State Of Corporate Domicile: Delaware Or Somewhere Else?
Joseph W. Bartlett, Special Counsel, McCarter & English LLP, Co-Founder of VCExperts
McCarter & English LLP
2002-08-02
State of Corporate Domicile: If the corporate form is selected, the next issue is where best to be domiciled. Ordinarily one would minimize expense by incorporating the business in the state in which the business is to be conducted, thereby saving the cost of appointing an agent in, say, Delaware, the most popular state for those seeking a flag of convenience. (There is rarely an income-tax advantage to domiciling a business outside of its principal place of operations; the income of a business operated in Massachusetts will generally be subjected to the same Massachusetts income tax whether it is technically a Massachusetts or a Delaware corporation.) Engaging a firm of professional representatives such as the Corporation Trust Company to act as resident agent in Delaware entails a modest, but not so trivial, fee each year. On the other hand, the Delaware corporate statute is well drafted and contains few of the anomalies one finds, on occasion, in the general corporation laws of certain other states. Moreover, the Delaware state secretary's office is well staffed and Delaware bureaucrats process papers at a high rate of speed. It is often frustrating to attempt to merge two New York corporations because the personnel in the secretary of state's office get around to clearing the paperwork only in their own sweet time. Further, Delaware maintains a separate court system—the Court of Chancery—to adjudicate (without the nuisance, for corporate practitioners anyway, of jury trials) issues involving the structure and governance of domestic corporations. Moreover, a modern statute such as Delaware's is generally permissive; the glitches that can frustrate counsel attempting to close on a financing have been ironed out.
Further, law firms around the country are willing to give opinions on matters involving Delaware law because of the general familiarity of the corporate bar with the Delaware statute and the cases interpreting it. The ability of counsel to opine on an issue is no trivial matter. Without the requisite opinion of counsel, no public stock offering or merger will go forward. Loan agreements routinely require comfort from the company's counsel in the form of opinions. Incorporating in Delaware gives the founder assurances that counsel will be able to render and/or appraise the necessary opinions to underwriters, lenders, merger partners, and others to enable business aims to be accomplished.
The foregoing is not designed as an uncritical hymn of praise in favor of Delaware incorporation. Other states are conforming to advanced notions of corporate practice and some—for example, Maryland in the area of franchise taxes—are actually to be preferred on some issues. However, Delaware is the rod against which other possibilities should be measured.