Is Delaware Losing Its Luster for Corporations?

Thanks to its business-friendly legal environment, Delaware is the home to many of the country’s largest corporations.  In fact, more than half of the Fortune 500 companies are incorporated in Delaware.

As an added incentive to incorporate a business in Delaware, the Delaware Court of Chancery’s large body of corporate case law often makes it easier to predict how the court may rule in a business dispute. The court also exclusively relies on judges rather than juries to decide corporate litigation matters.

However, despite these historical advantages, several notable companies have openly criticized the state in recent months, suggesting that Delaware may no longer be the corporate haven it once was. The criticism primarily stems from Court of Chancery decisions and state legislation that have made it easier for shareholders to file suit.

Dole Food Co. litigation

Dole Food Co., which is currently facing shareholder litigation over the sale of the company to CEO David Murdock in 2013, is one of the companies that has complained about diminishing corporate protections. “We moved to Delaware because of what we felt was a balanced corporate environment. We’re now seeing that trending the wrong way,” Michael Carter, Dole’s former chief operating officer, told The Wall Street Journal. “That’s troubling to us and, I think, should be troubling to others.”

Critics, which also include DuPont Co. and Ancestry.com Inc., are particularly concerned about several new laws passed by the Delaware legislature earlier this year. For instance, one measure prohibits Delaware-formed corporations from including fee-shifting provisions in their corporate bylaws which require shareholders to shoulder the company’s legal fees if such shareholders wage an unsuccessful suit against the corporation.

Business-friendly states

While Delaware may be losing some of its luster, other states are working hard to become more business-friendly. Nevada, Texas, and Oklahoma have enacted various measures intended to lower the cost of doing business in their states, such as lowering corporate taxes and establishing business courts. However, whether companies will be willing to abandon the predictability of the Delaware court system remains to be seen.

For businesses that are just getting off the ground, the message is simple: the decision to incorporate should not be taken lightly. Determining the most advantageous place for formation of your corporation or limited liability company requires careful consultation with experienced counsel who can advise you as to the pros and cons of each jurisdiction.