The massive Daniel E. Herrmann courthouse on Rodney Square in the center of downtown looks like many other court buildings across America. The scene inside is familiar, too, with prosecutors and police, defendants and lawyers scurrying about--with one major difference.
On the first floor, somewhat apart from the rush, sits Delaware's Court of Chancery--perhaps the most important court in the land for corporate America.
Through its doors pass the household names of the nation's commerce--Marriott, Apple Computer, Merck. All are here because Delaware is their legal home, and because the court has procedures and rules they like. Judges are appointed, not elected; there are no jury trials, and the court does not award punitive damages.
Likewise, around the corner and down the street at federal bankruptcy court, billion-dollar corporate bankruptcies involving Continental Airlines, TWA, Columbia Gas, Days Inn and Montgomery Ward have shared the docket at times with struggling credit-card debtors and out-of-work laborers. They can file where they are headquartered, but many choose corporate-friendly Delaware.
And in Dover, the capital, state officials are stamping out new Delaware corporations and limited-liability companies (LLCs) at a rate of 5,000 a month. About half the companies in the Fortune 500 are incorporated in Delaware, along with about 40 percent of the other companies listed on the New York Stock Exchange, officials say.
The legal business of corporate America is in many ways tiny Delaware's leading industry. The state collects nearly $475 million--almost a quarter of its budget--in fees and taxes from corporations, as well as other spending from the lawyers and experts needed when companies register, litigate, merge and, sometimes, fail.
It is an industry that requires little in the way of services, makes few demands on the school system, and doesn't pollute the air or water.
Some public officials elsewhere view Delaware's close relationship with big business with alarm. Not in most cases because they think there is anything untoward about it, but because they want the benefits themselves.
Some states are moving to make themselves more corporate-friendly in an effort to pry away from the First State some of its incorporations, giant bankruptcy cases and high-stakes litigation. Others are seeking help from their representatives in Washington to amend the provision of federal law that gives Delaware so much of the corporate bankruptcy business.
Delaware prides itself on its position. The state offers "unparalleled value" for business, said Sabrina Hill, of the secretary of state's office, noting that incorporation can be accomplished in as little as two hours.
It is Delaware's laws and its courts, both bankruptcy and chancery, experts say, that give the state its central place in corporate law. Taxes, the usual suspect in such matters, are much less of a consideration, they said.
The nation's corporations are so used to Delaware, in fact, there's now "a trademark value" to Delaware incorporation, said Lawrence A. Hamermesh, an associate professor at the Widener University law school here.
It's like Swiss watches, he explained. "You don't know why Swiss watches are better than other watches; you just believe that."
In fact, that belief may translate into real dollars. A recent study by Robert Daines of the New York University law school found that firms incorporated in Delaware are worth more than firms incorporated elsewhere--after controlling for size and other factors.
The main revenue source is the state's franchise tax, which ranges from $30 to $150,000 a year for corporations and a flat $100 for LLCs, which last year produced $425.5 million for the state, or about 22 percent of its operating budget, said Hill of the secretary of state's office.
In addition, companies are required to have a registered agent in the state, creating another source of business and fee income. Companies involved in litigation must be represented by Delaware counsel, which provides work for in-state lawyers and has even inspired some larger corporate firms to open Delaware offices.
And it has growth potential. A recent proposal to tweak a provision of the state's uniform commercial code--to allow property disputes to be resolved here instead of where the property is located--is estimated to raise between $10 million and $11 million annually.
It's not surprising, then, that other states, after years of alternately sneering at Delaware and grumbling about it, are now trying to do some of the same things for business that Delaware has done for so long.
The most recent effort was aimed at the bankruptcy court. Some House members tacked onto the pending federal bankruptcy reform bill a provision that would require corporations filing for bankruptcy protection to do so where their principal place of business is located. Current law allows that but also allows filing in the state of incorporation. For about 300,000 U.S. corporations, that state is Delaware.
Delaware's bankruptcy court is one of the busiest in the nation, and last year nine of the 12 largest corporate bankruptcies were filed there--bringing lawyers, accountants, witnesses and, most important, money into the state. Since 1990, 22 companies with assets exceeding $1 billion have filed for protection there.
Delaware's senators, Republican William V. Roth Jr. and Democrat Joseph R. Biden Jr., have mounted a bipartisan counterattack against the provision in the bankruptcy bill that threatens their state. As the measure heads for a House-Senate conference, the Senate version would leave that part of the law as it currently stands.
The bankruptcy bill is not the only challenge Delaware is facing.
In efforts to entice or retain corporations, states are trying all sorts of Delaware-like tactics, and some are even going the First State one better. For example:
* Nevada is pushing to become the "state of choice" for incorporation. The state currently levies no corporate income tax and places virtually no restrictions other than those imposed by federal law on who or what may own a Nevada corporation.
* A number of states, including North Carolina, have enacted or are considering separate business-only or business-focused courts--a long-standing feature of Delaware's system. They are hoping to provide corporations with expert judges and a developing body of case law to help them cope with increasingly complex business issues.
* Other states have enacted laws giving management important advantages in dealing with shareholders--dubbed management entrenchment statutes by critics. Pennsylvania, for example, has enacted statutes specifically to overrule Delaware case law on various issues. One provision there holds that boards of directors need not consider shareholder interests dominant in deciding among competing takeover offers.
