A key issue in business formation and planning that goes beyond what form a business should take, is where a business will choose to incorporate. Delaware is a popular choice of state for incorporation. Delaware has a reputation for having favorable corporate laws and a business-savvy judiciary that is well-prepared for potentially complex commercial litigation.

Delaware is not the only state, though, that holds appeal for corporations. Different states have different advantages that may appeal to various businesses. This inevitably leads to incorporation shopping, where companies seek to change their state of incorporation for some perceived advantage.

The practice is not necessarily popular with shareholders. A change of state of incorporation is usually seen as a move to benefit management, with no benefit or maybe even disadvantage to shareholders.

Recently, Abercrombie & Fitch management was planning a move to reincorporate in Ohio, but when investors objected that Ohio law was less favorable to shareholders, a vote on the move was called off.

A retreat like Abercrombie’s shows why shopping for a corporate domicile is not commonplace, and the public nature of the reversal may keep the shopping even rarer.

Abercrombie has been incorporated in Delaware for decades, so why, wondered San Diego business formation and planning attorneys, would management want to reincorporate in Ohio?

As it happens, Ohio law would give management more control over the course of a buyout than Delaware would. After rival J. Crew experienced a controversial management buyout, Abercrombie’s managers saw the appeal of Ohio. They claimed the proposed move had nothing to do with control and was only a favorable tax move, but shareholders were not convinced. A vote on the move was put off indefinitely.

Source: Reuters/NYT “A Failed Incorporation” 3/1/2011