Why Should Delaware Care?
Delaware’s budget depends on more than $2 billion brought in by its leading corporate franchise work, which helps to keep the cost of living lower for residents. A recent spat of high-profile corporate departures has unnerved state leaders, however, and now reforms may be in the cards for the first time in years.
Delaware’s business and legal scene is unsettled following new reports of high-profile companies contemplating Delaware corporation departures, and following what some in the community believe is troubling appetite for reform by Gov. Matt Meyer’s new administration.
“He’s obviously hearing from people who have a particular view,” said Joel Fleming, a corporate plaintiff attorney with Equity Litigation Group. “I hope that the governor is also listening to people who represent public investors, like pension funds for workers, teachers, police officers, firefighters, etc., who put their money in the public markets that Delaware law is going to protect.”
“Stay the course. Historically, Delaware has been able to evolve, but it has been that: evolution not revolution,” he added.
Already stung by long-running gripes from past litigants like TransPerfect and Elon Musk, Delaware’s corporate bar was unnerved by news last month that Meta, the multi-billion-dollar parent company of Facebook, Instagram and WhatsApp, was considering leaving the First State.
The news was amplified by discussion on X, the popular social media platform that is owned by Musk, the world’s richest man who lost two legal battles in Delaware in recent years and has made retribution a personal cause.
That criticism led Meyer, who is a former corporate lawyer himself, to undertake a media blitz, and his comments only further unnerved some at home at a time when his critiques of longstanding business practices in Delaware are already drawing concerns from corners of the business community.
What happened now?
The Wall Street Journal broke the news Jan. 31 that Meta founder and CEO Mark Zuckerberg was considering moving the company to Nevada or Texas after spending decades domiciled in Delaware.
Similarly, DropBox, another billion-dollar tech company, announced plans the same day to move its incorporation to Nevada.
In a notification to shareholders, DropBox cited the “increasingly litigious environment in Delaware,” among other reasons, for its move. The First State’s Court of Chancery has long valued the rights of minority shareholders, and therefore lawsuits are frequently filed on all manner of corporate actions.
News of the companies’ potential flight was touted by Musk, who moved his companies Tesla, SpaceX and Neuralink from Delaware last year after losing a massive lawsuit in Delaware that negated his $55.8 billion Tesla compensation package.
“Companies are flooding out of Delaware, because the activist chief judge of the Delaware court has no respect for shareholder rights,” he wrote on X on Feb. 1, referring to Chancellor Kathaleen McCormick who presided over his two latest cases.
Zuckerberg has reportedly been drawing closer to Musk in recent months, especially as the tech leader has taken a leadership role in the Trump administration. Meanwhile, Dropbox CEO Drew Houston is a longtime friend of Zuckerberg and sits on Meta’s board.
Billionaire private equity investors also later weighed in, with Bill Ackman announcing that he would move his firm, Pershing Square Capital Management, to Nevada and Chamath Palihapitiya adding that he has moved his latest incorporations there too.
The flurry of news prompted the development of a new term “DExit,” referencing those companies leaving Delaware with a nod toward Brexit, and increased scrutiny in the press and on social media.
“Ever since the judicial activism against Tesla shareholders, I redirected the incorporation of the last four companies I’ve bought or started to Nevada. Activism has a price and DE will pay it as fewer companies pick them. There’s just too much risk to be incorporated in DE anymore,” Palihapitiya added on X.
Controversy already boiling
The Court of Chancery had already been in national headlines for much of the last two years, as McCormick, its top jurist, forced Musk to buy Twitter in a chaotic deal and then later nixed his enormous compensation package – even despite shareholders voting to uphold the deal.
Just hours after the latter decision, Musk took to his social media platform to proclaim: “Never incorporate your company in the state of Delaware.”
It’s a crusade that he’s continued for more than a year, posting at least 18 times on X about Delaware to his 217 million followers in the last year.
It added to a chorus first echoed a decade ago by Phil Shawe, the multi-millionaire owner of translation company TransPerfect, who was the subject of a heated Chancery case that demanded the sale of his company. In the years since, Shawe and an organization created by his employees, Citizens for Judicial Fairness, have become vocal critics of Delaware courts and the Chancery Court in particular.
That climate of criticism grew last year, when the state legislature approved amendments to the Delaware General Corporate Law that supported deals cut by controlling shareholders. While the corporate bar supported the changes, the state’s judiciary and a number of law school professors opposed them.
The confluence of events has stirred the pot around the corporate franchise in Delaware, where more than two-thirds of the Fortune 500 are incorporated and about 80% of newly formed companies locate.
Delaware depends on filings
It’s no secret how important the legal incorporation business is to Delaware, with taxes and fees related to the industry bringing in more than $2.2 billion last fiscal year, or about a third of the state’s budget.
Leaders have long argued that revenue allows Delaware to continue avoiding a statewide sales tax and helps to subsidize state services while allowing a favorable tax climate for residents. But it also means that any negative movement in the industry that could affect the state’s golden goose is highly scrutinized.
The loss of a handful of companies – even major names like Facebook and Tesla – is not something Delaware would particularly be worried about, according to leaders. The most that any one company pays Delaware in franchise tax is $250,000 a year.
“As Secretary, I’m working tirelessly to improve our processes at the Division of Corporations and with our legal and registered agent communities. Delaware remains unrivaled for incorporation services,” said Charuni Patibanda-Sanchez, Delaware state secretary who oversees the legal incorporation industry, in a statement.
Lawrence Cunningham, a former corporate law attorney and now the director of the Weinberg Center on Corporate Governance at the University of Delaware, also noted that big companies are still seeking out Delaware.
