Why Delaware May Be Losing Its Status as Best Place for Companies to Set Up
Delaware has long been favored as a business-friendly environment.
— -- Thousands of U.S. companies choose to incorporate in the state of Delaware, but a spate of corporate lawsuits may be turning the tide, some experts say.
More than half of publicly traded companies listed on U.S. stock exchanges incorporate in Delaware, according to studies by the state.
Among the reasons are the predictability of the state's corporate laws, Bob Pozen, senior lecturer at MIT Sloan School of Management, told ABC News. Many companies that have IPOs, including Facebook and SoulCycle, incorporated in Delaware, despite having headquarters in California and New York City, respectively.
Other reasons include having the most flexible rules for starting businesses in the nation and tougher anti-takeover laws, Pozen said.
"The state is still business friendly. I don’t think that’s really an issue," Pozen said. "The argument is that it’s not as business friendly as it used to be."
But some argue that Delaware doesn't have enough protection for corporations when it comes to shareholder lawsuits.
For instance, one statute prevents companies that win lawsuits from passing on legal costs to the shareholders. Some companies fear statutes like that encourage shareholders to file lawsuits, like those against fruit company Dole.
Dole, which has operations in Hawaii and is headquartered in Westlake Village, California, was sued after it was sold to its CEO David Murdock in 2013. Shareholders claimed that the sale price was too low.
“We moved to Delaware because of what we felt was a balanced corporate environment. We’re now seeing that trending the wrong way,” Michael Carter, Dole’s former chief operating officer who retired in April, told The Wall Street Journal. “That’s troubling to us and, I think, should be troubling to others.”
Dole did not respond to a request for comment from ABC News. The case is ongoing.
Kelly Bachman, press secretary for Delaware Gov. Jack Markell told ABC News businesses and shareholders choose to incorporate in Delaware because the state's law and judges, "and especially our Court of Chancery, have a reputation for being able to strike a fair and predictable balance in resolving complex disputes."
"This ability stems from a robust catalog of case law built up over a century of trying these types of cases. It is a unique system we have in Delaware, and one that we work hard to maintain," Bachman said in a statement.
James DeChene, of the Delaware State Chamber of Commerce, said the courts are “clearly sensitized to the issues and are demonstrating that they tread carefully on a case by case basis based on the facts of the case.”
To compete with states like Delaware, other states like Oklahoma and Nevada are hoping to attract more businesses and are pushing to lower legal fees for businesses, Pozen said.
Still, Pozen said the predictability of Delaware's court system for corporate litigation makes going through the process of lawsuits less painful.
"This is a state where a lot of cases have been litigated so we know the law in these places," he said. "That’s important. Somebody advising the company knows what to do."