The email that started my thinking on this arrived from a former student, now general counsel of a mid-cap company, who asked me a deceptively simple question. Her board wanted to reincorporate out of Delaware. Nevada, probably. She wanted to know whether she could recommend it in good conscience. Not whether it was legal. Whether it was right.
I have taught professional responsibility for a long time. That question is the one I care about, and it is the one nobody in the DExit conversation seems eager to answer.
So let me try.
A vice chancellor sees a benefit that runs to only one side
Begin with the case that gave the whole argument its shape. Palkon v. Maffei (Del. Ch. 2024). The plaintiffs were stockholders of Tripadvisor and its parent, Liberty TripAdvisor, both controlled by Gregory Maffei, a name any Delaware watcher recognizes from a decade of Liberty Media entities. The companies proposed to reincorporate from Delaware to Nevada. The stockholders sued to enjoin the move.
Vice Chancellor Travis Laster wrote the opinion, and he wrote it the way he writes most things, which is to say he refused to pretend the obvious was not happening. The reincorporation, he reasoned, would strip stockholders of accrued protections that Delaware law supplies and Nevada law does not. Nevada, by statute and constitution, shields directors and officers from monetary liability except for intentional misconduct, fraud, or a knowing violation of law. Delaware does not go nearly that far. A controller who steers a company to Nevada therefore receives something the public stockholders do not: a reduction in his personal exposure to fiduciary claims.
Laster called that a non-ratable benefit. Under settled doctrine, a transaction in which a controller receives a benefit not shared with the minority triggers entire fairness review. That is the teaching of Weinberger v. UOP (Del. 1983) and of Sinclair Oil Corp. v. Levien (Del. 1971), the old cases every student learns: when the controller stands on both sides, or takes to the exclusion of the minority, the burden shifts and the court asks about fair price and fair dealing. Laster declined to dismiss. He let the entire fairness claim proceed.
I taught that opinion the semester it came down. My students, most of them, thought it was correct and even a little obvious. Of course a liability shield that protects the fiduciary and not the beneficiary is a benefit to the fiduciary. That is what the words mean.
The Delaware Supreme Court disagreed.
The Supreme Court reverses, and the theory gets thinner
In Maffei v. Palkon (Del. 2025), the state’s high court reversed en banc. The reasoning is worth sitting with, because it tells you where Delaware’s leadership decided to plant its flag when the ground started shifting.
The court held that the reduction in litigation exposure was too speculative to count as a material, non-ratable benefit at the pleading stage. The future lawsuits that Nevada law might extinguish were hypothetical. No one knew whether they would ever be brought, whether they would have merit, or what they would be worth. A benefit contingent on unknown future litigation, the court said, is not the kind of concrete, present advantage that flips the standard of review from business judgment to entire fairness. So the business judgment rule applied, and the complaint failed.
I understand the doctrinal instinct. Courts prefer concrete injuries to speculative ones. But I find the reasoning strange, and I said so to my class. The whole point of a liability shield is that it operates on contingencies. Insurance is valuable precisely because you do not know whether the house will burn. To say that a fiduciary derives no cognizable benefit from immunity until the specific suit that immunity would have defeated actually materializes is to misunderstand what immunity is for. Maffei did not need a particular lawsuit to be pending in order to value the protection. Sophisticated parties pay for protection against risk in the abstract every single day.
Set the doctrine aside for a moment and read the decision as an institutional document. Delaware was, by early 2025, watching companies threaten to leave. The court that handed down Maffei knew that a broad affirmance would give every controller in America a reason to worry that reincorporation itself could be attacked as a self-dealing transaction. A narrow, business-judgment-friendly rule kept the door open. Companies could leave, or could threaten to leave, without the leaving being treated as a breach.
That is not a criticism I make lightly. Courts are permitted to be aware of their environment. But when the reasoning bends to keep customers, a professional responsibility teacher starts paying attention to who the client is.
The pay package that would not die
Now the case everyone actually talks about. Tornetta v. Musk.
