Lecture Notes: State of Incorporation and Jurisdictional Issues for Corporations

Introduction

• Speaker: Professor Michael Conlin, Texas A&M University School of Law
• Topics Covered:
  • Importance of selecting a state of incorporation
  • Jurisdictional issues faced by corporations

State of Incorporation

• Trivia Question: Which state do more than half of the Fortune 500 companies incorporate in?
  • Answer: Delaware
• Facts about Incorporation:
  • Corporations can incorporate in any state, regardless of business operations there.
  • Delaware is preferred due to historical and legal reasons.

History of Delaware's Dominance

• Late 1800s: States realized benefits of businesses incorporating in their state.
• New Jersey initially led in attracting corporations.
• 1910: New Jersey repealed attractive statutes under Governor Woodrow Wilson.
• Delaware seized the opportunity to become the preferred state for incorporation.

Debate: Race to the Bottom vs. Race to the Top

• Race to the Bottom: States lower standards to attract businesses.
  • Supported by Justice Brandeis' description of a "race of laxity."
• Race to the Top: Better policies attract more businesses.
  • Evidence: Reincorporation in Delaware can increase stock prices.

Auction Winner's Fallacy

• Analogy of overestimating value in competitive bidding.
• Example: Classroom experiment with guessing beans in a jar.

Advantages of Incorporating in Delaware

• Precedent: More legal precedent leads to predictable legal outcomes.
  • Facilitates settlement and avoidance of legal disputes.
• Judicial Expertise: Delaware judges are knowledgeable and efficient in corporate law.

Financial Benefits for Delaware

• 20% of state revenue from franchise taxes on corporations.
• Franchise taxes are fees paid by corporations based on incorporation location.

Competition from Other States

• Nevada: Offers secrecy, 0% corporate tax rate, and promotes meetings in Las Vegas.
• Tax rates vary by state, affecting business decisions.

Tax Implications

• Corporate taxes depend on state of incorporation and where transactions occur.
• Personal tax rates influence recruitment in professional sports teams.

Considerations for Smaller Corporations

• Generally best to incorporate in home state.
• Complexity and costs of multi-state incorporations often not worth it.

Internal Affairs Doctrine

• Determines which state's laws apply to internal corporate disputes.
• Primarily guided by the state of incorporation.

Jurisdictional Issues

• Importance of long-arm statutes in determining jurisdiction.
• Minimum Contacts: Necessary for a state to bring a foreign corporation to court.
• Case Example: Robinsons vs. New York Dealer in Oklahoma.

Gray Areas in the Law

• Examples illustrate unclear situations regarding minimum contacts.
• Legal outcomes can vary and are often subject to interpretation.

Conclusion

• Importance of selecting the right state for incorporation under the internal affairs doctrine.
• Basic understanding of how jurisdiction works with corporations.