Reincorporation Considerations for Late-Stage Private and Pre-IPO Companies

Introduction

Companies thinking about, preparing for or going through the initial public offering (IPO) process have many things to do and many decisions to make (to put it mildly!). A relatively recent addition to this list of considerations for Delaware-incorporated companies is whether to reincorporate in a different state, with Nevada and Texas emerging as the front-runners.

Such moves – referred to in the industry as “DExit” – appear to be a response to recent Delaware court decisions that business leaders consider arbitrary and/or stifling to business interests, as well as a perception of Delaware as an increasingly litigious environment. We discuss this new landscape below, analyzing how we got here and what to consider now, to help Delaware-incorporated companies understand what may be at play if they’re thinking of packing up and hitting the road.

Current state of play: Delaware’s dominance

For decades, corporations have primarily chosen to incorporate in Delaware. According to the Delaware Division of Corporations’ 2023 Annual Report, that year, nearly 67.6% of Fortune 500 companies were incorporated in Delaware, and approximately 80% of all US IPOs were registered there. Delaware built this dominance on a combination of factors:

Experienced business courts. The Delaware Court of Chancery has been the leading tribunal for business disputes for decades. Disputes there are heard by one of the court’s seven judges, each of whom has deep experience in corporate law and is selected and confirmed, rather than elected. The court is known to move expeditiously, often hearing a case and issuing a decision within months if not weeks. Appeals bypass intermediate appellate courts and can instead be made directly to the Delaware Supreme Court, which can also expedite decisions when necessary.
Plentiful case law. Delaware courts have heard thousands of cases for more than a century, so suffice it to say there is substantial precedent for most issues that arise. Although this historical precedent has been somewhat uprooted by recent decisions that have been viewed as inserting a level of unpredictability into this body of case law, in general, Delaware is known for its clear common law frameworks supported by ample historical precedent. We discuss these recent decisions in more detail below.
Flexible corporate law. The Delaware General Corporation Law (DGCL) is generally understood to be business-friendly and flexible. Moreover, the DGCL is reviewed and amendments are proposed to it annually. As a result, updates that are considered necessary or timely can be passed fairly quickly (as we saw earlier this year – more on that later).
Ease of doing business. Delaware’s Office of the Secretary of State is known to be business-friendly, and the state is considered one of the easiest, least expensive and fastest places to set up and begin conducting business.

Changing tides: The recent evolution of Delaware corporate law

Recent Delaware court decisions

1. Elon Musk’s Tesla compensation package (2024)

The mainstream conversation about where to incorporate may have started when Elon Musk tweeted, “Never incorporate your company in the state of Delaware” in January 2024 after the Delaware Court of Chancery rescinded his multibillion-dollar compensation package at Tesla, which had received both board and stockholder approval back in 2018. That compensation package included an award whereby Musk would receive additional Tesla shares each time the company hit one of 12 specified milestones. In this initial case, the Tesla shareholder who filed suit in objection to the compensation package alleged that Musk, as a controlling shareholder of the company, exercised outsized influence with the board. Approaching this conflicted transaction involving a controlling shareholder, the Chancery Court analyzed whether the “MFW framework” had been satisfied and, in finding that it had not, analyzed the compensation package under the heightened “entire fairness” standard (see more on that standard below). In particular, the court found that the directors who approved the compensation package were not independent of Musk and that the subsequent stockholder vote was not fully informed. Therefore, the burden of proof fell on Tesla to prove that the process related to the compensation – and its amount – were fair to the company and its stockholders. In this regard, the court found that Tesla fell short of the mark.

In response to the Chancery Court’s decision, Tesla’s board submitted the compensation package to a disinterested stockholder majority vote in June 2024. Tesla stockholders (including the disinterested majority) once again approved the executive compensation package, along with a proposal to reincorporate from Delaware to Texas to boot. The Delaware courts rejected the compensation package for a second time in December 2024 on procedural grounds, ruling that a stockholder vote alone cannot cleanse a conflicted-controller transaction generally or the related misstatements in the Tesla proxy statement specifically.

Though Tesla has now reincorporated in the Lone Star State, this case remains on appeal in Delaware.

2. Moelis & Company (February 2024)

In West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, the Chancery Court struck down provisions of a stockholder agreement between a company and its founder – the company’s controlling stockholder – in which the founder had certain veto rights over various corporate actions and board composition. The court held that the stockholder agreement at issue was a prototypical internal governance arrangement because it implicated matters governed by the DGCL (specifically, Section 141, which provides that “the business and affairs of every corporation … shall be managed by or under the direction of a board of directors, except as may be otherwise provided in … its charter”) and found that many of the rights in the stockholder agreement were facially invalid because they took certain governance rights out from under the board’s purview.

