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NEW YORK (Reuters) – Elon Musk’s plan to pull up stakes from Delaware and reincorporate Tesla (NASDAQ:TSLA) in Texas may not give the electric carmaker’s CEO the greater freedom he desires given the lack of history and different rules in that state’s business courts, legal experts said.
After suffering a bruising loss this week in Delaware’s Chancery Court that voided his $56 billion pay package, Musk said on social media site X on Thursday that Tesla would “move immediately to hold a shareholder vote to transfer state of incorporation to Texas.”
“Change your state of incorporation out of Delaware before they lock the doors,” Musk added later on Thursday.
Musk’s corporate relocation strategy, if put forward by Tesla’s board of directors and approved by shareholders, would shift the EV maker’s incorporation from Delaware, the U.S. state with by far the most companies registered there due to its two-century-old corporate legal system. Companies have long preferred Delaware because of that certainty, something Musk may rattle by moving Tesla and inviting others to follow.
However, Musk should be careful what he wishes for as Texas’ newly created business courts will not officially open until September, University of Nevada law professor Benjamin Edwards said.
“The last thing Texas is going to want is a reputation that their corporate law is a game where billionaires always win, because then investors aren’t going to trust it,” he said.
Edwards and other legal experts did not view a mass exit from Delaware as likely, particularly among public companies eager to retain capital.
Building up a body of case law to make the courts a reliable place for business disputes takes time and volume – factors that have given Delaware the overwhelming advantage, Edwards said.
Some states, including Texas, have adopted so-called constituency statutes, enshrining the right of corporate leaders to consider factors beyond maximizing returns for shareholders. Delaware is not one of them, he said.
“Delaware law gives you clarity that your North Star is always going to be shareholder value,” Edwards said. “Texas law is vaguer.”
Musk had previously suggested reincorporating Tesla in either Texas or Nevada. The latter state is the corporate home of the social media company owned by Musk, X, formerly known as Twitter. Getting shareholders to approve a move to Texas is a less heavy lift, according to University of Virginia law professor Michal Barzuza.
Tesla is already headquartered in Austin, Texas, and the Lone Star State lacks Nevada’s reputation for protecting corporate leaders from shareholder lawsuits seeking to hold them accountable.
Whether a decision on Musk’s pay case would have gone differently in a Texas court is unclear, said Byron Egan, a corporate lawyer based in Dallas. He said Texas has a fairly robust duty of loyalty, which generally prohibits directors from acting out of self-interest.
“When it comes to loyalty, putting the interests of the entity above the individuals, Texas is going to be maybe even more sensitive than Delaware would be,” Egan said.
However, he added that Texas courts are “not as inclined to second-guess business decisions as the Delaware courts are.”
The judge in Delaware criticized Tesla’s board for failing to provide oversight of Musk, saying its members lacked independence due to their close ties with the billionaire.
Musk is not the first corporate leader to suffer a loss in Delaware court and question the state’s position as the No. 1 legal home for U.S. companies, yet the state remains the most popular for incorporating.
“This is a tactic that Delaware has seen before,” said Joel Fleming, a partner at Equity Litigation Group, which represents investors in Delaware court disputes.
