Why Does One Tiny State Set the Rules for Everyone? (Update)

Summary

Freakonomics Radio Episode Summary: "Why Does One Tiny State Set the Rules for Everyone? (Update)"

Release Date: July 23, 2025 | Host: Stephen Dubner

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Introduction

In this enlightening episode, Stephen Dubner delves into the peculiar dominance of Delaware in the United States corporate landscape. Despite being the second smallest state by area and the sixth smallest by population, Delaware hosts approximately 1.8 million companies, including two-thirds of the Fortune 500. This episode serves as an updated exploration of the original topic, shedding light on recent developments and ongoing debates surrounding Delaware's corporate franchise.

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The Delaware Corporate Franchise

Hal Weitzman, author of "What's the Matter with Delaware?", provides the foundational understanding of Delaware's unique position. He explains that Delaware's corporate laws and business-friendly environment have made it the go-to state for incorporation.

Hal Weitzman [06:21]: "If there's one overarching theme of what makes Delaware so attractive, it's probably efficiency. I've got nothing against efficiency, but what is the cost of efficiency. That's the only question I ask."

Delaware's appeal stems from its specialized Court of Chancery, favorable tax policies, and streamlined incorporation processes.

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Benefits and Attractions of Delaware Incorporation

Several factors contribute to Delaware's allure for corporations:

1. Efficient Incorporation Process:

   • Hal Weitzman [06:57]: "You can set up a Delaware company remotely on the Internet without giving any verified information. And if we pay the right fees, we can get it done in as little as half an hour."

   This ease of setup attracts a vast array of businesses, from giants like Google and Amazon to smaller LLCs.

2. Corporate Secrecy and Anonymity:

   • Hal Weitzman [07:38]: "Corporate secrecy... allows corporate anonymity. They have this don't ask, don't tell policy where you can set up a company. You don't have to say who's behind it."

   This feature is particularly appealing for entities seeking discretion.

3. Specialized Legal Framework:

   • Deneen Damon, a director with Richards, Leighton Finger, emphasizes the expertise within Delaware's legal system.

   The Court of Chancery offers a predictable and specialized venue for business disputes, enhancing corporate confidence.

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Costs and Implications of Delaware's Dominance

While Delaware's system offers undeniable benefits, Hal Weitzman highlights significant drawbacks:

1. Tax Avoidance:

   • Hal Weitzman [09:04]: "Companies have used a tax dodge called the Delaware Loophole, where they funneled profits through Delaware holding companies to avoid paying tax in other states."

   This loophole has led to a substantial decline in state corporate income tax receipts over the past five decades.

2. Facilitation of Illicit Activities:

   • John Cassara, a retired US Treasury investigator, discusses how Delaware's anonymity provisions aid money laundering and other criminal activities.

   • John Cassara [12:05]: "To be a money launderer and to be caught, and I don't care whether it's the United States or overseas, you would have to be really, really stupid or really, really unlucky."

3. Lack of Transparency:

   • Daniel Nielsen, a professor at the University of Texas, underscores the challenges in tracking beneficial ownership due to minimal disclosure requirements.

   • Daniel Nielsen [16:27]: "International standards require that you get photo ID of the beneficial owner. And in Delaware, registration is still highly anonymous."

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Case Studies Highlighting Delaware's Impact

1. Elon Musk's Relocation:

   • Following the invalidation of a $56 billion compensation package by a Delaware court, Elon Musk moved Tesla and SpaceX to Texas.

   This exodus signals potential vulnerabilities in Delaware's long-standing grip on corporate registration.

2. Victor Bout - The Merchant of Death:

   • John Cassara explains how notorious arms dealer Victor Bout utilized Delaware shell companies to launder money and mask illicit activities.

   • John Cassara [14:07]: "Bout and his organization established up to 10 shell companies in Delaware alone."

   This example underscores the darker side of Delaware's corporate anonymity.

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The Role of the Court of Chancery

A pivotal element of Delaware's corporate supremacy is its Court of Chancery. Travis Laster, a member of the court, elucidates its significance:

1. Specialized Jurisdiction:

   • The court exclusively handles business disputes, offering expertise that attracts corporations seeking efficient resolution.

2. No Juries and Precedent Setting:

   • Travis Laster [41:05]: "If your case is assigned to me, I'm it. I'm both ruler on the law and the finder of the facts."

   Decisions are made by judges, not juries, allowing for consistent and detailed legal opinions that guide future cases.

3. Predictability and Expertise:

   • The court's reputation for high-quality, technically sound judgments makes it a cornerstone of Delaware's legal infrastructure.

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Regulatory Capture and Legislative Influence

Hal Weitzman introduces the concept of regulatory capture, where the very experts shaping Delaware's laws have vested interests in maintaining the state's corporate-friendly environment.

Hal Weitzman [25:03]: "The Delaware Bar is very intimate... the laws in Delaware absolutely have formed the basis for some of the most monumental decisions."

Key points include:

1. Corporate Law Council:

   • A group of 27 lawyers craft and propose legislative changes in private, which are then swiftly approved by the state legislature without public scrutiny.

2. Resistance to Transparency:

   • Despite the Corporate Transparency Act passed in 2020 aimed at increasing ownership disclosure, Delaware lobbied to weaken its enforcement.

   • Hal Weitzman [19:12]: "They let companies register anonymously and require disclosure only a month later at the federal level."

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Attempts to Challenge Delaware's Dominance

Other states have made concerted efforts to rival Delaware's corporate franchise, albeit with limited success:

1. Nevada and Wyoming:

   • These states offer similar incorporation benefits but lack Delaware's established reputation and specialized legal institutions.

   • Hal Weitzman [34:26]: "Most people go for the real thing. Being a Delaware company means something. It's hard to recreate the reputation."

2. South Dakota:

   • In the 1980s, South Dakota challenged Delaware by introducing competitive financial regulations but failed to sustain significant corporate migration.

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Political Influences and Endorsements

Joe Biden, former US Senator from Delaware and current President, has historical ties to the state's corporate-friendly policies:

1. Legislative Support:

   • Biden consistently supported laws favoring credit card companies, many of which are incorporated in Delaware.

