Ted Orr
On February 14, 2024, Elon Musk announced via X that his space exploration company, SpaceX, transferred their incorporation from Delaware to Texas.[1] This move comes on the heels of a decision in the Delaware Court of Chancery that denied Musk’s $56 billion Tesla compensation package.[2] In the 201 page opinion, Judge Kathaleen McCormick labeled the desired figure an “unfathomable sum,”[3] ultimately ruling that rescission was warranted.[4] On the same day that the opinion was released, Musk took to X urging his followers to “[n]ever incorporate your company in the state of Delaware,”[5] and recommended “incorporating in Nevada or Texas if you prefer shareholders to decide matters[.]”[6] In the following weeks, Musk took heed of his own advice, converting the incorporation of SpaceX to Texas[7], and his brain chip company Neuralink to Nevada.[8]
Delaware’s Prowess and Others Challenge
Delaware is regarded as the premier choice for business incorporation.[9] As of 2022, over 1.9 million legal entities and 68.2 percent of Fortune 500 companies were incorporated in Delaware.[10] Scholars attribute this dominance to (1) its business friendly laws; (2) a sophisticated judiciary that is well suited to handle complex corporate disputes; and (3) a healthy body of caselaw that garners predictable results.[11]
Lawyer preference is an additional supporting factor in Delaware’s corporate prowess. A 2012 survey found that lawyers involved with Initial Public Offerings (“IPO”) recommend incorporating in Delaware more than 70 percent of the time.[12] In reporting these finding, Professor William J. Carney contends that the draw to Delaware is attributable to the lack of expertise and knowledge that attorneys possess in corporate law outside of Delaware and their home state.[13] This proclivity may lead lawyers to recommend Delaware incorporation, even when there are more favorable laws in other states, simply because Delaware’s corporate law is where the practitioner’s expertise and familiarity lies.[14]
Other states are competing for Delaware’s position by revisiting their corporate laws to attract incorporation.[15] For example, in the late 1980’s, Texas amended the Texas Business Corporation Act (“TBCA”) with business friendly provisions, such as limiting the liability of directors, updating and clarifying the rights and obligations of shareholders, and simplifying distribution provisions.[16] In more recent history, Wyoming has tried to secure the incorporation of digital asset companies by enacting favorable legislation and establishing a “blockchain-dedicated” chancery court.[17] Nevada is one of the most notable contenders, with “shockingly lax corporate law”[18] and protection of directors and officers from liability resulting from breaches of fiduciary duties.[19] Texas has also signaled their challenge by establishing business courts–set to open in September of 2024–to “hear certain types of complex commercial disputes.”[20]
Challenging states have had limited success in unseating Delaware[21], but Musk’s recent withdrawals have placed the issue on center stage. Musk’s removal of SpaceX and Neuralink begs the question of whether he will remove his flagship enterprise, Tesla, out of Delaware and trailblaze a mass exodus.
Tesla’s Withdrawal?
One of the biggest hurdles Musk faces in his pursuit of Tesla’s reincorporation is the required shareholder vote.[22] Comparing Nevada and Texas reincorporation, UVA School of Law Professor Michal Barzuza notes that “[a] move home to Texas would be easier to sell to shareholders than a move to Nevada . . . given that Texas is not as protective to management and directors as Nevada is.”[23] Musk seemingly recognized this reality. On January 30, the same day that the Delaware Court of Chancery opinion was released, Musk prompted his 175 million followers to vote on whether Tesla should move its incorporation in Texas, resulting in 87.1 percent voting in the affirmative.[24]
Even if Musk gets the votes and moves Tesla to Texas, others are unlikely to follow his lead. Professor Barzuza notes that “Delaware offers a balanced law with some protections and some accountability.”[25] These protections benefit shareholders and ensure market integrity.[26] Lawrence Cunningham, an expert in corporate governance, asserts that “[t]here will be neither a stampede nor a trickle[]” out of Delaware.[27] Harvard professor John Coates notes that this is not the first time Delaware has received backlash from corporate executives[28], and yet Delaware still remains on top. While Musk and his supporters are happy to see Delaware in the rearview, its seat at the head of the table is likely not in jeopardy.
Conclusion
It appears that Delaware will remain the nation’s capital of incorporation for the foreseeable future. While Elon Musk’s stature allows him to bring this conversation to the front pages, Delaware’s predictable corporate law, coupled with its wide acceptance among lawyers, will likely dampen any tremors from Musk’s departures.
[1] Elon Musk (@elonmusk), X (Feb. 14, 2024, 7:27 PM), https://twitter.com/elonmusk/status/1757924482885583112?lang=en (posting a photo of SpaceX’s Certificate of Conversion to Texas and stating “[i]f your company is still incorporated in Delaware, I recommend moving to another state as soon as possible.”).
