My take: Musk’s Texas-sized threat

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Elon Musk
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It came as no surprise when Tesla’s celebrity CEO Elon Musk got on his X (formerly Twitter) feed and announced that he would ask the board to move the company’s state of incorporation from Delaware to Texas.

It touched off a flurry of sometimes sketchy coverage, including one headline claiming that Delaware is a state in New England.

Last week, the Chancery decision dominated business headlines for one of the world’s richest men. Musk is no longer in first place as Tesla’s stock price has been affected by electric vehicle price cutting and perhaps the realization that it’s becoming more of a car company and less of a tech leader.

Musk’s tweets came after Delaware Chancellor Kathleen McCormick ruled that his $55 billion pay package should be rescinded. It resulted from a long-running shareholder suit that ended up being the subject of a rare trial in Chancery Court. The suit listed a small shareholder but was handled by corporate attorneys, seeing a chance to profit from what looked like an insider deal.

Such suits are criticized as adding to litigation, with advocates arguing that it helps keep boards honest.

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Many in the media had portrayed McCormick’s decision as a rejection of the size of the compensation package, which includes gaining a larger chunk of the company’s stock based on its market value and ability to generate cash.

While the Notre Dame law grad and Smyrna native did note that Musk’s compensation is astoundingly bigger than others, the core issue was the independence of board members who signed off on the deal. Musk’s compensation is indeed 39 times larger than the next biggest CEO pay and stock package. It comes without any time commitments for Musk who is involved in everything from planting chips into brains to sending rockets into space.

McCormick ruled that the Tesla board’s rubberstamping of the deal did not follow the usual process. Instead, the pay decisions were largely made by friends and associates who happened to be directors. That’s nothing new. However, most companies have a few directors without such ties. One example of the ties cited by McCormick was a board member known to vacation with the Tesla chief.

The independence of directors was questioned a while back in a Chancery case involving insiders agreeing to sell a financially ailing Solar City to Tesla, even though Musk and their family had ties to both companies. Chancery ruled that “all’s well that ends well,” with Solar City integrating into Tesla without damage to shareholders.

The genius argument

This time around, lawyers unsuccessfully argued that Musk’s genius in running a company posting strong profits of late justified the massive pay package. Never mind that Tesla has an aging vehicle line that needs some of the investment that Musk is pocketing.

Musk already had a bone to pick with McCormick when Twitter took him to Chancery Court after he attempted to back out of a deal to buy the fading social media company for a hefty $44 billion despite earlier signing a deal. McCormick ordered the sale, and Musk complied.

Musk has been selling Tesla stock to pay for X, reducing his stake in the company. Lately, he has been demanding a new pay package that includes more stock awards that would increase his operating control of the company. Otherwise, he will move some of Tesla’s technology elsewhere and make it pretty much a car company in the eyes of Wall Street.

Musk can appeal the ruling to the Supreme Court. However, the reasoning behind the 201-page ruling makes a successful appeal less likely.

Meanwhile, you will hear a lot of noise about Delaware being a “woke” blue state hostile to business that will see a flight of Fortune 500 businesses. Of late, corporate governance experts began to note that large, complex corporations with a lot of complex litigation will still prefer a state with a predictable business court system.

While Texas is still setting up a business court system, it does not have Delaware’s history of rulings that largely favor businesses but also consider the interests of stockholders. Texas law is a mixed bag that might not provide the protections Musk seeks.

Interestingly, Musk and Tesla could return to Chancery Court if a shareholder suit claims a move to Texas is a move to enrich the multi-billionaire further. A similar suit involving TripAdvisor’s controlling multibillion stockholder, who wants to move its incorporation to gazillionaire-friendly Nevada awaits a Chancery Court ruling.

Others suggest that Musk’s frequent appearances and failure to observe corporate norms financially burdened the Chancery Court.

Indeed, Tesla, its board, and Musk might regret heading to the Lone Star State once the current furor settles down. – Doug Rainey, chief content officer.

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