Recent developments in the global markets, including changes in tax and regulatory regimes, have motivated businesses to seek new jurisdictions for incorporation by entities in their corporate structure.* Although such a change may be accomplished by merger of the relevant entity with another entity located in the desired destination where applicable law permits, many recent migrations and transformations have taken advantage of the conversion provisions of sections 265 and 266 of the Delaware General Corporation Law (DGCL) and the transfer, domestication, and continuation provisions of sections 388 and 390 of the DGCL. Unlike a merger, which recognizes the existence of at least two constituent entities, a company proceeding through a conversion, transfer, domestication, or continuation is recognized as a single entity that retains its corporate personality while migrating and/or transforming into a seemingly different entity. Given that those technical processes have been used less frequently than merger provisions, a moment with those sections of the DGCL—before considering their utility in a corporate reorganization or flip transaction—may be in order.
Origins and Development of Domestication and Conversion under the DGCL
The concept of domestication was explored in the context of modern corporate statutes around World War II. Section 388 was not adopted until 1984, however, when entities formed outside of the United States were allowed to transfer or domesticate as Delaware corporations. Eleven years later, section 390 was adopted to allow Delaware corporations to similarly transfer and domesticate as corporations in a non-U.S. jurisdiction. Sections 388 and 390 have since been amended periodically to provide greater flexibility and, in their current forms, allow Delaware corporations to transfer and domesticate as any entity type in a non-U.S. jurisdiction (and vice versa). Those statutes also allow the original entity, which has transferred to a new jurisdiction of incorporation, to continue a dual existence in the original jurisdiction while being considered a single entity with the entity that has incorporated in the new jurisdiction.
The expanding scope of the domestication statutes has also come to overlap with significant aspects of the conversion statutes. Sections 265 and 266, arising from less bellicose beginnings, were adopted in 1999 to allow Delaware entities other than corporations (e.g., limited liability companies, limited partnerships, or business trusts) to convert into Delaware corporations (and vice versa). Given the similarities in function, the drafting of the conversion statutes closely tracked the drafting of the domestication statutes. When the domestication statutes were significantly expanded in 2005 to allow a Delaware corporation to domesticate as a non-U.S. entity other than a corporation, the conversion statutes were similarly expanded to allow a Delaware corporation to convert into an entity other than a corporation of a jurisdiction outside of Delaware (and vice versa).
As a result of their historical development, the conversion and domestication statutes now overlap significantly. Below is a chart comparing key aspects of those statutes and the merger statutes.