Delaware re-incorporation and entity conversion just got easier

Startup companies sometimes need to re-incorporate in Delaware if they did their incorporation in a state where corporate law is deemed less friendly to business operations or investments. Other times, it is the legal structure which has to be changed (say from an LLC to a C Corp).

Brad Feld has started a useful set of posts on the topic a while back, and just mentioned that both changes got easier in Delaware:

The first innovation (Section 265 of DCGL – Delaware Corporate General Law) creates a simpler process for the reincorporation of non-Delaware corporations in Delaware (through a one-step "conversion" rather than through the traditional but cumbersome reverse merger of the non-Delaware corporation into a wholly-owned Delaware sub.) In English - if you are incorporated in a state other than Delaware and want to reincorporate in Delaware - it's now a lot easier.

The second innovation allows for the one-step conversion of non-Delaware limited liability companies into Delaware corporations.  These conversions/reincorporations have historically required 2 steps - for instance, an Ohio LLC would be merged into a newly-formed Delaware LLC, and then that Delaware LLC would be converted into a Delaware corporation.  Now you can go from an Ohio LLC to a Delaware corporation in one step.  This eliminates one of my main objections to LLC’s that I wrote about in S-Corp’s vs. LLC’s.

A California incorporation is acceptable for most startups, but VCs will sometimes ask for the company to re-incorporate in Delaware. It is therefore good news that it got easier, which hopefully means cheaper as well.

Comments

[Franck Poisson]

Maybe a stupid question, but why the SF Bay and the Valley start-ups do not register a DE directly, avoiding the costs of a DE re-incorporation later on ?

[Jeff Clavier]

Frank> I have asked the man himself, David Hornik, what his views were on this matter. Here is his feedback:

As a general matter, the laws of Delaware are clear, predictable and well established and therefore better suited for corporate citizenship. When I was a lawyer I always advised my clients to incorporate in Delaware. Among other benefits, there is a simpler, quicker process for mergers of Delaware corporations. And, as a general matter, Wallstreet prefers taking Delaware companies public. I never quite understand when a company is incorporated in California. I wouldn't do it.