   • Elizabeth Warren [47:23]: "Joe Biden's energetic work on behalf of the credit card companies has earned him the affection of the banking industry and protected him from any well-funded challengers."

2. Personal Gain:

   • Hal Weitzman suggests that Biden's long tenure was bolstered by substantial donations from law firms benefiting from Delaware's system.

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Potential Reforms and Future Outlook

Despite its entrenched position, there are murmurs of potential reform:

1. Increased Transparency:

   • Voices like Travis Laster advocate for greater disclosure to mitigate illicit uses of Delaware corporations.

   • Travis Laster [42:26]: "No one wants Delaware corporations or alternative entities being used for money laundering or criminal activity."

2. Legislative Challenges:

   • Efforts to democratize and increase oversight of Delaware's corporate laws face significant hurdles due to the state's economic reliance on corporate registrations.

3. Global Implications:

   • Hal Weitzman [46:05]: "Delaware has set the rules that enable corporate anonymity, unlimited interest rates on credit cards, other elements of the corporate code... bypassing Democratic oversight."

   • Any reforms would require coordinated efforts beyond Delaware, addressing systemic issues in corporate governance and transparency.

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Conclusion

Delaware's unparalleled influence in the corporate world is a double-edged sword. While it provides efficiency and legal expertise that benefit countless legitimate businesses, it also opens avenues for tax avoidance and illicit activities due to its opacity and lack of stringent transparency measures. The episode underscores the complexity of reforming such a deeply entrenched system, highlighting the need for a balanced approach that preserves legal efficiency while enhancing accountability and transparency.

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Notable Quotes

• Hal Weitzman [06:21]: "If there's one overarching theme of what makes Delaware so attractive, it's probably efficiency. I've got nothing against efficiency, but what is the cost of efficiency."

• John Cassara [12:05]: "To be a money launderer and to be caught, and I don't care whether it's the United States or overseas, you would have to be really, really stupid or really, really unlucky."

• Travis Laster [41:05]: "If your case is assigned to me, I'm it. I'm both ruler on the law and the finder of the facts."

• Hal Weitzman [19:12]: "Only because Delaware doesn't want to add another question to its former who are you? And then ask its registering agents to verify that you are who you say you are."

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This comprehensive summary captures the essence of the episode, providing insightful discussions, expert opinions, and critical analyses that shed light on Delaware's pivotal role in shaping corporate America.

Transcript

[Stephen Dubner]

Freakonomics Radio is sponsored by WhatsApp. On WhatsApp, no one can see or hear your personal messages. So the calls with your mom, chats about the latest work drama, late night voice messages, and all those photos and videos of your dog. Every personal message stays private because no one, not even WhatsApp can see or hear your personal messages. WhatsApp message privately with everyone. Freakonomics Radio is sponsored by Dell Introducing the new Dell AI PC. Powered by the Intel Core Ultra processor, it helps do your busy work for you so you can fast forward through editing images, designing presentations, generating code, debugging code, summarizing meeting notes, finding files, managing your schedule, and responding to long emails. Leaving all the time in the world for the things you actually want to do. Get a new Dell AI PC starting at [e-mail] AI PC how those ahead? Stay ahead. Hey there, it's Stephen Dubner. For the past century, one small state Delaware has led the nation as the place where new businesses go to incorporate. Roughly two thirds of Fortune 500 companies are registered in Delaware. We thought this was worth looking into, so a couple years ago we published an episode called why does one Tiny State Set the Rules for Everyone? But recently, Delaware seems to be losing its grip. In 2024, a Delaware court invalidated a $56 billion compensation package for Tesla CEO Elon Musk, so he relocated Tesla's legal incorporation to Texas, along with another of his companies, SpaceX in Texas. And several other big firms have recently left Delaware, including Dropbox, TripAdvisor, and most recently, Andreessen Horowitz, the biggest venture capital firm in the world. 3 Andreessen Horowitz executives just published a post titled we are Leaving Delaware, and we think you should consider leaving too. Given this growing exodus, we thought you might like to hear our original episode. So here it is. As a bonus episode, we have updated facts and figures where necessary. As always, thanks for watching for listening. Walk me through your attraction to the Delaware story. When did that begin and how?

[Hal Weitzman]

When I was a financial reporter, all roads seemed to lead to Delaware.

[Stephen Dubner]

Elon Musk goes under the microscope in Delaware. Twitter is set to depose the Tesla CEO in Wilmington.

[John Cassara]

95% of the corporations that are incorporated in Delaware don't really do any significant business here.

[Stephen Dubner]

Evidence has been brought against Victor Boot for weapons trafficking in hot spots around the world that span Afghanistan, Colombia, Rwanda, Congo.

[Hal Weitzman]

So I had a vague understanding that Delaware was important, but not really why. And nobody else seemed to be asking that question.

[Stephen Dubner]

The truth is, most people don't Ask any questions about Delaware or even think about Delaware. It is the second smallest US state by area, the sixth smallest by population. It calls itself the first state since it was the first of the original 13 to ratify the Constitution. What else is it known for?

[Deneen Damon]

The Delaware beaches are absolutely spectacular. We have the Grand Opera House. We have the Dupont Theater. Delaware is a little hidden gem from that perspective.

[Stephen Dubner]

Delaware is also a gem if you were looking to hide something yourself.

[Hal Weitzman]

The whole system has enabled tax dodging, money laundering, the flow of dark money into the US political system, and the trafficking of people, drugs and arms.

[Stephen Dubner]

Delaware has established its own rules for how corporations incorporate.

[Hal Weitzman]

You can set up a Delaware company remotely on the Internet without giving any.

[Stephen Dubner]

Verified information for how legislators legislate.

[Hal Weitzman]

You, an elected lawmaker have no right to make laws. Only the unelected lawyers have the right to make laws.

[Stephen Dubner]

And even for how lawyers lawyer.

[Deneen Damon]

We're also known as a bar that operates in what I call the Delaware way.

