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Just when I thought lawfare was out, they pull me back in.
So.. a Delaware judge has once again unilaterally decided to void Elon Musk's $50 billion pay package.
For those following along, the timeline goes something like this. The exact details may be a bit fuzzy, but I think I have the broad strokes correct:
Elon Musk and the board of Tesla sign a compensation agreement where if Tesla stock goes up by some outrageous amount, Elon Musk will get an enormous reward. But it it doesn't, Elon will get very little.
People laugh (ha!) because the targets are so outlandish that there is no way in a million years that Tesla could ever...
Tesla stock meets and exceeds the targets
Some asshat with like 8 shares of Tesla sues, claiming that the pay package harmed him even though the price of Tesla stock has gone up like 1000%.
A Delaware judge sides with the asshat and voids the compensation agreement.
Elon asks for a shareholder vote on the pay package and wins with 72% of the vote despite a politically motivated campaign to pressure big funds to vote against it.
It goes back to the judge who says, nope, still doesn't count.
The judge awards the lawyers for the plaintiffs $345 million
Basically what this means is that, if you register your company in Delaware, a judge can prevent you from making legally binding contracts. If you make the wrong enemies, your shares in a company can be stripped from you. The lawyers who sue you will make a fortune.
There's a folk belief in the United States that companies register in Delaware to avoid taxes somehow. I thought this myself, but when it came time to register my own company, I learned that this is not accurate. Registering in Delaware doesn't save you any money and actually costs you quite a bit ranging from maybe $300/year for a small corporation to perhaps $100,000 for large one. People register their companies in Delaware because there is the perception that there is a large body of case law that protects companies against frivolous lawsuits.
Obviously, this is over now. You'd be a fool to register a company in Delaware. To quote Paul Graham:
Isn't Tesla's registration moving to Texas for exactly that reason?
Yes. The bigger problem for Delaware, of course, is the future companies that won't register in Delaware.
Delaware's state budget is around $6 billion. There are 2 million companies registered there. It's quite possible that a large percentage of the state budget is paid for by franchise and registration fees.
Personally, I found the whole rationale for registering in Delaware pretty facile in the first place. You already have to register in the state in which you have your physical headquarters. So there's little reason to add a second state into the mix, exposing you to additional risk.
This one judge will likely cost the state billions in future revenue because of Elon Derangement Syndrome.
The reason that Delaware was the home for most publicly traded companies is that the state was one of the first to enact business-friendly structured corporate governance statutes, giving companies a predictable legal environment to work with. This also let Delaware develop a more mature tapestry of corporate caselaw earlier than other states, lending even more legal predictability. And once everyone started registering in Delaware, it was seen as displaying a lack of corporate sophistication to register in some backwater, lawless jurisdiction like New York or California.
Having anti-business, activist judges making these kinds of decisions is not great for Delaware’s reputatio , but how many executive comp packages are or ever will be even remotely close to this kind of absurd number. I would be surprised if this fact pattern ever reappears. Musk will get his payout under the Texas reorganization, so this is a relatively hollow victory for everyone except Plaintiffs’ counsel.
None, presumably. But Delaware's friendly case law reputation is now shattered. I'll posit that it was never real. Companies registered in Delaware because that's what other companies did. It was always bullshit.
The opposite now. But registering in NY or CA would be foolish as well, for obvious reasons. Small red states like Wyoming and South Dakota will replace Delaware as the go-to place for corporate registrations and have a much more credible case as defenders of the rule of law.
I create corporations from time to time and know others who do as well, and yeah, South Dakota is apparently hot right now.
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