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

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Speaker 1 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.

Speaker 1 Roughly two-thirds of Fortune 500 companies are registered in Delaware. We thought this was worth looking into.

Speaker 1 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.

Speaker 1 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.

Speaker 1 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.

Speaker 1 Three Andreessen Horowitz executives just published a post titled, We Are Leaving Delaware and We Think You Should Consider Leaving Too.

Speaker 1 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.

Speaker 1 As always, thanks for listening.

Speaker 1 Walk me through your attraction to the Delaware story. When did that begin and how?

Speaker 2 When I was a financial reporter, all roads seemed to lead to Delaware.

Speaker 3 Elon Musk goes under the microscope in Delaware. Twitter is set to depose the Tesla CEO in Wilmington.

Speaker 4 95% of the corporations that are incorporated in Delaware don't really do any significant business here.

Speaker 5 Evidence has been brought against Victor Boot for weapons trafficking in hotspots around the world that span Afghanistan, Colombia, Rwanda, Congo.

Speaker 2 So I had a vague understanding that Delaware was important, but not really why. And nobody else seemed to be asking that question.

Speaker 1 The truth is, most people don't ask any questions about Delaware. or even think about Delaware.
It is the second smallest U.S. state by area, the sixth smallest by population.

Speaker 1 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?

Speaker 6 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.

Speaker 1 Delaware is also a gem if you were looking to hide something yourself.

Speaker 2 The whole system has enabled tax dodging, money laundering, the flow of dark money into the U.S. political system, and the trafficking of people, drugs and arms.

Speaker 1 Delaware has established its own rules for how corporations incorporate.

Speaker 2 You can set up a Delaware company remotely on the internet without giving any verified information.

Speaker 1 For how legislators legislate.

Speaker 2 You, an elected lawmaker, have no right to make laws. Only the unelected lawyers have the right to make laws.

Speaker 1 And even for how lawyers lawyer.

Speaker 6 We're also known as a bar that operates in what I call the Delaware way.

Speaker 7 We're in the happy position where most lawyers in the country speak Delaware.

Speaker 1 Today, on Freakonomics Radio, how did one tiny state come to have so much leverage? And does anyone care enough to fix it?

Speaker 8 This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stephen Dubner.

Speaker 1 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.

Speaker 1 Weitzman also has a day job at the University of Chicago.

Speaker 2 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.

Speaker 1 Before that, he worked for the Financial Times as an editor in London and as a foreign correspondent.

Speaker 1 During that time, he came to notice just how many companies, large and small, are incorporated in Delaware.

Speaker 2 Facebook, Visa, MasterCard, Verizon, Chrysler. We're all touched by Delaware all the time.
Delaware is everywhere.

Speaker 1 Delaware, in fact, has more companies than people.

Speaker 1 If you look at the Fortune 500, roughly two-thirds of those companies are legally registered in Delaware, but only one of those companies, DuPont, is physically based there.

Speaker 1 So why is Delaware such an attractive legal home?

Speaker 2 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.

Speaker 2 So if you ask a lawyer, they'll say it's the Chancery Court because they have this special court that handles business cases.

Speaker 2 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.

Speaker 2 So Stephen, you and I could set up a company in Delaware before the end of recording this podcast.

Speaker 1 I actually set one up while you were starting to talk a couple of seconds ago.

Speaker 2 I was going to 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.

Speaker 2 And if we pay the right fees, we can get it done in as little as half an hour.

Speaker 2 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?

Speaker 2 What office do you know, a government office that stays open till midnight, just so they can be as business-friendly as possible?

Speaker 1 Keep going. Are there other players who might give different answers?

Speaker 2 Yeah, there are.

Speaker 2 Corporate secrecy campaign 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.

Speaker 2 And then there's a whole load of sort of other,

Speaker 2 which is

Speaker 2 people who don't really know why they're incorporating in Delaware.

Speaker 2 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 got to set up in Delaware.

Speaker 2 We only fund Delaware companies. And so you get these single answers.
And all of these single answers are valid.