[Travis Laster]

We're in the happy position where most lawyers in the country speak.

[Stephen Dubner]

Delaware today on Freakonomics Radio. How did one tiny state come to have so much leverage? And does anyone care enough to fix it?

[Hal Weitzman]

This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stephen Dubner.

[Stephen Dubner]

In 2022, Hal Weitzman published a book called what's the Matter with Delaware? How the First State Has Favored the Rich, Powerful and Criminal and How It Costs Us All. Weitzman also has a day job at the University of Chicago.

[Hal Weitzman]

I'm the editor in chief of Chicago Booth Review, where we take academic research and try to make it intelligible to a non academic audience. I also teach business communication.

[Stephen Dubner]

Before that, he worked for the Financial Times as an editor in London and as a foreign correspondent. During that time, he came to notice just how many companies, large and small, are incorporated in Delaware.

[Hal Weitzman]

Facebook, Visa, MasterCard, Verizon, Chrysler. We're all touched by Delaware all the time. Delaware is everywhere.

[Stephen Dubner]

Delaware, in fact, has more companies than people. If you look at the Fortune 500, roughly 2/3 of those companies are legally registered in Delaware. But only one of those companies, DuPont, is physically based there. So why is Delaware such an attractive legal home?

[Hal Weitzman]

What's interesting about that question is that when you ask people who know why do companies incorporate in Delaware, they typically have one response, and they're very sure that that's the real reason. So if you ask a lawyer, they'll say it's the Chancery Court because they have this special court that handles business cases. If you ask a tax fairness campaign, they might say, well, Delaware is a tax haven. That's why. And some people will say it's because it's so easy to set up companies there. So, Stephen, you and I could set up a company in Delaware before the end of recording this podcast.

[Stephen Dubner]

I actually set one up while you were starting to talk a couple seconds ago.

[Hal Weitzman]

I was gonna say we could do it while recording the podcast because we don't need to go there. We don't need to show any identification. We don't need to do anything other than pay the fees. And if we pay the right fees, we can get it done in as little as half an hour. In fact, since writing this book, I've been informed that if you call the right person, you can get it done in about 10 minutes. Did I mention they're open till midnight to process applications? What office do you know a government office that stays open till midnight just so they can be as business friendly as possible?

[Stephen Dubner]

Keep going. Are there other players who might give different answers?

[Hal Weitzman]

Yeah, there are. Corporate secrecy. Campaigner will say it's because they allow corporate anonymity. They have this don't ask, don't tell policy where you can set up a company. You don't have to say who's behind it. And then there's a whole load of sort of other, which is people who don't really know why they're incorporating in Delaware. They're just told lawyers, tell them that's the place to go. Or the people who are funding them tell them, well, if you want funding from us, we're a venture capital firm you gotta set up in Delaware. We only fund Delaware companies. And so you get these single answers, and all of these single answers are valid. There is no single simple answer because there are 1.8 million companies registered in Delaware, and they range from Google, Amazon, to Joe Schmo llc. So their motivations are not going to be the same. If I had to sew all this together, Stephen, I would say that if there's one overarching theme of what makes Delaware so attractive, it's probably efficiency. I've got nothing against efficiency, but what is the cost of efficiency? That's the only question I ask.

[Stephen Dubner]

Weitzman argues there are a lot of costs to Delaware's way of doing business.

[Hal Weitzman]

That's what I call the franchise, this kind of legal industrial complex.

[Stephen Dubner]

For starters, let's consider what Delaware's tax policy is costing other states.

[Hal Weitzman]

If you look at state corporate income tax receipts over the past 50 years, they've completely collapsed in partly because companies have used a tax dodge called the Delaware Loophole, where they funneled profits through Delaware holding companies to avoid paying tax in other states. And Delaware doesn't charge tax on so called intangible profits. So things like trademarks and slogans and.

[Stephen Dubner]

Firms have been creative in deciding what falls into that intangible profit category.

[Hal Weitzman]

Oh yeah. So one of my favorite examples of the so called Delaware loophole is WorldCom. If you remember, the telecoms company paid its holding company in Delaware $20 billion over just three years for an intangible asset, therefore avoiding tax elsewhere and not paying in Delaware because they don't tax intangibles.

[Stephen Dubner]

WorldCom, you may recall, turned out to be one big heap of accounting fraud in the early 2000s. The company blew up and its CEO went to prison.

[Hal Weitzman]

And the intangible asset it was paying for was management foresight. In other words, saying that the profits it was making were because its management had superior skill to all other executives and therefore that was an intangible asset.

[Stephen Dubner]

Well, if you come up with $20 billion to shuffle off to Delaware, it does suggest superior skill of one sort, doesn't it?

[Hal Weitzman]

You got good accountants. That's what it suggests.

[Stephen Dubner]

To be fair, the accountants have a lot to work with in Delaware. Let's go back to the ease of setting up a company there.

[Hal Weitzman]

It's easier to set up a company in Delaware than to get a library card in Delaware. If you want to get a library card, you need to turn up in person. You need to show a valid id. But you can set up a Delaware company remotely on the Internet without giving any verified information.

[Stephen Dubner]

And here is Dan Nielsen. He is a professor of government at the University of Texas at Austin who studies corruption.

[Daniel Nielsen]

No one's breaking the law by not demanding photo ID in Delaware because the Delaware law does not require it. So, you know, that's the problem.

[Stephen Dubner]

And why is that a problem? Because anonymity makes it a lot easier to hide illegal activity. John Cassara is a retired agent and investigator with the U.S. treasury Department. He spent years chasing money launderers.

[John Cassara]

There's lots of different definitions of money laundering, but the one I use is very simple. It's really hiding or disguising the proceeds of any form of criminal activity. It's drug trafficking, but it's also human trafficking. It's also arms trafficking. It could be the proceeds of child pornography.

[Stephen Dubner]

The way Kassara sees it, the kind of anonymity offered by Delaware makes money laundering pretty easy.

