August 19, 2019

August 19, 2019

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Does Incorporation In Delaware Constitute "Abuse Of The Corporation"?

Until I happened upon a working paper by Professors Martin Gelter and Lécia Vicente, I had not encountered the notion of abusing a corporation merely by choosing where to incorporate it.  The authors describe abuse as follows:

"Abuse of law is sometimes understood to refer to a situation where someone employs a legal entitlement to gain an advantage.  In doing so, this person follows the letter of the law, but not its spirit.  In other words, the legal entitlement is used not for the purpose for which it was intended.  Abuse thus introduces a corrective element to the purely literal application of the law."(footnotes omitted). 

The authors go on to explain that the question of abuse has been raised in the context of Court of Justice of the European Union (CJEU) cases on the freedom of establishment of companies.   Although the article is focused on the European experience, it does describe California's principal statutory effort to prevent the abuse of corporations by incorporating in Delaware and the Delaware Supreme Court's decision in VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108 (Del. 2005). 

Abusive vel non, the authors conclude: "Overall, it seems that the CJEU’s case law has left us with a vision without a need for a doctrine of abuse". 

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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