Speaker 2 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.

Speaker 2 So their motivations are not going to be the same.

Speaker 2 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.

Speaker 2 I've got nothing against efficiency, but what is the cost of efficiency? That's the only question I ask.

Speaker 1 Weitzman argues there are a a lot of costs to Delaware's way of doing business.

Speaker 2 That's what I call the franchise, this kind of legal industrial complex.

Speaker 1 For starters, let's consider what Delaware's tax policy is costing other states.

Speaker 2 If you look at state corporate income tax receipts over the past 50 years, they've completely collapsed, partly because companies have used a tax dodge called the Delaware Loophole, where they've funneled profits through Delaware holding companies to avoid paying tax in other states.

Speaker 2 And Delaware doesn't charge tax on so-called intangible profits. So things like trademarks and slogans.

Speaker 1 And firms have been creative in deciding what falls into that intangible profit category.

Speaker 2 Oh, yeah. So one of my favorite examples of the so-called Delaware loophole is WorldCom.
If you remember, the Telecom's company paid its holding company in Delaware $20 billion

Speaker 2 over just three years

Speaker 2 for an intangible asset, therefore avoiding tax elsewhere and not paying it in Delaware because they don't tax intangibles.

Speaker 1 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.

Speaker 2 And the intangible asset it was paying for was management foresight.

Speaker 2 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.

Speaker 1 Well, if you come up with $20 billion to shuffle off to Delaware, it does suggest superior skill of one sort, doesn't it?

Speaker 2 You've got good accountants. That's what it suggests.

Speaker 1 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.

Speaker 2 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.

Speaker 2 You need to show a valid ID, but you can set up a Delaware company remotely on the internet without giving any verified information.

Speaker 1 And here is Dan Nielsen. He is a professor of government at the University of Texas at Austin who studies corruption.

Speaker 9 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.

Speaker 1 And why is that a problem?

Speaker 1 Because anonymity makes it a lot easier to hide illegal activity. John Kassara is a retired agent and investigator with the U.S.
Treasury Department. He spent years chasing money launderers.

Speaker 1 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.

Speaker 1 It's drug trafficking, but it's also human human trafficking. It's also arms trafficking.
It could be the proceeds of child pornography.

Speaker 1 The way Kassara sees it, the kind of anonymity offered by Delaware makes money laundering pretty easy.

Speaker 1 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.

Speaker 1 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.

Speaker 1 I've spent a lot of my time overseas doing training, talking about the importance of cracking down on

Speaker 1 money laundering, and I would invariably have a student or a colleague come up to me and say, yeah, Mr.

Speaker 1 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.

Speaker 1 Can you help us? There was nothing I could do and I was just embarrassed, just embarrassed.

Speaker 1 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.

Speaker 1 He's primarily talking about LLCs or limited liability companies. In 2023 alone, more than 200,000 new LLCs registered in Delaware.

Speaker 1 Many 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.

Speaker 1 Now, what's a shell company? It's a company without an active business organization or significant assets. They're kind of hollow.

Speaker 1 And that's what frustrates criminal investigators so often, because we're following the money trail. It often comes back back to the U.S.
Delaware LLCs.

Speaker 1 And the problem is there's nothing there. We don't know who's actually behind the company.
Let's have an example.

Speaker 1 I think a lot of people are familiar with Victor Boot, or at least the name Victor Boot. Boot is a Russian arms dealer who in 2022 was released from U.S.
detention in a prisoner exchange.

Speaker 1 The Biden administration exchanged Victor Boot. They released him in exchange for U.S.
basketball star Brittany Griner. Boot is known as the merchant of death.

Speaker 1 Basically, he supplied, you know, long-running civil wars in places like Sierra Leone and Angola and the Central African Republic, Sudan, Libya, and on and on and on and on.

Speaker 1 Now, to set up his network, Victor Boot 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.

Speaker 1 So I've seen some reports that Boot and his organization established up to 10 shell companies in Delaware alone.

