Delaware is swiftly moving forward with legislation intended to preserve its reputation as the top corporate hub globally, following a judge’s dismissal of Elon Musk’s significant compensation package from Tesla. The proposed law, however, faces criticism for potentially creating an imbalance against investors, including middle-class savers and pensioners.
After an extensive hearing, a Delaware House committee has decided to advance the bill, which Democratic Governor Matt Meyer supports. Governor Meyer argues the legislation will ensure Delaware remains an attractive location for U.S. and global businesses to incorporate. Advocates assert that this bill will update existing laws, address ambiguities, and strike a balance between corporate executives and shareholders in a state that has been a venue for resolving business disputes for over a century, hosting more than 2 million corporate entities, including a majority of Fortune 500 companies.
Conversely, critics, which include institutional investors such as pension funds and asset management firms, fear the bill could weaken corporate governance standards and diminish shareholder rights, thereby making it more challenging to hold corporate officers accountable for breaches of fiduciary duty. Having passed unanimously in the state Senate last week, the bill is set for a potential full House vote.
The controversy began with a Delaware judge’s decision to annul Elon Musk’s Tesla compensation deal, originally valued at over $55 billion. The ruling, issued by Chancellor Kathaleen St. Jude McCormick, cited concerns over the Tesla board’s lack of independence from Musk and misleading shareholder disclosures. Following this ruling, Musk briefly lost his position as the wealthiest person on Forbes’ list but later gained it back. Musk and Tesla have since appealed to Delaware’s Supreme Court, with Musk advising businesses against incorporating in Delaware and suggesting Nevada or Texas as alternatives.
Amid this backdrop, some companies have been contemplating leaving Delaware—a move termed “Dexit”—prompted by counsel from corporate lawyers and Elon Musk’s own actions. Tesla’s corporate registration was transferred to Texas after a shareholder decision, and Musk’s companies, SpaceX and Neuralink, were relocated to Texas and Nevada, respectively. Some worry that this legislative measure could exacerbate dissatisfaction among corporations.
Reports have surfaced suggesting that notable entities like Meta Platforms may consider relocating from Delaware. Though unconfirmed by Meta, other companies such as DropBox have shifted their registration to Nevada, and figures like Bill Ackman of Pershing Square Capital Management have expressed intentions to leave Delaware. Musk has publicly criticized Delaware’s judicial system, accusing it of undermining shareholder rights.
Opponents argue there is scant evidence of a mass corporate exodus from Delaware and believe lawmakers are succumbing to pressure from influential billionaires. Among those who have voiced opposition are The California Public Employees’ Retirement System (CalPERS) and New York City’s comptroller’s office, which oversee pension funds.
The proposed legislation aims to modify several aspects of legal proceedings. It intends to enhance corporations’ defenses in conflict-of-interest cases within state courts while also restricting the documentation companies must present in court cases. This restriction could limit stockholders’ access to crucial internal company documents or communications, potentially making it costlier and more arduous for them to mount legal challenges.
Eric Talley, a Columbia University law professor, has identified up to three dozen Delaware Supreme Court rulings that could be overturned by the legislation. However, Lawrence Hamermesh, a former Widener University law professor involved in drafting the bill, argues only a few doctrines might be affected. Should the bill become law, it is expected to face legal challenges, and institutional investors might push businesses they’re involved with to consider other states for incorporation.
This legislative change holds significant financial implications for Delaware, with corporate license fees and related tax revenues comprising roughly a third of the state’s annual revenue. This financial support allows Delaware to maintain low tax rates, which support its economy, including the beach vacation home market and the corporate legal sector around Wilmington.