M&A Today: Our Take on Take-Privates

Jeff Jacobs (00:01):

Welcome to Solomon Partners Presents. This is our M&A monthly podcast where we discuss the latest trends driving M&A activity in the market. I’m Jeff Jacobs, head of M&A, and COO of investment banking at Solomon Partners.

Chris Moynihan (00:15):

And I’m Chris Moynihan, a director in the M&A group. Today we’re talking about a topic that’s been getting a lot more attention lately, where companies choose to incorporate — and how that decision is evolving. It’s a topic we wrote about back in April, in a Forbes article, called Is Delaware’s Corporate Throne Under Siege, where we talked about some of these themes of companies reincorporating a new states aside from Delaware, which has been the historical home of many companies. And if you haven’t checked out that article lately, you should definitely read it. There’s been some notable development since then, right, Jeff?

Jeff Jacobs (00:50):

Well, that’s right, Chris. It’s a topic that’s come up more and more lately — and in the latest from Andreessen Horowitz, where they published a letter, which really only emphasized the point. And, by the way, if you haven’t read this letter, I’d encourage checking it out. I love the boldness of the title in their press release. It’s called, “We Are Leaving Delaware, and We Think You Should Consider Leaving Too.” They very directly make the case that Delaware isn’t what it used to be, and the legal community is certainly focused on the issue as well. So, today we’re diving into it, why companies choose to incorporate where they do and why that decision is starting to evolve. For a long time, Delaware really has been the default choice for a company to incorporate about two-thirds of the Fortune 500 companies, and most newly public firms are incorporated there. It’s known for a stable legal environment, deep case law, and courts that specialize in corporate matters. Boards and advisors have certainly come to rely on it over the years.

Chris Moynihan (01:49):

But lately, as you were getting at, we’re seeing more companies at least explore their alternatives. Tesla, TripAdvisor, the Trade Desk, Dropbox…these are just some of the high-profile names that have either reincorporated in a new state or proposed reincorporation outside of Delaware. What’s driving that shift, Jeff?

Jeff Jacobs (02:08):

A few different dynamics are converging. One concern is over legal risk. Delaware courts have issued some rulings recently that raised eyebrows. A big one was the Match Group case last year that was tied to I’S 2020 spinoff of Match. That ruling held that one of Delaware’s toughest legal standards applies to any deal where a controlling shareholder gets a special benefit. Arguably, one of the most high-profile recent catalysts for the shift in sentiment away from Delaware was the court’s decision to avoid Elon Musk’s $55 billion compensation package at Tesla. That case signaled that even longstanding norms can be reinterpreted, and that’s created a lot of uncertainty for boards and for executives. And, at the same time that all these rulings were taking place and causing commotion, other states we’re starting to step in to offer a different approach. In particular, Texas and Nevada have passed new laws that aim to give boards more predictability and more structure.

Chris Moynihan (03:06):

Why don’t we start with Texas? What changes have been made that are really drawing your attention?

Jeff Jacobs (03:12):

Well, Texas passed a major corporate law update in May. It was called Senate Bill 29, and it was a clear signal that they really want to compete with Delaware. The law gives companies more protection when it comes to shareholder lawsuits. For example, if a shareholder wants to sue the board, they better have real skin in the game to do so. Texas now prohibits shareholders or shareholder groups with less than 3% of stock from bringing derivative proceedings against a company. Three percent can be a pretty significant dollar value of stock, and even then, they’d have to prove something serious, like there was fraud or intentional misconduct, not just that the board made a questionable decision.

Chris Moynihan (03:53):

And didn’t they also tie in the rules around where lawsuits can be filed?

Jeff Jacobs (03:57):

Well, exactly. Companies can now require that lawsuits be filed in Texas, and they can limit the kind of internal documents, like texts or emails, that shareholders can request. The idea is essentially to reduce the uncertainty and to give boards more tools to manage litigation risk.

Chris Moynihan (04:15):

That’s a pretty big shift from the way things have worked historically in Delaware. What’s the thinking here? Just less risk for boards?

Jeff Jacobs (04:23):

The whole approach is about predictability and about protection, especially for the directors and the officers. It’s designed to make lawsuits harder to bring and easier to defend. And, by the way, Texas didn’t stop there: They also passed a second bill; it was SB 10 57 that not only creates minimum size thresholds for stock ownership that we just talked about, but it also requires minimum ownership holding periods and solicitation of at least two-thirds of the vote to even be permitted to submit a proposal.

Chris Moynihan (04:56):

Got it. So, Texas is basically saying, we’re going to give boards more control and fewer distractions so they can focus on the business. What about Nevada? Are they taking a similar approach? How are they attracting companies?

