We note an interesting post from the Delaware Corporate and Commercial Litigation Blog, a nice source for the most current developments in Delaware, about that state's preeminence in the corporate law realm.
- Many of the numbers indicative of why Delaware law is important to our country's businesses, are familiar to readers of this blog, but the updated figures warrant repetition. There are many volumes that have been written about how and why Delaware maintains its national prominence in corporate law. This short post only highlights some of the "net numbers" aspect of that multi-faceted topic. As reported in the August 22, 2007 issue of the Delaware Law Weekly, in connection with the Chief Justice's speech, here is a sampling of the key data: As of April 2007, over 61% of all Fortune 500 companies were incorporated in Delaware, according to the Administrative Office of the Courts. Since 1973, 75 percent of all U.S. initial public offerings selected Delaware as their state of incorporation.
Sometime soon we will produce a list of the Fortune 500 and the state of incorporation. Suffice it to say that he is absolutely correct about the domination of Delaware. But having said that, it begs the question about why companies go there. We know why Delaware wants them. As the post continues:
- The revenue that the legal industry generates for the State of Delaware is also of vital importance to the First State and its residents as well. Over $709 million or 21.6 percent of all of the state's general fund revenue in fiscal year 2007 came from the corporate franchise tax and related fees. Corporations generated another $15 million in special fund revenue and about $10 million for local governments.
Delaware has a clear financial motive for attracting the Fortune 500. Thus, one can conclude from this data that Delaware could put in place a system of corporate law that is designed to attract companies and raise revenues. This is not the same as saying Delaware has an incentive to put in place the most efficient corporate law, the claim made by those who argue that Delaware is a race to the top. Moreover, since it is management that in the first instance decides where to incorporate, any state seeking to attract public companies to incorporate (or reincorporate) would need to implement an approach to law that would appeal to management.
So we know that Delaware has a financial incentive to attract companies and that the incentive is most easily met by putting in a legal system that will appeal to management.
Note that in my piece, The Irrelevance of State Corporate Law in the Governance of Public Companies, I note that the type of provisions that would appeal to management include increased discretion (often at the expense of shareholders), reduced liability (Delaware more or less invented the waiver of liability provision), and job preservation (witness the judicial hesitancy in Delaware to interfere with antitakover devices). There are plenty of reasons for companies to incorporate in Delaware. Protecting and promoting the interests of shareholders, unfortunately, is not one of them.