Forming the Corporation
Analyze and report the importance of each of the following elements in forming a corporation. Remember to include the definitions and page references as part of your report.
Delaware and Nevada Corporation Law
The State of Delaware is the corporate haven of the United States. More than 50 percent of the publicly traded corporations in America, including 60 percent of the Fortune 500 companies, are incorporated in Delaware. In total, more than 500,000 business corporations are incorporated in Delaware. But why?
Remember that the state in which a corporation is incorporated determines the law that applies to the corporation: The corporations code of the state of incorporation applies to such things as election of directors, requirements for a merger to occur, laws for fending off corporate raiders, and such. So, even if a corporation does no business in Delaware, it can obtain the benefits of Delaware corporation law by incorporating in Delaware.
On the legislative side, Delaware has enacted the Delaware General Corporation Law. This law is the most advanced corporation law in the country. And, the statute is particularly written to be of benefit to large corporations. For example, the Delaware corporations code provides for the ability of corporations incorporated in Delaware to adopt “poison pills” that make it virtually impossible for another company to take over a Delaware corporation unless the board of directors of the target corporation agrees and removes such poison pills. In addition, the legislature keeps amending the corporation’s code as the demands of big business warrant or need such changes. For instance, the legislature has enacted a state antitakeover statute that makes it legally impossible to take over a Delaware corporation unless the corporation’s directors waive the state’s antitakeover law and agree to be taken over.
On the judicial side, Delaware has a special court—the court of chancery—that hears and decides business cases. This court has been around for over 200 years. In that time, it has interpreted Delaware corporation law favorably to large corporations in such matters as electing corporate boards of directors, eliminating negligence liability of outside directors, upholding the antitakeover provisions of the Delaware Corporation’s code, and such. And there are no emotional juries to worry about. The decisions of the chancery court are made by judges who are experts at deciding corporate law disputes. The court is known for issuing decisions favorable to large corporations as the court applies Delaware corporation law to decide disputes. Appeals from the court of chancery are brought directly to the supreme court of Delaware. Thus, Delaware courts have created a body of precedent of legal decisions that provides more assurance to Delaware corporations in trying to decide whether they will be sued and what the outcome will be if they do get sued.
The state of Delaware makes a substantial sum of money each year on fees charged to corporations incorporated within the state. Delaware is the “business state,” providing advanced corporate laws and an expert judiciary for deciding corporate disputes.
The State of Nevada has become a state of choice for incorporation of corporations. The primary reason for incorporating in Nevada is tax reasons: There are no state taxes on corporate income, franchises, or personal income, and for a Nevada resident, there is no state inheritance, gift, or estate tax. In addition, the Nevada corporations code makes it virtually impossible for creditors to ever reach the assets of shareholders of Nevada corporations. Nevada has also established a business court that has expert judges who hear only corporate and business matters. Nevada has taken a lead from Delaware and established itself as a “business-friendly” state. But, Nevada has aimed to attract smaller corporations, whereas Delaware still remains the choice of large publicly held corporations.
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