Regular readers know that I have been covering the DExit phenomenon. My article DExit Drivers: Is Delaware's Dominance Threatened?, which is forthcoming in the Journal of Corporation Law, provides empirical data on reincorporations out of Delaware. I concluded that DExit is a trickle not a flood. But I also concluded that there is a class of companies--namely, those with controlling shareholders--that are more likely to think seriously about changing their state of incorporation. As I explain in my other recent article, A Course Correction for Controlling Shareholder Transactions,
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.
The perception that controllers now face a significant risk of liability has prompted companies like Tesla, TripAdvisor, Pershing Square, and Dropbox to leave Delaware. On top of which, Meta announced that is considering do likewise.
I remain unpersuaded that DExit poses a serious threat to Delaware's dominance of the market for corporate charters. The recent high profile departures, however, appear to have freaked out the political class in Delaware. This is not surprising, of course. The annual franchise taxes companies pay Delaware for the privilege of being incorporated there make up as much as 20% of the state's total tax revenue. If that income stream went away because companies incorporated outside Delaware, the state government would either have to make massive budget cuts or raise other taxes dramatically.
Delaware's new Democratic Governor Matt Meyer told Business Insider that DExit must cease:
"It's really important we get it right for Elon Musk or whoever the litigants are in Delaware courts," he said. "We're cognizant that there may be some things that need to change. We're going to work on them."
Though he's been in office for less than two weeks, Meyer said he'd already met with "leading corporate legal brass" and state government leaders to chart a path forward.
"I think within the coming weeks, you're going to see some things rolled out that will help move our state forward and bring us into 2025 and beyond to make sure we're protecting and growing the corporate franchise," he said.
If he's got legislation in mind, might I point out that my article, A Course Correction for Controlling Shareholder Transactions, contains a number of recommendations for legislative reforms but that's another post.
It's not just the Governor, however. Delaware Senator Nicole Poore and Assembly Speaker Melissa Minor-Brown have offered up an op-ed on the importance of Delaware’s dominance of the market for corporate charters in generating tax revenues to fund liberal policies:
We have big goals for the next General Assembly, like adequately funding our education system so every Delaware child can receive a world-class education; expanding affordable housing so that working Delawareans can have a safe place to raise their families and earn an honest living; and improving access to quality and affordable healthcare so we can live healthier lives and make the healthcare system work better for everyone.
None of this will be possible if outside actors are successful in dismantling Delaware’s position as a leader in corporate governance. Discussions of increasing teacher pay, providing tax breaks for hardworking Delawareans and enacting large-scale infrastructure projects could be forced to the back burner as we attempt to navigate budgetary uncertainties.
... Whether a cut in Medicaid, decreases in law enforcement recruitment or deferred maintenance on roads and bridges, every single Delawarean would be affected by decreased revenue, as we would be forced to make cuts or raise taxes to keep pace with the cost of services our constituents desperately need.
They go on to call out the Chancery Court for threatening that income stream:
While Delaware's Court of Chancery has remained widely respected for its expertise and fairness, we acknowledge that it’s important to address its lack of diversity and ensure the judiciary reflects the broader perspectives of the communities it serves, thereby enhancing its credibility and fairness, and Delaware’s leadership in corporate governance and justice.
I don't think they've correctly identified the problem. Instead, as you might expect from my emphasis on the impact of Delaware's conflicted controller caselaw, I think Jonathan Macey correctly diagnosed the problem:
The problem is exacerbated by what are perceived to be the “suspicious and negative tone adopted towards corporate boards and management” by in certain opinions that weaken the contracting power of controlling shareholders and afford legal “protection” to minority and noncontrolling shareholders who neither want nor value the “protections” foisted on them. These protections appear to be unwelcome by controlling shareholders and their advisors who are highly influential in the decision about where to incorporate. Their increasing dissatisfaction with the Delaware legal landscape explains certain of the actual and threatened departures from Delaware.
Interestingly, yesterday's Delaware Supreme Court decision in the TripAdvisor case reversed one of the prominent cases in which a controller had lost. It calls to mind the switch in time that saved nine.
