Michael Hart writes:

With over 54% of public companies choosing to incorporate in Delaware, it’s evident that the state has long been regarded as a safe haven for corporations.  That sentiment may be changing, however.  According to a recent article in The Wall Street Journal (subscription required), a recent wave of shareholder lawsuits challenging the sale price of their companies is making businesses think twice about incorporating in Delaware.

Copyright: tang90246 / 123RF Stock Photo
Copyright: tang90246 / 123RF Stock Photo

The shareholder suits are being encouraged by a Delaware law that requires companies to pay interest on the value of all shareholder claims, no matter who the victor is.  Thus, a shareholder of a company that’s been sold can forgo the acquisition payment, challenge the sale price, lose and then receive the original acquisition payment plus the interest that accrued while litigating the challenged sale price.  Although Delaware is still perceived to offer many advantages, such as broad latitude to corporate management in day-to-day operations, strong anti-takeover laws and sophisticated business courts, early-stage businesses with an eye toward being acquired may want to consider incorporating in states that offer greater protections against shareholder lawsuits.

Oklahoma, for example, enacted a law last year requiring plaintiffs that lose shareholder lawsuits to pay both sides’ legal fees.  As other states enact similar laws to draw corporations away from Delaware, the decision to incorporate there is no longer such an easy one to make. Early stage companies in particular that are not headquartered in Delaware may have other reasons for incorporating in the state where their main office is located, such as minimizing the administrative costs and tax burden of being registered to conduct business in multiple states, and potentially limiting the jurisdictions in which they can be sued.

Michael Hart is an associate in the firm’s Los Angeles (Century City) office.