Jeff Jacobs (05:09):

Well, Nevada’s definitely moving in the same direction. They passed their own set of changes. They had something called Assembly Bill 2 39 to reinforce their position as another alternative to Delaware. One of the things they did was limit how and when a major shareholder, like a founder or a big insider can be held legally liable in Nevada, that person only gets in trouble if they push the board to do something that benefits them personally and clearly harms the rest of the shareholders. So, the bar is higher.

Chris Moynihan (05:40):

Okay. So, they’re also taking the more board friendly manager, protective, attacked. Are any companies actually buying into it?

Jeff Jacobs (05:49):

Well, they are so far in 2025, at least 15 public companies that were originally incorporated in Delaware have either completed or proposed reincorporating somewhere else. What we’re seeing is most are heading to Nevada — names like Affirm, Fidelity National, AMC Networks. But we’re also seeing several folks looking at reincorporating in Texas. And when you look at the filings, the reasons they cite are pretty consistent. What companies are saying is they want more predictability, and they want fewer lawsuits. They also want to break from Delaware’s franchise tax, which is proving to be more expensive than in other jurisdictions.

Chris Moynihan (06:26):

Got it. So, we’re not talking about a mass exodus here, but clearly there’s some momentum.

Jeff Jacobs (06:31):

That’s right, Chris. To be fair, Delaware has taken steps to mitigate some of this activity. Delaware has instituted Senate Bill 21, which is new legislation to relax some of the requirements for controlling shareholders. Over two million legal entities are incorporated there, and it remains the top choice for companies going public. But the playing field is definitely getting more competitive, and that’s something that boards and advisors are beginning to factor in on their long-term planning.

Chris Moynihan (06:57):

And Delaware put a little bit more clarity around control shareholders, identifying exactly who a control shareholder would be, and then also relaxed some of the requirements they had around independence on special committees. And we’re a little bit more specific on the types of transactions that could come under entire fairness, which helps give deal makers a little bit more clarity when looking at those types of transactions and hopefully makes Delaware a bit more competitive as a state. But let’s bring this back to M&A. How does a company’s incorporation state matter when you’re advising on a deal?

Jeff Jacobs (07:35):

Well, it can have a real impact, and it can certainly shape key parts of the process. So, for example, Delaware has a legal doctrine called Entire Fairness Review that applies to transactions involving a controlling shareholder. So, what that means is courts look closely at both price and process, and it raises the bar for board conduct. Other states have different rules. Some have clear statutory protections for directors or narrower definitions of what triggers a legal challenge. That means the likelihood of shareholder lawsuits, the timeline to closing and the diligence process can all be affected.

Chris Moynihan (08:12):

And that variation is what’s really driving some of this debate. Right?

Jeff Jacobs (08:16):

Well, that’s right. Some investors are concerned that new state laws could reduce shareholder rights. Others view them as a way to bring more clarity and to reduce litigation noise. There’s no one-size-fits-all answer here. It depends on a company’s ownership structure, their risk appetite, and how often they expect to be involved in transactions.

Chris Moynihan (08:38):

So, I get it for a company that might be acquired, but what about a buyer? Does this kind of thing come up when you’re actually valuing a target?

Jeff Jacobs (08:46):

Well, yes it can. Buyers always factor in execution risk. If a company’s state of incorporation means fewer legal hurdles or a smoother approval path, that might impact price; it might impact insurance costs or even integration planning. It doesn’t drive the whole valuation, but it’s certainly a factor.

Chris Moynihan (09:05):

So, in light of all this, and assuming that companies want the highest valuation possible, should they be considering reincorporation?

Jeff Jacobs (09:14):

Not necessarily, but it’s something that’s worth considering. Delaware still has a lot going for it, especially for companies preparing for an IPO or operating in complex industries. But this decision is becoming more strategic. It’s no longer something you just set and forget. Boards are starting to reassess whether the current framework fits their needs today, especially as their ownership base or their risk profile evolves.

Chris Moynihan (09:40):

And for us too, as deal makers, especially when we’re advising boards or committees, this is something that we probably have to have on our radar too. Right?

Jeff Jacobs (09:48):

Well, definitely. Whether you’re running a sale process or working with a special committee or advising on a take-private, the incorporation framework sets the guardrails. It influences fiduciary duties, legal standards, and how much flexibility the board has. It might not be front and center in every deal, but it is certainly becoming more relevant.

Chris Moynihan (10:09):

It’s always great getting your insights, Jeff.

Jeff Jacobs (10:11):

Well, thanks Chris. Glad we could dive into it.

Chris Moynihan (10:13):

To our listeners, thanks for tuning in. For more insights and updates on the M&A market, visit solomonpartners.com. We’ll see you next time.