Delaware corporate law
Delaware corporate law refers to the body of statutes, case law, and judicial precedent that govern the formation, operation, and dissolution of corporations incorporated in the State of Delaware. Rooted in a general incorporation act first passed in 1899, Delaware's legal framework has grown into the dominant system of corporate law in the United States, attracting businesses ranging from small startups to the largest publicly traded companies in the world. More than 67.6 percent of the Fortune 500 companies are incorporated in Delaware. The centerpiece of this framework is the Delaware General Corporation Law (DGCL), which governs the internal affairs of Delaware corporations and is administered in large part through the specialized Delaware Court of Chancery.
Historical Background
The Delaware Constitution of 1776 made no references to corporations but did state that the common and statutory law of England was widely adopted and remained in force. Under this regime, forming a corporation required a special act of the state legislature. General incorporation later allowed anyone to form a corporation by simply raising money and filing articles of incorporation with the state's Secretary of State.
Before Delaware's rise to prominence, New Jersey was the market leader for business formations, including for publicly traded companies. Following the development of modern corporation laws in the United States at the turn of the 20th century, New Jersey, Maine, and New York were the country's leaders in entity formation, while Delaware represented a small but growing minority position.
Aware of New Jersey's early success and in an effort to encourage corporations to domicile in Delaware, Delaware amended its constitution in 1897 to permit incorporation under general law instead of by special legislative mandate, and in 1899 adopted a general corporation law modeled largely after New Jersey's approach. Following the example of New Jersey, which enacted corporate-friendly laws at the end of the 19th century to attract businesses from New York, Delaware adopted on March 10, 1899, a general incorporation act aimed at attracting more businesses.
The turning point for Delaware's dominance came in the early twentieth century. Governor Woodrow Wilson's progressive reforms in 1913—known as the "Seven Sisters" Acts—imposed significant regulatory constraints on New Jersey corporations and catalyzed an exodus of corporations. Delaware, with its permissive General Corporation Law, expert Court of Chancery, and constitutionally protected legal stability, emerged as the preferred alternative.
Delaware also offered more stability than other states, exemplified by a requirement in the Delaware Constitution of 1897 that required a two-thirds majority in each house of the legislature to approve changes to the Delaware General Corporation Law. This constitutional protection provided businesses with confidence that Delaware's legal framework would not be capriciously altered.
Major amendments to the Delaware General Corporation Law were made in 1967. The new law was drafted by the Delaware Corporation Law Revision Committee. The Penn Carey Law Delaware Corporation Law Resource Center at the University of Pennsylvania archives amendments to the DGCL since 1967, including annual commentaries on legislative changes and the full history of the 1967 revision.[1]
The Delaware General Corporation Law
The foundation of Delaware's business advantage is its General Corporation Law ("DGCL"). Delaware has also developed advanced modern statutes for business entities other than corporations.
The DGCL governs only the internal affairs of the corporation—the relationship between the owners (stockholders) and the managers (directors and officers) of a corporation. In other words, the DGCL is essentially a specialized contract law governing the respective roles, duties, and relationships of those who manage corporations and those who invest in them. The DGCL does not address the varied other aspects of business law, such as competition law, labor law, or securities disclosure law, like a prescriptive civil code "company law" often does.
Among the reasons that corporations are formed under Delaware law is the DGCL's policy to provide stockholders and corporations with maximum flexibility in ordering their affairs. Unlike in a civil-law jurisdiction, which would likely have a prescriptive corporation law with mandatory terms, the DGCL is designed to be an enabling statute that permits and facilitates company-specific procedures.
The mandatory provisions of the DGCL are minimal and address only issues of utmost importance to protecting investors, such as the right to elect directors and to vote on certain major transactions. Even some of the mandatory terms of the statute may be overridden by managers and stockholders acting together to choose a different approach.
