Delaware Franchise Still Thriving, Secretary of State Says

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By Leslie A. Pappas

Jeffrey W. Bullock has served as Delaware’s Secretary of State since 2009 and oversees 18 agencies covering everything from the arts and cultural affairs to Delaware corporations.

In September, the U.S. Chamber of Commerce released a survey that found South Dakota had overtaken Delaware as the state with the best overall litigation environment. Delaware ranked eleventh, the first time since the survey began that the First State wasn’t in first place.

Some critics attributed the shift in part to legislation Delaware passed in 2015 that barred stock corporations from adopting “loser pays” bylaws or charter provisions. These clauses allow companies to recoup litigation expenses when they prevail in shareholder lawsuits. The legislative move came after the Delaware Supreme Court ruled in May 2014— ATP Tour Inc. v. Deutscher Tennis Bund—that non-stock corporations may lawfully adopt fee-shifting provisions.

Bloomberg BNA recently sat down with Bullock to discuss the health of the Delaware franchise. Below is an edited transcript of the conversation.

Bloomberg BNA: For many years, Delaware was the clear front runner as a place for companies to incorporate. Now other states are changing their laws and are trying to lure companies away from Delaware. How is the franchise doing?

Bullock: As you know, Delaware is a corporate epicenter, particularly in the area of corporate governance. And that competency has evolved over the course of over a century, primarily through our courts and specifically through our Court of Chancery. We like to say that if you’re incorporated in Delaware and you use Delaware law, and you end up in court for some reason as many businesses do at some point in their lives, you can pretty much figure out how your case is going to resolve itself because what we provide is that degree of certainty. There’s not a lot of guesswork that should be involved because it is that methodical and the quality is that high. So that’s the essence of why we’re strong.

And the numbers speak to that. Two-thirds of the Fortune 500 are incorporated here, the majority of publicly traded companies on the New York Stock Exchange and the Nasdaq are traded here. We have 1.2 million entities ranging from mom and pop corner store LLCs to literally the largest corporations in the world.

So we have a reputation for meeting the needs of our customers. We’ve changed the General Corporation Law to stay ahead of the game in terms of where the market is moving. We offer products that are responsive to what the business community thinks it needs or wants. For example, this past year we passed a statute allowing corporations to use blockchain. Delaware is the first state to enable corporations to use blockchain for their registries and other purposes. It’s just an example of how we try to stay current at the leading tip of the arrow.

All the sort of indices that you would use to judge whether the franchise is strong or weak or somewhere in between indicate that the franchise is as strong as it’s ever been. We have a record number of Fortune 500 companies that are here. We’re coming off several record years in terms of formations of entities of all kinds, whether they be corporations or limited liability companies or LLPs or whatever. We have and maintain a huge share of the [initial public offering] market, which is sort of the mother’s milk of keeping the franchise strong, because these are the companies that are going public, and these are the future Fortune 500 companies. I think our share is over 80 percent of all U.S. IPOs. So by all those indicators we are very, very strong.

What people need to always understand about Delaware and what we try to do here is that it is a balancing act. We are not pro-management. We are not pro-shareholder. We are not pro-board of directors, we are not pro-insurgents. We are a balancing act of all the varied interests that go into governing corporations.

Bloomberg BNA:The U.S. Chamber recently released a survey of states with the best overall litigation environment that showed Delaware had fallen from first to eleventh place. How do you explain that?

Bullock:The U.S. Chamber is a great friend of Delaware and we’ve worked together on a lot of issues. They disagreed with us about an issue relating to a case—the ATP case—a few years ago that dealt with this issue around fee shifting, or as they call it in your business, “loser pays.” And they would have preferred that we had allowed the decision to stand, which would truly have sort of turned things on their head in terms of some of these internal disputes in companies. And the decision—which I supported, the Delaware Bar supported, the Legislature and the governor ultimately supported—was to bring balance back. If we had not done so, I think we would have seen a significant uproar from institutional investors and from others who finance some of these same businesses.

It is a balancing act we have to maintain. A friend of mine said, ideally, Delaware should probably be about 25th in that survey, because then maybe we would have gotten the balance right.

Other states have tried to emulate [Delaware]. If you have a printer and some copying paper, you can copy Delaware law. If you want to establish something call the Chancery Court or some similar business court, you could do it. What other states can’t copy is the tradition and the consistency of our judiciary and our law over time, because only time can provide you that. And so when I talk to people around the country and around the world about the quality of the franchise, I don’t think it’s ever been stronger.

To contact the reporter on this story: Leslie A. Pappas in Philadelphia at LPappas@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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