For a small state, Delaware has an outsized impact on how corporations are governed around the world. A new book looks at the state’s near-monopoly on corporate formation, taking a skeptical look at how Delaware’s politicians, regulatory agencies and lawyers work together to ensure that companies continue to want to incorporate there.
This holistic approach to rulemaking and compromise is good for the incorporation business, which dominates other U.S. states. It attracts corporate filers from abroad, where Delaware is sometimes seen as a haven for shielding ownership from public eyes. It’s also good for the state itself, which uses the revenue from corporate filings and legal fees to fund its operations. But it’s not good for society, argues Hal Weitzman, a former journalist with the Financial Times who is now the executive director for intellectual capital at the University of Chicago's Booth School of Business.
Weitzman sees Delaware’s success in this area as an unqualified loss for corporate governance, transparency and even democracy itself. This tiny three-county state, nestled on the Amtrak corridor between the powerhouse centers of New York City and Washington, D.C., made itself business-friendly to such an extent that impenetrable corporate entities the world over can now do whatever they want, with no fear that their owners will be exposed, Weitzman explains in the book.
Delaware is in the news these days for two main reasons. First, it’s the home of President Biden, who spent the last several decades representing it on Capitol Hill. (Weitzman goes into Biden’s Senate voting record and how his support enabled Delaware to maintain its hold on the incorporation business.) Second, because such a large cluster of companies is domiciled there, even if they’re actually headquartered someplace else, Delaware corporate law — written, as the book details, by an unelected committee of the state’s top corporate lawyers, and greenlit with minimal debate by the state legislature — is the governing rulebook when companies battle one another.
This most recently has come to the fore in the case of Twitter, a Delaware corporation that signed a contract to be acquired by the Tesla-and-Mars billionaire Elon Musk, a PayPal founder. Any attempt by Musk to call off the deal likely will have to go through Delaware’s Chancery Court, the boxing ring where many mergers get adjudicated.
Weitzman identifies several intrinsic problems with how Delaware operates that have led to this point.
The first is the state’s trademark collaborative style of governing, known locally as the “Delaware Way.” This allows for more efficiency in getting things done, since there’s little adversarial wrangling, but it also means that important differences get papered over. One example: Racial tensions dating to before segregation boiled over into unrest over school busing (Biden was notably against federal busing efforts during the civil-rights era, although he claimed to be anti-segregation in schools).
In the corporate arena, the Delaware Way has often meant that all parties work together to maintain Delaware’s “Franchise,” as the incorporation business is known. This group effort to streamline regulations and encourage companies to keep sending over incorporation documents has also meant that the state does little to deal with the consequences of its success in attracting this business. Weitzman highlights a number of international law enforcement and anti-money-laundering efforts that ran up against Delaware corporate law, and points out that the state’s rules are well known for helping corporate owners avoid accountability by hiding their ownership.
If Delaware changed its system to encourage transparency and openness, and used a more democratic process to make rules, it would probably lose some corporate business as companies, especially nefarious ones, fled to looser jurisdictions. But, Weitzman argues, that might be just what the country — and the corporate world — needs.
Hal Weitzman, "What’s the matter with Delaware? How the First State has favored the rich, powerful, and criminal — and how it costs us all." Princeton University Press, 282pp, 2022.
