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definition - Delaware_General_Corporation_Law

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Delaware General Corporation Law

                   

The Delaware General Corporation Law (Title 8, Chapter 1 of the Delaware Code) is the statute governing corporate law in the state of Delaware. Delaware is well known as a corporate haven. While most small corporations do not have a 2/3 vote requirement, in the exact opposite, most large companies especially those incorporated in Delaware, do have a 2/3 vote requirement. A company that requires a 2/3 super-majority of shares to vote in favor of a motion can grant, in effect, veto power to a shareholder or block of shareholders that own controlling interest, which is more than 1/3 of the shares. Thus in some cases a single entity can essentially maintain controlling interest with only 33.4% of the outstanding shares. Over 50% of U.S. publicly traded corporations and 60% of the Fortune 500 companies are incorporated in that state.[1]

Contents

  History

Delaware acquired its status as a corporate haven in the early 20th century. Following the example of New Jersey, which enacted corporate-friendly laws at the end of the 19th century to attract businesses from New York, Delaware played the game of fiscal competition by adopting in 1899 a general incorporation act aimed at attracting more businesses.

  General Benefits

  • §102(b)(6) shareholders are not liable for corporate debts.
  • §109(a) shareholders have the right to change the bylaws.
  • §141(a) 'The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.' So there is a requirement for a board of directors or a comparable organ.
  • §141(b) the board's quorum for director meetings cannot be under one third.
  • §141(c) committees of the board cannot be given authority to amend the certificate of incorporation, merge, or recommend dissolution or sale to shareholders, or amend by laws.
  • §141(d), a director can serve no longer than three years, and if the board is classified one class must stand for election each year
  • §141(k) states that directors can be removed without any cause, unless the board is "classified", meaning that directors only come up for re-appointment on different years. If the board is classified, then directors cannot be removed unless there is gross misconduct.
  • §170, regulation of distributions.
  • §202(b), restrictions on transferability of stock cannot be imposed on shares previously issued without the shareholder's consent.
  • §211, there must be an annual meeting of shareholders for election of directors and (d) shareholder meetings can only be called if the constitution allows for it.
  • §216, the quorum for shareholder meetings cannot be less than one third of those entitled to vote. Also allows for plurality voting.
  • §218, a voting trust cannot last longer than ten years.
  • §219, shareholders have the right to inspect the shareholder register within ten days of a meeting.
  • §220, right to inspect corporations books and record for a proper purpose at any time.
  • §242(b)(1) any constitutional amendment requires a resolution by the directors, and then a majority vote of shareholders, and the affected classes.
  • §271, sale of substantially all the corporation requires majority shareholder approval.
  • §275, dissolution of the corporation requires majority shareholder approval.
  • §262, shareholders dissenting from a merger have the right to be bought out at a fair value.
  • §327, shareholders have the right to a derivative claim for a breach of duties of care or loyalty.

  Legal benefits

Because of the extensive experience of the Delaware courts, Delaware has a more well-developed body of case law than other states, which serves to give corporations and their counsel greater guidance on matters of corporate governance and transaction liability issues. Disputes over the internal affairs of Delaware corporations are usually filed in the Delaware Court of Chancery, which is a separate court of equity[2] (as opposed to a court of law). Because it is a court of equity, there are no juries, and its cases are heard by the judges, called chancellors. Since 1989, the court has consisted of one Chancellor and four Vice Chancellors. The court is a trial court, with one chancellor hearing each case. Litigants may appeal final decisions of the Court of Chancery to the Delaware Supreme Court.

Delaware has also attracted some major credit card banks because of its relaxed rules regarding interest. Many U.S. states have usury laws limiting the amount of interest a lender can charge. Federal law allows a national bank to "import" these laws from the state in which its principal office is located.[3] Delaware (amongst others) has relatively relaxed interest laws, so several national banks have decided to locate their principal office in Delaware. National banks are, however, corporations formed under federal law, not Delaware law. A corporation formed under Delaware state law benefits from the relaxed interest rules to the extent it conducts business in Delaware, but is subject to restrictions of other states' laws if it conducts business in other states.

Pursuant to the "internal affairs doctrine", corporations which act in more than one state are subject only to the laws of their state of incorporation with regard to the regulation of the internal affairs of the corporation.[4] As a result, Delaware corporations are subject almost exclusively to Delaware law, even when they do business in other states. Among other reasons, this contributes to Delaware's attractiveness as a state of incorporation.[5]

While most states require a for-profit corporation to have at least one director and two officers, Delaware laws do not have this restriction. All offices may be held by a single person who also can be the sole shareholder. The person, who does not need to be US citizen or resident, may also operate anonymously.

  Tax benefits and burdens

Delaware charges no income tax on corporations not operating within the state, so taking advantage of Delaware's other benefits does not result in an income tax cost. That said, Delaware has a particularly aggressive tax on banks that locate in the state.[citation needed] However, in general, the state is viewed as a positive location for corporate tax purposes because favorable laws of incorporation allow companies to minimize the corporate expenditures (achieved through legal standardization of corporate legal processes), creating a nucleus in Delaware with operating companies often in other states.[5]

In addition, Delaware has used its position as the state of incorporation to generate revenue from its abandoned and unclaimed property laws. Under U.S. Supreme Court precedent, a state of incorporation gets to keep any abandoned and unclaimed property, such as uncashed checks and unredeemed gift certificates, if the corporation does not have information about the location of the owner of the property.[6] Delaware is becoming increasingly aggressive in auditing and assessing companies for unclaimed property. For example, it has deputized sister states to act as contingency fee auditors for unclaimed property.

A state may levy, however, a franchise tax on the corporations incorporated in it. Franchise taxes in Delaware are actually far higher than in most other states which typically charge little or nothing beyond corporate income taxes on the portion of the corporation's business done in that state. Delaware's franchise taxes supply about one-fifth of its state revenue.[7]

  See also

  Notes

  1. ^ "About Agency". Delaware Division of Corporations. http://www.corp.delaware.gov/aboutagency.shtml. 
  2. ^ "Overview of the Delaware Court System". Delaware State Courts. http://courts.delaware.gov/overview.stm. 
  3. ^ "Interpretive Letter #822". Interpretations and Actions (Office of the Comptroller of the Currency) 11 (3). March 1998. http://www.occ.gov/static/interpretations-and-precedents/mar98/int822.pdf. 
  4. ^ Edgar v. MITE Corp, 457 U.S. 624 (1982).
  5. ^ a b Ryan, Patrick S (Winter 2004/2005). "Will There Ever Be a Delaware of Europe?". Columbia Journal of European Law 11: 187. http://ssrn.com/abstract=763164. 
  6. ^ Delaware v. New York, 507 U.S. 490 (1992)
  7. ^ "State General Fund Revenues by Category (F.Y. 2002 - F.Y. 2005)". Delaware 2005 Fiscal Notebook. Delaware Department of Finance. http://finance.delaware.gov/publications/fiscal_notebook_07/Section02/sec2page24.pdf. 

  External links

   
               

 

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