The Rise of "Dexits": Why Corporations are Leaving Delaware Behind
In recent months, a growing number of CEOs have expressed their dissatisfaction with Delaware’s corporate landscape, particularly its influential Chancery Court. More than just a trend, this wave of "Dexits" signals a potential shift in where companies choose to incorporate.
Though Delaware has long been touted as the gold standard for incorporation—often dubbed the "first state" because it was the first to ratify the U.S. Constitution—its appeal is beginning to wane. High-profile figures such as Elon Musk have spearheaded this movement, with companies like Tesla, SpaceX, and Neuralink either making a move or planning to relocate their corporate registrations to other states.
Over the past year, notable names including Meta, Dropbox, and hedge fund Pershing Square Capital Management have made headlines with their intentions to leave Delaware. Bill Ackman, CEO of Pershing Square, took to social media to announce his company’s choice of Nevada, echoing insights from top law firms that now recommend states like Texas, Nevada, and South Dakota over Delaware’s once-coveted legal framework.
For decades, Delaware could do no wrong in the eyes of corporate America due to its business-friendly laws, specialized courts, and streamlined incorporation processes. In fact, the state proudly claims that over two-thirds of Fortune 500 companies are registered there. Yet, recent statistics show a slight decline, with the percentage of these corporations dropping from 68.2% in 2022 to 67.6% in 2023. What’s more alarming for Delaware’s authorities is that while the state reported a record 2 million incorporations in 2023, its revenue from this sector has become increasingly critical—accounting for about 22% of its total state revenue, amounting to $1.33 billion.
The implications of this trend are significant. As corporations shift their registrations, other states are ramping up efforts to capture Delaware’s market share. States like Wyoming and North Carolina are rethinking and enhancing their business regulations to attract organizations tired of Delaware’s seemingly impenetrable Chancery Court. As attorney Michal Barzuza from the University of Virginia Law School noted, the "exodus" might make it easier for even more corporations to transition out of Delaware.
However, this is not just about queen bees seeking new hives. The tension is escalating in Delaware courts, highlighted by Elon Musk’s public criticism after Chancellor Kathaleen McCormick overturned a 2018 Tesla shareholder vote that approved his $56 billion compensation package. The ruling raised even more eyebrows when other companies like TripAdvisor faced similar court struggles, challenging their reincorporation moves.
In a response to complaints from both corporations and legal practitioners, Delaware’s new Governor, Matt Meyer, has initiated a working group to assess the grievances against the Chancery Court. Companies like TransPerfect have echoed these frustrations, as CEO Phil Shawe revealed his own legal battles in the state, which led him to abandon Delaware for a more favorable environment.
The growing narrative suggests that the Chancery Court may no longer be the ideal arbitration setting for corporate America. Cases like those of Itzik On, who faced challenges with courts that allowed competitor claims against him, resonate with a broader community that fears a potential downward spiral in Delaware’s reputation for fairness.
So, what does this mean for investors and entrepreneurs? As leaders navigate a landscape laden with legal uncertainties and rising costs, they must stay informed and consider revising their long-term strategies. Emerging destinations for incorporation may offer the protections and flexibility that seasoned executives are looking for, reshaping the corporate map in America in the process.
As the Dexits continue to gain momentum, investors and business owners alike should keep a close watch on these developments. The implications for investment and corporate governance could ripple across not just industries but also the broader economy. Delaware’s ability to retain its crown as the preferred state for incorporation will depend on its willingness to address these concerns and adapt to the evolving business environment.
For those looking to remain on the cutting edge of corporate finance and investment strategy, monitoring these trends will be crucial. At Extreme Investor Network, we emphasize the importance of understanding the intricate dynamics of incorporation decisions, helping you strategize to stay ahead in this shifting landscape of corporate governance.