Delaware is the second smallest state in the United States of America. It is also the leading corporate domicile and company law jurisdiction. Delaware has over one million active business entities, each paying an annual government fee. More than half of the Fortune 500 companies are incorporated in Delaware. Delaware is the brand name for company law in the United States.

Offshore, the British Virgin Islands (BVI) is the brand name globally for offshore incorporations. With over 450,000 active business companies, the BVI is the leading offshore incorporation domicile, far surpassing all of its competitors put together. However, the BVI is purely an incorporation jurisdiction while Delaware is the pre-eminent business jurisdiction. So, why is Delaware so successful? What can the BVI learn from Delaware? This article examines the factors that have combined to create the Delaware product. It also considers how these factors can be brought together in the BVI to improve incorporation numbers and more importantly, to expand and diversify the BVI product to make it a pre-eminent global business jurisdiction rather than purely an incorporation jurisdiction. The building blocks are already here in the BVI. They just need to be consolidated.

Overall Lessons

There are two overall lessons from the Delaware success story: a) treat the making of a business jurisdiction as a business, and b) ensure all constituencies work together to make it successful. There is an unwritten compact between all of the constituencies creating the Delaware product to set aside internal competition and protectionism and to work together as one unit to sell the Delaware product. There are 49 other states, all wanting a slice of the Delaware business. The external competition is intense. As a result, all of the constituencies have come together, sometimes formally but more often informally, to perfect their own area of the product and to work together to ensure each area works seamlessly with the others to improve the overall product. The making of a business jurisdiction is a business. Everyone in Delaware knows this. Everyone treats it like a business and the only way a business can be at the top of its market is for the units to work together to constantly improve the product.

On this note, let us examine the four reasons that Delaware is the number one business jurisdiction in the United States.

Delaware General Corporation Law

The Delaware General Corporation Law is the most advanced and flexible company statute in the United States. In the late 19th century, New Jersey had the most innovative company law in the United States and Delaware modelled its law on this. In 1913, the then New Jersey Governor, Woodrow Wilson passed anti-trust laws inhospitable to corporations, and the incorporations business moved to Delaware.1 Delaware has never looked back.

But an event over a century ago is not enough to keep the incorporations business in Delaware. What has Delaware done since then to keep the incorporations business in that state and to expand that business to include company law in order to become a full service business jurisdiction? The statute itself is easily duplicated, and has been duplicated by several states. However, it is the process and philosophy behind the statute that has kept Delaware at the top of its game. Over the years, the statute has been constantly revised and fine-tuned, keeping current and innovative.

But where does this drafting come from? The Corporate Law Section of the Delaware Bar Association, comprised of Delaware corporate lawyers, is responsible for recommending, reviewing and drafting amendments to the statute.2 In other words, the corporate lawyers in the state are responsible for the Delaware General Corporation Law. This is part of the unwritten compact mentioned earlier. Delaware lawyers are in constant contact with the users of Delaware companies. These users identify issues with the statute and point them out to their corporate lawyers which in turn creates a virtual cycle of change (and a vicious circle of change for competitor jurisdictions), allowing Delaware to keep its statute at the forefront of company law developments in the United States.

Delaware embraces changes to its General Corporation Law. In fact, change is regarded as a fundamental feature to ensure that Delaware remains the top jurisdiction for company law. These changes are led by the Delaware corporate lawyers who are at the forefront of these developments and who accept their responsibility to keep the statute current.

The Legislature

The second reason that Delaware is so successful is that the legislature gives high priority to company law issues and calls on corporate lawyers to draft the necessary amendments to the General Corporation Law. The legislature has approached its incorporation and company law product as a long term investment. Pandering to any one interest group is avoided and instead, the legislature has sought to create balance in the law, with the guidance of the corporate lawyers as embodied in the non-partisan committee.

What is interesting is that it is the smallness of the state which assists in this regard. Everyone knows everyone, and can tell when proposals are being pushed forward for partisan reasons. It is understood that when the corporate lawyers get together to propose amendments that they leave their client specific interests at the door and propose amendments which are in the best interests of the State of Delaware. Failure to do so is likely to get the lawyer booted from the committee.

In short, the legislature recognises the importance of company law to the jurisdiction and relies on the expertise of the persons who deal with it daily and their willingness to act in the best interest of the state. Through this harmonious relationship, the Delaware product is able to remain at the forefront of company law in the United States.

