TheCorporateCounsel.net

One of this year’s favorite topics among corporate law pundits has been whether Delaware’s century-old dominance as the preferred jurisdiction of incorporation for public companies has been threatened by the alleged increasing unpredictability of the Chancery Court.  We’ve spilled a lot of ink on this topic – and the efforts to amend the DGCL to address it – over on the DealLawyers.com blog. But Delaware’s status is a topic that isn’t relevant only to M&A lawyers, so I thought a recent article by UCLA’s Stephen Bainbridge titled “DExit Drivers: Is Delaware’s Dominance Threatened?” was worth sharing here.

Prof. Bainbridge looks at the recent sound & fury about Delaware and concludes that a mass exodus of corporations is pretty unlikely. Here’s the abstract:

For over a century, Delaware has led the corporate law landscape, though it has not been without competitors. States such as Georgia, Maryland, New Jersey, Ohio, Pennsylvania, Tennessee, and Virginia have attempted to rival Delaware, attracted by its significant tax revenue from incorporations. Today, Nevada emerges as a notable challenger, actively promoting “DExit”-a push for companies to leave Delaware. Consequently, this analysis primarily examines the choice between Delaware and Nevada.

Widespread discussion of the potential for mass DExit was triggered by recent criticisms from business leaders and prominent corporate lawyers. While such complaints have not yet triggered a mass exodus from Delaware, many firms are reportedly considering changing their corporate domicile. But is Delaware’s dominance genuinely at risk? Are these just isolated incidents or signs of a broader trend?

This article provides both an empirical and a qualitative analysis of firms that reincorporated from Delaware to another state between 2012 and 2024. It analyzes these firms based on size, filing status, and new state, along with their stated motivations.

The data suggest two main conclusions. First, almost all reasons given for reincorporation seem implausible. If DExit becomes more frequent, plaintiff lawyers should scrutinize these disclosures, particularly focusing on enhanced liability protections for controllers, directors, and officers, suggesting possible conflicts of interest requiring entire fairness review. Second, the number of reincorporations from Delaware remains minimal compared to the vast number of new incorporations Delaware attracts annually. Given the strong inertia behind the initial incorporation decision and the weak drivers for DExit, it is unlikely to become widespread soon.

One threat that the article doesn’t address is the idea that private equity and venture capital investors might be spooked by recent Delaware case law impinging on their ability to exercise post-IPO control and therefore decide to incorporate startups in jurisdictions perceived to be more friendly to controlling stockholders. However, that argument seems less compelling following the recent DGCL amendments, which become effective today.

– John Jenkins