Firms flee Delaware in growing ‘Dexit' trend

The Star

16-05-2025

NEW YORK: In the coming weeks, investors in nine public companies worth at least US$1bil each will vote on proposals to ditch Delaware as their place of incorporation, potentially denting the state's longtime reputation as Corporate America's capital, Reuters has found.
Five companies with a stock market value of at least US$1bil have moved their legal home out of Delaware since last year, in what some have nicknamed 'Dexit'.
Tesla made a high-profile move to Texas last year and in April, President Donald Trump's social media company Trump Media & Technology, which owns the Truth Social platform, decamped to Florida.
Most of the companies are dominated by a significant shareholder or founder.
Delaware judges have expanded the court's most stringent legal standard to a growing range of situations involving controllers, increasing the risk of shareholder lawsuits.
The decisions culminated with the blockbuster ruling last year that rescinded Elon Musk's US$56bil pay package from Tesla.
Less than an hour after the ruling, Musk said on X: 'Never incorporate your company in the state of Delaware.'
Musk's SpaceX and Tesla soon reincorporated in Texas.
Musk did not respond to a request for comment.
Trump Media, which is controlled by a trust that owns shares on behalf of Trump and is overseen by his oldest son, said in its March proxy statement that Delaware's 'increasingly litigious environment facing corporations with controlling stockholders has created unpredictability in decision-making.'
The company cited the Musk pay ruling as an example.
It is now incorporated in Florida.
Dropbox and The Trade Desk, which each have a large shareholder, and Cannae Holdings have moved their charter to Nevada from Delaware.
They did not respond to a request for comment.
Among the companies set to vote on proposals to leave are Simon Property Group, which is seeking shareholder approval on Wednesday to reincorporate in Indiana, and gaming platform Roblox, which wants to move to Nevada.
Unlike many of the other companies that have proposed a 'Dexit', Simon does not have a controlling shareholder.
It declined to comment on its reasons for proposing a move, referring to its latest proxy statement.
Roblox said that Nevada law provides greater predictability.
To be sure, the share of Delaware-based companies in the Russell 3000 index, which covers nearly all public companies, continues to grow, rising to 62% last year from 56% in 2020, according to ISS-Corporate.
However, 2024 was the first year that more companies in the Russell Index left Delaware than moved their incorporation to the state.
'On the Richter scale, it's not that high,' said Benjamin Edwards, a professor at the UNLV School of Law, of the changes.
'But it's still shaking the ground.'
Delaware, which has no sales tax, gets around a third of its general budget revenue from fees and taxes related to chartering businesses.
Fearing an exodus of companies leaving after the judicial rulings, the state enacted legislation in March that limits the role of the state's judges in reviewing certain corporate deals.
It also limited the scope of so-called 'books and records' requests, a legal tool often used by shareholder attorneys to try to obtain directors' emails and texts.
Despite the recent changes, corporate law in Delaware remains relatively strict when it comes to insiders making deals that would likely benefit them directly, such as a deal to buy assets from a controlling shareholder or Musk and his Tesla pay arrangement, legal experts said.
'That's one area where Delaware has consistently said, 'Look, we're going to kick the tyres of those decisions with a little bit extra force',' said Eric Talley, a professor at Columbia Law School.
Delaware law typically requires a company that strikes a deal with a controlling shareholder to prove the arrangement met a strict standard showing the price and process were fair, unless it was negotiated by independent directors or approved by shareholders.
In Nevada, the same controlling shareholder deal would likely be protected by a legal standard known as the business judgment rule, which shields against lawsuits, regardless of how it was negotiated and approved, legal experts said.
Talley said Nevada directors are protected unless they engage in fraud.
'It's actually okay to engage in self-dealing, as long as you don't lie about it,' he said.
A state's corporate law governs a company's relationship with shareholders and typically does not affect legal rights of employees or consumers.
In Texas, where Tesla and SpaceX are now incorporated, governor Greg Abbott signed into law on Wednesday amendments to its corporate code that are aimed at reducing the threat of shareholder litigation, in part by allowing companies to set stock ownership thresholds for lawsuits.
The plaintiff in the Musk pay case owned just nine shares when he filed suit in 2018.
The Texas law is effective immediately.
Eric Lentell, the general counsel at Delaware-chartered Archer Aviation, said the aircraft developer is considering reincorporating in Texas and believes directors of other public companies should reconsider Delaware.
After a Delaware judge refused last year to recognise a vote by Tesla investors to reinstate Musk's pay, Lentell said it signalled that Delaware judges 'have become kind of activist in nature' by appearing to rewrite settled law.
'I think that's where people get nervous,' he said. — Reuters