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Many people know that Delaware is the most popular jurisdiction in which to incorporate or to organize most forms of businesses. The reasons for Delaware’s advantages over other jurisdictions are hard to pin down. There is a general feeling that Delaware law is more modern or otherwise favorable to businesses than that of other jurisdictions.

What many people do not know is that the second most popular jurisdiction for New York Stock Exchange listed companies is Maryland. A number of knowledgeable lawyers prefer Maryland’s law to Delaware’s, not only for REITs and investment companies, where Maryland has a special statute in the one case and special statutory provisions in its corporate code in the other, but for ordinary corporations or other business entities, as well. Let’s examine some of the principal differences between the business laws of the two jurisdictions.

Cost. Filing fees and related costs are roughly comparable in both jurisdictions. Maryland has no franchise tax. Delaware has an annual franchise tax based on authorized capital ranging from $75 to $180,000.

Case Law. One of the reasons often cited to use Delaware law is that there are Delaware cases resolving so many corporate law issues. Further, since Delaware has a special court which handles business law matters, the expectation is that Delaware judges have a better understanding of these issues than the courts in other jurisdictions. Indeed, many courts around the country do rely on Delaware cases with respect to matters of first impression in those states. Maryland also now has a special court that hears business law cases, although the Maryland court, which is relatively new, does not yet enjoy the prestige or stature of Delaware’s.

As to the law, in some instances Delaware law is more flexible and management-friendly. For example, a Delaware limited liability company agreement may eliminate fiduciary duties owed to members, except that the implied contractual covenant of good faith and fair dealing may not be eliminated. On the other hand, in the limited partnership area there is one important Delaware case that is not management-friendly. In re USACafes, L.P., 600A.2d 43 1991 Del. Ch., held that directors of a corporate general partner owe a fiduciary duty to the limited partnership and its limited partners, not just to the stockholders of the corporate general partner. There is no comparable Maryland case, although it may well be that a Maryland court would hold the same way.

Relationship with Legislature.  The Maryland State Bar Association has a good relationship with the Maryland General Assembly, most of whose members are lawyers. As a result, the Maryland Bar can suggest updates and other important changes to the General Assembly and, eventually, the Bar’s suggested changes to the business laws are usually enacted. No jurisdiction in the country, however, has the close relationship between the Bar and the legislature that Delaware has established. As a result, the Delaware Bar’s suggestions to the Delaware General Assembly are considered quickly and usually enacted in some form or another.

Specific Statutory Provisions. Although there are differences in the provisions of the business law statutes of the two jurisdictions, the differences are, for the most part, not material. For example, in Delaware, stockholders can never be divested of the power to amend bylaws; in Maryland they can be. Maryland has a statutory standard of conduct for directors; Delaware’s standard of conduct is mostly case law driven. Both jurisdictions have broad indemnification and limitation of liability provisions. Delaware has no prescribed officers; Maryland requires a president, a secretary and a treasurer.

The Bottom Line. So which jurisdiction has the best law? In my view, unless there is a case specific reason to the contrary, the laws of both jurisdictions are sufficiently favorable so that a practitioner should feel comfortable choosing either. On the other hand, if a company is being formed that expects substantial funding from outside sources, or a forthcoming merger or public offering opportunity, Delaware is probably the best choice, since Delaware law is likely to be more familiar to venture capitalists, investment bankers and other outside sources of capital.

As always, please feel free to contact me for additional information.