Monday, June 11, 2012
Bloomberg has an interesting story about how Delaware became the jurisdiction of choice for corporate America. Basically, New Jersey blew its early lead by -- thank you, Woodrow Wilson -- regulating too heavily, a lesson that the Garden State has never really absorbed.
That said, there are at least three reasons why Delaware has retained its market share, none of which made it in to the linked article.
First, the advantage of a huge installed base gives Delaware an almost insurmountable lead, if for no other reason than Delaware corporation law remains just about the only state law on any subject about which the lawyers of other states are willing to opine. At least that was true back when I was lawyering like a banshee.
Second, Delaware knows how to give good service. When Ronald Reagan passed his massive reform of the Internal Revenue Code, effective January 1, 1987, there were certain very large advantages in closing corporate transactions before the end of 1986. The Delaware Secretary of State had the good sense to keep its office open until midnight, New Year's Eve, to process mergers that were closing at the last minute. Any state that delivers service like that deserves a huge market share.
Finally, Delaware's judges, unlike the judges of essentially any other state, know their way around corporation law. That is important, because competent and knowledgeable judges improve the predictability of the law, which is as valuable to business as it is rare in practice.
I know, I know. You're thinking, he came out of retirement for this?!>
Also, fees and taxes. Delaware knows to milk it, not kill it. Lots of transfer pricing going on, facilitated by Delaware.
If you want a New York LLC, you have to do an expensive legal notice publication. That’s a political pay-off, and in particular to one well-connected family that owns a string of local New York papers. In Delaware it’s a small fee, and quick turnaround.
No - race to the bottom. The most agent friendly (and hence owner unfriendly) jurisdiction.
After all, how did Gov. Romney make his money? Legitimately, with PE, providing a service, but one which ought not to have been necessary.
Delaware allows management to get entrenched, creating a gap between market price and asset value. Management sits on the assets like a dog in a manger, growling at the cattle. Then dog-catcher Romney removes the problem, freeing the assets for HABU.
But the cost of Romney's services, a transfer away from original owners, arises because of Delaware.
In the dark ages, when I worried about such trivia, there was a subtle but important difference in the indemnity of corporate officers allowed by Delaware vs all the other states. Don't know if that's still the case, but it sure was considered important by the executive suite guys way back when.