Did Delaware 'lock the doors' to stop companies from leaving, as Musk claims?

[February 14, 2024]  By Jody Godoy

(Reuters) - Elon Musk has claimed that Delaware, home to much of corporate America, is trying to prevent businesses from heeding his call to leave the state, where a court invalidated his $56 billion Tesla pay package.

Since the Delaware Court of Chancery ruled to rescind Musk's record pay package on Jan. 31, the Tesla CEO has posted on social media about reincorporating the electric vehicle maker in Texas, where it has its headquarters, and encouraging others to follow.

"Move your company out of Delaware before they lock the doors, as they just did with Tripadvisor," Musk tweeted on Monday.

Here are the facts behind the billionaire's claim.

WHAT IS HAPPENING WITH TESLA?

Musk said on the X social media platform on Feb. 1 that Tesla would "move immediately to hold a shareholder vote" to reincorporate the company in Texas.

It is not clear that Tesla's board will recommend such a vote, or that it would garner the necessary support from shareholders. Many are retail investors who, research shows, typically fail to vote their shares.

DOES DELAWARE BLOCK COMPANIES FROM LEAVING?

The vast majority of large publicly traded companies incorporate in Delaware, even when they have no physical presence in the state, in part because of the predictable court system, which has specialist judges and non-jury trials.

Delaware has actually made it easier to reincorporate elsewhere. State law had required a unanimous shareholder approval. Since a change in 2022, companies can leave Delaware with the approval of a majority of shareholders.

But Delaware's Chancery Court is now considering how closely to scrutinize moves that arguably benefit a controlling shareholder.

WHAT DOES TRIPADVISOR HAVE TO DO WITH IT?

A shareholder lawsuit against TripAdvisor's board seeks to block the online travel guide company's planned reincorporation in Nevada.

Tesla CEO Elon Musk and his security detail depart the company's local office in Washington, U.S. January 27, 2023. REUTERS/Jonathan Ernst/File Photo

The shareholders argue the move was designed to let Gregory Maffei, head of TripAdvisor's parent company, avoid accountability for potential self-dealing. Nevada sets a lower bar for such transactions, they argued.

At a November hearing in Delaware Chancery Court, Vice Chancellor Travis Laster seemed open to scrutinizing whether the move was fair to minority shareholders. But he expressed "discomfort" with the idea of blocking it.

"The idea that Delaware is going to block people from leaving, I think, is pretty strained," the judge said, according to a transcript of a hearing in the case.

An attorney for the TripAdvisor shareholders told the judge that only a "small subset" of Delaware companies could have moves scruntinized - those with controlling shareholders heading to a state with fewer legal protections for minority shareholders.

In a non-controlled company, "the stockholder vote would carry the day," the attorney, Andrew Blumberg, said.

COULD THE CASE AFFECT TESLA?

Musk does not have a controlling stake in Tesla, though he was found to have controlled the process that led to his 2018 pay package.

The shareholders who voted to approve the package lacked information about the process, the judge in that case ruled.

Texas does not shield corporate leaders in the same way as Nevada - meaning it could be harder for Tesla shareholders to argue a move there is designed to let Musk escape liability.

Still, a ruling expected this month in the TripAdvisor case could have implications, as it will show how closely Delaware judges will review out-of-state moves to determine if they are fair to minority shareholders.

(Reporting by Jody Godoy in New York; Editing by Tom Hals and Matthew Lewis)

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