Elon Musk and Tesla Lead Revolt Against Delaware’s Hold On Incorporations, Washington Post Reports

OPINION 

Elon Musk and Tesla Lead Revolt Against Delaware’s Hold On Incorporations, Washington Post Reports 

Dear Friends,

JUDSON Bennett–Coastal Network

Delaware’s grip on corporations seemed solid. Elon Musk led a revolt.

The state built its identity — and its budget — on being home to the world’s largest companies. But after Tesla took off for Texas, it’s scrambling to change its laws.

A revolt led by tech billionaires has Delaware scrambling to preserve its lucrative status as the corporate home of the American business world.

A year after a Delaware judge ordered Tesla to revoke Elon Musk’s $56 billion pay package, prompting him to relocate his companies’ incorporation to Texas and Nevada, reports that other prominent firms might follow his lead have sparked a potential crisis for the state.

Gov. Matt Meyer, in his second month on the job, faces the task of persuading billionaires such as Meta CEO Mark Zuckerberg and hedge fund manager Bill Ackman to keep their companies incorporated in Delaware while reassuring voters that he isn’t giving away the store.

That is proving to be no mean feat. Meyer, a Democrat, and top lawmakers have quickly crafted an overhaul to prevent an exodus. But the package has raised alarms from legal experts who say the changes could curtail corporate accountability — especially after it emerged that they were drafted in part by an attorney whose law firm represents Tesla.

At stake are the laws that set the terms of accountability for leaders of many of the world’s largest and most powerful companies, as well as the future of a state whose identity — and budget — are bound up with them.

“This is the time we need to take action so that we will remain the corporate capital of the world,” said Delaware’s secretary of state, Charuni Patibanda-Sanchez.

Along came Musk

Until recently, Delaware’s grip on that status seemed secure. Most Fortune 500 companies are incorporated there, bringing in some $2 billion a year in corporate franchise taxes — more than a third of the state’s annual revenue and a big reason it has no sales tax.

The state’s leaders refer to businesses that incorporate there as “customers.” A core service Delaware provides them is a specialized business court, the Delaware Court of Chancery, which puts power over most corporate lawsuits in the hands of expert judges rather than juries. The arrangement, experts say, speeds up the litigation process and reduces companies’ risk of unpredictable and perhaps ruinous trial outcomes.

Companies have occasionally complained about the system over the years, but few have left. Then came Musk, whose unorthodox business practices have landed him at the chancery court with increasing frequency in recent years.

In 2022, he won a case brought by Tesla shareholders who accused him of orchestrating a sweetheart deal to buy his cousin’s struggling solar panel company, SolarCity. But later that year, a new top judge — Chancellor Kathaleen McCormick, the first woman to hold the position — took a hard line on Musk’s efforts to wriggle out of his offer to buy Twitter, prompting the billionaire to go through with the purchase after all.

In a separate case decided in January 2024, McCormick struck down a pay package Tesla granted Musk in 2018, which had become worth an estimated $56 billion. She ruled that Musk had used his influence over Tesla’s board to enrich himself at the expense of the company’s shareholders.

“Never incorporate your company in the state of Delaware,” Musk said on X after that ruling. Weeks later, his company SpaceX moved its incorporation from Delaware to Texas, and Tesla followed suit in June.

The electric car company held a new shareholder vote on Musk’s pay package, which passed, but McCormick declined in December to reinstate it. Musk and Tesla have appealed the case to Delaware’s Supreme Court.

Musk’s exit from Delaware turned heads in the tech world but didn’t initially alarm the state’s legal establishment.

“I don’t see it getting serious traction,” Lawrence Hamermesh, professor emeritus at Widener University’s Delaware Law School, told The Washington Post at the time. “He’s sort of a one-off.”
Less than a year later, that confidence has collapsed.

On Jan. 31, the Wall Street Journal reported that Meta, the parent company of Facebook, Instagram and WhatsApp, was considering its own Delaware exit — or “Dexit,” as corporate wags have dubbed it — with Texas a possible destination. The report came days after Zuckerberg said the company would move its trust and safety workers from California to Texas because of concerns about liberal bias, partly in response to Donald Trump’s election as president. (Meta has declined to comment on the Journal’s report.)

That same day, cloud giant Dropbox filed to move its incorporation from Delaware to Nevada. The following morning, Feb. 1, the outspoken investor Ackman announced on X that his hedge fund, Pershing Square Capital Management, planned to leave Delaware, as well.

“Top law firms are recommending Nevada and Texas over Delaware,” Ackman said, though he added in a follow-up post that “we haven’t made a final decision.”

Delaware wasn’t always the country’s corporate capital. It snatched that title from New Jersey in the 1910s after that state passed more restrictive laws, influenced by the trustbusters of the era.

“For generations, most of America’s companies have picked Delaware as their corporate home, which has allowed us to help fund everything from our schools to our first responders to the infrastructure that helps support every part of our state,” Meyer said in an emailed statement.

Now it’s Delaware that fears losing its edge to Republican-led states such as Texas and Nevada, which have copied many of its legal features but positioned themselves as friendlier to companies’ top officials. That has emerged as a selling point for some tech companies, which are often steered by a single founder/CEO or by major venture capital investors.

An ‘emergency situation’

In the state capital, Dover, the real and threatened departures set off alarm bells. Democrats have controlled the legislature and governor’s office since 2009, presiding over the state of fewer than 1 million residents — and some 1.5 million corporations — with a pragmatic, clubby approach that some call “the Delaware way.”

“There was an immediate huddling up of top Delaware leaders, of what it might mean,” said the state’s Senate majority leader, Bryan Townsend (D). A decision was quickly made to “go out and canvass the market and find out how broad or deep the concerns about Delaware law might be.”
Patibanda-Sanchez, the secretary of state, embarked on what she called a “listening tour” with corporate leaders and lawyers. She said it quickly became clear to her that Delaware could be facing an exodus if it didn’t act quickly — perhaps as soon as April, when companies around the country convene shareholder meetings.

Changes to Delaware’s corporate laws are usually drafted by the state’s bar association. To speed the process, Meyer and Townsend, both lawyers, called on a small, handpicked group of Delaware corporate law luminaries to draft proposed legislation.

The group proposed three main changes to the state’s corporate laws: limit who can be considered a “controller” of a corporation; curb minority shareholders’ access to company records, such as emails between its officials; and cap the fees plaintiffs’ attorneys can be awarded when they win a case.
Together, those changes would shift the balance of power toward a company’s key figures and away from its minority shareholders.

But within days of introducing the proposal, the group faced an outcry.
Zeberkiewicz’s firm had defended Tesla in the case challenging Musk’s pay, prompting charges of a conflict of interest. Some aspects of the bill also seemed to open the door to the Delaware Supreme Court reinstating Musk’s pay package.

“The bill was drafted by Elon Musk’s lawyers outside the normal deliberative process,” said Jeroen van Kwawegen, a partner at the law firm Bernstein Litowitz Berger & Grossmann LLP and one of the leaders on the case that nullified Musk’s package. “It is deeply hostile to Delaware’s expert judiciary … while giving corporate insiders a license to steal from public investors.”

Several people directly involved in the process said such claims mischaracterize the bill’s intent and Zeberkiewicz’s role.