As hard as they try to get into bed with corporations, competitors to Delaware are having only limited success.
A look at how Delaware developed its current dominance makes it clear why companies love the First State and why the First State loves them.
Delaware was not always the favorite of corporate America. New Jersey was.
In the years following the Civil War, as business enterprises began to grow to sizes previously unknown, the old-fashioned methods of ownership--partnerships and sole proprietorships--quickly became outdated.
As corporations evolved, states enacted laws to govern them, but in the process they created a patchwork that giants such as Standard Oil found inconvenient to operate within. They found they could bypass state restrictions by creating trusts and placing shares of different corporations in them.
By the end of the century states began to enact new statutes enabling businesses to structure themselves as large corporations, and one of the most corporate-friendly was New Jersey. It was so friendly, in fact, that when the DuPont company reorganized in 1902 it was incorporated in New Jersey, according to University of Delaware history professor Carol E. Hoffecker.
"A lot of people assume that [Delaware's system] was done to accommodate the DuPont company, and it wasn't," she said. "It's an assumption that one would naturally make," but Delaware merely copied New Jersey's law, and for a number of years it had little impact in the state.
Under reformist governor Woodrow Wilson a few years later, however, "the New Jerseyites became inflamed with the Progressive-era hatred for trusts" and big business, Hoffecker said. "They changed their law--and Delaware didn't."
"That was the first key to it." But the state also got a major boost in the 1920s with rulings by a federal judge named Hugh Morris--as it happens, a Wilson appointee--"that I think alerted corporations to the, let us say, understanding point of view that they might obtain in Delaware," she said.
Today's system owes much to "serendipity," Hoffecker said. "I don't think anybody knew for a fact when Delaware adopted its law what the impact would be. They didn't foresee what the impact of large corporations would be. . . . The dominance of corporations in the American economy was something that happened in the 20th century."
However unexpected the outcome, the state and other beneficiaries continue to protect it vigorously today.
A key element is the state's chancery court, which has been around since 1792. It has evolved into a business-oriented court with special rules, special expertise, and a long history that companies and their lawyers understand.
It is now widely known for its corporate decisions, though, as Wilmington lawyer Mark D. Sisk noted, it has "another side . . . of what I call people stuff," such as guardianships and some estate matters.
Unlike judges in other states, chancery judges don't handle criminal matters or other types of civil matters. And for corporate lawyers, that's good.
"Corporate law is its own animal. A really good corporate judge does not merely understand the law but has a feel for the corporation itself . . ., a feel for what corporations are all about," said Charles Elson, a law professor at Stetson University.
"The last thing you want" is to have your case go before "a judge whose last case was an armed robbery," he said.
Elson called the state "very clever" in developing the chancery court this way.
"The key to any business planning is consistency," he said. "That gives you a predictability in a business transaction. If a certain arrangement was entered into, it gives you a sense of where the court would go if that issue was challenged," he said.
Along with the body of law, these factors "combine to make the dispute-resolution system in Delaware coveted" elsewhere, said Widener's Hamermesh.
"Once in place as the leading state of incorporation, there's nothing like familiarity and inertia to keep things in place," said Hamermesh, noting that "law schools teach Delaware corporate law."
It was in the late 1960s and early '70s that Delaware really achieved its current prominence in corporate law, he added. The state modernized its corporate law, and the legislature has been careful since to make changes quickly when new issues arise.
In the past, the state has been criticized as excessively pro-management, but recently, Elson said, the Delaware courts "have been very sensitive to corporate governance issues." As questions of shareholder rights have become more prominent, especially with the rise of sophisticated institutional investors, they have shifted in that direction, he said.
"The court strikes a balance. There is a recognition that shareholders have legitimate concerns that must be addressed, yet there are some matters that are appropriately the concern of management," Elson added.
A more recent explosion has come in bankruptcy court.
Continental Airlines has been through bankruptcy twice, the first time in Texas, the second time in Delaware, and several lawyers noted how much better things went for the company in its 1990 Delaware filing. The case gave the courts there a reputation as significantly pro-debtor, and troubled companies large and small have been swarming there ever since.
The Delaware court, though federal, seems influenced by the Delaware culture. Lawyers say it is receptive to "prepackaged plans"--deals worked out in advance of the filing with major creditors--and other "fresh start" arrangements helpful to debtors.
The court also goes out of its way to make things easier for participants, such as scheduling omnibus hearings months in advance and responding quickly to emergency scheduling requests.
There is one area where Delaware doesn't lead. "From a tax viewpoint, the state's benefits are lot more limited," said Nicholas Nesi, a multistate tax partner at the accounting firm BDO Seidman in New York.
Delaware has a corporate income tax, though it generally isn't imposed on companies that aren't doing business there. And there are some special breaks.
The state doesn't tax companies whose business is limited to the maintenance and management of investments, and it exempts income from intangible assets such as trademarks, Nesi said. So owners of such intangibles "will move parts of their business down to Delaware in hopes of qualifying for that zero tax rate," he said.
Delaware also exempts income from credit-card operations, making the state very hospitable to card issuers such as MBNA. "Delaware gets a lot of jobs out of" that break, Nesi said.
Other states, such as Nevada, may offer a better tax climate, and Pennsylvania and Maryland more protections for management. But Nesi and others said it will be a long time, if ever, before they catch Delaware as corporate America's favorite state.