This ruling caused such a stir in the business community that Delaware amended the DGCL to override this decision. Delaware Senate Bill 313 was signed into law in July 2024, creating a new Section 122(18) to authorize Delaware corporations to enter into agreements with stockholders even if the provisions are not set forth in a certificate of incorporation and would restrict the board’s discretion in managing the corporation.

3. In re Match Group (April 2024)

In re Match Group, Inc. Derivative Litigation is another case in which a Delaware Supreme Court decision sent shock waves through the system for controlling stockholders and conflicted transactions. Match Group, which owns dating services like Match and Tinder, was, until June 2020, a controlled subsidiary of IAC/InterActiveCorp. At the time, both IAC and Match Group were controlled by Barry Diller, IAC’s chairman, who held just under half of IAC’s voting power. In 2020, IAC announced it would separate Match Group from IAC. Match Group stockholders sued IAC and several directors over the separation transaction, claiming that IAC and its directors approved the conflicted transaction to the detriment of Match Group’s minority stockholders.

The Court of Chancery dismissed the complaint, finding that the MFW framework had been satisfied and, therefore, applied business judgment review to the transaction. The Delaware Supreme Court disagreed, holding that the separation committee, which it found was “staffed with members loyal to the controlling stockholder,” was insufficient and that the special committee must be fully (not just majority) independent. The Delaware Supreme Court reversed the Chancery Court’s decision to apply the business judgment rule (BJR), holding that the high standard of “entire fairness” was the appropriate standard of review. In so holding, the court clarified that the MFW framework would apply to any transaction involving a controlling stockholder who receives a non-ratable benefit.

4. Tripadvisor(Palkon v. Maffei)(April 2023/February 2025)

In April 2023, Tripadvisor announced plans to reincorporate from Delaware to Nevada. A shareholder lawsuit was filed in Delaware to block the move.

Initially, the Chancery Court held that because Tripadvisor is a controlled company (by virtue of its dual-class capital structure), the decision to approve the reincorporation would be subject to “entire fairness” review, which would require approval by both a special committee and a minority stockholder vote under the MFW framework. In so holding, the court determined that a material reduction or elimination in a fiduciary’s risk of liability (which plaintiff argued was the case due to decreased litigation exposure for directors of the new Nevada corporation by virtue of less stringent fiduciary duties and director liability standards under Nevada law – again, more on that below!) was a non-ratable benefit to the controller. However, in February 2025, the Delaware Supreme Court reversed that decision, holding that the BJR was the applicable standard of review. The court found that “the hypothetical and contingent impact of Nevada law on unspecific corporate actions that may or may not occur in the future is too speculative to constitute a material, non-ratable benefit triggering entire fairness review.”

Recent Delaware Updates

Earlier this year, the Delaware Legislature sprang into action to address several of the topics raised by the recent roller coaster of court decisions. On March 25, 2025, Delaware enacted Senate Bill 21, introducing significant changes to the DGCL that create a statutory structure for obtaining safe harbor protection for acts or transactions in which a director, officer or controlling stockholder may be conflicted (including with respect to controlling stockholder compensation matters), including greater clarity on what constitutes a disinterested director and controlling stockholder.

As it relates to the controlling stockholder issue, Senate Bill 21 made the following changes to Section 144 of the DGCL:

Created “safe harbor” procedures to cleanse conflicted transactions and transactions with controlling stockholders. Transactions with a majority interested board, as well as transactions with controlling stockholders (except for going-private transactions), must either be:
- Approved by a majority of disinterested directors serving on a committee of at least two members (and all members of such a committee must have been determined by the board to be disinterested).
- Approved or ratified by a majority of the votes cast by disinterested stockholders.

If a transaction meets these “safe harbor” requirements, it will be subject only to the lower Delaware business judgment standard. Both independent committee and stockholder approval must be obtained in certain going-private transactions to obtain the “safe harbor” protection.

Defined “controlling stockholder” with a relatively bright-line threshold. The amended DGCL defines a controlling stockholder as one that has either majority voting power or the right to elect a majority of directors or one-third of the voting power and the power to exercise managerial authority. This amended definition provides a relatively bright-line rule in that no stockholder with less than one-third of the voting power can be considered a controlling stockholder. This change limits the scope of transactions that would be considered conflicted transactions subject to heightened judicial review if not properly cleansed.
Presumption of independence when “independent” under exchange rules. Any director deemed independent under New York Stock Exchange or Nasdaq rules will be presumed disinterested unless substantial, particularized evidence proves otherwise. This change will make it harder to challenge director independence in the context of a conflicted transaction.

