Delaware’s continued resilience: The next hundred years

Abstract

Introduction The dominance of Delaware in terms of incorporations is well known, but bears repeating. Delaware has a population under 1 million people and is the second smallest state in the United States geographically. Delaware is, however, the state of formation of over 1 million legal entities – i.e., more legal entities than natural persons – that include 66 percent of the Fortune 500. Rather than eroding, in recent years Delaware's dominance in incorporations has held steady or grown with 86 percent of US-based initial public offerings in 2015 selecting Delaware as the state of formation. Delaware's peculiarly dominant position is based on the twin pillars of the Delaware General Corporation Law and the Court of Chancery of the State of Delaware coupled with a single level of appeal to the Delaware Supreme Court, with further support provided by the Office of the Secretary of State of the State of Delaware. We believe that what makes those institutions stand out from their counterparts in other jurisdictions is Delaware's tendency toward a “middle-of-the-road” approach, particularly in circumstances in which management's interests may be in tension with those of stockholders. Further, through its fast-moving court system and annual process for updating the Delaware General Corporation Law, Delaware develops these middle-of-the-road approaches with a responsive, but considered, work ethic. There are potential threats to Delaware's continued dominance in the field of corporate law, and additional threats may develop in the future. We believe that Delaware's responsive, middle-of-the-road approach well positions Delaware to respond to these threats and maintain its dominant position. Nevertheless, although we believe it unlikely, Delaware could be dethroned. If US corporate law were ever wholly federalized that would, of course, be the end of the line for the traditional system of state regulation of corporate law. Further, if exogenous, noncorporate law factors ever have a material impact of the business decision of the appropriate jurisdiction in which to incorporate (and whether to stay there), there may be little that Delaware can do to prevent a substantial migration of corporations out of Delaware. STRUCTURAL BASES FOR DELAWARE DOMINANCE Delaware's prominent position in corporation law traces back to the Delaware Constitution of 1897, and the 1899 General Corporation Law, and grew over the course of the early twentieth century.