DELAWARE: An Introduction
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DELAWARE: THE JURISDICTION OF CHOICE
Every US business organization must select which US state law should apply to its creation and every agreement must specify what law will govern its terms.
More than two-thirds of the Fortune 500 companies and eighty percent of all firms that go public select the law of the State of Delaware. The same may be said for participants in industries ranging from private equity, secured financing and investment funds to aviation, joint ventures and hedge funds.
In addition, Delaware law may be selected to govern sophisticated transactions to apply to even if the parties have no connection with the State of Delaware.
As a result, Delaware entities and/or law appear regularly in commercial transactions around the world.
WHY IS DELAWARE SO OFTEN THE JURISDICTION OF CHOICE?
It is not for tax reasons.
A combination of factors distinguishes Delaware from other US states:
• a knowledgeable legislature committed to keeping Delaware at the forefront of business law;
• a good working relationship between the legislature and corporate practitioners;
• an efficient and user-friendly Secretary of State office;
• an esteemed court system; and
• a well-established and expansive body of judicial precedent.
THE ROLE OF THE DELAWARE LAWYER
Only a lawyer that has passed the Delaware Bar exam and completed a five-month clerkship in Delaware may practice as a Delaware attorney. There are no exceptions.
Members of the Delaware Bar are regularly retained by other lawyers and in-house counsel worldwide to advise on the Delaware law aspects of a transaction.
The reason for this is because members of the Delaware bar advise not only on Delaware’s business statutes but also on the application of the opinions of the Delaware courts that interpret them. This is in contrast to lawyers that are not members of the Delaware Bar. For example, opinions from non-Delaware lawyers will typically address the Delaware statutes only. However, without consideration of the Delaware courts’ opinions, the value of such opinion is limited.
DELAWARE’S CORPORATE AND ALTERNATIVE BUSINESS ENTITY STATUTES ARE STATE OF THE ART.
The Council of the Corporation Law Section of the Delaware State Bar Association (the “Council”) considers amendments to the corporate and alternative entity statutes on an annual basis. The Council is comprised of experienced Delaware corporate and alternative entity practitioners. Its members determine the current issues and experiences that may warrant an amendment to Delaware’s business statutes. The Council prepares draft amendments and, if approved by the Delaware State Bar Association, the legislature considers them.
The process results in the adoption of timely amendments to account for the development of modern business. Examples include amendments (i) to authorize public benefit corporations (aka B Corps, if certified), public benefit limited liability companies and limited partnerships and (ii) to permit the use of electronic transmissions and blockchain technology.
Delaware’s Corporate Statute
The General Corporation Law of the State of Delaware (DGCL) offers flexibility to corporations while simultaneously providing a number of mandatory provisions to protect investors and directors. The combination of the DGCL and the significant body of reasoned precedent provided by the Court of Chancery since 1792 provides a roadmap for the proper operation of corporations and their constituents.
Delaware’s Alternative Entity Statutes
The wealth of knowledge and experience with the DGCL forms the basis for the creation of alternatives to the corporate structure. Each of the Delaware Revised Uniform Limited Partnership Act and the Delaware Limited Liability Company Act are based upon the principle of “freedom of contract.” As a result, the alternative structures provide the ultimate flexibility to privately order a business’s affairs to fit the vision of their management and owners.
THE DELAWARE COURT SYSTEM
Delaware’s judicial system is world-renowned.
The Court of Chancery is a specialized court of equity that maintains specific jurisdiction over most business disputes. Many consider it the nation’s preeminent business court. In contrast to the courts in other states, there are no jury trials in the Court of Chancery and the judges are not elected.
Instead, the Court of Chancery consists of five judges (one Chancellor and four Vice-Chancellors) appointed based upon their experience in business law. This results in litigation that is effective and efficient.
A party may appeal a ruling from the Court of Chancery directly to the Delaware Supreme Court, the final authority on all business and commercial law issues. The Supreme Court consists of five Justices who have significant experience and expertise in Delaware business law. The Supreme Court often sits en banc (i.e. with all five Justices) when it hears important business disputes and will expedite a corporate case for the benefit of the parties when the dispute demands a real-time answer to avoid injustice.
THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE
The Secretary of State works as hard as the businesses that choose Delaware to govern them to be as modern and efficient. The time between the submission of documents for filing and the actual filing of the document may be as little as 30 minutes. The expedited filings translate into records that are up to date. As a result, it takes minutes, not days, to obtain evidence of a business entity’s legal existence or its payment of franchise taxes or annual fees. Skilled staff are readily available to help. There is always the potential that a commercial transaction will face obstacles. However, the processes employed by the Office of the Delaware Secretary of State will not be one of them.
DELAWARE’S UNIQUE POSITION AND FLEXIBILITY HELPS BUSINESSES MEET THE CHALLENGES OF ESG INVESTING
Under Delaware law, businesses have the ability to structure operational regimes that meet environmental, social, and governance (ESG) goals. As the focus on ESG continues to grow, the demands of investors and customers may be met by careful consideration of the options provided by the Delaware statutes and the opinions of the Delaware courts.
Corporations and alternative entities are very important to Delaware. The collaborative nature of the interaction between the Delaware legislature and the Council is nurtured to insure Delaware’s business entity statutes meet the needs of the business and investor communities. The respect for the sophisticated court system and its well-developed case law remains the cornerstone of Delaware as the jurisdiction of choice. When combined with Delaware’s modern and service-oriented Secretary of State Office, Delaware is the preeminent choice of jurisdiction for the creation and operation of business entities and the adjudication of their disputes. To take full advantage of Delaware’s unique combination of factors, consult with members of the Delaware Bar.