Delaware is widely regarded as having the most business-friendly legal framework in the nation. Yet, a handful of companies have announced plans to reincorporate outside of the state. In our podcast, a Delaware judge and a senior partner in Skadden’s Wilmington, Delaware office describe the state’s unique focus on corporate law, including well-developed case law, a flexible corporate code and responsive executive and legislative branches, and why reincorporation outside of the state may not be the right move for your company.
Episode Summary
Delaware is home to more than two-thirds of the Fortune 500, and 1.8 million business entities. “The Delaware General Corporation Law is widely considered to be the most thoughtfully developed corporate law in the country,” explains Hon. Lori W. Will, vice chancellor of the Delaware Court of Chancery. In addition, sophisticated judges, responsive executive and legislative branches and extensive supporting infrastructure have solidified Delaware’s reputation as flexible and business-friendly.
Still, a handful of high-profile companies have recently announced plans to reincorporate outside of the state. “I think states like Texas and Nevada are sensing potential market opportunity and are seizing on a moment in time when Delaware is being challenged,” observes Skadden litigation partner Edward Micheletti of the firm’s Delaware office.
Recent amendments to the Delaware corporate code show how responsive the state’s governor, legislature and bar are to the need to update corporate law regularly to stay abreast of changes in the business world, Ed stresses.
Vice Chancellor Will and Ed join host Skadden M&A partner Ann Beth Stebbins to explore the factors that make Delaware the preferred jurisdiction for incorporation. They discuss the importance of corporate incorporations to the state, and the ecosystem that has evolved over time to support corporations. They compare Delaware’s flexible approach to the more rigid, code-based systems of competing states, and provide insight into how corporations should evaluate a potential reincorporation decision.
Voiceover (00:00):
From Skadden, you are listening to the Informed Board, a podcast for directors facing the rapidly evolving challenges of a global market. A complement to our newsletter for directors, our aim with this podcast is to help flag potential problems that may not be fully appreciated, explain trends, share our observations, and give directors practical guidance without a lot of legal jargon. Join Skadden Partners who draw on years of frontline experience inside boardrooms to explore the complex issues facing directors today.
Ann Beth Stebbins (00:34):
A number of high-profile companies have recently announced moves or plans to move out of the state of Delaware. Should your board be considering a move out of Delaware? I’m Ann Beth Stebbins, an M&A partner at Skadden and your host of the Informed Board podcast. I’m joined today on the informed Board by the Honorable Lori Will, Vice Chancellor of the Delaware Court of Chancery, and Ed Micheletti, a partner in Skadden’s Wilmington, Delaware office.
(01:02):
Vice Chancellor Will, let’s start with you. Delaware is a small state, but it’s home to 1.8 million business entities and more than 60% of Fortune 500 companies, a stat I found pretty incredible. How did Delaware become the preferred jurisdiction of incorporation for U.S.?
Lori Will (01:23):
There’s a story we tell in Delaware about how we essentially stole New Jersey’s crown as the place to incorporate sometime in the early 20th century when New Jersey became less corporate friendly. I don’t know what’s true and what’s a Delaware myth except that New Jersey fell out of favor, Delaware positioned itself as the place that you want to be just down the road conveniently located between New York and D.C., and we set ourselves up to be more business friendly.
(01:51):
We did a couple of things to give us that edge. We set up the Delaware General Corporation Law or the DGCL. That’s widely considered to be the most thoughtfully developed corporate law in the country. When I teach this to my students, I like to focus on the fact that the statute’s broadly enabling, which means that our law gives companies a lot of freedom and latitude to decide how they want to structure their governance. We don’t have a lot of mandatory rules so companies can tailor their governance to fit their needs. That’s something that goes all the way back to the early 20th century. We set up a very special court, at least I like to think so, to interpret the DGCL and resolve those types of disputes, which is the Delaware Court of Chancery that I sit on.
Ann Beth Stebbins (02:39):
One thing that always strikes me is the level of sophistication of the judges in Delaware.
Lori Will (02:47):
Our court and our Bar is focused on civility and excellence. We have really interesting and exciting matters that come through the court every day. It’s been a dream come true to join the court that I clerked on.
