DExit- Why Some Companies Are Leaving Delaware

Beth Bolan: Foreign.

Louis Lowe: I'm Louie Lowe. I'm a corporate partner at Foley and Lardner in Silicon Valley. And I'm delighted, uh, to be recording this short video with my colleagues Beth Bolan and Chris Converse, uh, to talk about this phenomenon. Uh, that's really one of the biggest shifts in U.S. corporate law in decades. Something we're going to call Denset, uh, the title of this video. But before we get started, uh, Beth, tell, uh, us about yourself.

Beth Bolan: Sure. I am the longtime chair of um, the securities Enforcement and Litigation Group here at Foley and Lardner. And I also chair the board of directors of the New England chapter of the, um, national association of Corporate Directors.

Louis Lowe: Thanks for joining us, Beth. Chris, over to you.

Chris Converse: Thanks, Louis, for having me. I'm, um, a corporate partner in our Dallas office. I also co head our Texas corporate governance team.

Louis Lowe: Um, and what a great group we have. Uh, Beth, what is Dexit and why are we here?

Beth Bolan: Sure. Dug Said is short for Delaware Exit. And the reason why we're here is there have been a string of decisions in Delaware Chancery Court that have begun to shake the faith of the corporate, uh, floor folks who are incorporated there in Delaware, like many public companies are, and uh, have caused them to wonder whether the Delaware courts are as protective of corporate directors and officers as they used to be. There are a couple of decisions in particular that created that perception. One has to do with the Mollus Corporation and their controlling shareholder and the director's, uh, attempts to provide that controlling shareholder with the ability to influence some key decisions in that corporation, such as selection of the CEO, uh, some ability to have input on corporate mergers and strategic, uh, combinations and so on. Another key decision that has been in the press a lot is the decision by the Delaware Chancery Court to strike down the compensation package that was voted on or that was approved by the Tesla board of Directors and voted on twice by the shareholders. Approved twice by the shareholders and the court. The Delaware courts have struck that down. So those, in addition to some other decisions, have caused some corporations to think about, do we want to stay in Delaware? And the Delaware legislature has also reacted in response to those as well.

Louis Lowe: Well, Chris, I think that was a generous, uh, uh, description of what the Delaware court did. What do you all think happened from Texas?

Chris Converse: Yeah, I mean, look, I think that there's a creation of uncertainty in the courts in Delaware in terms of Tesla, Tesla's board in 2024, um, based on a recommendation from a special committee of Tesla's board, um, recommended, uh, to shareholders in early 2024. To reincorporate to the state of Texas. After all, Texas was and is Tesla's headquarters. So it was a natural, um, uh, place for Tesla to consider and ultimately shareholders approve that reincorporation in June of 2024.

Louis Lowe: And did the court strike down that reincorporation or just the compensation package?

Chris Converse: Just the compensation package, not the reincorporation

Louis Lowe: out here in Silicon Valley, uh, that the traditional discussion about telling a founder, uh, please incorporate it as a C corporation in Delaware now is because, come on, the longer conversation about, hey, you should also think about Nevada, Texas or Florida, Um, what is Delaware's answer been to, uh, this movement called Exit, where companies like Tesla and Neuralink and Dropbox, SpaceX have moved out of Delaware and other places. What has Delaware's answer been?

Beth Bolan: Right. Well, as you noted before, Delaware has this tradition of developing their corporate law through the courts, through the common law, through case law decisions that are built on precedent. There are very few statutes actually in Delaware compared to other states, but that's changing. Um, in reaction to this, the Delaware legislature passed a couple of very key legislative packages to address some of these decisions and then some of the decisions by corporations to look elsewhere. The first is a piece of legislation, a statute that, that address the Mullis decision and the ability of corporate directors to delegate down to a controlling shareholder certain key decisions, um, that in other corporations the directors hold. So now that's been codified, or some of that has been codified by statute. The other key statute that was passed was just this past spring, um, in which the Delaware legislature did a couple of really important things. Number one, they defined what a controlling shareholder is. Even when a shareholder holds less than 50% of the stock, there is some judicial decision saying that they could still be deemed a controlling shareholder. That's now been codified by statute. The other thing that the statute did was to identify and really define the processes by which a board of directors in a corporation that has a controlling shareholder who also sits on the board, what hoops they need to go through in order to reach a corporate decision despite those competing interests.

