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ISBM – How did Delaware become the most common state for incorporation, and why is its position important

Business Ethics


CASE STUDY (20 Marks)

How did Delaware become the most common state for incorporation, and why is its position important? At a recent meeting of the Business and Organizational Ethics Partnership at Santa Clara University\’s Markkula Center for Applied Ethics, The Honorable Jack Markell, governor of Delaware, held a dialogue called \”Business Ethics: The Delaware Perspective\” on this subject with David Yosifon, associate professor at the Santa Clara University School of Law. In his introduction, Yosifon explained why the location of a corporation\’s incorporation matters: Corporations exist only when the law says they do, when a government entity grants a corporate charter. U.S. legal tradition says that in the case of a dispute – between shareholders in one state and a board member in another, for example – these internal affairs of the corporation will be governed by the laws of the state of incorporation. Corporations in the United States can charter in any state, even if they don\’t do business there. \”In the United States there is a clear winner in the competition for the sale of corporate charters, and that is Delaware,\” Yosifon said. As a result, \”Delaware\’s corporate law dominates the legal landscape.\” The work is advantageous for the state due to the fees it generates and the jobs it generates for corporate lawyers and those who support it. The governor said he and other leaders meet with lawyers, accountants, private equity investors, and others around the world, encouraging them to consider Delaware when they expand to the U.S. market. The governor discussed how Delaware achieved this premier position in corporate law, and how it works to maintain that position. Until about 100 years ago, Markell said, New Jersey was the premier place for corporate law. Then Gov. Woodrow Wilson, to improve his presidential prospects, pushed through some changes to that corporate law that broke the trust corporations had had in the stability of the state\’s law. As corporations looked for a new place to do business, Delaware stepped in. Delaware maintained its leadership positions through the Depression when the state adapted to the creation of federal securities regulation; in the 1960s when the law was rewritten to allow cash mergers and acquisitions; and in the 1970s when the state fought off proposals to federalize corporate law. These concerns appeared again after the 2008 financial crisis, with proposals to regulate executive pay and corporate directors. \”There\’s nothing wrong with any of those proposals in the abstract, but there is something wrong with the top-down, one-size-fits-all approach,\” Markell said. Shortly after he was elected in 2008, Markell met with the corporate law section of the state bar to talk about how to \”address all of these ideas and angst,\” he said. They decided on a three-part strategy: Offer a serious state-based alternative to one size fits all get organized in Washington, D.C., and find allies outside of Washington. Markell cited three main reasons for Delaware\’s strong position:

  • Delaware\’s corporate law is widely regarded as modern and flexible.
  • Delaware\’s judiciary is well respected. Markell described \”a very apolitical system\” in which judges are appointed by the governor but are chosen from a pool of candidates that have been vetted by a judicial nominating commission. The state bar association has a section on corporate law that recommends changes when necessary to state law.
  • The state workers in the Division of Corporations are well regarded as well. \”I\’ve gotten comments from the best law firms in the country that in the middle of a nasty snowstorm, the clerks in the Division of Corporations figured out how to make a merger go through,\” Markell said. \”We work hard to understand trends and strive to keep a very open door,\” he said. \”The corporate legal community is looking for stability and predictability.\” Markell said Delaware\’s system relies on \”timeless principles,\” such as balancing the interests of shareholders, directors, and managers not second-guessing business decisions that don\’t work out, and holding directors accountable if they fail to act carefully, loyally, and good faith. In answer to questions from the audience, Markell said he was hopeful that Congress and the White House would reach an agreement on corporate tax rates. He said he has had \”quite a few conversations\” in which business leaders say \”there are great workforces all over the world,\” so they have to decide whether to do business in the United States. He also defended the system of creating corporations, saying the United States has \”the most vibrant economy in the world, in large part because of our great system for capital formation.\”

Answer the following question.


Q1. Give an overview of the case.


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