Musk moves to dump Delaware for Texas after judge voids blockbuster Tesla pay package
Austin-based Tesla could incorporate in Texas rather than Delaware after a Delaware judge struck down CEO Elon Musk’s hefty pay package earlier this week.
Musk said the Austin-based company will hold a shareholder vote to determine if Tesla will be moving its incorporation after several days of expressing his distaste for Delaware in a series of posts on X, formerly Twitter, starting Tuesday night.
“Tesla will move immediately to hold a shareholder vote to transfer state of incorporation to Texas,” Musk posted Wednesday night.
Tuesday evening, a Delaware judge Tuesday overturned Elon Musk’s $55.8 billion Tesla pay package, siding with a shareholder who argued the company breached its fiduciary duties by awarding Musk the plan. In a 200-page ruling, the judge detailed Musk's "thick ties" to the board members he was negotiating with. It also said the company's board of directors did not prove the package was fair and failed to give proper disclosures.
The ruling means Tesla will have to either appeal the decision or go back to the drawing board on Musk's compensation plan. The 2018 plan did not give Musk a salary, but instead gave him significant stock options based on performance.
The massive pay package helped Musk become the richest man in the world, a status that has been teetering in recent years amid Tesla stock fluctuations and his Twitter purchase. The ruling could further put his rank in question because much of Musk's wealth is tied up in Tesla stock.
Tesla still has not said if it will appeal the Delaware court decision as of late Thursday morning. The company has yet to post any details about the shareholder vote on its website or on its X social media account.
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Musk put question to a poll
Musk initially posed the question of where to incorporate Tesla in an informal poll on X Tuesday night, where about 87% of the 1.1 million X users who voted were in favor of the move.
Earlier that night, immediately following the ruling, Musk posted “Never incorporate your company in the state of Delaware." Musk then posted that he recommended incorporating in Nevada or Texas if "you prefer shareholders to decide matters.” The poll followed shortly.
On Thursday Musk continued posting telling companies to “change your state of incorporation in Delaware before they lock their doors,” referencing billionaire and cable businessman John Malone who has had several cases in the Delaware court.
In the same thread he also replied to a user asking whether to incorporate in Nevada or Texas to say that for most companies Nevada, but that Texas makes sense for Tesla since it is physically headquartered there.
Why do companies incorporate in Delaware?
Several of Musk’s companies remain incorporated in Delaware, including aerospace company SpaceX and neurotechnology company Neuralink and Central Texas-based tunneling and infrastructure company The Boring Company. But artificial intelligence company xAI and social media X are incorporated in Nevada.
Many companies, including most Fortune 500 companies are incorporated in Delaware, which is considered to have business-friendly regulations. The state’s Court of Chancery specifically handles business law and corporate disputes, and handled the case related to Musk's compensation as well as a separate case related to Musk's purchase of Twitter in recent years.
Henry Hu, a chair at the University of Texas School of Law and expert in corporate law, said there are many reasons companies tend to incorporate in Delaware, including the existence of the Chancery Court, which has highly regarded judges experienced in corporate matters and is able to move quickly and efficiently.
The court also has a lot of precedent, making cases more predictable, and judges, legislators, and lawyers in Delaware have come up with “in effect, a 'legal product' that is attractive to investors and many publicly held companies,” Hu said.
“Delaware tries to strike the right balance in terms of allocation of power between management and shareholder,” Hu said.
The pay package ruling also followed Musk repeatedly pushing for more control of Tesla. Earlier this month, Musk posted on X that he wants at least 25% of company shares if he is to grow Tesla to be a leader in AI and robotics, or he would rather focus on building such products at another company.
During Tesla's latest shareholders meeting last week, the CEO doubled down saying it would help fend off "strange ideas" from activist investors. Musk held about 12% of company shares prior to the court ruling, a number that has dipped in recent years as he sold stock, in part to pay for his purchase of Twitter.
Musk already has an affinity for Texas
Musk, who said in 2020 he moved to Texas to focus on Tesla's Austin-area manufacturing facility and SpaceX's South Texas base, has increasingly set up shop in the Lone Star State and spends significant time in Central Texas. Tesla, which first announced its Austin facility in July 2020 said in late 2021 that it would move its headquarters to Austin from California.
The billionaire has increasingly moved his other entities into the Austin-area. This includes his private foundation, the Musk Foundation, his tunneling and infrastructure company, the Boring Co., which is now headquartered in Central Texas, his aerospace company SpaceX and Neuralink, his neurotechnology company.
Most recently this has included an Austin-based office for X, which will house a trust and safety team focused on content moderation. The company's career postings also list engineering positions that are able to work out of Austin.
Recent tax filings have shown that Musk could be looking to set up a school in Austin that would start as a STEM-focused primary and secondary school that could eventually add a university.
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