Musk’s Tesla Threats Unlikely to Shake Delaware’s Dominance

Many more companies are trying to incorporate in Delaware than outside of it, despite recent Court of Chancery opinions on controlling shareholder duties and protections for minority shareholders, which prompted Elon Musk’s recent statements about moving Tesla Inc. to Texas.

It’s possible to smoothly exit Delaware, if a publicly held company really wants to reincorporate. Generally, the steps a company needs to follow to reincorporate are simple: Fill out the paperwork. Hold a shareholder vote. Avoid litigation. It helps to follow the guidelines laid out in opinions like the recent TripAdvisor Inc. one, which has widely been been seen as a road map for Musk if he follows through on moving Tesla.

Reaction to recent Court of Chancery opinions exploring how broadly to define control and conflict in transactions—what duties are owed by controlling shareholders, and the protections for minority shareholders that must be met—ranged from confusion to alarm to near-fatalism among court watchers over Delaware’s role as the premier corporate home. Some critics argue the court has introduced too much uncertainty into judicial reviews of insider deal conflicts, shareholder challenges to mergers, or boards amending shareholder pacts.

But until Delaware courts issue an opinion “so burdensome that it precludes businesses from functioning in their day to day, I suspect we’re not going to see a massive shift in interest in becoming or remaining as a Delaware-governed entity,” said Benjamin Hicks, co-founder of Wagner Hicks PLLC.

Often it’s venture capital firms and other investors who push for Delaware incorporation, identifying the state as they “undisputed preeminent jurisdiction for corporate matters,” Hicks said.

“If the company’s choosing to do it, it’s often to make themselves more appealing for investors,” he said.

Large public companies rarely try to leave Delaware, but it’s not the state or Chancery Court that’s stopping them, said Michal Barzuza, a University of Virginia law professor.

“If it’s hard for companies to get out of Delaware now, it’s because their shareholders don’t want it,” she said.

When companies do announce a move, they usually say it’s because they want to be incorporated where their headquarters are located, or because they want lower incorporation taxes, she said. They don’t usually say, as TripAdvisor did, that they want to move to Nevada because of its “potentially greater protection from unmeritorious litigation for directors and officers.”

Nevada explicitly promotes itself as different from Delaware in terms of shareholder protections, while other state laws hew closer to the precedents set by Delaware courts, Barzuza said.

But none of the roughly two dozen states with designated courts for complex business matters have the two centuries of case law that makes Delaware’s Chancery Court so dominant. A new business court in Texas won’t officially get up and running until later this year, and it’s had trouble recruiting judges.

Those other state business courts exist primarily to resolve disputes for mom-and-pop businesses, not the massive corporations that appear before Chancery Court, said Carliss Chatman, a Southern Methodist University law professor.

“These big shareholder disputes impact our 401(k)s and, yes, it impacts all of us on a macro level. But the things that impact small businesses day to day, where it would just be really, really helpful to have a sophisticated judge, that’s what the Texas business court gets at,” she said.

Musk’s Moves

Should Musk follow through with his apparent desire to move Tesla from Delaware to Texas, he shouldn’t expect a green light to overrule shareholders who disagree with him, Chatman said.

“There is not a state that is going to let him run a publicly traded company into the ground,” she said. “There is nothing he can do with publicly traded companies that is 100% what he wants to do. That’s what happens when you take money from the general public.”

Musk’s frustrated threat to relocate the publicly held electric car maker, followed by the ruling allowing TripAdvisor to reincorporate in Nevada, jump-started some hand-wringing over whether Delaware was losing its corporate appeal.

Musk already relocated his privately held companies to Nevada and Texas. He’s said he’d hold a Tesla shareholder vote on reincorporation, but it hasn’t happened yet.

Tesla shareholder support isn’t guaranteed, and an investor could sue to block the deal. That was the case with TripAdvisor over its plan to move its incorporation to Nevada, where shareholders allege it’s harder to hold directors and officers accountable.

Delaware’s judiciary has largely responded to the consternation with something akin to dismissal.

Roughly two million corporate entities called Delaware home in 2022, double the number of just a decade before, Supreme Court Chief Justice Collins Seitz Jr. told lawmakers in February. The number keeps rising because corporate attorneys drafting merger contracts keep choosing Delaware as their forum to resolve multimillion- or multibillion-dollar disputes, he said.

Of TripAdvisor’s imminent departure and Musk’s criticism, Seitz said, “I do not see these as threats to our franchise in Delaware. Far from it.”