Ann Beth Stebbins (03:00):
Your term on the court is 12 years, is that right?
Lori Will (03:03):
That’s right.
Ann Beth Stebbins (03:04):
And you were appointed by the governor?
Lori Will (03:06):
I was appointed by Governor Carney. All of the members of our judiciary are appointed. We’re not elected. By and large, the members of our court have extensive corporate law backgrounds and we practiced in this court before we joined the bench.
Ann Beth Stebbins (03:20):
Ed, a number of companies have reincorporated outside of Delaware. Despite all of the good things that Vice Chancellor Will just told us about the judiciary in Delaware, we’ve seen companies move or make noise about moving, most notably to Texas and Nevada. What is driving companies out of Delaware?
Ed Micheletti (03:43):
I’d start by saying is still the dominant force when it comes to incorporations. There have been some high-profile companies that have reincorporated outside of Delaware recently, but I think Delaware still has an overwhelming majority of the Fortune 500 public companies and there’s a host of reasons why companies are thinking about moving out of Delaware. At the core, I think states like Texas and Nevada, they’re sensing potential market opportunity and are seizing on a moment in time when Delaware is being challenged.
Ann Beth Stebbins (04:17):
Just like Delaware took advantage of New Jersey way back when.
Ed Micheletti (04:21):
To me, Delaware is actively working to maintain its dominant position as the best place to incorporate. It never stops doing that. The Delaware legislature and the bar in Delaware were always focused on, how do we maintain and keep the prominence in Delaware for incorporation. And there’s some Delaware companies and some high-level executives at these Delaware companies that have been, just for lack of a better phrase, burned in litigation over the past decade or so. I think many of them are reacting and you might even say overreacting, with social media and the political sentiment around the country is playing a role. I’ve been around long enough and Vice Chancellor Will has too to know that this isn’t the first time some other state’s trying to take a shot at Delaware and trying to grab market share.
(05:09):
The only other thing I’ll say is, competition is good. The idea that there’s some competition here, it really makes everyone focus. Delaware is clearly in the pole position having a half century head start on most other states looking to try to replicate what Delaware has. Honestly, a little competition is a good thing because it’s causing people in Delaware, key people in Delaware to reflect on the current state of play in Delaware and elsewhere, and right now Delaware is focusing on Delaware companies and Delaware is taking active steps to keep Delaware highly competitive and the obvious place to incorporate.
Ann Beth Stebbins (05:45):
Vice Chancellor Will, of the companies that have announced an intention to move out of the state or thinking of moving their incorporation out of the state, is there any commonality, any common theme, any other characteristics that might make reincorporation attractive?
Lori Will (06:04):
One of the main commonalities is that a lot of the companies that are reincorporating or thinking about reincorporating are controlled companies. They have a controlling stockholder. Now, that’s not universally the case either, but I want to echo what Ed said. The recent discussions about reincorporation have meant to me that we have competition and that’s not a bad thing since it’s incentivized us and our entire corporate law community to look at what’s working and where we might be able to improve because we want to get it right regardless of whether we’re dealing with a controlled or a non-controlled company. And I won’t take a view on the recent amendments to the DGCL since I don’t think that’s my place until I have an actual dispute before me. Regardless of what you think about the amendments, it seems hard to dispute that our legislature and our Corporate Law Council was extremely responsive. I hope that that’s the takeaway. We have an extraordinarily responsive and thoughtful Corporation Law Council, legislature and executive branch.
Ann Beth Stebbins (07:10):
That’s actually a great segue, Ed, to one topic I wanted to dig a little deeper with you on. The focus in Delaware is often the judiciary, the sophistication of the judiciary, the hard work that the judiciary puts in, but the legislature also plays an important role and from time to time has amended corporate law to address concerns that arise out of court decisions. Can you talk about the Delaware Corporation Law generally and the involvement of the state legislature in corporate law matters?
