The state of Delaware has a well developed company law, which attracts various companies from other states to incorporate in Delaware. The company law of Delaware provides greater power to management; whilst providing significantly, less protection, in comparison to other states, to shareholders. This feature has served to entice a large number of companies to move their operations to Delaware . The perception was that as the management was more adept at managing the company than the shareholders; such empowerment would be beneficial to all concerned.
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The case law of Delaware has supported such legislation. Nevertheless, it has been anticipated that there would be reforms to the existing company law, which would make it more beneficial to shareholders . There are several qualms regarding the Delaware effect, such as whether it is beneficial and whether there is any competition in Delaware. These doubts have not been resolved. Apparently, the Delaware approach is detrimental to the interests of shareholders, because it upholds the superiority of management.
Although this factor has proved to be attractive to companies, there is no evidence that the shareholders interests had been sidelined. This has been borne out by the keenness shown by the public to invest in these companies . Furthermore, there is virtually no competition from the other states to Delaware. This is demonstrated by the widespread use of the Model Business Corporation Act. As such, engaging in completion with Delaware does not bestow any incentive on a state . Delaware’s legal regulations have transformed it into the leading incorporating state in the US.
These regulations had been adopted by the state, way back in the 1920s. It serves as the State of Incorporation for corporate America and it is home to 58% of the public companies and 59% of Fortune 500 companies . Delaware’s companies invariably prefer to operate from this state; and as such this state is the clear leader, as far as the retention of companies is concerned. It serves as the leading jurisdiction for companies that aspire to reincorporate. Moreover, the majority of the companies prefer to incorporate in their home state .
However, Delaware is the preferred choice of firms that wish to incorporate in some other state. The corporate law of Delaware plays a major role in the evolution of US companies. This is on account of the fact that its corporate law provides alternative legislation that are convenient for companies throughout the US . The United States legal system has considered company law to be a state matter. Consequently, there is appreciable and crucial disparity between the corporate legislation of some states in the US. Companies in the US generally select a state whose laws are most beneficial to their business interests.
Delaware offers the most beneficial environment for such companies with attractive incentives . The courts accept this traditional practice and if a conflict of laws transpires, they respect the rules of the chosen state even where the company has no other interaction with that state except incorporation. The corporate legislation of a state regulates the basic rights and duties of firms incorporated in it. New Jersey and Delaware enacted highly liberalized and modernized incorporation legislations, by the end of the 19th century . However, Delaware has emerged as the leading incorporation state.
Not surprisingly, more than half of the US companies, listed on the New York Stock Exchange, are from Delaware. This state had taken several steps to update its statutes, and its judicial expertise is difficult to emulate. Moreover, other states are likely to find it very difficult to provide the benefits that Delaware bestows upon companies incorporated in it . The corporate law adopted by Delaware has had a tremendous influence on the evolution of US companies. It provides an alternative set of rules to help companies across the US.
Some corporate authorities have queried whether the corporate law of Delaware would bring about a maximization of value . The harmonization of corporate law in the EU is aimed at preventing a recurrence of what had happened in the US, on account of the Delaware effect. To this end, the Member States have taken the necessary steps to honor a common and cooperative legal balance. There were instances of dominant legal practices, which had been restated by the first and second generation company law Directives of the Commission .
The European Union initiated a harmonization program for companies held publicly that ensured the independence of the Member States, in respect of enacting legislation. The European companies have to engage in cross border trade with several Member States. Domestic courts have to take cognizance of the harmonized rules in the case of reincorporation of the firms in a Member State. As such, the latter are chary of foregoing their autonomy to enact legislation in this area . The third and fourth generation Directives left critical matters and issues to the discretion of the Member States.
The EU level interventions failed to achieve appreciable success, in respect of European company forms. Although, many doubts were expressed regarding the benefits of a European Company, there exists the distinct possibility that several firms may choose this structure, in order to avoid company law tenets that entailed great cost . Such measure can be implemented only if the EU were to implement a tax regime at the EU level for the European Company. In addition, it has to introduce an EU wide common corporate tax base. Only then will the dream of a European Company come true.
Unfortunately, political benefits for enacting laws; which could bring about imbalance in the non – competitive legislation of the EU’s company law, are negligible . The establishment of a European Company in the EU would require the fulfillment of several requirements. In order to bring about the outcomes of a European Delaware syndrome in the EU, there are a number of requirements. Furthermore, even if such conditions were to be met, a Delaware effect akin to that obtained in the US would not be possible within the EU.
