Texas vs. Delaware: See you in court
Delaware is in a battle to keep our place on the corporate map, said Ben duPont in the Wilmington News Journal. More than two-thirds of the companies in the S&P 500 are incorporated in the nation’s second-smallest state, including Amazon, Google, and Coca-Cola. The primary reason is that we have a separate business court system, “where disputes are decided by judges with extensive experience in corporate law.” These judges—known as chancellors in the Delaware Court of Chancery—have “been the gold standard of fairness and justice for over 100 years.” But in recent months, since Tesla reincorporated in Texas, other companies, like Meta, are exploring similar changes. Delaware now “needs to compete for the corporation business,” or we stand to lose over “$2 billion in annual revenue, more than a third of our state budget.”
Sorry, Delaware, but you blew it, said Texas governor Greg Abbott in The Wall Street Journal. Delaware’s Chancery Court was indeed “a model for the country.” But the state has “squandered its inheritance” with “increasingly unpredictable theories of liability.” That’s why businesses are running for the hills. Tesla left after a Delaware chancellor, Kathaleen McCormick, issued a surprising ruling against Elon Musk last year in favor of shareholders that sued to strike down his $56 billion pay package—ignoring the fact that he had produced $600 billion in shareholder return. The court used to understand its role was not to “subject routine business decisions to second-guessing.” That’s why Texas has set up a business court of our own, and we’re open for business.
Yes, the Tesla ruling changed the calculus on Delaware, said Matt Levine in Bloomberg. It was unexpected—exactly what businesses don’t want from a business court—and “bad for controlling shareholders.” But in general, Delaware is not “super-unfriendly to corporate management.” The long record of corporate case law in Delaware means “there are a lot of precedents saying what is and isn’t allowed.” And if corporations want predictability, then Texas’ business court, which allows jury trials, isn’t exactly the answer for corporations that must dread the prospect of a “merger being stopped by the unpredictable decision of some random laypeople.”
Whether or not corporations move, this might be the end of what made the Delaware courts special, said Sujeet Indap in the Financial Times. The new governor and legislative allies “are quickly seeking to enact sweeping changes to the law this spring to make traditional shareholder litigation much more difficult to bring.” Judges, too, will lose much of their discretion. Delaware will keep its revenue—but the rest of the country may lose the corporate “policing” that Delaware’s courts have provided.