By Alex Vuocolo
Special to Delaware Business Times
DBT checked in with Professor Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. Elson offers expertise on the subject of boards of directors and he is a contributor on corporate governance issues to various scholarly and popular publications.
Nearly half of all corporations in the country have made Delaware their legal home. How did the state become such a haven for incorporation?
It’s two-fold: It’s our corporate statutes, which are considered the most advanced in the country. They’re drafted by a very sophisticated bar [Delaware State Bar Association] and adopted by a legislature that is responsive to that bar. Secondly, it’s the reputation of our judicial system, particularly the Court of Chancery. The court is considered one of the fairest and most sophisticated business courts in the world. People know when a matter is adjudicated here that it will be done intelligently and fairly. There is no local industry that would suggest the court is biased one way or the other. The shareholders and businesses are basically our business. So we have well-respected courts and well-respected laws, and that’s why a lot of people are here.
You’re speaking on this topic at UCLA next semester in a forum called “Can Delaware Be Dethroned?” Why ask that question now?
There’s a lot of concern about Delaware and the outside world. There’s a concern that our expertise has been federalized. There are also a number of other states that have developed sophisticated courts and legal practices [around corporate law].
How has Delaware responded to these trends?
It really hasn’t. I think we do a good job marketing ourselves, but I think, in this climate, we’re going to have to redouble our efforts and emphasize to the world that we’re important. The argument for federalizing is that we want to create a national corporate law. But Delaware has done that already in the sense that every state typically follows our lead on corporate regulation. Because we’re considered a neutral site, our courts do in fact create national corporate law. If you went to the federal government, you would have a very disparate approach because federal district courts, where these things would be decided, are really creatures of localities. You run the danger of getting very different and conflicting business decisions that would ultimately have to be resolved by the Supreme Court, which has little interest in business law cases.
Can Delaware really be considered totally neutral, though? It’s still a state with its own financial needs and priorities.
Well, its financial needs are getting corporate regulatory structure correct. If it isn’t viewed as neutral and intelligent, people will go somewhere else, and then we lose the revenue. It’s in our interest to be fair and smart. Ultimately the key is: we protect investors. I think that has to be our theme going forward. The federal government cannot effectively protect investors because of the way the judicial system is designed. Other states can’t protect investors because they have local industrial interests. Our only interest is getting it done right.
After the release of the Panama Papers, a cache of legal documents that revealed Panama was being used as a tax haven, Delaware was often mentioned as an example of a tax haven on our own shores. Do you think the First State is comparable to a place like Panama?
No, no, I think people incorporate here not because it’s a tax haven but to take advantage of a very sophisticated corporate law as well as the courts of Delaware. It’s very different. Now, do people use Delaware who engage in problematic operations? Yeah, probably. But they could use any state. It could happen here. It could happen anywhere. That’s not to say Delaware supports those activities or has any connection to those activities.
So there isn’t a disproportionate number of, say, shell companies forming in Delaware compared other states?
Remember, Delaware is the most recognized place to incorporate in the world. So, whether it’s a shell company or an active business, you’re going to use Delaware. But the corporate laws of most states are very similar to Delaware. You could incorporate a shell company in Oklahoma if you wished, or California or Kansas. It happens here because most people incorporate here. But I don’t think our law lends credence to problematic operations. That, to me, is incidental to our primary business.
Do you still think that the association with these practices has created a negative perception of the state?
Absolutely, Delaware has to tell the world that we are here to protect investors, and I think we need to a better job of that.
Delaware is currently the target of lawsuits by 21 states for its policy on taking unclaimed private property from companies incorporated within its borders. The lawsuits contend that unclaimed money should go back to the state where the transaction occurred, not to the state where the corporation is based. Delaware could end up losing a crucial revenue stream. How does this issue play into the larger question of Delaware’s status as a corporate haven?
It’s very important. It created some really bad feeling towards us among some of our biggest clients. You have to be fair in asserting tax jurisdiction. If you become viewed as overly aggressive, you run the real risk of alienating them. I think it’s a policy we really need to seriously rethink.
What do you suggest the state should do to maintain Delaware’s current position?
No. 1, I would be very aggressive in reminding the world that we protect investors. We need to be really careful in our law and in how we tax. We need to be very careful in who we pick to go on our courts. We need to let the world know that we are fair, that we are intelligent and that, above all, we protect investors. That should be the mantra of Delaware. Virginia is for the lovers. Delaware protects investors. We need to emphasize that we do a better job than other states and the federal government.
Charles M. Elson is the Edgar S. Woolard Jr. Chair in Corporate Governance and the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
He served on the National Association of Corporate Directors’ Commissions on Director Compensation, Director Professionalism, CEO Succession, Audit Committees, Strategic Planning, Director Evaluation, Risk Governance, Effective Lead Director, Board Diversity, Talent Development, Strategy Development, the Compensation Committee, and Long-Term Value Creation, and was a member of its Best Practices Council on Coping With Fraud and Other Illegal Activity.
He is vice chairman of the ABA Business Law Section’s Committee on Corporate Governance and was a member of its Committee on Corporate Laws. He is also a member of the Standing Advisory Group of the Public Company Accounting Oversight Board.
He has been included in the list of the “100 most influential players in corporate governance” of Directorship, the “100 most influential people in finance” of Treasury & Risk Management, the list of top 10 governance “stars” of Global Proxy Watch, and Ethisphere’s 100 Most Influential People in Business Ethics in 2014.
He earned his A.B. from Harvard University and his J.D. from University of Virginia.
– Credit University of Delaware
