The fight for bragging rights over the best incorporation laws is on-and longtime champ Delaware has some competition.
Concerned about lost revenue and pride, states stretching from Nevada to Maryland have made their own corporate governance laws more business- friendly so that banks and other companies incorporate in their home states.
In particular, officials are trying to give corporations more power to defend themselves against hostile takeovers and shareholder activists, the current bane of many community banks.
"The advantage to being in Delaware no longer exists, because of changes in the Maryland law," said Hunter Hollar, chief executive officer of $1 billion-asset Sandy Spring Bancorp, Olney, Md.
What used to be an easy decision for many bank holding companies-where to incorporate-now requires more careful thought, attorneys agreed. Some banks have even switched states long after initial incorporation to take advantage of changes.
"We used to use Delaware law for all our holding company charters 10 years ago," said David Baris, an attorney at Bethesda, Md.-based Kennedy & Baris and executive director of the American Association of Bank Directors. But "a lot of states have modernized their corporate governance laws, so we don't automatically go to Delaware. There's a lot more choice than there used to be."
In fact, a bank's home state now might provide the same benefits and level of protection as Delaware, or might even have special benefits Delaware doesn't.
Take the case of Sandy Spring Bancorp. Sandy Spring National Bank originally incorporated its holding company in Delaware, but officials reincorporated it in their home state in 1992 after comparing the pros and cons.
Banks have even turned to third states, which are jockeying with Delaware in promoting themselves as the place to incorporate. "Yeah, there are a few states that are giving Delaware a run for its money," said David J. Block, an attorney at San Francisco's Leland, Parachini, Steinberg, Flinn, Metzger & Melnick.
First Federal Bank of Colorado, Lakewood, also found its home state to be attractive. First Colorado Bancorp, formed in 1995, was originally to be established in Delaware, but that plan was abandoned because Colorado changed its securities and corporate governance laws to nearly match Delaware's.
"We feel very comfortable with what they have here," said Malcolm E. Collier Jr., chairman and chief executive officer of $1.5 billion-asset First Colorado, the state's largest thrift holding company. Incorporating in Colorado was "pretty similar, and cheaper," he said. "We don't have to pay all the extra fees that we would have" in Delaware.
And Tacoma, Wash.-based Columbia Banking System, which is incorporated in its home state, never considered Delaware, even though Washington State is "not on a par with some of the other states, like Delaware," said president William Philip.
"We just felt we wanted to be incorporated in our home state," he said. "That drove our decision." In other cases, community banks still must decide whether a public relations boost from incorporating at home is more important than corporate needs, said Richard Schaberg, attorney at Thacher Proffitt & Wood in Washington. "If you analyze the corporate-law benefits, Delaware in most cases will be superior," he said.
Much of that historic advantage has been centered around Delaware's business-friendly tax provisions and stronger protections for management and boards of directors. In addition, an array of legal decisions in the state's Chancery Court have thoroughly tested and interpreted the state's laws over time, while questions remain unanswered about laws in other states.
Also, because of Delaware's pro-business tradition, its courts and bureaucracy have become very efficient at dealing with legal business issues. "It's been a home for corporations for many, many years, and the procedures work well," Mr. Baris said.
But to stem the outflow of business, states such as Nevada, Maryland, Ohio, and Pennsylvania have slashed taxes and modified their business codes to allow stronger antitakeover defenses and limit directors' liability. Many are also trying to clarify laws on how corporations can deal with aggressors.
Ten years ago well over half of all banks chose Delaware incorporation, but now less than half do, Mr. Baris estimated. "The differences then were more significant," he said.
