An August, 2015 Wall Street Journal article argues that corporations are souring on Delaware as their desired state of incorporation. Long ago, Delaware made a conscientious effort to attract corporations, building a comprehensive and knowledgeable business court system. Over time, this has attracted many businesses as the courts have shaped corporate law doctrine. Read any corporate law textbook, and many of the cases are in Delaware courts. Corporations are attracted to Delaware due to the knowledgeable business court system, pro-business attitude, and comprehensive and established corporate law principals. As the article notes: “’Delaware has long been a preferred place of incorporation because we have a legal community and court system with unparalleled experience in corporate law matters,’ said a spokesman for Delaware Gov. Jack Markell.” But are corporations turning away from Delaware?
We have assisted clients form Delaware corporations for several reasons. The common reason, for our clients, is financing and an end-goal of selling the corporation. Financiers and acquiring companies like to see a Delaware corporation for their investment, for the reasons given above. But, as this WSJ article points out, some companies are not so pleased with Delaware anymore. Noted in the article is an issue Dole is facing in Delaware court, namely a potentially costly shareholder lawsuit. Dole complains that Delaware hasn’t done enough to stop shareholder litigation, such as refusing to require that suing shareholders that lose their lawsuit bear the cost of the corporations legal fees in defending the lawsuit. Defending a shareholder lawsuit can be extremely costly, and corporations argue that Delaware hasn’t done enough to stem a recent rise in shareholder litigation.
Whether large corporations leave Delaware is left to be determined, but several states have taken steps to attract corporations. Michigan is one state that has taken a page from Delaware’s playbook. One argument for incorporating in Delaware is their knowledgeable and dedicated business court system. A corporation doesn’t want their complicated takeover lawsuit or shareholder claim before a judge that mostly sees civil matters such as divorce and personal injury. Hence, a dedicated business court is one method to attract corporations. By having judges and courts that solely deal with business disputes, one main attraction of Delaware is eliminated.
We will discuss the Michigan business court system in a later post. The turmoil in Delaware is something new corporations may wish to consider. For some start-ups, the benefits of Delaware far outweigh any possible drawbacks, or the proposed changes and legal issues simply won’t be an issue in the future, given the business plan of the corporation. For some corporations, though, Delaware may no longer be the best option. In our next post, we will discuss the Michigan business court system, and why corporations should consider Michigan as their state of incorporation.