Musk Pay Pushes Corporate Law to Bend-or-Break Inflection Point

A year that saw Elon Musk’s record pay plan push corporate law to the breaking point has investors casting a wary eye across a legal landscape reshaped by billionaires.

Delaware’s leaders upended its best-in-class corporate system in March, eliminating crucial judicial checks on self-dealing. They portrayed the move—sparked by attacks from Musk, whose $56 billion compensation was voided by a judge last year and reinstated by the state’s top court Dec. 19—as a modest course correction to save the golden goose in a state that funds a quarter of its budget with corporate fees.

The jurisdiction, which faces competition from Texas and Nevada, still offers more investor protections than its rivals. But the forces buffeting Delaware aren’t going anywhere, and molding corporate law to the idiosyncrasies of moguls is yielding rules ill-suited to ordinary shareholders, said Berkeley Law professor Stavros Gadinis.

“That could work for Musk"—whose investors often care more about his dreams than their returns—"but there are not a lot of Musks around,” Gadinis said. “He’s pushing the logic of the market, and the logic of corporate law, to its end.”

Worse than the overhaul’s substance is the way it politicized a technocratic process, emboldening powerful founders who learned how to end-run Delaware’s world-renowned courts, said retired University of Delaware law professor Charles Elson.

The lawyers and lobbyists behind the legislation “were trying to solve a problem for their clients,” said Elson, alluding to corporate controlling stockholders like Musk and Mark Zuckerberg.

“But by injecting the patient with a drug to protect the controlling shareholders, they killed everybody else,” he said.

Precarious Moment

For a century, Delaware’s Chancery Court has set the tone on buyouts, boardroom battles, and shareholder rights. The overhaul, Senate Bill 21, came at a precarious moment for the state’s judges, who’ve weathered a barrage from Musk since the 2024 ruling striking down his Tesla Inc. comp deal.

The bill’s backers have denied catering to the world’s richest person. But skyrocketing pay for the billionaires flexing power over our economy, politics, and culture is a key part of the story,said Harvard Law professor John Coates.

Deference toward day-to-day managerial decisions—a doctrine known as the business judgment rule—has been a pillar of corporate law for decades. Even when corporate leaders faced conflicts of interest, that deference was the default.

“Managers are given enormous latitude to pursue a value-maximizing strategy, whether it’s building a plant or hiring a certain person,” said Lawrence Cunningham, director of the University of Delaware’s Weinberg Center for Corporate Governance.

The exception was high-stakes M&A transactions, which raise the risk that insiders will siphon value. Executive pay straddled both categories, but as long as its size was manageable, Delaware’s judges took the view that close scrutiny would lead to micromanagement.

Then equity mega-grants like Musk’s—representing a growing proportion of total enterprise value—began presenting the same type of looting risk as a whole-company sale. Many reflect self-dealing by founders with minority stakes who exercise control through influence or dual-class stock, said Coates.

“The number of people in this new controller category, pushing comp to levels never seen in the history of the world,” undermined the distinction between M&A and compensation, he said.

A billionaire backlash followed.

‘Race to the Bottom’

After his landmark court loss, Musk relocated Tesla to Texas, where he won a $1 trillion replacement package. Many experts now view angling by Texas and Nevada as a serious challenge to Delaware’s dominance.

Several major companies followed Tesla out the door, a mini-wave of “DExits” that unnerved the incoming governor. The resulting shake-up—rolled out aggressively by lawyers linked to Musk and Zuckerberg—took aim at a ruling that cleared the way for elevated scrutiny of compensation.

“What SB21 showed is that if you spend some money, you can overturn a Delaware court decision,” Elson said.

Delaware is now in a “race to the bottom” with Texas and Nevada, where corporate leaders face far less liability, said Southern Methodist University law professor Carliss Chatman. “Maybe it doesn’t matter where you incorporate, because shareholders can’t recover anyway,” she said.

The question is how far corporate law can bend—and what happens if it breaks.

“People like Elon Musk are deciding what happens with our assets,” Chatman said. “I get to retire—or not—based on Elon’s whims. I don’t know how long the market tolerates that.”

Texas and Nevada are betting on systems that let shareholders place total trust in founders they admire. That may work for Tesla on a sunny day, but corporate law exists for failure and conflict, said Coates. When those states inevitably find themselves backing into increased accountability, it’s unclear they have anything to offer besides a pale imitation of Delaware, he said.

‘Naked Politicization’

Delaware may be following Texas and Nevada toward that cliff. US-listed companies can already incorporate in tax havens that make investor litigation virtually impossible, but few reputable businesses go that route due to the increased cost of capital.

As major jurisdictions continue reducing fiduciary duties, sophisticated investors could turn away from traditional equity and toward debt instruments that carry contract rights enforceable anywhere, according to Elson.

“It would be a disaster,” he said. “Debt is very difficult for a small, growing company. You could really snuff out some really good ideas before they even come to market.”

Then there’s the prospect of a national corporate law, Delaware’s recurring nightmare. The state’s corporate constituencies have largely staved off federal incursions by emphasizing its sophisticated judiciary and a legislature that took its cues from experts.

“With the naked politicization of SB21, it’s going to be harder to make that argument,” according to Elson, who said a decision striking down portions of the law—currently before Delaware’s top court—could save the state from itself.

“It would force all parties back to the table for a reasoned, careful discussion,” Elson said.