One of the hot topics in the corporate space over the last several months has been the question whether Delaware corporations should consider reincorporating in another state, such as Texas or Nevada. Much of the discussion in this re-domestication debate has centered on recent controversial decisions out of Delaware’s courts. The ongoing discussion of these issues resurfaced in the last few days with the news that Delaware Chancellor Katherine McCormick had rejected Tesla’s motion for reconsideration of her earlier rejection of Elon Musk’s $55.8 billion pay package.

A recent law review article by Yale Law Professor Jonathan R. Macey addresses the question whether, in light of the recent case law developments in the state’s courts, Delaware corporations will now be “Leaving for Las Vegas.” Professor Macey’s article considers the extent to which recent Delaware case law developments may motivate key Delaware constituents to consider incorporation alternatives. As discussed below, Professor Macey’s article has in turn triggered further discussion of the central questions about the recent output of Delaware’s courts in corporate and securities lawsuits.

Professor Macey’s Article

Professor Macey’s article posits that Delaware’s “dominance in the jurisdictional competition for corporate charters” may be “in jeopardy” due to “unprecedented unease about the legal environment in Delaware” among significant stockholders and corporate advisors. Professor Macey cites both concerns about the “suspicious and negative tone adopted toward corporate boards and management” by certain Delaware Judges (particularly Chancellor Kathleen McCormick and Vice Chancellor Travis Laster) as well as the outcome of recent decisions that “weaken the contracting power of controlling shareholders and afford legal ‘protection’ to minority and nonminority shareholders who neither want nor value the ‘protections’ foisted upon them.”

Among the decisions to which Professor Macey is referring is the original ruling by Chancellor McCormick striking down Musk’s Tesla pay package, and also Vice Chancellor Travis Laster’s  February 2024 Delaware Chancery Court’s decision in the Moelis & Co case, in which held that a number of provisions in a Stockholder Agreement between a company and its founder were facially invalid, as they unlawfully constrained the board’s discretion in violation of the Delaware Corporations Code.  

These decisions, Professor Macey writes, alienate key Delaware constituents, not only the controlling shareholders but also including the minority shareholders who “ostensibly were the beneficiaries of those decisions” but who “did not perceive any benefits from the decision, and actually opposed the decisions when they had the opportunity to do so.” Professor Macey goes on to state that the Delaware constituents most involved in making chartering decisions (controlling shareholders, transactional attorneys) are “increasingly uncomfortable advising firms to charter in Delaware because they have been targeted in recent decisions.”

Finally, Professor Macey notes that while “the legislature can, and did, reverse decision that harm Delaware’s competitive position,” the legislature “cannot change the anti-controlling shareholder judicial temperament that led to those decisions.” Given that, “the risks to Delaware’s competitive position remains real.”

Commentary on the Article

Professor Macey’s article, which is actually still just circulating in draft form, has occasioned further commentary. For example, Anthony Rickey of the Margrave Law LLC in a recent LinkedIn post (here), noted that while he disagreed with Macey’s criticism of certain Delaware judges, he agrees that Macey is making an important point; that is, that “controlling and minority shareholders’ interests can be aligned.” In that regard, he noted that he 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 [the plaintiff in the Moelis lawsuit’s] arguments with the beliefs of other stockholders was simply assumed.”

UCLA Law Professor Stephen Bainbridge added his own commentary on Professor Macey’s article in a November 29, 2024, post on his ProfessorBainbridge.com blog entitled “Have the Delaware Courts Become Pro-Plaintiff and Anti-Business?” (here), quotes extensively from Professor Macey’s article, saying, among other things that “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.” Professor Macey, Professor Bainbridge notes, contends that the state’s judicial temperament increasingly undermines these priorities, creating friction in the market for corporate charters. Bainbridge concurs, commenting that “If this sentiment grows, companies may explore alternative states, shaking the foundations of Delaware’s corporate dominance.”

Discussion

At a minimum, Professor Macey’s article provides an intellectual and jurisprudential context for the ongoing discussion about whether Delaware companies should re-domesticate in other jurisdictions. In the meantime, the rest of the world is not standing still. Among other the leading alternative states, including Nevada and Texas, are taking steps to make their jurisdictions more appealing to fleeing Delaware corporations. For example, the new Texas business courts became operational on September 1, 2024.

There is no doubt that there is a real debate here involving real issues. There have in fact been companies that have reincorporated from Delaware to other states, as I have noted in prior blog posts on this site. Despite the real substance to this debate, I wonder whether the no doubt serious issues that Professor Macey’s article raises will in the end motivate significant numbers of Delaware corporations to re-domesticate in other jurisdictions. For starters, inertia is a powerful force. Shareholders and corporate executives have other important issues to consider, including company operations and profitability. These more immediate concerns will for most companies take preclusive precedence.

In addition, the controlling shareholder issues that predominate in Professor Macey’s discussion, while undoubtedly important to certain companies, are simply not relevant to the majority of companies for because they do not have a controlling shareholder. To be sure, for many of the tech and other high growth that attract a significant amount of media attention and that do have controlling shareholders, these issues will be important, and for that reason you can expect the public discussion of these issues to continue. However, for the vast majority of Delaware corporations, these issues will be irrelevant, and therefore will be unlikely to provoke consideration of re-domestication issues.

A final consideration here is that even if questions have recently been raised about Delaware’s courts, the state’s overall and historical reputation is likely to ensure that most companies will remain there, in preference to other jurisdictions where the historical record is still just being established. Indeed, despite the concerns he notes in his article, Professor Macey remains generally positive about Delaware. As Professor Bainbridge summarizes in his blog post, “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.”

One final note is that even Delaware corporations considering re-domesticating elsewhere the question is not whether they could be “Leaving for Las Vegas.” The question, even if it comes up, will be whether they will be “Leaving for Carson City,” or even “Leaving for Austin.” I know, I know, these alternatives don’t make for as interesting of a headline, even if more technically correct. I still think it is important that in this debate, nobody is actually talking about moving to Las Vegas.

Special thanks to a loyal reader for sending me drawing my attention to Professor Macey’s article.