Did Delaware 'lock the doors' to stop companies from leaving, as Musk
claims?
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[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.
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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.
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![](../images/021424PIX/busine59.jpg)
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
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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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