Beware Delaware: Trusts and Business Entities Face New Risks

The firm has long held a dim view of Delaware as a domestic asset-protection jurisdiction. The 2014 ruling in Kloibermade clear that the Delaware Chancery Court would not shield a Delaware asset-protection trust from a Kentucky divorce proceeding. At the time, we observed that the political climate of the state — increasingly progressive and increasingly aligned with the plaintiffs’ bar — posed a risk to the very investors and entrepreneurs who had come to rely on Delaware’s deep body of business law for certainty in planning.

The concern has now extended to Delaware’s ordinary business jurisprudence. A November 2023 opinion piece in the Wall Street Journal, co-authored by former United States Attorney General William Barr, set out the developing concern: several justices appointed to the Delaware courts, including the Court of Chancery, now hold a strikingly broad view of their authority to target and punish businesses and their officers for failure to satisfy environmental, social, and governance principles whose contours the courts decline to define.

Of particular concern is the Caremark doctrine — a principle of Delaware law making officers liable for failures of risk management. The doctrine was originally framed to encourage vigilant stewardship. Today, the Court of Chancery has begun to apply Caremark to punish officers who fail to honor the political flavor of the day, while using the same doctrine to shield politically favored companies from shareholder accountability.

The arbitrariness with which Chancery judges identify their favored litigants undermines the credibility of Delaware as a reliable forum. A litigant’s outcome should not turn on which political party holds majority approval inside the courthouse. A business that incorporates in Delaware ought not find itself the target of a third-party suit aimed at compelling expenditure on the personal political preferences of the Chancery’s bench. That is not the contract Delaware originally offered.

The firm’s counsel for any client with a Delaware trust or operating entity is to consider redomiciling now. Wyoming offers a politically neutral forum, lower fees, lower taxes, and faster service. For trust planning specifically, the offshore jurisdictions in which we operate — Belize, Nevis, and the Marshall Islands — provide statutory protection that Delaware no longer credibly offers. There are at present very few sound reasons to organize a new trust or business entity in Delaware.