Incorporating in the First State

Copyright 2009, 2010, 2011 Kenneth A. Sprang

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NATIONAL CONSTITUTION CENTER&

KENNETH A. SPRANG, ESQ.

Incorporating in the First StateSuccessfully Navigating Delaware Corporate Law


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Delaware is often regarded as the most business friendly state.

Delaware corporations account for over 60% of fortune 500 companies and more than 50% of the corporations listed on the NYSE, NASDAQ, and AMEX.

WHY?

INTRODUCTION


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General Advantages to Incorporating In Delaware

The Delaware General Corporation Law Permits maximum flexibility Emphasizes simplicity in drafting and Avoidance of unnecessary complexity.

Delaware is a pro-business state with a highly specialized and efficient court system familiar with business matters.

Delaware continually updates its General Corporation Law and implements state of the art convenience such as online-filing and two-hour service.


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Advantages to Incorporating In Delaware (2)

No minimum capital requirement Does not require a principal place of business

in Delaware Allow one person to be the sole director,

officer and stockholder Have no residency requirement for directors,

officers or stockholders


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Delaware’s Pro-Business Intangibles

Corporation franchise taxes are a significant source of state revenue

Delaware law firms, specializing in corporate law matters employ a large number of the state’s citizens.

Delaware’s government and citizenry is generally sympathetic to businesses.

Lawyers throughout the United States and even abroad are familiar with Delaware’s corporate statutes and the hospitable welcome to corporations.

Delaware corporate law and the Secretary of State’s Office projects an aura of credibility and predictability, unmatched by other states.


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Biased against regulation Predictable and supported by clear case law Limits liability of directors Authorizes indemnification of directors, officers, and employees

Simplified procedures for entities changing corporate form

Offers a wide variety of “alternative entities”

Delaware General Corporation Law


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Court of equity—decisions by judges Highly experienced judges explain decisions in

written opinions Reputation for expertise and sophistication in corporate matters Highly developed body of case law Predictability of Delaware case law assists in corporate planning

Delaware Court of Chancery


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Modern and user-friendly Employs state-of-the-art computer technology Electronic document storage Registered agents may view and file

documents online Accommodates urgent and time-sensitive filings—as little as two hours

Secretary of State’s Office


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CORPORATE STRUCTURING &

FINANCIAL CONSIDERATIONS

Business in Delaware


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LLC Corporation

Member managed or manager managed

Except for limited situations, insulation from liability

Ideal for sole proprietors, small companies

Operating agreement

Managed by Board and Executives

Insulated from liabilityOwners have no direct

say in managementNecessary to go publicBylaws

Limited Liability Companies vs. Corporations


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Management and control Personal liability Tax treatment Regulatory compliance

Considerations in Selecting Your Business Entity


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Do you want centralized or decentralized management?

Corporations generally have centralized management through the board of directors

LLC’s, depending on the terms of their articles and bylaws, can be either centralized or decentralized

Management and Control


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Both corporations and LLC’s offer limited liability Thus, generally, a stockholder or limited partner,

member or beneficial owner has no personal liability for the debts and obligations of the entity

Personal Liability


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Corporations are treated as separate entities and pay corporate taxes, including income taxes Shareholder profits in the form of dividends a then taxed a second time as income to the shareholder S corporations: generally pay no income tax at the corporate level

Tax Treatment: Corporations


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May be taxed as either a corporation or a partnership, depending on how the LLC is structured

Tax Treatment: LLC’s


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Under Delaware law, certain types of businesses (i.e., banking and insurance) must be conducted in corporate form, subject to

either state or federal regulatory authority Special considerations for professionals, such as lawyers, doctors, and architects

Regulatory Compliance


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Certificate of Incorporation

Bylaws

Non-conflicting nameRegistered agent name

and address within the state of Delaware

Purpose for which corporation is organized

Number and par value of initial shares of stock

Name and street address of organizing incorporator

Signature of incorporator

Location of Office Meeting of Shareholders Board of Directors Officers Shares of Stock Dividends Amendments Waiver of Notice Interested Directors Indemnification and Advance

of Expenses Miscellaneous

Essentials for Crafting Your Certificate of Incorporation and Bylaws


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Corporate Governance Under Delaware Law:

Director Indemnification and Advancement of Expenses

Recent amendment to Section 145(f) of the DGCL

Essentially overturns Schoon v. Troy Corp.

Right to indemnification or advancement of expenses existing under a provision within certificate of incorporation or bylaws cannot be eliminated or impaired “after the occurrence of the act or omission”

Advantages of Doing Business with the Court of Chancery

Renowned for corporate law expertise

Wealth of case law makes DE law highly predictable, facilitating planning and avoiding litigation

Efficient and timely Summary Proceedings

Act minimizes burdens and expenses of litigation


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Fix date for annual meeting Address who has permission to call special meetings in the articles of incorporation or bylaws DE law allows for virtual annual meetings Shareholders not permitted to call a meeting unless authorized by the articles

Obligations Regarding Annual Shareholder

Meetings


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State the quorum for meetings in the articles of incorporation Shareholders can vote via proxy, by mail ballot, telephone, or online

Obligations Regarding Annual Shareholder

Meetings


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RECENT DEVELOPMENTS IN DELAWARE LAW

Doing Business in Delaware


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Statutory Amendments: Effective August 1, 2009

Increased stockholder access to corporation’s proxy materials (Section 112)

Reimbursement of proxy expense (Section 113)

Separate record dates for notice and voting (Section 213(a)

Judicial removal of directors (Section 225(c))


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Recent amendments reconciled the record dates under the DGCL with e-proxy delivery system, mandated via the exchange act

As a result, corporations are now permitted to separate the record date for determining the shareholders entitled to receive notice of a meeting from the record date for determining the

shareholders entitled to vote at the meeting

E-Proxy and Section 213(a)


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Critical DE Case Law Developments

Kistefos AS v. Trico Marine Services, Inc. et al. Defendant corporation argued that a shareholder

proxy proposal would be invalid because it was inconsistent with, among other things, the corporation’s certificate of incorporation

Delaware Court of Chancery permitted shareholder to solicit proxies and present arguments at the annual meeting in the same manner as shareholders were permitted to do under proposed bylaws

Decision may empower shareholders with the right to solicit proxies that are inconsistent with a corporation’s certificate of incorporation


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Could increase activists shareholders proposals in Delaware, a state traditionally seen to favor corporations and insulate directors

Impact of Kistefos


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CA Inc. v. AFSCME Employees Pension Plan

Delaware Supreme Court held that a bylaw, proposed by a shareholder, requiring the company to reimburse the shareholder's reasonable proxy expenses if the shareholder was successful in electing at least one director pursuant to a proposed “short slate” would violate Delaware law

Court’s decision makes it clear that shareholder proposed bylaws may not “mandate” how the board makes substantive business decisions


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Further Empowers Directors Of Delaware Corporations Delaware Courts Will Not Allow Shareholder Bylaws To Interfere With Directors Fiduciary Duties

Impact of CA Inc. v. AFSCME Employees

Pension Plan


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Modern and nationally recognized corporation statute Immense body of well-developed case law, facilitating predictability in business planning Respected court of chancery, without juries Efficient and user-friendly secretary of state’s office A legislature that prioritizes corporate law matters

Why Delaware?: Conclusion


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Contact Information

KENNETH A. SPRANG, Esq.Washington, DC

Telephone: (202) 683-4090FAX: (202) [email protected]

Incorporating in the First State

Business

annual shareholder

personal liability

states office

record date

delaware law

solicit proxies

tax treatment

shareholders