Our M&A colleagues dived into detail on these changes shortly after Senate Bill 21 was enacted.

Senate Bill 21 also makes changes to Section 220 of the DGCL, relating to the inspection of books and records, including the following:

Restricts the scope of books and records requests. Addressing an issue previously undefined in statute, Senate Bill 21 amends Section 220 to expressly enumerate the categories of “books and records” that can be requested.
Imposes a three-year lookback period. The amendments cap stockholder access to records at three years.
Procedural requirements for books and records requests. The amendments codify the requirement that a stockholder demand be made in good faith and for a proper purpose and must describe the purpose and records sought “with reasonable particularity.”

Our securities litigation + enforcement colleagues provided their two cents on these amendments shortly after Senate Bill 21 was enacted as well.

But don’t hang up your coat just yet, since the constitutionality of these amendments has been questioned, and the Delaware Supreme Court has taken up the challenge.

The alternatives: Nevada and Texas

With all the kerfuffle over the recent string of Delaware cases, Nevada and Texas have capitalized on the opportunity to present a different way for corporations to set up shop. Nevada seems to have emerged as the lead alternative, with its statute-based corporate jurisprudence standing in stark contrast to Delaware’s judicially prescribed system. While the vast majority of companies continue to choose Delaware (at least for now), many companies are rightly asking whether a different state would be more appropriate for their current and anticipated needs in terms of growth, investor base, capital structure and more.

If the last two short years are any indication, this is – and will continue to be – an evolving horse race. Delaware has clearly shown a willingness and ability to adapt, but not to be outdone, both Nevada and Texas have made clear their commitment to innovation for a business-friendly environment. As we note below, for example, Nevada is considering legislation that would move it from a system of elected judges serving relatively short terms to one of appointed judges. Texas, which like Delaware has historically developed its jurisprudence through case law, recently amended the Texas Business Organizations Code (TBOC) to, among other things, codify the BJR, allow public companies to set a minimum ownership threshold of up to 3% for shareholders to bring derivative actions, allow companies to petition the Texas Business Court (or district courts in some cases) to determine the independence and disinterest of special committee directors with respect to related-party transactions, allow for certain waivers of jury trial rights, and restrict the types of records that can be requested by shareholders in a books and records demand.

Needless to say, we’re all getting our popcorn ready to watch how this saga unfolds. Even as the pendulum may continue to swing back and forth as states make their next moves on the chessboard, companies with their eyes on an IPO may want to consider the following:

Controlled company transactions

Many of the recent Delaware decisions have had an outsized negative impact on controlled companies, including those with dual-class stock structures, by creating uncertainty over who is a controlling stockholder and what fiduciary duties such controlling stockholders may owe to a company’s minority stockholders. Between the increased risk of liability for controlling stockholders, the uncertainty over which standard of review the courts will apply to transactions or board decisions, and the increased risk of litigation for corporate decision-making, Delaware appears to be losing its foothold as the default state of incorporation for controlled companies. Though the Delaware assembly amended the DGCL to essentially overturn Match and address some of the complications created by recent case law for conflicted controller transactions, other states – Nevada and Texas, in particular – have already gained strong standing in this conversation amid the shuffle. Will Delaware be able to put the genie back in the bottle?

While Delaware now has a statutory safe harbor to cleanse transactions with controlling stockholders, unless the transaction is properly approved in accordance with the applicable provisions, a controlling stockholder transaction will still be evaluated under the entire fairness standard. Moreover, the recent amendments to the DGCL that codify this safe harbor have yet to go in front of the Delaware courts, and in a case law-based regime such as Delaware, there is still a fair bit of uncertainty around how the amended DGCL will be interpreted. For example, though the amended DGCL now has a presumption of independence for any director that satisfies the applicable stock exchange director independence requirements, rebuttable only by “substantial and particularized facts” of such director’s material interest or relationship, it remains to be seen how courts will interpret what constitutes “substantial and particularized facts.”

By contrast, Nevada courts have held that the state’s codified business judgment standard of review is the “sole avenue to hold directors and officers individually liable for damages arising from official conduct.” To put it plainly, Nevada law simply does not recognize the concept of applying an enhanced level of scrutiny to a controlling stockholder transaction.

Moreover, seemingly in answer to the recent DGCL amendments, in May 2025, the Nevada Legislature passed AB239, which, among other things, proposes to:

Define a “controlling stockholder” as a stockholder who has the ability to elect a majority of the corporation’s directors and is in a position to control the direction and management of the corporation, without setting forth ownership thresholds.