[John Cassara]

To be a money launderer and to be caught, and I don't care whether it's the United States or overseas, you would have to be really, really stupid or really, really unlucky. Now, there are of course, a lot of stupid criminals, and there are some unlucky ones, and we get them. But your odds of getting caught are slim and none. I've spent a lot of my time overseas doing training, talking about the importance of cracking down on money laundering. And I would invariably have a student or a colleague come up to me and say, yeah, Mr. John, I hear you, but we're conducting a money laundering investigation in my country, and it goes to your country, it goes to the state of Delaware. We can't get any information about this company. Can you help us? There was nothing I could do and I was just embarrassed. Just embarrassed.

[Stephen Dubner]

Now, to be fair, Kassara isn't talking about the big and mostly law abiding corporations that register in Delaware for the legal and tax advantages. He's Primarily talking about LLCs or limited liability companies. In 2023 alone, more than 200,000 new LLCs registered in Delaware. Many of these are perfectly legitimate operations that are simply exploiting the Delaware advantages. But Delaware is also known for anonymous LLCs, some of which are shell companies. Now, what's a shell company?

[John Cassara]

It's a company without an active business organization or significant assets. They're kind of hollow. And that's what frustrates criminal investigators so often. Because we're following the money trail, it often comes back to the US Delaware LLCs. And the problem is there's nothing there. We don't know who's actually behind the company.

[Stephen Dubner]

Let's have an example.

[John Cassara]

I think a lot of people are familiar with Victor Boot, or at least the name Victor Bout.

[Stephen Dubner]

Bout is a Russian arms dealer who in 2022, was released from US detention in a prisoner exchange.

[John Cassara]

The Biden administration exchanged Victor Bout. They released him in exchange for US Basket Start. Brittney Griner.

[Stephen Dubner]

Boot is known as the merchant of death.

[John Cassara]

Basically supplied, you know, long running civil wars in places like Sierra Leone and Angola and the Central African Republic and Sudan, Libya, and on and on and on and on. Now, to set up his network, Victor Bout and his organization needed to set up a number of shell companies to mask their work and to launder the money to launder the proceeds of crime. So I've seen some reports that Bout and his organization established up to 10 shell companies in Delaware alone.

[Stephen Dubner]

Here's the thing. The US prides itself on the legitimacy of its financial system. Legitimacy of this sort typically includes a high level of transparency. Yes, we do have financial frauds and opaque investments and bank failures. But we also have a ton of regulations, reporting and compliance and disclosure regulations designed to boost transparency. So how does the US Compare to other countries when it comes to transparency? Well, that is an empirical question. And for the answer we need to go back to Daniel Nielsen at the University of Texas.

[Daniel Nielsen]

I research international development broadly with a focus on the control of corruption, which brought me to this topic of anti money laundering.

[Stephen Dubner]

The world's foremost anti money laundering organization is called the Financial Action Task force. It has 39 members, including the U.S. its mission is to set international standards to ensure national authorities can effectively go after illicit funds linked to serious crimes.

[Daniel Nielsen]

These are the Financial Action Task Force recommendations. They're not laws. Right. They're what we call an international relations soft law. So there's no enforcement mechanism.

[Hal Weitzman]

Right.

[Daniel Nielsen]

It's not like there's some global police that can bust you and put you in handcuffs and take you away to global jail. That doesn't happen. But what they do have is the ability to set expectations. And there's lots of international standards. They're voluminous. One of the main ones we focus on is that you need to know who controls the companies that move that money, who is ultimately in charge of that company and that bank account. This is called the beneficial owner. And in order to make sure you can track that person, international standards require that you get photo ID of the beneficial owner. And so we just started with that. Just like, to what degree is this practice being followed?

[Stephen Dubner]

Nielsen, along with fellow researchers Michael Findley and Jason Sharman, conducted a massive experiment to learn where this recommendation was and was not being followed.

[Daniel Nielsen]

We thought the best way to learn is just to ask directly. We just created a bunch of false names from all around the world asking for shell companies, saying that confidentiality is important. I think it was like 7,500 emails that we sent. We kind of gave them a hint if we can get away with something here, we want to. We said, what's required? What documents do you need from us? And then they told us, you know, whether or not they required photo id.

[Stephen Dubner]

Nielsen and his co authors compiled their findings in a 2014 book called Global Shell Games.

[Daniel Nielsen]

We reported that the United States was the easiest place in the world to get an anonymous shell company, and the easiest place in the United States was Delaware.

[Stephen Dubner]

They replicated the experiment in 2019, and the results suggest it's still pretty easy to get a shell company in the U.S. nielsen is not the only researcher to find a result like this. In 2025, the UK based tax justice Network released a financial secrecy index which ranked the US Number one in the world as, quote, the most complicit in helping individuals to hide their finances from the rule of law. This is not a good look for any country. And over the years, some members of Congress have tried to address the problem.

[Daniel Nielsen]

The United States passed, I think, a landmark law, the Corporate Transparency act, in 2020. So that's pretty important legislation that requires that company owners, that we get photo ID for them.

[Stephen Dubner]

This law went into effect at the start of 2024. But in March of this year, the Trump administration announced that the law would not be enforced against US Citizens and companies. According to Hal Weitzman, Delaware was heavily involved in lobbying for this new law.

[Hal Weitzman]

Yeah, so the solution that we've come up with is rather than asking people at the point that they register the company, who's behind this company, we're going to let them register a company anonymously and then a month later they have to file another form with the federal government saying, who's behind the company. It's a bit like imagine, Stephen, imagine you got on a flight and you flew somewhere internationally and then a month later you had to send in a photocopy of your passport. It's a bit like that. And so when you ask transparency campaigners, what do you think we should do? They said just ask people at the moment that they incorporate who they are. You're going to register at the state level, but then you're going to identify yourself at the federal level a month later. Why would we set up a bifurcated system like that? Only because Delaware doesn't want to add another question to its former who are you? And then ask its registering agents to verify that you are who you say you are.

[Stephen Dubner]

Coming up after the break, how did Delaware get this kind of leverage and how do they keep it?

[John Cassara]

The bottom line is it comes down to money. Okay.

