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Over the past century, Delaware has achieved preeminence with respect to corporate law. Given the prevalence of Delaware-incorporated corporations nationwide (more than 50% of all public companies in the United States and more than 60% of the Fortune 500 have chosen Delaware as their state of incorporation), young lawyers may be asked to review or draft documents involving Delaware corporations or give advice with respect to where to incorporate.1 The reasons for Delaware's preeminence are many: the Delaware courts have unparalleled corporate expertise; a large body of corporate case law from the last century provides practitioners and corporations with predictability in transaction-planning and litigation; the Delaware courts and Secretary of State are exceptionally efficient with respect to corporate litigation and filings; the tax policies in Delaware have remained consistent; and Delaware legislators routinely review and revise the statutory laws to be responsive to the corporate climate and to increase the efficiency and clarity of the laws. This article will provide a 10,000 foot view of Delaware corporate law, including brief descriptions of (1) the Delaware court system, (2) the Delaware General Corporation Law, (3) the Delaware Secretary of State's Office, (4) the documents governing Delaware corporations, and (5) the role of directors, officers and stockholders in a Delaware corporation.
The Delaware Court System. Delaware's court system includes the following entities that are relevant to corporate law issues: the Court of Chancery (a court of equity), the Superior Court (a court of law), and the Supreme Court (a court of appeals for the Court of Chancery and the Superior Court).2 As a general rule (albeit with some exceptions), the Court of Chancery has jurisdiction over corporate cases due to statutory and common law authority. The Court of Chancery consists of a Chancellor and four Vice-Chancellors, who decide cases without a jury.3 The Supreme Court, consisting of a chief justice and four justices, hears appeals from the Court of Chancery and the Superior Court (which sometimes handles law-based corporate issues, such as contract cases) and also has the authority to hear questions certified from the Securities and Exchange Commission.4 The Delaware Constitution requires a bipartisan bench and all Delaware judges are appointed, rather than elected.5
The Delaware General Corporation Law. Commonly referred to as the DGCL, the Delaware General Corporation Law is the statute governing Delaware stock and non-stock corporations.6 The DGCL is largely an enabling statute, providing corporations with flexibility with respect to corporate organization and operations. For example, the DGCL allows a corporation flexibility with respect to its capital structure so that a corporation can have different classes and series of stock, and a corporation's board of directors can have one-year or staggered terms, and certain directors may be elected by certain classes or series of stock. Upon recommendations by the Corporation Law Section of the Delaware Bar Association, the General Assembly has enacted minor changes to the DGCL on an almost annual basis since 1967.7
The Delaware Office of the Secretary of State. The Delaware Office of the Secretary of State is the official depository for corporate filings and records for Delaware corporations. The Division of Corporations is the agency under the aegis of the Secretary of State that receives and maintains corporate and UCC filings and franchise tax records, and exercises the other corporation-related responsibilities of the Secretary of State. The Division is easily accessible online or by telephone and has been recognized for its efficiency and professionalism.8
Corporate Governing Documents. Delaware corporations have two main governing documents, the certificate of incorporation and the bylaws. To incorporate in Delaware, a certificate of incorporation must first be filed with the Secretary of State. Under Section 102 of the DGCL, a certificate of incorporation, which is also commonly referred to as a charter, must include certain mandatory information about the corporation and can also include certain optional provisions. Once a certificate of incorporation has been filed, bylaws are adopted setting forth the corporation's organization and procedures. Section 109(b) of the DGCL provides broadly that corporate bylaws may contain any provision, not inconsistent with law or the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights and powers or the rights or powers of its stockholders, directors, officers or employees. To the extent that a provision in a corporation's bylaws is inconsistent with its charter, the charter provision trumps and the bylaw provision is nullified.9
The Role of Directors, Officers and Stockholders in a Delaware Corporation. The board of directors has the authority to manage the business and affairs of the corporation,10 but generally, the day-to-day management of the corporation is delegated by the board (in the bylaws or by resolution) to the officers of the corporation.11 Directors and officers owe fiduciary duties to the corporation and the corporation's stockholders to act in the best interests of the corporation. The stockholders of the corporation mainly exercise power by voting to elect directors. Stockholders also have the right to vote on certain transactions, such as mergers, charter amendments and dissolutions.12
Delaware corporation law has been called our “national corporate law.” While this article has described the relevant courts, the DGCL and basic governing documents, the Delaware corporate law is far more interesting and complex than this 10,000 foot view might suggest. Fortunately, because the law is so well-known and well-developed, there are many resources young practitioners can turn to for additional assistance in understanding the law, some of which are cited in this article.
1 Figures available at: http://www.corp.delaware.gov/aboutagency.shtml .
2 See http://courts.delaware.gov/Courts/.
3 For a more thorough discussion of the Delaware court system, especially as it pertains to corporate law, see David A. Drexler, et al., Delaware Corporation Law and Practice § § 1.02, 2.01-2.07 (2008).
4 Del. Const. Art. IV § 11.
5 Under Article IV of the Delaware Constitution and Title 10 of the Delaware Code, the Governor appoints, by and with the consent of the State Senate, the Chief Justice and Justices of the Delaware Supreme Court, the Chancellor and Vice Chancellors of the Court of Chancery, and the President Judge, Judges and Commissioners of the Superior Court. Del. Const. Art. IV.
6 The Delaware General Corporation Law is found in Title 8, Chapter 1 of the Delaware Code.
7 Drexler, § 1.01.
8 See http://corp.delaware.gov/contact.shtml.
9 Centaur Partners, IV v. Nat'l Intergroup, Inc., 582 A.2d 923 (Del. 1990).
10 8 Del. C. § 141(a).
11 Drexler, § § 13.01, 14.01.
12 See, e.g., 8 Del. C. § 211 (stockholder election of directors at annual meetings); 8 Del. C. § 251 (stockholder approval required for mergers). See generally A. Gilchrist Sparks, III & Frederick H. Alexander, The Delaware Corporation: Legal Aspects of Organization and Operation, Part III, 1-4th C.P.S. (BNA).
About the Author
Ms. Priest is associated with the Delaware law firm of Morris, Nichols, Arsht & Tunnell LLP