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Delaware General Corporation Law

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The Delaware General Corporation Law (sometimes abbreviated DGCL), officially the General Corporation Law of the State of Delaware (Title 8, Chapter 1 of the Delaware Code), is the statute of the Delaware Code that governs corporate law in the U.S. state of Delaware.[1] The statute was adopted in 1899. Since the 1919 anti-corporation reforms in New Jersey under the governorship of Woodrow Wilson,[2] Delaware has become the most prevalent jurisdiction in United States corporate law and has been described as the de facto corporate capital of the United States.[2]

Delaware is considered a corporate haven because of its business-friendly corporate laws compared to most other U.S. states.[3][2] 66% of the Fortune 500, including Walmart and Amazon (two of the world's largest companies by revenue) are incorporated (and therefore have their domiciles for service of process purposes) in the state.[4] Over half of all publicly traded corporations listed in the New York Stock Exchange (including its owner, Intercontinental Exchange) are incorporated in Delaware.

The statute has been credited with reducing the tax burdens on Delaware residents as revenues from the statute provide two-fifths of the state's budget, but has been controversial for facilitating tax dodging and money laundering by major corporations, as well as providing safe haven to money launderers, kleptocratic foreign rulers, and human traffickers.[2]

History

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See also: Regulatory competition and Race to the bottom

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[5] 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 intended to establish a corporation that would sell services to other businesses incorporating in Delaware.[6] 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.

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Because of the extensive experience of the Delaware courts, Delaware has a more well-developed body of case law than other states,[7] 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.[8] Because it is a court of equity, there are no juries; its cases are heard by judges, called chancellors. Since 2018, the court has consisted of one chancellor and six 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.[9] Delaware (among others) has relatively relaxed interest laws,[10] 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,[11] but is subject to restrictions of other states' laws if it conducts business in other states.[10]

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.[12] 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.[13] 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 through whom the company is registered named.[14]

Tax benefits and burdens

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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.[15] 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.[16]

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.[17] Abandoned property provides Delaware with about half a billion dollars annually.[18]

Delaware charges a franchise tax on the corporations incorporated in it. Franchise taxes in Delaware are higher than in most other states which typically get revenue from 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.[17]

In February 2013, The 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.[19]

2013 amendments

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On June 30, 2013, Delaware Governor Jack Markell signed amendments to the Delaware General Corporation Law. The new legislation took effect on August 1, 2013, except for the ratification of the defective corporate acts amendment which took effect in 2014.[20]

Securities law

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In 2020, the Delaware Supreme Court upheld a provision allowing companies to require in their certificates of incorporation all Securities Act of 1933 claims to be filed in federal court.[21]

DGCL 203[22] is particularly known as an antitakeover law.

See also

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Notes

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  1. ^ "Delaware General Corporation Law". Delaware Code Online. Retrieved 21 December 2018.
  2. ^ a b c d Weitzman, Hal (2024). What's the Matter with Delaware?: How the First State Has Favored the Rich, Powerful, and Criminal—and How It Costs Us All. Princeton University Press. ISBN 978-0-691-23574-5.
  3. ^ "How Delaware Thrives as a Corporate Tax Haven". The New York Times. 30 June 2012.
  4. ^ "About the Division of Corporations". Delaware Division of Corporations. Retrieved 1 January 2020.
  5. ^ Cary, William L. (1969). Cases and Materials on Corporations. Mineola: The Foundation Press, Inc. p. 9.
  6. ^ A History of Delaware Corporation Law, S. Samuel Arsht, Delaware Journal of Corporate Law, 1976, pg. 6.
  7. ^ "A new judicial boss". The Economist. 23 November 2013.
  8. ^ "Overview of the Delaware Court System". Delaware State Courts.
  9. ^ "Interpretive Letter #822" (PDF). Interpretations and Actions. 11 (3). Office of the Comptroller of the Currency. March 1998.
  10. ^ a b Usa Ibp Usa (2009). Us Company Laws and Regulations Handbook Volume 2 Delaware. Int'l Business Publications. ISBN 978-1433070822.
  11. ^ Webber, Annie (21 Jul 2015). "Delaware, the Tiny Capital of Big Business". Legal Hero. Archived from the original on 26 October 2014. Retrieved 13 April 2016.
  12. ^ Edgar v. MITE Corp, 457 U.S. 624 (1982).
  13. ^ "DEL CODE § 141 : Delaware Code – Section 141: BOARD OF DIRECTORS". Findlaw.com. Thomson Reuters.
  14. ^ Watson, Libby (6 Apr 2016). "Why are there so many anonymous corporations in Delaware?". Sunlight Foundation.
  15. ^ "State of Delaware – Delaware Corporate Law – Delaware Corporation And Entity Laws". Archived from the original on 2013-12-13.
  16. ^ Ryan, Patrick S. (Winter 2004–2005). "Will There Ever Be a Delaware of Europe?". Columbia Journal of European Law. 11: 187. SSRN 763164.
  17. ^ a b "State General Fund Revenues by Category (F.Y. 2002 – F.Y. 2005)" (PDF). Delaware 2005 Fiscal Notebook. Delaware Department of Finance. Archived from the original (PDF) on 2011-08-16.
  18. ^ Vuocolo, Alex (2017-01-20). "Delaware Senate approves abandoned property bill". Delaware Business Times. Retrieved 2024-06-24.
  19. ^ "Onshore financial centres: Not a palm tree in sight". The Economist (2013-02-16). Retrieved on 2013-09-05.
  20. ^ "Significant Amendments to Delaware General Corporation Law Enacted". Holland & Knight Securities Bulletin. August 5, 2013. Archived from the original on August 6, 2013.
  21. ^ "Delaware Supreme Court Validates Federal Forum Provisions – Richards, Layton & Finger – Delaware Law Firm". rlf.com. Retrieved 2020-06-18.
  22. ^ Nugent, Eileen T. (2010). "A Timely Look at DGCL Section 203". The Business Lawyer. 65 (3): 753–759. ISSN 0007-6899. JSTOR 40688595.
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