Where do entities incorporate? The question is of perennial interest to academics who wish to research and teach the laws that govern many companies. It is of particular interest now, given a string of controversial court decisions and legislative responses in Delaware. Most people assume that Delaware is the dominant state for issuing corporate charters, and that its dominance is now in danger – either through excessive judicial hostility to corporate insiders or through excessive legislative solicitude.

Patterns and trends in incorporation are factual matters, subject to empirical verification, but they have proven surprisingly difficult for commentators to observe. States retain their own incorporation records and are not always timely or forthcoming in sharing these records. Nor is it easy to integrate records from different states, which may have different entity types or different ways of describing the same entities.

Accordingly, scholars have looked where data is available. Most studies track the incorporation patterns of large publicly traded companies, even though 99.99 percent of companies are not public. Other studies focus on just a subset of private companies large enough to appear in some kind of commercial database. A few projects look at all entity formations, but only for a subset of years or states. We have lacked a comprehensive database of incorporation decisions.

My new working paper fills that gap, drawing on over 100 million corporate filings to offer firm-by-firm, day-by-day, incorporation data going back to the nation’s founding.

My research for the paper began with painstaking state-by-state efforts to buy and beg state data and continued in partnership with OpenCorporates, a commercial enterprise that supports academic research as part of its public benefit mission. OpenCorporates litigates and lobbies to dislodge incorporation information from reluctant states, so it reaches data I could not otherwise get. These records often came in different formats and had to be auditing and then brought into conformity. The whole process took six years.

The paper is intended to support scholarly research on any question for which accurate state incorporation information would be important. It  also provides proof of concept by addressing topics of great historical, theoretical, and contemporary interest.

Is Delaware Losing Its Dominance?

Professor Bainbridge investigates public company reincorporation and finds little evidence of companies leaving Delaware for other states. Professors Norwood and Alon-Beck offer similar findings based on data about startup incorporations and unicorns, respectively. I reach similar conclusions. Looking at incorporation patterns in recent years, there is no obvious downward trend for Delaware.

The vertical line represents Vice Chancellor Laster’s controversial decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. There is no immediate sign of a reaction. My data only run into April of 2024, so it is possible that subsequent events have changed things. But there was no real evidence of Delaware’s decline as of a year ago.

States Competing With Delaware

That is not to say that Delaware’s dominance is universal and uncontested. To the contrary, my research reveals that Delaware has rarely stood in even the top five for number of charters issued – and that the large and growing number of its competitors are not the states one might expect.

California and Florida are the big surprises. Many scholars take a dismal view of California corporate law, and few give much thought to Florida.

Of course, both are populous, economically vibrant, and growing. Yet both create many more new entities than one might expect given the size of their populations and rates of new business formation.

Interestingly, despite ample scholarly attention on the threat posed by Nevada, it does not appear to attract a large or growing number of incorporations.

Laws Competing With Delaware Law

California and Florida are among the states that compete with Delaware to attract and keep corporations. But the corporate laws of some states are basically the same, making it possible to compare groups of states with one another to see the competition among bodies of law. Most important, the majority of states have adopted the Model Business Corporation Act, so it makes sense to ask how many corporations are now subject to the MBCA.

A large and growing number of states have adopted the MBCA, and it governs about five times as many corporations as Delaware law does. Its popularity is the result of both more states adopting it and more incorporations in those states after they adopted it. The MBCA is popular with legislators and incorporators alike.

The Rise of the LLC

It is no surprise that the LLC has proven increasingly popular, but my research underscores just how central it has become.

When the leading corporate law textbooks were written, LLCs were virtually nonexistent. However, over the past 20 years, LLC formations have consistently outpaced incorporations. By this time next year, the total number of LLCs ever created may surpass all corporations ever formed.

The rise of the LLC is another story of the rise of model and uniform law. Delaware’s LLC law is popular, but it competes with the Uniform Limited Liability Company Act, which now governs almost 50 percent of LLCs.

The Past

Most debates about the future of corporate federalism are implicitly based on a model of its past. The story of how Delaware came to be king is also a prophecy of how it might lose the crown. In this history, New Jersey dominated corporate law by offering laws amenable to rapacious trusts and corporate giants – until 1913, when its progressive legislature enacted tough restrictions on corporate conduct. Corporations swiftly left New Jersey for Delaware. New Jersey repealed the unpopular laws in 1917, but it was too little too late. The moral of the story is that corporate charter dominance is a precarious business.

My paper casts doubt on this story. It shows the number of New Jersey incorporations dipping in 1913, as expected. However, New Jersey’s 1917 repeal seems to have led to a relative gain in position.

It would appear that corporations were often willing to forgive New Jersey’s transgression. It is only in the 1980s that Delaware’s relative share eclipsed New Jersey.

Public and Private Divide

Delaware’s growth in popularity among corporations in the 1980s was probably attributable to Section 102(b)(7), the statutory provision authorizing exculpation of directors for breaches of the duty of care. Other scholars have established this as a turning point for public company incorporation, and my research shows that exculpation was generally popular for private corporations too. Not all decisions achieve such universal acclaim.

In the late 1990s and early 2000s, Delaware continued to grow in its share of public company charters, but its share of private charters began to dip. Perhaps something in Delaware law proved generally unpopular but was valued by the largest franchise-tax payers. Delaware watchers may wonder whether something similar may be happening again. Legislation empowering corporate insiders may undermine desired protections in most companies, while better accommodating the preferences of prominent controlled or venture-backed companies.

Conclusion

A field is only as strong as its empirical foundations, and my research promises to unlock new and improved research channels. The working paper itself contains new looks at a number of timely and timeless questions. It suggests that Delaware has not recently suffered a loss in position (at least as of April 2024). However the state’s dominance has always been weaker than commonly assumed. It has long faced serious competition from sources such as California, Florida, and states that adopted the MBCA. Even New Jersey fought Delaware much more successfully than many people thought. And of course the number of LLCs has grown to overtake almost the entire field outside of a few public corporations.

These findings may nudge teachers to increase their focus on the MBCA and LLCs (focusing on the Uniform LLC Act in particular). Some textbooks have already been written with this focus in mind.

These findings also change how we study and debate corporate federalism. Rather than asking merely whether Delaware stands to lose its leadership in corporate charters, we can granularly investigate whether it increases its prominence among one class of firms at the expense of another class. Perhaps Delaware will specialize as the home of controlled and venture-backed companies, just as Maryland specializes as home to REITs.

The nation’s founders deemed it crucial to ensure a census of natural persons. Certain features of our federal system have frustrated the construction of a census of artificial persons. The Corporate Census now offers scholars a new and comprehensive look at topics of enduring and emerging importance.

This post comes to us from Professor Andrew Verstein at UCLA School of Law. It is based on his recent paper, “Corporate Census,” available here. The research for the paper was supported by UCLA’s empirical research group, and Professor Verstein discusses the paper on the Business Scholarship Podcast, here.