State that stockholders of Nevada corporations do not owe fiduciary duties to either the corporation or its stockholders except under limited circumstances.

Provide that the only fiduciary duty owed by a controlling stockholder is to refrain from exerting undue influence over a director or officer in order to cause such director or officer to breach their fiduciary duty in the context of a transaction where the controlling stockholder has a material and nonspeculative financial interest and that results in a material, nonspeculative and non-ratable financial benefit to the controlling stockholder.

The proposed legislation also provides a cleansing mechanism for controlling stockholder transactions, providing for a presumption of no breach of fiduciary duty by a controlling stockholder if the underlying transaction has been approved by either a committee of only disinterested directors or the board of directors in reliance upon the recommendation of a committee of only disinterested directors. Lastly, the proposed amendments provide that a stockholder is not individually liable to the corporation or its stockholders unless the stockholder is a controlling stockholder, the presumption of BJR is rebutted and the controlling stockholder has been found to have breached its fiduciary duty.

In the context of a controller transaction, Texas courts apply somewhat of an intermediate approach, focusing on the duty of loyalty in analyzing the propriety of director conduct. To prove a breach of a duty of loyalty, it must be shown that the director was interested in the transaction. Once it is shown that a transaction involves an interested director, the burden is then shifted to the directors to prove the fairness of their actions to the corporation – a heightened review regime more akin to entire fairness than the BJR. A challenged transaction found to be unfair may nonetheless be upheld if ratified by a majority of disinterested directors or the majority of stockholders. With the recent TBOC amendments codifying the BJR, this heightened legal regime would not apply to a controller transaction in the case of a public company or company that opted into the BJR codification regime and complied with Texas law.

The amendments to the TBOC also provide a right for the board of a public company to petition the Texas Business Court (or if the company’s principal place of business does not have an operating business court, the applicable district court) to determine the independence and disinterest of directors comprising special committees formed to review and approve transactions involving controlling stockholders, directors or officers. Notably, the petition must be filed in the applicable court, and shareholders must be notified of such filing via Form 8-K, which may make such an action unattractive to public companies that may not want to indicate to the market that an interested party transaction is in the pipeline.

Fiduciary duties and director liability

Much like the rest of Delaware corporate law, the fiduciary duty regime is heavily reliant on case law rather than the DGCL. The standard litany of fiduciary duties (care, loyalty, good faith) is established via case law, as are the standards of review for evaluating director conduct (i.e., BJR and various varieties of enhanced scrutiny, including entire fairness).

Nevada corporate law is rooted in statute, and the Nevada Business Corporations Act is intended to exert control over conflicting case law from other jurisdictions and to limit the ability of Nevada judges to supplement or modify fiduciary duty standards. The Nevada BJR is explicitly codified, and Nevada courts have specifically rejected heightened standards of review. Under Nevada statute (NRS 78.138), a director or officer cannot be held individually liable to the corporation or its stockholders for a breach of fiduciary duty unless such director’s or officer’s breach involved intentional misconduct, fraud or a knowing violation of law.

In May 2025, Texas amended the TBOC to explicitly codify the BJR in the TBOC for public companies and companies that choose to opt into this new regime. With that amendment, neither a corporation nor any of its shareholders has a cause of action against a director or officer unless the claimant proves that the director’s or officer’s act or omission constituted a breach of fiduciary duty and the breach involved fraud, intentional misconduct, an ultra vires act or a knowing violation of law. Thus, in both Nevada and Texas (but not Delaware), gross negligence would be insufficient to find a breach of fiduciary duty.

Restrictions on business combinations with interested stockholders

Each jurisdiction has certain limitations on discretion with respect to making decisions in the context of a takeover. Delaware and Texas impose a moratorium of three years on business combinations with interested stockholders, whereas Nevada imposes a moratorium of only two years (with some restrictions for the following two-year period).

However, Texas is more lenient than Delaware or Nevada in that “interested stockholders” are 20% or more holders, as opposed to 15% in Delaware and 10% in Nevada.

In Delaware, Nevada and Texas, corporations are entitled to opt out of the business combination provisions of the DGCL, the Nevada Revenue Statute and TBOC, respectively.

Business courts and other legislative updates

Delaware courts are known to be highly specialized given the substantial body of case law that has developed through their decisions, as well as a state-level focus on establishing business-friendly public policies for Delaware corporations. Delaware updates and revises its corporate code often to meet changing business needs. In addition, judges in Delaware are appointed and confirmed by the state senate, not elected. Delaware judges serve 12-year terms.

