Governing Law: Don’t Be Swayed by DExit

Key Takeaways

• Delaware law offers robust case law on fiduciary duties
• Material adverse effect clauses are most predictable under Delaware jurisprudence
• Nevada and Texas lack depth in merger‑agreement precedent
• Cross‑border deals often split governing law between incorporation state and Delaware

Pulse Analysis

The recent DExit controversy has sparked a flurry of commentary about where companies should incorporate to shield internal governance. However, as Pete Korzynski points out, the governing law of a merger agreement serves a distinct purpose: it dictates how the parties’ contractual relationship is interpreted and enforced. This separation means that the debate over incorporation jurisdiction—whether a firm should move out of Delaware to avoid perceived tax or regulatory pressures—does not automatically dictate the optimal law for the acquisition contract itself.

Delaware’s advantage lies in its extensive body of case law covering the two pillars of modern M&A: directors’ fiduciary duties and material‑adverse‑effect (MAE) clauses. Courts in the First State have repeatedly refined standards for fiduciary breaches, no‑shop provisions, and the thresholds that trigger MAE clauses, giving practitioners a reliable framework for risk allocation. Moreover, Delaware judges are accustomed to handling complex, high‑stakes disputes efficiently, often adhering closely to the parties’ agreed‑upon terms. By contrast, Nevada and Texas, while attractive for certain tax or regulatory reasons, lack comparable precedent, leaving parties to navigate more uncertain legal terrain.

In practice, many dealmakers adopt a hybrid approach: they retain the target’s incorporation state for internal corporate matters while expressly selecting Delaware law for the merger agreement. This split‑governing‑law strategy preserves the benefits of a favorable incorporation jurisdiction while leveraging Delaware’s predictability for the contract’s substantive provisions. As cross‑border transactions grow and private equity activity intensifies, the ability to allocate risk with precision becomes a competitive differentiator. Firms that ignore Delaware’s jurisprudential strengths risk higher litigation costs and longer closing timelines, underscoring why the governing‑law decision remains a cornerstone of M&A strategy.