Right, so here's you're scenario.
No, that is not my scenario, so let me explain.
>large faction claims all the best territory right when the server starts
>oh wait they don't have enough members to actually maintain the fleets to hold this territory effectively
>lose territory to a dozen opportunistic empire builders who started in "bad" systems and actually built up their fleets instead of stretching themselves thin
Misunderstanding #1.
You think I'm talking a week after the server starts. I'm talking 6 months to a year after the server starts. The big factions with all the space have plenty of people to control that space. They have built stations, defenses, the whole nine yards. In your scenario, they are able to wage total war and take systems those small rival factions claimed early on. Or if you want to say they can't wage total war and wipe the player out, they simply surround them and blockaid them into their own system with no way out until they either agree to join the faction or they leave the server, and then they take the system. Either way, the largest factions will grow until they consume as much territory as they can before running into another equally large faction that they can't bully around. The strong get stronger by taking out the weaker factions in their way until things have stabilized with only a few large factions left.
And how about your "big faction leaves and muh server dies" scenario?
>big faction leaves
>suddenly tons of valuable space unclaimed
>massive race to claim and control this as smaller rimsystem factions pour inwards that reinvigorates the server
As opposed to the current situation
>big faction leaves server
>server dies because their enemies no longer have a reason to log in and combined were 50% of the server population
>no one left even tries to take big faction's territory because territory is not important
Misunderstanding #2, I didn't say the faction leaves. I said the individuals leave. Players will come and go, that is a fact. A server must be able to replenish those players by enticing new ones to join.
Once a faction has reached empire size, that faction is going to be used to controlling that much power. They're not going to just let it go. So when they start having their founding members retire, or just stop logging in and never coming back, they are going to become alarmed that their membership is dwindling. Which means they're going to start "recruiting" by any means necessary. Which means they're going to start coercing the smaller factions to join them. They might not have the people power anymore, but by this point they have some of the most powerful ships and stations on the server, the small guys aren't going to be able to resist them and they know it. So it becomes a "join us or die" scenario.
In the mean time, any new players who log in are going to see massive sprawling empires with no territory available to them thats worth taking, and the decaying empires trying to strong arm the smaller factions, and go "Nope, I can't build my own empire here, everything is already taken" and simply leave to find another server. Or they try to start and the big boys come demanding taxes and tributes, and the new player goes "Screw that noise" and leaves. Which means the server gets a bad reputation. And once a server has a reputation for not being suitable for new players, its only a matter of time until it dies.
How do solo empires even fix the "problems" you see with this galaxy rework? Because the problems you're describing don't even come from the idea of limiting solo empires. They come entirely from the universe changes which are being done to encourage conflict, because the current galaxies do nothing to encourage conflict.
Smaller factions mean less space controlled by any one group, which means more space for everyone to come claim territory and start their own stuff. It also means if one faction is being an ass, there's more than enough force on the server to stop them. Not the case when the asshole faction is a sprawling empire.
You make up imaginary scenarios about a one man faction taking over half the universe, but most one man factions never take more than 2-3 systems because that gets them all the resources they need to build whatever they want.
Its the idea of huge galaxy spawning empires that kills servers. 50 people in 30 different factions makes for a MUCH more interesting game than 50 people in 5 factions. And it means that as the individual players come and go, their territory opens back up and new players have room to move in. Huge factions that control tons of space just for the sake of controlling a ton of space don't do that.