[Stephen Dubner]

I'm Stephen Dubner. This is Freakonomics Radio. We will be right back. Freakonomics Radio is sponsored by Mint Mobile. You know what doesn't belong in your epic summer plans? Getting burned by your old wireless bill. Mint mobile is offering three months of unlimited premium wireless service for 15 bucks a a month. All plans come with high speed data and unlimited talk and text delivered on the nation's largest 5G network. Ditch overpriced wireless and get three months of unlimited service from Mint Mobile for 15 bucks a month. This year, skip breaking a sweat and breaking the bank. Get this new customer offer and your three month unlimited wireless plan for just 15 bucks a month at mintmobile.com freak that's mintmobile.com/freak. Upfront payment of $45 required, equivalent to $15 per month limited time. New customer offer for first three months only. Speeds may slow above 35 gigabytes on unlimited plan. Taxes and fees extra. See Mint Mobile for details. Freakonomics Radio is sponsored by Amazon. Have you ever gotten sick on a very expensive, very non refundable family trip? AmazonOne Medical has 247 virtual care so you can get help no matter where you are. And with Amazon Pharmacy, your meds can be delivered right to your hotel fast. It's kind of like the room service of medical care. Thanks to Amazon, Healthcare just got less painful. Freakonomics Radio is sponsored by ebay. Picture this. You're halfway through a DIY car, fix tools scattered everywhere, and you realize you're missing a part. It's okay, because whatever it is, it's on ebay. Brakes, headlights, cold air intakes. Whatever you need. Guaranteed to fit. No more crossing your fingers and hoping you ordered the right thing. All the parts you need at prices you will love. Guaranteed to fit every time. Ebay Things people love okay, from what we've learned so far, the Delaware franchise, what Hal Weitzman calls the state's legal industrial complex, is valuable to legitimate corporations looking to profit maximize and to illegitimate players looking to dodge the law. But let's be honest, it is also incredibly valuable to Delaware itself.

[Deneen Damon]

The legal industry is very important to Delaware's economy.

[Stephen Dubner]

That is Deneen Damon.

[Deneen Damon]

I am a director with Richards, Leighton Finger, which is the largest law firm in Wilmington, Delaware.

[Stephen Dubner]

Wilmington is the biggest city in Delaware, but still it only has around 70,000 residents. That includes a lot of lawyers, many of whom Damon knows personally.

[Deneen Damon]

The Delaware Bar is very intimate. We're also known as a bar that operates in what I call the Delaware Way. That means you may be with different law firms and you may compete with other law firms for some of the same business, but at the end of the day, we're all moving in the same direction.

[Stephen Dubner]

And how influential is the Delaware Way?

[Deneen Damon]

The laws in Delaware absolutely have formed the basis for some of the most monumental decisions. When it comes to corporations, we are very protective of our laws.

[Stephen Dubner]

They are especially protective of what's known as the Delaware General Corporation Law. That is the statute that governs the companies that are incorporated in Delaware, which, as we've already heard, includes most big American companies. And what's involved in this protection so.

[Deneen Damon]

There'S a corporate council that is constantly reviewing the corporate statute, looking at how entities are used. Are there issues that have popped up through various court cases that might need to be addressed? Take for example, the use of electronic means. When these statutes were initially drafted, everything was done on paper. If you think about where we are now, most things are done electronically over the computer. So updating the statute over time to allow for electronic signatures and the filing of documents electronically, that's what the bar association committees are laser focused on doing. Making sure that that work is done in a very meaningful way, in a very consistent way, and also in a very timely way.

[Stephen Dubner]

As Hal Weitzman described it earlier, the Delaware franchise is an efficiency maximizer.

[Hal Weitzman]

Yeah, that's right. What it exemplifies is a kind of clubby system that is the Delaware way, heavy on backroom wheeling and dealing, scant on democratic oversight.

[Stephen Dubner]

As Weizman sees it, the chief crop of Delaware is corporate law.

[Hal Weitzman]

It exports corporate law all over the United States and all over the world. It sets the standard. That code is written by 27 working lawyers who are part of this corporation Law Council of the Delaware Bar. They meet in private and they issue proposed changes every year to the law. And then they present these often very technical proposals to the Delaware state legislature without any explanation, without any justification of why these changes are necessary.

[Stephen Dubner]

As I imagine the state legislators trying to assess the merits of this argument, and I've also read in your book that Delaware has the least well educated state house in the US With a pretty high share of lawmakers not holding a college degree and a very low level of lawyers in the legislature as well. I imagine this transaction as if someone brings to me the findings of a recent set of experiments about nuclear fusion and says, hey, Dubner, what do you think? Is that about what we're talking about?

[Hal Weitzman]

Yeah, I mean, they're told, these are the experts, here's the proposals, and they effectively rubber stamp them. The thing that I found interesting about the process is these are working lawyers. They appear in court, they argue cases under the laws that they themselves writing. So being in the University of Chicago, it brings to mind the work of the legendary UChicago Nobel laureate George Stiegler, who introduced the idea of regulatory capture. And in regulatory capture, interest groups come to control lawmaking and regulation of their own sectors. And then the regulators sort of become lobbyists for the industries they oversee. Delaware has kind of perfected that because the lawyers don't even need to lobby the legislature to change the corporate code. They just write it themselves and it gets rubber stamped. So the system's efficient, it's effective, it's just not democratic. There's no checks and balances. There's an interesting story that encapsulates this system. In 2017, there's a lawmaker in Delaware, now retired, a guy called John Kawalko, styled himself as the Bernie Sanders of Delaware. And John Kawalco proposed that Delaware should require agents who register companies to check the name of the companies against a list called the OFAC list, basically a list of organizations that the US has deemed to be terrorist organizations. This is a pretty non controversial proposal. In fact, it actually was adopted later by Delaware as a law. But when John Coelco tried to promote it, he was asked, has this gone through the process? Koalko says, what do you mean, what process? In Delaware, changes to the corporate code have to come from the Corporation Law Council of the Delaware Bar. In other words, you, an elected lawmaker, have no right to make laws. Only the unelected lawyers have the right to make laws.

