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The Delaware General Corporation Law Provides Predictability, Stability, and Flexibility

 

An installment in the series “Why Incorporate in Delaware?”

In the U.S., a corporation is created under the laws of the specific state in which it elects to incorporate. That process typically includes the filing of incorporation documents with a state agency (like the Division of Corporations in the Delaware Secretary of State’s Office). The state law will then govern issues like the corporation’s organizational documents, stockholders’ rights, and directors’ fiduciary duties.

The foundation of Delaware’s corporate law is its General Corporation Law (“DGCL”). The DGCL governs only the internal affairs of the corporation, the relationship between the owners (stockholders) and the managers (directors and officers) of a corporation. In other words, the DGCL is essentially a specialized contract law governing the respective roles, duties, and relationships of those who manage corporations and those who invest in them.

The DGCL does not address the varied other aspects of business law, such as competition law, labor law, or securities disclosure law the way a prescriptive civil code “company law” often does. All corporations must comply with state and federal law where they operate on these and other topics, but Delaware does not mix these areas of the law with corporate governance. Although Delaware has laws governing these and other regulatory issues affecting society, its regulatory statutes only apply to corporations that conduct business operations in the State. For example, Delaware’s labor and environmental laws only apply to business activity within the physical borders of Delaware. By contrast, Delaware’s corporate law applies to all Delaware corporations no matter where they are located, whether their headquarters are in a different state or in a different country.

Among the reasons that corporations are formed under Delaware law is the DGCL’s policy to provide stockholders and corporations with maximum flexibility in ordering their affairs. Unlike in a civil-law jurisdiction, which would likely have a rigid corporation law with mandatory terms, the DGCL is designed to be an enabling statute that permits and facilitates company-specific procedures. The mandatory provisions of the DGCL are minimal and address only issues of utmost importance to protecting investors, such as the right to elect directors and to vote on certain major transactions. Even some of the mandatory terms of the statute may be overridden by managers and stockholders acting together to choose a different approach.

Although the lawmaking process around corporate governance and securities regulation issues outside Delaware is sometimes subject to partisan squabbling, hasty and scandal-driven action, and lobbying by special interests, Delaware’s corporate statute is an island of stability, where changes are made only after careful study and reflection. Delaware’s constitution requires a super-majority vote by the legislature to amend the corporation law, protecting the DGCL from one-time amendments proposed by special-interest groups or influential corporations. This keeps the DGCL stable and predictable for all of Delaware’s corporations, which is important to managers charting a long-term course for their businesses.

Further, the Delaware legislature relies on the assistance of a group of experienced Delaware corporate lawyers to advise and recommend annual amendments. This group is drawn from a wide variety of practitioners (transactional attorneys, plaintiffs’ lawyers, and corporate litigators), each of whom has expertise in Delaware corporate law and deals with it on a daily basis, and who themselves may solicit views of experts from outside the State. Each year, this group studies the DGCL and recommends for passage the crucial amendments necessary to keep the DGCL current and responsive to the needs of the managers and owners of Delaware’s corporations. Partisan divides are unheard of, because both political parties understand that so much is at stake and respect the importance of ensuring that managers and investors can rely on a statute with real integrity, efficiency, and reliability. The DGCL, therefore, combines the stability of its long history with the most current and advanced ideas in corporate law.

The DGCL and International Business

Delaware’s business statutes provide many advantages to international businesses. For example, no state-level judicial or regulatory approval is needed before Delaware entities may enter into business combinations with other entities. Further, because the Delaware statute provides clarity on these transactions, international investors are usually able to obtain legal opinions regarding the post-transaction nature of the resulting entity.

In comparison to many international company laws, which may involve more regulation or require more onerous procedures such as “schemes of arrangement,” Delaware’s statutory methods for completing merger and acquisition transactions are flexible and have been tested by actual, efficient, and effective use over many generations. For that reason, even many American corporations domiciled in other U.S. states have reincorporated in Delaware specifically because they expect to engage in a high level of mergers and acquisitions activity and view Delaware as the state whose law most effectively facilitates such transactions.


We are committed to providing you with the tools and resources you need to understand Delaware corporate law and to do business with us here in the State. We encourage you to share any questions you might have about Delaware’s law, court system, fees, taxes, dispute resolution, services and support, and anything else on your mind. We will act quickly to address your questions, concerns, and interests. Please contact us at corplaw@delaware.gov.

 


Categories:  DECALS Delaware Court of Chancery DGCL Division of Corporations Incorporate Invest Legislation

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