Page 125 - Introduction to Business

CHAPTER 3 Business Governance, Ethics, and Social Responsibility 99

than 20 percent) exist in corporate form, these businesses do the vast majority of
dollar volume business in the country.
Historically, corporations did not dominate early American commerce. In the
eighteenth and early nineteenth centuries, high transportation costs limited the
size of the markets factories and other businesses could serve. This, in turn, led to
relatively small local businesses with relatively low needs for capital. But new tech-
nology in the form of the steam-powered railroad locomotive dramatically lowered
the cost of land transportation and led to the growth of far larger factories and
businesses. These new larger businesses needed capital, and the corporate organi-
zational form with its limited liability and opportunities for anonymous invest-
ment (no one has to know in what businesses someone owns shares) was ideally
suited to the needs of these new larger business entities. In 1837, the state of Con-
necticut passed the first general incorporation law in the United States, giving any-
one who met certain basic requirements the right to form a corporation in that
state. Nearly all other states in the United States passed similar legislation shortly
thereafter, and today each state in the country has its own incorporation laws.

Place of Incorporation. A corporation is created by filing a certificate of incor-
poration in a given state. Different states have different laws regarding corporations,
and they impose different taxes on corporate entities. The most popular state in the
United States in which to incorporate is the state of Delaware. Over 300,000 compa-
nies are incorporated in Delaware, including more than one-half of the nation’s 500
largest corporations (the so-called Fortune 500). Why Delaware? For one, Delaware
has established a special, and now very respected, court known as the Chancery
Court, which devotes itself to corporate issues. This court has developed a compre-
hensive body of corporate law precedents and has been known to interpret the law in
a flexible manner that is responsive to corporate needs. In addition, this corporate-
oriented court is also known for the timeliness of its decisions and its impartiality. 6
Indeed, not only do a good number of companies initially incorporate in
Delaware, some even switch their incorporation to that state from another state.
Recently, for example, a major California telecommunications company named
Surewest Communications switched its incorporation from California to Delaware
(while now formally incorporated in Delaware, it still does nearly all its business in
its original “home” state of California). These were the main reasons it gave for
wanting to reincorporate in Delaware.

Prominence, Predictability, and Flexibility of Delaware Law. For many years
Delaware has followed a policy of encouraging incorporation in that state and . . .
has been a leader in adopting, construing and implementing comprehensive, flexible
corporate laws responsive to the legal and business needs of corporations organized
under its laws. . . . [B]oth the legislature and courts in Delaware have demonstrated
an ability and a willingness to act quickly and effectively to meet changing business
needs. The Delaware courts have developed considerable expertise in dealing with
corporate issues, and a substantial body of case law has developed construing
Delaware law and establishing public policies with respect to corporate legal affairs.
Well-Established Principles of Corporate Governance. There is substantial
judicial precedent in the Delaware courts as to the legal principles applicable to
measures that may be taken by a corporation and as to the conduct of the Board of
Directors such as under the business judgment rule and other standards. The
Company believes that its shareholders will benefit from the well-established prin-
ciples of corporate governance that Delaware law affords. 7
In addition, and far more controversially than incorporating in Delaware, some
U.S. companies incorporate or reincorporate offshore in countries like Bermuda,

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