Why Companies Like Meta Want to Leave Delaware | WSJ

Delaware Corporate Law: Exodus and Course Correction

Key Concepts:

• Corporate Incorporation
• Delaware General Corporation Law (DGCL)
• Controlling Shareholders
• Minority Shareholder Lawsuits
• Fiduciary Duty
• Safe Harbors
• Predictability in Corporate Law
• Senate Bill 21

1. The Delaware Advantage and Recent Challenges:

• Delaware is the leading state for corporate incorporation due to its business-friendly environment, well-developed body of corporate law, expert courts (Court of Chancery) that hear cases without juries, a responsive legislature, and a speedy administrative environment.
• However, recent high-profile companies like Dropbox and Roblox have left or are considering leaving Delaware, citing an increasingly litigious environment and court rulings unfavorable to controlling shareholders. Meta and Walmart have also reportedly considered moving.
• Elon Musk's criticism of Delaware after a court struck down his Tesla pay package highlighted concerns about shareholder lawsuits and judicial scrutiny of controlling shareholders.

2. Shareholder Lawsuits and the Role of Corporate Law:

• Corporate law aims to make investors feel comfortable investing in companies by protecting them from potential abuse by controlling shareholders.
• Minority shareholders can bring lawsuits alleging actions that harm the company, even without a controlling stake.
• The central issue is the level of scrutiny courts should apply to controlling shareholders, especially in the context of visionary founders and superstar CEOs who wield significant influence.

3. Reasons for Leaving Delaware:

• Dropbox: Reincorporated in Nevada, citing the "increasingly litigious environment in Delaware."
• Roblox: Seeking shareholder approval to move to Nevada, stating that Nevada's corporate law framework aligns with its "culture of innovation" and provides a "supportive" environment.
• Meta (considering): Reportedly considering moving to Texas.
• These companies are seeking jurisdictions perceived as more favorable to controlling shareholders.

4. Delaware's Response: Senate Bill 21:

• Delaware Governor Matt Meyer recognized the potential "existential crisis" if companies continue to leave, given that corporate franchise taxes constitute nearly 30% of the state's revenue.
• Senate Bill 21 was enacted to address concerns about the "lack of predictability" resulting from recent court decisions.
• The bill aims to create "safe harbors" by limiting the ability of shareholders to bring lawsuits.
• The law explicitly defines a controlling shareholder as holding at least one-third of the shares.

5. Criticisms of Senate Bill 21:

• Critics argue that the legislation undermines the expertise of Delaware's courts and the stability of its corporate code.
• Overturning court decisions with legislation raises questions about the predictability and reliability of Delaware law.
• Some argue that codifying rules makes it easier for other states to replicate Delaware's system.

6. Governor Meyer's Defense:

• Governor Meyer argues that leaving Delaware for states like Nevada or Texas is risky for companies seeking predictability.
• He contrasts Delaware's established legal framework with the perceived uncertainty of other jurisdictions.

7. Impact on Investors:

• Changes in Delaware corporate law or companies moving to other states can affect investors, as many retirement savings are invested in S&P 500 tracker funds composed of mostly Delaware corporations.

8. Historical Context:

• Delaware's dominance in corporate law was not always the case. 100 years ago, New Jersey held the crown but lost it by failing to maintain "clarity, consistency, predictability, and fairness."

9. Conclusion:

• Delaware is facing a challenge to its position as the leading state for corporate incorporation due to concerns about shareholder litigation and judicial scrutiny of controlling shareholders.
• Senate Bill 21 represents an attempt to address these concerns and maintain Delaware's competitive advantage, but it has also drawn criticism for potentially undermining the state's legal expertise and predictability.
• The outcome of this situation will have significant implications for companies, investors, and the future of corporate law in the United States.