Delaware is the legal home of 54 percent of public companies. Next on the list is Nevada, with roughly 14 percent; the bronze medal goes to Maryland, with 6 percent.
All this, according to a recent report about how some Delaware companies--namely Dole, DuPont Co., and Ancestry.com--are now upset with the state as a legal haven. "Among their gripes: a growing tide of shareholder litigation, which some feel the state hasn't done enough to curb," writes Liz Hoffman in the Wall Street Journal.
For Delaware companies, the appeal has always been its pro-business statutes, specifically its protections when it comes to mergers and takeovers. There's a reason most public companies continue to call it their (legal) home.
But very soon, Delaware may not hold the same appeal.
Time to Find a New Legal Haven?
For Dole, in particular, it's an important topic. The company moved its legal home to Delaware from Hawaii in 2001, precisely so it could enjoy the state's legal protections. Nor is Dole's presence in Delaware strictly a legal matter: At the Port of Wilmington, Delaware, the company unloads more than 60 million bananas and 1 million pineapples each week, Hoffman reports.
Other states have their own advantages. Nevada, for example, has no state corporate income taxes, no franchise taxes, and no personal income taxes, according to the SBA. And Oklahoma, the Journal points out, passed a law in 2014 requiring plaintiffs in certain shareholders lawsuits to pay both sides' legal costs if they lose.
That law stands in stark contrast to a new one in Delaware that prohibits corporations from dumping legal fees onto shareholders who sue and lose.
The Fundamental Flaw
You can read stories like this with the eyes of a lawyer or a business leader. From that perspective, you have to do what's in the best interest of your client or company. You have to incorporate in the most advantageous place, regardless of where you actually put your headquarters.
But you can also read stories like this and wonder why things are so needlessly complex. A commonsensical solution would be a simple rule requiring you to incorporate in the state where you put your headquarters.
As an illustration, consider the following list from the Journal story. It paints a picture of how utterly unrelated your state of incorporation is to the place you call home. Walmart, Chevron, Berkshire Hathaway, General Motors, and Ford are all incorporated in Delaware. But all of them are, in fact, headquartered elsewhere.
In some cases, the contrast is striking. You think of companies like GM and Ford, and it calls to mind Michigan, or Detroit, in particular. Yet on paper, each is a Delaware company. The same is true for Walmart, even though it too takes pride in its hometown (Bentonville, Arkansas) heritage.
When it comes to starting a business, the decision of where to locate is a big one--as it should be. Some entrepreneurs opt for Silicon Valley, for obvious reasons. For others, Utah is a wise choice, with its tons of tech talent and infrastructure without the California overhead. And if you're the corner barber shop in Batavia, Illinois, that's cool too.
Yet for some reason, your very conscientious choice as a founder-owner about where to locate is often a separate decision from where you incorporate. Wouldn't everything be less tangled if companies had no choice in the matter?