Jonathan Macey has a new article, “Leaving for Las Vegas?," which posits that Delaware's historic dominance of the market for corporate charters is now threatened by a shift in both tone and outcome on the part of certain Delaware jurists.
I argue that, while the Delaware judiciary remains, for the most part, talented and knowledgeable, the legislature remains responsive, and the Secretary of State’s office remains highly efficient, certain members of the Delaware judiciary appear to be adopting an attitude towards business that appears to be “suspicious or negative.” This change in judicial attitude marks a sharp break with historic practice, and it is a change that matters. It is generally difficult, and often impossible, for public companies to avoid being sued, and, understandably, directors and officers do not like being subject to ridicule and derision, as Elon Musk was in a recent decision generally deriding “superstar CEOs” and questioning their value-added. The perception that judges do not recognize or appreciate the contributions made to corporations by their officers and directors could lead companies to resist the historical proclivity to incorporate in Delaware.
Additionally, this Essay makes the point that the “suspicious and negative tone adopted towards corporate boards and management” by Delaware judges stands in sharp contrast to the veneration that Delaware judges have shown towards the plaintiff-side lawyers who sue these officers and directors. Certain Delaware judges appear to have lost sight of the fact that the same agency costs that plague corporate officers and directors similarly plague the plaintiffs’ lawyers who sue these officers and directors. In other words, just as officers and directors do not always act in the best interests of their shareholders, plaintiffs’ lawyers do not always act in the best interests of the shareholders they ostensibly represent.
. . . Simply put, certain judges are making Delaware corporations feel unwelcome, and are raising concerns that the plaintiffs’ side of the bar is entitled to more deference than the defense bar.
A Climate of Discontent
Macey’s central thesis is that Delaware risks alienating key constituents in the incorporation decision-making process: controlling shareholders, corporate advisors, and legal practitioners. Recent decisions by the Delaware Chancery Court have adopted a tone that some perceive as "suspicious and negative" toward corporate boards and management. This shift marks a departure from the historically collaborative spirit between Delaware's judiciary and its corporate constituents.
Controlling shareholders, for instance, increasingly feel under siege. Macey cites cases like Tornetta v. Musk, where judicial scrutiny of Elon Musk’s compensation sparked backlash despite the overwhelming approval of Tesla’s non-controlling shareholders. Such decisions, he argues, impose protections that minority shareholders neither seek nor value.
Anthony Rickey concurs with Macey's argument on that score:
While I don’t agree with everything in Jonathan Macey’s new article (including some harsh criticism of judges), it makes an important point: controlling and minority stockholder interests can be aligned, and the assumption that stockholders value draconian enforcement of the DGCL is contestable. I found it surprising that the Moelis opinion did not mention the possibility that some stockholders purchased shares in a company with Ken Moelis’s name on the door, and a fully disclosed contract giving him control, because they wanted to participate in a firm led by Ken Moelis over anyone else. The congruence of a Florida pension fund’s arguments with the beliefs of other stockholders was simply assumed.
... Moelis stockholders never asked to be championed by a Florida pension fund. It’s not even clear that the West Palm Beach fund itself was all that concerned by its supposed injury. I’ve read most of their public board minutes and I can’t find any mention of Moelis until the Fund’s board was approached by counsel a few days before the complaint was filed.
I concur. It is an odd omission. A plaintiff lawyer found a theory, brought a suit that likely was not ripe, and was rewarded with an opinion that did more to advance the wealth of the plaintiffs bar than to make investors better off. As Rickey further observed:
Delaware law assumed that stockholders valued the disclosure settlements that used to plague Chancery’s docket. Its courts still assume that stockholders value the protections provided by representative litigation and appreciate paying class counsel 15 times a standard hourly rate (or more) for such benefits. Macey’s article usefully pushes back against that assumption.
Why It Matters
Delaware’s dominance has always depended on its ability to meet the preferences of those making incorporation decisions. Lawyers, investment bankers, and controlling shareholders value certainty, clarity, and deference to contractual arrangements. Macey contends that the state’s judicial temperament increasingly undermines these priorities, creating friction in the market for corporate charters:
In particular, recent decisions regarding controlling shareholders undermine the work of judges like Leo Strine and William Allen, who sought to simplify the corporate law of Delaware and to make clear the rules of the road. Instead, in recent years a mystifying shadow law for corporate controllers has emerged that practitioners, investors and controlling shareholders find frustrating and opaque. Decisions construing Delaware statutes and applying Delaware common law run hundreds of pages in length and provide far more nuance than clarity.
I pause briefly to plug my recent articles that speak to some of these same issues:
DExit Drivers: Is Delaware's Dominance Threatened?: This article provides both an empirical and a qualitative analysis of firms that reincorporated from Delaware to another state between 2012 and 2024. 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. But the subset of firms with controlling shareholders may prove an exception, as Delaware law is increasingly skewed against controllers.
A Course Correction for Controlling Shareholder Transactions: This paper critically examines the evolving legal standards applied by Delaware courts to controlling shareholder transactions, highlighting the increasing constraints faced by controlling shareholders. Delaware courts increasingly exhibit a reflexive suspicion of transactions involving a controlling shareholder. This article contends that Delaware courts need a course correction. They have pushed the law governing controlling shareholders far beyond legitimate policing into unnecessary and unwise overregulation. This has prompted a backlash in which controllers threaten to reincorporate outside of Delaware, following Elon Musk’s example of moving Tesla to Texas.
Returning to Macey, he argues that legislative interventions to "correct" judicial decisions, while effective in addressing immediate concerns, cannot alter the perception that Delaware courts are becoming less predictable. If this sentiment grows, companies may explore alternative states, shaking the foundations of Delaware’s corporate dominance.
A Broader Perspective
Despite these challenges, Macey remains cautiously optimistic. He notes that Delaware’s competitors face their own hurdles, and the state’s advantages—efficiency, legal expertise, and a comprehensive statutory framework—remain unmatched. As long as Delaware can maintain its reputation as marginally better than its alternatives, it will likely retain its position at the top.
Future Directions
Macey’s analysis offers a rich vein for scholarly exploration. Legal writers could investigate whether Delaware’s challenges represent a broader trend in corporate governance or if they are unique to the state’s peculiar role in U.S. corporate law. Similarly, examining the long-term implications of judicial-legislative friction in maintaining a jurisdiction’s appeal could yield valuable insights for other states vying for a slice of Delaware’s market. As Macey observes:
Vice Chancellor Laster and Chancellor McCormick have expressed displeasure with Delaware statutes that they likely will be called upon to construe. A reasonable corporate planner thinking about how a statute will be interpreted and applied would expect that the judges’ disdain for a statute inevitably would affect these interpretations and applications.
In short, Delaware is not "leaving for Las Vegas," but Macey's essay reminds us that even the mightiest players in law and policy must adapt to maintain their edge. So I highly recommend reading Macey's essay.