Speaker 1 Here's the thing. The U.S.
prides itself on the legitimacy of its financial system. Legitimacy of this sort typically includes a high level of transparency.

Speaker 1 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.

Speaker 1 So how does the U.S. 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.

Speaker 9 I research international development broadly with a focus on the control of corruption, which brought me to this topic of anti-money laundering.

Speaker 1 The world's foremost anti-money laundering organization is called the Financial Action Task Force. It has 39 members, including the U.S.

Speaker 1 Its mission is to set international standards to ensure national authorities can effectively go after illicit funds linked to serious crimes.

Speaker 9 These are the Financial Action Task Force recommendations. They're not laws, right? They're what we call an international relations soft law.

Speaker 9 So there's no enforcement mechanism. 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.

Speaker 9 But what they do have is the ability to set expectations.

Speaker 9 And there's lots of international standards. They're voluminous.
One of the main ones we focused on is that you need to know who controls the companies that move that money.

Speaker 9 who is ultimately in charge of that company and that bank account. This is called the beneficial owner.

Speaker 9 And in order to make sure you can track that person, international standards require that you get photo ID

Speaker 9 of the beneficial owner. And so we just started with that.
It's like, to what degree is this practice being followed?

Speaker 1 Nielsen, along with fellow researchers Michael Findlay and Jason Sharman, conducted a massive experiment to learn where this recommendation was and was not being followed.

Speaker 9 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.

Speaker 9 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?

Speaker 9 And then they told us, you whether or not they required photo ID.

Speaker 1 Nielsen and his co-authors compiled their findings in a 2014 book called Global Shell Games.

Speaker 9 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.

Speaker 1 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.

Speaker 1 In 2025, the UK-based Tax Justice Network released a financial secrecy index, which ranked the U.S.

Speaker 1 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.

Speaker 1 And over the years, some members of Congress have tried to address the problem.

Speaker 9 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.

Speaker 1 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 U.S.
citizens and companies.

Speaker 1 According to Hal Weitzman, Delaware was heavily involved in lobbying for this new law.

Speaker 2 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.

Speaker 2 And then a month later, they have to file another form with the federal government saying, who's behind the company?

Speaker 2 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.

Speaker 2 It's a bit like that. And so when you ask transparency campaigners, what do you think we should do? They say, just ask people at the moment that they incorporate who they are.

Speaker 2 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?

Speaker 2 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.

Speaker 1 Coming up after the break, how did Delaware get this kind of leverage? And how do they keep it? The bottom line is it comes down to money, okay?

Speaker 1 I'm Stephen Dubner. This is Freakonomics Radio.
We will be right back.

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Speaker 1 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.

Speaker 1 But let's be honest, it is also incredibly valuable to Delaware itself.

Speaker 6 The legal industry is very important to Delaware's economy.

Speaker 1 That is Denine Damon.

Speaker 6 I am a director with Richards, Leighton, and Finger, which is the largest law firm in Wilmington, Delaware.

Speaker 1 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.

Speaker 6 The Delaware Bar is very intimate. We're also known as a bar that operates in what I call the Delaware Way.

Speaker 6 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.

Speaker 1 And how influential is the Delaware Way?

Speaker 6 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.

Speaker 1 They are especially protective of what's known as the Delaware General Corporation Law.

Speaker 1 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?

Speaker 6 So there's a corporate council that is constantly reviewing the corporate statute, looking at how entities are used.

Speaker 6 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.

Speaker 6 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.

Speaker 6 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.

Speaker 1 As Hal Weitzman described it earlier, the Delaware franchise is an efficiency maximizer.

Speaker 2 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.

Speaker 1 As Weitzman sees it, the chief crop of Delaware is corporate law.

Speaker 2 It exports corporate law all over the United States and all over the world. It sets the standard.

Speaker 2 That code is written by 27 working lawyers who are part of the Corporation Law Council of the Delaware Bar. They meet in private and they issue proposed changes every year to the law.

Speaker 2 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.

Speaker 1 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 statehouse in the U.S.

