Incorporating in the First State

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Delaware is the state of choice for incorporation for many of the nation's companies. This presentation discusses the advantages of Delaware incorporation.

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Incorporating in the First State

  1. 1. N A T I O N A L C O N S T I T U T I O N C E N T E R & K E N N E T H A . S P R A N G , E S Q . Incorporating in the First State Successfully Navigating Delaware Corporate Law Copyright 2009, 2010, 2011 Kenneth A. Sprang 1
  2. 2.  Delaware is often regarded as the most business friendly state.  Delaware corporations account for over 60% of fortune 500 companies and more than 50% of the corporations listed on the NYSE, NASDAQ, and AMEX. WHY? INTRODUCTION Copyright 2009, 2010, 2011 Kenneth A. Sprang 2
  3. 3. General Advantages to Incorporating In Delaware  The Delaware General Corporation Law  Permits maximum flexibility  Emphasizes simplicity in drafting and  Avoidance of unnecessary complexity.  Delaware is a pro-business state with a highly specialized and efficient court system familiar with business matters.  Delaware continually updates its General Corporation Law and implements state of the art convenience such as online-filing and two-hour service. Copyright 2009, 2010, 2011 Kenneth A. Sprang 3
  4. 4. Advantages to Incorporating In Delaware (2)  No minimum capital requirement  Does not require a principal place of business in Delaware  Allow one person to be the sole director, officer and stockholder  Have no residency requirement for directors, officers or stockholders Copyright 2009, 2010, 2011 Kenneth A. Sprang 4
  5. 5. Delaware’s Pro-Business Intangibles  Corporation franchise taxes are a significant source of state revenue  Delaware law firms, specializing in corporate law matters employ a large number of the state’s citizens.  Delaware’s government and citizenry is generally sympathetic to businesses.  Lawyers throughout the United States and even abroad are familiar with Delaware’s corporate statutes and the hospitable welcome to corporations.  Delaware corporate law and the Secretary of State’s Office projects an aura of credibility and predictability, unmatched by other states. Copyright 2009, 2010, 2011 Kenneth A. Sprang 5
  6. 6.  Biased against regulation  Predictable and supported by clear case law  Limits liability of directors  Authorizes indemnification of directors, officers, and employees  Simplified procedures for entities changing corporate form  Offers a wide variety of “alternative entities” Delaware General Corporation Law Copyright 2009, 2010, 2011 Kenneth A. Sprang 6
  7. 7.  Court of equity—decisions by judges  Highly experienced judges explain decisions in written opinions  Reputation for expertise and sophistication in corporate matters  Highly developed body of case law  Predictability of Delaware case law assists in corporate planning Delaware Court of Chancery Copyright 2009, 2010, 2011 Kenneth A. Sprang 7
  8. 8.  Modern and user-friendly  Employs state-of-the-art computer technology  Electronic document storage  Registered agents may view and file documents online  Accommodates urgent and time-sensitive filings—as little as two hours Secretary of State’s Office Copyright 2009, 2010, 2011 Kenneth A. Sprang 8
  9. 9. CORPORATE STRUCTURING & FINANCIAL CONSIDERATIONS Business in Delaware Copyright 2009, 2010, 2011 Kenneth A. Sprang 9
  10. 10. LLC Corporation  Member managed or manager managed  Except for limited situations, insulation from liability  Ideal for sole proprietors, small companies  Operating agreement  Managed by Board and Executives  Insulated from liability  Owners have no direct say in management  Necessary to go public  Bylaws Limited Liability Companies vs. Corporations Copyright 2009, 2010, 2011 Kenneth A. Sprang 10
  11. 11.  Management and control  Personal liability  Tax treatment  Regulatory compliance Considerations in Selecting Your Business Entity Copyright 2009, 2010, 2011 Kenneth A. Sprang 11
  12. 12.  Do you want centralized or decentralized management?  Corporations generally have centralized management through the board of directors  LLC’s, depending on the terms of their articles and bylaws, can be either centralized or decentralized Management and Control Copyright 2009, 2010, 2011 Kenneth A. Sprang 12
  13. 13.  Both corporations and LLC’s offer limited liability  Thus, generally, a stockholder or limited partner, member or beneficial owner has no personal liability for the debts and obligations of the entity Personal Liability Copyright 2009, 2010, 2011 Kenneth A. Sprang 13
  14. 14.  Corporations are treated as separate entities and pay corporate taxes, including income taxes  Shareholder profits in the form of dividends a then taxed a second time as income to the shareholder  S corporations: generally pay no income tax at the corporate level Tax Treatment: Corporations Copyright 2009, 2010, 2011 Kenneth A. Sprang 14
  15. 15. May be taxed as either a corporation or a partnership, depending on how the LLC is structured Tax Treatment: LLC’s Copyright 2009, 2010, 2011 Kenneth A. Sprang 15
