Countries around the world continue to look at Silicon Valley as a model for creating their own innovation and entrepreneurship ecosystems – or the next Silicon Valley. But less talked about in this conversation is that companies often incorporate in Delaware, a state on the east coast of the USA. Even companies like Facebook, though headquartered in California, are incorporated in Delaware. In fact it is claimed that 83 percent of all U.S. initial public offerings were incorporated in Delaware in 2013.
According to the Invest Delaware web site, the state ranked first in the nation for business friendliness, with its straightforward incorporation process, an expert corporate legal community, and award-winning courts, including the Delaware Court of Chancery and the Delaware Supreme Court. The cost of doing business in Delaware is 9.3 percent below the U.S. national average, and it doesn’t charge sales or inventory taxes, plus it offers many tax credit opportunities.
So can this be the key to making it easier for the creation of an innovation ecosystem and to encourage home-grown startups to grow, wherever they may be?
Indian entrepreneur and investor Ravi Kiran certainly thinks so. Writing about what needs to be done in India to keep Indian startups in the country rather than heading to Silicon Valley, he says in a recent blog that India should be looking to create a Delaware like framework.
Kiran says that Indian regulators have, in recent times, been talking a lot about creating a conducive environment for businesses, specifically startups, given the recent exodus of some startups to foreign shores to take advantage of friendlier business policies and regulations.
He says that in order to create a thriving ecosystem, Indian government is taking inspiration from places like Silicon Valley. He adds that he is often asked by Indian entrepreneurs, “Will Indian regulators be able to give the Indian startups an ecosystem similar to what Silicon Valley has provided?” His answer is: “Why just look at Silicon Valley when there’s so much more that the Delaware framework can teach us?”
As the Invest Delaware web site indicates, the flexible governance framework allows for ease of doing business which is crucial for startups.
The Delaware General Corporation Law is a simple yet dynamic one: although it was written in the last decade of the 19th century, it has been constantly fine-tuned since then to suit the ever-changing business environment. It has also managed to strike a perfect balance by treating both, regulators and business entities at par, with no bias towards either, which is often rare to see in many countries. The statute permits companies and their shareholders to work with maximum flexibility to ensure they work smoothly.
Ravi Kiran adds, “Then there’s the Delaware legislature that not only gives high priority to corporation law but also has a good expertise over these matters. The state legislature also has an understanding with the bar and it is clear that when proposing corporate legislation, the bar will deal candidly on any matter that involves corporation law.”
“Lawyers too, swear by their courts. The Court of Chancery has developed an exemplary expertise over matters related to Corporation Law. Not only do you see some of the best lawyers practicing in Delaware, you will be pleasantly surprised to see how familiar the judges are with complex business transactions and the kind of insights they have about the inner workings of corporations. Since the court has already dealt with cases that cover almost all aspects of businesses, it more or less has answers to most questions that haunt businesses. This offers them a greater sense of security.”
Delaware itself cites the following five reasons why it is so business-friendly:
- The statute is the foundation on which Delaware corporate law rests, offering predictability and stability. It is shaped by corporate-law experts and protected from influence by special-interest groups. Delaware’s corporate statute is not a detailed prescriptive ‘company law’ such as exists in many nations. Instead, it includes a few important mandatory requirements to protect investors and otherwise provides flexibility for corporations to carry out their business.
- The courts: Delaware is known worldwide for its judicial system and the expert and impartial judges that decide its corporate cases. The Delaware Court of Chancery is a specialized court of equity with specific jurisdiction over corporate disputes. Without juries, and with only five expert jurists selected through a bipartisan, merit-based selection process, the Court of Chancery is flexible, responsive, focused and efficient.
- The case law: the Court of Chancery and the Delaware Supreme Court both have a historical tradition of issuing reasoned written opinions supporting their decisions, thus allowing a significant body of precedent to accumulate over many decades. Judges, not juries, decide all corporate cases and must give reasons for their rulings. One of the key concepts embodied in Delaware case law is the ‘business judgment rule’, which is a judicial recognition that law-trained judges should not second-guess business decisions made by directors in good faith and with due care.
- The legal tradition: along with a sophisticated judiciary, Delaware has an ample supply of lawyers expert in Delaware corporate law. Delaware’s statutes and case law provide a base of knowledge for attorneys who specialize in Delaware transactional matters and who practice in front of Delaware’s courts. No matter where a Delaware entity is headquartered, it can find expert attorneys in Delaware to help it navigate issues of its law.
- The Delaware Secretary of State provides corporations and their advisors with a prompt and efficient service – since incorporations provide a major portion of the state’s revenue, so Delaware takes its role seriously.
This clearly seems to be a model framework that helps startups to do business. There is no doubt that a combination of proper, friendly legal and regulatory framework such as Delaware provides, combined with the collaborative mindset of the Silicon Valley, along with the resources in terms of talent and capital, is what countries trying to create the next Silicon Valley should be aiming to create.