Why is Elon Musk so mad at Delaware?
Delaware Chancery Court judge Kathaleen McCormick ruled against a Tesla shareholder-approved pay package that would have awarded Musk $56 billion.
Elon Musk wants to move more of his companies’ legal work out of Delaware, after a pair of decisions by the top Chancery Court judge in the state cost him $100 billion, at least on paper.
Musk, a South Africa native and University of Pennsylvania grad, is stinging from last week’s 201-page ruling by Chancellor Kathaleen McCormick, derailing a $56 billion Tesla pay package. Though that fortune was approved by shareholders, the judge says they appeared to be acting with Musk’s interests, not the company’s, in mind. The suit objecting to the pay package for Musk — who until last week held the title of richest man in the world — was filed in 2018 by Wilmington lawyer Gregory Varallo on behalf of Richard J. Tornetta, a Tesla shareholder and Norristown native who formerly played drums in a thrash-metal band, the Lords of Correction.
McCormick is the same judge who ruled in a 2021 case that forced Musk into honoring his pledge to buy Twitter for $44 billion after he tried to back out.
Now, less than a year after Musk renamed Twitter as “X” and moved the social media site’s legal home to Nevada from Delaware, Musk posted a string of anti-Delaware messages on the site, announcing his intention to recharter Tesla from Delaware to Texas, and urging businesses to avoid incorporating in Delaware.
The state is the legal home to most of the nation’s publicly-traded companies, and it draws about a third of its yearly budget from corporate fees and related income. Delaware bills itself as “America’s Corporate Capital.”
Never incorporate your company in the state of Delaware— Elon Musk (@elonmusk) January 30, 2024
Musk said he will call on Tesla shareholders (he is by far the largest, with Malvern-based Vanguard Group’s clients a distant second) to approve moving its corporate charter from Delaware to Texas.
The company’s head offices relocated to Texas from California in 2021 after Musk criticized the Golden State’s high levels of regulation, taxes, and COVID restrictions. Last September, Texas enacted a law establishing its own separate business courts.
Musk said he’s not the only billionaire frustrated by Delaware cases. TripAdvisor, a large but money-losing travel company controlled by telecom baron John Malone, who also owns West Chester-based QVC and other media companies, is fighting shareholder challenges to its decision to reincorporate in Nevada.
Change your state of incorporation out of Delaware before they lock the doors.— Elon Musk (@elonmusk) February 1, 2024
They are currently blocking John Malone from changing incorporation from Delaware to Nevada.
Seeking a friendly state
Musk characterized the potential exit from Delaware as a pro-shareholder move, noting McCormick’s decision had, effectively, overruled Tesla shareholders’ approval.
But legal scholars say Delaware is the more obviously pro-shareholder state.
“Nevada has clearly tried to set itself up as pro-management,” said professor Jill E. Fisch, of the University of Pennsylvania law school. “Delaware has tried very hard to provide an appropriate balance of giving directors flexibility while protecting shareholder interest.”
Shareholders and their counsel have long appreciated the difference: Nevada has only attracted “a trickle” of large companies, Fisch said, and TripAdvisor’s attempt to move there “has faced allegations of self-interest and self-dealing” by the company’s management, leading to the litigation that has held up the charter move.
The Texas Business Court, scheduled to debut this fall, is to feature state-appointed judges, as in Delaware. But unlike Delaware’s Chancery, the Texas Business Court will allow parties to request jury trials. And plaintiffs who sue companies will be able to choose a venue from the state’s 254 counties — some of which have been favored by plaintiff’s lawyers for their historically antibusiness verdicts.
The provision for jury trials would “make the Texas court system relatively unattractive” compared to Delaware,” said Lawrence Hamermesh, emeritus professor at Delaware Law School.
Hamermesh noted that when billionaire investor Carl Icahn (who owns Philadelphia-based Pep Boys, Cottman Transmissions, and many other companies) tried to make North Dakota an incorporation center, “that went over like a frozen lead balloon.”
Delaware’s appointed judges are chosen, typically from the corporate bar, as “experts” in corporate law, “and that means they are predictable and move quickly,” said Ann Lipton, a professor at Tulane University’s law school in New Orleans, who has written about Musk’s corporate travails.
The Musk effect
Musk’s “casual” approach to rules and precedents, his defiance of regulators, and his history of taking on “outrageous challenges” and “impossible goals” instead of warning investors away has actually boosted share prices “by pleasing Musk fans,” Lipton added. (Tesla shares have fallen by half since the stock’s 2021 peak, but the company is still worth five times larger rivals GM and Ford, combined, because its sales are growing faster than theirs.)
Still, Lipton notes that commentators worry Musk’s personal “star power” might not boost shares indefinitely. Musk’s high-handed ways have provoked a steady stream of challenges from dissident shareholders and outside critics — for behavior including “conscripting” Tesla workers to other businesses he controls (at shareholders’ expense); alleged illegal pollution; and Musk’s tight, potentially controlling ties to board members. McCormick found that those ties should have been made clearer to shareholders before they voted in favor of his $56 billion in compensation.
Musk is considering, not just law, but politics, in this campaign, Lipton told The Inquirer. “Texas politicians have been very vocal” about opposing restrictions on corporate social and environmental policies, and Musk seems to expect that “appointed judge in Texas will therefore be personally sympathetic” in future cases. (Musk fans, noting that Delaware is a Demoratic-run state and the home of President Joe Biden, have been quick to argue that judges in such a place could let politics trump legal principle in stymieing Musk. Delaware insists its system is nonpartisan.)
Lipton concludes that Musk’s expensive Delaware court losses “would not have happened if Tesla had at least adhered to the basic formalities and appearances of ordinary corporate governance. Most corporate executives don’t have a problem with that.”