A cascade effect (a.k.a. domino effect or snowball effect) occurs when a change triggers a chain of events in which one state of the world rapidly transforms into a new state.
Many commentators on the DExit phenomenon appear to assume that we are on the verge of a cascade event in which huge numbers of Delaware corporations decide to change their state of incorporation to some other state.
As I explain in my article, DExit Drivers: Is Delaware's Dominance Threatened?, the number of firms that have moved from Delaware is tiny. It barely amounts to a trickle. As I also explain therein, for most firms, Delaware remains the preferred choice. The only plausible exception is the small number of publicly traded firms having a controlling shareholder, who have faced a greater risk of liability as a result of recent Delware court decisions (discussed in my A Course Correction for Controlling Shareholder Transactions). Assuming SB 21 passes the Delaware legislature, those decisions will be overturned and the incentive driving DExit will be significantly reduced.
But let's assume I'm wrong. Would DExit become a cascade?
This brings us to my friend and UCLAW colleague Andrew Verstein's new article, The Corporate Census. This is a really important new article in which Andrew presents:
... the first database of all entity formations in the United States, going back to the founding. All previous studies were based on tiny subsets of corporations, such as only large public corporations. Looking at the broader sample destabilizes core empirical assumptions in the field. For example, while Delaware is commonly thought to be the leader for incorporations, its law is not even in the top five.
Of particular import for present purposes is Andrew's finding that, although "Delaware is thought to have taken New Jersey's leading role in the early 20th century, New Jersey actually continues to beat Delaware until the late 1980s." Contrary to conventional wisdom there was no cascade in which massive numbers of corporations decamped from New Jersey to Delaware.
To my mind, Andrew's findings suggest that there will not be a domino effect. If DExit becomes a real phenomenon rather than clickbait, it will still take decades for Delaware to be overtaken.
This doesn't mean SB 21 is unnecessary. To the contrary, as I discuss in Course Correction, Delaware common law has gone seriously awry in this area. Both as a matter of doctrinal consistency and sound policy, the law needed to be changed. It does, however, suggest that Delaware can take its time and do it right.
In any case, go read Andrew's article.
