Incorporating in the First State

N A T I O N A L C O N S T I T U T I O N C E N T E R
&
K E N N E T H A . S P R A N G , E S Q .
Incorporating in the First State
Successfully Navigating Delaware Corporate Law
Copyright 2009, 2010, 2011 Kenneth A. Sprang
1

 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
2

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.
3

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
4

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
6

 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
7

 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
8

CORPORATE
STRUCTURING &
FINANCIAL
CONSIDERATIONS
Business in Delaware
9

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 liability
 Owners have no direct
say in management
 Necessary to go public
 Bylaws
Limited Liability Companies vs. Corporations
10

 Management and control
 Personal liability
 Tax treatment
 Regulatory compliance
Considerations in Selecting Your
Business Entity
11

 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
12

 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
13

 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
16

Certificate of
Incorporation
Bylaws
 Non-conflicting name
 Registered 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
19

 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
20

RECENT DEVELOPMENTS IN
DELAWARE LAW
Doing Business in Delaware
21

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))
22

 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)
23

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
25

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
27

 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) 683-4090
FAX: (202) 403-3644
ken@wibclaw.com
29

Incorporating in the First State

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