Delaware General Corporation Law

The Delaware General Corporation Law (Title 8, Chapter 1 of the Delaware Code) is the statute governing corporate law in the U.S. state of Delaware. Over 50% of publicly traded corporations in the United States and 60% of the Fortune 500 are incorporated in the state.^[1]

History

Delaware acquired its status as a corporate haven in the early 20th century. Following the example of New Jersey, which enacted corporate-friendly laws at the end of the 19th century to attract businesses^[2] from New York, Delaware adopted on March 10, 1899, a general incorporation act aimed at attracting more businesses. The group that pushed for this legislation was not acting entirely from altruism, as they intended to establish a corporation that would help other businesses incorporate in Delaware.^[3] Before the rise of general incorporation acts, forming a corporation required a special act of the state legislature. General incorporation allowed anyone to form a corporation by simply raising money and filing articles of incorporation with the state's Secretary of State.

Incorporation and corporate operational provisions^[4]

• §102(b)(6) shareholders are not liable for corporate debts.
• §106 A corporation is considered to be in existence after its certificate of incorporation is filed with the secretary of state.
• §109(a) shareholders have the right to change the bylaws.
• §126 Corporations cannot act as banks.
• §132(a) Every corporation must maintain a registered agent in the state.
• §141(a) 'The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.' So there is a requirement for a board of directors or a comparable organ.
• §141(b) the board's quorum for director meetings cannot be under one-third.
• §141(c) committees of the board cannot be given authority to amend the certificate of incorporation, merge, or recommend dissolution or sale to shareholders, or amend by laws.
• §141(d), a director can serve no longer than three years, and if the board is classified one class must stand for election each year
• §141(k) states that directors can be removed without any cause, unless the board is "classified", meaning that directors only come up for re-appointment on different years. If the board is classified, then directors cannot be removed unless there is gross misconduct.
• §170, regulation of distributions.
• §202(b), restrictions on transferability of stock cannot be imposed on shares previously issued without the shareholder's consent.
• §211, there must be an annual meeting of shareholders for election of directors and (d) shareholder meetings can only be called if the constitution allows for it.
• §216, the quorum for shareholder meetings cannot be less than one-third of those entitled to vote. Also allows for plurality voting.
• §218, a voting trust cannot last longer than ten years.
• §219, shareholders have the right to inspect the shareholder register within ten days of a meeting.
• §220, right to inspect corporations books and record for a proper purpose at any time.
• §226, right of the court to appoint one or more persons to be custodians, and, if the corporation is insolvent, to be receivers, if board is deadlocked and company solvency is threatened.^[5]
• §242(b)(1) any constitutional amendment requires a resolution by the directors, and then a majority vote of shareholders, and the affected classes.
• §271, sale of substantially all the corporation requires majority shareholder approval.
• §275, dissolution of the corporation requires majority shareholder approval.
• §262, shareholders dissenting from a merger have the right to be bought out at a fair value ("appraisal rights").
• §327, shareholders have the right to a derivative claim for a breach of duties of care or loyalty.

Other legal aspects

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, as opposed to a court of law.^[6] Because it is a court of equity, there are no juries, and its cases are heard by judges, called chancellors. Since 1989, the court has consisted of 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.

Delaware has also attracted 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.^[7] Delaware (amongst others) has relatively relaxed interest laws,^[8] 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,^[9] but is subject to restrictions of other states' laws if it conducts business in other states.^[8]

Pursuant to the "internal affairs doctrine", 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.^[10] As a result, Delaware corporations are subject almost exclusively to Delaware law, even when they do business in other states.

