Where to Incorporate? Florida Bar Survey Results and a Florida vs. Delaware Comparative Analysis.

• Author: Aronson, Daniel H.

As of December 31, 2021, there were 811,396 active for-profit corporations incorporated under Florida law, including 104,625 incorporated in 2021. (1) Results of a survey conducted in March 2021 by The Florida Bar's Business Law Section (BLS) indicated that approximately 70% of corporations organized by respondents (Florida-based practitioners) are incorporated in Florida. (2) Why are 30% of Florida-based businesses organized as corporations incorporated in other states? Counsel, their business-founding clients and outside investors often instinctively choose or gravitate to Delaware as the state of incorporation, which accounts for most out-of-state incorporations. However, for Florida-based start-ups as well as early stage, emerging, family-owned and closely held companies (referred to in this article as "homegrown" companies or businesses), out-of-state incorporation may not be the best or even most appropriate choice.

To be sure, publicly traded corporations and companies raising equity capital from sophisticated, institutional funding sources, and their counsel, often choose Delaware, given its internationally recognized and annually updated corporate law, excellent business court system, rich caselaw, and administrative user-friendliness. Yet, for homegrown companies, there are significant and substantial elements in Florida that favor consideration of instate incorporation or, at least, largely neutralize the seeming advantages of being incorporated in Delaware. This article discusses the results of the BLS survey and analyzes some of the principal differences between Florida and Delaware corporate law, as well as cost, administrative, and other considerations.

Survey Results

* Participants--Approximately 200 members of the BLS participated in the survey, with over 70% having more than 16 years of practice experience. Respondents were from large and small firms and included a fair number of solo practitioners, with approximately one-third of the respondents coming from firms of more than 50 lawyers.

* Incorporation Data--As noted above, survey responses indicated that approximately 70% of corporations organized by Florida-based practitioners are incorporated in Florida. Of the remaining 30% of out-of-state incorporations, Delaware claimed 73%, with the rest of the states having a small smattering of incorporations (no state exceeded 2%).

* Factors Affecting Choice of State--Based on a ratings scale, the following factors were deemed by survey respondents to be the most important in influencing the choice of state for incorporation purposes (3) (see Figure 1).

The principal influencing factor, location of the business, is reflected in the fact, as demonstrated by the survey results in Figure 2, that most Florida-based practitioners are comfortable with incorporating their clients' businesses in Florida. However, the influence and expectations of outside investors, particularly private equity, venture capital, and other non-Florida-based institutional investors, are major factors causing out-of-state incorporations, especially in Delaware. Although Delaware's judicial system, in particular its Court of Chancery comprised ofjudges experienced and expert in business law matters, is regarded to be the nation's leading business court, the relatively lower influence percentage for the "judicial system" factor is probably due to the fact that for start-up, early-stage, and other home-grown businesses, that factor is not of critical importance.

* Impact of Recent Revisions to Florida's Corporation Statute--Survey participants were asked if the recent modernization of and substantial revisions to Florida's corporate statute (4) encouraged in-state incorporations. The responses are in Figure 2.

The survey results in Figure 2 suggest that the Florida corporate statute revisions have positively impacted the choice of Florida as the state of incorporation.

The BLS survey responses were from a small sample of BLS members. However, there is no reason to believe that the results would have been materially different with a larger response. A review of the results suggests that an analysis of the differences, including the advantages, benefits, costs, and disadvantages, relative to and flowing from Florida and Delaware incorporations is timely and appropriate.

Florida vs. Delaware: Comparative Elements

Opinions will vary as to whether and under what circumstances to incorporate a client's business in Florida versus Delaware, and which factors are of greater or lesser importance in choosing the state of incorporation. For example, although fees and other costs associated with Florida incorporation may be considerably less than in Delaware, that factor may be of little importance to highly capitalized and profitable businesses. Similarly, while administrative efficiencies and user-friendliness in Delaware are generally viewed as excellent, for many counsel, that factor may not be as important as the approachability and ease of communicating with Florida's Division of Corporations.

