Elon Musk, the celebrity billionaire and CEO of Tesla, caused a stir in the news this week when he appeared in Delaware Court of Chancery ready to fight a shareholder plaintiff in a long-running lawsuit.
Such big-name appearances happen in Wilmington occasionally — Facebook CEO Mark Zuckerberg was spotted meeting with members University of Delaware’s Disaster Research Center in 2017 before taking the stand in Chancery Court, for instance — and it usually leads to the question:
“Why are they in Delaware?”
The quick answer is because both Tesla and Facebook are incorporated in Delaware — and they’re far from alone as far as large companies that are not headquartered in the state go.
Walmart (ranked #1 in the Fortune 500) is a Delaware corporation, as are Amazon, Google and Coca-Cola (other Fortune list toppers). Being incorporated in Delaware means legal proceedings involving the company happen in Delaware’s Chancery Court in Wilmington.
That may be a far distance to travel for companies headquartered in other regions of the country (or in other countries), but it’s apparently worth it: According to the Delaware Division of Corporations’ annual report, 67.8% of Fortune 500 companies are incorporated in Delaware, up nearly 4% since 2014. In all, about 1.5 million companies are incorporated in Delaware — a state with a population of about 995,000.
Incredibly, 89% of U.S.-based initial public offerings (IPOs) in 2019 incorporated in Delaware.
Why? People will say because Delaware is a tax haven, and it’s true that taxes are part of it. Technical.ly CEO Chris Wink laid out some reasons for the high rate of Delaware incorporation in 2014:
- Delaware General Corporation Law is said to be among the most flexible for business creation and protection. Among other perfectly legal advantages is that taxable income earned elsewhere can be made into tax-exempt income (no out-of-state corporate tax) in Delaware, thereby drastically reducing a company’s tax bill.
- The Delaware Court of Chancery was established in 1792 and has remained relatively speedy and inexpensive for resolving disputes for Delaware corporations with trials by judge, not jury. It’s the national standard. That head start has given an enormous body of Delaware case law that further maintains it as a favored place for corporate law.
- Business incorporation fees represent the state’s second largest revenue source behind income tax. Since it has been a state focus for so long, Delaware state government and its Division of Corporations says it prioritizes business formation and support.
Basically — but not exclusively — the Delaware court, with its huge body of standard-bearing corporate case law, is what brings billionaire CEOs like Musk to our town every now and then.
There are downsides, naturally. One issue we run into is that, while companies that are incorporated in Delaware but located in another location are meant to put their physical home city as their headquarters, some companies, for whatever reason, will use their required registered agent address in Delaware or their Delaware mailbox address as their HQ. This makes data such as regional VC dealings in Delaware (and Greater Philadelphia) difficult to manage.
Not to mention that covering Delaware businesses inevitably means having to explain to companies that are only incorporated in Delaware that a mailbox doesn’t meet our requirements for being market relevant.
The state differentiates between Delaware businesses (those with licenses and locations in the state) and businesses that are incorporated in Delaware, and so do we. Otherwise, we’d be covering the Teslas and Coca-Colas of the business world as much as the companies that live here.