Speaker 1 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

Speaker 1 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?

Speaker 2 Yeah, I mean, they're told, these are are the experts, here's their proposals, and they effectively rubber stamp them.

Speaker 2 The thing that I found interesting about the process is these working lawyers, they appear in court, they argue cases under the laws that they themselves are writing.

Speaker 2 So being in the University of Chicago, it brings to mind the work of the legendary U Chicago Nobel laureate George Siegler, who introduced the idea of regulatory capture.

Speaker 2 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.

Speaker 2 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.

Speaker 2 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.

Speaker 2 In 2017, there's a lawmaker in Delaware, now retired, a guy called John Kowalco, styled himself as the Bernie Sanders of Delaware.

Speaker 2 And John Kowalcombe 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 U.S.

Speaker 2 has deemed to to be terrorist organizations.

Speaker 2 This is a pretty non-controversial proposal. In fact, it actually was adopted later by Delaware as a law.
But when John Kowalco tried to promote it, he was asked, has this gone through the process?

Speaker 2 Kowalco 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.

Speaker 2 In other words, you, an elected lawmaker, have no right to make laws. Only the unelected lawyers have the right to make laws.

Speaker 1 And these lawyers, Weitzman argues, inevitably make laws that protect and promote the Delaware franchise.

Speaker 1 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.

Speaker 2 Why is it so resistant to knowing who's behind them? Because most companies would be perfectly happy to tell us who the owners are. So it's really just, well, who are we protecting?

Speaker 2 A tiny number of wrongdoers.

Speaker 6 I think it's definitely an unfair label for us to have.

Speaker 1 Denine Damon again for the defense.

Speaker 6 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.

Speaker 6 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.

Speaker 6 It's not as easy, you know, to simply draft up three paragraphs, submit something to the state, and you're done.

Speaker 6 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.

Speaker 6 It's a quick process because we have a system in place. The law firms here and the lawyers here are well versed in entity creation.
So we know what advice to give our clients.

Speaker 6 We know how to lead them through the process. This is what we do every day.
This is what we do for a living.

Speaker 1 The bottom line is it comes down to money. Okay.

Speaker 1 That, again, is John Kisara, the former treasury investigator. This is state government greed.
That's the bottom line. They do it because it generates revenue.

Speaker 1 And to a lesser extent, it generates some job opportunities.

Speaker 1 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.

Speaker 1 They don't really have much out there, but, you know, bat guano.

Speaker 1 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 it attracts money.

Speaker 1 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.

Speaker 1 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.

Speaker 1 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.

Speaker 1 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.

Speaker 1 So it's easy to see why Delaware has little incentive to impose transparency regulations or other regulations that might undercut its franchise, especially because they're lucky to have the franchise in the first place.

Speaker 1 Here's how Weitzman again:

Speaker 2 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.

Speaker 1 This requires a brief history lesson.

Speaker 2 So in 1888,

Speaker 2 New Jersey allowed holding companies where one company owns another. And then that decade after that, they relaxed the rules a lot on corporate structures and what they could do.

Speaker 2 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.

Speaker 1 That's the same share Delaware has today.

Speaker 2 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-way contest for the presidency between Taft, who was the incumbent, Woodrow Wilson, who was the Democrat, and Teddy Roosevelt was the progressive candidate.

Speaker 2 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 the companies in your own state.

Speaker 2 How are you going to 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.

Speaker 2 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.

Speaker 2 And Delaware, which had copied their law, was there to welcome them with open arms.

Speaker 2 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.

Speaker 2 And it's always aimed to stay ahead of any competitors by making itself as business friendly as possible.

Speaker 1 Are there any campaigns, either overt or covert, to steal the franchise from Delaware? Perhaps you, Hal, and your book are part of some stealth campaign by some other state.

Speaker 1 I mean, your book is published by Princeton University Press, which is located in New Jersey.

Speaker 2 Well, I should say, first of all, all, I'm not paid by any state to provide any kind of services of that nature.

Speaker 2 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?

Speaker 2 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.

