The Delaware general corporation has had the strongest type of company structure in the United States since the late 1800s.
At that time, major entities, such as the railroads, Standard Oil and The DuPont Company, needed to arrange themselves into organizational structures that could provide for the governance of the companies once they had grown beyond their famous founders.
The general corporation is perfectly designed as an entity for engaging in business, yet it also provides a way to raise capital, as needed, throughout the life of the company.
In its simplest form, the general corporation has three tiers of power: the shareholders, the directors and the officers. The shareholders own the company; the directors manage the company; and the officers run the company on a day-to-day basis.
The bylaws of the company set forth the powers and the limits of power in each of the three tiers. Each group may have separate priorities, and they may clash occasionally.
When one tier rises up against the others, a takeover battle may ensue; takeover battles are usually fought and resolved in the Delaware Court of Chancery.
In this unique business court, a single judge decides the case—there are no juries, no tribunals and no 12 angry men. One judge determines—quickly—which party shall prevail, according to 200 years of laws and legal precedents.
It is said that the Chancellors of the Court respect the good faith decisions of directors over the profit priorities of shareholders, but a majority of shareholders can generally elect a new Board of Directors if they don’t like their current directors.
The rules on how these three tiers interact with each other are embodied in three general knowledge bases. The code, which is the written law passed by the state legislature (in this case, the Delaware General Corporation Law).
The case law, handed down by the Delaware Court of Chancery and the Delaware Supreme Court over the past 200 years; and Letter Rulings, which are individual, judicial decisions on a myriad of minute details that come up in court cases.
Stockholders are granted two rights that directors and officers are not permitted: the right to vote for the Board of Directors and the right to share in the dividends of the company when the directors declare dividends.
The shareholders, however, cannot operate the company; they cannot walk in and start telling people what to do. They act as a group, in a meeting, not individually. (Unless one person owns more than 50% of the company, in which case s/he could control the entire company and all three tiers of power.)
The Board of Directors also acts as a group in meetings. Directors generally do not act individually. Meetings must be announced in advance, to all Directors, and each meeting much be attended by a majority of directors in order to be a legal meeting.
The Board of Directors makes all the important decisions in the company; it is responsible for company policy and overseeing the managers.
The directors determine what the company will do with its profits, and they control the sale of stock in the company. They hire the officers of the company to run the business on a day-to-day basis.
The officers work at the pleasure of the Board of Directors, or by contract with the Board of Directors. Officers are usually the President, Vice President, Secretary and Treasurer, but the company’s bylaws can prescribe any officers and their titles, responsibilities and duties.
Officers are responsible for the conduct of the company as well as the profitability. If they fail, they usually get fired, quickly; if they succeed, they become superstars.
This unique structure, with its three mandatory tiers of power, deserves a great deal of credit for the success of the American Industrial Revolution, the American economy (since 1900) and the success of Wall Street itself.
This structure differs greatly from other forms of company organization, such as the sole proprietorship or the partnership, both of which precede it, as well as the LLC, which followed it chronologically.
If your vision is to form a big company, like Apple, Google or Dell, you couldn’t pick a better corporate organizational structure than a Delaware general corporation.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.
There is 1 comment left for Delaware General Corporation StructureLaura Bushby said: Saturday, July 28, 2018
Please advise me concerning my common stock value and or dividends to be paid for Col.Com Corporation. I own common shares but have no communication with said company.HBS Staff replied: Friday, August 10, 2018
Laura -- Ownership of stock typically provides the holder with a share of the entity’s profits and gains, normally through the receipt of dividends. If there is no communication with the company, you may want to consider working with an attorney to help rectify the situation.