Ed Micheletti (07:44):
I’ll start by saying that Delaware takes its corporate franchise extremely seriously. Part of that process involves the Delaware legislature and the governor’s office. One of the things that distinguishes Delaware from pretty much every other state, we have Corporation Law Council, which oversees the corporate section of the Delaware Bar. We look at all sorts of amendments on an annual basis to see what we need to do to either course correct things or to keep the law modern and current. That happens every single year and that’s why we see so many amendments on an annual basis.
(08:25):
The legislature plays a key role. They understand the benefit to Delaware of the corporate franchise. It brings in billions of dollars a year to the state and it’s a significant piece of what the Delaware government is relying on year in and year out. In order to do that, they have to be very focused like on monitoring and keeping the Delaware law current and vibrant.
Ann Beth Stebbins (08:51):
So Vice Chancellor Will, when we were prepping for this call, we talked about how important corporations are to the State of Delaware. You told a story which I found fascinating. Recent amendments to the Delaware Corporation Law got so much attention that ordinary citizens in Delaware had signs on their lawn in support of the amendments to the Delaware Corporation Law.
Lori Will (09:17):
That’s true. It was a very exciting and hotly contested time in Delaware, but I think it shows how much our bar and our community cares about our corporate law. It is a big piece of our state’s financial budget to be sure, but we’re also passionate about protecting what we have in Delaware and the incredible centuries-long traditions of our court and of our state’s corporate law. It just showed how much our legislature, our community, our bar and our court and our governor, as Ed said, just wants to get it right and protect the very unique and special brand that we have here.
Ann Beth Stebbins (09:58):
Ed, the Delaware Corporation Law was recently amended to address concerns that arose out of recent court decisions. The legislature and the governor acted very quickly to address those concerns. Have you seen, and I know it’s only been a few weeks, any change in corporations talking about leaving the state? Has that been dialed back since the amendments became law?
Ed Micheletti (10:29):
I would like to think so. If companies, Delaware companies, were thinking about or hoping for a statute that was going to help level set on certainty and predictability in the law, those companies got that with the recent amendments. They respond in a very specific way to the proliferation of books and records and also for how to manage certain conflict situations. Both of those things are the answer for a lot of concerns that were expressed that caused these amendments to come forth.
(11:11):
Now, the Delaware court system is a premier court system, and Vice Chancellor Will sits on what I think is the crown jewel of Delaware’s court system, and the Court of Chancery, being a court of equity — it’s a unique court system. And the statute is the fuel going forward, but the engine of Delaware is the Court of Chancery and how it addresses each and every case specifically and always with equity.
Ann Beth Stebbins (11:41):
Vice Chancellor Will, one of the top contenders for migrating Delaware corporations has been Nevada. Nevada takes a different approach to corporate law. Their approach is a code-based approach as opposed to a case law-based approach, particularly when it comes to fiduciary duties. How would you respond to the assertion that a code-based approach provides corporations with more predictability than case law and judges who may interpret the law in different ways?
Lori Will (12:14):
I can see pros and cons to a code-based approach and Delaware, at this point, I think we have some features of both a common law and a code-based system, but I don’t think that having a system that goes too far down the code-based approach road is necessarily the right thing for Delaware or for our corporate constituents. It provides some upfront clarity, as you said, Ann Beth, and I can see why that’s important to companies, but that sort of system lacks the nuance and the flexibility to address real world and complicated governance situations that we see every day in our court. I agree with Ed, I think our primary strength in Delaware is the massive body of precedent and a judiciary that’s highly focused on maintaining that law and getting it right. We strive to give guidance, but the guidance isn’t rigid and it isn’t one size fits all in the way that a code-based approach would be.
Ann Beth Stebbins (13:10):
Well, because facts evolve, you can’t legislate for everything. You can’t have precision and specificity in the code that will address every situation because the business world evolves and you need law that can be flexible enough to address businesses as they evolve.
Lori Will (13:30):
Every business is different and equity isn’t rigid. It’s not meant to be. We put substance over form in Delaware and if we get it wrong, if business practices change or we go off the rails, it’s extremely fixable from a common law approach. I can think of many times over the years where the Court of Chancery or the Supreme Court has course corrected and if we take an overly strict code-based approach, we lose the court’s ability to do that in a nuanced and thoughtful way.
