States Aim to Edge Out Delaware’s Primacy in Corporate Formation

Delaware has long been the preeminent state for incorporation, known for its sophisticated Court of Chancery and comprehensive corporate laws that offer businesses a predictable legal framework.

However, recent claims suggest Delaware might be losing its position as the dominant state for incorporation. Companies such as Tesla and TripAdvisor have sought redomestication out of Delaware to states such as Texas and Nevada. These developments signal a shift in the corporate landscape, making the debate over redomestication more complex, and foreshadowing other states as potential rivals to Delaware’s corporate dominance.

Whether Delaware cedes significant ground to other states may hinge, in part, on whether other jurisdictions successfully offer a judicial forum that can match or exceed the reputation of Delaware’s Chancery Court in providing a predictable forum for resolving corporate disputes.

Comparative Environment

Delaware’s long-standing reputation as the preeminent US jurisdiction for incorporation has naturally prompted other states to emulate its success. More than two dozen states have established business courts in the past three decades.

There are some substantive legal differences between Delaware corporate law and the law of other jurisdictions with respect to certain issues, including legal standards governing interested-director transactions and shareholder derivative suits.

Yet the similarities tend to predominate, and most states now offer substantially similar bundles of economic, governance, and litigation rights for stockholders as Delaware. From the standpoint of substantive corporate law, incorporating in Delaware doesn’t appear to offer significant benefits relative to other jurisdictions.

It’s also unclear whether there remains any measurable economic benefit to incorporating in Delaware. The longstanding belief is that Delaware incorporation may boost investor confidence and bestow a market premium based on the perceived value companies gain from Delaware’s respected legal system.

Evidence suggests market actors do perceive Delaware as offering superior quality versus other jurisdictions, and that larger and more sophisticated corporate entities and private equity and venture capital startup hopefuls are more likely to choose Delaware.

Surprisingly, however, there is scant evidence that companies actually realize any quantifiable premium from Delaware incorporation. While some financial sponsors, institutional investors, and other market actors may continue to prefer Delaware, the state’s perceived reputational advantage doesn’t necessarily translate into higher stock valuations or easier access to capital.

In advocating for redomestication, Tesla acknowledged that Texas and Delaware have substantially equivalent corporate laws. Tesla’s special committee similarly found no observable valuation premium associated with Delaware incorporation. Conversely, the report also found no observable pattern that redomestication impacted stock value positively or negatively. The illusory concept of the “Delaware premium” may further erode as states continue to develop similar business court systems.

While Delaware’s primacy may diminish in the long run as other states develop their own business-court systems, these states are still doing so in Delaware’s wake. For instance, Texas is opening a new business court system in September. These courts, however, will likely continue to look to Delaware case law as persuasive authority in adjudicating disputed issues where Texas and Delaware law are consistent.

The absence of jury trials in Delaware Chancery Court may further bolster the perception that Delaware courts offer greater predictability than jury-friendly courts in other states. While there is certainly optimism that the business courts in Texas and other states will succeed in providing a strong alternative forum for corporate disputes, it could take significant time for such courts to garner similar respect in the market as Delaware’s long-established corporate forum. Time will tell whether Texas and other states are successful in overcoming Delaware’s perceived reputational advantage.

Cost issues can also affect the redomestication calculus. Historically, Delaware has charged a franchise tax for the privilege of incorporating there. By contrast, states such as Nevada and Texas do not require companies to make such payments, which could result in meaningful savings.

The vast majority of redomestication proxies have cited this cost difference as supporting reincorporating outside Delaware. On the other hand, redomestication of public companies is a time-intensive process that can result in legal fees and possible litigation, which could then negate the cost savings from reincorporating. Companies may not be inclined to reincorporate if they don’t perceive a significant overall reduction of costs.

Perception and Advocacy

Companies that redomesticate out of Delaware often cite the intuitive value of “home-state incorporation” and director autonomy and greater corporate freedom in compensation decisions, strategic transactions, and stronger protections from liability.

Tesla extolled the benefits of home-state incorporation in successfully advocating for shareholder approval of its Texas redomestication, writing to shareholders that there is “value in business disputes being heard where Tesla is headquartered” because “the community is directly impacted by court decisions affecting our Company.”

Some market participants and observers, however, have contended these benefits flow disproportionately to management and incumbent directors rather than to shareholders. Recently, the Delaware Chancery Court allowed a lawsuit challenging TripAdvisor’s redomestication from Delaware to Nevada to proceed as a damages claim, finding it was reasonably conceivable the greater liability protections for corporate fiduciaries under Nevada law impacted the value of shareholders’ investment.

It remains to be seen whether advocates or critics of redomestication will prevail in future disputes over these issues, and whether these moves will prompt a wave of similar reincorporations by other companies down the road.

Companies may not view redomestication as cost-effective, and it may prove difficult for other jurisdictions to overcome Delaware’s reputational advantage built over many decades by a highly sophisticated business court and corporate bar. On the other hand, companies may come to view Texas, Nevada, or other states as offering greater flexibility at a lower cost.

Redomestications will likely be relatively limited in the near term, but could increase more significantly down the road as courts in other states build track records in handling significant corporate litigation.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Debra Gatison Hatter is partner at Norton Rose Fulbright with a focus on corporate securities, mergers and acquisitions, joint ventures, and other business matters.

Peter Stokes is partner at Norton Rose Fulbright and represents clients in securities, SEC enforcement, investigations, corporate governance, and other matters.

Elie Krief is an associate at Norton Rose Fulbright who represents public and private companies, private equity sponsors and portfolio companies, financial advisers, and boards/committees in complex transactions.

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