Why Public Companies are Ditching Delaware

About the Video

Cort and Adam discussed the trend of companies leaving Delaware due to its liberal court system and the potential for lawsuits to negatively impact businesses. They highlighted Nevada as a more favorable option, citing its charging order protection for corporations and its attractiveness to growing businesses. They also mentioned several prominent companies, including Tripadvisor, Neuralink, and the parent company of the Atlanta Braves, all of which are relocating to Nevada.

Prefer to Read? A full transcript is provided below.

Cort: 

Hello and welcome to another edition of the Wealthy and Wise. I’m your host Cort Christie. And today we’re going to be talking about what’s going wrong with Delaware. Delaware is known as the place where every publicly traded company or financial institution registers and initially forms itself. But there are problems with Delaware right now, and it’s all over the news.

And I brought an expert in with us today to talk about it. We have Adam Kitnigh. Adam is an expert with business formation, and has been working with clients, thousands of clients with NCH for many years now. And he’s my go-to person when I need to understand what’s going on out there in the world of business formation.

We’re going to talk about Delaware today. So Adam, welcome to the program. Thanks for being on. 

Adam:

Thank you for having me. 

Cort:

Absolutely. So, Adam, there’s been some news out there that Delaware is really losing its luster. What’s going on? 

Adam:

Well, one of the things we looked at is these key court cases that have taken place, Elon Musk being the catalyst for all of this.

When we had a shareholder of Tesla who owned nine shares of stock they then decided that his pay package, which he had a $56 billion pay package. A quick little background with that is that Elon said, listen he talked to the board of directors, said I will take no salary from our company, none. And you all know that these CEOs and executives are making millions and millions.

He said, I will take no salary, but if I am able to ten times Tesla, then I get a massive pay package. And that was a $56 billion pay package, which he did it. It was absolutely crazy that one guy could do that. 

Cort:

Yeah, shocking and unprecedented that a CEO would take $0 for this bonus plan. And I mean, anybody would have bet on it because you would never thought he would have been able to do it.

Adam:

And lo and behold, he did. And he had that one shareholder, an attorney in Delaware, who owned nine shares of Tesla stock that took this to court as an illegal pay package. And lo and behold, the Delaware courts sided with the attorney, and Elon lost that pay package. And as soon as that happened, Elon said, hang on a second, we’re in Delaware.

There are a lot of other great states out there. And so, of course, Elon immediately looked into moving his company, not just Tesla, but a lot of companies that he owns and controls. So he started saying, okay, we’re out of Delaware, we’re going to move to these other states that have more conservative, predictable court systems that will protect us and protect our companies.

Cort:

And it’s just interesting, you know, he as you mention, he’s got many companies and there’s a few of them that are outside of Delaware, but most of them all are registered there as far as, you know, where their primary focus is because it’s been the state for a 100 plus years or people file corporations and now LLCspredominantly and now it’s like this is not the place anymore.

And when you’ve got lawfare that just happened against Elon Musk or you’ve got a liberalization of the court system that can decide shareholders or turnover what a shareholder decision was. And this was a shareholder vote that came in at 70% agreed with his package when it was initially introduced. And then just to re-solidify it, Elon brought it to a vote again at a shareholder meeting and it was approved by lo and behold, 70% of the shareholders once again.

And this time they didn’t have to give it to him. Right. They could have said, well now that you got us ten times, return, we’re just going to say no to this package. It’s sort of like you made a bet and you can live with your bet. And lo and behold, most people have high integrity and they came back and they agree with it.

I know there are a couple of big funds that didn’t agree with it this time, and they got really called out for agreeing with it the first time when the bet was made, and then when it came time to pay the bet, not agreeing with it the second time. But you know, this is big news and they’re not the only ones right. There’s others considering leaving this state for the very reasons of this liberal court system that used to be the greatest place in the United States to register companies because they had the laws in the court system that were designed to look after business interests, shareholders, boards, you know, officers. And now that’s going away quickly.

Adam:

Absolutely. Now, one of the things I love about Nevada is Nevada is the only state in the country that provides charging order protection for corporations. Now, there’s other states that provide charging order protection for LLCs. But for a lot of people, you’re starting and growing your business. We’re not public yet, but we want to get to that point.

And lawsuits can take a business down immediately with the cost and the time of litigation. So Nevada is that state where we have this predictable court system that as you’re starting, you want to go public. Having that protection when you’re starting is incredible. And that law only applies to businesses that have 100 shareholders or less.