[2] Tom Hals, Judge Voids Elon Musk’s ‘Unfathomable’ $56 Billion Tesla Pay Package, Reuters (Jan. 31, 2024), https://www.reuters.com/legal/judge-rules-favor-plaintiffs-challenging-musks-tesla-pay-package-2024-01-30/.
[3] Tornetta v. Musk, No. 2018–0408-KSJM, at 180 (Del. Ch. Jan. 30, 2024).
[4] See id. at 196; see also Hals, supra note 2.
[5] Elon Musk (@elonmusk), X (Jan. 30, 2024, 5:14 PM), https://twitter.com/elonmusk/status/1752455348106166598?lang=en.
[6] Elon Musk (@elonmusk), X (Jan. 30, 2024, 7:17 PM), https://twitter.com/elonmusk/status/1752486201083543842?lang=en.
[7]See Musk, supra note 1.
[8] See Akash Sriram, Musk’s Neuralink Switches Location of Incorporation to Nevada, Reuters (Feb. 9, 2024), https://www.reuters.com/business/musks-neuralink-switches-location-incorporation-bloomberg-news-2024-02-09/.
[9] See William J. Carney et al., Lawyers, Ignorance, and the Dominance of Delaware Corporate Law, 2 Harv. Bus. L. Rev. 123, 124 (2012).
[10] Annual Report Statistics, Del. Div. of Corps, https://corp.delaware.gov/stats/ (last visited Mar. 2, 2024).
[11] See Stephanie S. Rojo, Delaware Versus Texas Corporate Law: How does Texas Compare?, 3 Hous. Bus. & Tax. L. J. 290, 291 (2003); Bryan F. Egan, Choice of State of Incorporation–Texas Versus Delaware: Is it Now Time to Rethink Traditional Notions?, 54 SMU L. Rev. 249, 250 (2001).
[12] Carney, supra note 9 at 134.
[13] See id. at 135.
[14] See id. at 136 (noting that “Delaware has only to compete with the Lawyer’s home state, rather than will all fifty jurisdictions.”).
[15] Robert Anderson IV, The Delaware Trap: An Empirical Analysis of Incorporation Decisions, 91 S. Cal. L. Rev. 657, 660 (2018).
[16] Egan, supra note 11 at 251 (listing the changes to the TBCA).
[17] Pierluigi Matera, Delaware’s Dominance, Wyoming’s Dare: New Challenge, Same Outcome?, 27 Fordham J. Corp. & Fin. L. 73, 79 (2022).
[18] Id. at 98 (quoting Michal Barzuzu, Market Segmentation: The Rise of Nevada as a Liability-Free Jurisdiction, 98 Va. L. Rev. 935, 935 (2012).
[19] Id.
[20] Welcome to Texas: Texas Governor Signs Law Creating Specialized Business Courts, Sidley Austin LLP (Jun. 12, 2023), https://www.sidley.com/en/insights/newsupdates/2023/06/welcome-to-texas_texas-governor-signs-law-creaing-specialized-business-courts.
[21] See Matera, supra note 17at 97–98 (noting North Dakota’s abandonment of its attempt, and Connecticut’s conclusion that “Delaware was too hard . . . to dethrone[.]”).
[22] See Melissa Castro Wyatt, Professor Looks at Why Tesla May Settle in Texas, While X found its Spot in Nevada, Univ. of Va. Sch. of L. (Feb. 15, 2024), https://www.law.virginia.edu/news/202402/professor-looks-why-tesla-may-settle-texas-while-x-found-its-spot-nevada.
[23] Id.
[24] Elon Musk (@elonmusk) X (Jan. 30, 2024, 7:40 PM), https://twitter.com/elonmusk/status/1752491924848820595.
[25] See Wyatt, supra note 22.
[26] See id. (noting that Professor Barzuza sees Delaware’s corporate law protections “as a boon to the shareholder and market integrity.”).
[27] Kelsey Vlamis, Elon Musk May be Done with Delaware, But Don’t Expect Other Corporations to Follow his Crusade, Bus. Insider (Feb. 21, 2024 6:06 PM), https://www.businessinsider.in/tech/news/elon-musk-may-be-done-with-delaware-but-dont-expect-other-corporations-to-follow-his-crusade/articleshow/107896153.cms#:~:text=follow%20his%20crusade-,Elon%20Musk%20may%20be%20done%20with%20Delaware%2C%20but%20don%27t,corporations%20to%20follow%20his%20crusade&text=Elon%20Musk%20is%20moving%20SpaceX,Delaware%20because%20of%20Musk%27s%20rhetoric.
[28] Id. (quoting John Coates: “Over the past 100 years, Delaware has periodically irritated one or two executives by enforcing the law, and even led some prominent lawyers to call for companies to move elsewhere from time to time[.]”).