Last week I highlighted three Nevada reincorporations and one Texas reincorporation after Delaware passed SB21. A week has passed, and there are four more. The new firms are:
- Madison Square Garden Entertainment Corp.
- Madison Square Garden Sports Corp.
- Xoma Royalty Corp.
- BAIYU Holdings, Inc.
This brings my total post-SB21 reincorporations to eight. Seven to Nevada and one to Texas.
The stated reasoning here appears consistent with what happened the week before.
MSG Entities
Rather than break out MSG Sports and MSG Entertainment separately here, I’m just going to draw from MSG Sports. Although I haven’t run a redline or anything to confirm, the stated rationale seems the same for both firms. There are three main bullet points for it:
- Nevada Law Provides More Predictability and Certainty in the Underlying Laws that Impact Decision-Making
- The Nevada Redomestication Reduces the Risk of Opportunistic Litigation Against the Company, and its Directors and Officers, Which Can be Time-Consuming, Burdensome and Expensive
- Expected Savings From Not Having to Pay a Franchise Tax in Delaware
Xoma Royalty Corp.
Xoma makes many of the points others have highlighted. It also indicates that it thinks it might be able to get a better deal on D&O insurance by coming to Nevada.
We anticipate potential cost savings in Director and Officer (“D&O”) insurance premiums from expected reductions in the future of litigation and litigation costs, including attorneys’ fees, which can be significant for corporate litigation.
BAIYU Holdings
BAIYU is a fairly small company by public company standards. For them, the cost difference between Delaware and Nevada may be most material. This is what they lead off with in their rationale:
Among other things, Nevada Reincorporation will eliminate our obligation to pay the annual Delaware franchise tax that will result in significant savings to us in the future. Under Nevada law, there is no obligation to pay annual franchise taxes and there are no capital stock taxes or inventory taxes. In addition, under Nevada law, there are minimal reporting and corporate disclosure requirements and the identity of the corporate shareholders is not a part of the public record. Otherwise, the general corporation laws of the States of Delaware and Nevada are quite similar as both states have liberal incorporation laws and favorable tax policies. . . .
Takeaways
As I’m watching this space, I’ve been surprised by the volume declaring for Nevada. We’re at the start of proxy season and if this rate continues, a significant number of firms will be switching. I’m not certain that’s going to be the case now. Sphere, and the two MSG entities are all related.
There is still a degree of uncertainty out there about whether SB21 will be constitutional under Delaware law. I’ve had a chance to skim through the argument for declaring it unconstitutional under Delaware’s constitution and it seems like a colorable claim. That said, I would still be surprised if the Delaware Supreme Court declared it unconstitutional.
The D&O premium discount could be highly significant if it materializes, but I’m not aware of any insurer now offering better rates to Nevada entities. The D&O Diary covered this possibility for Delaware firms after SB21 recently:
There are a lot of assumptions behind these questions about D&O insurance premiums. First and foremost, the question assumes that the new statutory provisions will affect Delaware corporate litigation sufficiently to reduce insurers’ anticipated loss costs. While I certainly expect the new amendments to have a positive impact on Delaware litigation (positive, that is, from the perspective of corporate defendants and their insurers), no insurer is going to cut its premiums based solely on possible future changes; the insurers will want time and experience to be able to see whether and to what extent the changed litigation environment will actually result in less litigation and better outcomes. It will be some time (in my view, more than just one year) for insurers to be sure of the benefits and to be able to quantify the benefits. I don’t see the insurers cutting their rates just because of the Delaware legislation before that.
There is another important reason insurers might hesitate to cut prices because of possible Delaware litigation benefits. That is, none of these various legislative changes under consideration have anything to do with securities class action litigation. Securities suits represent the largest severity exposure related to public company D&O insurance. This exposure is not going away. Given the anticipated securities litigation loss costs, the D&O insurers are likely to try to resist price reductions, even if there turns out to be an improvement in loss costs resulting from Delaware litigation.
Although we’ve seen more action, we haven’t yet seen any changes in the preferred jurisdictions for IPOs. If some firms start to pick Nevada over Delaware for their IPO, that’s probably a strong signal. With the current tariff-related market turmoil, I don’t know when IPOs will pick back up.