Richard Tornetta owned nine shares of Tesla. In 2018 the Tesla board granted Elon Musk a compensation package of stock options that, at its peak, was worth something in the neighborhood of fifty-five billion dollars, the largest pay arrangement in the history of public companies by an order of magnitude that makes the comparison almost silly. Tornetta sued, claiming the board that approved it was not independent of Musk and that the process was tainted.
Chancellor Kathaleen McCormick tried the case and, in January 2024, rescinded the entire package. Her opinion is a long, careful application of entire fairness. She found that Musk was a controlling stockholder for purposes of the transaction, that the compensation committee and board were riddled with personal and financial ties to him, and that the disclosures to stockholders who ratified the grant were materially deficient. The negotiation, she wrote, was not the arm’s length process the defendants described. It looked more like a man setting his own salary and asking friends to nod.
The doctrine she applied is not exotic. It descends from Weinberger, from Kahn v. Lynch Communication Systems (Del. 1994), and from the framework of Kahn v. M & F Worldwide Corp. (Del. 2014), the case lawyers call MFW, which holds that a controller transaction can earn business judgment deference only if it is conditioned from the outset on both an independent, empowered special committee and an informed vote of the minority. Musk got neither of those protections in the form the doctrine requires. So entire fairness governed. And under entire fairness, the defendants bore the burden of proving the deal was fair. McCormick found they had not.
Tesla’s answer was audacious and, I concede, effective as theater. The company reincorporated in Texas following a June 2024 stockholder vote. It then held a new ratification vote purporting to bless the 2018 package all over again. When the case came back before the Chancellor in December 2024, she was unmoved. A stockholder vote taken years after the fact, she held, could not ratify a transaction already adjudicated to be a breach, and the procedural gymnastics did not cure the defects she had already found. She reaffirmed rescission.
She also addressed fees. The plaintiff’s lawyers, having achieved what was on paper the most valuable result in the history of stockholder litigation, requested a fee that beggared belief, denominated in Tesla stock and worth billions. McCormick awarded three hundred forty-five million dollars instead. Even the reduced number is staggering, and it tells you something about the economics that drive this entire practice area, a point I will return to, because the plaintiffs’ bar has as much interest in Delaware’s dominance as any defense-side controller does.
The appeal to the Delaware Supreme Court was pending as of late 2025. I will not predict its outcome. I will only observe that Musk himself did not wait. He moved Tesla to Texas, moved SpaceX to Texas, moved Neuralink to Nevada, and told anyone who would listen that Delaware could no longer be trusted. When the richest man in the world tells corporate America that a jurisdiction has turned against founders, corporate America listens, whether or not the claim survives contact with the actual opinions.
SB 21, or Delaware negotiates with itself
Which brings us to the legislative panic.
In March 2025, Governor Matt Meyer signed Senate Bill 21 into law, amending the General Corporation Law with unusual speed and unusual candor about its purpose. The bill was a response to precisely the anxiety that Tornetta and the DExit talk produced. Its supporters said so plainly. Delaware makes real money from its franchise, hundreds of millions of dollars a year in franchise taxes and fees, a sum that funds a meaningful slice of the state budget. Companies leaving is not an abstraction to Dover. It is a hole in the ledger.
SB 21 did several things, and I want to describe them without the cheerleading that accompanied the bill’s passage and without the apocalyptic framing that came from its critics.
First, it rewrote Section 144 of the DGCL, the provision governing interested-director and controller transactions. The amendments created cleaner statutory safe harbors. A controller transaction that satisfies specified procedural conditions, approval by a committee of independent directors, or an informed vote of disinterested stockholders, now earns protection from equitable challenge in a way the statute spells out with more precision than the common law ever did.
Second, and this is the part that provoked the fight, the bill narrowed the definition of who counts as a controlling stockholder and tightened the showing a plaintiff must make. It set numerical guideposts around the one-third ownership range for the control inquiry, moving away from the more fact-intensive, functional approach that Delaware courts had developed case by case.