Speaker 1 What about South Dakota? They show up in this realm now and again, don't they?

Speaker 2 Yeah, in the 1980s, there was an interesting battle between South Dakota and Delaware to win the admiration of financial institutions.

Speaker 2 South Dakota was the first state, I believe, to say, we'll get rid of interest rate caps for credit card companies.

Speaker 2 And there was a great concern at the time in Delaware that the credit card companies would just go South Dakota.

Speaker 2 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.

Speaker 2 And then they introduced them to the legislature in the late afternoon and said, You've got three hours to approve these. And nobody, of course, could understand what the hell they were reading.

Speaker 2 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.

Speaker 2 If you look at how much the trust business is worth to South Dakota, it's negligible. It's basically nothing.
Because there aren't as many trusts, right?

Speaker 2 Whereas companies, there are 1.8 million of them. It's a volume business is kind of, you know, stack them high and sell them cheap.

Speaker 1 But also, Weitzman admits, Delaware has become so good at being Delaware that the other places just can't compete.

Speaker 2 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.

Speaker 1 Coming up after the break, we will hear about the Chancery Court, perhaps the most special feature of the Delaware franchise.

Speaker 7 I do sit on a high bench with a robe on. Fortunately, we don't do wigs.

Speaker 1 I'm Stephen Dubner. This is Freakonomics Radio.
We will be right back.

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Speaker 1 Okay, we promised we would tell you about one of the most special features of Delaware's massive legal industrial complex.

Speaker 7 My name is Travis Laster, and I'm here today because I'm a member of the Delaware Court of Chancery.

Speaker 1 And what is the Court of Chancery?

Speaker 7 Well, there's a short answer and a long answer. The short answer is we are one of the three constitutional courts of Delaware.

Speaker 7 We are best known as perhaps the nation's preeminent venue for deciding business disputes.

Speaker 7 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 story.

Speaker 1 Let's hear the medium story.

Speaker 7 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

Speaker 7 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.

Speaker 7 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.

Speaker 7 So he could send out his soldiers, and regardless of what the courts said, his soldiers could either make you do something or they could make you stop doing something.

Speaker 7 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.

Speaker 7 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.

Speaker 7 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.

Speaker 7 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.

Speaker 7 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.

Speaker 7 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.

Speaker 7 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.

Speaker 7 And that's the entry point for Delaware being a special place and the court being a special place for hearing business disputes.

Speaker 1 One thing that makes the court of chancery especially special is there are no juries.

Speaker 7 If your case is assigned to me, I'm it. I'm both the ruler on the law and the finder of the facts.

Speaker 7 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.

Speaker 7 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.

Speaker 7 All of us are, for better or for worse, very well known, particularly to the Delaware practitioners.

Speaker 7 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.

Speaker 7 I know people are out there psychoanalyzing me me in terms of every case.

Speaker 1 And what would such an analysis come up with?

Speaker 7 They're going to say that Laster doesn't have patience for people who make extreme arguments or things that just sound good, but you don't test them.

Speaker 7 They're also going to tell you to be completely transparent.

Speaker 7 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.

Speaker 1 So what does Judge Laster say about Delaware's reputation as a haven for anonymous LLCs and shell companies and money launderers?

Speaker 7 No one wants Delaware corporations or alternative entities being used for money laundering or criminal activity. If you made me U.S.

Speaker 7 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.

Speaker 7 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.

Speaker 1 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?

Speaker 1 A lot of people would say yes, to some degree. And what about the Court of Chancery? Here, even Hal Weitzman is a defender.

Speaker 2 It has some quirks.

Speaker 2 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.

Speaker 2 So the Chancery Court is a great advantage of Delaware.

Speaker 2 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?

Speaker 1 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.

Speaker 1 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.

Speaker 1 Do you want this to serve as some kind of polemic or at least cautionary tale? Or were you just telling the story?

Speaker 2 I think a bit of both. I am attracted to really interesting stories, particularly obscure stories.
And this was one of those.

Speaker 2 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.

