Elon Musk, a billionaire, vented his fiery response on social media after a Delaware judge threw down his $55 billion Tesla Inc. remuneration plan, saying, “Never incorporate your company in the state of Delaware.”
Musk’s bitter emotions toward Delaware are understandable considering his expensive legal failures in the First State. The largest-ever compensation package in US corporate history, received by Elon Musk, on Tuesday was declared unconstitutional by a judge due to conflict of interest and false disclosures made by the electric vehicle manufacturer.
Nonetheless, the serial entrepreneur’s disputes with Delaware’s legal system have led him to aim at the state’s primary business sector, which houses over 70% of Fortune 500 firms. In 2022, incorporation fees brought in over $2 billion for the state, or about 25% of the whole yearly budget.
Professor of law at the University of Pennsylvania Jill Fisch said of Musk, “He’s not used to that. He doesn’t like Delaware because he’s been held accountable there for his actions.” Fisch teaches litigation and business law. “The Delaware courts have a reputation for being willing to rein in controlling shareholders when they act inappropriately.”
Elon Musk blames Delaware; know why
Musk has made it clear that he dislikes Delaware, so much so that during the Twitter rebranding process, he changed the firm’s location of incorporation to Nevada, where corporate statutes provide more defense against investor lawsuits directed at business officials.
Musk stated in another X post on Tuesday that Texas and Nevada, the jurisdictions where Tesla is headquartered, are “better for letting shareholders decide” on matters of corporate governance, including compensation packages.
Other businesses, such as the travel website TripAdvisor, are hoping to relocate to Nevada in line with X, but some TripAdvisor shareholders have filed a lawsuit to stop the transfer, claiming that the company’s owner, Greg Maffei, wants to shift to a state where investors would suffer due to its “race-to-the-bottom” corporate liability regulations.
However, Elon Musk has asked X devotees to vote on whether to shift Tesla’s incorporation papers to Texas, where he moved the company’s business operations in 2021.
Why is Delaware important for corporates?
Delaware, which has just set up a business court, has a strong grip on the US incorporation industry, with over 1.9 million businesses choosing the state as their corporate home by the end of 2022.
The state’s Chancery Court judges are recognized as business-law experts, and most high-profile merger-and-acquisition disputes are litigated in the state in non-jury cases.
Despite Musk’s ire, some cases have been won in Delaware, including suits brought by Tesla investors claiming his $2.6 billion acquisition of renewable-power provider SolarCity amounted to a bailout for the company.
A judge ruled in 2022 that the billionaire didn’t improperly force fellow directors to accept an overpriced buyout of SolarCity, despite criticized Musk for failing to properly remove himself from involvement in the deal.
The Delaware ruling that sparked Musk’s outrage
Elon Musk is not entitled to a $55 billion compensation package awarded by Tesla’s board of directors, according to the ruling by a Delaware judge.
The ruling by Chancellor Kathaleen St. Jude McCormick follows a shareholder lawsuit against Musk and the company’s directors, accusing them of breaching their duties and resulting in unjust enrichment.
The shareholder’s lawyers argued that the compensation package should be voided due to Musk’s dictated decisions and misleading disclosures.
Defense attorneys argued that the pay plan was fairly negotiated by an independent compensation committee, contained lofty performance milestones, and was approved by a shareholder vote that was not required under Delaware law. They also argued that Musk was not a controlling shareholder, as he owned less than one-third of the company at the time.
However, Elon Musk has been criticized for allegedly incorporating his company in Delaware, a state where Tesla defendants have filed a lawsuit. Musk, who currently holds 13% of the company, challenged Tesla’s board to create a new compensation package for him, which would give him a 25% stake.
Tesla’s board concluded that Musk’s compensation package was unfair and that the only suitable remedy was for it to be rescinded.
In the meantime, a Tesla investor contended that the 2018 compensation package lacked clarity regarding what Mr. Musk had to do to earn the money and that the board was riddled with conflicts of interest when it approved the agreement to keep him as CEO. Chief Judge Kathleen St. J. McCormick of the Chancery Court agreed with the investor on Tuesday.
The ruling is seen as a significant legal decision by investors and Tesla.
Will Elon Musk Shift Tesla’s Offices?
In keeping with his own style of decision-making, Mr. Musk put out a question on X on whether or not Tesla need to modify its incorporation state.
He asked, “Should Tesla change its state of incorporation to Texas, home of its physical headquarters?”
Following him sharing of the question, within seven hours, 8,8% of the 6,56,805 voters cast “yes” votes.
After ranking first for the previous two years, the decision might push Mr. Musk down to the third place in the world’s richest person rankings.
In addition, Elon Musk cautioned business owners on Wednesday to “never incorporate your company in the state of Delaware” in the wake of a defeat his in a Delaware court.
Thus, it is yet to be seen where the enigmatic brain of Musk would do this time.
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