Print Friendly, PDF & Email

 

“Copy the Delaware General Corporation Law into Illinois law. Just copy it.”

 

By: Mark Glennon*

 

If you’ve ever worked as an accountant, lawyer or paralegal doing corporate work, you already know this: Companies in Illinois and other states send a fortune to Delaware every year in filing fees, registered agent costs and related expenses.

 

It needn’t be so. Illinois can keep its money here and money from other states could just as well be coming to Illinois instead of Delaware.

 

The numbers are huge. Delaware is far and away the state of choice in which to incorporate. About 900,000 businesses are incorporated there, about equaling its population. It has had as many as 133,000 new businesses set up there per year. About half of all public companies are incorporated in Delaware. Each new corporation pays at least $104 in fees to start, often much more. Each year thereafter they pay $50 with an annual report plus franchise taxes that range from $175 to $180,000. Corporate franchise fees alone bring in about $600 million to Delaware’s state government.

 

That’s just the revenue for Delaware government. In addition, each company formed there must have a registered agent in the state. That’s at least $50 per year for each of those 900,000 companies, going to private sector firms that provide that service. Harder to quantify, but probably much larger, is spending on Delaware lawyers, litigation costs and bankruptcy. Like it or not, that’s big business, too. Routine legal work and legal opinions are often needed from Delaware lawyers by companies headquartered elsewhere. Major corporate litigation and large bankruptcies have migrated to Delaware, primarily because of court expertise in local law.

 

Why do incorporators choose Delaware?

 

Primarily because of Delaware’s main statute for corporations, its General Corporation Law. It’s sensible, modern, flexible, well-understood and firmly interpreted by extensive case law. Some larger companies also have have separate tax advantages to incorporating in Delaware, but it’s really the General Corporation Law that attracts initial incorporations. It provides common sense rules for running a company that most managers and lawyers like, and initial filing fees are reasonable and competitive. Ask any startup lawyer where to incorporate. Whether they are here, the Silicon Valley or anywhere else, the answer in most circumstances is Delaware.

 

Copy the Delaware General Corporation Law into Illinois law. Just copy it. Make a Delaware type of corporation an alternative form available here. Keep the filing fees paid by Illinois companies here, make Illinois as attractive as Delaware as a place to incorporate, and draw in some of the related private sector revenue now going to Delaware.

 

Who would object? Nobody with good reason. At first blush, it might seem that objections could come from proponents of minority shareholder protection provisions. The current Illinois statute provides special provisions for minority shareholders under certain circumstances. Delaware corporate law does not include those provisions, and generally adheres instead to majority rule concepts. But here’s the thing: New companies, whether located in Illinois or elsewhere, can already opt out of Illinois’ minority protection rules simply by incorporating in Delaware or another state without those rules. And opting out is exactly what they have done, evidenced by Delaware attracting so many new company formations.

 

Illinois can leave its whole, existing corporation law in place and allow incorporators to choose between it and a Delaware copy.

 

Aside from that, few other changes should be made. Maybe tweak the filing fees and a couple details but don’t try to “improve” it — keep the Delaware form and wording intact.

 

I’ve spoken to many corporate attorneys, from Fortune 500 lawyers at big firms to startup lawyers at smaller firms. None has criticized this idea. Some have said they would want to see the body of case law interpreting the Delaware statute adopted along with it. That’s sensible and would be easy to do in the statutory change for Illinois that would be needed to copy the Delaware law.

 

Nothing retroactive need be done that would upset existing rights and procedures. The new statute would apply only to new corporations, and perhaps to old ones that choose to convert after an appropriate vote.

 

While we are at it, we might want to do the same for limited liability companies, though differences there are more extensive between the states. Illinois might also want to assign corporate litigation to courts with that specialty, as Delaware has done, resulting in fairer, better reasoned decisions.

 

Illinois needs bold solutions — lots of them, small and large — to restore business confidence and solve its fiscal crisis. Copying Delaware’s corporate statute would be a small one, but it would send a big signal.

 

*Mark Glennon is founder of WirePoints and has over thirty years corporate experience as a lawyer, venture capital investor, and consultant.

 

 

h&m