Dexit
-- by Jessie Gabriel
Who doesn’t love a catchy portmanteau? Barbenheimer, Brangelina, Sharknado! Would Scandoval have become a pop culture phenomenon if it had been referred to as Tom Sandoval cheating on Ariana with Raquel/Rachel? Obviously not. So if you have been intrigued by the term Dexit popping up in your feed; but couldn’t be bothered to read on, here is your cheat sheet.
I am loathe to write a post that was initially inspired by Elon, but here we are. Between 2022 and 2024, a number of decisions came out of the Delaware Court of Chancery (those are the Delaware courts set up specifically to deal with business matters) that were perceived as hostile to management. To back up, when you incorporate in a state, you are subject to that state’s laws (statutes and court decisions) about corporate governance. Corporate governance is a whole body of law that lays out how a corporation should be run, acknowledging that a corporation is not an island—it exists only because of its shareholders.
In 2024, one such case drew the attention of a certain high-profile CEO with a particularly large pocketbook, his own social media platform, and an ego the size of his mouth. That lawsuit was In re Tesla Motors, the suit challenging the award to Elon of a $56 billion (that’s billion, with a “b”) compensation package. Even though a shareholder vote had approved the package, the court struck it down as the result of a flawed process. You will be shocked to hear that an argument was made that the Tesla board was just a bunch of Elon kiss-ups who would do whatever he wanted. Following the decision, Elon used his vast resources to attempt to cancel Delaware (hard to do). Still, he took his own personal stand and reincorporated Tesla and SpaceX in Texas.
Since Silicon Valley has a specific kind of mob mentality when it comes to Elon, his reincorporation moves on the heels of these Delaware Chancery decisions prompted a number of Delaware corporations to reincorporate elsewhere. If my shareholders want to give me $55b in compensation, they must be allowed to do so! It’s outrageous! I mean, I joke, but honestly Sequoia submitted a filing earlier this year that basically said exactly that.
Thus, the Dexit.
But was there really a Dexit?
No, not really. Some companies did reincorporate in other states, yes. But not many. In addition to Elon’s companies, Dropbox reincorporated in Nevada, and (wait for it) Trump Media Group reincorporated in Florida. I wonder if Trump will move back to Delaware as a way of giving Elon the middle finger. You hate Delaware? Then I love Delaware! Suck on that!
Most have stayed put and new businesses continue to incorporate in Delaware in vast numbers, according to Carta. Apparently, Mike Maples shouting on X, “It’s time for every startup to reject Delaware” was not sufficient.
Why do people incorporate in Delaware?
Delaware has been the hub for incorporation for as long as I can remember. They have a well-developed body of corporate law and a truly excellent business court system. This gives founders and shareholders a genuine sense of predictability. Delaware has also worked hard to strike a balance between honoring corporations and protecting shareholders, which gives both factions some comfort. You know what you are going to get with Delaware.
Where have the Dexited gone?
Mostly to Texas and Nevada, states known to be even more deferential to corporations (and, thus, less concerned about other stakeholders). These are states where the corporate governance requirements are minimal. Corporations can do what they like, shareholders be damned.
While incorporating somewhere other than Delaware may seem like the hot new thing, most people who are asking about it aren’t doing so because they have any real understanding of the legal differences. They are asking about it because it’s in the ether (and on X). That doesn’t mean there aren’t good reasons for certain corporations to move, but those moves come at a cost.
Why are we talking about this when Dexit happened in 2024?
Delaware is a rare, fast-moving state, at least when it comes to business. Earlier this year, Delaware enacted new laws meant to address some of the issues raised in 2022–2024. To Delaware’s credit, they did not simply throw the rules out to attract corporations “back” to Delaware. What they did was add clarity to some areas that previously had been less clear. Bravo.
Even more recently, Texas doubled down by enacting new laws that reduce the burden of corporate governance. I’m not trying to say that this is all bad. But there are reasons these rules were first created, and those reasons are still pretty good ones. Throwing them out to please a bratty billionaire is not the move.
But seriously, what's the difference between Delaware and Nevada?
There are real legal differences between the corporate governance standards in Delaware and a state like Nevada. Nevada lowers even further the fiduciary duty standard for officers and directors and gives even more weight to decisions by the board of directors. This may sound great as a founder, and possibly even as a director, but not as a shareholder or anyone who values a balance of powers. Board of directors are not meant to be circles of cronies ready to rubber stamp the decisions of management, or a group that is just looking to personally enrich themselves at the expense of the company and its other stakeholders. Director and officers exist to serve the corporation and, as someone who is both a founder and a shareholder in a number of companies, that seems like a good thing. Boards should be working alongside the officers, supporting them, challenging them, raising important questions, and coming together for the good of the company. The CEO as king model is, let’s just say, not optimal.
