueness hereafter, and the desire of current Delaware judges.

As businesses grew larger in the United States, the U.S. Congress installed the 1890 Sherman Antitrust Acts, meant to break up large corporations, such as Carnegie Steel and Standard Oil, into smaller companies to increase market competition. These Acts held individual personnel liable, so business executives looked for a backdoor to avoid personal liability when their companies went to court, and thus the idea of incorporation grew. In court, a person cannot personally be penalized if their work is on behalf of an incorporated entity, which results in the company being held liable and guaranteeing personal asset protection. Incorporation has become standard for virtually all businesses today, aside from solo proprietorships, new partnerships, and your typical small-town family run businesses.

Concurrently with the 1890 Acts, Delaware eased incorporation requirements and soon took the helm from New Jersey as the Motherland of Corporate America. Woodrow Wilson, the liberal Governor of New Jersey, was preparing for the 1912 U.S. Presidential election on a progressive platform. To appeal to primary voters with anti-big business sentiment, he shifted many of his policies to the left, such as raising incorporation prices and requirements in New Jersey to higher standards than those of Delaware. Delaware did not change its practices, and this was the start of Delaware’s rise in corporate governance. However, another major reason exists which makes Delaware a corporate haven too. With a court specific to corporate law, the decisions in Delaware are more predictable. The Chancery Court serves this function, which has had precedents favoring corporate interests, such as In re Walt Disney Derivative Litigation (I will most likely write in depth on this case in the future). Many companies would prefer going to court in front of judges with expertise in their field rather than a typical judge. Another way to look at it is “would you rather have a general physician, or a cardiac surgeon, operate heart surgery on you.” It only helps that the process for Delaware incorporation is simple: merely fill a form, give $75, and pay low annual taxes.[2]

Essentially, Delaware has the only court in the country which handles only corporate cases, and the judges on this court tailored their whole career for these seats. This appeals to companies who want favorable results in courtrooms, and leads these companies to incorporate in Delaware so that, if sued, they will have a better shot at winning lawsuits. To best prepare for this, corporate attorneys and future corporate workers are tailored in Delaware law, which is what they will be under jurisdiction of.  This is unlikely to change in the future, so it will be interesting to see new corporate governance cases unravel in Delaware. I predict antitrust and fiduciary cases will be the hottest topics in the near future.

I wrote a term paper on this topic in college, so my interest in this subject matter has always been high. As always, direct any questions or comments to amahdi1128@hotmail.com.

[1] Quillen, Hanraham 1993.

[2] How to Form a Business Entity

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