While most states require a for-profit corporation to have at least one director and two officers, Delaware laws do not have this restriction.^[11] All offices may be held by a single person who also can be the sole shareholder. The person, who does not need to be a U.S. citizen or resident, may also operate anonymously with only the Listing Agent with whom the company is registered with Delaware named.^[12] This proves advantageous in civil suits as the owner or owners cannot be disclosed under Delaware law and thus are safe from being sued alongside the company.^[13] However, this does not apply if the civil suit is in regards to having committed a criminal act which the business has been found guilty of in court.^[14]

Case of TransPerfect

According to Section 226 of the Delaware General Corporation Law (DGCL) the Court of Chancery is permitted to appoint a receiver or custodian for a corporation when its stockholders or directors are divided and the deadlock is injurious to the corporation.^[15] In August 2015, the head of the Delaware Chancery, Chancellor Andre Bouchard employed 226(a) of the DGCL to order the dissolution of a company that was not in financial distress, nor at risk of insolvency, because its co-owners could not get along.^[16] The forced sale of TransPerfect is the first time a company that did not meet the criteria for receivership and mandated sale under Delaware law was being forced to dissolve, to award one board member who wanted to exit with a control premium.^[17][18] Former New York Mayor Rudolph Giuliani has taken an interest in this case because of what he views it as "contradictory" to the Delaware corporate laws.^[19]

Under the law, the Chancery is not obligated or even mandated to make accommodations for any party to sell his or her interest. The only concern for the Delaware court is to make sure that a company is run well and not being harmed. In this regard, the case of TransPerfect can seem at odds with the court's mandate.^[20] The Chancellor decided to mandate the sale of the company because the two directors were locked in a dispute that left them unable to negotiate among themselves.^[21] At issue, however, is that in doing so, the Chancery and the Chancellor appear to be seeking an inequitable share for one of the partners who wanted to exit and asked for an offer to leave, forcing the partner who would prefer to remain and operate the firm to exit as well.^[22] The court cited employee affidavits attesting to one party's commitment over the other's.^[22]

On April 27th 2016,^[23] rather than sealing his decision, Chancellor Bouchard told the parties to take more time and to come to a resolution outside of the courtroom. Shawe then made a public offer of $300M to his co-founder.^[24]

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 taxation.^[25] At the same time, 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 corporate expenditures (achieved through legal standardization of corporate legal processes), creating a nucleus in Delaware with operating companies often in other states.^[26]

In addition, Delaware has used its position as the state of incorporation to generate revenue from its abandoned and unclaimed property laws. Under U.S. Supreme Court precedent, the state of incorporation gets to keep any abandoned and unclaimed property, such as uncashed checks and unredeemed gift certificates, if the corporation does not have information about the location of the owner of the property.^[27]

A state may levy, however, a franchise tax on the corporations incorporated in it. Franchise taxes in Delaware are actually far higher than in most other states which typically charge little or nothing beyond corporate income taxes on the portion of the corporation's business done in that state. Delaware's franchise taxes supply about one-fifth of its state revenue.^[28]

In February 2013, Economist published an article on tax-friendly jurisdictions, commenting that Delaware stood for "Dollars and Euros Laundered And Washed At Reasonable Expense". Jeffrey W. Bullock, Delaware's Secretary of State, insists that the state has struck the right balance between curbing criminality and "paying deference to the millions of legitimate businesspeople who benefit" from hassle-free incorporation.^[29]

2013 amendments

On June 30, 2013, Delaware Governor Jack Markell signed into law amendments to the Delaware General Corporation Law that affect several provisions in the current law and could substantially affect the process through which public companies are merged. The new legislation took effect August 1, 2013, except for ratification of defective corporate acts amendment which took effect in 2014.^[30]

See also

• Combined reporting
• Corporation Service Company
• Corporation Trust Center (CT Corporation), Wilmington, Delaware, home to over 6,500 Delaware corporations
• Corporation
• Corporate haven
• Delaware Journal of Corporate Law
• Say on pay
• Flag of convenience (business)
• United Kingdom company law

