Tesla CEO Elon Musk has had enough of Delaware after a state court ruling voided his $55.8 billion pay package. Musk said last night that Tesla will hold a shareholder vote on transferring the electric carmaker’s state of incorporation to Texas.
Musk had posted a poll on X (formerly Twitter) asking whether Tesla should “change its state of incorporation to Texas, home of its physical headquarters.” After over 87 percent of people voted yes, Musk wrote, “The public vote is unequivocally in favor of Texas! Tesla will move immediately to hold a shareholder vote to transfer state of incorporation to Texas.”
Tesla was incorporated in 2003 before Musk joined the company. Its founders chose Delaware, a common destination because of the state’s low corporate taxes and business-friendly legal framework. The Delaware government says that over 68 percent of Fortune 500 companies are registered in the state, and 79 percent of US-based initial public offerings in 2022 were registered in Delaware.
One reason for choosing Delaware is the state’s Court of Chancery, where cases are decided not by juries but by judges who specialize in corporate law. On Tuesday, Court of Chancery Judge Kathaleen McCormick ruled that Musk’s $55.8 billion pay package was unfair to shareholders and must be rescinded.
McCormick’s ruling in favor of the plaintiff in a shareholder lawsuit said that most of Tesla’s board members “were beholden to Musk or had compromising conflicts.” McCormick also concluded that the Tesla board gave shareholders inaccurate and misleading information in order to secure approval of Musk’s “unfathomable” pay plan.
Musk a fan of Texas and Nevada
Musk yesterday shared a post claiming that McCormick’s ruling “is another clear example of the Biden administration and its allies weaponizing the American legal system against their political opponents.”
McCormick previously oversaw the Twitter lawsuit that forced Musk to complete a $44 billion purchase despite his attempt to break a merger agreement. After Musk became Twitter’s owner, he merged the company into X Corp., which is registered in Nevada.
“Never incorporate your company in the state of Delaware,” Musk wrote in a post after the Delaware court ruling. “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters,” he also wrote.
Last year, Texas enacted a law to create business courts that will hear corporate cases. The courts are slated to begin operating on September 1, 2024. Musk is clearly hoping the new Texas courts will be more deferential to Tesla on executive pay if the company is sued again after his next pay plan is agreed on.
Tesla shareholders who will be asked to vote on a corporate move to Texas “need to take a hard look at how transitioning out of Delaware might impact their rights and the company’s governance,” Reuters quoted business adviser Keith Donovan as saying.
Reuters quoted AJ Bell investment analyst Dan Coatsworth as saying that “Elon Musk’s plan to change Tesla’s state of incorporation from Delaware to Texas is typical behavior for the entrepreneur who always looks for an alternative if he can’t get what he wants.”