But you get the charging order protection where the courts can’t come in and foreclose on cash or assets held by the business to satisfy a judgment. So we look at out of the grand scheme of things, very few companies go public. But Nevada gives you that foundation where as you’re getting there, we’ve got all these incredible laws there to protect you and your business and your shareholders as you’re getting through that process.

So we saw other companies. So there’s Elon said that Tesla is going to be moving. Well, a lot of other companies, very wealthy people that as well. And this is costing the state of Delaware billions of dollars. When I look at the fees that are involved with setting up and maintaining a company in Delaware, it is the largest revenue generator for that state.

And now Delaware is through their actions, through their courts, which are solidified in court. They are now losing all of these big companies that are now going elsewhere to states like Nevada. So you had mentioned you were talking about earlier, where are the other companies that you’re mentioning of a lot of very wealthy people and very successful businesses are moving out of Delaware.

It was kind of that little list that you were rambling through. 

Cort:
Yeah, I think some big names. I mean, you look at TripAdvisor, TripAdvisor came out and said, we are leaving. We’re going to Nevada. That’s a big deal. NeuroLink, one of Elon’s other assets is leaving Delaware and moving to Nevada. I think the parent company of the Atlanta Braves, they are moving to Nevada and they did a very quiet shareholder meeting with respect to it. They didn’t really want to make a big splash because they didn’t look for a lot of attention. But, you know, this is a big move for them. And you want to go to a place that is not going to use… That’s going to use the courts properly and for real disputes, not to sabotage, not to interfere with business, not to interfere with somebody’s bonus structure.

I mean, it was just really poor of a decision that was made and that decision was overturned. However, it still hasn’t been settled. What’s going to be the outcome of the case for Elon and Tesla. And so there’s a lot of other silent companies that are doing press releases that are moving and in the process of moving. I’m very close with our Secretary of State, Cisco Aguilar in Nevada, and he kind of gives me updates on, you know, companies that I can’t necessarily disclose because they haven’t moved to the press for their announcements.

But there’s many that are leaving. And what Nevada’s position itself is, is a safe haven for entrepreneurs and investors. But it’s really never positioned itself for publicly traded companies. It’s not been its thing has been its focus. But the laws that extend to the protection of small business owners benefit and the court systems benefit large companies as well.

And you mentioned something really important, Adam, which was, you know, we have charged, you know, to protection for corporations, and corporations are the vehicle that’s used when you ultimately do want to go public and be a traded company. And the fact that when you’re in that development stage raising some money from, you know, maybe private equity firms or investment bankers or hedge funds and kind of seeding the growth of your company, you very well could have 50 shareholders, 70 shareholders.

But as long as you’re under 100 shareholders, you’ve got these unique protections in place and you may have raised hundreds of millions of dollars even at that point. But you’ve got protections that are afforded only in Nevada, nowhere else that allow this charging order protection, this unique protection for the people that are running and operating that business, and to limit individuals who might want to go after that company, creditors that might want to go after that organization.

So there’s some powerful laws that will benefit future publicly traded companies. But I think our court system in Nevada, we’re still a very sort of Western pro-individual, conservative state where it’s going to take us years. And as we know, the liberalization of politics or the liberalization of the court systems are insidious, and they kind of compound and evolve over time.

We’re still well behind others and the development of laws in Nevada are really unique as well. Many states meet regularly there. Their legislative sessions go annually and sometimes continuously, almost in the case of California. In Nevada, we only meet once every two years for about four months. And what that means, which is really good for the citizens of Nevada and for people that would register companies here is the laws don’t change very quickly. 

Things tend to move slowly here, even though we’re a fast-paced state with, you know, gaming and entertainment and all those wonderful things, the laws don’t change very rapidly. And that’s a pro for businesses of all kinds. So big companies looking to move to Nevada. It’s a really big deal. It’s a significant shift because, you know, it’s like when you think of any place that’s really unique, like New York City, the Big Apple, like losing its luster of not being a place that people want to go to or travel to or see and not be that tourist destination anymore.

It’s like Delaware is the big state where every publicly traded company went and now that’s disappearing because they’re ruining it. And the fact that there’s an alternative is exciting for companies that want to take advantage of what Nevada has. And there are protections here that are, you know, unique to any other state. 

Adam:
I want to point out that I had a client several years ago who wanted to set up a company and he was in New York. He was going to be moving to Nevada. So logically, you want to form a Nevada entity and they got to talk about it and get to know him a little bit. And he was going to have a lot of shareholders. And I mentioned, well, if you have a lot of shareholders, we might want to look at Delaware.

