Our ongoing Corporate Governance Insights series addressing the so-called “DExodus” (or “DExit”) continues with this installment focused on a specific, and often overlooked, governance issue for boards and compensation committees.  Prior posts in this series have examined the broader trend away from Delaware incorporation and recent market developments involving venture capital sponsors and public companies.

This post addresses what a potential reincorporation out of Delaware means from a board and compensation committee perspective with respect to Delaware-based equity incentive plans and outstanding equity incentive awards.  While a statutory conversion generally preserves the existing legal entity, equity compensation programs raise distinct governance, tax, securities, and process considerations that require focused compensation committee attention.

As more boards evaluate whether a change in state of incorporation is appropriate, compensation committees should be prepared to assess how such a move affects existing equity plans, outstanding awards, and related administrative mechanics, and to ensure continuity without creating unintended tax, securities, or compliance consequences.

The Equity Incentive Plan: Compensation Committee Considerations

As part of the reincorporation process, compensation committees should focus on several threshold questions:

• Whether the equity incentive plan assumes Delaware law or Delaware-specific corporate law concepts that may not translate cleanly to the destination state.
• Whether governing-law or forum-selection provisions should be updated to align with the new state of incorporation.
• Whether any plan amendments required in connection with the conversion are considered “material” under applicable stock exchange rules, potentially requiring stockholder approval.
• Whether board and officer delegation provisions remain valid under the destination state’s general corporation law and accepted governance practices.

In many cases, the equity incentive plan can be assumed by the converted entity without substantive changes.  Even where no amendments are required, best practice is for the compensation committee to document that conclusion and the supporting analysis.

Outstanding Awards and Amendment Authority

Outstanding equity incentive awards present a separate set of governance considerations.

Award agreements frequently contain provisions that expressly reference Delaware law, restrict amendments that are adverse to the award recipient without written consent, or rely on statutory concepts tied to Delaware corporation law.  While the economic terms of awards may remain unchanged, a reincorporation can raise questions about amendment authority, substitution mechanics, and whether any award recipient consents are required for technical updates.

From a compensation committee standpoint, early identification of these issues allows the board to sequence approvals appropriately and reduce execution risk as the conversion approaches closing.

Tax Considerations and Preservation of Award Treatment

A properly structured reincorporation should not, by itself, create a new equity grant, accelerate vesting, or trigger payment events.  However, compensation committees should confirm that the mechanics used to implement the conversion do not inadvertently alter the economic terms of outstanding awards or trigger plan-defined change-in-control provisions.

Compensation committee oversight in this area is largely procedural.  The focus should be on confirming that vesting schedules, exercise prices, award terms, and settlement mechanics remain unchanged, and that any assumptions or substitutions are documented as economically equivalent.

Securities Law and Exchange Rule Implications

For private companies, Rule 701 generally continues to provide a federal exemption for compensatory equity incentive awards both before and after reincorporation. What does not change is the need to comply with state “blue sky” laws for each jurisdiction in which award recipients reside.  A change in state of incorporation does not eliminate those obligations.

Depending upon the destination state, reincorporation may introduce new or different compliance requirements that affect equity incentive plans or award agreements.  These can include additional disclosure or notice requirements, registration or qualification mechanics, data-privacy or employee-information considerations, or other state-specific rules that were not previously implicated under Delaware law.  Where applicable, compensation committees should confirm whether targeted plan amendments, updated award documentation, or revised administrative practices are required to address those differences.

For public companies, compensation committees must consider whether any equity plan amendments required in connection with the conversion are treated as material under applicable stock exchange rules and therefore require stockholder approval.  Even amendments intended to be technical or conforming should be evaluated carefully under the relevant listing standards.

What Typically Does Not Change

Several points are worth stating clearly for boards and compensation committees:

• A statutory conversion that preserves the same ultimate parent generally does not constitute a change in control for equity compensation purposes.
• Outstanding equity awards typically continue with the same issuer, share reserve, and economic terms.
• Properly structured assumptions or substitutions generally preserve the intended tax and incentive treatment of outstanding awards.

Clarifying these points early can help compensation committees distinguish between true action items and issues that do not require intervention.

Practical Guidance for Boards and Compensation Committees

For boards considering reincorporation out of Delaware, compensation committees should treat equity compensation as a core governance workstream, not a post-conversion clean-up item.  At a minimum, compensation committees should:

1. Review the equity incentive plan and standard award forms for governing-law, amendment, and delegation issues.
2. Confirm that outstanding awards continue without economic change and without triggering unintended tax consequences.
3. Assess whether any plan amendments require stockholder approval under applicable exchange rules.
4. Confirm ongoing securities law compliance for post-conversion grants.
5. Approve a communication plan addressing award continuity and administrative changes.

Bottom Line

Recent developments have made reincorporation a more realistic option for many companies.  While fiduciary-duty standards governing conversion decisions may continue to evolve, the governance and execution risk around equity compensation has not.

For boards and compensation committees, the objective is not to redesign equity programs, but to preserve continuity, compliance, and clarity.  Addressing equity incentive plans and outstanding awards as part of the front-end reincorporation analysis helps avoid surprises, supports sound governance, and keeps the board focused on oversight rather than remediation.

Nelson Mullins’ Securities & Corporate Governance Industry Group works regularly with its clients to navigate the changing legislative and regulatory landscape affecting both private and public companies and their boards.

These materials have been prepared for informational purposes only and are not legal advice.  This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship.  Internet subscribers and online readers should not act upon this information without seeking professional counsel.