Corporate Flight from Delaware: The Impact of Escalating Shareholder Litigation and Legal Uncertainty

Unpredictable court rulings and a wave of lawyer-driven, profit-seeking litigation are destabilizing Delaware’s historic dominance for corporate domiciling. At the same time, competition among states to attract corporate charters is heating up. Policymakers in the First State should take notice and reverse course, or companies will continue to seek less hostile jurisdictions — and Delaware’s famously stable legal environment will risk transforming into a Judicial Hellhole®.

For more than one century, Delaware has been the ideal destination for incorporation, largely due to its reputation for predictable corporate law and fair settlement of disputes in the world-renowned Delaware Court of Chancery.

Delaware’s historically attractive business environment has positioned the state to capture most initial U.S. public offerings and incorporations, including roughly 68% of Fortune 500 companies.
However, recent trends have called into question Delaware’s domination of the corporate charter. Delaware has been listed in the American Tort Reform Foundation’s (ATRF) Judicial Hellholes® report as a “Dishonorable Mention,” with ATRF recently declaring the state “on the verge of becoming a litigation hotbed” in 2024.

Unpredictable court rulings from the Court of Chancery and Delaware Supreme Court have caused several companies to consider redomiciling in other states — a trend known as “Dexit.” Tesla, Dropbox, Coinbase and TripAdvisor are some of the high-profile companies that have decided to set up shop outside of Delaware in pursuit of other jurisdictions like Texas, Nevada, Maryland, and Florida that offer lower costs and reduced litigation risk.

Delaware has become a preferred jurisdiction for opportunistic shareholder litigation. This has damaged the state’s reputation, with critics arguing that the overload of “strike suits,” derivative lawsuits lacking a valid legal basis, will further damage the state’s corporate reputation.
Despite some efforts by Delaware courts and the state legislature to mitigate the level of frivolous shareholder litigation, these lawsuits continue to increase. In fact, the Delaware Court of Chancery has seen an uptick in the number of shareholder litigation claims in recent years with over 100 cases filed in 2024 — nearly double the year before.

Many of these cases are steered by plaintiffs’ law firms rather than the shareholders themselves. They may also be backed by third-party investors with their own financial incentives. More often than not, these lawsuits fail to generate any sort of value for shareholders and ultimately end in excessive fee awards for the plaintiffs’ attorneys.

If Delaware does not diligently pursue reforms, the state’s failure to protect businesses and their shareholders against value-destroying litigation places the state’s core sector — the corporate franchise industry — at risk.