Delaware business courts have burned Musk twice, now he’s looking for friendlier rulings by reincorporating in Texas
February 1, 2024 at 13:20
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Elon Musk has revealed his plans to conduct a shareholder vote to reincorporate Tesla in Texas, as revealed in a poll on his social media platform, X (formerly Twitter). This move follows a recent legal setback related to his $56 billion compensation package in Delaware, where the company is currently incorporated, with the judge characterizing the payout as “unfathomable.”
The legal loss prompted Musk to post “Never incorporate your company in the state of Delaware.” In another post, he wrote, “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters.”
Musk’s posts follow a ruling handed down on Tuesday by Delaware judge Kathaleen McCormick. Per Reuters, she ruled that the CEO’s 2018 share-based pay package worth $55.8 billion, the largest in corporate America, was unfair to Tesla shareholders and found that it had been negotiated by a board of directors who appeared to be beholden to their CEO.
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If Musk goes through with the move, it would be just his latest attempt to shift more of the company to Texas. He moved Tesla’s headquarters out of California and into the state in 2021, and the Wall Street Journal reports that he has been working to build his own company town outside Austin where his employees could live and work.
Relocating to Texas could offer advantages for Musk and Tesla, especially with the state’s favorable business court and tax laws. However, it’s worth noting that attempting to reincorporate in Texas may lead to legal challenges from shareholders who might raise concerns or objections to the move. This could potentially result in legal action against Musk and Tesla, even if the EV maker’s CEO is confident in shareholders’ preference for the Lone Star State.
Read: Elon Musk’s ‘Unfathomable’ $55.8 Billion Tesla Pay Package Blocked By Judge
TripAdvisor is currently being sued by shareholders over its decision to move its state of incorporation from Delaware to Nevada. More than 65 percent of Fortune 500 companies and half of all publicly traded American companies are incorporated in Delaware due to the state’s business-friendly tax policies, its courts, and, importantly in this scenario, the protections it offers investors.
Should Tesla change its state of incorporation to Texas, home of its physical headquarters?
— Elon Musk (@elonmusk) January 31, 2024
However, Musk has been increasingly interested in consolidating his control over Tesla. On X, he recently revealed that he would like to control 25 percent of the company, nearly doubling his current stake. This, coupled with the timing of his decision shortly after a legal defeat in Delaware, may lead investors to perceive his actions as driven by self-interest rather than the company’s best interests.
The perception that this is a personal matter for Musk could be challenging to shake off. Judge McCormick is the same judge who ruled against the CEO after he tried to back out of his proposal to buy Twitter, which he has since renamed X.
The decision was a major blow to Musk, piercing his image as a brilliant businessman and forcing him to sell Tesla shares, which ultimately weakened his control over the company. In addition to posting about his hope to reincorporate, he also shared a post calling Judge McCormick’s independence into question, and linking her to a conspiratorial plan to disempower him allegedly launched by the Bidens.
