A Delaware judge rescinded Elon Musk’s $55.8 billion pay plan last month. His next move? Recruit other companies to rage quit being incorporated in Delaware.
Some followed suit or promised to do so, but a copycat billionaire rebellion against the Fortune 500’s preferred place of incorporation did not exactly materialize.
Lawrence Cunningham, special counsel at Mayer Brown and a director on the boards of Constellation Software and Markel Group, has a prediction for what will happen now: mostly nothing in fact, although a lot of words may fly.
“There will be neither a stampede nor a trickle,” said Cunningham. “There will always be frustrated and delighted customers in Delaware. All of this is both familiar and desirable.”
Why companies like Delaware and will probably stay
Musk launched his protest on X after the ruling, saying the judge in the case, Chancellor Kathaleen McCormick, was an “activist and politician, first and foremost.” Musk now has plans to move Tesla’s incorporation to Texas and he has already rehomed his implantable brain-chip company Neuralink from Delaware to Nevada.
The problem with Musk’s play is that other companies —and their lawyers—like Delaware. A lot. About 68% of Fortune 500 companies are domiciled in the First State and 79% of IPOs in 2022 were registered there. As of 2024, 49% of Russell 3000 companies and 44% of S&P 500 companies have corporate bylaw provisions that require their investors, if they sue, to do so in Delaware, according to data analytics firm ESGAUGE. These exclusive forum provisions have proliferated specifically because the Delaware Court of Chancery—the same court where Musk’s pay was rescinded—is known to defer to decisions made by corporate boards rather than intervening.
Even Institutional Shareholder Services, a proxy advisory company for large investors, generally recommends that investors vote in favor of bylaw changes designating Delaware as the best spot for lawsuits because of the “likelihood of a speedy and efficient resolution of Delaware corporate law cases.” Meaning, companies typically have their best shot legally if they get sued in Delaware.
“This is a predictable reaction by one person who got stung,” said Tom Bayliss, a partner at Delaware law firm Abrams & Bayliss. “The only thing different about [Musk’s] case is how big it is and how high profile it is.”
Musk’s response isn’t even a new phenomenon, Mayer Brown’s Cunningham points out. Companies led by CEOs with outsized personalities on the receiving end of unfavorable judgments with large dollar sums in the past have made noises about Delaware being an inhospitable place, he said.
Will unicorns look to Nevada and Texas?
Still, Musk’s entreaties come at a time when Delaware has issued several rulings that have sent a chill into one of its core constituencies: boards of directors. Since 2019, the court has been more willing to allow cases to survive a motion to dismiss that previously would have died on the vine. Marquee companies including Boeing and McDonald’s have advanced past the motion to dismiss stage of litigation.
The Wall Street Journal reported last week that three shareholders are seeking to reincorporate businesses they are affiliated with in Nevada or Texas, noting the examples of Barry Diller and Tripadvisor chairman Greg Maffei. Both Nevada and Texas are trying to woo companies with the promise of a less-stringent legal climate than Delaware, per the Journal’s report. In the case of online travel company Tripadvisor, it is looking to make a move to Nevada, but minority shareholders aren’t in favor of the plan.
As Delaware has taken steps to hold directors more accountable, discussions about its rulings have increased, said Frank Placenti, leader of the U.S. corporate governance practice at law firm Greenberg Traurig. The impact could divide the world of companies into two parts: existing Delaware-based public companies and new companies that have a choice about where to incorporate before they go public.
If the founder of the next unicorn wants compensation similar to Musk’s, whether or not to incorporate in Delaware could be on the table, said Placenti. “That might have an impact on the thinking of a founder here and there,” he said.
Plus, investors may not care where a company is domiciled if it’s a hot-ticket IPO with people lining up to buy stock, he said. “That may provide an avenue for states like Nevada, which is making a push to increase the number of companies they have.”
For already established companies, it would be tough to sell a move out of Delaware to shareholders, said Placenti. Companies would have to explain their reasoning to investors before a vote, and absent some compelling tax advantage or other business reason for the move, it would be hard for companies to tell investors they don’t want their board to have the same responsibilities as directors who oversee companies based in Delaware.
“That’s not a story that sells very well,” he said. “I don’t see a rush to the exits for existing public companies because of that factor.”