FIGURE 1 Factor Percentage Response Location of business or HQ 67% Corporate statute 63% Expectation of outside investors 62% Ease of administrative procedures 53% Privacy expectations 52% Type of entity 45% Judicial system 44% Filing, formation, and fees 43% Maturity of business 36% Size of business 26% FIGURE 2 Not at All Somewhat Quite a Bit Start-ups 45% 44% 11% Significant Florida 44% 41% 16% operations Multiple 45[degrees]% 43% 12% shareholders The discussion below that examines comparative factors is not meant to suggest that any one factor is or should be determinative in any given case. Selecting the state of incorporation requires consideration and analysis of a variety of factors that impact the corporation's structure, ownership, management, and operation. Our principal theme is that "pausing" the instinctive selection of Delaware, and favoring serious consideration of a Florida incorporation, is both desirable and appropriate for many home-grown companies.

Board and Management Factors

* Duty of Care--Florida has a specific statutory provision that defines the duty of care applicable to corporate directors. (5) In contrast, Delaware has no statute defining the elements of the duty of care other than a single provision, also found in Florida's statute, that grants protection to directors who rely on corporate records, officer reports, and third-party opinions that directors reasonably believe are within the professional or expert competence of the third party. (6) Delaware's lack of clear, central standards leaves the parameters of this core fiduciary duty entirely to judicial precedents and interpretation. While duty of care caselaw in Delaware is, for the most part, similar to Florida standards, for courts and counsel seeking guidance in a particular transaction or matter, Florida offers a more comprehensive statute on which to rely.

Delaware's judicial system is excellent, but Delaware caselaw regarding the duty of care can be both a blessing and a curse, depending on one's perspective and circumstances. Delaware courts are not as pro-board and pro-management as popular opinion may hold. For example, duty of care litigation is very much influenced by the so-called business judgment rule. Both Florida and Delaware courts recognize this nonstatutory evidentiary presumption in favor of directors' actions and decisions. (7) The Delaware Supreme Court's decision in Smith v. Van Gorkom, 488 A. 2d 858 (Del. 1985), holding directors of a publicly traded corporation, under a gross negligence standard, personally liable for lack of sufficient diligence in valuing the company in light of a cash-out offer, and therefore denying their business judgment rule defense, was considered by many practitioners to be a somewhat shocking result and one that set a high standard of conduct for Delaware corporate directors before the business judgment rule could be applied. (8) In addition, no Florida court has yet imposed upon the board of directors the duty to monitor corporate matters to the extent required by Delaware courts under the case, In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), and doctrine. (9) In Caremark, shareholders brought suit against the corporation's directors alleging that they were negligent because they had failed to assure that the corporation had in place an adequate process to detect illegal kickbacks made to physicians and others for referring Medicare and Medicaid patients. (10) This case has since been followed by Delaware courts and has caused exposure for directors where there has been "an utter failure to attempt to assure a reasonable information and reporting system exists." (11) Finally, it is worth noting that, unlike Florida, Delaware has no statutory provision protecting directors who, in discharging their duties, determine to take into account non-financial considerations such as societal, economic, legal, and other effects on a variety of constituencies and concerns, including employees, customers, and the community. (12)

* Duty of Loyalty; Director Conflicts of Interest--Conflict of interest and personal benefit concerns are highly sensitive issues in corporations of all sizes and stages of development, but particularly in closely held corporations that have dominant owners who may also be compensated managers. This is an area fraught with minority shareholder claims and related litigation. Florida's recently amended conflicts of interest provision is both more specific and clearer than Delaware's in terms of defining what constitutes a conflict of interest transaction, explicating the issue of fairness to the corporation, determining which directors are qualified to vote on the validity of transactions, and setting forth the burden of proof and role of the courts in considering shareholder challenges to such transactions. (13) Much of Delaware's law in this...