U.S. Firms Shift from Delaware to Texas, Boosting Canada’s Appeal

The trend of U.S. companies moving their corporate domicile from Delaware to states like Texas is gaining momentum, raising concerns for shareholders in the process. This shift, often referred to as “Dexit,” was notably highlighted by Tesla Inc.’s decision to relocate amid a legal dispute involving CEO Elon Musk and his controversial pay package of US$55.8 billion in March 2023. As states vie for corporate registrations, Canada emerges with a competitive edge in corporate governance.

The legal battles in Delaware, particularly those affecting Musk’s compensation, have sparked a broader conversation about the protections afforded to shareholders. Delaware has long been the preferred state for incorporation, hosting over half of U.S. publicly traded companies, including around two-thirds of Fortune 500 firms. In recent years, about 90 percent of U.S.-based initial public offerings (IPOs) have featured Delaware-incorporated entities. The state’s corporate fees and associated business activities generate significant revenue, making the potential loss of its corporate dominance a serious concern for local lawmakers.

In response to the troubling trend of Dexit, Delaware lawmakers have made swift amendments to corporate statutes to retain companies. Yet, experts caution that the changes may not serve the long-term interests of shareholders. John Coates, a law and economics professor at Harvard, remarked that this could signify a shift away from protecting shareholder rights. Similarly, Alan Jagolinzer, a financial accounting professor at Cambridge, characterized the situation as indicative of a severe crisis in information and accountability.

As Texas and Nevada move to attract companies fleeing Delaware, they have begun to ease shareholder protections. For instance, Texas has implemented measures making it more difficult for small shareholders to initiate lawsuits against directors for breaches of fiduciary duties. Nevada has similarly made it harder for minority shareholders to challenge perceived undue influence from larger shareholders.

While larger shareholders may benefit from these relaxed regulations, the implications for companies and smaller shareholders could be detrimental. This environment creates a unique opportunity for Canada, which maintains strong corporate governance standards. Unlike Delaware and Texas, Canadian regulations ensure that the fiduciary duties of directors cannot be waived. Shareholders in Canada also enjoy protections under the “oppression” remedy, which safeguards their reasonable expectations along with those of creditors and other stakeholders.

Canadian corporate law emphasizes informed decision-making and director independence, aiming to prevent conflicts of interest. Moreover, regulators in Canada possess broad “public interest” powers to intervene when they believe shareholders’ interests are at stake. This includes ensuring adequate public disclosures amid potential conflicts.

With the policies of the second Trump administration and the current U.S. landscape, Canada faces a competitive battle for investment capital. The rise of Dexit underscores the importance of Canada’s robust corporate governance as a key selling point to investors. Canadian companies should recognize this advantage and leverage it to attract both current and potential shareholders, particularly in a market where U.S. firms are reconsidering their incorporation strategies.

As the landscape evolves, the potential for Canada to emerge as a haven for corporate governance presents a compelling narrative in the global investment arena.