The WSJ reports:
Meta Platforms is discussing moving its incorporation from Delaware, where most big U.S. companies are legally housed, people familiar with the matter said. Texas has billed itself as a better destination for companies such as Meta with controlling shareholders like Zuckerberg. ...
Executives and controlling shareholders of public companies have long expressed frustration with the Delaware Court of Chancery, which has become home to a thriving shareholder plaintiffs’ bar. The big companies that have reincorporated elsewhere have tended to have a dominant owner potentially affected by recent Delaware decisions. ...
“The Texas state government is trying to send out signals that the Texas state courts will be more friendly to businesses than the Delaware court has been,” said Stephen Bainbridge, a law professor at the University of California, Los Angeles. “But there’s no guarantee that that’s going to happen.”
Regular readers will recall that my two most recent law review articles speak to this precise issue. DExit Drivers: Is Delaware's Dominance Threatened?, which is forthcoming in the Journal of Corporation Law, provides empirical data on reincorporations out of Delaware. It concluded that the number of reincorporations from Delaware remains trivial 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 seems unlikely to become widespread soon.
But there is a but. My article opines that:
None of the companies in our dataset identified controlling shareholder liability exposure as a motivation for reincorporating, but there is reason to suspect that it was an important motivator for a subset of the redomiciling corporations in our study. ...
Delaware courts have decided a series of recent high profile cases that have raised controller’s liability exposure. Specifically, in cases “involving Tesla Inc., TripAdvisor Inc., Moelis & Co., and Sears Hometown and Outlet Stores Inc.,” the court has “sought to tighten the standards for conduct by controlling stockholders.” Areas in which the Chancery Court is perceived to have tightened standards respecting controllers include a broader definition of who is in control, expanding the class of conflicted transactions requiring cleansing, and the strictness with which the standards for cleansing are applied, especially with respect the definition of who is an independent director. . . .
As such, concerns about both the application of the law and the tone of the opinions are mounting. A New York-based corporate law partner observed that uncertainty about the definition of independence is a major concern among those voicing skepticism about the direction of Delaware law. The same partner noted a growing impression that certain Delaware Chancery Court judges have developed a skeptical attitude towards independence of directors of Silicon Valley firms. Similar sentiments were expressed by both a prominent Delaware academic and a leading Delaware practitioner. On her group blog, Professor Ann Lipton likewise speculated that these developments may “hit Silicon Valley companies particularly hard, because of the chumminess of the tech world, and it's not surprising that once independence is questioned, the tone of the opinions is going to come off as skeptical, in a manner that defendants do not like.”
Having said that, however, neither Texas nor Nevada (Delaware's other major competitor has a well developed body of law governing the fiduciary duties of controlling shareholders.
In addition, it is possible that Delaware courts will adopt a course correction that rebalances the law governing controllers. Indeed, my other recent article, A Course Correction for Controlling Shareholder Transactions, advocates just such a correction. Or, more precisely, four corrections:
... the courts: (1) should narrow the definition of controller; (2) should not attempt to sort out in which cases controllers owe fiduciary duties to the minority from those in which they do not, but instead hold that a controller always owes fiduciary duties to the minority; (3) narrow the class of cases under which entire fairness is the standard of review by adopting a reinvigorated Sinclair Oil threshold test under which entire fairness is triggered only when the controller receives a benefit at the expense of and to the exclusion of the minority; and (4) improve the regime for cleansing transactions in which entire fairness applies. These changes will reduce costs and encourage beneficial investment, are doctrinally sound, and will enhance Delaware’s position as the state of choice for incorporation.
The article argues that these corrections are necessary because:
Delaware courts increasingly exhibit a reflexive suspicion of transactions involving a controlling shareholder. The court has operationalized that skepticism by notably broadening the definition of who qualifies as a controlling shareholder. In particular, the courts are increasingly willing to hold that shareholders who own less than a majority of the corporation’s voting power nevertheless possess control. Taken to its logical extreme, this trend easily could result in someone being deemed a controller even in the absence of stock ownership.
The court’s growing skepticism of controlling shareholders is further reflected in its tightening of the standards governing the conduct of controlling shareholders. In doing so, the court has expanded the range of conflicted transactions necessitating cleansing and heightened the rigor with which cleansing standards are applied, particularly regarding the criteria for independent directors.
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.
I confess to taking a certain amount of pleasure in saying I told you so.
By the way, as I have said before, the UCLA Law Library is one of UCLAW's crown jewels. The reference staff is exceptionally friendly, helpful, knowledgeable, and supportive. The DExit article would not have been possible without their support. Likewise, this blog post owes our head librarian a shout out, as he flagged the WSJ article for me. It's precisely the sort of little assists they do routinely that make this such a supportive environment. Prospective students and faculty should take our library's excellence into account when deciding whether to join us.
