Published on APR 11, 2022

How a Brief Change in New Jersey’s Approach Led to Delaware Becoming the Center of American Corporate Law

I was excited to see the recent article by my friend and colleague Tron Black discussing the concept of enabling legislation and its potential application to crypto legislation. That article arose out of a conversation we had at a Ravencoin meetup at sea.

There is a backstory to it.

It begins with my bi-weekly trip on the train from New Jersey to Washington, D.C., where I teach blockchain law to eager young minds interested in this fascinating new technology. Each trip involves a brief stop in Wilmington, Delaware – a small city along the Amtrak Acela line that sits at the heart of corporate law in America. One day, I asked myself: how did this happen? Why is Delaware, the second-smallest state in the U.S., the locus of most of our largest corporations? Why is this tiny city and its revered Delaware Court of Chancery the font of corporate law in our country?

It turns out the answer is all about enabling legislation.

A Journey Through History

Corporations used to be disfavored in American law. So much so that incorporation in the late eighteenth and early nineteenth centuries required a special, one-off charter from the legislature. One famous example was the first Bank of the United States, incorporated by a special Federal statute in 1791 at the urging of our first Secretary of the Treasury, Alexander Hamilton.[1]

In the years that followed, incorporating a special corporation under state law did not require the support of a Founding Father. Lobbyists made it their business to jump through legislative hoops and obtain the necessary votes to establish corporations under state law on a case-by-case basis. Nevertheless, in the early part of our nation, these special corporations were relatively few and far between.

As the nineteenth century progressed, states began to enact general corporation statutes one-by-one. These statutes permitted companies to incorporate without a special statute, but in the early days, these statutes tended to be restrictive in scope. As a consequence, some of the nation’s largest enterprises opted for other forms to organize and conduct their business.

That all changed in the late 1800s, when New Jersey became the first state to liberalize its approach to corporations by adopting corporate “enabling” legislation. New Jersey abolished the special corporate charter by Constitution.[2] Then, “[t]hroughout the 1880s and 1890s, [New Jersey] relaxed long-standing restrictions on size and business combinations, enabling corporations to merge with each other (1888), to deal in each other’s securities and thus act as holding companies (1889), and to operate outside New Jersey without express permission from New Jersey’s legislature (1892).”[3] In 1896, New Jersey consolidated its enabling legislation and permitted corporations to easily change their charters, without legislative permission.[4]

The race to attract businesses was born. Many of the nation’s largest corporations availed themselves of New Jersey’s liberal corporate enabling laws, culminating in the corporate reincarnation of John D. Rockefeller’s Standard Oil Trust into Standard Oil Co. of N.J., a New Jersey corporation.

Competition Among The States

Other states, witnessing New Jersey’s rise to corporate prominence, were not about to sit idly by. One of those states was Delaware. “In 1899, Delaware enacted a general corporation law modeled on New Jersey’s.”[5] It just so happened that a prosperous family partnership founded in Paris by Éleuthère Irénée du Pont had its gunpowder mill on a creek near Wilmington, Delaware. On October 23, 1899, the partnership was reorganized as the E.I. du Pont de Nemours & Company – a Delaware corporation.[6]

Other states attracted significant incorporations as they passed similar enabling statutes, including New York, Maine, and West Virginia.[7] But New Jersey was the first mover, and it maintained its position of prominence.

New Jersey’s Epic Blunder – the “Seven Sisters”

Just over a decade later, in 1913, New Jersey Governor Woodrow Wilson proposed a slate of anti-corporate legislation known colloquially as the “Seven Sisters” (apparently named after “seven sisters featured in advertising for a patent medicine”).[8] The consequences were immediate. As the State of Delaware itself notes prominently on its website: “This caused corporate attorneys and others to question the political and legal climate in New Jersey. At the time, Delaware’s corporate law had the same attractive features as New Jersey law, without New Jersey’s newly enacted restrictions.”[9]

Corporations began incorporating in the State of Delaware in earnest. After a short time, New Jersey tried to backtrack, but it was too late. Delaware’s lead by that point had solidified.[10]

The rest, as they say, is history. Today, most of the nation’s corporations are incorporated in Delaware, not New Jersey.

Lessons Learned

Nowadays, when lawyers study corporate law in school, they study Delaware law.

When corporate litigators practice in high-stakes cases involving corporate legal issues, they head to Delaware to appear before the Delaware Court of Chancery.

I have been privileged to do both.

And as my train briefly stops in Delaware on the way to teach in Washington, D.C., I no longer need to wonder why this is the case. We know.

Delaware’s legislature enabled corporations at a time when other states were restricting them, and that made all the difference.

There is a lesson in here for blockchain.

_____

[1] See An Act to incorporate the subscribers to the Bank of the United States1 Stat. 191 (1791).

[2] Susan Pace Hamill, From Special Privilege to General Utility: A Continuation of Willard Hurst’s Study of Corporations, 49 Am. Univ. L. Rev. 87 n.21 (1999).

[4] Joseph F. Mahoney, Backsliding Convert: Woodrow Wilson and the “Seven Sisters,” 18-1 American Quarterly, at 72 (Spring, 1966).

[5] Delaware Corporate Law Facts and Myths, available at https://corplaw.delaware.gov/facts-and-myths/.

[6] See Archival Collections at Hagley Museum & Library, E.I. du Pont de Nemours & Company minute books (1899-1940), available at https://findingaids.hagley.org/repositories/3/resources/1124

[7] See Charles M. Yablon, The Historical Race Competition for Corporate Charters and the Rise and Decline of New Jersey: 1880-1910, 32 J. Corp. L. 327 (2007).

[8] Mahoney, supra note 4 at 71 n.4.

[9] Delaware Corporate Law Facts and Myths, supra note 5.

[10] Andre G. Bouchard, The Delaware Court of Chancery’s 225th Anniversary, 73 The Business Lawyer 956-57 (Fall 2018).

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