Delaware General Corporation Structure
The Delaware general corporation has proven to be the preeminent business entity in the United States since the late 1800s.There are now more than 1.6 million Delaware corporations operating in all 50 states and around the world. Over 93% of all companies that held an Initial Public Offering (IPO) in 2020 were Delaware corporations. Snowflake Inc., Airbnb, Inc., DoorDash, Inc are just a few of the Delaware companies that engaged in high-profile IPOs during 2020.
Before the corporation became a legal entity, all companies were partnerships which made the partners personally liable for the debts of the company. Then New Jersey legalized the corporation and the major companies at the time rushed to New Jersey and converted their partnership to NJ Corporations. These included the Standard Oil Corporation, the major railroads, and a gun powder manufacturer headquartered in Delaware called E I dPont de Nemours & Company (the Dupont Company),
Delaware is a small state, and the Dupont company was a large successful firm, but it produced a volatile product – gun powder – and the duPont family was concerned that their fortune could be taken away from them if a great catastrophe happened with their product. So, they appealed to the Delaware state legislature to create a corporation law which was better than New Jersey’s law, which they did.
About the same time, a man named Woodrow Wilson was elected to become Governor of New Jersey and he quickly passed 7 laws which were punitive to big corporations. With this government assault, all the big companies changed their corporate domicile to Delaware and New Jersey lost out. Since then, Delaware has dominated the corporation business. (Woodrow Wilson then became President).
The Delaware general corporation is perfectly designed as an entity for engaging in business. It provides fair powers to the stockholders, the directors and the officers, AND it also provides a way to raise capital, as needed, throughout the life of the company through the sale of stock.
In its simplest form, the general corporation has three tiers of power:
- The shareholders, who own the company.
- The directors, who manage the company.
- The officers, who run the company on a day-to-day basis.
The Bylaws of the corporation set forth the powers and the limits of power in each of the three tiers. Each group has separate priorities, and they may clash occasionally. When one tier rises up against the others, a special kind of lawsuit, called a “derivative suit” may ensue. This type of case will always be settled in the Delaware Court of Chancery.
In this unique business court, a single judge decides the case—there are no juries, no tribunals and no 12 angry men. One judge determines—quickly—which party shall prevail, according to 200 years of case law and legal precedents of the Delaware General Corporation Law (DGCL).
The Chancellors of the Court can be counted on to respect the good faith decisions of the Board of Directors over the profit priorities of shareholders, but a majority of shareholders can generally elect a new Board of Directors if they don’t like their current directors.
The rules on how these three tiers interact with each other are embodied in three general knowledge bases. The DGCL code, which is the written law passed by the state legislature.
The case law handed down by the Delaware Court of Chancery and the Delaware Supreme Court over the past 200 years; and Letter Rulings, which are individual, judicial decisions on a myriad of minute details that come up in court cases.
Division of Powers in a Delaware Corporation
Stockholders are granted two rights that directors and officers are not permitted: the right to vote for the Board of Directors and the right to share in the dividends of the company when the directors declare dividends.
The shareholders, however, cannot operate the company; they cannot walk in and start telling people what to do. They act as a group, in a meeting, not individually. (Unless one person owns more than 50% of the company, in which case s/he could control the entire company and all three tiers of power.)
The Board of Directors also acts as a group in meetings or as committees of the Board. Directors generally do not act individually. Meetings must be announced in advance, to all Directors, and each meeting much be attended by a majority of directors in order to be a legal meeting. Alternatively, in lieu of a meeting the board may act “by unanimous consent” meaning that all directors approve of the action.
The Board of Directors makes all the important decisions in the company; they determine what the company will do with its profits, and they control the sale of stock in the company, they hire the officers of the company to run the business on a day-to-day basis.
The officers work at the pleasure of the Board of Directors, or by contract with the Board of Directors. Officers are usually the President, Vice President, Secretary and Treasurer, but the company’s bylaws can prescribe any officers and their titles, responsibilities and duties.
Officers are responsible for the conduct of the company as well as the profitability. If they fail, they usually get replaced. If they succeed, they may become business superstars.
This unique structure, with its three mandatory tiers of power, deserves a great deal of credit for the success of the American Industrial Revolution, the American economy (since 1900) and the success of Wall Street itself.
This structure differs greatly from other forms of company organization, such as the sole proprietorship or the partnership, both of which precede it, as well as the LLC, which followed it chronologically.
If your vision is to form a company that will raise money through the sale of stock, like Apple, Google or Dell, you couldn’t pick a better corporate organizational structure than a Delaware general corporation.
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There is 1 comment left for Delaware General Corporation Structure
Laura Bushby said: Saturday, July 28, 2018Please advise me concerning my common stock value and or dividends to be paid for Col.Com Corporation. I own common shares but have no communication with said company.
HBS Staff replied: Friday, August 10, 2018Laura -- Ownership of stock typically provides the holder with a share of the entity’s profits and gains, normally through the receipt of dividends. If there is no communication with the company, you may want to consider working with an attorney to help rectify the situation.