Dillard's eyes up reincorporation in Texas over rising costs & legal concerns

Department store chain Dillard’s Inc. has set its sights on relocating its legal company headquarters from the state of Delaware to Texas. 

The board’s decision to reincorporate in Texas, recently disclosed in a regulatory filing, comes as more and more retail companies and businesses move out of Delaware in response to mounting shareholder legal challenges and adverse judicial decisions affecting executives.

In the SEC filing, Dillard’s Inc. highlighted “notable Delaware court decisions affecting corporations with majority stakeholders” as one of the main reasons behind its relocation proposal, which still has to pass a shareholder vote. 

One recent case was the Tesla compensation case, where Chancellor Kathaleen McCormick struck down Elon Musk’s pay package despite receiving shareholder approval on two separate occasions. Adding fuel to the fire, the court granted plaintiff lawyers 345 million US dollars in fees, triggering widespread criticism from business executives and corporate governance specialists. In response, Tesla reincorporated in Texas last year.

Responding to stakeholder and leadership apprehensions, Dillard’s board established a specialized committee to assess its corporate headquarters location earlier this year. The committee, partnering with leading legal counsel Vinson & Elkins, conducted a comprehensive analysis of Delaware, Texas, and Nevada’s regulatory landscapes before settling on Texas as their preferred location. 

“The special committee concluded that Texas’s statute-focused approach would likely foster more predictability than Delaware’s common law approach, and that predictability could be a competitive advantage,” pointed out the filing. 

In addition, the committee also noted that relocating to Texas may “reduce the potential for opportunistic and frivolous litigation against the Company and its directors and officers.” It could also assist Dillard’s in attracting and retaining “qualified management and directors by reducing the risk of litigation.” The company stated that it believes Texas is more protective than Delaware against these types of lawsuits.

Outside of legal aspects, the Arkansas-based retailer pointed to several costly Delaware requirements as additional reasons for the move, like ongoing franchise taxes, abandoned property obligations, and a surge in shareholder lawsuits driven by attorneys working on contingency fees. These factors have also pushed up the cost of insurance coverage for company directors and officers. By leaving Delaware, Dillard’s expects to reduce these expenses significantly.

If shareholders approve the move in an upcoming vote, Dillard’s will join the wave of major corporations abandoning Delaware, a trend some call the “Delaware exodus” or “Dexit” movement. Incorporated in Delaware since 1964, Dillard’s is a retail staple in the US, operating approximately 270 stores in 30 states and employing 40,000 workers. The department store chain currently operates 55 stores in Texas, more than in any other state where the company operates. 

The filing stressed that the move “reflects the company’s strong operational nexus in Texas, preserves stockholder economic and voting rights, with expansion of rights to call a special meeting or act by unanimous written consent, may reduce frivolous litigation, and will create cost savings in terms of annual franchise tax cost and management time.”

Dillard’s disclosed that it has no ongoing legal disputes in Delaware courts.