Notes

1. "About Agency". Delaware Division of Corporations.
2. Cary, William L. (1969). Cases and Materials on Corporations. Mineola: The Foundation Press , Inc. p. 9.
3. A History of Delaware Corporation Law, S. Samuel Arsht, Delaware Journal of Corporate Law, 1976, pg. 6.
4. CHAPTER 1. GENERAL CORPORATION LAW. Delcode.delaware.gov. Retrieved on 2013-09-05.
5. "2014 Delaware Code". Justia US Law. § 226. Appointment of custodian or receiver of corporation on deadlock or for other cause (Title 8 - Corporations). 2014.
6. "Overview of the Delaware Court System". Delaware State Courts.
7. "Interpretive Letter #822" (PDF). Interpretations and Actions (Office of the Comptroller of the Currency) 11 (3). March 1998.
8. Usa Ibp Usa (2009). Us Company Laws and Regulations Handbook Volume 2 Delaware. Int'l Business Publications. ISBN 1433070820.
9. Webber, Annie (21 Jul 2015). "Delaware, the Tiny Capital of Big Business". Legal Hero.
10. Edgar v. MITE Corp, 457 U.S. 624 (1982).
11. "DEL CODE § 141 : Delaware Code - Section 141: BOARD OF DIRECTORS". Findlaw.com. Thompson Reuters.
12. Watson, Libby (6 Apr 2016). "Why are there so many anonymous corporations in Delaware?". Sunlight Foundation.
13. Biron, Carey L. (19 Jun 2014). "Delaware To Remain U.S. "Shell Corporation" Capital". Mint Press, LLC. Mint Press News.
14. Wayne, Leslie (30 Jun 2012). "How Delaware Thrives as a Corporate Tax Haven". New York Times.
15. "DEL CODE § 226 : Delaware Code - Section 226: APPOINTMENT OF CUSTODIAN OR RECEIVER OF CORPORATION ON DEADLOCK OR FOR OTHER CAUSE". Findlaw.
16. Gerasimovich, Kenneth (15 Dec 2015). "Delaware Chancery Court Appoints a Custodian to Sell Deadlocked Company". Globe Business Media Group. Lexology.
17. Waltz, Samuel (26 Apr 2016). "Giuliani steps into ‘business divorce’ case in Chancery". "The Chancellor appears to want to not merely force the sale of the company, but to award the control premium to one party alone. That is not equitable, and this is an equity court.”. Delaware Business Times.
18. Elstein, Aaron (25 Aug 2015). "Court orders feuding biz partners, ex-lovers, to sell their profitable translation firm". Crain's NY.
19. Mordock, Jeffrey (22 Apr 2016). "Giuliani blasts Delaware court for decision in lover's spat". Delaware New Journal.
20. Gerasimovich, Kenneth (15 Dec 2015). "Delaware Chancery Court Appoints a Custodian to Sell Deadlocked Company". Greenberg Traurig, LLP. GTLaw Newsletter.
21. Cline, Joanna; Levine, James; Chuff, Christopher (3 Sep 2015). "CHANCERY ORDERS SALE OF SOLVENT COMPANY TO RESOLVE BOARD DEADLOCK". Pepper Hamilton LLP.
22. "In re: SHAWE & ELTING LLC". Delaware Court Decision Elting V Shawe. "The distinct possibility also exists that Shawe would be the most logical purchaser of the business or that a third party would be unwilling to acquire the Company without securing his participation and expertise." (C.A. No. 9700-CB): 83. 13 Aug 2015.
23. Waltz, Samuel (26 Apr 2016). "Former NYC Mayor Giuliani’s 2 cents’ worth seems very welcome". Delaware Business Times.
24. Elstein, Aaron (2 May 2016). "Feuding ex-lovers inch closer to a TransPerfect divorce". Crain Communications. Crain's New York.
25. http://corplaw.delaware.gov/delaware_law.shtml>
26. Ryan, Patrick S. (Winter 2004–2005). "Will There Ever Be a Delaware of Europe?". Columbia Journal of European Law 11: 187.
27. "State General Fund Revenues by Category (F.Y. 2002 - F.Y. 2005)" (PDF). Delaware 2005 Fiscal Notebook. Delaware Department of Finance.
28. "State General Fund Revenues by Category (F.Y. 2002 - F.Y. 2005)" (PDF). Delaware 2005 Fiscal Notebook. Delaware Department of Finance.
29. "Onshore financial centres: Not a palm tree in sight". The Economist (2013-02-16). Retrieved on 2013-09-05.
30. "Significant Amendments to Delaware General Corporation Law Enacted". Holland & Knight Securities Bulletin. August 5, 2013.

External links

• Delaware Department of State, Division of Corporations Official website, corporation name search.
• Delaware's General Corporation Law
• Delaware Division of Corporations
• The Delaware Journal of Corporate Law