The Delaware Arbitration Paradox: A New Margin of Competition in the Market for Corporate Charters

The debate over mandatory shareholder arbitration is usually framed around investor protection, private enforcement, and the relative merits of litigation and arbitration. But the SEC’s recent shift may also add a new dimension to one of the most important developments in contemporary US corporate law: renewed competition in the market for corporate charters.

In our recent paper, The Political Economy of Mandatory Shareholder Arbitration, we examine the institutional forces that will determine whether corporations adopt arbitration provisions now that the SEC has changed its position. One element deserves particular attention: shareholder arbitration may become another margin of competition among Delaware, Nevada, and Texas.

From a Dual Constraint to Jurisdictional Choice

For decades, mandatory arbitration provisions covering shareholder claims were largely absent from US public-company governance documents. Their absence did not result from a single categorical prohibition, but from what we describe as a ‘dual-constraint regime’.

At the federal level, the SEC maintained an informal but highly effective practice of opposing arbitration provisions in the governing documents of companies seeking to go public. At the state level, Delaware law preserved judicial adjudication for core categories of shareholder claims. DGCL § 115(a) requires that Delaware courts remain available for internal corporate claims, while § 115(c) prevents governance provisions from using exclusive arbitration to displace the judicial forum available for covered federal securities claims.

Together, these constraints produced a stable, litigation-centered equilibrium. Arbitration was not necessarily prohibited by any single rule; it was simply not a viable governance option.

The SEC’s 2025 policy change disrupted that equilibrium. The Commission announced that a mandatory arbitration provision would no longer affect whether it accelerates a registration statement. The SEC thus moved from substantive gatekeeping toward a disclosure-based approach, leaving the choice to issuers, investors, and the market, subject to adequate disclosure.

Removing the federal constraint does not create a uniform regime. It makes differences among state corporate-law regimes more consequential.

Delaware continues to impose statutory constraints that appear to preclude mandatory arbitration of important shareholder claims. Nevada and Texas, by contrast, do not appear to impose equivalent restrictions. If that divergence persists, shareholder arbitration may become another variable in the increasingly visible competition among these jurisdictions.

Delaware remains dominant, but ‘DExit’ can no longer be dismissed as purely theoretical. Whether it proves to be a durable migration trend or principally a catalyst for renewed debate, prominent companies have considered or completed reincorporations in Nevada and Texas, while both states have strengthened their positions as alternatives. Nevada has long differentiated itself through a more management-protective regime; Texas has moved more recently, including through a specialized business court and legislative reforms aimed at attracting corporations.

The Delaware Arbitration Paradox

A company that values reducing exposure to shareholder class actions may now confront a new form of jurisdictional choice. Delaware offers the accumulated expertise, predictability, and extraordinary body of precedent associated with the Court of Chancery. Incorporating elsewhere, however, may offer greater flexibility to experiment with arbitration-based dispute resolution.

Delaware’s competitive advantage does not consist merely of a sophisticated corporate statute. Its model depends heavily on courts. The Court of Chancery does more than resolve disputes: it produces precedents that define fiduciary obligations, guide transactional planning, and continually update Delaware corporate law. That production of precedent is itself part of Delaware’s product.

Arbitration potentially interrupts that cycle. Private arbitral proceedings are ordinarily confidential and non-precedential. If a meaningful number of internal corporate disputes were diverted from courts, fewer cases would generate publicly available decisions, potentially weakening the process through which Delaware law develops and maintains its comparative advantage.

This produces what we might call the Delaware arbitration paradox: Delaware’s greatest competitive strength—its court-centered model of corporate law—is also what may give it the strongest institutional reason to resist a dispute-resolution innovation that competing states can accommodate at comparatively low cost.

Delaware has invested for decades in a specialized judiciary, accumulated precedent, and a legal ecosystem built around adjudication. Nevada and Texas need not reproduce that architecture to offer greater flexibility over dispute resolution. If their laws permit firms to channel shareholder claims into arbitration, experienced private arbitrators can supply specialized decision-making at parties’ expense.

That does not mean Nevada or Texas can replicate Delaware. Its jurisprudential depth, judicial expertise, and network effects remain extraordinarily difficult to reproduce. But arbitration changes the competitive problem: a rival state may not need an equivalent Court of Chancery if it can permit firms to contract around the need for an equivalent public adjudicative institution.

In that sense, shareholder arbitration may lower one of the traditional barriers to competing with Delaware. The very innovation easiest for competing states to accommodate may be one Delaware has unusually strong institutional reasons to resist.

Arbitration as a New Margin of DExit

None of this means that corporations will embrace mandatory shareholder arbitration. That is the broader ‘adoption puzzle’ we explore in our paper. Legal availability does not imply governance adoption.

Institutional investors may resist arbitration provisions, particularly when coupled with class-action waivers. Proxy advisers may react negatively. Companies may fear reputational costs. And arbitration does not necessarily dominate class litigation: federal securities class actions provide procedural screening, centralized resolution, and class-wide finality that individualized arbitration may fail to reproduce. Mass arbitration could even recreate collective pressure in a more fragmented form.

Mandatory arbitration may never become widespread. But widespread adoption is not necessary for it to matter to jurisdictional competition.

State competition operates at the margin. For firms already reconsidering whether Delaware remains their optimal domicile—particularly those concerned about shareholder litigation—the ability to adopt an arbitration provision elsewhere could reinforce an existing inclination to reincorporate. What appears to be a dispute-resolution debate may therefore become part of the calculus of corporate domicile.

The dynamic may also run in the opposite direction. If firms begin to attach meaningful value to arbitration flexibility, and Nevada or Texas incorporate that flexibility into their competitive offering, Delaware may face pressure to reconsider its statutory position. Credible exit, even if limited in absolute numbers, can influence the political economy of Delaware corporate law.

The SEC’s policy shift should therefore be understood as more than a change in federal securities regulation. By withdrawing from substantive gatekeeping, the Commission has effectively returned an important part of the shareholder-arbitration question to state corporate law and market choice, creating a new axis along which states can differentiate themselves.

The larger point concerns the changing structure of the market for corporate law. Successful challengers to Delaware have not necessarily sought to replicate its institutional model. Nevada, for example, has pursued a market-segmentation strategy, differentiating itself through a more management-protective regime and appealing to a distinct subset of firms. Mandatory arbitration may represent another form of differentiation. What makes it distinctive is the institutional asymmetry it exploits: Delaware’s court-centered model is one of its greatest competitive strengths, but may also make Delaware less willing to embrace a mechanism that rival jurisdictions can accommodate at comparatively low cost.

The question, then, is no longer simply whether arbitration is legally permissible, or even superior as a method of dispute resolution. It is whether differences in its availability become sufficiently valuable to influence where corporations choose to incorporate.

If they do, shareholder arbitration will have become another front in the emerging competition over the corporate-law franchise.

The authors’ full paper may be found here.  

David J. Berger is a Partner at Wilson Sonsini Goodrich & Rosati, President of the American College of Governance Counsel, a Fellow at the Rock Center for Corporate Governance at Stanford University, and a Senior Fellow at the NYU Institute for Corporate Governance & Finance. He can be reached at dberger@wsgr.com.

Pierluigi Matera is a Visiting Professor of Corporations at Boston University School of Law and a Professor of Comparative Law at LCU of Rome. He is also a Co-Founder and Co-Managing Partner at Libra Legal Partners. He can be reached at matera@bu.edu.