More Musk-like 'DExits' Pose Fresh Threat to Delaware's Corporation Crown

In the world of corporate law, Delaware has long been the undisputed king, with over 65% of all publicly traded companies and 60% of the Fortune 500 calling it home. However, recent trends, such as Elon Musk's advice to avoid incorporating in Delaware, have raised concerns about a potential exodus of companies, or 'DExits,' threatening the state's dominance. Let's delve into the reasons behind these 'DExits' and explore whether Delaware's crown is truly at risk.



The Rise of Nevada and Texas

Nevada and Texas have emerged as popular alternatives to Delaware, with companies like Tesla and Oracle opting to reincorporate in these states. Nevada, in particular, has been aggressive in its pursuit of Delaware's corporate crown, setting up dedicated business courts and pointing to differences in its corporate statutes. However, it remains to be seen how these courts will operate in practice and how these states' corporate laws will be applied in various circumstances.

Franchise Tax Savings: A Red Herring?

While franchise tax savings are often cited as a motivation for leaving Delaware, the actual savings are typically negligible for larger firms. For instance, Tesla's reincorporation in Texas is estimated to save the company around $1 million annually, a small fraction of its earnings. Smaller firms may benefit somewhat, but for larger firms like Tesla, the savings are minimal.

Quality of New State Law: A Myth?

Reincorporating firms often claim that their new state's laws are more modern, flexible, or determinate than Delaware's. However, Delaware's legal system is renowned for its high-quality and up-to-date corporate law, supported by a strong judiciary and a responsive legislature. It is difficult to argue that other states offer more modern or comprehensive laws than Delaware.

Corporate Governance Flexibility: A Double-Edged Sword

Nevada's law allows more discretion in board decision-making and simplifies certain processes, such as reverse stock splits. However, recent amendments to Delaware law have narrowed this gap by allowing similar flexibility. While some firms may find greater flexibility appealing, larger firms may not find significant benefits, given the flexibility already offered by Delaware law.

Perceptions of Determinacy: A False Promise?

Some firms argue that their new state offers a more determinate and predictable legal environment compared to Delaware's common law approach. However, on close examination, these claims seem implausible. The structure of Nevada's business courts presents challenges, such as a lack of specialized judges and a backlog of cases.

The Delaware Response

In response to the perceived threats, Delaware has taken steps to address the concerns of businesses. The recent legislative amendments to the Delaware General Corporation Law (DGCL) aimed to restore predictability and address perceived issues that led to 'DExits.' These amendments may help slow the trend of companies leaving Delaware by restoring predictability, addressing specific issues, and reassuring businesses that Delaware law supports their interests.

The Future of Delaware's Corporation Crown

While the trend of companies leaving Delaware is still minimal compared to the vast number of new incorporations Delaware attracts annually, the increasing number of 'DExits' poses a fresh threat to the state's dominance. However, Delaware's strong judicial system, responsive legislature, and superior corporate law may help it maintain its crown. As the competition between states continues, it will be interesting to see how Delaware responds to the challenges posed by Nevada, Texas, and other jurisdictions vying for the corporate crown.

In conclusion, while the trend of companies leaving Delaware is a cause for concern, it is unlikely to become widespread soon, given the strong inertia behind the initial incorporation decision and the weak drivers for 'DExits.' Delaware's recent legislative amendments and strong legal system may help it retain its dominance, but the state must remain vigilant and adapt to the changing landscape of corporate law.