As Musk Calls for Exodus, Value of Delaware Law Proves Elusive

Shareholders challenging corporate shifts from Delaware to laissez-faire Nevada are struggling to prove the maneuvers steer value to insiders.

Driven by laxer accountability rules and goaded by Elon Musk, several high-profile companies have relocated to the Silver State, which is trying to lure corporate bigwigs repelled by Delaware’s crackdown on self-dealing. Two of them, TripAdvisor Inc. and Trade Desk Inc., were hit with novel court challenges.

The dynamic has fueled a divisive discourse on whether the moves represent a self-contained problem or the start of an exodus. But Delaware’s judges have a more immediate concern: Even when it’s clear a reincorporation is about escaping legal scrutiny, there may be no way to tally the cost for shareholders.

“Delaware is the gold standard,” said George Washington University law professor Omari Scott Simmons. “But trying to put a price on it—that’s another thing.”

With a TripAdvisor ruling from Delaware’s top appeals court expected any day, the pension fund leading the case argued Friday that the proceedings became moot when the company announced a restructuring Thursday that would allegedly leave it with no controlling stockholder—unusual moves by both sides after nearly two years of litigation.

But regardless of whether the “DExit” trickle widens into a torrent, the state’s courts are being forced to grope for answers to issues that are already out there. Their response could smooth the way for business leaders drawn to Nevada’s “no liability” reputation or throw up roadblocks that make them think twice.

Delaware Premium

The judge in the TripAdvisor case allowed the company to move in February—assuaging concerns about Delaware as a “Hotel California”—but held open the possibility of money damages. The state supreme court sounded more doubtful at an October hearing.

Their reluctance reflects a decades-old debate about the hard-to-quantify value of Delaware corporate law. More recently, the idea that the state’s robust body of precedent and roster of specialist judges create value has gained the upper hand, according to Simmons.

He pointed to Delaware’s broad bundle of shareholder rights, its elite business court, and the judicial doctrines that have evolved over a century of corporate dominance, such as heightened scrutiny of conflicted transactions.

But there’s also an emerging consensus that the seminal studies behind the “Delaware premium” theory made too much of ambiguous results, according to Berkeley Law professor Adam Badawi. One of the shareholder attorneys cited those studies at the TripAdvisor appeal hearing.

“It’s pretty easy to understand what the Delaware premium might be: The controller isn’t going to be able to take everything,” Badawi said. “The problem is how to measure it.”

In other words, it might just be a widely shared hunch.

“There’s not enough evidence one way or the other,” said University of Pennsylvania law professor Jill Fisch.

Variables

The chairmen of TripAdvisor and Trade Desk—media executive Greg Maffei and tech billionaire Jeff Green, respectively—are both regulars in Delaware’s Chancery Court, where they’ve confronted a stream of shareholder suits. The relocation lawsuits against them both quoted a quip from Tulane University law professor Ann Lipton, who said in 2022 that “Nevada is where you incorporate if you want to do frauds.”

It’s a logical leap to automatically conflate fewer court cases with reduced value, according to Fisch. “Nevada law will result in less shareholder litigation, but experts disagree on whether there’s too much now,” she said. “Reducing the amount might harm shareholders, but it might help.”

Vice Chancellor J. Travis Laster said in his TripAdvisor ruling that he’ll start with any stock movement around the relocation. But the skepticism from Delaware’s justices is more than justified, according to Badawi, who said there are too many factors to reach reliable conclusions about cause and effect.

“Interest rates go up and down, or someone says something about the travel business,” he said. “A lot of times these sorts of changes are announced on an earnings call, so the market could be digesting earnings.”

There’s also no reason to think traders have a sophisticated enough understanding of the often-fine differences between Delaware and Nevada law for the movement to be a meaningful gauge.

“We don’t have very good tools for measuring the relationship between an event and a movement in stock price, and we’re not sure movement in stock price is a very accurate tool for measuring corporate value,” Fisch said.

Chicken or Egg

Even if it were possible to say Delaware corporations are more valuable, that would only get the courts halfway home. It’s plausible Delaware law adds value, but it’s just as likely “better companies are attracted to Delaware,” according to Badawi.

“It’s kind of the chicken or the egg,” he said. “A bunch of people have tried to solve it, and no one really believes the answer.”

The problem is of the court’s own making, according to Fisch, who cited a ruling in April that upheld heightened scrutiny of more types of deals.

“Unless you say reincorporating in Nevada constitutes self-dealing by a controlling shareholder, courts don’t even have to get into the task of determining what’s fair in unfamiliar areas,” she said.

The pension fund argued in the TripAdvisor case that reincorporation damages resemble other corporate features—like voting and dividend rights—that judges routinely grapple with. The court can’t just throw up its hands, according to Simmons.

“Corporate law deals with a lot of intangibles,” he said.

Any attempt to account for all the variables might look like the approach judges take to appraisal litigation, a notoriously technical type of case—second-guessing a transaction price—that they’ve “been explicit about not liking,” according to Badawi.

“There’s a path, but I think they would keep this theory quite narrow,” he said. “Something like, ‘If it’s Nevada, and if it’s a controlling stockholder, and if they’ve tried to engage in self-dealing transactions and gotten those blocked in Delaware.’ Which will then flood the courts with follow-up cases.”