Third, it restricted stockholders’ rights to inspect books and records under Section 220, the demand mechanism that plaintiffs’ lawyers use to gather the pre-suit evidence that makes complaints survive dismissal. Section 220 is not a footnote. The Delaware courts have spent twenty years telling plaintiffs to use the tools at their command and investigate before they file, a directive that runs from Rales v. Blasband (Del. 1993) through a long line of demand-futility cases. Curtailing 220 while insisting on pre-suit diligence puts plaintiffs in a genuine bind.
The reaction from the academy was loud. A group of corporate law professors, some of them people whose casebooks I have assigned for years, warned that the legislature was doing the controllers’ bidding, that it was overturning the settled equity jurisprudence of the Court of Chancery by statute, and that it did so with the very interests that stood to benefit sitting at the drafting table. The counter-argument, advanced by the bill’s defenders in the Delaware bar, was that the common law had grown unpredictable, that MFW’s conditions had become a minefield, and that clarity is itself a value that draws companies and keeps them.
Both sides have a point, which is the thing nobody wants to hear. The pre-SB 21 doctrine really had become intricate to the edge of incoherence in places. A transactional lawyer trying to counsel a board through a controller deal faced a shifting body of Chancery decisions, each fact-bound, each adding a wrinkle. Predictability is a legitimate good for the people who have to plan around the rules. But predictability purchased by shrinking the fiduciary duties themselves is a different thing from predictability purchased by clarifying them, and SB 21 did some of both. I do not think you can read the books-and-records provisions and honestly call the bill neutral. It moved power toward controllers and away from the stockholders who bring suits. That was the point.
What Nevada and Texas are actually selling
The competitor states understood the moment and moved.
Nevada had already positioned itself as the jurisdiction for founders who want to be left alone. Its statutory and constitutional protections for directors and officers are the broadest in the country, shielding them from monetary liability absent intentional misconduct, fraud, or a knowing statutory violation, a standard so demanding that fiduciary suits there are nearly theoretical. Nevada does not have a Court of Chancery. It does not have two centuries of accreted precedent. For a certain kind of controller, that is the feature, not the defect. You do not fear a body of law that does not exist.
Texas made a more ambitious play. In 2024 it created a specialized business court, staffed by appointed judges, meant to offer sophisticated adjudication of commercial disputes and to compete directly with Chancery on the one thing Delaware genuinely sells, which is expert judges who understand corporate law and decide cases quickly. Texas paired the court with statutory changes friendly to management, including provisions bearing on the demand-futility gate and on jury waivers. Tesla’s relocation gave the effort a marquee tenant. The pitch is coherent: come to a state with a business court, favorable statutes, no income tax, and a political culture that regards founders as heroes rather than defendants.
I want to be fair to these states, because the easy move for a Delaware loyalist is contempt, and contempt is not analysis. There is nothing illegitimate about a jurisdiction competing for incorporations. Delaware itself won its franchise a century ago by out-competing New Jersey, whose corporation law had been the national standard until the state tightened it under Governor Woodrow Wilson and drove businesses to friendlier Dover. The race is old. Delaware has simply been winning it for so long that we mistook its lead for a law of nature.
But here is what the competitor states are actually selling, stated plainly. They are selling weaker fiduciary accountability. That is the product. Lower liability exposure for directors and officers, harder paths for stockholder plaintiffs, fewer occasions on which a court will second-guess a controller. You can dress it in the language of predictability and founder-friendliness and freedom from litigation abuse, and some of that dressing fits, because Delaware litigation does contain genuine abuse. The strike suit, the disclosure-only settlement, the fee award untethered from real benefit, these are old pathologies, and the Court of Chancery itself moved against them in In re Trulia, Inc. Stockholder Litigation (Del. Ch. 2016), which killed off the worthless disclosure settlement. But when you strip the marketing away, the core offering of Nevada and Texas is a smaller role for the courts in policing those who control other people’s money.
The question my former student asked
So return to the general counsel and her board.
The DExit conversation is usually framed as a contest between states, or between managers and plaintiffs, or between predictability and equity. I teach professional responsibility, so I frame it differently. I ask who the lawyer in the room is advising, and whose interest that lawyer is required to protect.
