Delaware Chancery Court: Get woke, go broke

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Background

I’m comfortable using Google’s AI when I already know a fair bit about the subject I’m asking about and can spot an “off response. This one seems right:

AI Overview

Corporations are leaving Delaware ("DExit") primarily due to a perception that the Delaware Court of Chancery has become less business-friendly, delivering high-profile rulings that increase shareholder litigation risks, scrutinize executive pay, and expand corporate liability.

While the Chancery Court historically favored management, recent decisions have been interpreted as favoring stockholders, leading to an exodus of companies like Tesla, SpaceX, and Meta to states with stronger management protections, such as Nevada and Texas.

Why Corporations Are Leaving Delaware

  • Hostile Court Rulings: High-profile decisions, particularly under Chancellor Kathaleen McCormick, have unnerved executives. The most prominent example is Tornetta v. Musk, where the court voided Elon Musk's $56 billion compensation package.

  • Increased Litigation Risk: Companies feel that shareholder activists are encouraged by the court, resulting in more derivative lawsuits and increased D&O (Directors & Officers) insurance costs.

  • Rise of Alternatives: States like Nevada and Texas are actively wooing corporations by offering stronger statutory protections for directors, less litigation-friendly environments, and no state corporate income tax.

  • "Subjective" Judicial Standards: Critics, including major startup investors like Andreessen Horowitz, argue that Delaware's traditionally predictable common law has become unpredictable, with judges substituting their judgment for that of boards.

Have Chancery Court Opinions Changed?
Yes, there is a strong perception and evidence that the court has become more stockholder-friendly (or less "management-friendly") in recent years:

  • Heightened Scrutiny of Pay: The court has shown an increased willingness to overturn massive executive compensation packages, challenging the "all-performance" pay structures common in tech.

  • Restrictions on Controlling Shareholders: Decisions have increased scrutiny on "controlling stockholders," making it harder for founders to manage companies without intense legal oversight.

  • Broadening "Entire Fairness": The court has applied the rigorous "entire fairness" standard of review to more transactions, which makes it harder for cases to be dismissed early, forcing expensive, long-term litigation.

Delaware's Response (2025–2026)
In response to this exodus, Delaware has taken significant steps to reverse this trend:

  • Senate Bill 21 (The "DExit" Amendment): Signed in March 2025, this law allows more "safe harbors" for conflicted transactions, restricts stockholder access to "books and records," and limits liability for controlling stockholders.

  • Legislative vs. Judicial Split: The Delaware Legislature has acted to override certain Chancery decisions (like Moelis) that threatened founder-friendly stockholder agreements, demonstrating a move to restore the state’s pro-business reputation.

  • Supreme Court Reversals: The Delaware Supreme Court has begun reversing some of the Chancery Court’s most aggressive rulings, signaling a return to a more director-friendly interpretation of the business judgment rule.

Despite the "DExit" buzz, Delaware still holds over 60% of Fortune 500 companies due to its unrivaled body of legal precedent, though its dominance is facing its toughest challenge in decades.

But, credit where due, Chancellor McCormick’s forcing Musk to complete his deal to buy Twitter, while certainly intended to punish him, inadvertently turned out to be a huge boon to the conservative cause and freedom of speech in America.