  16. 16.  Under Delaware law, certain types of businesses (i.e., banking and insurance) must be conducted in corporate form, subject to either state or federal regulatory authority  Special considerations for professionals, such as lawyers, doctors, and architects Regulatory Compliance Copyright 2009, 2010, 2011 Kenneth A. Sprang 16
  17. 17. Certificate of Incorporation Bylaws  Non-conflicting name  Registered agent name and address within the state of Delaware  Purpose for which corporation is organized  Number and par value of initial shares of stock  Name and street address of organizing incorporator  Signature of incorporator  Location of Office  Meeting of Shareholders  Board of Directors  Officers  Shares of Stock  Dividends  Amendments  Waiver of Notice  Interested Directors  Indemnification and Advance of Expenses  Miscellaneous Essentials for Crafting Your Certificate of Incorporation and Bylaws Copyright 2009, 2010, 2011 Kenneth A. Sprang 17
  18. 18. Corporate Governance Under Delaware Law:  Director Indemnification and Advancement of Expenses  Recent amendment to Section 145(f) of the DGCL  Essentially overturns Schoon v. Troy Corp.  Right to indemnification or advancement of expenses existing under a provision within certificate of incorporation or bylaws cannot be eliminated or impaired “after the occurrence of the act or omission”  Advantages of Doing Business with the Court of Chancery  Renowned for corporate law expertise  Wealth of case law makes DE law highly predictable, facilitating planning and avoiding litigation  Efficient and timely  Summary Proceedings Act minimizes burdens and expenses of litigation Copyright 2009, 2010, 2011 Kenneth A. Sprang 18
  19. 19.  Fix date for annual meeting  Address who has permission to call special meetings in the articles of incorporation or bylaws  DE law allows for virtual annual meetings  Shareholders not permitted to call a meeting unless authorized by the articles Obligations Regarding Annual Shareholder Meetings Copyright 2009, 2010, 2011 Kenneth A. Sprang 19
  20. 20.  State the quorum for meetings in the articles of incorporation  Shareholders can vote via proxy, by mail ballot, telephone, or online Obligations Regarding Annual Shareholder Meetings Copyright 2009, 2010, 2011 Kenneth A. Sprang 20
  21. 21. RECENT DEVELOPMENTS IN DELAWARE LAW Doing Business in Delaware Copyright 2009, 2010, 2011 Kenneth A. Sprang 21
  22. 22. Statutory Amendments: Effective August 1, 2009  Increased stockholder access to corporation’s proxy materials (Section 112)  Reimbursement of proxy expense (Section 113)  Separate record dates for notice and voting (Section 213(a)  Judicial removal of directors (Section 225(c)) Copyright 2009, 2010, 2011 Kenneth A. Sprang 22
  23. 23.  Recent amendments reconciled the record dates under the DGCL with e-proxy delivery system, mandated via the exchange act  As a result, corporations are now permitted to separate the record date for determining the shareholders entitled to receive notice of a meeting from the record date for determining the shareholders entitled to vote at the meeting E-Proxy and Section 213(a) Copyright 2009, 2010, 2011 Kenneth A. Sprang 23
  24. 24. Critical DE Case Law Developments  Kistefos AS v. Trico Marine Services, Inc. et al. Defendant corporation argued that a shareholder proxy proposal would be invalid because it was inconsistent with, among other things, the corporation’s certificate of incorporation Delaware Court of Chancery permitted shareholder to solicit proxies and present arguments at the annual meeting in the same manner as shareholders were permitted to do under proposed bylaws Decision may empower shareholders with the right to solicit proxies that are inconsistent with a corporation’s certificate of incorporation Copyright 2009, 2010, 2011 Kenneth A. Sprang 24
  25. 25. Could increase activists shareholders proposals in Delaware, a state traditionally seen to favor corporations and insulate directors Impact of Kistefos Copyright 2009, 2010, 2011 Kenneth A. Sprang 25
  26. 26. CA Inc. v. AFSCME Employees Pension Plan  Delaware Supreme Court held that a bylaw, proposed by a shareholder, requiring the company to reimburse the shareholder's reasonable proxy expenses if the shareholder was successful in electing at least one director pursuant to a proposed “short slate” would violate Delaware law  Court’s decision makes it clear that shareholder proposed bylaws may not “mandate” how the board makes substantive business decisions Copyright 2009, 2010, 2011 Kenneth A. Sprang 26
  27. 27.  Further Empowers Directors Of Delaware Corporations  Delaware Courts Will Not Allow Shareholder Bylaws To Interfere With Directors Fiduciary Duties Impact of CA Inc. v. AFSCME Employees Pension Plan Copyright 2009, 2010, 2011 Kenneth A. Sprang 27
  28. 28.  Modern and nationally recognized corporation statute  Immense body of well-developed case law, facilitating predictability in business planning  Respected court of chancery, without juries  Efficient and user-friendly secretary of state’s office  A legislature that prioritizes corporate law matters Why Delaware?: Conclusion Copyright 2009, 2010, 2011 Kenneth A. Sprang 28
  29. 29. Contact Information KENNETH A. SPRANG, Esq. Washington, DC Telephone: (202) 683-4090 FAX: (202) 403-3644 ken@wibclaw.com 29 Copyright 2009, 2010, 2011 Kenneth A. Sprang

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