Louis Lowe: Um, Beth, so if I can summarize, in Delaware courts, we cannot trust, but in Delaware's legislature, ah, we can trust. And the Delaware legislature has come in to correct, uh, the law so that a judge could not make the same decision that it made before under Molis and the Tesla case, Is that right? If we were to relitigate those cases under today's law, uh, that, that those decisions would have come out differently. Thus, you know, whatever is the rationale Pumping this denseit movement, uh, is gone.

Beth Bolan: Well, I think, I think that there are some key aspects of those decisions that may have come out differently under the statute. And certainly the Delaware legislature is attempting to try to create that sort of definition and clarity and certainty that is less true when one does have uh, uh, a body, a corpus of law that is created by the corpus courts over time as opposed to sharp lines that are defined by the legislature.

Louis Lowe: And Beth, I read a lot of academics criticize this bill. These two bills that the Delaware legislature passed overturned, uh, the judicial decisions, um, and even that they have challenged those decisions. What is the status of that? Can we trust that SB313 and SB21 are going to remain the law of the land? Or is this something that remains, uh, to be decided?

Beth Bolan: I think it's to be decided. And a lot of that decision will come through judicial interpretation of those. And that's where the rubber is really going to hit the road as we see those fact patterns play out in the courts and the application of the statutory language to any given fact pattern.

Louis Lowe: And so I guess this whole Dexit thing isn't over then. Beth. And this is why at least 20 companies valued at $100 million or more have left Delaware since 2023 and gone to places like Nevada, Texas and Florida who are seeing the biggest gains? Um, I think Trump Media reincorporated in Florida. What a surprise. Texas and SpaceX, uh, two of Elon Musk's companies chose Texas. But uh, Neuralink and TripAdvisor, uh, and Dropbox all chose Nevada. Sitting in Silicon Valley, a lot of the big tech companies that I know are thinking about, uh, what to do and are establishing uh, surveys and committees to have a look at this. Um, Chris Converse, what has been the response of the Texas government to Dexit and what has Texas done to make itself a worthwhile place to think about when companies are either at formation and are thinking about where to set up or they're going public and thinking about where's the place that they'll be best situated, uh, to be a public company or if they're already a public company, uh, and they want to grow, where is the best place to go.

Chris Converse: Yeah, Louis, I think Texas takes, uh, there's two main themes with its, uh, reforms that it has instituted this year and that is certainty and innovation. So in contrast to Delaware, Texas has adopted a more code based system for corporate governance. Um, while that system might reduce the amount of flexibility that a state like Delaware has that has created so much case law, um, Texas believes that that code based system creates more certainty for corporate decision making. And um, it'll, it, the idea is that it'll will allow companies to clear roadmap, um, uh, at the very get go.

Louis Lowe: Um, Chris, I don't know about you, but my name is Louis Lowe and I sit in Palo Alto, California. And the last thing that I, uh, might want my client to do is get before a judge and jury in some uh, rural county in Texas, uh, to talk about my CEO's compensation. Um, what has Texas done to address that concern?

Chris Converse: Sure. There's two things. First, the Texas business courts were created last September, September 2024. They are appointed judges, um, appointed by our governor. They're sophisticated, um, lawyers, uh, that are. And it's a court system similar in some ways to the Chancery in Delaware. But uh, it's a sophisticated business court that's been created. The other thing, and we'll talk about SB29 in a minute, but SB29, one of its features is allows companies that are in Texas in its court governing documents to waive jury trials, um, for internal entity affairs, like a matter you just mentioned, um, so sort of eliminates the idea of runaway juries.

