DExit Drivers: Is Delaware’s Dominance Threatened?

For over a century, Delaware has comminated the competition for corporate charters. Over the last several decades, however, a number of states have attempted to chip away at Delaware’s lead. The most successful of these competitors has been Nevada, but other states such as Texas, Maryland, and Wyoming have also sought to gain incorporations. This competition recently made headlines when Elon Musk advised his followers on X.com to never incorporate their business in Delaware, which triggered discussion in both the popular and legal press about whether companies might leave Delaware for purportedly more friendly climes. My article DExit Drivers: Is Delaware’s Dominance Threatened? 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 for reincorporating.

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.

Attributes of Reincorporating Firms

New State of Incorporation: Nevada is the leading choice for firms leaving Delaware, followed by Maryland, Texas, and Wyoming. Other states identified in the research, such as Colorado, Florida, and Virginia, appear to have been chosen primarily for home-state advantages.

Size of Reincorporating Firms: Smaller firms, especially non-accelerated filers and smaller reporting companies, are more likely to leave Delaware. Larger firms tend to remain in Delaware, although there are exceptions such as Tesla, which reincorporated in Texas.

Stated Motivations for Reincorporating

Franchise Tax Savings: While frequently cited as a motivation for leaving Delaware, the actual savings typically are not significant relative to company earnings. The smallest (or most financially troubled) firms may benefit somewhat, but for larger firms like Tesla, the savings are negligible.

Quality of New State Law: Reincorporating firms cited three purported benefits arising out of their new state’s corporate law: the modernity and comprehensiveness of the new state’s law, the flexibility of the new state’s law, and the increased determinacy of the new state’s law.

A total of 12 firms (15.4% of the sample) claimed that their new state’s laws were more modern than Delaware’s. Of these, seven were moving to states other than Nevada, indicating a perception that Delaware was not as proactive as its competitors in updating corporate laws to meet changing business needs. Despite claims, it is difficult to argue that other states offer more modern or comprehensive laws than Delaware. Indeed, Delaware’s legal system is renowned for its high-quality and up-to-date corporate law, which is supported by a strong judiciary and a responsive legislature.

Corporate Governance Flexibility: Eight companies, mostly non-accelerated filers reincorporating to Nevada, cited greater flexibility in corporate governance as a motivation. Firms perceive that Nevada allows more discretion in board decision making, most notably by allowing consideration of nonshareholder interests, and simplifies certain processes, such as reverse stock splits.

Transactional Flexibility: Twelve companies cited flexibility in certain corporate transactions as a reason for reincorporation. Nevada’s law allows certain amendments to corporate charters without shareholder approval, for example, which some companies find advantageous. However, recent amendments to Delaware law have narrowed this gap by allowing similar flexibility. Indeed, Delaware law is widely regarded as being highly flexible, offering numerous options for corporate governance and transactions.

Perceptions of Determinacy: Some firms argue that their new state offers a more determinate and predictable legal environment compared to Delaware’s common law approach. Fourteen companies cited Nevada’s statute-focused approach as an advantage, for example, claiming it reduces dependence on judicial interpretations. On close examination, however, these claims seem implausible. The structure of Nevada’s business courts presents challenges, such as limited written decisions and lack of judicial specialization, which adversely impact the predictability and consistency of Nevada corporate law. Indeed, Nevada courts have been known to look to Delaware for interpretive guidance, despite statutory differences, reflecting the reality that Delaware’s large body of case law provides extensive precedents that contribute to predictability and certainty in legal outcomes.

Director and Officer Litigation Risk: Many firms that chose to reincorporate cited reduced litigation risk as a primary motivation. Nevada is widely perceived as offering stronger protections for directors and officers against litigation compared to Delaware. Nevada law has even been described as lax, reflecting the low risk of personal liability for directors and officers. In contrast, Delaware imposes more rigorous standards on directors and officers, holding them to strict fiduciary duties of care and loyalty. Delaware courts have a reputation for stringent enforcement of these duties, moreover, which can increase the perceived litigation risk for directors and officers.

This motivation for reincorporation appears to be based more on perception than reality. The study reviewed litigation data from Westlaw and Bloomberg Law, focusing on director and officer lawsuits in the five years prior to reincorporation. Only a small number of firms in the sample experienced director and officer litigation, with Tesla being the most notable outlier, having faced eight lawsuits before reincorporation, which likely explains Musk’s disdain for Delaware.

DExit Drivers concludes that while litigation risk can influence the decision to reincorporate, it is unlikely to drive a widespread exodus from Delaware. The inertia of initial incorporation in Delaware, combined with its well-established legal infrastructure, makes it unlikely that litigation concerns alone will lead to a significant shift to other states.

Litigation Concerns for Controlling Shareholders: Perhaps curiously, reincorporating firms did not cite liability risks for their controlling shareholders (if any) as a motivation for leaving Delaware. Yet, there is considerable anecdotal evidence to suggest that it is an important—probably the most important—driver.

Seventeen firms in the dataset had identifiable controlling shareholders. Many more had large shareholders and/or CEOs who are plausibly viewed as controllers under Delaware law. These firms often cite the desire to reduce litigation risk—albeit with reference to directors and officers—as a motivation for reincorporation. News accounts and legal commentary on DExit frequently refers to controller shareholder liability risk as an important motivation for leaving Delaware.

Controlling shareholders do face significant litigation risk in Delaware. Delaware law holds controlling shareholders to high standards, particularly regarding transactions that might benefit them at the expense of minority shareholders. This risk is widely perceived as increasing. Delaware law has broadened the definition of who is a controller, with superstar tech CEOs facing particularly enhanced risks. Delaware law has expanded the categories of controller transactions deemed to be tainted by a conflict of interest and thus triggering entire fairness review. Finally, Delaware law has made it harder for controllers to obtain cleansing of conflicted transactions, mainly by imposing stricter standards of director independence.

On the other hand, despite Nevada’s generally more relaxed legal standards, the actual protection offered to controlling shareholders may not be significantly greater than Delaware’s. While Nevada provides a favorable environment for directors and officers, the benefits for controlling shareholders are less clear-cut. Indeed, what little Nevada law on point exists, has generally tracked Delaware law. Controllers opting for Nevada incorporation thus face uncertainty about their legal exposure and risk that that exposure will differ little from that they experienced in Delaware.

In addition, although the perceived benefits of Nevada’s legal environment may attract some firms, but Delaware’s systemic advantages and robust legal infrastructure will often outweigh these considerations. In particular, the comprehensive protections offered by Delaware law, while burdensome for controlling shareholders, contribute to its attractiveness for investors and overall market stability. The combined effect of investor resistance and the general inertia behind the original decision to incorporate in Delaware suggests that DExit will remain rare.

Conclusion

While Nevada offers some legal advantages, the systemic strengths of Delaware’s legal environment continue to provide significant incentives for firms to remain. Specifically, although Delaware’s rigorous enforcement of fiduciary duties is perceived as a risk, rigorous enforcement of those duties ensures high standards of corporate governance that can be beneficial in attracting investors. The balance of risks and benefits, combined with the inertia of Delaware’s dominant position, suggests that litigation concerns will not trigger a large-scale departure from Delaware in the near future.

In sum, Delaware’s dominance in corporate law is unlikely to be threatened in the near future due to its strong legal infrastructure and the inertia of existing incorporations. While Nevada presents some competition, the benefits of reincorporating there are not compelling enough for most firms.