In the EU, Company Law has been harmonized in the Member States to a significant level . In addition, the individual Member States do not express the same level of keenness to attract companies to incorporate in their territories. Moreover, the Member States are not willing to participate in the formation of a centralized corporate world, as they do not have the same economic interests . The US had favored the Delaware system because of the franchise tax regime. This tax is levied on companies, registered in a state, regardless of the place where that company conducts its business.
It is not possible to levy such tax on companies in the EU; because such levy would be in violation of the indirect taxes Directives on raising capital. The registration of a number of companies need not, by itself, bring about any extra revenue for a Member State through company taxes. The question emerges as to which Member State would transform into the Delaware of Europe in case the Delaware syndrome was to take effect in the EU. It is the opinion of economic analysts that the United Kingdom and Ireland would be the most likely candidates to become Delaware nations in the EU.
These two countries have adopted the incorporation theory in their nations. Such incorporation theory is the fundamental requisite to derive from the European Company advantage to the maximum extent possible. Under these incorporation principles, there is no statutory limit regarding the minimum capital to be maintained by a private limited company. Moreover, company law provisions in these two nations are liberal, in comparison to the other Member States . The company law in Ireland and the United Kingdom does not insist on employee participation in the policy making process of companies.
Such conducive legislative environments encourage companies to incorporate themselves in those nations. It is general practice for company directors to preclude the participation of employees in the decision making process. Therefore, companies would tend to apply for incorporation in nations that promote such practices . The process of forming a Delaware corporation would be a mere formality, which would not necessitate any specific declaration to be made. Its formation would not entail minimum capital provisions; and such a corporation’s accounts and auditing would not be subject to EC Directives.
In addition, there would be no compulsion to register shareholders . Companies would prefer to incorporate their firms under a lenient legal order to circumvent stringent national laws. The advent of a Delaware syndrome in the EU is difficult to envisage, because of the case law of the European Court of Justice, which does not encourage such attempts. The ECJ had ruled in the case of Ponente that foreign companies in the EU may not be required to pay annual incorporation fees, if their registered office was located in the Member State, in which they were incorporated .
There is no fear of unfair competition in the Member States. This is because, by virtue of the Directives and the harmonized law provisions, foreign companies do not enjoy greater rights than the national companies. In addition to this, it is not possible for any company, whether foreign or national, to take undue advantage of a dominant position within the EU. If a foreign company attempts to do so, the national companies have several means of countering such moves. The EC had developed several interventional methods to counter abuse of dominant position.
The EU is most unlikely to suffer setbacks on account of the negative effects of the Delaware Syndrome. Moreover, there will be no abuse of a dominant position, by virtue of the Delaware dominance. This is on account of the fact that companies that desire to collect exorbitant amounts by way of franchise fees have very little leeway to do so in the present European Union scenario. Corporate law is of great significance to the value of firms in the United States of America.
National corporate rules have a trans – jurisdictional effect, hence they are not limited to the jurisdiction in which they were enacted. Therefore, such national rules do not provide any sort of direct mechanism to regulate the process of reincorporation. The Delaware effect involves alternative mechanisms that are effective everywhere in the US. In the US, cross-border mergers are employed as common reincorporation measures. Consequently, it is possible for an existing company in the US to reincorporate its firm through a cross-border merger.
This is not the case with the EU. The European jurisdictions, in general, do not have institutions that allow such cross-border mergers. In the absence of mitigation of the severity of the universal succession processes, as laid down by the statutes that deal with mergers; the reincorporation of firms becomes difficult to manage. The difficulty arises on account of the increase in the cost of transaction that affects the specific transfer of a company’s assets or avoidance of complex structures . Thus, the merger statutes do not encourage the reincorporation of companies.
The transfer of the shares of a company to a foreign company is not a completer alternative. This is the case even when most of the company’s corporate governance can be made to comply with the legislation that prevails upon the holding corporation. In other words, the laws of the state, in which the company is located become binding. Consequently, the state of formation principle, in the absence of additional regulations that allow cross border mergers, have a greater binding effect on corporations than that under the real seat theory .
Thus, the tenet of state of formation of a company regulates cross border mergers. This situation acts as a barrier for corporations that aspire to reincorporate their firms in some other state. As such, changing the jurisdiction applicable to a corporation, by means of a transfer of seat of administration of the company, does not, in general, prove to be difficult to achieve. The size of the company and difficulty envisaged in administering it are important factors, in this regard .