Delaware, with a population of less than 1 million people, is home to over 1.8 million business entities, including more than 60% of Fortune 500 companies. The state was traditionally viewed as having a business-friendly legal structure and specialized business court system (the Court of Chancery) which made it a preferred incorporation destination.

Businesses seek environments with clear legal frameworks and precedent, low judicial activism, and a business friendly environment. If the environment feels more arbitrary, litigious, or politicized in nature, it can harm the ability for a business to serve its customers and to function. If given a choice, business may avoid or leave these jurisdictions.

Recently, Delaware has had a series of lawsuits, “creative writing” in case law and politicized judges that has been changing the perception of the state as a stable place for companies to legally base their businesses. Companies like SpaceX, Tesla, Dropbox, and others have either left, or disclosed plans to move their incorporation from the state of DE. The primary states companies are considering for the move include Montana, Wyoming, Nevada, and Texas, with most eventually moving to either Nevada or Texas.

This post breaks down some of the pros and cons of Nevada, Texas, and Delaware as well as discusses high level process to leave the state. TradeDesk published a good primer as well.

While many companies have physically moved their headquarters from California to other states (Palantir, Oracle, SpaceX, to name a few) most CA-based companies have left their incorporation in Delaware. This is starting to shift as more companies consider moving Incorporation to Nevada or Texas.

Part of the concern in Delaware is, as a WSJ opinion piece recently put it, “the likelihood of expensive, meritless or value-destroying litigation leads public companies in Delaware to avoid deals they would otherwise make.” The other part is a few more extreme Delaware activist judges who apply “creative writing” to interpreting the law. The most famous example of this is a court invalidating Elon Musk’s board and then subsequently a shareholder-approved compensation package. This ruling was viewed as political activism by many versus following any form of legal framework. Tesla subsequently reincorporated to Texas with 84% non-controller shareholder support.

However, there are other recent examples beyond Tesla. These include:

• Trade Desk – Delaware court required special committee approval for controller transactions that were fully disclosed at IPO and had operated without challenge for years

• Activision – Delaware court invalidated merger approval process on technical grounds despite 98% shareholder approval and no evidence of harm

• Moelis & Company – Delaware court invalidated long-standing stockholder agreements between the company and its founder that were disclosed in IPO; required legislative fix

• TripAdvisor – Delaware court ruled that merely reincorporating to Nevada required special committee approval and minority shareholder vote because reducing litigation exposure was deemed a “non-ratable benefit” to the controller

Three articles on why companies are leaving Delaware.

Most analysis of which state to incorporate in to collapses down to a choice between Delaware, Nevada and Texas. You can find a full analysis from Ben Potter & Team at Latham here (they have kindly open sourced a quick analysis they did for me and my team):

In general, Delaware has been historically seen to be stronger on:

• Historical development & predictability of corporate law (although judicial activism is impacting this)

• Experience of judiciary (specialized corporate law judges)

• Office of the Secretary of State (ease of set up and doing business)

While Nevada and Texas have been better on:

• Litigation risk

• Business judgment rules

• Takeover defenses

• Director and Officer indemnification & exculpation

• Expenses of doing business

Between NV and TX, there seem to be slight tradeoffs between each state enumerated below. One plus for NV is that fiduciary duties are established in statute rather than case law (Delaware and Texas being in the case law camp), so theoretically Texas could be subject to the same risk of politicization / creative writing over time that is leading companies to exit Delaware. The hope is that Nevada’s statute-based approach will offer more predictability, which was historically the draw for Delaware. However there are obvious benefits to Texas as well, leading companies like Tesla and SpaceX to decide to move there.

Companies that have left, or announced, plans to leave Delaware for:

• Nevada: Dropbox, TripAdvisor, Neuralink, Pershing Square, and others

• Texas: SpaceX, Tesla, and others

Tradeoffs to consider in terms of where to incorporate include case law, judges, fiduciary duties and other interests, as well as expense and cost. See also a write up from TradeDesk.

Full analysis from Ben Potter & Team at Latham here:

On the margin it seems a few more companies are choosing Nevada over Texas, although obviously SpaceX and Tesla are giant companies who decided to move to Texas. Anecdotally it seems like more corporate entities have moved to Nevada, while more market cap has moved to Texas.

The other tradeoff faced by companies is the cost of doing business in each state. Expenses seem possible lower in Nevada or Texas versus Delaware when comparing the following:

If you are just incorporating a company now, it is worth considering Nevada or Texas up front versus dealing with it later.

If you are a private company, moving to Nevada or Texas is straightforward. It will probably take a few months start to finish, but with most of the lift done by lawyers and accountants working in the background and not require much of your time as CEO. This process is known as domestication or conversion, depending on the state.

You will have to do a shareholder vote and/or board approval, initiate a conversion/domestication filing in both DE and NV/TX, obtain formation/articles of incorporation and pay a filing fee. You lawyers will then draft new bylaws compliant with new target state laws, revise or update any stock certificates, etc. Finally you may get a new EIN, file final returns in DE and initiate in the new state, and update contracts, employee benefits etc. There may be some indu