MUSK, TESLA AND DELAWARE CORPORATE LAW: THE RENEGADE VS. THE ESTABLISHMENT

Author: Benjamin Wehrle, Senior Editor

On January 30, 2024, the Delaware Court of Chancery released its decision denying Elon Musk the compensation package he was seeking from Tesla for his work as its CEO.[i] The Court found that the compensation package was not made in fair dealing and was excessive in its amount.[ii] Despite the Court of Chancery’s decision, Tesla’s shareholders approved the massive $46 billion pay package.[iii] Additionally, Tesla’s shareholders voted to change Tesla’s state of incorporation from Delaware to Texas.[iv] Should Tesla follow through with this move, it would be venturing into unknown waters.

Approximately 68% of all Fortune 500 companies and 93% of all Initial Public Offerings in the United States are registered as Delaware corporations for seemingly valid reasons.[v] Corporations that do not do business in Delaware do not have to pay corporate income tax to the state of Delaware.[vi] Delaware’s corporate law allows for a broader degree of privacy as corporate officers and directors do not have to disclose their identities.[vii] In Delaware, one can complete the incorporation process within a single day and one person can be a director, officer and shareholder.[viii] That can only be accomplished in most other states by forming a sole proprietorship or a Limited Liability Company.

Most importantly, Delaware has the Court of Chancery, a court stocked with judges who specialize in corporate law.[ix] Delaware’s Court of Chancery has well-established case law and precedent that very few other states have.[x] As of 2020, only 25 states have business courts.[xi] Unlike Delaware’s Court of Chancery, which has been around for over 200 years, other states only started developing business courts starting in the 1990’s and onward.[xii] Even then, many of the states that have business courts only have them in specific counties rather than the whole state.[xiii]

It would seem elementary for any major corporation or promising startup to incorporate in Delaware. However, Elon Musk disagrees.[xiv] After Musk was denied his $46 billion compensation package by the Court of Chancery because it was viewed as substantively unfair to the company, Tesla’s shareholders moved to approve the compensation package and reincorporate their headquarters in Texas.[xv] To attract corporations, Texas has set up its own specialized business court system.[xvi] Also, various financial firms have collaborated to create a Texas-based stock exchange in response to discontent with the new rules and rising regulatory costs at the NASDAQ and the NYSE stock exchanges.[xvii]

In addition to the recent actions in Texas, other states have made similar moves. Nevada has extensively attempted to market itself as a viable alternative to Delaware.[xviii] Nevada touts its low filing fees, accessibility of state lawmakers to businesspeople and support of controlling shareholders in conflict with minority shareholders.[xix] The travel company TripAdvisor recently made the decision to move to Nevada[xx] Though, there are some drawbacks to Nevada as its business courts are divided into districts in Las Vegas and Reno, which could create conflicting interpretations of corporate law.[xxi] Also, their opinions are unpublished and the courts work on non-business cases, slowing down the process.[xxii]

It is clear that other states are trying to incentivize businesses to move away from established corporate strongholds in America. Incorporating in new states also has its own risks as these states lack the consistency and predictability of the courts and corporate law in Delaware. Tesla argues that their company is built on doing new things, so traditional corporate law is not a good fit for them.[xxiii] This could potentially be the beginning of an exodus from Delaware as companies seek better opportunities and become dismayed with Delaware’s case law and restrictions. Tesla and Musk are daring to "boldly go where no man has gone before,"[xxiv] and their decision may encourage other businesses to do the same in the future.

[i] See Tornetta v. Musk, 310 A.3d 430 (Del. Ch. 2024).

[ii] Id.

[iii] David Ingram, Elon Musk wins Tesla shareholder vote for $56 billion pay package, NBC NEWS (June 13, 2024), https://www.nbcnews.com/tech/tech-news/elon-musk-wins-tesla-shareholder-vote-56-billion-pay-package-rcna156892.

[iv] Id.

[v] Chauncey Crail and Rob Watts, Why Incorporate In Delaware? Benefits & Considerations, FORBES ADVISORS (Feb. 15, 2024), https://www.forbes.com/advisor/business/incorporating-in-delaware/.

[vi] Id.

[vii] Id.

[viii] Id.

[ix] Id.

[x] Id.

[xi] Lee Applebaum, et al., Through the Decades: The Development of Business Courts in the United States of America, 75 THE BUS. LAWYER 2053, 2057 (2020).

[xii] Id.

[xiii] Id. at 2072-76.

[xiv] Elon Musk (@elonmusk), X (Jan 30, 2024, 5:14 PM), https://twitter.com/elonmusk/status/1752455348106166598?lang=en.

[xv] Ingram, supra note iii.

[xvi] Theo Francis, The Big Loser in Tesla’s Shareholder Vote Is Delaware, WALL STREET JOURNAL (June 16, 2024, 5:30 AM), https://www.wsj.com/business/tesla-texas-incorporation-delaware-edcbd0dd.

[xvii] Martin Slipczuk, Financiers plan to launch a Texas-based stock exchange, THE TEXAS TRIBUNE (June 5, 2024), https://www.texastribune.org/2024/06/05/texas-stock-exchange/.

[xviii] Elon Musk is not alone in having Delaware in his sights, THE ECONOMIST (Mar. 24, 2024), https://www.economist.com/business/2024/03/14/elon-musk-is-not-alone-in-having-delaware-in-his-sights.

[xix] Id.

[xx] Id.

[xxi] Id.

[xxii] Id.

[xxiii] Francis, supra note xvi.

[xxiv] STAR TREK: THE ORIGINAL SERIES (Paramount Pictures 1968).