What is DExit? It might signal a new norm

What is DExit? It's an emerging trend in corporate America that speaks to a broader problem of balance between rules and flexibility. 

The phenomenon has been in and out of business news for over a year. It centres on a US state that is, traditionally, one of the most popular places in the country to do business. Lately, though, that reputation has suffered a few setbacks. It was enough to anger some of the biggest names in global business, including Elon Musk. 

Now, DExit symbolises a trend of migration towards areas where the rules might not be as strict. In today's world, where businesses face increased competition and the need to rethink even the most central elements of corporate strategy, this migration might prove to be a valuable option, signalling the beginning of a new normal.

DExit (a combination of the words "Delaware" and "exit") is the trend of US companies relocating from Delaware to other US states, commonly Nevada and Texas. 

Delaware has long been considered the "corporate capital" of the US, and the go-to for incorporations for some of the biggest worldwide brands. Proponents praised its business-friendly laws and the ease of access to its Court of Chancery. The state historically accounts for over 80% of US IPOs each year.

But recent high-profile court rulings have spooked some businesses. Elon Musk is the most notable example. When a Delaware court rejected a pay package he had agreed with Tesla, he took to social media and advised against doing business in the state. 

Tesla moved its incorporation to Texas in mid-2024. Along with Nevada, Texas is now seen by some as a better place to host corporate headquarters, with more technical and legal protections for boards (for example, via interpretation of the business judgment rule), lower taxes, and less regulatory scrutiny. 

The emerging trend spooked Delaware lawmakers enough to make them introduce a new law – officially called Senate Bill 21 – but more widely known as the "Billionaire's Bill". The law aims to address many of the fears that prompted corporate relocations from Delaware, such as more protection for directors and more streamlined processes for shareholder approval.

The entire saga of DExit has brought sharp focus onto the balance between regulation, oversight and competitiveness in multiple areas of the world. DExit is a good example of the pushback that will ensue if the balance isn't right. The problem is that pleasing everyone becomes nearly impossible when the balance provokes a tug-of-war. 

From a regulatory point of view, a similar situation is developing in the European Union, where lawmakers have been aggressive in implementing new ESG reporting rules. But the bloc has faced enough pushback from sectors like finance, prompting a rethink of the laws and how much of a burden they'll place on companies. 

And then there's the UK, struggling with its own business identity post-Brexit. The country faces a challenging economy, and inward investment might be a key step to remedying that long-term. However, there has been debate over corporate governance laws as part of this process. Are they too weak, meaning that standards won't get to where they need to be? Or are they too strong, meaning companies won't want to invest there for fear that leaders will be buried under red tape? In both cases, the balance doesn't seem to have been struck yet. 

Ultimately, businesses today operate globally, under intense pressure to perform—making location choice a strategic issue. In the meantime, global efforts to regulate businesses have stumbled in the face of economic nationalism. The combination means that companies are urgently thinking about the future of their headquarters while states become more aggressive in trying to outdo each other's attractiveness.

The tug-of-war over rules vs. competitiveness, and the occasional corporate migration as seen in Delaware, means a lot for boards and business stakeholders. Ultimately, all of this centres on how corporate leaders are able to work, and what personal risks they face. 

In general, looser restrictions (championed by businesses moving to Nevada and Texas) mean less personal risk for boards. The interpretation of fiduciary duty in these places is less strict, giving directors more confidence to act without fear of landing in a legal battle or receiving a regulator reprimand. 

Tighter restrictions, while meaning the opposite for directors, tend to be supported by shareholder advocates, because the rules enforce more accountability, transparency and control for them. This is the logic that prompted criticism of the "Billionaire's Bill" in Delaware, and of watered-down regulations in the UK and EU.

DExit—the migration away from Delaware— underscores the shifting landscape around corporate rules. Some jurisdictions are getting tougher, others offer looser alternatives, prompting the former to change their laws and become more attractive. 

So far, the desire for balance between these two poles is an ongoing issue. Delaware, for example, continues to play host to a vast number of corporate entities – despite DeExit – but criticism of the "Billionaire's Bill" lingers.