Happy Halloween!
The Delaware Supreme Court just heard oral argument in the TripAdvisor case. Both sides had talented lawyers representing them. Keith Bishop has also covered this here. You can watch the oral argument here:
I’d like to offer three quick thoughts.
The Reincorporation Premium/Discount
At around the 28th minute, counsel for the stockholder made claims about there being a Nevada discount. This doesn’t seem to be supported by the weight of the evidence–or recent evidence. Steven Davidoff Solomon summarized the evidence in a recent memorandum that was attached to The Trade Desk Proxy. This is what he found:
24. Professors Paul Gompers, Joy Ishii, and Andrew Metrick also examined Professor Daines’ results as part of their study of 1,500 large firms to assess how firm governance affects stock returns. Consistent with the unique nature and heterogeneity of each company, they found that the premium observed in Professor Daines’ study was attributed to various governance characteristics, such as a classified board, limited ability to call special shareholders’ meetings, and state law and charter takeover protections. After controlling for these factors, they discovered that the Delaware premium was no longer statistically significant. In other words, Professors Gompers, Ishii, and Metrick concluded that any valuation increase in Delaware firms identified by Professor Daines was not due to incorporation in Delaware, but rather to the individual governance choices of those firms.
25. Finally, in a 2020 article, Professor Ed Fox investigated whether there is a premium for controlled companies incorporated in Delaware.35 Replicating the Daines study with a smaller sample of firms, Professor Fox found a potential effect for middle-market diffusely held Delaware firms, but it was not significant. He also examined controlled firms, like The Trade Desk, and discovered that “controlled Delaware firms have a lower Tobin’s Q compared to controlled firms incorporated elsewhere, after factoring in firm characteristics.”36 In other words, Professor Fox identified a Delaware effect, but it was negative for controlled firms. He found that controlled Delaware firms are, on average, worth 4.9% less than similarly situated firms incorporated elsewhere.
26. Regarding Nevada firms and the value of Nevada incorporation, the primary study by Professors Clark and Barzuza found that, as of 2011, Nevada is the place of incorporation for 8.0% of all public firms incorporating outside their headquarters state, making it second only to Delaware in attracting out-of-state incorporations.37 Professors Clark and Barzuza also replicated the Daines study and found “no discernible valuation effect for firms that incorporate in Nevada,” in contrast to Delaware firms, which are “valued higher than firms incorporated in Nevada and other states outside Delaware.”38 This discrepancy may be attributed to the fact that the Nevada firms in their sample are significantly smaller than Delaware firms, potentially leading to a lower overall value. Additionally, the value differential could reflect differences in the quality of firms incorporating in Delaware versus Nevada.39
27. Professor Eldar has more recently analyzed studies of whether Nevada firms have a premium or discount. He states that “there seems to be no convincing evidence that incorporation in Nevada adversely affects share prices.”40 Professor Eldar also conducted his own study and concluded that “the evidence supports the hypothesis that Nevada’s protectionist laws do not harm shareholder value…. ”41
28. Ultimately, these and other studies suggest that while incorporating in Delaware may have had some value in the past, the premium has diminished as capital markets have matured. Additionally, these findings are subject to limitations, such as the inability to fully control for selection effects and omitted variable bias. More specifically, it is possible that these studies observed higher or lower-quality companies choosing Delaware, Nevada, or elsewhere, and that these unobserved characteristics influenced the results. Furthermore, the findings of Professors Gompers, Ishii, and Metrick, along with subsequent research, support the idea that any observed valuation effects of incorporation may also be attributed to the unique governance characteristics of the companies.42
In short, there doesn’t seem to be any meaningful change in stock price when firms pick Nevada over Delaware. To the extent that controlled firms really do trade at a discount in Delaware, reincorporation might offer a minority stockholder benefit by helping reduce that discount.
What Companies Give Up When They Decamp to Delaware
If Delaware does start imposing liability for reincorporations, other states might respond. Nevada made this point in its brief by pointing out that stockholders might sue under the law of other states because a reincorporation to Delaware would deprive them of their rights to a jury trial.
But there are other differences between the states. Take constituency statutes for instance. Over thirty states have them. They generally provide that the corporation’s board may consider constituencies other than shareholders when making decisions. Nevada’s constituency statute allows a corporate board to take into account the interests of “the corporation’s employees, suppliers, creditors or customers” among an array of other constituencies when considering the interests of the corporation. Reincorporation to Delaware trims away a corporate board’s ability to consider these other interests directly and makes it so that they must be considered through the lens of what best advances shareholder interests.
The states that charter corporations surely have an interest in them. As there isn’t a good mechanism for these constituencies to sue for the loss of their ability to be considered as part of the interests of the corporation, states might authorize their attorney generals to seek damages for reincorporations to jurisdictions that apply different standards.
Damages Remain Speculative
Either for the loss of the constituency statutes or for other changes in rights between states, figuring out damages appears to be a really nasty thicket. I don’t know any great way to do it. I don’t think anyone does. How do you value a different set of statutes, different cases, and a different court system? I don’t know. I don’t think the Delaware Supreme Court has a great answer either. It might be better to just treat damages here as too speculative.