Thursday, June 13, 2024

Corporate Redomestications

Corporate redomestication has been in the news.  Earlier this week, the Wall Street Journal ran an op-ed I penned with Nevada's Secretary of state, Francisco Aguilar, explaining why some corporations seek to redomesticate from Delaware to Nevada or elsewhere.  Ann also covered the issue today in the context of Tesla's redomestication to Texas.  

Although the Tesla redomestication proposal apparently passed at the shareholder meeting, not all redomestication proposals will pass.  Notably, Glass Lewis recommended against the Texas reincorporation.  I have some faith that states like Nevada will react and legislatively change their laws if they prove a barrier to securing additional incorporations.  After all, Delaware has been changing its laws to ensure it remains attractive for decades.  Indeed, much of the movement in Delaware around proposed amendments to Delaware's corporate law seems aimed at maintaining Delaware's dominance and securing continued incorporations.

The key will be striking the right balance between investor protection and shielding managers from possibly unwarranted and value-destroying litigation costs. Ultimately, striking the right balance is hard.  Under a too lenient standard for litigation, corporations and shareholders will suffer from costs driven by excess litigation.  Under too demanding a regime, shareholders may suffer losses from uncompensated fiduciary breaches with courts refusing to intervene despite some misconduct.

One of the best things about being a corporate law professor is that it continues to actively develop.  In her post today, Ann gave the example of a controller possibly seeking to monetize her control premium personally instead of splitting it with all shareholders when selling. The WSJ story frames it as the controller losing trust in a CEO "after extensive back and forth with him that resulted in her family getting less cash from the deal than in earlier proposals" Exactly how Nevada law would treat this issue warrants development, but I doubt it would allow a majority shareholder to wantonly expropriate value from minority shareholders.  While Nevada does have a broad business judgment statute, it only applies to officers and directors--not to shareholders that may owe fiduciary duties.  Yet the statute does not currently clearly address the obligations controlling shareholders owe to minority shareholders. 

It's an area of Nevada law that needs more development.  As Keith Bishop pointed out in an email to me on this, there are some Nevada cases.  One is Foster v. Arata.  It found that stockholders in a dominant position owe fiduciary duties.  Another is Shivers v. AMERCO.  It's a Ninth Circuit decision that also recognized that majority shareholders owe duties.  It'll be an area to continue watch.

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