Pursuant to the "internal affairs doctrine," corporations which act in more than one state are subject only to the laws of their state of incorporation with regard to the regulation of the internal affairs of the corporation. As a result, Delaware corporations are subject almost exclusively to Delaware law, even when they do business in other states.
Among the key structural flexibilities Delaware offers, while most states require a for-profit corporation to have at least one director and two officers, Delaware laws do not have this restriction. All offices may be held by a single person who also can be the sole shareholder. The person, who does not need to be a U.S. citizen or resident, may also operate anonymously with only the listing agent through whom the company is registered named.
The full text of the Delaware General Corporation Law is codified in Title 8, Chapter 1 of the Delaware Code and is maintained by the Delaware Division of Corporations.[2]
The Delaware Court of Chancery
Delaware houses the nation's oldest business court—the Delaware Court of Chancery established in 1792. The Court of Chancery has broad jurisdiction over disputes involving the internal affairs of Delaware business entities. Otherwise, its jurisdiction is generally limited to traditional equity jurisdiction.
Disputes over the internal affairs of Delaware corporations are usually filed in the Delaware Court of Chancery, which is a separate court of equity, as opposed to a court of law. Because it is a court of equity, there are no juries; its cases are heard by judges, called chancellors. Since 2018, the court has consisted of one chancellor and six vice-chancellors. The court is a trial court, with one chancellor hearing each case. Litigants may appeal final decisions of the Court of Chancery to the Delaware Supreme Court.
Unlike in many other states, Delaware corporate law cases are tried exclusively by professional judges, and not by juries. Delaware's judges are impartial and not beholden to special-interest donors or shifting political winds.
Because of the extensive experience of the Delaware courts, Delaware has a more well-developed body of case law than other states, which serves to give corporations and their counsel greater guidance on matters of corporate governance and transaction liability issues. Litigating parties can expect one judge to handle their case from start to finish and, in most instances, to provide a well-reasoned written opinion. The Court of Chancery's equity jurisdiction gives it the distinct ability to create special remedies, beyond money damages, to redress breaches of duty.
The defining hallmark of Delaware corporate law has been its independent judiciary, adhering to the rule of law, and reaching case-specific decisions as challenges emerge and conditions change.[3]
Fiduciary Duties
Under Delaware law, directors and officers of corporations owe fiduciary duties to the corporation and its stockholders. Basic fiduciary duties include the duty of care, the duty of loyalty, and the duty of good faith. The board of directors of a publicly-traded Delaware corporation must abide by fiduciary duty rules. In simple terms, the law requires directors to act in the best interests of the corporation. This includes avoiding conflicts of interest and overseeing the corporation's affairs with an appropriate attention level.
The standard of judicial review applied to board decisions varies depending on the circumstances. The business judgment rule is a set of presumptions that affords protections to directors who make decisions for the company. This hallmark of Delaware law is highly deferential and gives directors wide decision-making latitude. Under the business judgment rule, the court will not substitute its judgment regarding a board decision for the judgment of the board under certain conditions.
Under the entire fairness standard of Delaware law, the board of directors must prove it conducted a thorough process to determine the corporation transaction involved both "fair price" and "fair dealing." The Revlon rule requires judicial review to involve "enhanced scrutiny" in situations where the board decides to sell the company. The Unocal rule establishes a reasonableness test when a board implements defensive measures in response to a perceived threat.
Delaware corporate law is renowned for its balance between flexibility in business arrangements and the fundamental principles of fiduciary accountability. One of the areas where this balance is most evident is in the treatment of fiduciary duties and their modification through stockholder agreements.[4]
In 2023, the Delaware Court of Chancery extended fiduciary oversight duties to corporate officers. Corporations may now amend their articles of incorporation to exculpate corporate officers from monetary damages stemming from breaches of their duty of care. In addition, corporate officers are now affirmed to have a duty of oversight regarding the operations of the corporation.[5]
Franchise Taxes and Economic Impact
Every corporation incorporated in Delaware is subject to an annual franchise tax, regardless of whether it conducts business within the state's borders. Every for-profit corporation incorporated in Delaware is subject to the annual franchise tax requirement. The corporation does not have to be doing business in Delaware or earn any income there. It's not an income tax; it's a franchise tax. You are paying for the right to incorporate and exist as a Delaware corporation.
