Why Delaware Is Losing Its Edge as Corporate Home Base

Delaware has long been the go-to state for corporations and LLCs to organize. However, a recent drift toward woke judicial activism has led to bad decisions that jeopardize its dominant position. Over two-thirds of Fortune 500 companies and more than 60% of public firms incorporate there, drawn by its specialized Chancery Court and once-predictable rules. The key rule: the state of incorporation sets the mandatory venue for internal governance lawsuits, like fiduciary duty claims and derivative suits. In an important recent case involving Elon Musk's pay package, a shareholder with just nine shares challenged a shareholder-approved plan. The lower court agreed, rejecting the compensation package. It initially awarded plaintiff's lawyers up to $345 million in fees—paid by Tesla—under the "corporate benefit" doctrine, which lets courts force companies to pay lawyers' fees if the suit supposedly created some benefit for the corporation, even if dubious. The Delaware Supreme Court reversed in December 2025, reinstating Musk's compensation package and essentially acknowledging the suit was a wasteful action. Nevertheless, it still left Tesla on the hook for ~$55 million in unwarranted legal fees to the plaintiff's attorneys, while the company bore massive legal defense costs. An objective outsider would argue that a meritless suit that ultimately failed should yield zero fees for lawyers. The bill belongs to the instigating shareholder, not the company. One wonders whether the lawyers who brought this meritless suit should be responsible for paying some of Tesla's legal fees.

This mandatory venue forces Delaware-incorporated firms to face its courts exclusively for internal disputes, even as rulings grow less predictable and more woke. Recent decisions heightened scrutiny on board actions, controlling shareholder deals (where a major owner influences transactions), and executive compensation, boosting risks of small shareholders trying to micromanage the corporation. Delaware collects over $2 billion yearly in franchise taxes and fees—roughly one-third of state revenue—while rivals like Texas and Nevada impose no corporate income tax and offer stronger director protections, such as requiring minimum stock ownership (e.g., 3% in Texas) for derivative suits.

The court's woke direction accelerated an exodus in 2025. In the proxy season alone, 18 public companies proposed leaving Delaware via shareholder votes, with 13 targeting Nevada and others Texas—far more than prior years. High-profile moves include Tesla (to Texas), SpaceX (to Texas), Dropbox (to Nevada), TripAdvisor (to Nevada), Roblox (to Nevada), and Coinbase (planning Texas). Delaware passed 2025 amendments for more safe harbors, but the trend persists: businesses prefer lower bureaucracy and courts less open to low-stake, lawyer-driven suits. Incorporating in company-friendly venues like Texas and Nevada cuts exposure to activist rulings.