California Companies
Incorporate in Delaware
 

(Mike O'Sullivan 10.13.03)

According to a forthcoming study that attempts to explain why public companies choose to incorporate where they do, very few California public companies choose to incorporate in California. Stephen Bainbridge asks "Why doesn't California retain incorporations?"

Most public companies headquartered in California incorporate in Delaware. Most public companies headquartered anywhere in the United States choose to incorporate in Delaware. Many factors can explain this, especially if the issue is being debated among corporate lawyers and law professors who know the various state codes inside and out. However, the most consistently compelling factor I've encountered -- one that sways both corporate lawyers and businesspeople -- is predictability.

Many businesspeople are surprised to learn, after asking me a seemingly mundane corporate law question, that I can't supply them with a definite answer. They hate that. It makes it difficult for them to do the right thing. It introduces unnecessary uncertainty and risk. It delays action. It requires them to spend more time with me than they'd like.

This hardly ever happens with Delaware corporations.

It's not because Delaware's corporate statute is a model of clarity and completeness. In fact, I find Delaware's code to be one the most impenetrable, poorly organized and confusing of the state corporate statutes. California's corporations code is often much clearer by comparison.

Instead, Delaware's strength is its wealth of published judicial decisions applying its corporate law to real world factual situations. Even the clearest statute is of limited use to a practitioner, as the real world is infinitely more varied than any statute. It's only by applying a statute to the real world over time that the statute takes on a life, assumes certain habits, develops a personality and, in a word, becomes predictable.

Comparatively few corporate law issues ever make it to litigation, let alone to a published court decision. So often, when trying to figure out how a particular corporate statute works, we simply don't have any history showing how the statute worked in similar situations. Sometimes, we don't have any history of the statute operating in any situation. This void is the enemy of predictability.

Delaware, by dint of its efficient court system, its huge pool of corporations and its long record showing, through reported court decisions, how these issues have been applied and resolved, simply has the deepest well of corporate law experience out there. This deep well gives Delaware the most predictable corporate law. For example, Delaware's highly developed body of fiduciary duty case law is both unique and invaluable. When I get questions regarding fiduciary duties for directors of Delaware corporations, chances are very good that I'll find an very similar factual situation dealt with in a prior case. Even when I don't find a similar factual situation, I know enough about how Delaware courts have applied these principles in other situations to make a well-educated guess as to how they would apply it to my situation. By contrast, very few California cases have dealt with board fiduciary duties. The few that have addressed these issues often reference Delaware cases applying Delaware law. This helps a little (it suggests that California courts defer to Delaware when California statutes are sufficiently similar to Delaware's statutes), but doesn't really tell much about how a particular California court will apply a particular California law to a particular situation.

Practical everyday predictability is often underrated, especially by those of us with the luxury to cogitate over the great corporate law issues of the day. A businessperson with a corporate law issue doesn't really care what the law should be, he wants to know what it is and how it will affect his plans. The devil he knows is preferable to the devil he doesn't. Even a "bad" answer under Delaware law is often better than no answer at all.
[by Mike O'Sullivan 10.13.03]

 

What is so Special about a Delaware Corporation?
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[Why Incorporate in Delaware?]
[Delaware State Corporation Information]
[Information on Delaware Corporate Law]
[Delaware Incorporation Definition of Terms]
[Delaware Corporation Formation Time Frame]
[Delaware Incorporation Process & Procedure]
[California Companies Incorporate in Delaware]
[Roots and Origin of the Corporate System]

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