Hal Weitzman on the Corporate State of Delaware

Delaware is the de facto capital of corporate America. The state has provided safe haven to money launderers, kleptocratic foreign rulers, and human traffickers, and facilitated tax dodging and money laundering by multinational companies and international gangsters.

Revenues from Delaware’s business-formation industry, known as the Franchise, account for two-fifths of the state’s budget and have helped to keep the tax burden on its residents among the lowest in the United States. 

Delaware derives enormous political clout from the Franchise, effectively writing the corporate code for the entire country – and because of its outsized influence on corporate America, the second smallest state in the United States also writes the rules for much of the world.

That’s the take of Hal Weitzman in his book What’s the Matter with Delaware – How the First State Has Favored the Rich, Powerful, and Criminal – and How It Costs Us All (Princeton University Press, 2022).

Weitzman teaches at the University of Chicago Booth School of Business and is editor-in-chief of the Chicago Booth Review.

And who exactly writes the nation’s corporation law?

Twenty-seven lawyers who sit on something called the Corporation Law Council – made up of 26 lawyers from Delaware’s fourteen corporate law firms – plus Penn Law Professor Lawrence Hammermesh.

Weitzman quotes the late Illinois Law Professor Larry Ribstein as saying that “Delaware lawyers, in essence, are the Delaware legislature, at least insofar as corporate law is concerned.”

“Virtually all of Delaware corporate law is proposed by the Delaware bar, and the bar’s proposals invariably pass through the legislature,” Ribstein wrote.

“The Corporation Law Council meets in private and every year they suggest changes to the corporate code of Delaware,” Weitzman told Corporate Crime Reporter in an interview last month. “And that is the corporate code of the United States and to some extent the world, because other jurisdictions copy the United States. Every year they meet and propose changes to those laws and those changes go to the Delaware legislature to be approved.”

“The Delaware legislature doesn’t have the capacity to understand what those changes are. They don’t have many lawyers in that legislature. They are not experts. They don’t have in-house experts to advise them. What they get is a set of proposals from the Corporation Council and they have no ability to judge as to whether these proposals are needed, why they are needed, what effect they will have. Because they don’t have that expertise, they effectively just rubber stamp the proposals. Then it goes to the Governor who invariably rubber stamps it as well.”

“As the legal experts put it themselves, they have removed all political uncertainty from the process.”

Did you find any dissent within the legislature?

“There have been and I do give examples in the book. The system is not completely watertight, but those are the exceptions. Again, the legal experts say – they have eliminated political uncertainty from the process.” 

“There is a story that I tell in the book about a lawmaker, John Kowalko, who tried to introduce a change to the corporate code. It was quite innocuous. He would require registering agents in Delaware to check the name of the registering corporation against the so-called OFAC list kept by the Treasury Department. It’s essentially a list of terrorists and criminal organizations. It was a pretty innocuous idea. And it did become law later.” 

“But when it was introduced by John Kowalko, he was in front of the Judiciary Committee. He proposed this change. And the chair of the Committee asked – did this come from the Corporation Council?” 

“And he said no – it comes from me. And she said – that’s now how this process works. All changes and recommendations on changing the corporation code come from the Corporation Council. In other words, an elected lawmaker has no right to change the law. Only unelected lawyers on this Corporation Council have the right to change the law. The system is very efficient and these people are experts. But they don’t explain why these changes are necessary. In fact, they don’t offer any explanation of the discussion at all. They do put minutes on their website, but the minutes say something like – a meeting happened and decisions were made and recommendations were drafted. But it doesn’t explain why those changes are needed.”

“The legislature receives the changes without any understanding as to why those changes are necessary. Whether they are necessary or not I don’t know. But no explanation is given. And then the legislature rubber stamps it.” 

“The whole thing has the form of democracy but it doesn’t have any substance. It’s kind of a hollow process where the lawyers control the system.”

You said that the legislation that Kowalko proposed eventually became law. How did it become law?

“The Corporation Council proposed it.” 

Historically, there have been proposals for federal chartering of corporations. This would be one way to upend Delaware’s control of corporation law. In your recommendations, you come close to saying – federal chartering. But you don’t get there. Give us your thought process on that.

“I don’t necessarily want to strip Delaware of that influence. I’m not convinced that Delaware having influence over corporate law is necessarily a problem. I do think it should be more exposed to oversight. The advantage of having it at the federal level is that you would have a level playing field across all states. Second, you would have more oversight presumably. The oversight would fall to a federal body or Congress, instead of this part-time legislature where you pay the lawmakers $45,000 a year. And they are not corporate experts.” 

“That would be an advantage. I don’t know the answer. And I didn’t want to make that recommendation unless it was clear to me what the advantage would be. All I recommended was that we discuss it and then make a choice. Delaware happened to win this business because more than 100 years ago, New Jersey gave it up and Delaware just copied the law from New Jersey and picked up the mantle from New Jersey. But we never as a country debated – what is the most effective way of developing corporate law? We just let it evolve in Delaware. Having said that, there is a tremendous amount of expertise in Delaware – both in the Chancery Court and in the law firms. I don’t necessarily think that there is anything lacking.” 

“I don’t know what the correct answer is. But I think it would be a discussion worth having.”

You write this in your recommendations:

“Incorporation at the state level can seem something of a relic, ill-suited to the global economy. Periodically, the question arises as to whether business registration should be made a standardized, federal process.  No doubt, such a system would have its own weaknesses, but the gap that the Corporate Transparency Act has created between forming businesses locally and identifying their owners nationally may force the issue to the surface once again. Often the conversation has been prompted by scandals. Why wait for that? Having a rational discussion about the optimal way to structure business formation and corporate oversight might help prevent scandals in the first place.”

