Delaware’s Longstanding Dominance in Corporate America
For decades, the answer to “Where should we incorporate?” was almost automatic: Delaware.
That answer made sense. Delaware offered a mature body of corporate law, experienced judges, a respected Court of Chancery, and a legal framework that investors, lenders, buyers, directors, and lawyers all understood. For public companies and venture-backed businesses, Delaware was not just the default. It was the path of least resistance.
That assumption is now being tested.
Recent Delaware decisions involving controlling stockholders, founder-led companies, compensation arrangements, stockholder agreements, and reincorporation transactions have caused boards to revisit whether Delaware still offers the right balance of predictability, flexibility, and litigation risk. Nevada and Texas have noticed, and both are positioning themselves as attractive alternatives. While only a small number of companies have actually reincorporated, the issue remains a hot topic in public company boardrooms.
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Why Boards Are Reconsidering Delaware
In cases involving controller transactions, conflicted governance arrangements, and executive compensation, Delaware courts have shown they are willing to scrutinize process, independence, disclosure, and fairness. For companies with controlling stockholders or influential founders, that can be challenging. A transaction may make business sense and still invite expensive litigation. A board may believe it acted properly and still face close judicial review. A governance structure that seemed commercially routine may later be questioned under Delaware law.
But the “Delaware exodus” narrative can be overstated. Companies are talking about leaving Delaware far more often than they are actually doing it. That distinction matters. Boards are not fleeing in droves. They are reassessing whether Delaware still serves their company’s particular ownership structure, investor base, transaction plans, and risk profile.
The Myth That Reincorporation Eliminates Litigation Risk
One common misconception is that leaving Delaware eliminates fiduciary litigation. It does not. Reincorporation may reduce certain types of stockholder claims or change the standards that apply, but it does not make the company litigation-proof. Federal securities laws still apply. Disclosure obligations remain. Stock exchange rules remain. Regulators remain. Plaintiffs’ lawyers do not disappear; they adapt.
Another misconception is that Nevada or Texas is automatically “better” for directors and officers. Better for what? Nevada may be attractive to companies seeking stronger protection against fiduciary-duty claims. Texas may be attractive to companies with real operational ties to the state or those interested in its developing business court and corporate-law reforms. But those benefits come with tradeoffs. Institutional investors and proxy advisors may view a move skeptically, particularly if the company has a controlling stockholder or pending insider transactions. A reincorporation that looks like an effort to reduce accountability can create its own litigation and reputational risk.
The Value of Delaware’s Judicial Scrutiny
Delaware’s critics sometimes describe the state as hostile to business. That is too simplistic. Delaware’s value has always been tied to meaningful judicial review. The same scrutiny that frustrates some executives is part of what gives investors confidence. Delaware courts have long provided a roadmap for conflicted transactions: use an independent committee, empower it, retain independent advisors, condition the deal appropriately, disclose carefully, and build a record that can survive review.
That process can be burdensome. It can also be protective.
Consider a public company with a founder who owns a large voting stake and wants the company to enter into a transaction with another business he controls. In Delaware, counsel will immediately focus on whether the founder is a controller, whether he is receiving a unique benefit, whether entire fairness review applies, and whether procedural protections can restore business judgment review. That may be frustrating for management, but it also forces discipline before the transaction is approved.
In Nevada, the same board may face a more protective liability regime. That may reduce litigation exposure. But minority investors may see the move differently, especially if the company reincorporates shortly before a conflicted deal. What the board views as efficient governance, stockholders may view as a loss of rights. That perception matters.
Texas as an Emerging Alternative
Texas presents a different case. For a company headquartered in Texas, with employees, operations, and leadership there, reincorporation may be easier to explain. The company can say its legal home should match its business home. That is a more credible rationale than a company with no meaningful Texas connection moving there simply because it wants a more favorable litigation environment. Still, Texas does not yet have Delaware’s depth of corporate precedent, and that lack of case law may be either a benefit or a risk depending on the company.
Which Jurisdiction Makes Sense for Your Business?
The practical answer depends heavily on the business.
Startups and Venture-Backed Companies
For many startups and venture-backed companies, Delaware will remain the cleanest choice. Investors understand it. Financing documents assume it. Exit transactions are easier to execute. Choosing another jurisdiction too early may create more questions than benefits.
Late-Stage Private and Public Companies
For late-stage private companies and public companies with founders, dual-class structures, significant investor rights, or recurring related-party transactions, the analysis is more nuanced. Delaware still offers credibility, but the company should review its governance documents, committee structures, approval rights, and conflict procedures with fresh eyes.
The answer may not be to leave Delaware. It may be to improve the record before a problem arises.
Companies with Controlling Stockholders
For companies with controlling stockholders, the conversation is unavoidable. Delaware imposes process discipline. Nevada or Texas may reduce certain risks, but could increase investor-relations concerns. A board considering reincorporation needs a clear, well-documented rationale that explains why the move benefits the corporation and its stockholders, not merely insiders who want less scrutiny.
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Key Factors Boards Should Evaluate Before Reincorporating
That is the heart of the issue. Incorporation is not just a legal formality. It is a governance decision.
Boards should analyze:
- Ownership structure
- Investor base
- Litigation profile
- Transaction pipeline
- Insurance implications
- Proxy advisor reactions
- Long-term strategic objectives
before deciding whether to stay in Delaware or move elsewhere.
Avoiding a Decision Driven by Headlines
There are certainly situations where leaving Delaware may make sense. A company with deep Texas ties may have a strong case for Texas. A company seeking broader director and officer protections may reasonably consider Nevada. A company facing repeated stockholder litigation may conclude that the costs of remaining in Delaware outweigh the benefits.
But there are also times when leaving Delaware is more emotional than strategic. A founder may focus on personal litigation risk while the board must consider all stockholders. A management team may assume investors will not care, only to discover that the move becomes a distraction. A board may believe it is reducing risk while creating a new record for plaintiffs to attack.
The Bottom Line: There Is No One-Size-Fits-All Answer
The Delaware exodus is real in the sense that companies are asking questions they did not ask five years ago. It is not yet real in the sense that Delaware has lost its position as the dominant corporate jurisdiction.
For many companies, Delaware will still be the right answer. For others, Nevada or Texas may deserve serious consideration. The right choice depends less on headlines and more on the company’s specific facts.
The companies that handle this well will not be the ones that simply follow the latest reincorporation trend. They will be the ones that can explain, with a clean record and a straight face, why their chosen jurisdiction serves the company rather than merely protecting the people who control it.
About the author
Thomas Przybylowski is a litigation attorney with extensive experience leading complex commercial litigation, securities fraud and high-stakes disputes. He previously practiced at Pomerantz LLP and Schulte Roth & Zabel LLP and was named a Super Lawyers® Rising Star in 2020 and 2021.
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