Louis Lowe: So you've got business courts and you've now got a business judgment rule in Texas, uh, that sort of mirrors Delaware. But Beth, I, I'm still thinking, if I am a founder or management team or a board of directors, do I want to be in front of a chancery court in Delaware or do I want to be in front of one of these sophisticated uh, judges appointed by the governor of Texas? Um, how do you talk to clients about that?

Beth Bolan: Sure, sure. And as I mentioned before, I am the litigator among this group. I actually appear in Delaware court and in courts around the country. And you made the exact right point before, which is you do not want a bet the company case going before a judge who has not litigated and adjudicated and overseeing year after year after year of some of the most sophisticated business disputes that can come before a court. That's what Delaware really specializes in. One can disagree with the ultimate conclusion by any given judge in any given court. But the thing that is absolutely clear is that those Delaware judges are uh, this is, they live and breathe this work. They take on and have for decades the most sophisticated business disputes in the country. That's all they do day in, um, day out. Their appointments are for 12 years. In other states, like in Texas, it's for two years. In other states it is for similarly short periods. Of time. In some states they're even elected as opposed to being appointed. So that judicial experience and um, depth of the bench is really important.

Louis Lowe: Isn't Delaware also a code based system with just a sophisticated jurisprudence on top or is it really a common law system?

Beth Bolan: It's more of a common law system. There are fewer statutes than in other states and um, so Delaware has chosen to develop most of its law by the court. There's still some key statutes that form the backbone, but most of it is judicially developed over time.

Louis Lowe: Well, um, I, I think um, what you said is, is, is prescient. But I, I, I also remind you that uh, you know a Delaware court wrote 55 pages of stuff about why twice both a board and stockholders after full information, uh, still couldn't approve a ah, compensation package which certainly uh, I think uh, uh, is, is going to be going to remain in the minds of anybody who's uh, running a company. And um, I guess, I guess uh, the jury's out on this uh, this new Texas business court system. Um, and I'm, I'm excited to learn more Chris. But you know I, I think there are other states that we also have to think about. There's Nevada, there's Wyoming. Uh, Wyoming had a big uh, renaissance in 2017 at the outset of the digital asset, uh, revolution. Nevada has always been a state uh, that um, people have looked at for easy, easy, easy to do business. Chris, I know you were involved uh, quite closely in creating this new statute in Texas and I wondered what you thought about these other states and how these other states experiences informed uh, what, what, what Texas eventually adopted.

Chris Converse: Yeah, I mean I think we were, our team here at Foley played an integral role in drafting and, and it's part of the passage of, of the legislation in Texas. And um, not surprisingly we took lessons and experience from Nevada in particular, but also Delaware, um, and how Delaware I think sort of veered off course in certain respects. How Nevada um, we took a lot of the things like the codification, which we'll talk about in a second of the business judgment rule. That is something that Nevada has. So we borrowed. The great thing about our federal system is that it's an experiment, we're experimenting in Texas and we think we've got a really good franchise that we're building and we've taken some, taken some lessons from other states in creating that unique system that we have here.

Louis Lowe: Um, super helpful in terms of um, setting up in any one of these various states. What do you think are the key considerations in Picking a jurisdiction. Um, either again you're starting a new company, you're about to go public, or you're a large public company and you're thinking about making some big decisions that you don't want to court. Uh, second guessing, um, as you look at other states and frankly one of those decision points might be stay in Delaware. Um, what are the, what are the key drivers? And I'll throw that out to both um, of you. Starting with you Chris.

Chris Converse: Yeah, I mean I think you start with uh, uh, analysis of the statutes and case law in each jurisdiction. Think about what is important to you as a board. Look at it from a board perspective. Are you a controller company, you're a non controller company, meaning you have a controlling shareholder, um, in your company or not? Um, look at what, what statute, what common law system M is going to give you as a board the most flexibility, the most clear uh, framework and guidelines for making decisions so that you're not um, necessarily second guessed by activist shareholders and activist judges in certain cases. So it's a very, very fact based analysis. It's um, and obviously there's a little bit different thinking, um, if you're a public company versus a private company.