Franchise Taxes and annual Reports are due no later than March 1st of each year. Failure to file or pay can result in penalties, loss of good standing, and even charter voidance if non-compliance lasts more than one year. The franchise tax is calculated using one of two methods—the Authorized Shares Method or the Assumed Par Value Capital Method—with corporations choosing whichever produces the lower tax.[6]
Corporate franchise taxes and related fees typically generate 25% to 30% of Delaware's General Fund revenue, totaling approximately $1.8 billion to $1.9 billion annually in recent fiscal years. That makes revenue from the corporate franchise tax one of the single largest funding sources for state government, supporting education, healthcare, transportation, and public safety. These revenues flow directly into the General Fund and are a key reason Delaware can operate without a general sales tax.[7]
Delaware charges no income tax on corporations not operating within the state, so taking advantage of Delaware's other benefits does not result in corporate income taxation. Today, more than two million business entities have made Delaware their legal home.
Senate Bill 21 and Recent Controversies
Delaware's dominance in corporate law faced a significant test in late 2024 and early 2025, when a series of high-profile judicial decisions and corporate departures threatened the state's standing. The turning point came in December 2024, when the Delaware Court of Chancery invalidated Elon Musk's $56 billion Tesla pay package for failing to meet fiduciary standards. In response, Musk not only pulled Tesla and SpaceX's incorporations out of Delaware, but publicly urged other founders to do the same.
Dropbox moved its site of incorporation to Nevada, and Bill Ackman said his Pershing Square Capital Management would exit Delaware. Delaware is the corporate home to 2.2 million registered entities and incorporated 81% of U.S. Initial Public Offerings last year. The corporate franchise represents more than one-third of the state's budget at roughly $2.2 billion.
In response, Delaware's legislature moved quickly to pass Senate Bill 21 (SB 21). On March 26, 2025, the Governor of Delaware signed Senate Bill 21 (SB 21) into law, amending the state's corporate laws to provide additional protections for certain directors, officers, and stakeholders involved in potential conflict of interest acts or transactions.[8]
SB 21 codifies a bright-line definition of "controlling stockholder": anyone who holds a majority of voting stock, can elect a majority of the board, or owns at least one-third of voting stock and exercises managerial authority equivalent to a majority holder. This marks a departure from the more flexible "actual control" test previously used by courts. The legislative update gives companies more control in navigating conflicted transactions. Instead of requiring both board and shareholder approval to shield such transactions from intense scrutiny, companies now have the option to use just one of these "cleansing mechanisms" and still benefit from business judgment rule protection.
The bill was deeply controversial. New York University law professor Edward Rock, a longtime scholar of the Delaware court, suggested the Senate bill was a reaction to a recent "vibe" that Delaware's reputation for "sophisticated courts with business acumen" has suffered. Critics, including a coalition of consumer and investor groups, dubbed the legislation a "Billionaires' Bill," arguing it would reduce judicial oversight and harm minority shareholders.[9] For some time, states such as Nevada and Texas have attempted to lure corporations by developing even friendlier corporate laws than Delaware's. SB 21 is, in large part, Delaware's attempt to mitigate the risk of companies re-incorporating elsewhere.[10]
Senate Majority Leader Bryan Townsend (D-Newark), the bill's prime sponsor and a career attorney focused on Delaware corporate litigation, explained that recent court decisions had effectively muddied some key aspects of Delaware's legal franchise, and he hoped the proposed legislative changes would bring a sense of predictability back to the corporate law system.[11]
See Also
- Delaware Court of Chancery
- Delaware General Corporation Law
- Delaware Division of Corporations
- Delaware Supreme Court
- Franchise tax