After a Delaware judge struck down Elon Musk’s $56 billion Tesla compensation package, Musk put the state in his crosshairs with a series of posts encouraging companies to flee America’s corporate kingdom, as he hopes to do with Tesla. Given Musk’s influence, are his actions a real threat to Delaware?
Around 2 million companies are incorporated in Delaware, including 68% of Fortune 500 companies. Incorporated businesses outnumber people in Delaware by a ratio of 2-to-1.
“The business of this state is corporate regulation; a good chunk of our tax revenue comes from that. It’s in the state’s interest to get the answer right,” said Charles Elson, a leading authority on corporate governance and founding director of the Weinberg Center for Corporate Governance at the University of Delaware.
The big reason so many companies choose to incorporate in Delaware is the Court of Chancery, Musk’s latest target.
Striking down Musk’s record-breaking compensation
Elson said Chancellor Kathaleen McCormick’s decision to void Musk’s CEO pay package is unusual and surprising but not unfounded.
“The judge’s concern was that the disclosure to the shareholders about this package was inadequate, that there are serious flaws she felt in the process, the independence of the directors, how the thing came together,” Elson said. “And she felt that had disclosure been more accurate, the shareholders may not have approved it.”
In 2018, 73% of shareholders approved the CEO’s pay package, excluding votes by Musk and his family. After hitting set targets in the coming years, the deal’s value hit around $56 billion, which McCormick called “an unfathomable sum.” That’s roughly the market cap of all of Tesla back when shareholders first approved the compensation plan. Tesla’s market cap is now more than 10 times that.
“Is it really, quote-unquote, a transfer of funds for services rendered? Or is it more of a gift?” Elson said. “The larger the amount becomes, the more questionable the compensation for services rendered becomes.”
Musk’s relations to Tesla directors questioned
McCormick cited Musk’s extensive ties to members of Tesla’s board of directors in her decision, questioning the board’s independence. Then, the Wall Street Journal published an exposé on the money and drugs that tie Musk to some directors.
Musk hit back at the newspaper, calling them liars and trash not fit to line a birdcage. He noted that he has passed every random drug test in the past three years as part of an agreement between NASA and SpaceX.
Musk and X army v. the state of Delaware
Since his court defeat, Musk has not only vowed to incorporate Tesla in Texas with shareholder approval but has strongly encouraged other companies to leave Delaware as well.
With 172 million followers on his platform X, it is realistic to question whether his influence will impact Delaware’s status as the country’s corporate paradise.
“I think whether you win or lose in Delaware, you do get a fair shake,” Elson said. “[Musk] didn’t seem too upset with Delaware when he won the Solar City case a few years ago.”
Why Delaware is the chosen state of incorporation
“The fundamental advantage is this judicial system and this body of very well-developed corporate law,” Elson said.
The Delaware Court of Chancery dates back to 1792 but didn’t hit its corporate stride until more than a century later. In 1899, Delaware copied favorable business laws from New Jersey, which at the time was the country’s de facto corporate home.
In 1913, future President Woodrow Wilson, then New Jersey’s governor, passed a series of laws perceived to be anti-business. In response, corporations fled across the river to Delaware, where they remain today.
“North Dakota has a corporate statute that some say is more shareholder-friendly than Delaware; Nevada has a corporate statute that some say is a little more managerial-friendly than Delaware,” Elson explained. “But you still haven’t seen a flocking of companies to those jurisdictions because a statute can’t lay out every rule and regulation for corporate conduct. It has to really be interpreted by judges through a common law process.”
In Delaware and its dedicated business court system lies a large body of precedent developed over many years, Elson said.
“There are not that many situations here that haven’t come up before,” he added.
But now Delaware is coming up against a CEO who happens to be one of the richest people in the world (Musk dropped to No. 2 on Forbes’ Billionaires List after his compensation package was voided). Now, Musk is looking to Texas for a fresh start.
“I think it would be rather insulting to Texas judges to suggest that they would have done something differently had they found the same facts. You can’t go forum shopping, if you will, for a friendly judge, or if you do, it’s not the right thing to do,” Elson said.
Musk eyeing Texas comes at an interesting time. Last year, Texas Gov. Greg Abbott signed a law to create specialty business courts to rival Delaware. But those courts won’t be in session until September 2024 at the earliest.