Louis Lowe: You know, let me let a few of mine, um, Chris, I, I think that most of the founders and management teams and boards that I talk to are not going to do any kind of analysis of case law. I think they're going to start with um, where am I incorporated and where should I be, sorry, where am I headquartered? And, and uh, you know, what's the correlation between my state of headquarters and my state of incorporation?

Chris Converse: They're two separate things. But um, I think there is a developing thought among especially public companies that there is an advantage, um, if you are incorporated in the same jurisdiction that you're headquartered. For instance, um, if you have employees, if you've deployed capital, you're in that state, you're going to. The term is home field advantage. You will have some advantage in the court systems in that jurisdiction. So I think that's certainly something to be thoughtful of as you think about different states.

Louis Lowe: So if I'm Tesla, makes sense. My headquarters is in Texas, I should be incorporated in Tesla in Texas and I should have some sort of home field advantage. Neuralink, um, is, I'm not sure where their headquarters is, but they're in, they've decided to be in Nevada. Um, most of the companies I work with in Silicon Valley are, have a, have a headquarters here in Silicon Valley and if they, they've created one in Another state, it's for tax purposes only. Uh, and, um, we go to Delaware. Um, never in a million years would I advise a company to. To go to California to headquarter, pardon me, incorporate in the state of California. Although I think there are some advantages to. To it. Um, I think the disadvantages vastly outweigh those advantages. And 99 times out of 100, I would say get the heck out of here. Um, both because of the legislature and the courts. Um, but, um, I guess after the home field advantage, uh, question that I would get, I think the next question I would get would be cost. And tell me about what it costs to be in Texas versus Delaware. Chris and others did.

Chris Converse: Yeah, so. So Delaware has a franchise tax that is based on the number of shares outstanding. Um, and it's capped. It's capped at about $250,000, I believe, per year. Texas has a franchise tax, but it's really based on a different metric, and that is how much revenue you're generating in Texas. So it's a little bit apples and oranges. I mean, look, I think the cost difference from a purely, um, you know, paying the government, the state governments an amount of money, it's negligible. I think the cost difference is really how you view your litigation risk, frankly, between the two jurisdictions. And SB 29 in Texas is meant to address, um, litigation, uh, risk, uh, which we could talk about.

Louis Lowe: Well, you absolutely led me to the next question. Um, I think especially for public companies, the question. Next question I get is, if I get sued, uh, where do I want to be sued? And what's the difference to me, if I'm, uh, a corporation that's set up in Delaware versus Texas versus Other states. And it used to be that if we want it to be pursued, we always wanted it to be in Delaware because we trusted the judges, um, and we trusted the legislature, um, and the legislature certainly has been very responsive to this. These controversial judicial decisions. But what about in Texas? What does that look like? And again, uh, as I mentioned, uh, uh, a bunch of tech nerds from. Maybe founded, uh, informed by folks from other countries might not so comfortable in front of a. A judge in Texas. Tell me about what shareholder litigation looks like in Texas.

Chris Converse: Well, I. I'm gonna. I'm gonna point you to three components of the new law in Texas that was effective in late May of 2025 that we think are the primary litigation risk components of SB 29. So, number one is, we mentioned this. It codifies. SB 29, codifies the. Just b. The business judgment rule so that that rule can't essentially be overturned or mitigated by courts. In Texas, it's a codified business judgment rule applicable to board decisions. That's number one. Number two, it permits, and this is innovative. No other state has it. It permits a public company or a company with more than 500 shareholders to establish in its governing documents an ownership threshold that shareholders must satisfy in order to bring a derivative shareholder claim, uh, on behalf of the company. Um, again, that's innovative. That's, uh. There's a cap on what that threshold must be. It's a 3% cap. You can certainly be, well, under whatever percentage, uh, the board or the shareholders determine that cap should be. But that's innovative. The last one I would point you to is that unlike other states, Texas in SB 29, allows a company to seek a judicial certification of the independence of board members serving on a committee. So too often we see situations where there's litigation about a board, committee, um, determination and a board and a judge or a court in hindsight, after that, after that determination by committee is made, determines, well, those board members on that committee were not independent. In this case, Texas allows you to go to a court before that committee makes a determination and seek a judicial determination of the independence of those board members serving on a committee.

