Elon Musk recently filed paperwork to convert the incorporation of his rocket manufacturing company SpaceX from Delaware to Texas.
The move came after the Delaware Court of Chancery issued its decision rejecting Mr. Musk’s nearly $56 billion compensation plan with Tesla. In late January, Delaware Chancellor Kathleen St. J. McCormick ruled that the process leading to the approval of his pay package was “deeply flawed” and “unfair.”
“Never incorporate your company in the state of Delaware,” Mr. Musk wrote on X after the court’s decision. “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters.”
He vowed to re-incorporate Tesla from Delaware to Texas if shareholders approve. In February, the billionaire moved Neuralink’s corporate home from Delaware to Nevada.
The 2018 lawsuit against Mr. Musk’s multibillion-dollar compensation package was brought by Richard Tornetta, who held nine shares of Telsa.
Defense lawyers argued that the pay package needed to be rich to keep Mr. Musk, who does not receive a salary, from leaving the company.
“Swept up by the rhetoric of ‘all upside,’ or perhaps starry-eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: ‘Was the plan even necessary for Tesla to retain Musk and achieve its goals?’” Ms. McCormick wrote in her post-trial opinion.
Tesla lawyers countered that the compensation committee justly negotiated the plan.
In late 2022, the case made it to trial, but the ruling wasn’t issued until earlier this year.
Incorporating in Delaware
Although many businesses incorporate in the state where they operate, Delaware has long been the overwhelming preferred home for business entities, offering tax benefits, a simple business registration process, and a centuries-old corporate legal system.About 68 percent of Fortune 500 companies and 79 percent of all U.S.-based initial public offerings were incorporated in Delaware in 2022, according to the latest data from Secretary of State Jeffrey Bullock. The total number of business entities, including corporations, LLCs, LPs, and statutory trusts, topped 1.9 million in the same year.
Delaware, the second-smallest state (by size), with a population of about 1 million people, “basically, since its founding, decided it was to its economic benefit to corner the corporate law market,” Texas lawyer Garland Kelley told The Epoch Times. Mr. Kelley specializes in securities litigation and energy and commercial litigation.
In a typical trial court, judges oversee a wide variety of cases, including property disputes, business disputes, car accidents, and divorce cases, among others.
But Delaware’s Court of Chancery, which dates back to 1792, is composed of judges specializing in corporate law.
Mr. Kelley also pointed out that every state except for Delaware has merged two types of jurisdiction in their court system, allowing a judge to issue a legal or equitable decision.
Delaware uniquely adopted a court of equity rooted in English history, which sets it apart from the remaining 49 states.
“They have spent over 200 years very carefully creating a very coherent body of corporate law,” Mr. Kelley continued, adding that the court’s precedent has been that as long as entrepreneurs adequately inform themselves before making decisions, the chancery court won’t punish them for making mistakes.
It is that cohesive body of case law and predictability that has kept businesses flocking to Delaware for generations, he added.
“What’s slightly changing now has people scratching their heads: Is it so predictable after all?” he said.
There has been little competition in other states, although a few states, such as New York, have a commercial division that typically echoes Delaware’s chancery court regarding its judges and a focus on developing a coherent body of law, Mr. Kelley explained.
‘A Larger Trend’
In 2022, Delaware added 58,662 new corporations, down from 62,510 the year before and the first time the number of new corporations has slipped in more than a decade, according to the state’s annual reports.Other states, such as Nevada and Texas, are stepping up to compete with Delaware by creating their own specialized business courts.
In 2001, the Nevada Supreme Court created the Business Court “loosely after Delaware’s Chancery Courts” with specialized judges to resolve complicated business disputes in a “timely, cost-effective manner.”
TransPerfect, a global provider of language and technology solutions for businesses, moved its incorporation from Delaware to Nevada after Delaware’s Chancery Court ruled “against the wishes of two out of three of its owners, the first ruling of its kind in the U.S.” the company said in a press release in 2018.
“For many years, most companies, including ours, considered Delaware the default option for incorporation,” TransPerfect President and CEO Phil Shawe said in a statement. “But times and circumstances have changed. Other states, Nevada chief among them, now represent compelling alternatives.”
Shareholder Shirley Shawe said: “The expense burden some jurisdictions place on resident companies through overly high litigation costs is simply staggering; our situation in Delaware was a perfect example. Without significant legislative reform, I would not be surprised if TransPerfect’s ‘Dexit’ becomes part of a larger trend.
“Nevada has a reputation for a rational and predictable judiciary, as well as one that operates with lower litigation costs and promotes settlements.”
More recently, TripAdvisor reincorporated in Nevada after Delaware Chancery Court Judge J. Travis Laster ruled that the online travel company could make the move despite an ongoing lawsuit.
The company asked shareholders to support a move to re-incorporate in Nevada, as did its parent company, Liberty TripAdvisor. Two-thirds of TripAdvisor’s shareholders approved, and 80 percent of the parent shareholders approved, The Wall Street Journal reported.
However, TripAdvisor’s chairman, Greg Maffei, held a large portion of the vote, 56 percent at TripAdvisor and 43 percent at Liberty TripAdvisor.
In November 2023, minority shareholders filed a lawsuit arguing that the move to Nevada would be unfair because the state gives greater rights to company directors, such as Mr. Maffei.
Last year, the Texas Legislature approved House Bill 19, creating specialty business courts that will have jurisdiction concurrent with the state’s 14 district courts.
Republican Gov. Greg Abbott will appoint two judges to each court to serve two-year terms.
“There’s a real alternative with the Texas business court,” Mr. Kelley said, adding that the Texas Supreme Court has posted the preliminary rules for public comment.
The new business courts will open in September in Austin, San Antonio, Houston, Dallas, and Fort Worth.
