Three words simply describe why U.S. directors need Delaware— intelligence, neutrality and balance. The great majority of the largest U.S. public corporations are incorporated in the state of Delaware. That is, they are subject to Delaware corporate law and find that any disputes arising out of their conduct relating to that law will be adjudicated in a Delaware court. The reason for this is both historical and practically based. Delaware’s dominance over corporation law dates back decades. Originally, it was the provisions of the law itself that attracted businesses to incorporate here. Today, the reason most incorporate in Delaware has become duo-fold. First the law itself is particularly sophisticated as it relates to business affairs. The state bar is highly experienced in corporate matters and the legislature quick and efficient in its reaction to changing trends in corporate practice. The law is continually and smartly updated. But the most important reason for the Delaware dominance in incorporations is judicially-based. The Delaware Court of Chancery, which has exclusive jurisdiction over most corporate disputes, is globally recognized as a premier, if not the premier business court.
The judges who make up this judicial body are each business lawyers with significant experience in corporate law matters, assuring an intelligent and informed approach to the disputes before them. Additionally, they are viewed as particularly neutral and impartial in adjudicating corporate matters. The primary business of Delaware involves corporate regulation and there are no local interests that act to compromise the Court’s perceived neutrality and commitment to excellence in corporate matters. The body of case law created by this Court and the state’s equally venerable Supreme Court is large and respected and creates great predictability in the conduct of corporate affairs. Because of these factors, both investors and corporate management and directors seek and, in many circumstances, demand a Delaware incorporation. They realize that the Delaware courts have no significant bias toward any particular party and will resolve matters in the fairest, most impartial and consistent manner. Ultimately the objective of the courts and the corporate law itself is the protection of investor interests. The goal is not to protect a particular party or interest group, but to promote general investor welfare. It is not only a continuously emphasized objective, but critical to the state’s survival as a corporate regulatory center. Losing the confidence of investors would not only be harmful to the state’s reputation, but to the accomplishment of the overriding goal of investor protection. This is why Delaware remains a director favorite.
Charles M. Elson is the Edgar S. Woolard Jr. chair in corporate governance and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.