Jeff Jacobs is Head of M&A and COO of Investment Banking at Solomon Partners, a leading investment advisory firm founded in 1989.
Delaware has been the favored home of corporate America for decades. Roughly two-thirds of Fortune 500 companies and 80% of newly public firms incorporate there, drawn by its specialized courts, established case law and governance framework that ensures stability for executives and investors.
But cracks are forming in Delaware’s dominance. A wave of high-profile companies—Tesla, TripAdvisor, The Trade Desk, Dropbox and Meta—have reincorporated or are considering reincorporating elsewhere. This shift is no fluke. It reflects growing legal uncertainty in Delaware, increasing tax burdens and intensifying competition from states such as Texas and Nevada.
Delaware lawmakers are scrambling to stem the tide, but the larger question looms: Is this the beginning of the end of the state’s corporate supremacy? The answer carries major implications for chief executives, investors and corporate governance.
Why Location Matters
Incorporation legally establishes a business as a separate entity, shields owners from personal liability and provides a stable governance structure and long-term continuity.
Switching jurisdictions is no trivial matter. It affects governance frameworks, shareholder rights and the legal environment in which boards operate. Investors must assess whether such a move would signal greater executive control, weakened shareholder protection or changes in corporate transparency.
Many companies are choosing states with stronger liability protections for directors and controlling shareholders, potentially making shareholder litigation more difficult. This could reshape how investors engage with publicly traded firms and even influence company valuations if markets interpret these shifts as reducing legal oversight.
The Tide Turns
Delaware has long been favored for its business-friendly laws and over 200 years of corporate case law, which provides a predictable legal environment. Its specialized business courts have reassured boards and investors, particularly in cases involving controlling shareholders. However, several recent Delaware court rulings are challenging long-standing precedents—especially regarding executive liability and shareholder rights. Notably, the Delaware court’s decision to reject Elon Musk’s $55.8 billion Tesla compensation package turned heads throughout corporate America and raised concerns that the state’s legal environment is becoming less predictable. Musk’s response was characteristically swift and direct: He urged companies to exit Delaware altogether.
This sentiment is spreading among corporate lawyers, who prioritize legal predictability when advising clients on governance and liability risks. If Delaware courts continue shifting in ways that increase litigation exposure for directors and controlling shareholders, more companies may seek alternatives.
Sensing an opportunity, other states are aggressively positioning themselves as alternatives to Delaware. Nevada has become a haven for businesses seeking stronger legal protections for executives. And, unlike Delaware, Nevada has no franchise tax, making it attractive for cost-conscious firms. Artificial intelligence company Gaxos.ai is leaving Delaware for Nevada, citing an estimated $200,000 annual franchise tax bill in Delaware for 2024 versus less than $1,000 in annual fees to incorporate in Nevada.
Texas is taking a different approach, setting up a specialized business court system to replicate Delaware’s advantages. By building a judiciary tailored for corporate cases, Texas is positioning itself as a serious contender for incorporation.
Delaware Takes Note
Delaware lawmakers are not standing still. In response to the corporate departures, the state has passed a sweeping bill (known as Senate Bill 21)—the most significant overhaul of Delaware corporate law since 1967.
The legislation aims to narrow the legal definition of a “controlling shareholder,” making it harder for courts to deem executives as having undue influence unless (a) they hold a majority of the voting power or (b) they hold at least 1/3 of the voting power and control management. While the bill is not retroactive, under this new legislation Musk would not have been considered a controlling shareholder in his Tesla compensation case, since he never controlled 1/3 of the vote.
The bill also raises the bar for proving director conflicts. It restricts shareholder access to certain internal records, and it also makes it easier for controlling shareholders to avoid “entire fairness” review by loosening the requirements for cleansing conflicted transactions. The hope for this new legislation is that it will improve Delaware’s reputation as a business-friendly jurisdiction.
A More Competitive Environment
Despite recent turbulence, Delaware remains the dominant player. Over 2 million legal entities are still incorporated there, and Delaware’s incorporation revenue, the majority of which comes from franchise taxes, accounts for roughly 30% of the state budget.
Switching incorporation is a complex, often disruptive process, meaning a large-scale corporate exodus is unlikely in the immediate future. However, the trend of high-profile departures signals a fundamental reevaluation of Delaware’s value proposition. If states such as Texas and Nevada continue refining their corporate laws while Delaware’s legal environment remains in flux, the long-standing status quo may not hold. The decision of where to incorporate is no longer a mere formality; it has become a strategic choice with real financial and legal consequences. Companies must weigh Delaware’s established legal framework against the emerging advantages of competing states.
Directors and officers should evaluate whether alternative jurisdictions offer stronger liability protections, lower costs or a more predictable regulatory environment. Investors must monitor how these shifts impact governance structures, shareholder rights and corporate transparency across public firms.
Delaware’s dominance in corporate America has long been taken for granted. But as companies rethink their options and alternative jurisdictions gain traction, Delaware’s SB 21 shows its willingness to adapt to ensure it remains the gold standard for corporations.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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