So he said, Well, let’s see what those fees are. Well, in Nevada to form this company, he wanted me to check on either a $100 par value or $200 par value with a billion shares of stock. This is a big company. So the state of Nevada, we called to form that company in with that value was $33,000 just to form the company.

Now, we called Delaware if we wanted a $100 par value just to form the company was $4 million. If we were a $200 par value, it was $8 million dollars. So we look at the fees that are involved with this and you start looking at the fees to set up and maintain your company. This is significant savings for anybody in any business.

And when we’re in an economy where you are fighting to keep every penny you can, this is a great way to save your business. A lot of money and give you the best legal protection. Not to mention we have so many businesses that are in Nevada because we have no inventory tax, no shareholder under tax, and no state income tax.

The casinos are still ponying the bill or the state of Nevada. So there’s all these tax savings, annual fee savings, all of these things add up. And in today’s economy, no one can afford to overpay all of these fees. We want the best legal protection. We want the lowest competitive fees, we want the lowest, most competitive taxes. And that’s what Nevada has created. So it’s fantastic. 

Cort:

Yeah, it’s definitely a shift and it’s going to be a big deal for these companies having their shareholders meetings, having this discussion, getting votes on getting out of Delaware. And you mentioned the high cost of registration there. You know, I think for the average single-person LLC or corporation, the fees are very low, both in Delaware and in Nevada, I mean, very low.

But when you’re talking about big companies that have aspirations of going public, like in the case of this individual from New York that you worked with, you know, the fees can be incredibly expensive. I mean, you’re talking about $30,000 just in Nevada to register. But by contrast, if it’s going to be $4 million or $8 million in Delaware, where are you going to go?

You know, you want to choose a state that’s going to keep the cost of registration down, and more importantly, have the laws to protect the interest of the people involved in running those companies and to not let the court systems get in the way of shareholder decisions that are made for the benefit of the company. And somebody that just decides to file a lawsuit like in the case of Tesla, can freeze out somebodies, you know, compensation structure. And that’s ridiculous. 

Adam:

So I do want to point out that $33,000 to form that company in Nevada, that was a one-off 99.99% of companies are not going to set a company up with that large of share value, etc.. So I don’t want people to be afraid if they go, my gosh, 33,000 in Nevada. No, not the case at all.

Cort:
But so and I think finally, Adam and I want to thank you for coming on and talking about this today. You know, the final point I’d like to make to the viewers here today is they have choices. You have a choice if you want to raise a lot of capital and look at Delaware, but maybe you want to look closer at Nevada and what its laws are.

And everyone has a choice of registering in their home state where they live or registering a new business of any kind in Nevada. And you don’t have to be a resident here. You just need an address. And that’s what NCH does. It registers companies and provides an address for you, a location address in Nevada, and then you operate your company back home and it’s really easy and it gives you really a kind of like I consider the umbrella policy for insurance.

If you’ve heard of umbrella policies, which are designed to really protect you from catastrophic events, things that are unexpected business accidents, that’s what Nevada is for. And it really only matters in rare situations. But if you’re in one of those rare situations, you’re going to really appreciate the laws that are here in Nevada, because once you’ve built a company, once you put your blood, sweat, and tears into establishing an organization and a business, you want to make sure you’ve done it in the best state that’s going to protect you. If an accident does happen in your business. 

Adam:

Awesome. 

Cort:
Awesome. Well, thank you, Adam, once again for informing us a little bit about what’s going on in Delaware and why people are really retreating from that state and looking elsewhere to register companies. And thank you for all the service you provide to our great clients. And for all of you who are listening, who want to talk to Adam or one of the other amazing advisors at NCH, we offer a free consultation for as long as you need to just discuss the ins and outs of how it might work for your current business, your future business, maybe a real estate investor and want to understand more. A free complimentary consultation. We don’t charge you a penny for that and we help thousands of individual business owners and investors every year. We are a five-star rated organization. Go online, and check us out. It’s all real. And we’ve been doing this for over 32 years now, a very long time. And we love what we do. We love supporting clients. 

So reach out to us at the link below. You can just simply register for a consultation and please like and subscribe because we love spreading the word about what’s going on in the business world and in the business formation world. So thanks again for tuning in and this has been a great episode of Wealthy and Wise.

I’m your host Cort Christie. Have a great day.

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.