Business owners often have two questions when launching their business and growing it through commercial relationships and/or corporate transactions. These questions are “where should I incorporate?”, and once the business is incorporated and operating, “what should the applicable law be of our agreements?” Two states come to mind when dealing with these questions. Both Delaware and New York have developed a reputation for purposes of incorporating businesses and being the governing law/jurisdiction of choice in commercial agreements and corporate transactions. But which makes more business sense? In this two-part series, we first address the question “which state is best to incorporate your business?”, revealing key insights that businesses of all types should consider when navigating the incorporation process and negotiating transactions and business relationships.

Where Should I Incorporate?

For businesses operating in more than one state, both Delaware and New York have become go-to jurisdictions for incorporation purposes and, while their corporate legislation can be quite similar and the incorporation process just as relatively simple and convenient (requiring the same documentation such as certificate of incorporation and by-laws for corporations and certificate of formation and operating agreement for limited liability companies), there are a few differences worth mentioning, specifically in the area of shareholder protections.

Delaware does not have a statutory provision requiring that all shareholders of a corporation receive the highest cash price paid by a bidder to another shareholder. The New York Business Corporation Law on the other hand requires that all shareholders receive a minimum fair price per share in any business combination with a shareholder owning 20% or more of the corporation’s issued voting stock. The fair price will generally be the higher of: (i) the price paid by the interested shareholder and (ii) the market value of the shares on the date the transaction is announced or completed, whichever is higher (See New York Business Corporations Law §912(c)(3)).

The same applies to “greenmail”. “Greenmail” is described as purchases by companies from their shareholders at a price per share higher than market value. The Delaware General Corporation Law does not include an express prohibition in this regard. However, New York Business Corporation Law §513(c) only permits purchases by a publicly traded company of more than 10% of its shares when such a purchase has been approved by the board of directors and the majority of the outstanding shares.

While these two particular points are not issues that may affect a business at its inception, they might do so in the long run and should be kept in mind for long-term planning purposes.