Last year, three companies with market capitalizations of at least $1 billion came to Delaware while four left.
One South Dakota-domiciled company worth more than $750 million is even currently battling its shareholders to move to Delaware, arguing that it’s in their best interests.
How Meyer responded
With the First State finding itself the topic of national conversation, Gov. Meyer appeared on CNBC and NewsNation in the past week, and was interviewed by Business Insider to try to rebuff the narrative.
In each interview, Meyer asserted that “there need to be changes.”
“We need to make sure that every litigant who comes into Delaware’s very unique and special Chancery Court .. needs to get a fair shot. We’re looking at it. You’re going to see changes coming in the coming weeks,” he said on NewsNation on Sunday.
In his appearance on CNBC’s “Squawk Box” on Wednesday, Meyer used a schoolroom analysis to float his support of random judicial selection, which is also known as “wheel spin.” Currently, the court’s chancellor gets the first right to hear any case and she can then defer those she chooses not to hear to another of the court’s six vice chancellors.
Notably, McCormick ruled over three separate cases involving Musk and she has drawn his ire in particular.
“We need to look at that and just make sure not only is it actually fair, but there’s an appearance of fairness to any litigant that comes before our court,” Meyer said.
Following publication of the Business Insider interview, Musk wrote on X, “This is encouraging. The new governor of Delaware wants what is best for his state.”
Corporate bar’s response
Meyer’s appetite for change in Delaware’s courts has drawn concern from some within Delaware’s corporate bar who believe that the latest storms will pass and making changes to the proverbial golden goose is unwise though.
Spotlight Delaware spoke with a half dozen corporate litigators who work in Delaware, and all expressed concerns about buying into the “DExit” narrative and reforming the courts simply from criticisms lobbed by Musk or others.
“I think the kind of rhetoric that there’s some horrible threat to Delaware is significantly overblown,” said Fleming, the corporate plaintiff attorney. “It’s very much a tempest in the teapot.”
He noted that the decisions of singular companies should not be as concerning as the opinions of institutional investment funds, which look at Delaware as the “gold standard” due to its precedent, judiciary and speed.
Last spring, the Council on Institutional Investors – which represents more than 100 public pension and other foundation funds worth more than $4 trillion – wrote a letter expressing concern about the amendments then being considered by the legislature.
“A hallmark of [Delaware General Corporate Law] is the careful and deliberate nature in which it is adopted and enforced, as well as the ways in which Delaware law balances boards’ decision-making with accountability to shareholders’. That reputation could be seriously impaired by a perception that influential actors can easily change the law whenever a court has the temerity to rule against them,” the council wrote.
Charles Elson, the founding director of UD’s Weinberg Center and a columnist for Directors & Boards magazine, noted that the most vocal critics are controlling shareholders, or singular leaders who hold a majority control of companies.
“They object to the fact that we don’t give them as much control as they would like,” he said. “If someone leaves you and complains that you’re not willing to allow them to act to the disadvantage of their fellow shareholders, then so be it. Then maybe they need another home.”
Elson added that some disgruntled defendants may not find what they’re looking for in other states, noting that a Nevada court recently ruled against the controlling shareholder in a case connected to Rupert Murdoch.
Cunningham, the current Weinberg Center director, said that true concern for the state would only begin when large investment funds no longer saw Delaware as the safest bet for its early-stage investments. By incorporating in Delaware, pre-IPO companies can market the Chancery Court assurance to investors.
But Cunningham added that the Chancery Court could use more resources to handle a significant caseload. While some reforms could be warranted, he said, they should be made in consultation with court leaders.
“It’ll be a real test to the governor’s leadership. He really needs to exercise independent executive judgment to determine what is in the best interest of Delaware,” he said.
Is reform needed?
Chris Coffey, who has led Citizens for Judicial Fairness for the past decade and sought to reform Delaware’s courts in the wake of the TransPerfect case, said the latest moment feels different than any in their crusade.
“Whether you like him or not, Elon Musk is now in a position of great power and he has all of these complaints with the Chancery Court,” he said. “The whole point of coming to Delaware is knowing that you’re going to get a fair shake and that things are not going to be rocky and crazy. And yet Chancery has created a rocky and crazy situation for corporations, and they’re leaving.”
The megaphone of Musk has also been an opportunity for Citizens for Judicial Fairness, who have partnered with other high-profile leaders like Al Sharpton. Coffey said that they have had conversations with Musk’s team about aiding their push for reform.
Among the reforms that the group has pressed for: random judicial selection, audio and/or visual recordings of proceedings, more stringent conflict-of-interest regulations and stricter financial disclosures for judges.
“No one is talking about a wholescale uprooting of the court system. We’re just talking about a little bit more consistency and a little bit more fairness,” Coffey said, noting that federal courts and already use random judicial selection and other states have far more transparent court hearings.
Yet the closeness of the TransPerfect-aligned group and Gov. Meyer, who benefited from its $1 million of campaign advertising blitzes against his foremost primary election rival, former Lt. Gov. Bethany Hall-Long, has also drawn skepticism in the legal community. Shawe attended Meyer’s inauguration.
When asked about the concern from Delaware’s corporate law industry over those ties and his appetite to reform the courts, the governor’s office downplayed any connection to Shawe.
“The Delaware Judiciary is the best in the nation. Between our Judges and our jurisprudence, we are the best place in the world to incorporate. That’s why nearly 70% of Fortune 500 companies incorporate here. However, it is the Governor’s job to protect our revenue streams, make sure our laws are keeping up with the competition, and listen to stakeholders. The Governor will always prioritize protecting Delawareans above all else and that’s exactly what he’s doing,” said Nick Merlino, the governor’s deputy chief of staff.
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