Thousands of U.S. companies incorporate in Delaware because it has the most business friendly state statutes and court system. Whether it is appraisal suits in mergers or acquisitions, manager discretion, or corporate spending, the business courts and state legislature have created an environment where it is difficult, if not impossible, for shareholder plaintiffs to prevail, and if they lose the results can be draconian.
Of the U.S. firms who have gone public in the last two years, 85% have incorporated in Delaware, and 55% of public companies overall. The motivation for Delaware is a no-brainer: the annual corporate fees for the incorporating companies is over $1 billion, which is 26% of the state’s budget. Of course, this revenue does not include the cottage industry supporting the companies incorporating there like law firms, support companies, and restaurants.
The next closest states to harbor public corporations are Nevada with 14% and Maryland with 6%. The fact that Delaware is leading the race to the bottom by this magnitude and has for decades, tells the tale. Quite simply, Delaware has made it the easiest for businesses to do what they want with as little judicial oversight as possible, and when lawsuits do get filed, there are enough landmines to narrow down the number of suits that survive.
Why does this matter to the average U.S. investor? Because jurisdiction and terms of the litigation for the business-related lawsuits are often decided by the place of incorporation or the companies own by-laws. Companies like Wal-Mart, Chevron, General Motors, Ford, Dole, all opt to incorporate in Delaware to minimize the pesky lawsuits that demand investors be paid market price for their shares or just to be treated fairly.
At the expense of main street, Delaware generates a billion dollars in fees year after year with almost no oversight. There is simply no motivation for Delaware to balance shareholder rights with corporate governance rules. Instead, Delaware has actively lobbied federal officials to ensure acts like the Dodd-Frank financial overhaul didn’t tread on its state court system or its rules. Delaware has been successful protecting its turf, and it is way past time to ensure that one state cannot single handily protect corporate America while lining its own pockets.
