Why Delaware is the Preferred Choice for Incorporation?
The state of Delaware has long been the favored destination for companies looking to incorporate, thanks to its well-developed corporate-governance laws and extensive case decisions that provide strong protections for board directors and executives. Delaware's Chancery Court judges, recognized as experts in business law, handle cases on an expedited basis. Most high-profile merger and acquisition disputes are litigated in Delaware, even by foreign companies.
What is Elon Musk's Issue with Delaware?
Elon Musk, the billionaire CEO, has encountered legal setbacks in Delaware. In January, a Delaware judge invalidated his $55.8 billion compensation package for Tesla, the largest in US corporate history, after an investor alleged conflicts of interest and misleading disclosures. Following this, Musk announced plans to hold a shareholder vote to relocate Tesla's incorporation to Texas. In 2022, the same Delaware judge ruled against Musk in pretrial decisions related to his attempt to withdraw a $44 billion offer to acquire Twitter Inc., now called X. Musk eventually abandoned the effort. In response to the compensation package ruling, Musk posted on X, "Never incorporate your company in the state of Delaware."
Why Reincorporate in Nevada?
Nevada offers corporate laws that provide greater protection against investor lawsuits targeting executives. Additionally, the state does not impose a corporate income tax or franchise tax on corporations. Other companies, such as travel website TripAdvisor, are also considering following X's move to Nevada. However, some TripAdvisor shareholders have filed lawsuits to block the relocation, expressing concerns that the shift to a state with weaker corporate liability laws may harm investors.
Why Choose Texas?
Texas has been successful in attracting CEOs and their companies for years by promoting its business-friendly regulations and low taxes—individual income and capital gains are not taxed in the state. Musk already has a significant presence in Texas, with Tesla's headquarters in Austin since 2021 and SpaceX's testing, manufacturing, and production facilities spread across the state. Additionally, Musk may find the political climate in Texas appealing, as state lawmakers recently prohibited public universities from maintaining offices of diversity, equity, and inclusion—a topic he has often criticized.
Possible Risks of Reincorporating in Texas
Unlike Delaware, Texas does not have well-established business courts with knowledgeable judges specializing in business law. However, the state plans to establish such courts in major cities to streamline corporate dispute proceedings. These courts are scheduled to open in September, but many details about their operations are still being determined. Texas has faced challenges in recruiting experienced judges for complex civil business litigation due to its reluctance to offer higher pay for judges. The starting salary for a judge on the business courts would be $140,000, compared to almost $185,000 for a Delaware chancery judge.
Analyst comment
Positive news: The news that Elon Musk has moved two of his companies from Delaware to Nevada and Texas can be seen as positive as it highlights the attractiveness of those states for incorporation. The move suggests that Nevada and Texas offer more favorable corporate laws and tax benefits, which could potentially attract more businesses to relocate.
Market impact: The market is likely to see an increased interest in Nevada and Texas as potential locations for incorporation. Other businesses may follow suit, especially if they perceive the benefits of the corporate laws and tax advantages offered by these states. The move may lead to a potential shift in the concentration of corporate headquarters away from Delaware towards Nevada and Texas. However, the lack of established business courts in Texas may pose some risks and uncertainties for companies relocating there.
