In the latest move to protect its reputation as the leading hub for corporate registrations, Delaware is advancing legislation in response to a recent high-profile legal setback involving billionaire Elon Musk’s compensation package from Tesla. The proposal, supported by Democratic Governor Matt Meyer, aims to ensure Delaware maintains its standing as the go-to location for U.S. and international firms to incorporate.
Proponents of the legislation argue that it will update the current legal framework and preserve a fair relationship between corporate officers and shareholders. Delaware has long been the legal domicile for over 2 million corporate entities, including a significant portion of Fortune 500 companies, making it a historic center for adjudicating business conflicts.
However, the proposed changes have sparked criticism from institutional investors, pension funds, and asset managers. These groups express concerns that the legislation may lower corporate governance standards, restrict shareholder rights, and consequently reduce the accountability of corporate officers for breaches of fiduciary duties.
The state Senate has already given unanimous approval to the bill, advancing it further along the legislative path.
The backdrop to this development involves a significant legal decision made by a Delaware judge against Elon Musk’s compensation plan at Tesla. The lawsuit claimed that the package, which could have surpassed $55 billion, was flawed due to a biased board of directors and inadequate disclosure to shareholders. As a result, Musk briefly lost his position as the wealthiest person globally, though he has since recovered.
Musk and Tesla are currently appealing the decision at the Delaware Supreme Court. Following the ruling, Musk criticized Delaware, advising businesses to consider states like Nevada or Texas as alternative hubs for incorporation.
Reports suggest that numerous corporations and legal advisors are contemplating a “Dexit,” a term coined for businesses potentially leaving Delaware. Companies like Meta Platforms and Dropbox have been rumored or have allegedly made moves to shift their corporate registrations out of Delaware, though Meta has not confirmed such plans.
The bill promises several legal adjustments. It seeks to offer corporations more defenses in cases of conflict of interest, such as CEO pay packages or deals between related companies, within state courts. The revisions would also restrict the scope of documents companies must produce in court cases, complicating stockholders’ access to potentially critical internal communications.
While some experts predict that the new law could overturn numerous existing Delaware Supreme Court precedents, others argue its impact may be more limited. Nonetheless, a legal challenge is anticipated if the governor signs it into law, and critics warn it could drive some corporations to incorporate in different states.
Delaware’s economic dependence on corporate license fees is substantial, contributing nearly one-third of the state government’s revenue, around $2.2 billion. This income not only bolsters the economy but also allows local governance to forgo a sales tax and maintain low property taxes, creating a favorable economic environment. Indeed, the legal and corporate services sector thrives in Wilmington, supporting a network of services around the state’s judicial landmarks.