Ann Beth Stebbins (14:01):
You have the ultimate course correction of the legislature, who understands how important Delaware corporations are to the state and the state’s economy.
Lori Will (14:11):
Right. We have a multi-layered approach that I don’t think any other state can replicate at this point.
Ann Beth Stebbins (14:17):
Ed, you touched on something earlier that I wanted to talk about more fulsomely and that’s books and records claims. One concern I’ve heard from clients about Delaware’s frequency of litigation, and in particular the ability of shareholders to gain access to the books and records of a corporation. The amendments that the legislature and governor recently signed into law address some of these concerns. Can you spend a few minutes talking about books and records claims in Delaware and how you expect the practice to change based on these new amendments?
Ed Micheletti (14:56):
Let me start by talking about how it was when I first came to the job. Books and records requests were always around for shareholders, and the truth is it was pretty targeted. The court wasn’t going to allow widespread document collection or production. You weren’t supposed to get every single email or every single text message as part of a 220.
Ann Beth Stebbins (15:21):
And 220 being the...
Ed Micheletti (15:23):
Books and records statute. Yes.
Ann Beth Stebbins (15:24):
The code section of books and records claims.
Ed Micheletti (15:26):
Yes, so it’s just ingrained in my head saying 220 over and over again. It’s not supposed to replicate civil discovery. Somewhere along the way, it got to a point where it very much felt like that. The case law always cautioned about going beyond the formal books and records, and by that I mean minutes, board presentations, basic documents like that before the new statute was approved. The fight was over, can we get emails? How much email can we get? Can we get text messages? How much text messaging can we get? And I think it just sort of I think got to a point where companies were throwing their hands up saying, We’re engaging in pre-complaint discovery, essentially, civil discovery before the case has even been filed.
(16:11):
The statute is effectively designed to level set things back to where there was more balance, which is you’re going to get a core set of formal documents under the new statute, but anything else that you need to ask for or want, the stockholder is going to be held to a higher standard to try to obtain those. And the idea is to try to reduce litigation around books and records and demands in large measure because, and Vice Chancellor Will correct me on this if I’m wrong, but it has really clogged the court system in many respects, given how many books and records demands have been made over the past seven or eight years.
Lori Will (16:49):
I think that’s fair. They have become extensive. My last year in practice in 2020, I had a client that got 16 section 220 demands on one issue. I understand that that hasn’t changed much. We only see a subset of those that are filed in the court, but we’ve had a significant number of cases year over year to the point where we’ve started assigning those cases to the magistrate judges on the Court of Chancery so that our docket isn’t completely clogged up with these cases. I think this is probably one of the areas of law I mentioned before where the pendulum swung a little bit too far in one direction and now we’re focused on some course correction to bring it back to the core board documents that Ed talked about.
Ann Beth Stebbins (17:34):
To back up for a minute, a stockholder needs a proper business purpose and with a proper business purpose can effectively go on a fishing expedition. The amendments to the statute now limit what they can fish for, but do they limit at all the proper business purpose? Are you still expecting the same number of books and records demands? Should corporations still be prepared to deal with these on a regular basis? It’s just what they need to produce is in this extensive.
Lori Will (18:08):
It has to be a purpose related to their interest as a stockholder. But the real bottom line is that the set of documents the stockholder can get is defined. I don’t think it’s out of line with how we had been thinking about these things on the court. We had been seeing for a long time that board minutes and board presentations were going to be the key set of documents that you could get in the section 220 demand. Now, it’s very clearly articulated in the statute.
Ed Micheletti (18:34):
That’s the key feature of the new revised section 220 books and records statute. There’s no more debate over what documents you’re getting. There’s delineated categories of documents that the stockholder can get going back on some instances three years if it’s relevant, but that’s it. They have to basically make a case for something in addition to all of that under the statute.
Lori Will (19:00):
Scope had been the big battle that we were dealing with in court in any event, so it might cut down on that to some extent. I think it still incentivizes people to keep thoughtful and sufficiently detailed minutes, because there is a part of the statute where, if the minutes don’t speak to the issue, the stockholder could get some additional documents and the court has freedom and discretion to craft that scope.