[Stephen Dubner]

And these lawyers, Weitzman argues, inevitably make laws that protect and promote the Delaware franchise. He points back to the Corporate Transparency act, the federal legislation that Delaware pushed hard to shape, thereby preserving Delaware's right to allow companies to register anonymously.

[Hal Weitzman]

And why is it so resistant to knowing who's behind them? Because most companies will be perfectly happy to tell us who the owners are. So it's really just, well, who are we protecting? A tiny number of wrongdoers.

[Deneen Damon]

I think it's definitely an unfair label for us to have.

[Stephen Dubner]

Deneen Damon again for the defense.

[Deneen Damon]

The probability of bad actors using Delaware entities for nefarious purposes increases just by the sheer number of entities that are being formed on an annual basis. But I don't think that's a fair analysis. There is a rigorous process in place to form an entity in Delaware. You have counsel working with you to submit the proper documentation. It's not as easy, you know, to simply draft up three paragraphs, submit something to the state, and you're done. I think oftentimes people assume that because it's a relatively quick process, that it's also a relatively easy process. And those two are not analogous. It's a quick process because we have a system in place. The law firms here and the lawyers here are well versed, an entity creation. So we know what advice to give our clients. We know how to lead them through the process. This is what we do every day. This is what we do for a living.

[John Cassara]

The bottom line is it comes down to money, okay?

[Stephen Dubner]

That again, is John Casara, the former treasury investigator.

[John Cassara]

This is state government greed. That's the bottom line. They do it because it generates revenue and to a lesser extent, it generates some job opportunities. Now this is Delaware, but then you extrapolate that overseas and you've got all these little islands in the South Pacific or in the Caribbean or elsewhere. They don't really have much out there, but, you know, bat guano. And so what are you going to do? You got to get something to generate money. So they set up these financial havens, these tax havens, and, and it attracts money.

[Stephen Dubner]

It was Upton Sinclair who once said, it is difficult to get a man to understand something when his salary depends upon his not understanding it. In a given year, the Delaware franchise generates roughly $2 billion for the state. For a big state like New York or California, that would be a rounding error. But for tiny Delaware, that represents about one third of government revenues. That's one reason that Delaware levies no state or local sales taxes. And then there are all the jobs for lawyers, paralegals, administrative assistants, notaries, and all the other jobs supported by the money those people spend. So it's easy to see why Delaware has little incentive to impose transparency regulations or other regulations that might undercut its own franchise. Especially because they're lucky to have the franchise in the first place. Here's Hal Weitzman again.

[Hal Weitzman]

Delaware didn't win this industry because it had a better business model. It won it by picking it up from New Jersey, who bowed out.

[Stephen Dubner]

This requires a brief history lesson.

[Hal Weitzman]

So in 1888, New Jersey allowed holding companies where one company owns another. And then about a decade after that, they relaxed the rules a lot on corporate structures and what they could do. So by 1911, this had attracted a lot of corporations to set up in New Jersey. And the franchise tax accounted for about a third of their state revenue.

[Stephen Dubner]

That's the same share Delaware has today.

[Hal Weitzman]

And other states, including Delaware, copied them. But they just couldn't get market share until the election of 1913, when there was this interesting three ways contest for the presidency between Taft, who was the incumbent, Woodrow Wilson was the Democrat, and Teddy Roosevelt was the progressive candidate. And a big issue in that election was how to regulate corporations. And Teddy Roosevelt attacked Wilson in public, saying, you haven't reined in companies in your own state. How are you gonna do that in the United States? He was rattled by this. And when Wilson won the election, he went home to New Jersey, fired up in his lame duck session. His allies in the state legislature introduced a bill to ban holding companies, plus a host of other measures. And the corporations fled. New Jersey and Delaware, which had copied their law, was there to welcome them with open arms. Delaware is very aware of this history, and it wants to make sure that it doesn't do anything to jeopardize this source of revenue, as New Jersey did. And it's always aimed to stay ahead of any competitors by making itself as business friendly as possible.

[Stephen Dubner]

Are there any campaigns, either overt or covert, to steal the franchise from Delaware? Perhaps you, Hal, in your book, are part of some stealth campaign by some other state. I mean, your book is published by Princeton University Press, which is located in New Jersey.

[Hal Weitzman]

Well, I should say, first of all, I'm not paid by any state to provide any kind of services of that nature. There have been some attempts. Nevada is one state that has attempted to win this business, and Wyoming, another state that has attempted to win this business. How do they do it? By sort of being a cut price version of the real thing. They're kind of the private label cola, you know, and like private label cola. Some people like it, but most people don't.

[Stephen Dubner]

What about South Dakota? They show up in this realm now and again, don't they?

[Hal Weitzman]

Yeah. In the 1980s, there was an interesting battle between South Dakota and Delaware to win the admiration of financial institutions. South Dakota was the first state, I believe, to say, we'll get rid of interest rate caps for credit card companies. And there was a great concern at the time in Delaware that the credit card companies would just go South Dakota. And so they invited in two of the biggest Wall street names to rewrite their financial rules. And they did it in private, of course, because it's Delaware, nothing is public. It was all very secret. And then they introduced them to the legislature in the late afternoon, said, you got three hours to approve these. And nobody, of course, could understand what the hell they were reading. So it all got voted through, and that's how the credit card companies ended up in Delaware. But South Dakota was able to win the trust business. If you look at how much the trust business is worth in South Dakota is negligible. It's basically nothing because there aren't as many trusts, right? Whereas companies, they're all 1.8 million of them. It's a volume business, is kind of, you know, stack them high and sell them cheap.

[Stephen Dubner]

But also, Weitzman admits Delaware has become so good at being Delaware that the other places just can't compete.

[Hal Weitzman]

So most people go for the real thing. You know, being a Delaware company means something. It's hard to recreate the reputation. It's hard to recreate things like the Chancery Court.

[Stephen Dubner]

Coming up after the break, we will hear about the Chancery Court, perhaps the most special feature of the Delaware franchise.

