DExiting to Nevada?

A growing number of U.S. companies have begun reconsidering Delaware as the default state of incorporation in a phenomenon dubbed “DExit.” Historically, Delaware has been the preferred jurisdiction for public and private companies alike, primarily due to the well-developed and predictable body of corporate law emanating from the Court of Chancery. However, controversial recent rulings have prompted the well-publicized consideration of alternatives.

Andreessen Horowitz is the latest to announce that it's joining the DExit movement.  Andreesen issued a public blog post arguing that it's no longer a no-brainer to incorporate in Delaware, that it plans to reincorporate in Nevada, and that it thinks other companies – including, notably, its own portfolio companies – should do the same.  Andreesen argues that Delaware's Court of Chancery is losing its “reputation for unbiased expertise” and has “injected an unprecedented level of subjectivity into judicial decisions.”  Its thesis is that Nevada offers greater certainty and deference to corporate actors, as it notes that “Nevada, unlike Delaware, has codified the business judgment rule in statute,” thus “eliminating the ability of judges to modify or change the rule.”

The Trade-Off

Delaware’s strength lies in its highly reasoned, frequently published Court of Chancery opinions, which provide clear guidelines and predictability for corporate actors. Each decision builds on the existing legal framework, giving lawyers and executives dependable counsel on fiduciary duties, governance disputes, M&A structures, and more.  By contrast, Nevada operates through trial courts whose opinions are by rule non-precedential. While this may benefit founders seeking flexibility or reduced oversight, it may also introduce unpredictability. Without authoritative precedent, corporations may find themselves navigating uncharted legal waters in every fresh dispute.  

Nevada's business court is also not as specialized as the Court of Chancery, as its judges are selected from among the broader pool of state-court judges elected to six-year terms.  Moreover, Delaware's Court of Chancery excels at determining critical business disputes on an expedited timetable when required, which Nevada courts are not known for.

What's Next?

Andreessen Horowitz’s move is perhaps the most significant and well-publicized move towards incorporation in Nevada since DExit began, as many other prominent proponents have sought to incorporate in Texas or offshore (or have simply, after further consideration, stayed put in Delaware).  But Nevada offers its own unique set of question marks given the non-precedential nature of its trial court decisions and a commercial bench that, while experienced and expert in its own right, has not dealt with the depth and breadth of controversies that the Court of Chancery handles routinely.  

Nevada appears to recognize these distinctions, and has introduced proposed reforms, including a proposal to allow the Governor to appoint business court judges with significant corporate experience.  Indeed, Andreesen's post acknowledges that “more work remains to be done on reforming Nevada’s business courts,” but argues that the state has taken enough concrete steps to demonstrate its commitment to being a business- and founder-friendly venue going forward.

Time may tell whether the Delaware or Nevada trial courts offer a lower “level of subjectivity,” but Andreesen's announcement ensures that Nevada's business courts – and business court reforms – will be watched closely in the months to come.