Jodi Godoy
(Reuters) – Elon Musk said Delaware, home to much of corporate America, is trying to prevent businesses from heeding his call to leave the state, where a court has invalidated his $56 billion Tesla (NASDAQ:) compensation package.
Since the Delaware Chancery Court ruled on Jan. 31 to overturn Musk’s record pay package, the Tesla CEO posted on social media about the electric vehicle maker’s reorganization in Texas, where it is headquartered, and urged others to follow his lead.
“Get your company out of Delaware before they close the doors like they just did to Tripadvisor “Musk tweeted on Monday.
Here are the facts behind the billionaire’s claim.
WHAT IS HAPPENING TO TESLA?
On February 1, Musk said on social media platform X that Tesla would “immediately take steps to hold a shareholder vote” to reorganize the company in Texas.
It is unclear whether Tesla’s board of directors would recommend such a vote or whether it would receive the necessary shareholder support. Many of them are retail investors, who research shows typically don’t vote on their shares.
IS DELAWARE BLOCKING COMPANIES FROM LEAVING THE COUNTY?
The vast majority of large public companies are incorporated in Delaware, even if they do not have a physical presence in the state, in part because of the predictable court system, which has specialized judges and non-jury courts.
Delaware has actually made it easier to reincorporate elsewhere. State law required unanimous shareholder approval. Following the changes in 2022, companies can leave Delaware with the approval of a majority of shareholders.
But the Delaware Chancery Court is now considering how closely it should scrutinize steps that may benefit the controlling shareholder.
WHAT DOES TRIPADVISOR HAVE TO DO WITH THIS?
A shareholder lawsuit against the board of directors of TripAdvisor (NASDAQ:) seeks to block the online travel guide company’s planned reincorporation in Nevada.
Shareholders argue that the move was designed to allow Gregory Maffei, the head of TripAdvisor’s parent company, to avoid liability for possible self-dealing actions. They argue that Nevada sets a lower bar for such transactions.
At a November hearing in Delaware Chancery Court, Vice Chancellor Travis Laster appeared willing to examine whether the move was fair to minority shareholders. But he expressed “discomfort” with the idea of him being blocked.
“The idea that Delaware is going to stop people from leaving is, I think, pretty far-fetched,” the judge said, according to a transcript of the hearing.
A lawyer for TripAdvisor shareholders told the judge that only a “small portion” of Delaware companies could be subject to scrutiny, sending those with controlling shareholders to a state with fewer legal protections for minority shareholders.
In an uncontrolled company, “the vote of shareholders will be critical,” said lawyer Andrew Bloomberg.
COULD THE CASE AFFECT TESLA?
Musk does not have a majority stake in Tesla, although he was found to have controlled the process that led to his 2018 pay package.
Shareholders who voted to approve the package had no information about the process, the judge in the case ruled.
Texas does not protect corporate leaders in the same way as Nevada, meaning Tesla shareholders may have a harder time arguing that the move is designed to allow Musk to escape liability.
Still, the expected decision this month in the TripAdvisor case could have implications because it will show how closely Delaware judges will look at out-of-state actions to determine whether they are fair to minority shareholders.