Speaker 2 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 U.S.

Speaker 2 and how many are owned by U.S. resident? 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.

Speaker 2 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.

Speaker 1 Let's imagine for a moment that the franchise in Delaware were shut down, which is hard to imagine.

Speaker 1 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.

Speaker 1 I am assuming that none of the activity that's facilitated there would stop. It would just find other willing hosts.
You agree?

Speaker 2 Yes. And what that tells us is this is an American problem.
It's not just a Delaware problem.

Speaker 2 But Delaware has set the rules. It set the rules that the world has to follow.

Speaker 2 It's set the rules that enable corporate anonymity, unlimited interest rates on credit cards, other elements of the corporate code.

Speaker 2 And it's done so in a way that has effectively bypassed democratic oversight.

Speaker 1 Now, if I recall correctly, there was a longtime U.S. Senator from Delaware named Joe Biden, who then became president of the United States.

Speaker 1 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?

Speaker 2 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.

Speaker 2 That's very much a Delawareian type way of approaching politics. In terms of his funding,

Speaker 2 Throughout his 36 years in the Senate, his main donors were all big law firms that benefit from the system.

Speaker 2 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.

Speaker 2 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.

Speaker 2 And because they're registered in Delaware, they were subject to Delaware law.

Speaker 1 And what is the cap that Delaware law established for credit cards?

Speaker 2 No cap.

Speaker 1 So if I am a credit card company and I register in Delaware, could I charge 300% interest?

Speaker 2 I don't think there's anything legally stopping you from doing that.

Speaker 1 So here's something that Elizabeth Warren wrote about Joe Biden in 2002.

Speaker 1 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 for his Senate seat.

Speaker 1 Does that seem like a fair assessment, or do you think that's overstating it?

Speaker 2 He certainly was a a strong defender of the interests of credit card companies on Capitol Hill. You remember there was a lender called MBNA.

Speaker 2 They were the ones who came up with all the loyalty cards.

Speaker 2 So if you wanted to have a Chicago Bears credit card or a University of Chicago credit card, it would be issued by MBNA, Arnold Schwarzenegger credit card, whatever you wanted.

Speaker 2 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.

Speaker 2 It obviously rattled him. And I think it rattled him because there was something to that.

Speaker 1 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.

Speaker 1 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?

Speaker 2 I'm not. I'm not.

Speaker 1 Okay, so they can't even take that away from you. You're free to say anything.

Speaker 2 Well, I've got a green card, so hang on a second.

Speaker 1 Yeah, I bet I could get you a green card in Delaware in like five minutes. So

Speaker 2 that's right.

Speaker 2 So I think he would say that the reason that it's in Delaware, this is the location of the experts. We have built an expertise.
Illinois, you know, you grow corn. This is what we do.

Speaker 1 So this goes back to David Ricardo. This is what places do.

Speaker 2 Specialization, exactly.

Speaker 1 Yeah, you make wool, I make textiles, somebody else has salt. Yeah, we launder money.

Speaker 2 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.

Speaker 2 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.

Speaker 2 And there's no doubt that the expertise is there. I just think that the way that the experts are just given free reign is not democratic and it's not transparent.

Speaker 2 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.

Speaker 1 That was Hal Weitzman, author of What's the Matter with Delaware? How the First State Has Favored the Rich, Powerful, and Criminal, and How It Costs Us All.

Speaker 1 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 at freakonomics.com, or you can leave a review on any podcast app.

Speaker 1 We will be back very soon with a new episode. Until then, take care of yourself.
And if you can, someone else too.

Speaker 1 Freeconomics 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.

Speaker 1 The Freakonomics Radio Network staff also includes Alina Coleman, Augusta Chapman, Eleanor Osborne, Ellen Frankman, Elsa Hernandez, Gabriel Roth, Greg Ripon, Jeremy Johnston, Morgan Levy, Sarah Lilly, Teo Jacobs, and Zach Lipinski.

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Speaker 2 Are you asking me to give you advice on how to launder money?

Speaker 1 Sure.

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