Here is the uncomfortable structure of a reincorporation decision. The board proposes it. The controller, if there is one, wants it, because the whole documented value of moving is a reduction in the controller’s and the directors’ own exposure. The lawyer who advises the board is retained by the corporation, which means, under the entity theory that every jurisdiction accepts and that Model Rule 1.13 codifies, the client is the organization, not the directors personally and not the controller. The lawyer’s duty runs to the entity and, through it, to the body of stockholders as a whole.
Read Maffei again with that in mind. The Delaware Supreme Court held there was no material non-ratable benefit sufficient to trigger entire fairness. Fine. But the professional responsibility question is not the same as the standard-of-review question. A benefit can be real for purposes of a lawyer’s conflict analysis even if it is too speculative for a court’s pleading-stage doctrine. When the people directing the reincorporation are the people whose personal liability the reincorporation reduces, the lawyer advising the entity is standing in a room full of conflicts, and the fact that a court will apply the business judgment rule to the outcome does not dissolve them.
I do not say the lawyer must refuse. I say the lawyer must see it clearly and must serve the entity rather than the individuals who happen to sit atop it. That means the reincorporation memo should describe, in candid terms, what the stockholders give up, not merely what the company gains in franchise-tax savings or founder comfort. It means the independent directors, if there are any, should get their own counsel. It means the disclosure to stockholders should read like a fair disclosure and not like a brochure. Smith v. Van Gorkom (Del. 1985) is fifty years old this decade and its lesson has not aged: a board that approves a fundamental change without informing itself, and without informing the stockholders, is exposed no matter how good the deal looks. Van Gorkom’s board lost because it acted in two hours on an oral presentation. A board that reincorporates to escape liability, on the advice of counsel who never named the conflict, is running the same risk in slower motion.
There is a second professional responsibility problem that nobody in the DExit debate wants to name, and it sits on the plaintiffs’ side. The Delaware stockholder-litigation machine is not a charity. The three hundred forty-five million dollar fee in Tornetta tells you that the plaintiffs’ bar has an enormous economic stake in Delaware remaining the forum where these suits are brought and won. When academics defend Delaware’s fiduciary regime against SB 21 and against Nevada, some of that defense is principled and some of it is a defense of a fee structure. I hold no brief for the strike suit. A profession that permits disclosure-only settlements enriching lawyers and no one else earned the Nevada pitch it is now receiving. Trulia was necessary because the abuse was real.
Both sides, in other words, are talking their book, and the corporate lawyer caught between them owes a duty to neither book. She owes it to the entity and its owners.
What I told her
I told my former student that the choice of state is a business judgment her board is entitled to make, and that I would not moralize about a company preferring Nevada’s franchise fees or Texas’s business court. Reincorporation is lawful. It is sometimes wise. New Jersey’s loss became Delaware’s gain, and the sky did not fall.
But I told her the memo mattered more than the destination. If the board reincorporates because the controller wants a liability shield and the directors want to sleep better, and the lawyering pretends that is merely a tax-planning exercise, then the lawyering has failed the entity even if it satisfies the statute. If the board reincorporates after being told plainly what the minority loses, after the disinterested directors have taken independent advice, and after the stockholders have received a disclosure that a court would call complete, then the board has done its job and the lawyer has done hers, and the state on the certificate is a detail.
The larger point I keep returning to, teaching this material, is that Delaware’s dominance was never really about the tax revenue or the specialized court, valuable as those are. It was about a bargain. Managers got a stable, sophisticated, management-respectful body of law, and in exchange stockholders got the assurance that when a fiduciary took what was not his, a court in Wilmington would say so. Weinberger, Van Gorkom, Lynch, MFW, and yes, Tornetta, are the stockholders’ half of that bargain. SB 21 renegotiated the terms. Nevada and Texas offer to tear the bargain up.
My worry is not that companies will leave Delaware. My worry is that a generation of corporate lawyers will learn to treat the reincorporation as a neutral logistical choice, a box to check on a slide, rather than as the moment when they decide how much accountability their client’s owners will retain. That is not a Delaware question or a Nevada question. It is a question about what we think the corporate lawyer is for. And on that question, the statute cannot answer for us.