Companies Say Their #DExit from Delaware Incorporation Is About Activist Judges and Taxes — But Their New Homes Offer Less Protections for Shareholders

Delaware is home to more corporations than people, with over 2M business entities — including the majority of Fortune 500 companies. Many have been domiciled in the state because of its corporate laws, dedicated chancery courts, and tax advantages. However, the state’s main attraction could be under threat.

Flight from Delaware: As with most things these days, it all started with Tesla and Elon Musk — who was sued by an opportunistic law firm representing a shareholder over his $55.8B compensation package. A Delaware Chancery Court struck down the package as “excessive” not once, but twice. Soon after, the automaker defected to its new corporate home in Texas. It’s no longer a one-off case, either. More companies are now considering reincorporating elsewhere, citing concerns about state franchise taxes, tougher risk disclosure requirements, and activist judges.

• Over the past year, corporations like DropboxDBX
  , RobloxRBLX
  , and AffirmAFRM
  have begun the process of reincorporating in Nevada — while Mercado LibreMELI
  is heading to Texas.
• The trend may continue with other high-profile firms, too — MetaMETA
  is said to be considering a move to Texas, and WalmartWMT
  is mulling the same.

Protecting Shareholders

Affirm points to spurious litigation from “well-funded firms” as creating a “less predictable and less stable landscape and body of case law in Delaware.” Mercado Libre cites saving $250K in franchise taxes and gaining “greater flexibility for strategic corporate actions.” However, there are alternative interpretations.

• A 2013 study found that Nevada — the most common destination for reincorporation — “designed its corporate law with almost no liability for breaches of fiduciary duties,” leaving shareholders with less “protection if or when there is malfeasance at the top.”
• Similarly-situated states boast similar protections for company operators, often at the expense of shareholders — who would otherwise have more rights under Delaware law.

Bad for business? Delaware is aiming to keep its golden goose — which generates over a third of the state’s budget — by introducing a new law that “reduces the legal guardrails for founders or powerful executives making deals inside massive companies,” per PBS. But as DExit anxieties mount, shareholders should be wary of companies’ true intentions for exiting America’s go-to corporate home. As it turns out, politics aside, there are plenty of reasons founders and CEOs prefer Nevada, Colorado, or Texas — and it mostly benefits them, not shareholders.