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Why U.S. corporations love Delaware

Marketplace Staff Jan 24, 2011

Why U.S. corporations love Delaware

Marketplace Staff Jan 24, 2011


JEREMY HOBSON: Well as I said, that case Alisa was talking about is being heard in a Delaware court. And that’s no accident.

Here to explain is Charles Elson. He’s the head of the Weinberg Center for Corporate Governance at the University of Delaware and he’s with us this morning from Newark. Good morning.

CHARLES ELSON: Good morning.

HOBSON: So according to the State of Delaware’s website there are more than 850,000 business entities that have their legal home in Delaware, including more than half of all publicly traded U.S. companies. What’s that all about?

ELSON: Originally, most companies were incorporated in the State of New York. And around 1880, 1890, New York law changed and made it less hospitable for large companies to be there and they moved across the river to New Jersey. And New Jersey law changed. Delaware was the next state over and all that Delaware had was a law that simply was the old New York law, but they didn’t change it.

HOBSON: And what is it about that law, Charles Elson, that companies like so much?

ELSON: Well, it was just a very smart way of ordering relationships between investors, management and boards of directors. And dispute would be resolved in an effective manor. But that really isn’t the reason people are here today. We developed in this state a court system to resolve disputes involving that law. And the judges in that court became particularly good at resolving these disputes. And as a result, the court itself became really the reason to incorporate here, as opposed to the law itself.

HOBSON: Are there other states that are vying to take over as the place where companies want to incorporate?

ELSON: Oh yeah. Nevada, North Dakota for instance — have tried but they haven’t been successful. And I think it has to do again with this judiciary. It’s considered neutral. The state itself has no business other than the affect of regulational corporations. So it’s important to the state to maintain that franchise and maintain the view in the investor community that it is balanced in it’s approach.

HOBSON: What does it mean for Delaware’s economy to have all these companies incorporating in the state?

ELSON: About 27 percent of our direct revenue — tax revenue — comes from the corporations. Another significant amount comes from unclaimed dividends and what not. And then there’s a lot of income tax that comes in from those businesses that are involved in corporate regulations. So it’s very significant to the state. And that’s why the state is so insistent on getting it right.

HOBSON: Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware. Thanks so much for your time this morning.

ELSON: Very good to be with you.

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