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Delaware Will Be Just Fine
By "just fine" we mean the Delaware incorporation economy will continue to thrive, not corporations and shareholders there will easily navigate some significant proposed changes to Delaware law.
A couple of weeks ago the Delaware legislature shook the corp gov and securities law world with Senate Bill 21. It represents "seismic changes to Delaware's business statutes", an "urgent situation where swift action is necessary", and a "total capitulation" to corporate interests over those of investors, and that's all from just one recent report.
The bill responds to sentiment among Delaware's elected leaders that Delaware judges have antagonized some significant corporations, namely TSLA, leading it and a few others to find a new domicile. This prompted concerns that many others will follow. None of the bill's sponsors or supporters come right out and say it, though, instead appealing to "balanced protections" for companies and investors.
We'll consider the substance and implications of the changes to Delaware law later. We first wondered what the available evidence suggests about the state's position as the favored domicile for US corporations. Does the state's leadership have a sound empirical basis for its concerns?
Delaware's own data indicates a thriving incorporation environment. In 2023 (the most recent year for which it provides data), almost 300,000 new entities were formed in the state, including almost 60,000 corporations. The rest were LLCs, LLPs, and LPs. This is roughly consistent with the numbers for 2021 and 2022. Almost 400,000 corporations were domiciled in Delaware in 2023, too. Among publicly traded corporations, the ones activists care most about, roughly two-thirds of them call Delaware home, domicile-wise. Finally, the state claims 80% of all IPOs registered in 2023 did so in Delaware.
Among all types of new incorporations, not just IPOs, an even larger share, 90%, register in Delaware, according to data from Carta, the cap table software company. That rate has barely changed in the past five years.
A broader analysis of tax revenues also shows Delaware dominates incorporations. Franchise taxes, preservation of which is one of the main points of SB21, have grown steadily for the past ten years. An independent state fiscal council forecasts a steady increase for the next three years, too.
Over a very long period of time, Delaware has maintained its share of new entity formations. A new academic paper compiles incorporation data for the past century. Delaware essentially dominates corporate formation for at least the past 20 years.
Right now we know of a handful of Delaware corporations that left or might leave: TSLA, META, TRIP, DBX. "Others are also evaluating whether to make the move, DealBook hears." Evidently, Delaware seeks to respond to a problem affecting a minuscule percentage of its corporations with a "seismic change."
We'll have more to say about SB21 in the coming weeks. For now, the available data on Delaware incorporation activity suggests the state's leaders need not worry about losing entities and tax revenues in any meaningful way.
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