They are corporate giants, employing thousands of Connecticut residents at their headquarters and generating hundreds of millions in tax dollars each year.
But much of the tax revenue paid by Connecticut’s largest corporate citizens goes to a tiny coastal state south of New Jersey. Among the largest U.S. companies that do business in Connecticut, more than half, including General Electric and United Technologies Corp., are registered as Delaware corporations. As a result, much of their litigation is handled in Delaware state courts, resulting in lost dollars for Connecticut and its corporate lawyers.
“There are only a few publicly traded companies that are registered in Connecticut,” said John Lawrence, a corporate lawyer with Shipman & Goodwin who is chair of the Connecticut Bar Association’s Corporate Law Practice Section. Lawrence understands why the Connecticut companies look south. For instance, he said, Delaware’s courts are skilled and efficient at dealing with corporate law issues.
But he and other corporate lawyers in Connecticut don’t like losing business to Delaware. “I think there’s a general feeling within the section and the business law community that Connecticut is not a very friendly place to do business,” Lawrence said. “I think it’s largely governmental, and there are infrastructure and regulatory issues as well that we could do better on.”
Connecticut is fighting back. For the first time, the legislature is taking concrete steps, in the words of state Rep. William Tong, to “be more like Delaware,” In a measure signed by Gov. Dannel Malloy on June 5, a new entity called the Commission on Connecticut’s Leadership in Corporation and Business Law is being created to look at ways Connecticut can challenge and even overtake Delaware as the top place for corporations to incorporate and do business.
“We are very supportive of this,” Lawrence said. “Rep. Tong met came to one of our meetings to explain the concept and it was greated with a great deal of ethusiasm.”
Under the new law, the 17-member commission will be comprised of leaders from the bench, bar and legislature. The commission is charged with developing and recommending new policies to encourage businesses to incorporate here and to adjudicate their legal matters in Connecticut courts.
The commission will be comprised of the CBA business law section chair, the commissioner of Economic and Community Development, the chief court administrator, the co-chairs of the legislative Banks, Commerce and Judiciary committees, six legislative designees and one member appointed by the governor. A chair will be selected once the membership is determined.
Another goal of the commission will be to make the Secretary of the State’s Office, which is the custodian of all corporate records, to be more user-friendly for corporations and lawyers. Delaware’s secretary of state stays open until midnight Monday through Thursday, and until 10:30 p.m. on Fridays.
Lotstein said more important than extended office hours in Connecticut would be improved access to “corporate records online immediately, without having to submit a request and wait for days to do a lien search or look up a pending transaction.”
The commission will consider changes that might improve attorney access to corporate records when it submits a 10-year action plan for making Connecticut “a highly desirable location to organize a business” to the legislature by Oct. 1, 2015.
Tong, the main sponsor of the legislation that created the committee, is the Banks Committee co-chair as well as a commercial litigator with Finn Dixon & Herling. He said the establishment of a special court docket with judges knowledgeable in corporate law would be a vital piece of the puzzle.
The approved legislation calls for the creation of a special court docket “with exclusive jurisdiction over business entity organizations, shareholders, securities … and transactions involving the sale or transfer of ownership interests” in corporations.
Tong said he began pushing for the law when he began to realize that “whenever a company looks to change their state of incorporation form their home state, that almost always choose Delaware.”
More than half of the nations’ companies are incorporated in Delaware, reaping more than $850 million for that state in annual taxes, Tong said. “The Delaware General Corporation Law is widely regarded as the most well developed and stable business law in the nation, and a highly regarded legal system has grown up around Delaware,” he said. “I started to ask, ‘Why can’t Connecticut be better, or least closer to Delaware?”
Connecticut has many things going for it in terms of attracting businesses to incorporate here, Tong said.
“I am confident that Connecticut can supplant Delaware as the most business-friendly state in the nation,” he said. “We’ve got a highly educated and productive work force [and] great universities. We have several key industries already here, including financial services. We have a great judiciary and a great court system, so I don’t see why Connecticut can’t come up with a plan where Connecticut can at least rival Delaware, if not exceed it.”
James Lotstein, a corporate law partner with Edwards Wildman Palmer in Hartford, said there are several differences between the Connecticut Business Corporation Act, which got its last substantial update in 1997, and the Delaware General Corporation Law.
For one thing, Delaware relies on its own established caselaw, while Connecticut is one of many states that base their corporate law on a model act established by the American Bar Association.
On the one hand, when the ABA changes the model law, it can take Connecticut lawmakers two years or more to make changes to state corporate laws. But on the plus side, attorneys say, is that the Connecticut Business Corporation Act contains more specific guidance to corporations and their lawyers and is ultimately more flexible.
“While Delaware has a significant body of corporate caselaw and judges who are expert in matters of corporate law, there is not always universal agreement with the decisions of those courts,” Lotstein said.
There are, of course, other differences between the states. According to a recent report by the Connecticut Office of Legislative Research, Connecticut’s corporate income tax rate is lower than Delaware’s (7.5 percent versus 8.7 percent). But Connecticut imposes a 20 percent surcharge on corporate income as well. That surcharge is set to expire in 2015, and the commission being created will discuss whether to propose business-friendly changes to Connecticut’s tax code.
Lotstein said he and other corporate lawyers are supportive of any measures that will attract more businesses to the state and boost the demand for legal services.
“The reason Delaware is considered to be corporation friendly, and many corporations are drawn there, is that people have a great deal of faith in Delaware judges to be sophisticated and educated and to reason through complex legal questions in very short order,” Lotstein said. “If the [Connecticut] Judicial Branch were to establish a court to handle corporate law matters, I think all of us would applaud that.”
In Connecticut, the best current venue in a corporate law matter, such as a lawsuit involving a merger or acquisition, is often the Complex Litigation Docket. But Lotstein said even the docket’s most experienced judges aren’t all experts on business matters.
“I’ve been involved in class action shareholder suits following the sale of a public company with clients of mine in Connecticut, and you’re hoping the case will be put on the Complex Litigation Docket so you will be dealing with a court that is experiences in that area of the law,” Lotstein said. “But that’s not assured. It would be great to have a court that has people who are devoted to resolving these kinds of cases.”•