In light of Andreessen Horowitz’s loud DExit a few weeks ago, late-stage companies are giving serious thought to the “where to incorporate” decision. Some public companies are also more open to exploring reincorporation than they would have been a year ago, especially if there are controlling shareholders in the mix.

This Cooley memo gives a thorough recap of where things stand and factors that companies are considering when deciding whether to (re)incorporate in Delaware versus Nevada or another state. It also summarizes important process issues for public and private companies to map out before getting too far down the path of changing domicile. Here’s an excerpt on that piece:

– While a controlled public company may be able to effect a move with board approval and written consent (see, for example, Dropbox’s information statement), public companies without a controlling stockholder will likely have to obtain a full stockholder vote through a proxy solicitation at an annual or special meeting. This can be onerous and time-consuming (not only to prepare the proxy statement but also to solicit the votes) and comes with the risk that stockholders will not ultimately approve the move.

– The company must determine which consents it will need in connection with a reincorporation and review its governing documents, contracts, equity plans and other documentation to ensure it is soliciting and receiving all required consents to move.

– A public company will likely need to establish a special committee to evaluate whether and where to reincorporate, have a clear rationale for why a reincorporation is good for the company, and ensure the board understands and is supportive of this rationale. Is the company trying to protect its culture of innovation? Does a different state give the board more certainty in corporate decision-making without the specter of litigation or a second-guessing of board decisions? And is this rationale ultimately compelling to the company’s stockholders?

– Keep a clear record of the board’s consideration of the decision, and ensure the board has reviewed and adequately evaluated both the benefits and risks of a move. Bring in experts and/or legal advisers to help clarify issues or considerations.

– Statutory appraisal rights of stockholders under DGCL Section 262 apply in the context of a conversion of a Delaware corporation to a foreign corporation. In the public company context, the DGCL so-called “market exception” (whereby appraisal rights do not apply to any class of stock listed on a national securities exchange or held of record by more than 2,000 stockholders) usually exempts public companies from stockholder appraisal rights in a conversion. However, the market exception does not apply to private companies, and stockholders will most likely have appraisal rights in connection with a private company conversion. Such rights can be waived, but serious consideration should be given to appraisal rights and the related process for a private company considering a reincorporation away from Delaware. Public companies with dual-class structures where a high-vote class is not listed on a public market will also have to consider appraisal rights with respect to that high-vote class.

– Proxy advisory firms may also weigh in on redomiciliation proposals by public companies. While both Glass Lewis and Institutional Shareholder Services (ISS) review such proposals on a case-by-case basis, Glass Lewis generally recommends voting against a redomiciliation if it results in a decline in shareholder rights, has minimal financial benefits and offers significantly weaker shareholder protections, while ISS will recommend voting against a proposal if the move would result in a deterioration of shareholder rights or governance standards.

It’s too early to know how much market share Delaware may lose in the coming years, but it’s safe to say that the question of where to incorporate has captured the attention of executives & directors. That means the First State is no longer a “no brainer.” Right now, it’s one of a few leading options that corporate lawyers need to understand & be prepared to work with.

– Liz Dunshee