Delaware’s Corporate Law in the Culture War: What It Means for Startups and Founders
By Amit Singh
A recent New York Times article titled “Delaware Law Has Entered the Culture War“ has highlighted a surprising trend: companies like Tesla, Dropbox, and Meta are reconsidering their incorporation in Delaware, long considered the gold standard of corporate law. Historically, Delaware has been the go-to jurisdiction due to its expert Chancery Court and extensive legal precedent. However, controversial rulings—combined with high-profile criticism from high profile figures like Elon Musk—have sparked a broader debate about whether companies should explore alternatives such as Texas or Nevada.
As an experienced corporate attorney, I believe that Delaware’s legal infrastructure still provides significant advantages, even in today’s changing legal landscape.
Why Delaware Has Been the Default for Startups
For decades, Delaware has been the favored jurisdiction for more than 68% of Fortune 500 companies and countless startups, largely because of its:
Dedicated Delaware Chancery Court: Delaware’s Chancery Court is a specialized court that focuses exclusively on business disputes. Judges are experts in corporate law, making decisions faster and more predictable compared to general courts.
Extensive Legal Precedent: Delaware boasts an unmatched body of case law that covers key corporate matters, from mergers and acquisitions to fiduciary duties and shareholder disputes. Companies can predict legal outcomes with relative certainty, reducing risk.
Flexible Governance Structures: Delaware offers significant flexibility in structuring governance arrangements, including dual-class shares, staggered boards, and protective provisions that allow founders to maintain control.
Investor Confidence: Venture capitalists and institutional investors, as well as their lawyers, trust Delaware’s legal framework, which has historically provided stability and protection for both management and shareholders. Many VCs require startups to be Delaware-incorporated as part of a funding round.
These advantages have made Delaware the top choice for companies seeking both flexibility and legal security. But recent rulings, combined with social media posts by Elon Musk, have introduced new concerns, leading some companies to consider whether it’s time to move on.
Key Rulings Fueling the Debate
The recent controversy surrounding Delaware stems largely from high-profile cases involving Elon Musk and Moelis & Company, which have raised questions about the state’s approach to corporate governance and shareholder rights.
The Musk Cases: Compensation and Shareholder Approval
One of the key catalysts for Musk’s criticism was Chancellor Kathaleen McCormick’s ruling against his $56 billion Tesla compensation package. McCormick found that Tesla’s board failed to adequately inform shareholders of the package’s details and that the board was not sufficiently independent to provide proper oversight. Even after shareholders approved the package in a vote, McCormick reaffirmed her decision, citing procedural shortcomings.
Musk responded by publicly accusing the Delaware courts of “absolute corruption,” arguing that the ruling represented judicial overreach that undermined the autonomy of management. His criticism resonated with other founders who value minimal interference in corporate decision-making, particularly those relying on dual-class shares to maintain control.
The Moelis Case: Restricting Board Discretion
In another controversial ruling, Vice Chancellor J. Travis Laster struck down a contractual arrangement between Moelis & Company’s board and its controlling shareholder, Ken Moelis. The board had delegated key decision-making authority—such as executive compensation and major transactions—to Moelis, bypassing typical board involvement. Laster ruled that this arrangement violated fundamental corporate governance principles, as it effectively stripped the board of its fiduciary responsibilities.
This decision sent shockwaves through the corporate world, particularly among founder-led companies that rely on flexible governance arrangements. In response to the backlash, Delaware’s legislature intervened in mid-2024, passing an amendment that overturned the court’s ruling. The amendment gives corporations the authority to enter into the type of stockholder agreements that were invalidated in Moelis. Note that, corporations must receive some form of consideration for entering into such an agreement, which is consistent with prior caselaw. The consideration may include requiring stockholders to take, or refrain from taking, one or more actions, such as placing restrictions on transfer or granting the corporation a power-of-attorney in drag-along transactions.
However, this legislative intervention created new concerns. If court rulings could be easily overturned by legislative action, would Delaware’s legal stability and predictability be compromised?
Exploring Alternatives: Texas and Nevada
The uncertainty surrounding Delaware’s courts and legislature has led some companies to explore alternatives, with Texas and Nevada emerging as the most attractive options. Here’s how they compare:
Texas: Pro-Business, Minimal Regulation
Pros:
Specialized Corporate Court: In 2024, Texas created a dedicated business court to compete with Delaware’s Court of Chancery, where judges have the same expertise in corporate law.
