Why do we still mark the beginning of corporate existence with the filing of a charter?  Why file charters publicly when the content is overwhelmingly focused on internal stock rights?  Why does the leading jurisdiction of Delaware make charters so hard for the public to retrieve when other states offer easy online access?  What do charters do that could not be achieved by private contracts, internal corporate record keeping, and a registration database?  In a recent essay, I examine charters, tracking their history from Delaware’s first corporate law statutes up through modern day practice in Silicon Valley, and surprising answers emerge.

It is not as if charter content has never been considered in legal scholarship.  There is excellent scholarship noting that a requirement to memorialize an arrangement in a charter sets a high bar for approval: Charter amendments need both board and shareholder consent.  By requiring that certain arrangements be enshrined in a charter, particular features of corporate law can be made “sticky.”  This line of scholarship is true as far as it goes.  But note that corporate law could, and sometimes does, [1] explicitly require  board and shareholder approval without reference to the charter instrument.  If the charter is simply shorthand for dual approval, then it is an awfully elaborate way of communicating the concept. Why require the whole filing ritual for this set of decisions when other very consequential ones can simply be tracked in an internal minute book?

Other scholars have focused on the public nature of the charter and suggested a public disclosure function.  These scholars are right to focus on the public filing aspect of charters because it is distinctive.  There is no other significant mandated public disclosure requirement for pre-IPO companies.  Yet, the actual content of charters is, then, puzzling.  The document starts with boilerplate, consisting mostly of generic stock rights and internal litigation and liability rules.  It sometimes expands to include detailed preferred stock terms in connection with a venture-capital financing.  But at no point does the charter provide the kinds of information that the public (or even most shareholders) would seek.  Moreover, in the leading jurisdiction of Delaware, the charter is relatively cumbersome to obtain.  Doing so generally requires waiting for long periods or paying significant fees for a rush order and enlisting the help of private vendors.  It is hard to believe this is how one would design a disclosure system for the broad public.

So, what are charters for?  I think there is a clue in the history of charter administration in Delaware.  Prior to 1899, Delaware set out quite the gauntlet of requirements to form a corporation.  The initial general incorporation statute called for three incorporators (two of whom had to be Delaware residents), publication of notice in a newspaper, review of the certificate of incorporation by a local judge, and filing of the approved certificate with the secretary of state and the local county recording office   (Apparently, most entrepreneurs thought it was easier to just lobby the legislature for a special incorporation by legislative act, until that practice was definitely prohibited.)

Over the years, most of these requirements disappeared, except that the requirement to double file the certificate in the local real estate recording office persisted until 1996.  By 1967, duplicate filing was widely perceived as wasteful, but apparently streamlining the system ran into resistance from local recording offices and perhaps filing vendors.  Even when duplicate filing was eliminated, the statute still showed signs of internal politics by directing payments to the local recording offices in which filings would no longer be made.

Besides demonstrating the power of parochial interests over Delaware law, this episode concerning real-estate recording offices raises an interesting comparison between charters and real-estate recording systems.  Like a property recording system, the filing of a charter creates a particularly reliable and definitive record of certain legal rights.  Just as recording a deed can reduce investigation costs for a future purchaser or lender in the context of a real estate transaction, placing a provision in a filed charter (or omitting a provision when it can only be done through a charter) streamlines due diligence for corporate transactions.  By this account, the charter is not primarily functioning as a public disclosure document.  It is instead an effective way to credibly communicate information to those with an ownership interest in the corporation or the intention to obtain such an interest.  With such an understanding of charters, it suddenly makes sense that the document focuses so heavily on shareholder rights and that it is filed in a definitive form.

In terms of doctrine, this story might suggest stronger charter requirements and less tolerance of private shareholder agreements – pretty much the opposite of where the Delaware statute moved through DGCL 122(18).  The reason, however, is transactional efficiency rather than a broad public transparency rationale.

There might also be some lessons for Delaware regarding charter administration.  The Delaware system, with its paywalls and reliance on private vendors, works well enough for public companies that do not mind paying for concierge service.  It also likely works fine for venture capital firms looking to invest millions of dollars.  But if Delaware wants to retain its advantage with the entrepreneurs who make actual incorporation decisions, it might consider a more modern system that offers instantaneous access to filings.  You only get one chance to make a first impression, and Delaware’s legacy system is unlikely to favorably impress design-conscious innovators.

ENDNOTE

[1] For example, Section 271(a) of the DGCL requires approval of both shareholders and the board for sale of substantially all of the corporation’s assets.

Abraham Cable is a professor at UC Law, San Francisco. This post is based on his recent article, “Why Charters?” available here.