Page 28 - Delaware Lawyer - Fall 2021

FEATURE | A HOME FOR CORPORATIONS
(Continued from page 28)
Article IX’s Provisions
The foundation of Article IX is Section 1, authorizing the General Assembly by a two-thirds vote of each house to enact a general corporation law and making the general incorporation process the exclu- sive method for creating, amending or ex- tending charters of all Delaware business entities,15 except municipal corporations, banks and state-sustained corporations for charitable, penal, reformatory or edu- cational purposes.16 After debate, Section 1 was revised to provide that all charters, including existing charters, could only be amended, renewed or revised under general law.17 The section also authorized the General Assembly to provide, by gen- eral law, for the revocation or forfeiture of corporate charters.18
Section 2, requiring existing corpora- tions to file a certificate with the Secretary of State accepting the provisions of the Constitution, was hotly debated because of constitutional concerns over impair- ment of existing contracts.19 The proposal was revised so that existing corporations had to accept the Constitution to have their charter “amended or renewed.”20 Similar constitutional concerns caused in- clusion of Section 4, which echoed earlier constitutional provisions preserving the rights and privileges of “corporate bod- ies.”21
To prevent corporations from issu- ing stock for “little or no value,”22 Sec- tion 3 required consideration for stock to be money paid, labor done or personal property, real estate or leaseholds actu- ally acquired.23 The legitimacy of poten- tial forms of consideration (e.g., patents, leaseholds and bonds), the difficulty of determining the value of non-monetary consideration, and the potential effects on various businesses, were debated at length.24 Section 3 was amended in 1903 to eliminate the requirement that the price paid for labor done and property received not exceed “actual value.”25 The section generated litigation over the validity of various forms of consideration.26 It was
deleted by constitutional amendment in 2004, when Section 152 of the Delaware General Corporation Law was revised to permit consideration for stock to include “cash, any tangible or intangible property or any benefit to the corporation.”27
After a further requirement of a “known place of business” in Delaware was deleted, Section 5, mandating that foreign corporations doing business in Delaware designate a registered agent, was approved.28
Section 6 imposed a one-share/ one-vote requirement for election of directors.29 The legislature deleted the provision in 1903 after the predecessor of 8 Del. C. § 212(a), allowing certifi- cate provisions giving shares different voting powers, was held to violate the constitutional provision.30 A prohibi- tion on taxation of shares of Delaware corporations held by nonresidents re- placed the initial Section 6 in 1903.31
Sections 1, 2, 4, 5 and revised 6 re- main in effect.
The Delaware General Corporation Law (DGCL)
After a legislature-drafted bill in 1898 failed to pass, a Delaware General Cor- poration Law was enacted in 1899.32 Josiah Marvel, a Delaware lawyer, played a major role in drafting the law, which borrowed heavily from New Jersey’s law.33 In 1899, Marvel founded one of the initial Delaware incorporation servic- es; Christopher Ward, another Delaware lawyer, also formed an incorporation company with Otho Nowland, president of Equitable Guarantee and Trust Com- pany.34 The new general corporation law repealed the 1883 law and operated as a partial revocation of the exclusive fran- chises granted under existing charters.35 While Delaware’s adoption of a “liberal” incorporation law was criticized, New Jersey, Massachusetts and other states al- ready had similar laws.36 Delaware’s new general corporation law achieved greater success because of three features: a sim- ple formation procedure, low corporate taxes and broad corporate powers.37
The DGCL Passes the Test of Time
Since 1899, the DGCL has been subject to numerous amendments, a comprehensive revision in 1967 and an- nual review for potential amendments.38 Amendments have addressed ambiguities, technical issues, new economic and finan- cial developments, and judicial opinions.39 The DGCL has produced substantial rev- enue for Delaware and fostered economic development of Delaware corporations based inside and outside of the state.40
Delaware’s general corporation law has evolved and endured for over 120 years. Its preeminence has been the subject of debate among competing views that the law reflects “a race to the bottom” that lowers corporate law standards versus “a race to the top” providing a framework for adapting to changing business and financial conditions.41 The DGCL has survived copying efforts by other states and various federal legislation.42 As new potential challenges from offshore ha- vens and arbitration bylaws emerge,43 Delaware still retains its distinction as the preferred home for corporations.
NOTES
1. A. Gilchrist Sparks, III and Donna L. Cul- ver, Corporations Article IX, (“Sparks”), in The Delaware Constitution of 1897, The First One Hundred Years (Harvey Bernard Rubenstein, Randy J. Holland, et al., eds., 1997), 159.
2. Id.
3. S. Samuel Arsht, A History of Delaware
Corporate Law, 1 Del. Corp. L. 1, 2 (1976) (“Ar- sht”); Sparks at 159–60.
4. Arsht at 2; There were no incorporations in Delaware in colonial times and only three under the 1776 Constitution, but special acts became more frequent under the 1792 Constitution. Arsht at 2–3.
5. Arsht at 3–4; Sparks at 160. Russell Car- penter Larcom, The Delaware Corporation, 3 (1937) (“Larcom”). A proposed constitution was rejected in 1853, the only time a Delaware Con- stitution was submitted to popular referendum. Paul Dolan, The Constitution of Delaware, 59 Dick. La. Rev. 75, 77–78 (1954). Unlike other states, Delaware’s Constitution permits amend- ments by two-thirds votes of each legislative branch in two successive sessions. Id. at 82.
6. Charles G. Guyer and Edmond C. Hard- esty, Debates and Proceedings of the Delaware Constitutional Convention (1896–1897) (“De- bates”), pp. 123–25; Arsht at 3. The reserved legislative power to revoke a charter, which was constitutionally valid because it was part of the original contract, enabled the legislature to revoke an exclusive franchise by subsequently
26 DELAWARE LAWYER FALL 2021