State’s ‘Small Wonder’ Is Big Corporate Role : As Home to So Many Fortune 500 Companies, Delaware Has Legal Muscle in Takeover Fights

PHILADELPHIA —  Although Delaware is one of the nation’s smallest states, it is one of the mightiest when it comes to U.S. corporate law. More than half of the Fortune 500 companies are incorporated there.

In the last 2 weeks alone, Delaware, whose tourism slogan is “Small Wonder,” has flexed its legal muscle in several big takeover fights.

Monday, the Delaware Chancery Court gave Pillsbury Co. a hand in fighting an unwanted $5.23-billion bid by Britain’s Grand Metropolitan PLC. The court denied Grand Met’s motion for an order stopping Pillsbury’s anti-takeover “poison pill” plan.

Last week, the Delaware Supreme Court paved the way for British publisher Robert Maxwell to win his bitter $2.5-billion battle for Macmillan Inc., the New York-based publishing and information services company. The court blocked a takeover of Macmillan’s white knight, Kohlberg Kravis Roberts & Co., the leveraged-buyout firm.

Also last week, the Delaware Chancery Court stopped its earlier order that Interco Inc. dismantle its poison-pill defense. The move gives Interco a reprieve from a threatened takeover by the Rales brothers while it appeals to the Delaware Supreme Court.

Although Delaware courts have figured prominently in several highly publicized takeover fights in recent years, the state’s pre-eminence in corporate law dates from the early 1900s. That was when it replaced New Jersey as the state of choice for incorporation after New Jersey’s trust-busting governor, Woodrow Wilson, tightened that state’s lenient incorporation law.

The rush to incorporate in Delaware was initially fueled by the state’s relatively relaxed incorporation rules. But as other states developed similar laws, Delaware secured its lead through the development of a specialized judiciary and an extensive case law, legal experts said.

Incorporated in Delaware are 56% of Fortune 500 companies and 45% of New York Stock Exchange-listed firms. Incorporation fees account for about $160 million or 16% of Delaware’s yearly revenues.

At the heart of Delaware’s business law structure is its unique chancery court, a throwback to a medieval English court. The four-judge court specializes in business cases and wields great influence through its power to issue injunctions and temporary restraining orders against corporate maneuvers.

John Coffee, a Columbia University corporate law professor, said that corporations “may not like all decisions that come out of chancery court, but they respect it for its in-depth knowledge of corporate law.”

Lewis Black, a corporate lawyer for 20 years in Wilmington, Del., said out-of-state lawyers are grateful that, when arguing before a chancery court judge, “they don’t have to explain what a share of common stock is.”

Given the court’s deliberations and rulings often moving financial markets, its office and two small courtrooms in downtown Wilmington are regularly besieged by reporters and lawyers and representatives for arbitragers, speculators in shares of takeover targets.

The concentration of business cases in Delaware has also produced a powerful local corporate bar, which takes the lead in updating Delaware business law and has acquired a national reputation in legal circles despite its small size.

“It’s a remarkable situation,” Coffee said. “Wilmington is this hothouse of corporate law despite being essentially in the middle of farmland.”

With state law requiring the use of local lawyers in all corporate cases in Delaware, the few top corporate lawyers in the state tend to participate in many of the hundreds of cases fought each year in Delaware.