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DELAWARE: An Introduction

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THE JURISDICTION OF CHOICE 

Every US business organization must select which US state's laws should govern its creation. To date, more than 1 million businesses have selected Delaware to govern their business entities. This includes more than two thirds of the Fortune 500 companies and 80 percent of all firms that go public. In 2018 alone, 216,005 new business entities chose Delaware law to govern them.

As the business jurisdiction of choice in the US, it is common for Delaware entities to appear in commercial transactions around the world. Delaware law is also often selected as the choice of law to govern agreements among parties with few or no operations in Delaware.

Members of the Delaware Bar are regularly retained by in-house counsel and law firms worldwide to advise on Delaware’s business statutes and the opinions of the Delaware courts that interpret them. Although lawyers throughout the US work with business entities created under Delaware law, only a lawyer that has passed the Delaware Bar exam and completed a five-month clerkship in Delaware may practice as a Delaware attorney. There are no exceptions.

WHY IS DELAWARE SO OFTEN THE JURISDICTION OF CHOICE?

No one factor makes Delaware unique. A combination of factors distinguishes Delaware from other US states. The factors include (i) a knowledgeable legislature committed to keeping Delaware at the forefront of business law; (ii) a close relationship between the legislature and corporate practitioners; (iii) an efficient and user-friendly Secretary of State office; (iv) an esteemed court system; and (v) a well-established and expansive body of judicial precedent.

DELAWARE’S BUSINESS ENTITY STATUTES. 

There is a process in place to ensure that the Delaware business statutes reflect current business realities. The Delaware legislature considers amendments to the business statutes on an annual basis. A critical component to the amendment process is the Council of the Corporation Law Section of the Delaware State Bar Association (the “Council”). The Council is comprised of experienced Delaware corporate and alternative entity practitioners. Its members determine the current issues and experiences that may warrant an amendment to Delaware’s business statutes. The Council prepares draft amendments and, if approved by the Delaware State Bar Association, the legislature considers them.

The process results in the adoption of timely amendments. Examples include amendments to the General Corporation Law of Delaware (DGCL) to authorize public benefit corporations and amendments to the Delaware Limited Liability Company Act, the Delaware Revised Uniform Limited Partnership Act and the DGCL to reflect the use of electronic transmissions and blockchain technology in modern business entities.

With respect to the statutes themselves, the DGCL is an enabling statute that offers flexibility to corporations while simultaneously providing a number of mandatory provisions to protect investors and directors. The DGCL, in conjunction with the significant body of reasoned precedent provided by the Court of Chancery since 1792, provides a roadmap for the proper operation of corporations and their constituents.

The precedent and experience with the provisions of the DGCL help with the creation and adoption of statutes that provide alternatives to the corporate structure such as limited partnerships and limited liability companies. Each of the Delaware Revised Uniform Limited Partnership Act and the Delaware Limited Liability Company Act are based upon the principle of “freedom of contract.” As a result, the alternative structures provide the ultimate flexibility to privately order a business’s affairs to fit the vision of their management and owners.

THE DELAWARE COURT SYSTEM 

Delaware’s judicial system is world-renowned.

The Court of Chancery is a specialized court of equity that maintains specific jurisdiction over most business disputes. Many consider it the nation’s preeminent business court. In contrast to the courts in other states, there are no jury trials in the Court of Chancery. Instead, the Court of Chancery consists of five judges (one Chancellor and four Vice-Chancellors) appointed based upon their experience in business law. This results in litigation that is effective and efficient.

A party may appeal a ruling from the Court of Chancery directly to the Delaware Supreme Court, the final authority on all business and commercial law issues. The Supreme Court consists of five Justices who have significant experience and expertise in Delaware business law. The Supreme Court often sits en banc (i.e. with all five Justices) when it hears important business disputes and will expedite a corporate case for the benefit of the parties when the dispute demands a real-time answer to avoid injustice.

THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE 

It works hard to be as modern and efficient as the businesses that choose Delaware to govern them. The time between the submission of documents for filing and the actual filing of the document may be as little as 30 minutes. The expedited filings translate into records that are up to date. As a result, it takes minutes, not days, to obtain evidence of a business entity’s legal existence or its payment of franchise taxes or annual fees. Skilled staff are readily available to help. There is always the potential that a commercial transaction will face obstacles. However, the processes employed by the Office of the Delaware Secretary of State will not be one of them.

CONCLUSION 

Corporations and alternative entities are very important to Delaware. The collaborative nature of the interaction between the Delaware legislature and the Council is nurtured to insure Delaware’s business entity statutes meet the needs of the business and investor communities. The respect for the sophisticated court system and its well-developed case law remains the cornerstone of Delaware as the jurisdiction of choice. When combined with Delaware’s modern and service-oriented Secretary of State Office, Delaware is the preeminent choice of jurisdiction for the creation and operation of business entities and the adjudication of their disputes. To take full advantage of Delaware’s unique combination of factors, consult with members of the Delaware Bar.