Or, Delaware Caught Heat for Playing the Sorcerer’s Apprentice, Even in 1899
Corporate Voters Project – Research Note #2
Recently, there’s been a bit of controversy about amendments to Delaware’s General Corporation Law. Supporters pushing recent amendments have gotten quite hot under the collar in public print and in legislative debates, and have accused critics of (what is now the signed) law of threatening the state’s entire political economy with their unprecedented rudeness.
Much like the recent revisions to state law themselves, these reactions to mild criticism are expressions of myopia. Criticism of the sort SB 313 attracted in 2024 – that it proceeded anti-democratically, that it harmed ordinary people, that it was motivated by a small set of special interests’, and would lead to abuse – were leveled at Delaware state legislators when the state’s corporate law first passed in 1899.
If anything, earlier observers of Delaware corporate law in the Gilded Age were far more blunt in their criticism than anyone in the 21st century has ever thought about being. To illustrate, lend your eyes to this brief article from the American Law Review, a legal journal based in St. Louis: “Little Delaware Makes a Bid for the Organization of Trusts,” American Law Review 33, no. 3 (May-June 1899): 418–24.
Well-known to Delaware lawyers – and recently, at least one historian – the article takes the form of an unsigned “note,” one of a few dozen that appeared at the back section of every journal issue, after the treatises and articles, but before the listings of recent major court decisions. My assumption is that it is either written by the editors, Seymour D. Thomson and Leonard A. Jones, or one of their close associates – and either way expresses their editorial views.
And my goodness, are the Am.L. Rev. editors unimpressed with Delaware trying to copy New Jersey’s loose corporate charter rules, much less their attempt to “improve” on them by giving corporations even more expansive powers. After some praise for Delaware’s old Democratic (and enslaving) political establishment (and some sharp elbows at the emerging state Republican party), the editors note that the curious feature of US federalism – that state sovereign powers are equal, and that states set corporate law – is what provides the temptation that Delaware has now given into:
“The “sovereign” States of the American Union are equal: equal in the Senate, for little Delaware wields the same voting power there as does great New York. They are also equal in regard of the deviltry they can do – equal in regard of the injury they can inflict upon their sister States. It is as though a Klondike gold mine had been discovered in New Jersey, and all Delaware were on the rush to get there. In other words little Delaware, gangrened with envy at the spectacle of the truck-patchers, sand-duners, clam-diggers and mosquito-wafters of New Jersey getting all the money in the country into her coffers, – is determined to get her little tiny, sweet, round, baby hand into the grab-bag of sweet things before it is too late.” (p. 419)
And, the editors note, this law will be a jobs-employment program for Delaware politicians; they may need to even import labor:
“But with this exception; and herein the little great “State of Delaware” casts its little great anchor to the windward. Although ” any three persons may organize a corporation,” yet ” only one director need be a resident of Delaware.” And this ” one director'” is going to be paid for being a director, and don’t you forget it. If the rush to organize corporations and trusts under this new Delaware law is as great as under the New Jersey law, there will not be politicians enough in Delaware to serve as directors of corporations and trusts for all the other States of the Union, but professional directors will have to migrate to Delaware from other States, and their name will be Legion.” (p.420)
Delaware legislators’ grandiose proclamations about their new law’s global applicability seem to be particularly grating:
” Nor will you be confined, in the conduct of your business, when so happily incorporated, to your drought-smitten and grasshopper-eaten prairies. “It,” – that is to say you when you have turned yourselves into Delaware corporations – ” may conduct business anywhere in the world.” Certainly you may. Why not? The great State of Delaware says so, and is not that enough?” (p. 421)
Halfway through, the editors re-frame their note as addressing the great political enemies of the Big Corporations in this particular moment – the hardworking, Populist Party-supporting farmers of Kansas. (This is for rhetorical effect; I doubt too many populists were reading this attorney-specialty journal). And in this section, the editors suggest that should these farmers try to use the state power they control, they’ll face a potent force – in law, if not actually in the military.
“If Kansas attempts, through its legislation, to interfere with the sovereign prerogatives of Delaware, Delaware will be there with its oyster-boat and clam-boat navy, and with its unterrified militia; and what then will Kansas do about it?” (p.423)
And then finally, they note the alchemical aspects of Delaware’s new law.
“Let us not forget, oh, toiling brothers of the Kansas deserts, one other feature of this congenial law: 6. “The liability of the stockholder is absolutely limited when the stock has once been issued for cash, property or services.” Brother, do you need to photograph this sentence by means of an X-ray? Can you not see through it? Is it not pellucid ? It says, ” issued for cash.” It does not say paid for in cash. Is it not ” issued for cash” when it is issued for the promise of cash? and is it not issued for property or services when it is issued for the promise of such commodities? And if the gold bugs, bond- holders and other octopi, should render it hard to redeem your promise to pay for your shares – even in chips and whetstones, – why should you so pay? You have launched your corporation; the sovereign laws of Delaware allow you to commence business before any “sum whatever was paid in; ” and who or what is going to stop you from continuing your business? Do you not see that here is a scheme to turn the world into a sudden millennium? And if you object that a millennium must consist of a thousand years and cannot be created in a day, the answer is that all things are possible with the sovereign State of Delaware. What were the dreams of the ancient alchemists to this? They at most could, by processes somewhat tedious and expensive, convert gross metal into gold. But, without any gross metal of any kind to work upon, not even silver at the ratio of 16 to 1, the sovereign State of Delaware stretches forth her wand over the prairies of Kansas and calls upon money to come, and it comes.” (p.424)
What the irritated attorneys have described here is the central magic of finance, generally, and corporate finance, in particular. With some law and a bit of market faith – and a willingness to grift – you can conjure something out of nothing, and profit. Devolving sovereign power onto private parties who derive artificial persons, and then mortgage those “persons’ ” future cash flows for current income to actually do something (well, sometimes) – That’s Capitalism, Baby! If it feels like fraud, well, you probably don’t sit on the right corporate boards.
This is all to say that criticism of those would weave this kind of spell – and of Delaware legislators’ meddling in its magics, specifically – is nothing new in 2024. The First State’s legislators been catching heat for playing sorcerer’s apprentice, and carrying water for outside financial interests, for a very long time. Maybe they should get used to it? (Or, I dunno, change their ways?)
Note: for further discussions of this article, and critiques of Delaware law generally, see: “Law for Sale: A Study of the Delaware Corporation Law of 1967,” University of Pennsylvania Law Review 117, no. 6 (April 1969): 861–98, and Hal Weitzman, What’s the Matter with Delaware?: How the First State Has Favored the Rich, Powerful, and Criminal―and How It Costs Us All (Princeton, NJ: Princeton University Press, 2022).
Dael A. Norwood 