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Understanding Reasons Not to Reincorporate in Nevada

Apr 4, 2024 | Legal News | 0 comments


A great deal of attention, including in this blog, has been focused Delaware reincorporating in Nevada and other states. See, e.g., Reasons To Quit Delaware Are Gettin’ Bigger Each Day. Despite the talk, I have not found many recent examples of publicly traded companies reincorporating in Nevada. In this post, I offer up some reasons why the reincorporation floodgates have not yet opened:

  • Lawyers go with what they know. Because Delaware has had a long-time, near monopoly as the corporate home of public companies, lawyers on both coasts are accustomed to dealing with Delaware corporate law. In my own experience, corporate lawyers in California who represent public companies will typically have greater familiarity with the Delaware General Corporation Law than the California General Corporation Law. Only a very few lawyers at major law firms have Nevada corporate law experience. Lawyers who have spent their entire careers learning and thinking about Delaware corporate law are not likely to be enthusiastic about having to learn and apply Nevada law. As a result, they are not likely to recommend a move away from what they already know.
     
  • No one ever got fired for choosing a brand name. Delaware’s historical dominance has endowed it with an implicit reputational advantage. Consequently, lawyers and investment bankers are likely to view Delaware, not Nevada, as the safe bet. As they used to say, “Nobody gets fired for buying IBM”. In the same way, no lawyer or investment banker expects to be criticized for recommending Delaware. Unless and until Nevada becomes mainstream, recommending Nevada is likely to be viewed as “riskier” even though Vice Chancellor J. Travis Laster has ruled that it is “reasonably conceivable” that Nevada provides greater protection of fiduciaries than Delaware. Palkon v. Maffeii, 2024 WL 678204 (Del. Ch. Feb. 20, 2024). 
     
  • When you’re in a hole, the tendency tends to be to keep digging.  Delaware public companies have incurred formation and documentation costs that are essentially sunk costs. Even though many public companies could save many thousands of dollars by moving out of Delaware, they would incur costs in preparing articles, bylaws, shareholder agreements and other corporate documents in line with Nevada law. Thus, they may fall victim to the sunk cost trap – an irrational decision to stick to something because one has already invested in it.



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