At present, Nevada judges are elected, although there is legislation currently under consideration that would move the state to appointed judges. Currently, the chief judge has the ability to appoint elected judges to serve on more specialized business courts. This helps ensure judges with relevant experience decide business cases, but it is not as beneficial as the direct appointment process in Delaware. While Nevada has also encouraged incorporation in the state and, as part of that effort, has adopted comprehensive, modern, flexible statutes that it periodically updates and revises to meet the needs of businesses, Nevada case law concerning the effects of its statutes and regulations is more limited. As a result, there may be less predictability with respect to the legality of certain corporate affairs and transactions – and stockholders’ rights to challenge them – to the extent a court must interpret the application of Nevada’s statutes to particular situations.

The Texas business court system, comprising 11 business courts across all the state’s counties, was created in 2023 and has been in operation only a little more than a year. The Texas business court judges are appointed by the governor, not elected, and they serve two-year terms. While there is currently little written corporate case law in Texas, the business courts will be required to issue written opinions that over time should help flesh it out, adding to the predictability of acting as a Texas corporation. Even so, in the absence of applicable precedent, Texas and many other states look to Delaware Court of Chancery decisions in applying their own analogous laws.

Lastly, both Nevada and Texas permit jury trials for securities and corporate law cases, while Delaware tries corporate law cases exclusively by professional judges rather than juries, based on the presumed benefits of experience and efficiency of such judges. However, Texas amended its business codes – and Nevada has proposed amendments to its codes – to allow corporations to waive jury trial provisions in their charter documents. Texas now allows a resident corporation to include in its governing documents an enforceable waiver of the right to a jury trial for any internal entity claim (which would include breach of fiduciary duty claims), and Nevada has proposed legislation permitting resident corporations to require in their governing documents that any, all or certain internal actions (which would include breach of fiduciary duty claims) be tried in a bench trial.

Reincorporation considerations for pre-IPO companies

Companies gearing up for an IPO may want to consider whether to reincorporate in a state other than Delaware as part of their pre-IPO prep work. Although the recent Tripadvisor decision (Palkon v. Maffei) indicates that Delaware courts would apply the BJR to a public company’s reincorporation decision (so long as the decision to do so was made on a “clear day” and not with a view to avoiding specific and actual liability), making the move as a private company is more straightforward, with less risk of litigation, enabling a much quicker trip across state lines.

A few things to keep in mind:

While a controlled public company may be able to effect a move with board approval and written consent (see, for example, Dropbox’s information statement), public companies without a controlling stockholder will likely have to obtain a full stockholder vote through a proxy solicitation at an annual or special meeting. This can be onerous and time-consuming (not only to prepare the proxy statement but also to solicit the votes) and comes with the risk that stockholders will not ultimately approve the move.
The company must determine which consents it will need in connection with a reincorporation and review its governing documents, contracts, equity plans and other documentation to ensure it is soliciting and receiving all required consents to move.
A public company will likely need to establish a special committee to evaluate whether and where to reincorporate, have a clear rationale for why a reincorporation is good for the company, and ensure the board understands and is supportive of this rationale. Is the company trying to protect its culture of innovation? Does a different state give the board more certainty in corporate decision-making without the specter of litigation or a second-guessing of board decisions? And is this rationale ultimately compelling to the company’s stockholders?
Keep a clear record of the board’s consideration of the decision, and ensure the board has reviewed and adequately evaluated both the benefits and risks of a move. Bring in experts and/or legal advisers to help clarify issues or considerations.
Statutory appraisal rights of stockholders under DGCL Section 262 apply in the context of a conversion of a Delaware corporation to a foreign corporation. In the public company context, the DGCL so-called “market exception” (whereby appraisal rights do not apply to any class of stock listed on a national securities exchange or held of record by more than 2,000 stockholders) usually exempts public companies from stockholder appraisal rights in a conversion. However, the market exception does not apply to private companies, and stockholders will most likely have appraisal rights in connection with a private company conversion. Such rights can be waived, but serious consideration should be given to appraisal rights and the related process for a private company considering a reincorporation away from Delaware. Public companies with dual-class structures where a high-vote class is not listed on a public market will also have to consider appraisal rights with respect to that high-vote class.
Proxy advisory firms may also weigh in on redomiciliation proposals by public companies. While both Glass Lewis and Institutional Shareholder Services (ISS) review such proposals on a case-by-case basis, Glass Lewis generally recommends voting against a redomiciliation if it results in a decline in shareholder rights, has minimal financial benefits and offers significantly weaker shareholder protections, while ISS will recommend voting against a proposal if the move would result in a deterioration of shareholder rights or governance standards.

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