From New York to Delaware: The Process of Redomesticating a New York Corporation
It is a common story we have heard from many emerging company clients: a young New York-based entrepreneur wants to start a company. The entrepreneur decides to incorporate his or her company in New York, believing New York to be the most obvious and best logistical choice because New York is where they are based, where the operations of the company, including its employees, offices etc. are to be based, and, not to mention, because of the many opportunities, diverse talent and creativity that has always attracted start-up companies to New York. Fast forward a couple of years, the company is starting to take off and has caught the eye of several institutional investors who are willing to invest in the company’s growth, however, before investing they are requiring the company to be incorporated in Delaware. Why? As many entrepreneurs will soon learn, Delaware is considered to be the “gold standard” among many for a corporation’s domicile. It is known to be business and management friendly, there is an extensive body of corporate cases for companies to refer to, it follows the “business judgement rule” regarding decisions of directors, and generally, the laws tend to be flexible and favorable for founders and their investors.
So then what options does this entrepreneur have since their company has already been incorporated in New York? The entrepreneur can redomesticate their corporation in Delaware. The good news is that redomestication in Delaware does not prohibit the company from continuing to do business in New York, as it can still have its offices, employees, and general business operations in New York. In a classic “best of both worlds” scenario, the company can continue benefiting from the convenience and robust network and talent that New York offers, while also reaping the benefits and protections that Delaware offers under its corporate law.
For a company that has already acquired assets and liabilities over the past few years as a New York corporation, the best option to redomesticate in Delaware is to perform a “short-form” merger between the New York corporation and a newly-formed Delaware subsidiary corporation. This process is described below.
How to Complete a “Short-Form Merger” Between a New York Corporation and Delaware Corporation
The best option for relocating a New York corporation to a Delaware corporation is to create a wholly-owned subsidiary of the New York corporation that is incorporated in Delaware and merge the parent New York corporation (the “Parent”) into the subsidiary Delaware corporation (the “Subsidiary”), leaving the Subsidiary as the surviving entity. This is generally called a “short-form merger” and is allowed under both Delaware and New York corporate law (Delaware General Corporation law (“DGCL”) §253; New York Business Corporation Law (“NY BCL”) §905, §907). The short-form merger option provides corporations with a relatively easy process of redomesticating an entity into Delaware, by allowing the Parent to unilaterally merge with its Subsidiary without requiring any shareholder or board approval at the Subsidiary level or requiring an agreement of merger between the two companies. The step-by-step process of a short-form merger in Delaware is detailed below.
Step 1: Forming a Delaware Subsidiary: The formation of a corporation in Delaware is standard and requires filing a certificate of incorporation with the Delaware Secretary of State. Please see Subchapter I of the DGCL for detailed instructions on forming a corporation in Delaware. In order to qualify for a short-form merger, the Parent must own at least 90% of all outstanding shares of the Subsidiary entitled to vote on such merger; however, it makes it simpler if the Parent owns 100% of the Subsidiary’s shares, because otherwise the merger documents must detail how the remaining 1-10% of shares not owned by the Parent will be distributed after the merger.
Step 2: Obtaining Necessary Authorization for the Merger: Once the Subsidiary has been formed in Delaware, the next step is to secure the necessary authorization from the Parent to approve the merger. The Parent should consult its certificate of incorporation and bylaws (collectively, its “Formation Documents”) to determine the necessary authorizations for such a merger. Notwithstanding anything to the contrary in the Parent’s Formation Documents, New York and Delaware law both require: (i) approval by the Parent’s board of directors, and (ii) approval by the holders of at least a majority of the outstanding shares of the Parent that are entitled to vote either by written consent or by a meeting duly called and held after 20 days’ notice of the purpose of the meeting (DGCL §253; NY BCL §905). The resolution of the Parent’s board of directors must include the terms and conditions of the merger, a provision for the pro rata issuance of stock of the Subsidiary to the Parent’s shareholders, and, in the event that the Parent owns less than 100% of the Subsidiary, the resolution shall set forth the consideration to be paid by the Subsidiary to the Parent’s minority shareholders upon surrender of their shares (DGCL §253).
Step 3: Filing Certificates with the New York and Delaware Secretary of State: The last step to complete the short-form merger is to file (i) a Certificate of Ownership and Merger with the Delaware Secretary of State, and (ii) a Certificate of Merger of [Parent name] into [Subsidiary name] with the New York Secretary of State. Both forms of certificates can be found on the state’s Secretary of State website and will include requests for information such as: the names of the companies completing the merger, a statement confirming that a majority of the Parent’s shareholders have approved the merger, a copy of the Parent’s board of directors resolutions, any amendment to the Subsidiary’s certificate of incorporation (including any name change), and any other important terms and conditions of the merger. The New York corporation does not need to be formally dissolved upon filing the certificates of merger with each state, however, the Delaware Subsidiary corporation will need to apply for a new EIN.
Step 4: Qualifying as a Foreign Corporation in New York: If the company wishes to continue freely conducting business in New York and have full access to the New York court system even though its domicile is now Delaware, it can easily do so through submitting a fee and application to the New York secretary of state to register as a foreign entity.
It should be noted that there is one more option besides a short-form merger that is available to New York companies who wish to redomesticate in Delaware. If the corporation was recently incorporated in New York and does not have any assets or liabilities, then the corporation could simply dissolve its New York corporation and form a new corporation in Delaware. However, we do not suggest this approach for corporations who have already acquired assets and/or liabilities because there are tax consequences that then need to be addressed before dissolving the New York corporation.
Lastly, some entrepreneurs may have heard of the simple statutory conversion or domestication process that easily allows companies to re-domicile by submitting an application to transfer its domicile over to a new state. While this is the simplest and most cost-effective way to redomesticate a corporation, this process only works between states that both allow for such redomestication. Although, Delaware law does allow for statutory conversion, New York law does not. Therefore corporations looking to redomesticate in Delaware from New York cannot do so through statutory conversion and must do so through the processes described above.