New York Times Article Bashes Delaware as Corporate Haven

In today’s New York Times, Delaware is bashed in a smear piece that attacks the state’s corporate law with an article entitled To Delaware, With Love, that is light on research, weak on substantive analysis and replete with cliches that add nothing new to the conversation.

Trotting out the “usual suspects”,  such as companies that have been formed for nefarious purposes (a market for which Delaware can hardly be said to have a monopoly), the article adds more heat than light on the subject of Delaware’s role among the 50 states and in the world in terms of a forum to incorporate. Yes, Delaware has more business entities that use it as their corporate registered address than it has citizens, but is that ipso facto evidence in support of any position? It is a state with less than one million residents, and slightly less than one million entities use Delaware as their state of incorporation. Now for more meaningful details.

As if to support the notion that more federal intrusion in this area is needed, the article uses a faulty syllogism in connection with a quote from a federal official to try to make the connection between ease of formation and criminal activity. Among the other inaccurate parts of the article lacking in nuance are the following:

  • The article casually asserts that one of the reasons that Delaware is a preferred forum for forming entities is that they come with the hope of “… plying the friendly courts….” Anyone familiar with the rulings of the Delaware courts would never use the words “plying” and “friendly” in this context. The Delaware courts are repeatedly ranked as among the most independent, fast and scholarly; a mere sampling of recent decisions in which those who run afoul of Delaware standards have been unceremoniously penalized would suggest that the author of the article has an incomplete understanding of the Delaware courts and their decisions. See, e.g., here, here, here and here. If the Delaware Courts are an attraction for businesses, it is not due to them being pliable. See, e.g., comments by Chancellor Strine here on why businesses may be attracted to Delaware.
  • The article devotes substantial space to the option that Delaware allows for passive income to be received by a Delaware entity, such as royalties on patents, and if a list of prerequisites are satisfied, that income will not be taxed in Delaware.  The article does not mention, and perhaps the author is not aware of, the dwindling percentage of revenue that Delaware receives from those specialized holding companies (compared to the majority of the income that Delaware receives from corporate franchise taxes charged to companies that do not receive passive income), and the article does not include the growing number of states that are closing the so-called loophole that allows a small percentage of Delaware companies to use this Delaware benefit. So, the article seems to focus on the tax advantages of forming a Delaware entity, but the reality remains that the tax benefit is only used by, and available to, a small and declining percentage of all Delaware entities.

Supplement: Joseph DiStefano of the Philadelphia Inquirer refers here to the NYT article and offers a much more nuanced and informed perspective on the topic, along with some humor.