Louis Lowe: Fascinating. So, recap. We've got a codified business judgment rule. We've got a codified ownership threshold, uh, that shareholders have to own in order to bring a lawsuit. You, uh, can create special committees and you can certify, uh, by a court independence. Um, that sounds. That sounds compelling. Um, and, uh, you know, I come back to you, Beth. Should companies move or should they stay?

Beth Bolan: Well, I think that any legislation is only as good as the judge's interpreting it. As we all know, one can have, uh, the business judgment rule codified. One can have, uh, board independence codified, controlling shareholders codified. And that gives some level of certainty. But as we litigators all know, the number of variations on that theme is infinite. And hence, that's why we have these court cases, um, even in states where you do have codification, because it's the judge's role to determine, did this board, uh, of directors, under these circumstances, this myriad of facts, do they fall under the business judgment rule or not? And that is an issue of judicial interpretation, because statutes can only go so far. The rest has to be filled in by judges. And I think where you really go back to you, and I think you made an excellent point earlier, which is there are two real considerations, two different considerations as to where, um, your principal place of business is, where your headquarters is, and where you are incorporated. Because where you are incorporated is where you get those judges. That's you selecting the statutory system and the judicial system that is going to affect your key business decisions as you go down. The last thing that I'll say on that is, um, as directors are figuring out, should we reincorporate here versus there versus there, it's not a given that that decision will be protected by the business judgment rule. Okay. There was a big decision recently in Delaware called the Trip Advisor, um, case where the Supreme Court, the Delaware Supreme Court said that in most cases, that decision whether to reincorporate will be covered by the business judgment roll, which is really important protection. However, if the directors make that decision during a time when, when they believe that there is litigation either occurring or imminent, then you might not get that protection. It might be a much higher standard. So that's another thing for boards really to determine as they are making, uh, the initial determination, but in particular deciding whether to switch.

Louis Lowe: Um, so I want to wrap this up and uh, just add a few more points. I think we've talked about, uh, the fact that where your headquarters, whether you're a public or private company, but especially if you're a public company, really matters as to where you decide to incorporate. I think the reputation and the brand of that state's, uh, uh, judicial and legislature matters. Uh, the statutory flexibility, the investor familiarity and the investor comfort level with that state is important. And so it used to be that if you set up in California or Nevada, uh, investors would force you to immediately reincorporate the Delaware if you wanted to get a check. Um, I, I'm not seeing that anymore. Uh, and I'm seeing a trend where companies are forming initially and in either Delaware or Texas, but still the vast majority of companies are being, uh, formed in, in, in Delaware, but, but many are, are thinking about, uh, going elsewhere. So, um, it's still a very vibrant debate and much left, uh, to be learned.

Beth Bolan: And I think what will really be the proof in the pudding is how these business courts pan out over time in different states. What investment are those states going to make in their business courts and in their judiciary so that, uh, investors and companies can get that level of certainty and familiarity as they currently do with Delaware. So Louis, what do you think? Will Dexa become a mass movement or is it just a one off? Ah, fad for now.

Louis Lowe: Um, well, thanks Beth, for asking me a question. Um, from, from where I sit in Silicon Valley, uh, the default decision to go to Delaware is no longer a default. Uh, it is now a discussion. And companies are really interested in, in learning about the relative benefits and costs of being in a lower cost jurisdiction, whether it be Nevada, Texas or Florida. Um, and Delaware still has, in my opinion, uh, the, the easiest it's the easiest state to me to recommend in most cases. But increasingly, Beth, uh, it's a discussion that we're having, and I think it's a discussion we're going to have more and more. So, Chris and Beth, thank you for joining me today and for putting on this, uh, video clip. And I look forward to communicating with all of our friends in the ecosystem about this topic and others.

Chris Converse: Thanks, Lou.

Beth Bolan: Thanks, Chris.

Louis Lowe: Thank you.