Incorporate in Delaware? Yes.

• Author: REED, JOHN L.

Choosing the 'First State' as a corporate venue offers compelling advantages -- including, says a recent study, a measurable shareholder value-friendly impact on the stock price.

DELAWARE, the "First State," has long been known as the home of more corporations than any other state. Although its 750,000 residents represent less than 1% of the United States population (0.3% to be exact), more than half of all U.S. corporations are incorporated in Delaware, and approximately half of the Fortune 500 call Delaware home. This is so because it is a well-known fact of modern American business that Delaware offers quick and inexpensive incorporation, a low corporate tax burden, and flexibility in key corporate structural issues, including staggered terms for directors, limitations on appraisal rights, and an antitakeover statute that promotes fair and efficient negotiation of mergers, to name a few.

What really makes all of this effective is Delaware's Court of Chancery, which has the most knowledgeable corporate judiciary in the nation, and the ability to adjudicate disputes quickly -- frequently within a matter of a few months. These facts are almost ingrained into the fabric of business thinking. It has been noted, for example, that venture capitalists and leveraged buyout specialists incorporate in Delaware 70-80% of the time.

But is there more? There is.

Deciding where to incorporate

For a developing business, particularly one evolving to the point of an IPO, the decision on where to incorporate is made either by venture capitalists or the business managers. The interests of those two constituencies, although largely aligned, differ in emphasis. The investor seeks business success as a means to a successful investment, and strong stock value is the goal. The business manager seeks a successful IPO and strong stock value as a means of further his or her business goals (although the manager will likely -- and should -- have strong stockholdings as well). Both groups will look at rules of corporate governance, and corporate forms and formalities, in terms of reaching their own goals.

Delaware has numerous, balanced advantages that appeal to both of these groups and that are, to varying degrees, well-known in the business and financial world. The choice of corporate venue may, in general, be more important to the investor; however, any evidence that electing to incorporate in a particular state would directly improve firm value would be of great interest from either perspective.

While Delaware already tops the list of choices for incorporation, beyond the advantages previously identified a recent study has actually shown empirical evidence that Delaware corporations have greater market value than comparable businesses incorporated in other states. This past year, professor Robert Dames of the New York University Center for Law and Business published a study with the Columbia Law School Working Paper Series that concludes that incorporating in Delaware increases a business' value by as much as 5%. The study received some attention, including an article in The Wall Street Journal, but it has not been given its due.

Professor Daines surveyed 4,481 corporations over a 15-year period, controlling for various factors such as size, industry, diversification...