[Travis Laster]

I do sit on a high bench with a robe on. Fortunately, we don't do wigs.

[Stephen Dubner]

I'm Stephen Dubner. This is Freakonomics Radio. We will be right back. Freakonomics Radio is sponsored by Southern Company. Southern Company knows that energy goes beyond turning on the lights. It's what spins those records you love, kickstarts your productive week and provides opportunity to your local community. Energy is health, connection and progress. It's what makes your possibilities possible. Southern Company is committed to ensuring your energy is there when you need it Most. Go to southerncompany.com to learn more. Southern Company Building the Future of energy. Freakonomics Radio is sponsored by Wells Fargo. This is an ad for the active cash credit card from Wells Fargo. That's a mouthful, but that's because it packs in a lot. Earn unlimited 2% cash rewards on purchases with it. So whether it's buying tickets to the game or grabbing a coffee, earn unlimited 2% cash rewards on purchases made with it. Let's say it together. The active cash credit card from Wells Fargo. Learn more@wells Fargo.com ActiveCash terms apply. Freakonomics Radio is sponsored by Ameca Insurance. They say if you want to go fast, go alone. But if you want to go far, go together. When you go with Amica, you're getting coverage from a mutual insurer that's built for their customers. So they'll help look after what's important to you together, auto, home life, and more. Amica has you covered at Ameca. They'll help protect what matters most to you. Visit amica.com and get a quote today. Okay. We promised we would tell you about one of the most special features of Delaware's massive legal industrial complex.

[Travis Laster]

My name is Travis Laster, and I'm here today because I'm a member of the Delaware Court of Chancery.

[Stephen Dubner]

And what is the Court of Chancery?

[Travis Laster]

Well, there's a short answer and a long answer. The short answer is we are one of the three constitutional courts of Delaware. We are best known as perhaps the nation's preeminent venue for deciding business disputes. The longer answer is that we're a court of equity, and I'd be happy to spell that out. If you want to hear the long.

[Stephen Dubner]

Story, let's hear the medium story.

[Travis Laster]

Sure. So a court of equity is an artifact of really, the Middle Ages legal system in Britain, if you think back to the 1300s, the reign of King Edward, the legal system in England had gotten very, very formal and fixed. They would only let you file a case if you could fill out a form called a writ and fill in the blanks. Precisely. If you were a wealthy member of the nobility, you had another recourse, and that was that you could go to the king. And the king had something better than the courts. He had soldiers. So he could send out his soldiers. And regardless of what the court said, his soldiers could either make you do something or they could make you stop doing something. So what happened was privileged people would access the king and the king got tired of hearing these petitions. But our kings in England had a right hand man and he was the chancellor. And so starting in King Edward's time, he would refer these petitions to the chancellor and the chancellor would make decisions about what to do with them. And so over time, what grew up was this separate system in England where there was a Court of Chancery headed by the Chancellor and eventually vice chancellors existing beside the court of law. And when the colonies were established, that system came over here. Now, let's fast forward. Most places in this country today do not have a separate Court of Chancery. There are only three states that have a separate Court of Chancery. Delaware, Tennessee and Mississippi. In most places, they said, why do we need two court systems? We're going to combine them. So why did it persist in Delaware? It persisted in Delaware because part of the traditional jurisdiction of the Court of Chancery is over fiduciary relationships. And fiduciary relationships include trustees, guardians, and similar relationships, like directors of a corporation. So that is the entry point for business jurisdiction in the Court of Chancery. And that's the entry point for Delaware being a special place and the court being a special place for hearing business disputes.

[Stephen Dubner]

One thing that makes the Court of Chancery especially special is there are no juries.

[Travis Laster]

If your case is assigned to me, I'm it. I'm both ruler on the law and the finder of the facts. And part of what our court is known for is putting out detailed opinions that not only resolve the case at hand, but also give people guidance for how to deal with the next situation. The other thing that I think people like about it is there's a know your jurist factor. So there are 10 members of the court. All of us are, for better or for worse, very well known, particularly to the Delaware practitioners. And part of the value you bring as a Delaware lawyer is to be able to, in effect, psychoanalyze your judge and be able to predict what they will do in particular situations. I know people are out there psychoanalyzing me in terms of every case.

[Stephen Dubner]

And what would such an analysis come up with?

[Travis Laster]

They're going to say that Lassiter doesn't have patience for people who make extreme arguments or things that just sound good, but you don't test them. They're also going to tell you to be completely transparent. Part of what we're trying to offer is high integrity, and part of high integrity is high transparency. And that extends to the litigants as well.

[Stephen Dubner]

So what does Judge Laster say about Delaware's reputation as a haven for anonymous LLCs and shell companies and money launderers?

[Travis Laster]

No one wants Delaware corporations or alternative entities being used for money laundering or criminal activity. If you made me US King for a day, I would require across the board some level of disclosure for all jurisdictions. What I think you have there is a first mover problem. This is one of those places where if Delaware starts requiring disclosure and nobody else is requiring disclosure, then that's a place where we could conceivably suffer harm to the franchise.

[Stephen Dubner]

And Delaware, as we have already noted, is not interested in suffering harm to its franchise. Does this mean the franchise itself is to some degree corrupt? A lot of people would say yes, to some degree. And what about the Court of Chancery here? Even Hal Weitzman is a defender.

[Hal Weitzman]

It has some quirks. It definitely operates in the interests of Delaware, But I'm not sure that that necessarily means that the judgments that it issues are not fair and well thought out and technically excellent. So the Chancery Court is a great advantage of Delaware. And once again, if it's really about the Chancery Court, then why do we need anonymous corporations, which almost by definition cannot appear in Chancery Court?

[Stephen Dubner]

Now, Hal, let me ask you this. As I hear you talk about the book, I see why this topic was so attractive. It's this bizarre den of anomalies that everyone kind of shrugs at. In a way, I'm curious why you wrote the book, other than the fact that it's a good story and you're a writer and that's what you do. Do you want this to serve as some kind of polemic or at least cautionary tale, or were you just telling the story?

