Delaware Is Broken: Why You Shouldn't Incorporate There

Once upon a time, Delaware was the Gibraltar of American corporate law. It stood for predictability, neutrality, and a kind of legal Calvinism: sober, restrained, and austere in its application of fiduciary duties. Businessmen could rest easy knowing that the rules would be applied fairly and that their decisions, if made in good faith, would be respected by courts. That Delaware is gone. In its place stands an activist legal regime, captured by a few ideological judges and hungry plaintiffs' attorneys, doling out litigation jackpots with multipliers that would make a Las Vegas pit boss blush.

The epicenter of this transformation is the Delaware Court of Chancery, now led by Chancellor Kathaleen Saint Jude McCormick. What was once a model of legal temperance has devolved into a jackpot justice factory. Recent research from Stanford Law professor and former SEC Commissioner Joseph A. Grundfest, along with co-author Gal Dor, has delivered an empirical body blow to Delaware's reputation. Their May 2025 paper, "Lodestar Multipliers in Delaware and Federal Attorney Fee Awards," is not merely a statistical comparison. It is an indictment.

The authors found that Delaware courts are awarding 7x and 10x legal fee multipliers at rates far beyond anything seen in the federal system. To the uninitiated, a "lodestar multiplier" is a device by which courts enhance legal fees. If a lawyer earns $5 million based on hourly billing, and a judge awards a 10x multiplier, that lawyer walks away with $50 million. Grundfest found that such astronomical payouts are far more common in Delaware than in federal courts. In fact, over the past five years, 7x fee awards have been 23 times more likely in Delaware than in federal courts. 10x fee awards are 57 times more frequent. These aren’t statistical anomalies. They are policy choices.

And whose choices are they? Grundfest’s study reveals something even more disturbing. Of the 20 7x cases in Delaware, more than half were awarded by just two judges. The same two judges were responsible for nearly two-thirds of all decuple awards. Worse, the Chancellor of the Chancery Court, McCormick herself, not only doles out these jackpots but also assigns the cases. This means she can steer cases to herself or to a like minded colleague, perpetuating a closed circuit of enrichment. The incentives are perverse, the arbitrariness profound.

One such case, now infamous, involves Tesla and Elon Musk. There, the plaintiff, a shareholder with just nine shares, secured a judgment that led to plaintiff attorneys walking away with over $300 million. The shareholder recovered essentially nothing. One might expect a justice system to apportion rewards in proportion to damages or to distribute fees in alignment with effort or outcome. Not so in Delaware. Here, the legal profession is the real plaintiff.

Now ask yourself this: what rational board member, general counsel, or CEO would willingly choose to place their company in this judicial crossfire? For decades, Delaware had been the default choice. But that was premised on the belief that Delaware courts prized fairness and neutrality. Today, incorporating in Delaware is an invitation to fund an aristocracy of trial lawyers and to entrust your governance to a bench now indistinguishable from an NGO boardroom.

There is a better way. Take Texas. Senate Bill 29, recently passed and signed into law, directly addresses the systemic abuses we now see in Delaware. It allows corporations to set a minimum ownership threshold, 3 percent, for initiating derivative lawsuits. This simple provision eliminates the plague of “ambulance chaser” litigation from shareholders who own just a handful of shares but initiate lawsuits with the real purpose of scoring legal fees, not protecting shareholder value. Nevada has similarly structured statutes designed to protect corporate directors and officers from bad-faith litigation driven by opportunistic attorneys rather than genuine claims of malfeasance.

In contrast, Delaware courts have become co-dependent with the plaintiff bar, using shareholder derivative suits not as tools of accountability but as vehicles for redistributive enrichment. Grundfest highlights that, in Delaware, lawyers in these cases routinely earn over $25,000 per hour. In one instance, an attorney collected what would amount to over $48,000 per hour when adjusted for inflation. These are not numbers that emerge from a just process. They are the artifacts of a broken system.

Defenders of Delaware will claim that high multipliers are necessary to incentivize high-quality litigation. But this ignores the market test. In federal court, where multipliers are rare, legitimate corporate litigation proceeds apace. There are no deserts of justice. Plaintiffs still sue. Defendants still defend. Outcomes are still adjudicated. What Delaware has done is build a parallel legal economy, one in which rent-seeking is not just tolerated, but institutionalized.

If one were to imagine a conspiracy to funnel public corporate wealth into private legal hands, it would look very much like the current regime in Delaware. And here we find the great inversion: Delaware’s famed efficiency and reliability have become myths deployed to perpetuate a racket. The state’s power elite cloak their decisions in the rhetoric of shareholder democracy while functioning as a fiefdom of legal bounty.

The harm extends beyond financial cost. When directors and officers know that good-faith decisions can be relitigated endlessly by plaintiffs with microscopic holdings and judges with jackpot authority, they begin to govern defensively. Risk-taking declines. Innovation suffers. Value creation is subordinated to litigation avoidance. And who ultimately pays the price? Employees, investors, pensioners, those who rely on the long-term health of American enterprise.

Grundfest does not call for revolution. He is too sober, too precise. But the numbers speak for themselves, and the implications are plain: Delaware is no longer the gold standard. It is a jurisdiction in decline, corrupted by concentrated judicial power and a plaintiff's bar incentivized to exploit the system.

In a sane world, judicial rewards would track justice, not enrich lawyers at the expense of the corporations they sue. In a just system, judges would act as neutral referees, not economic partners of the attorneys appearing before them. Delaware, once the jewel of corporate governance, now resembles a casino whose dice are weighted in favor of the house. The solution is not to reform the casino. The solution is to leave.

It is time for American business to find a new home. Texas and Nevada are leading the way. They offer not just tax efficiency or regulatory clarity, but something more fundamental: the promise that courts will function as courts, not as vending machines for ideological judges and entrepreneurial attorneys. If corporations care about protecting shareholder value, preserving board independence, and defending against parasitic litigation, they must act. That means reincorporation.

Delaware is no longer a safe harbor. It is a storm.

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