Amidst a flurry of recent reincorporations—conveniently coined “DExits”—of major corporations such as Dropbox, Tesla, and potentially Meta, Delaware’s future as a corporate safe-haven faces uncertainty. Delaware has long been the state of incorporation for the largest number of limited liability companies and corporations out of any other state. With more than 60% of Fortune 500 Companies and well over 1 million registered companies, Delaware paved its way to a business-friendly reputation by establishing the Delaware General Corporation Law (“DGCL”) and the Court of Chancery, a court of equity dedicated solely to business disputes, –an offering other states have tried but failed to perfect. Such a system has developed a complex and rich body of case law, which in theory provides predictability to companies and their investors.
In recent years, however, tech companies have begun an exodus of sorts, reincorporating in and moving operations to states including Nevada, Texas, and Wyoming. The idea of relocating became a topic of discussion when a Delaware court decision invalidated Tesla CEO Elon Musk’s $56 billion compensation package from SpaceX. In response, Musk reincorporated SpaceX in Texas in an effort to allow his compensation plan to proceed. Shortly after, other companies began questioning the status quo of Delaware as the most business-friendly state. Musk’s subsequent reincorporation of Tesla in Texas intensified conversations around reincorporation outside Delaware. Moreover, the Delaware Courts were hit with criticisms stating that judges were incorporating politics and creative writing into their work, therefore undermining the state’s previously predictable corporate law precedents.
Criticisms were amplified when the Court of Chancery initially disallowed TripAdvisor from reincorporating in Nevada. The Court said that a reincorporation for the public company required approval from a special committee within the company and that making such a decision would deprive certain shareholders of their litigation rights. Similarly, a Delaware judge voided an Activision Blizzard merger because one shareholder filed suit on the grounds that the merger process violated the technical requirements of the DGCL, despite the company obtaining 98% shareholder approval. These decisions indicated an increased likelihood that reincorporation actions could lead to expensive litigation in Delaware.
Corporations shouldn’t write Delaware off just yet, though. In 2025, the Supreme Court of Delaware overturned the Chancery Court’s Activision Blizzard decision, stating that the business judgment rule—a standard of review known for being deferential to business leaders and decisionmakers—should have been applied, rather than the “entire fairness” standard of review. This decision provides some reassurance that the Delaware Supreme Court trusts business leaders to make decisions as basic as where to incorporate; however, the backdrop of shareholder activists pursuing litigation and a plaintiff’s bar seeking windfalls only increases the likelihood of litigation surrounding reincorporation. These risks alone may be enough to make corporations want to avoid the Delaware environment altogether and seek greener, less litigious pastures elsewhere. This fact is especially true where said pastures are claiming to offer fewer regulatory constraints, relaxed governance laws, and the ability for companies to have greater autonomy.
Nevada, for example, has a controlling shareholder anti-takeover statute that aims to protect a company from potential meritless litigation or hostile takeovers without having to consciously enact measures such as “poison-pill” shareholder plans. Wyoming does not collect entity ownership information and allows a trust to hold a Wyoming-registered LLC, creating a thicker-than-usual veil of secrecy. In comparison, Delaware merely refrains from disclosing the name of directors and officers in public filings, but those fiduciaries can often be found with some digging.
Additionally, a Nevada Supreme Court ruling in the landmark case Chur v. Eighth Jud. Dist. Ct. of Nev. held that grossly negligent or reckless actions may not violate the duty of care owed to the company or its shareholders. This stands in contrast to the Delaware standard by which it must be proven that directors or officers acted in bad faith or were grossly negligent.
Both Delaware and Texas take a similar approach to fiduciary duties for directors and officers, with both having implemented standards for fiduciaries’ duties of care and loyalty through case law. Texas’ standards regarding these duties are in their infancy but will eventually make their way into a court, arguably making Texas case law vulnerable to the same alleged “creative writing” accusations of Delaware’s judges. Texas’ standards differ from Nevada’s, where the fiduciary duties of directors and officers are codified in statute, with the aim of providing less room for judicial interpretation. However, Texas law also establishes the fiduciary duty of obedience—directors and officers cannot exceed the scope of what the corporation is permitted to do under its governing documents and any other limits set out under state law.
But are these other states offering enough to warrant dismantling the century-old history of incorporation in Delaware? Is the legal uncertainty worth venturing into the wild west of corporate governance?? Time has yet to tell. It will likely be many years before the more defined state statutes are tested by each state’s respective courts—courts that do not have as much expertise with complex corporate litigation. Depending on which court a company may find itself in outside of Delaware, a handful of different, unpredictable outcomes may be had. When it comes to corporate governance, every Board should be acting by the books, and should an action be challenged, the company will want to understand the ideally predictable case law by which it will be judged.
From simple procedural matters to complex litigation backed by minimal case law, these compounding unknowns have inspired many company leaders to disregard the recent reincorporation trend and remain in the hands of their familiar state, Delaware. The fact that Delaware has no state sales tax and no taxes on intangible assets is an added bonus. Despite the temptation that may come with a lack of franchise tax in Nevada, the franchise taxes in Delaware are often predictable, and even so, the Delaware tax may not pose much of an issue for smaller companies, but rather is more financially and administratively burdensome for larger, more complex businesses. Even Texas implements franchise taxes that are a percentage of annual revenue, which for an emerging company could be as little as nothing, but for an entity like Tesla, could be exorbitant. Another notable tax consideration is the fact that neither Texas nor Nevada implements state corporate income taxes. However, it’s worth understanding that Nevada and Texas implement variable gross receipts taxes based on business activity and sales amounts, which in practice, may create tax implications similar to those resulting from a formal income tax.
In response to all the commotion, Delaware released an announcement on February 17, 2025, regarding its intent to pass a legislative response to the corporate departures and other uncertainties. Topics of note include plaintiff’s award fee limits, the status and rights of controlling stockholders, and director independence. With a patchwork of caselaw pointing corporate leaders and legal teams in different directions, the Delaware state legislature hopes to set a clearer standard for the controlling stockholder characterization. This standard increases the ownership percentage threshold that allows a shareholder to exercise control, dictates when a controlling stockholder vote can be approved by the company, and narrows the scope of “books and records” within the purview of stockholders’ rights, thus shielding the company’s business doings from prying eyes without a proven need for an investigation of wrongdoing or other proper purpose. Overall, Delaware’s various proposed legislative actions seek to provide the corporate stability Delaware built its foundation on. Given the urgency of the frustration of investors and companies, the proposed legislation was released by the Delaware House Judiciary Committee to the full state House for a vote on March 19, 2025.
While reincorporation outside of Delaware is by no means the standard, it may be a valuable conversation for some businesses, one that requires weighing the potential costs and benefits. Such a decision would require the approval of the shareholders and the Board of Directors of the company, the adoption of a Plan of Conversion or Merger, and various formation documents and filings with the Secretaries of State, depending on the jurisdictions to and from which the company is moving. Many of these steps require filing fees and proper documentation, so it is prudent that any company consult with legal counsel before taking any of these steps. Full entity conversion and reincorporation costs can get expensive (not counting potential litigation surrounding efforts to reincorporate).
At this point, incorporation in Delaware remains the prudent choice for early and growth stage companies that don’t have the same considerations or expendable capital as larger companies. Corporate governance decisions such as selecting a state of incorporation can impact a company’s success in a variety of ways, and for most companies, the advantages that have long made Delaware the state of choice still stand.
