The Shift Continues: Gaxos.ai Proposes Departure From Delaware’s Charters

The corporate exodus in Delaware continues; another publicly traded company in the First State has submitted a proposal to reincorporate in Nevada.

Gaxos.ai Inc. filed its preliminary proxy materials with the Securities and Exchange Commission last week, citing a strategic decision behind its proposal to leave Delaware’s charters.

Although the move has yet to be approved by the company’s shareholders, the proposal indicates a bigger problem that could mean the end of Delaware’s reign as the country’s corporate domicile.

Gaxos.ai Eyes Nevada for Tax Breaks, Flexibility & Top Talent

Tax savings, flexibility, and top talent are the primary reasons behind Gaxos.ai’s proposed move to the Silver State.

According to their preliminary proxy statement, reincorporating in Nevada would provide Gaxos.ai with significant tax savings. If the company continues to be a Delaware corporation, its franchise taxes for the 2024 tax year will stay at a whopping $200,000.

But if it successfully moves to Nevada, the company will only have to pay $975 in annual fees to maintain its legal status. This rate already includes the yearly charges for its business license, domestic agent representation, and number of authorized shares.

In addition to tax savings, reincorporating in Nevada would give the company flexibility in certain corporate transactions, such as reverse stock splits. 

Delaware and Nevada have laws allowing disagreeing shareholders to demand fair value on their shares called the appraisal remedy. However, the Silver State’s remedies have a wider scope than Delaware’s. 

In Delaware, the appraisal remedy is only applicable to mergers and consolidations. But in Nevada, the statute can be applied to various transactions, including reverse stock splits.

Lastly, the move would allow Gaxos.ai to attract more top talent. Since the risk of litigation among shareholders is lower in Nevada, the company will have a much easier time hiring and retaining qualified management. 

The Flip Side

Although Gaxos.ai believes the move will benefit its operations, the company recognizes its potential disadvantages. 

For one, Nevada’s case law regarding corporate disputes is more limited than Delaware’s. Gaxos.ai’s stockholders may experience less predictability regarding the legality of its affairs and transactions. If Nevada’s laws do not provide clear legal interpretation on certain issues, it’s up to the court system to set a precedent. 

Gaxos.ai also acknowledges that reincorporation could unnerve investors. Some of its underwriters may think Nevada’s laws are less developed than Delaware’s and be less willing to assist the company in raising capital.

Lastly, reincorporating in Nevada would allow Gaxos.ai’s board of directors to make certain actions without stockholder approval. Since the state’s appraisal remedies are comprehensive, it could encourage the board to make transactions without the approval of Gaxos.ai’s shareholders. 

Changing Currents

Gaxos.ai is not the first public company to leave Delaware for Nevada. Major companies like Tesla and TripAdvisor announced their reincorporation plans last year, and since then, more businesses have followed suit.

Trouble began when Chancery Court judge Kathleen McCormick voided Elon Musk’s compensation package. Musk was disappointed with the decision, claiming he “recommends incorporating in Nevada or Texas if you prefer shareholders to decide matters.”

Unfortunately, he wasn’t the only one. Lawmakers also scrutinized the fairness of Delaware’s Chancery Court after it tried to prevent the popular travel website TripAdvisor from moving to the Silver State.

The case has since been moved to Delaware’s Supreme Court. Nevada has also issued a brief to help TripAdvisor and other companies reincorporate in its jurisdiction without paying a single cent.

However, the problem goes beyond barring corporations from leaving the state. Experts have said that the Chancery Court’s Environmental, Social, and Governance (ESG) activism is becoming more aggressive.

Former Attorney General William Barr and Labor Department official Jonathan Berry say, “Delaware’s corporate-law elder statesmen are advocating the state to adopt a more assertive and explicitly pro-ESG corporate law.”

ESG is a framework that evaluates a company’s impact on environmental, social, and corporate governance issues. Although ESG principles can help corporations become more sustainable, excessive judicial intervention could expose executives to liability for failing to manage “common” ESG issues.

It also doesn’t help that Delaware’s plaintiffs’ bar vigorously pursues cases to protect shareholder interests and charges thousands of dollars in legal fees.

Cannae Holdings, one of the many companies that recently announced their reincorporation in Nevada, said that “there has been an increased risk of opportunistic litigation for Delaware public companies,” making the state less attractive for business.

So, although Delaware has a richer body of case law than Nevada, its strict ESG activism in corporate litigation and aggressive plaintiff attorneys are causing big businesses to rethink their locations.

The Nevada Edge

Nevada’s edge against Delaware goes beyond low taxes and flexible appraisal remedies. The state also has a statutory approach to corporate law that can protect shareholders from value-destroying lawsuits.

Its laws may not be able to answer as many questions as Delaware’s laws could, but its judges will try their best to uphold business owners’ interests.

However, this doesn’t mean Nevada’s courts won’t hold officers and directors liable for intentional misconduct. The state’s statute requires plaintiffs to prove that directors breached their fiduciary duties or engaged in “fraud, or knowing violation of the law” to establish liability.

More importantly, Nevada’s LLC asset protection is the country’s golden standard. Its laws have unique features, such as comprehensive charging order protections and domestic asset protection trusts (DAPTs), unavailable in other states.

A Search For Safer Homes

Delaware has billions of reasons to keep its major corporations within its shores. However, if its Chancery Court continues to burden them with expensive lawsuits, its chances of attracting new business will become increasingly slim.

Curious to experience the Nevada edge? Let NCH assist you in incorporating your business in the Silver State.

NCH specializes in LLC formation for asset protection. Our team of business formation specialists will ensure your business takes advantage of Nevada’s many opportunities. We’ll guide you through the formation process, from choosing a unique business name to hiring a reliable registered agent. 

To learn more, visit our website here or call 1-800-508-1729 to schedule a complimentary consultation with one of your business formation specialists!