Delaware has held a dominant position in corporate law for more than a century. When New Jersey liberalized its incorporation statute in the late 19th century, it successfully attracted new incorporations and states raced to deregulate. Delaware adopted much of the New Jersey statute as its general corporate law in 1899. However, in 1910, New Jersey reversed course and altered its corporate code to be less business-friendly, so companies moved to reincorporate in Delaware to take advantage of its nonregulatory enabling statute. Until recently, companies haven’t looked back.
Despite being the second smallest state in the United States, more than two-thirds of Fortune 500 companies are incorporated in Delaware. Corporations are a significant part of Delaware’s budget, with the annual “franchise tax” accounting for more than 12 percent of revenues to the state. The State of Delaware attributes its significance in corporate law to its ability to provide “managers and investors with laws optimal for engaging in ethical and profitable business.” The State cites five factors as contributing to Delaware’s preeminent place in corporate law:
(1) The Delaware General Corporation Law’s (DGCL) statute, which contains only a few mandatory requirements to protect investors and otherwise offers corporations full flexibility to run their business.
(2) The Delaware court system, including its specialized, jury-free, bipartisan Court of Chancery with jurisdiction over corporate disputes.
(3) Delaware’s case law and its extensive body of favorable precedent, including its “business judgment rule” (that courts shouldn’t second-guess business decisions made in good faith and with due care).
(4) The array of expert attorneys in Delaware corporate law who help the Delaware legislature by reviewing and recommending changes to Delaware corporate law.
(5) The Delaware Secretary of State’s office, which offers corporations expedited services for time-sensitive matters.
However, in recent years, a widely shared perception has emerged that Delaware courts have become more receptive to shareholder litigation, leading some companies to consider reincorporating outside of Delaware. This perception has been matched with recent moves by other states – specifically Texas and Nevada – to attract businesses to incorporate and invest in their states. In combination with several high-profile reincorporations, some outside observers question the longevity of Delaware’s preeminent place in corporate law.
In August 2024, Texas launched a new Texas Business Court in an attempt to create a forum similar to the Delaware Court of Chancery. The court comprises eleven geographic regions, five of which are currently operational, and seeks to resolve certain complex business disputes. As enacted in Texas’ House Bill 19, the court’s jurisdiction includes corporate governance actions, claims related to state or federal securities laws, actions seeking to hold directors or officers liable, and other actions arising from transactions. According to a recent Op-Ed in the Wall Street Journal from Texas Governor Greg Abbott, Texas’ legislature is also considering amendments to its Business Organizations Code to codify the business judgment rule and set ownership limitations for derivative suits.
Likewise, Nevada has also promoted itself as an attractive destination for corporations. Nevada’s legislature has sought to distinguish the state’s corporate law statutes from Delaware’s for decades by offering corporate managers greater protection than Delaware. Later this year, Nevada’s legislature will also consider a constitutional amendment to establish a business court with exclusive jurisdiction over business-related disputes. Judges on the court would be appointed by Nevada’s governor to six-year terms and chosen from a list of nominees provided by a judicial selection commission.
While it is too soon to know if these changes will lead to an exodus from Delaware, several high-profile reincorporations illustrate the need for Delaware to take these changes seriously. For example, since 2024, Elon Musk has moved three companies – SpaceX, Neuralink, and Tesla – to Texas. This was prompted in large part by multiple adverse outcomes before Delaware Chancery Judge Kathaleen St. J. McCormick. In 2022, Chancellor McCormick rejected Musk’s efforts to back out of purchasing Twitter. More recently, Musk appeared before McCormick in a shareholder lawsuit alleging that Tesla’s directors breached their fiduciary duties by awarding Musk a $55.8 billion compensation package. Writing for the Chancery Court, McCormick criticized the board’s process, conflicts of interest, and Musk’s compensation amount, before ultimately rescinding Musk’s compensation plan. In response, Tesla shareholders voted to re-approve Musk’s compensation package and support Musk’s proposal to move the company’s legal home to Texas. Musk then posted on X: “Never incorporate your company in the state of Delaware.”
Additionally, a February 2025 Delaware Supreme Court ruling in Maffei v. Palkon could pave the way for more companies to reincorporate out of Delaware. The case arose from TripAdvisor’s reincorporation from Delaware to Nevada, which the plaintiffs alleged was a self-interested transaction because Maffei provided the decisive votes in favor of reincorporation. The decision applied the business judgment rule, allowing the reincorporation to proceed because no board member received a material benefit. The decision provided needed legal clarity for companies considering reincorporation, which could lead to additional reincorporations in the future.
It isn’t yet clear how many other companies may choose to reincorporate out of Delaware. The Wall Street Journal recently reported that Meta is also considering moving its legal residence out of Delaware, with the company apparently weighing the benefits and drawbacks of reincorporating to Texas. While Meta’s motivations aren’t certain, commentators have speculated that shareholder litigation against Meta in Delaware may be a factor. Meta potentially leaving Delaware on the heels of Tesla’s reincorporation could represent a shift that could have significant reputational repercussions for the State of Delaware.
In response, Delaware Governor Matt Meyer is weighing unilateral changes to Delaware’s chancery court system. Meyer highlighted how the Chancery Court is designed to assign one judge all subsequent cases involving the same company. While intended to improve the court’s efficiency by allowing judges to use their prior knowledge of the company to expedite litigation, companies may feel they aren’t getting a fair opportunity when repeatedly appearing before the same judge (particularly if that judge has already ruled against them, as demonstrated by Elon Musk’s criticism of Chancellor McCormick).
Most notably, however, the Delaware state legislature recently enacted Senate Bill 21 to quell additional corporate defections from the state. Signed into law on March 25, the legislation provides a safe harbor for directors or officers, as well as controlling stockholders like Musk and Zuckerberg, who have interests or relationships that might not normally render them independent in a transaction. The changes to the DGCL will protect directors or officers if their actions were approved or ratified by a majority of disinterested directors or stockholders (something that may have resulted in a different outcome for Musk’s compensation package). Further, the legislation sets forth new limitations and procedures that stockholders must follow to inspect a corporation’s books and records, which could reduce stockholder’s influence over a corporation. Senate Bill 21 passed the Delaware Senate with the Governor’s backing 20-0 on March 13, passed the Delaware House of Representatives 32-7 on March 25, and was quickly signed into law.
While Tesla and TripAdvisor were highly visible reincorporations, Delaware’s swift response to amend their corporate laws, and other companies’ relative caution, suggest that Delaware’s place of preeminence won’t change anytime soon – despite other jurisdictions’ efforts to seize Delaware’s longstanding role as the top state for corporate law.