You point out in your book that more than 100 years ago, federal chartering of corporations became a central issue in Presidential campaigns. Given all of the scandals that you lay out in your book that can be traced to Delaware, why do you think it’s not as political an issue as it was 120 years ago.

“At that time, corporations were newer and there was a lot more concern about the power of corporations. There is concern about the power of corporations now, but not at the fundamental level of how they are formed. I’m not sure that’s what people are concerned about. I would love it to be a big issue. But people care more about other issues like companies polluting the environment, the carbon footprint of corporations, the moral hazards exposed in the bailing out of banks and customers.”

Arguably those issues have to do with the corporate code – how the corporations are structured, the rights of shareholders, limited liability. All of those govern corporations and determine corporate accountability outcomes.

“The difference between now and a hundred years ago is that a hundred years ago, people were concerned about the structure of companies. Now corporations are well established. The Corporate Transparency Act was one attempt to rein in LLCs and pass through entities. A huge amount of money flows through those companies. Every Uber driver is their own company nowadays. I’m not sure the structure of the big C corporations are going to animate people very much.” 

Tell us the story of how and why Delaware repealed its usury laws. 

“In the 1980s, because of deregulation, there was much more freedom for financial firms to change location and go to jurisdictions where it was most favorable. Competition emerged for credit cards and trust funds. And the chief competitors were South Dakota and Delaware. South Dakota had an early favorable law.”

“Delaware invited two of the big banks – Chase Manhattan and JP Morgan. The state invited them in. This was all done privately. The Governor, a DuPont, invited them in to write the legislation. And the legislation of course was very favorable to credit card companies. And the legislation included scraping rate caps that had been a standard feature of state financial codes.” 

“What happened after that, even states that wanted to keep rate caps could enforce them because companies would just incorporate in Delaware so they could charge whatever interest they wanted. That set the stage for the whole system. And because of that change, five of the six largest credit card companies are incorporated in Delaware.” 

How did they beat out South Dakota?

“They had a very favorable law. And South Dakota was not a very attractive location for New York financial companies and Delaware was. Location was one of the huge advantages that Delaware has over competitors who have tried to copy it, like Nevada.” 

“South Dakota didn’t lose completely. They got the trust business. The Pandora Papers revealed that, for example, a lot of Russian oligarchs set up trusts in South Dakota. South Dakota has a bigger trust business than Delaware, but Delaware has the credit card companies.”

“The credit card corporations have a much much bigger business than trusts. The trusts don’t actually produce very much revenue at all. Trusts do not produce a lot of revenue for South Dakota. But the incorporation business and credit card business produce a huge amount of revenue for Delaware.”

Did Joe Biden’s connection to Delaware fuel his political career?

“He didn’t create the system, it definitely predated him. But he’s definitely very much a creature of the system. His voting record is very much favorable to credit card companies. His votes on the bankruptcy system have been very much favorable to credit card companies. He’s been teased about that and he doesn’t like that teasing.” 

“His style is very Delawarian. He tries to reach across the aisle. That has its positives as well as some negatives in terms of backroom dealing. When he was a Senator, the biggest single donors to his campaigns were the big law firms that benefited from the system. His campaigns were fueled by the big Delaware law firms. So he’s very much a product of that system.” 

“He boasts about it. He says in his speeches even now – I’m from the corporate state of Delaware. He’s quite proud of that reputation. He spoke about it in one of the State of the Union speeches. He sees it as a strength of Delaware as a corporate state.”

You report that some companies in Delaware have a right to vote. How did you come across that?

“I can’t remember how I came across it. I had been to Reheboth. It comes about because of the growth of LLCs. When people own property nowadays, it is not uncommon for them to put it under an LLC. That means they can be anonymous. If you own Airbnb property, you can put it under an LLC to limit your liability. If you have two Airbnb properties, you can have two LLCs.”

And the reason you would put it under an LLC would be to limit your liability if something went wrong with your tenant for example?

“Exactly. If something happens with one property, it doesn’t infect the whole of your property.” 

“Like a lot of beach towns, the town of Rehoboth has a very small full time population. Many of the owners of the properties live in Washington, D.C. And the argument was made that those property owners should be allowed to vote in special elections that affect real estate like property tax issues. And the LLCs are allowed to vote in these special elections. And a proposal was made to allow them to vote in the general election for candidates for Mayor for example. These are property owners. They would be able to vote not just remotely but to vote multiple times. And there was a case in Newark, Delaware where somebody voted 31 times because they owned 31 separate LLCs related to property in the city.”

“And we don’t know who these people are. Delaware doesn’t distinguish between a U.S. based owner of a company and a non-U.S. based owner. They might be based in California or DC. Or they might also be based in Africa, or Russia or the Middle East. We don’t know because Delaware never asks about ownership information.”

Delaware requires a real person’s name on the incorporation papers, but it can be someone’s other than the owner’s name?

“You have to put a contact person’s name. It just has to be someone who knows who the owner is and can be in contact with them.” 

How widespread is the practice of allowing LLCs to vote?

“It’s in a few towns around Rehoboth. And it’s in Newark.” 

[For the complete Interview with Hal Weitzman, see 37 Corporate Crime Reporter 18(12), May 1, 2023, print edition only.]

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