Ann Beth Stebbins (19:24):
That’s good advice.
Another area I wanted to talk about, and again, this is a benefit I see for Delaware, is Delaware’s policy of freedom of contract. Vice Chancellor Will, do want to talk about why this is so important for corporations and a benefit for corporations remaining in Delaware.
Lori Will (19:43):
It’s a critical feature of our court. We’re mostly known for our corporate law decisions, but I have a full docket of complex commercial cases, so things like busted deal matters, earnout disputes. We have a very developed body of case law in my court and the complex commercial division of our superior court in dealing with these sorts of disputes. That’s in large part because the freedom of contract, like you said, is really a centerpiece of our law in Delaware. We respect and enforce the agreements that parties make with each other, and that’s important for businesses because they know when they’re structuring their deals and relationships that the court will enforce them if things go sideways.
Ann Beth Stebbins (20:29):
Ed, we’ve talked about the judiciary and the response of legislature. Another feature of Delaware is the infrastructure. I think that uniquely positions Delaware to service corporations. Think of as a young associate, those last-minute calls to the Delaware Secretary of State that you need evidence of a merger within 30 minutes. The Delaware Secretary of State staffers are always able to get it done. These are routine matters that sometimes in other states can take days. Ed, talk about how important the infrastructure is to corporations in Delaware.
Ed Micheletti (21:08):
I think it’s hugely significant, and again, another distinguishing feature between Delaware and probably most other states. You could say it starts from the top down. The governor’s office is clearly in tune with the corporate franchise, and I think it’s not lost on the current governor how significant that is to the state. The legislature every year, again, annually they’re considering amendments to the Delaware code. Some years, like the past couple of years, it’s been contentious and highly publicized, but most years it’s routine cleanup and maybe one or two tweaks here and there around the edges, but every year that happens. I think that that’s an extraordinary thing for a state to be that nimble.
(21:54):
And I’ll also say that the Secretary of State’s office is very, very focused on the corporate franchise, and I think it’s in part because the Secretary of State’s office wants to understand where everyone’s heads are at on these issues. Are they happy with the amendment? Is there still more that can be done? What are the positives for Delaware corporations? What are the concerns and what are the critiques so that they can understand and learn about that and maybe consider making some tweaks or adjustments.
(22:26):
But in addition to the fantastic judicial system that we have in Delaware and the nimble legislature and the governor that’s paying attention and the Secretary of State that’s paying attention, we also have so many people that are servicing companies in Delaware. You’re talking about the Secretary of State’s office staffers, but there’s also a whole host of other people out there that are principally focusing on incorporating companies into Delaware law and a whole host of other issues that make the engine run. It’s one big operation in Delaware and it’s just continuously humming.
Ann Beth Stebbins (23:05):
I also think the frequent interaction between practitioners, the legislature, the judiciary, the bodies that are making the law have a real grounding in practicality because they’re hearing from the practitioners about what’s working, what’s not working. There’s a real willingness to learn from the practitioners and listen to what’s working and not working and to make the corporate law as flexible and pragmatic as possible.
Ed Micheletti (23:35):
And that’s crucial feedback. The state likes hearing that, frankly. They appreciate hearing what’s working and what’s not working, and it allows the state to make adjustments.
Ann Beth Stebbins (23:47):
And those adjustments will hopefully keep corporations in Delaware. Chancellor Will, Ed, thank you for joining me today on the Informed Board and look forward to more companies staying in Delaware.
Ed Micheletti (24:00):
Absolutely.
Voiceover (24:02):
Thank you for joining us for today’s episode of the Informed Board. If you like what you’re hearing, be sure to subscribe in your favorite podcast app so you don’t miss any future conversations. Additional information about Skadden can be found at skadden.com. The Informed Board is a podcast by Skadden, Arps, Slate, Meagher & Flom, LLP and Affiliates. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.
See also our article “Delaware Tells Companies: ‘Let’s Stay Together’” discussing the expected impact of recent amendments to Delaware corporation law.
Listen here or subscribe via Apple Podcasts, Spotify or anywhere else you listen to podcasts.