Minimal Regulatory Interference: Texas has a pro-business legal climate with limited restrictions on corporate governance. Its courts and political environment emphasize minimal government interference, making it attractive to founders seeking maximum control.
Standard of Review: In Delaware, when a decision is made by an interested board or involves a controlling shareholder, the decision is subject to an entire fairness standard of review that places the burden on the directors to show the transaction process and the financial determinations were fair. In change of control transactions, Delaware’s courts use an enhanced scrutiny standard, which is between business judgment and entire fairness. Texas law does not utilize heightened standards and is much more deferential to the directors than Delaware, unless there was a personal benefit, which is subject to stricter judicial scrutiny.
No State Corporate Income Tax: Texas offers financial incentives by eliminating the corporate income tax, potentially saving companies significant amounts of money.
Cons:
Limited Legal Precedent: Texas lacks the depth of case law that Delaware provides, making legal outcomes less predictable in corporate disputes.
Best For:
Companies seeking minimal regulatory oversight and maximum founder autonomy.
Startups focused on operational flexibility rather than legal predictability.
Nevada: A Close Competitor to Delaware
Pros:
Specialized Corporate Court: Nevada has a dedicated business court to compete with Delaware’s Court of Chancery, where judges have the same expertise in corporate law.
Management-Friendly Laws: Nevada’s corporate statutes are designed to favor management, offering strong protections against shareholder lawsuits and hostile takeovers. Nevada by statute automatically exculpates director and officer liability for any breach of fiduciary duty, unless their breach of involved intentional misconduct, fraud, or a knowing violation of the law. Nevada explicitly rejects the use of any standard other than the business judgment standard, even in the case of interested transactions. This makes a finding of director or officer liability much less likley than in Delaware.
Flexible Governance Options: Like Delaware, Nevada allows dual-class shares, staggered boards, and other governance structures that favor founders and management.
Cons:
Limited Case Law: While Nevada offers business-friendly laws and a dedicated business court system, it lacks Delaware’s extensive body of case law since those courts do not issue published written decisions. This can lead to uncertainty when legal disputes arise.
Best For:
Companies seeking strong protection for management and reduced exposure to shareholder lawsuits.
Founders who prioritize control over investor involvement.
Why Delaware Still Holds the Edge (For Now)
Despite the recent controversies, Delaware’s core strengths are difficult to replicate:
The Chancery Court’s Expertise: The Chancery Court remains the gold standard for resolving complex corporate disputes quickly and efficiently.
Comprehensive Legal Precedent: Delaware’s extensive case law ensures more predictable outcomes, reducing uncertainty during disputes involving fiduciary duties, shareholder rights, and M&A activity.
Investor Trust: Investors continue to favor Delaware because of its predictable legal environment, reducing friction in funding rounds and acquisitions.
Ecosystem Participant Momentum: Founders, investors and their respective attorneys are all most familiar with Delaware, so it is easier and less expensive to negotiate Delaware focused documentation related to forming companies and funding them.
Should Startups and Founders Consider Leaving Delaware?
Founders Seeking Maximum Control
If preserving control is your top priority, Nevada’s management-friendly laws or Texas’s minimal regulatory environment may be worth considering.
Companies Expecting Litigation
If you anticipate disputes involving shareholders or board decisions, Delaware’s specialized courts and legal infrastructure offer unparalleled predictability. However, Nevada’s board/management friendly laws would be a big advantage to the board and management in any dispute.
Companies Balancing Risk and Growth
Most startups will find Delaware’s established legal framework and investor trust difficult to replace, making it the safest option despite recent challenges.
Final Thoughts: Delaware Remains Dominant, But Watch for Changes
As highlighted in the New York Times article, the backlash against Delaware is real, but its advantages remain significant. The Chancery Court, extensive legal precedent, and investor confidence make it difficult to dethrone. However, founders and startups should stay informed, as Delaware’s legal landscape is evolving. While alternatives like Texas and Nevada offer new opportunities, they come with their own risks and uncertainties.
For now, Delaware remains the default choice—but staying proactive and adaptable will be key to navigating the shifting landscape of corporate law.
The original article can be found here. To learn more about startup-related legal information, visit Amit’s blog.