Will companies flee Delaware?
Some big companies will leave Delaware, but most large corporations remain keenly aware that the Delaware Court of Chancery, the Delaware General Corporation Law (DGCL) and the case law established over Delaware's 126-year reign as the most fair and flexible legal jurisdiction in the history of civilization are too valuable to abandon.
For more than a century, law students in all 50 states have learned the importance of Delaware Corporation law. Some insiders say that the massive body of case law and the Court’s steadfast adherence to its own rules, make for a more “predictable” outcome for the professionals who make up the whole Delaware Legal Industry.
Just as importantly, most sophisticated legal eagles agree that Delaware’s “legal infrastructure” makes for the fairest decisions weighing BOTH the interests of the Shareholders (the investors or owners) against the interests of the Management (The Directors and Officers) in making corporate decisions. Like all mature infrastructures, it’s difficult to create one and takes time before you’ve got it all right.
That’s hard to reproduce in any other “Jurisdiction” and all the contenders (Florida, Texas, California, Nevada & Wyoming) are just starting out to establish a broad range of sophisticated corporate case law. So, the Fortune 500 companies (a super-majority being Delaware Domiciled Corporations) will not be leaving Delaware without serious trepidation and undeniable uncertainty as to what they are getting vs. what they are giving up, from a corporate legal perspective.
The trend has been, when a major corporate legal battle happens in one of the “other” 49 states is that the local court accepts Delaware DGCL statutes, and in some cases, even Delaware case law and letter rulings to be admitted to the court in support of a corporate client’s position.
But this can backfire and has in the past. Take the case of the ITT Sheraton case which was fought in Nevada against an unwelcome takeover by Hilton. Had this case been fought in Delaware, it might have worked out better for the Nevada corporation. NOTE: If ITT Sheraton had been domiciled in Delaware this case would have been decided by a Delaware Chancellor. ITT Sheraton, a Neveda corporation, did not survive intact.
However, if you’re thinking that Elon Musk leaving Delaware is NOT an Existential Crisis in Delaware, think again. NEVER, in the recent history of Delaware Corporate Law has an individual law firm submitted a bill for the Delaware Legislature’s consideration without first consulting with the Corporate Law Council of the Delaware Bar Association. This is all you need to know to realize that we have a crisis on our hands here in Delaware with regard to the recent thrashing of our reputation and perhaps our cash cow as well.
However, one point that I have not seen much attention given to: How does all this effect Delaware Limited Liability Companies? (LLCs)
Although Delaware is world-Famous for its Corporation Law, the Delaware LLC Act, as it’s called, is a completely separate section of the Delaware Code born under the Partnership Act originally, and it is brilliant! Delaware was not the first state to offer a “Limited Liability Company”, but Delaware set a new path to the customization of a business structure when they codified Title 6, Chapter 18 of the Delaware Code known officially as the Delaware Limited Liability Company Act. This act passed both houses of the Delaware legislature and was signed into law on July 1, 1992 by Governor Michael N. Castle in the final year of his eight-year term.
In 2023, according to the Delaware Secretary of State’s Annual Report, there were 218,708 new Delaware LLCs formed whereas there were only 59,729 new Delaware corporations. The rest were Limited Partnerships and other specialty entities.
What makes a Delaware LLC different from a corporation… for a small business that doesn’t need a billion shares of stock?Instead of the three-tiered structure of a corporation (Shareholders / Directors / Officers) which is hard-coded into the DGCL, the LLC is the recipient of its structure and governance details – to a HUGE degree – by a contract between the parties. If THAT were not enough of an open field to work with, they (the drafters of the legislation) also added the two main tenants of partnership law into the LLC Act:
Freedom of Contract: A bed-rock tenant of the Delaware LLC Act allows the parties to agree to any terms on any subject with any caveats and any equations or whatever they want built-in. In other words, the skilled attorney can draft into the contract exactly what the clients need and want in the way of ownership rights, voting rights, etc., etc., etc.
Enforceability of Contract: The corresponding legal tenant here is the assurance that -- if your company is hit with an insider lawsuit, the judge will turn to the contract signed by and agreed to by all parties, rather than the constricts of the Delaware General Corporation Law.
This brilliantly flexible legal foundation astonished the entrepreneurial community and made Delaware THE premier jurisdiction (state) in which to form an LLC. Since introducing it’s LLC statute in 1992, Delaware has been known as an innovator state that encourages technological advancements rather than trying to control and regulate entrepreneurs
Delaware was right out front supporting electronic filing, Electronic Signatures, Blockchain Record Keeping, Uncertificated Shares, Reverse Splits, Registered Series and Protected Series LLCs, and many more innovations that have given entrepreneurs the ability to do business at the speed of electronics.
As a Delaware Registered Agent for more than 40 years, I can tell you that small business LLCs are NOT leaving Delaware, and they are happy with the low fees of maintaining a Delaware LLC as well as the excellent service they get from the Delaware Secretary of State’s Office.
LLCs are NOT leaving Delaware. This is important because in 2023, a whopping 70% of all new Delaware Entity formations were LLCs. Only 20% were corporations.
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