[Hal Weitzman]

I think a bit of both. I am attracted to really interesting stories, particularly obscure stories, and this was one of those when I was writing this book. Do you ever get that moment when you're working on a story and you think, this can't be right. And I had a last minute panic because it's just so weird. So I called the Secretary of State's office in Delaware and said, just want to check how many companies, of all the 1.8 million companies registered in Delaware, how many are owned by people resident outside the US and how many are owned by US Residents? They said, we don't know, and there is no way of knowing. If you don't collect the information, then there's nothing to dig into. And that's sort of the dead end that investigators have always come up with when they're trying to pursue cases that lead to Delaware.

[Stephen Dubner]

Let's imagine for a moment that the franchise in Delaware were shut down, which is hard to imagine. It's so entrenched and it seems like it's got a lot of friends in high places and very few enemies, really, with any sort of leverage. But let's pretend just for a moment that it did happen. I am assuming that none of the activity that's facilitated there would stop. It would just find other willing hosts. You agree?

[Hal Weitzman]

Yes. And what that tells us is this is an American problem. It's not just a Delaware problem. But Delaware has set the rules. It set the rules that the world has to follow. It's set the rules that enable corporate anonymity, unlimited interest rates on credit cards, other elements of the corporate code. And it's done so in a way that has effectively bypassed Democratic oversight.

[Stephen Dubner]

Now, if I recall correctly, there was a longtime US Senator from Delaware named Joe Biden who then became President of the United States. What was his position on the Delaware franchise, as you call it? How much did he defend it and how did he benefit from it?

[Hal Weitzman]

Joe Biden did not create the franchise or the Delaware way, but he's very much a creature of that system in terms of his style. He's known for his belief in bipartisanship, his deal making. That's very much a Delawarean type way of approaching politics. In terms of his funding, throughout his 36 years in the Senate, his main donors were all big law firms that benefit from the system. And then in terms of his voting record, he led the efforts to tighten bankruptcy rules. Because of the credit card companies that are based in Delaware and their interests, states tried to put caps on how much interest credit card companies could charge. But the credit card companies, the big ones, are registered in Delaware, and because they're registered in Delaware, they were subject to Delaware law.

[Stephen Dubner]

And what is the cap that Delaware law established for credit cards, no cap. So if I am a credit card company and I register in Delaware, could I charge 300% interest?

[Hal Weitzman]

I don't think there's anything legally stopping you from doing that.

[Stephen Dubner]

So here's something that Elizabeth Warren wrote about Joe Biden in 2002. His energetic work on behalf of the credit card companies has earned him the affection of the banking industry and protected him from any well funded challengers from for his Senate seat. Does that seem like a fair assessment or do you think that's overstating it?

[Hal Weitzman]

He certainly was a strong defender of the interests of credit card companies on Capitol Hill. You remember there was a lender called mbna. They were the ones who came up with all the loyalty cards. So if you wanted to have a Chicago Bears credit card or a University of Chicago credit card would be issued by MBA Arnold Schwarzenegger credit card, whatever you wanted. So MBNA was a huge operator in Delaware and at one time Biden was teased. They teased him by saying he was the senator from mbna. And he reacted very badly and said, I'm not the senator from mbna. It obviously rattled him. And I think it rattled him because there was something to that.

[Stephen Dubner]

If you could sit down with Joe Biden and do a postscript to this book. He is, after all, the President of the United States. He is, after all, from the state that is the focus of this book, which has a lot of critical elements. What are the first few questions you'd want to ask him? Are you an American citizen?

[Hal Weitzman]

I'm not. I'm not.

[Stephen Dubner]

Okay, so they can't even take that away from you. You're free to say anything.

[Hal Weitzman]

Well, I've got a green card, so hang on a second.

[Stephen Dubner]

I bet I could get you a green card in Delaware in like five minutes. So that's rush.

[Hal Weitzman]

So I think he would say that the reason that it's in Delaware, this is the location of the experts that we have built an expertise. Illinois, you know, you grow corn. This is what we do.

[Stephen Dubner]

So this goes back to David Ricardo. This is what places do.

[Hal Weitzman]

Specialization. Exactly.

[Stephen Dubner]

Yeah. You make wool, I make textiles. Somebody else has salt.

[Hal Weitzman]

Yeah, we launder money. That's what we do. No, I'm just kidding. What we do is provide excellent legal expertise to companies around the world. You know what? They're not wrong. I don't have any beef with that particular aspect of what they do. It's not like I want to shut down the Chancery Court. It definitely has its place in corporate America. And there's no doubt that the expertise is there. I just think that the way that the experts are just given free rein is not democratic and it's not transparent. You know, one of the hard things about writing this book is nothing is broken now. I don't really want to break it. I just want to, you know, let a little bit of sunlight in.

[Stephen Dubner]

That was Hal Weitzman, author of what's the Matter with how the First State Has Favored the Rich, Powerful and Criminal and How It Costs Us All. And that's it for today's episode. I'd love to know what you thought of it or any of our episodes. Our email is radio freakonomics.com or you can leave a review on any podcast app. We will be back very soon with a new episode. Until then, take care of yourself and if you can, someone else too. Freakonomics Radio is produced by Stitcher and Renbud Radio. This episode was produced by Ryan Kelly and updated by Dalvin Abuaji. It was mixed by Jasmine Klinger. The Freakonomics Radio Network staff also includes Alina Coleman, Augusta Chapman, Eleanor Osborne, Ellen Frankman, Elsa Hernandez, Gabriel Roth, Greg Rippon, Jeremy Johnston, Morgan Levy, Sarah Lilly, Teo Jacobs and Zach Lipinski. You can find our entire archive on any podcast app. [e-mail] where we publish transcripts and show notes. Our theme song is Mr. Fortune by the Hitchhikers, and our composer is Luis Guerra. As always, thank you for listening.

[Hal Weitzman]

Are you asking me to give you advice on how to launder money?

[Stephen Dubner]

Sure.

[Hal Weitzman]

The Freakonomics Radio Network the Hidden side of Everything Stitcher.

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[Stephen Dubner]

Relax responsibly.

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