The Courts

The Delaware courts are considered the leading business law courts in the country, along with New York courts. The judges are well prepared and extremely familiar with complex business transactions. The decisions are of high quality and the courts are known for their speed. The legislature has invested heavily in the courts to ensure they are of top quality. When coupled with the volume and the quality of incorporations, there is that virtual cycle again where Delaware judges hear cutting edge issues first, making it impossible for competitor jurisdictions to break into the model.

An interesting aspect of the Delaware courts is that it is the Court of Chancery which hears corporate law disputes while commercial law disputes are heard by the Delaware Supreme Court. In other words, one court for disputes regarding companies and their workings, and another court for disputes involving contracts.

The Secretary of State's Office

The Secretary of State's Office, or in our vernacular the Registry of Corporate Affairs, has an excellent reputation for two reasons, efficiency and attitude.3 These persons, more than any others, recognise that they are running a business which is critical to the success of the state. They know they have to respond to their customers' demands, that being the demands of the registered agents and corporate lawyers. They are user-friendly. They offer a multitude of services, such as late night filings, expedited filings, pre-clearance and others to ensure that their product never falls behind that which is offered by other jurisdictions and which meets the needs of customers. Much like the corporate lawyers are constantly updating the General Corporation Law, the managers in the Secretary of State's office are keeping their systems up to date and staying responsive to the needs of their customers. Further, the staff work with their customers to create solutions.

Unlike most government bodies around the world, the Delaware Secretary of State's Office is run like an efficient business which generates income for the state.

Softer Factors

There are softer factors which help to keep Delaware at the cutting edge of its business. The people of Delaware are aware of the importance of incorporations and the company law business to their state, and that the business employs a significant number of people. The people of Delaware support the time that the legislature spends on this business recognising that it is a necessary use of their time for the good of the state.

Most American corporate lawyers are knowledgeable about Delaware law, making it the lingua franca for lawyers in states not connected to Delaware. Delaware recognises and embraces this feature, knowing it is much better to have a larger 'pot' in which Delaware lawyers can play a pivotal role rather than trying to restrict the growth of that 'pot'.

A more subtle factor is the approach to regulation. A business approach is applied to the issue of regulation. Delaware "seeks to avoid over-regulation frowned upon by the market, while at the same time avoiding under-regulation frowned upon by regulators in other jurisdictions. In doing so, [Delaware tries] ... to bring private sector experience to bear upon the regulatory design process, seeking to maintain a cutting-edge regulatory regime while at the same time conveying stability and credibility to global markets and their foreign regulatory counterparts".4

Lessons to be Learned

Do we in the BVI have anything to learn from Delaware? Frankly, any one running a business should always look at similar successful businesses, as almost certainly there are lessons to be learned. This is not always easy when the business provider is a jurisdiction rather than an individual. The BVI is fortunate. The success of Delaware provides a comparable jurisdiction that can and should be considered.

Lessons to be learned:

  • Diversify into the business of incorporations and company law
  • Treat the business as a business
  • Ensure that all the constituencies work together
  • Update the company legislation regularly, as recommended and drafted by the private sector, notably the corporate lawyers
  • Have a legislature which is aware of and supports the financial services product, including the company law product
  • Support the courts
  • Ensure the Corporate Registry is always innovative and efficient; operates the business for the good of the jurisdiction and is responsive to customer demands " Ensure the citizenry is aware of the role financial services plays in the success of the BVI and that they are tolerant of the resources invested in the product
  • Avoid restricting the practice of BVI corporate law, if doing so limits the growth of BVI corporate law as a product
  • Treat regulation as part of the product and ensure that the private sector is actively consulted and its views are considered in the ongoing attempt to create an appropriate level of regulation to avoid driving away business, while at the same time complying with international obligations in an appropriate time scale

Conclusion

These are just some of the lessons that can be learned from Delaware. No doubt there are many more. If it is recognised that we are in the business of offering both incorporations and company law, that Delaware should be examined in greater detail and that the private sector should play a leading role in the growth of the BVI business product, then this article will have achieved its objective.

The building blocks currently exist in the BVI. The Territory can become the global offshore equivalent of Delaware. However, if we do not act promptly, the building blocks will develop elsewhere and the BVI will have lost its chance.

As originally seen in Business BVI.

Footnotes

1 Parsons and Slights, "The History of Delaware's Business Courts", 2008.

2 Lewis S. Black, Jr., "Why Corporations Chose Delaware", 2007; Parsons and Slights.

3 Lewis S. Black, Jr., "Why Corporations Chose Delaware", 2007.

4 Christopher Bruner, "Delaware as 'Market- Dominant' Small Jurisidiction", 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.