Treasure Islands - Nicholas Shaxson [76]
A brief look at the story of Delaware helps bring this historical section of the book up to the present day.
Delaware, the second smallest of the U.S. states, is home to many of the world’s biggest corporations. Conventional definitions of tax havens—those that focus on tax—fail to capture Delaware as a part of the offshore system. But something important is clearly happening here: Over half of U.S. publicly traded companies and nearly two-thirds of its Fortune 500—Coca-Cola, General Motors, ExxonMobil, you name it—are incorporated here; the little state hosted over 90 percent of all IPOs in the United States in 2007. These corporations don’t have their headquarters here; they are just incorporated there. Being in Delaware gives modest tax advantages over other states, but the killer lure is, as I’ve said, laissez-faire standards of corporate governance that give tremendous power to corporate managers.
Delaware has long been a refuge for financial capital. In 1899 the state government, influenced by the du Pont family, who wanted to incorporate their chemical industries,33 adopted a new and permissive corporation law that reflected the laissez-faire spirit of an age of growing corporate power. In Delaware, the message went, company managers gain huge leeway to do what they want at the expense of other stakeholders. Other states began to follow suit. “Even as the starter’s gun went off,” the Chancery Court’s official history puts it, “Delaware was already being accused of leading a ‘race to the bottom.’” This classically offshore theme has remained a permanent character of Delaware history. In 1974 William Cary, a former chairman of the U.S. Securities and Exchange Commission, wrote in a landmark article in the Yale Law Journal that Delaware law has “watered down the rights of shareholders vis-à-vis management to a thin gruel” and that “necessary high standards of conduct cannot be maintained by courts shackled to public policy based upon the production of revenue, pride in being ‘number one,’ and the creation of a ‘favorable climate’ for new incorporations.”
To be fair to Delaware, there are healthier reasons for incorporating here. Its Chancery Court has become—because of Delaware’s success in attracting out-oftowners—the specialist in corporate law, with unrivaled experience and expertise.34 And its location halfway between New York and Washington gives Wilmington a fearsome geographical edge too. Who wants to fly to Alaska to litigate?
The Delaware Chancery Court has a “business judgment rule” under which courts should not second-guess corporate managers, provided they have not blatantly violated some major rule of conduct and their decisions are approved by a “neutral” decision-making body. Whatever one thinks of this approach, Delaware has taken it to extreme lengths, granting corporate bosses extraordinary freedoms from bothersome stockholders, judicial review, and even public opinion. As Bernard Black, a professor of law at Columbia University, wrote in 1998, “Shareholders haven’t been able to stop managers, and their allies on the Delaware Supreme Court and in state legislatures, from chilling hostile takeovers through poison pills, antitakeover statutes, and judicial decisions that let managers ‘treat shareholders like morons’ who are incapable of understanding a firm’s true value.”35
In 2003 Delaware passed new legislation expanding the Chancery Court’s jurisdiction, and the official synopsis said the aim was to “keep Delaware ahead of the curve in meeting the evolving needs of businesses, thus strengthening the ability of the state to convince such businesses to incorporate and locate operations.”36 J. Robert Brown, a professor of corporate law at Denver University and a leading critic of Delaware courts, said that “Delaware courts have all but eliminated meaningful limits on self-interested transactions.”
A Reuters story in May 2010 provided a fascinating insight into one role Delaware’s incorporation business