The Changing Climate for Corporations and Shareholders

Delaware's corporate law has a long and influential history, playing a central role in shaping how U.S. business entities are governed. The state’s reputation for favorable business laws makes it a top destination for corporations. Delaware is home to more than 2.2 million corporations, which accounts for more than half of U.S. public companies and over 68% of Fortune 500 companies.

History of Delaware Corporate Law

Early Development: Delaware's rise as a business-friendly jurisdiction began in the late 19th century, with the passing of the General Corporation Law of 1899. This law allowed corporations to operate more freely and with fewer restrictions than in many other states. Delaware made it easier for corporations to incorporate there by offering a flexible legal framework.

Court of Chancery: One of Delaware’s critical features is its Court of Chancery, a specialized court that focuses on corporate law matters. Established in 1792, the court is known for its expertise and efficiency in resolving business disputes. The Court of Chancery has a reputation for delivering consistent, sophisticated, and well-reasoned rulings, which had until recently increased its appeal to companies seeking legal certainty.

Flexibility and Favorable Corporate Laws: Over time, Delaware passed laws that gave corporations flexibility in terms of corporate governance and shareholder rights. For instance, Delaware allowed for no-par stock, simplified the process for mergers and acquisitions, and provided greater protection for directors and officers. This attracted many companies, as the laws allowed them to operate more freely and with less interference from the state.

Corporate Tax Advantages: Delaware also became known for its tax advantages for corporations. While Delaware does impose a franchise tax, the state's tax system offers incentives for companies to incorporate there. The state does not impose a sales tax, and the corporate income tax is relatively low compared to many other states.

Judicial Expertise and Legal Precedent: The Court of Chancery and Delaware Supreme Court have built a rich body of case law regarding corporate governance, making it the go-to jurisdiction for resolving disputes. The legal precedents set in Delaware are highly influential and often become the standard for corporate governance across the U.S.

Why Are Some Companies Leaving Delaware?

In recent years, some companies have started to move away from Delaware and incorporate in other states or even offshore. This trend has been influenced by several factors:

Increased Franchise Taxes: Delaware’s franchise tax has become a point of contention, particularly for larger companies with complex capital structures. The tax is based on a company’s authorized shares, which can lead to high tax bills for companies with many shares. Some businesses have moved to states with lower taxes to reduce their operational costs.

Evolving Corporate Needs: As businesses become more global and technology-driven, some companies feel that other states or countries may better serve their needs in terms of regulatory frameworks, tax policies, and other corporate governance aspects. Some companies, especially tech startups, have been opting for incorporation in states like Nevada or overseas jurisdictions like the Cayman Islands or British Virgin Islands, which offer more lenient regulatory environments and potentially lower taxes.

Competition from Other States: States like Nevada, Texas, and Florida have become increasingly attractive alternatives to Delaware, offering low taxes, fewer regulations, and greater privacy protections for business owners. These states have seen a rise in business incorporations, particularly for companies seeking lower costs and avoidance of run ins with so-called activist judges.

Changing Legal Landscape: In some instances, companies may be leaving Delaware due to concerns about its evolving legal landscape. Some critics argue that Delaware’s corporate laws tend to favor shareholders and have become increasingly receptive to cases alleging breaches of oversight by directors.

In January 2024, Chancery Court Judge Kathleen McCormick voided Elon Musk's $56 billion compensation package ruling that it was illegally granted. In response, Musk criticized the ruling and Delaware law in general and moved all his companies out of Delaware to Nevada. Other corporations followed suit.

How is Delaware Wooing Back Corporations

In 2023, 86% of newly formed companies incorporated in Delaware. That same year, business taxes and incorporation fees brought in $2 billion to the state, totaling 40% of the state's $5 billion budget. Delaware cannot afford to lose businesses.

In response to Musk's criticism and companies leaving the state, Delaware State Majority Leader Bryan Townsend sponsored SB 21 to keep Delaware attractive to businesses. The bill was signed into law on March 26, 2025, by Delaware Governor Matt Meyer. SB 21 is designed to lower judge-made guardrails around insider deals, restrict shareholder access to the texts and emails of board members when investigating possible wrongdoing, and strengthen a presumption that board members are independent of management, controlling stockholders, and one another.

While these changes may appease corporations, it has frustrated shareholder advocates. First, the bill was fast-tracked, drafted by a panel selected by Governor Meyer rather than the state bar subcommittee that typically writes statutory amendments in Delaware. Evidence shows that Meta Platforms Inc. executives were involved in backroom meetings that led to SB21. Also involved in the drafting was a critic of recent precedents and three corporate defense attorneys, including two former judges whose firms defended Musk and Facebook founder Mark Zuckerberg. Amendments to the bill were swiftly disregarded and no compromises as requested by the opposition were implemented. In its current form, the bill could overturn prior decisions of the Delaware Supreme Court, limit the Delaware's court discretion to provide equitable relief, and generally tip the scales of balance in favor of board decisions against accountability to shareholders.

Conclusion

Delaware's corporate law history has played a major role in its dominance as a corporate hub for over a century.  However, as corporations leave the state in search of more accommodating jurisdictions that better align with their current business needs, financial goals, or global strategies, Delaware is making a play to bring corporations back. It remains to be seen whether implementation of SB 21 will work its magic or just serve to hinder the rights of shareholders to challenge the self-serving conduct of corporate fiduciaries.