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Delaware General Corporation Law

Delaware General Corporation Law is the statute governing corporate law in the state of Delaware. Delaware is well known as a corporate haven. Over 50% of US publicly-traded corporations and 60% of the Fortune 500 companies are incorporated in the state.

Legal benefits

Delaware began to stand out as a corporate haven when its laws began to give corporate management notable latitude in its powers to operate and control the corporation. This latitude has frequently come at the expense of the shareholders' ability to control the corporation. As the popularity of Delaware as a corporate home grew, Delaware also became known for the professionalism of its corporate governance lawyers and courts.

Because of the extensive experience of the Delaware courts, Delaware has a more well-developed body of case law than other states, 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). Because it is a court of equity, there are no juries, and its cases are heard by the judges, called chancellors. As of 2008, there are one Chancellor and four 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.

The status of Delaware as a corporate haven is not recent: following the example of New Jersey, which enacted corporate-friendly laws at the end of the 19th century to attract businesses from New York, Delaware played the game of fiscal competition by adopting in 1899 a general incorporation act aimed at attracting more businesses.

More broadly, many U.S. states have usury laws limiting the amount of interest a lender can charge, but Federal law allows corporations to "import" these laws from their home state. Delaware (amongst others) has relatively relaxed interest laws, in effect allowing banks to charge as much as they want, hence the preponderance of credit card companies and other lenders in the state.

However, other states—such as Nevada—are more friendly to corporations in certain respects, especially in offering protection from hostile takeovers.

The reason for this sort of an issue is that, in general, in the United States, a corporation which operates in more than one state (or country) has a particular state where it is incorporated, to which it is a domestic corporation. In all other states where it operates and has filed papers to be allowed to operate, it is a foreign corporation, and the requirements for corporate governance in the case of a law suit do not use the law where the corporation is sued, but instead, the law where the corporation is a domestic corporation.

This is relevant, for example, in cases where someone wants to "pierce the corporate veil" and disregard the corporation's existence (to get at the assets of the owners or directors.) Since this is a corporate governance matter, the law of the state where the corporation is a domestic corporation applies. For example, if a corporation is chartered in California is sued anywhere, California's laws apply in whether or not piercing the corporate veil is allowable, but if the corporation is chartered in Delaware, even if the corporation is sued in California, the California court would apply Delaware law in determining whether or not the corporation's existence can be disregarded, even if the corporation only operates in California and has never had any other contact with Delaware and is simply chartered there as a "flag of convenience."

Tax benefits

A major factor of Delaware's preeminence is related to the fact that Delaware charges no income tax on corporations not operating within the state.

A state may levy, however, a franchise tax on the corporations incorporated in it. Franchise taxes in Delaware are actually far higher than in most other states which typically charge little or nothing beyond 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.