Matt Rourke/AP Photo
Elon Musk departs from the justice center in Wilmington, Delaware, July 13, 2021.
For over a century now, Delaware has been the home of most large American corporations. The state government has set up an incredibly corporate-friendly regulatory, tax, and legal regime, and so big companies locate their official headquarters there. Many trusts and on-paper shell corporations are Delaware-based as well, for the same reasons. It’s a classic race-to-the-bottom dynamic where, because the federal government does not set a consistent baseline, states competed as to who could pander the hardest to big business, and Delaware hit bottom first. Most Fortune 500 companies locate there, and in return the state gets about a third of its budget from corporate franchise fees and taxes.
But Delaware’s incorporation laws also provide some rights to shareholders. While shareholders have extremely limited ability to sue over the business judgment of corporate managers, corporations must prioritize them and treat them fairly. Due to these precedents, Elon Musk has been losing repeatedly in Delaware Chancery Court over a proposed pay package for himself worth an estimated $55 billion. Musk responded by moving Tesla’s headquarters from Delaware to Texas to try to get his cash.
As a result, legislators from both parties, in short, panicked. As CNBC reported, Musk’s own lawyers drew up a sweeping reform to state law that would weaken protections and powers for small investors and almost certainly let things like Musk’s big pay package through.
Delaware’s state government—which is fully controlled by Democrats—fears the prospect of Musk leading a stampede of businesses out of the state, and is reportedly supporting the bill. A ruling earlier this month in a case involving Tripadvisor’s move to Nevada would make it easier for companies to leave Delaware and added fuel to this possibility. Clearly, Democrats want to head off a massive hole developing in the state budget, and so are poised to give corporate America whatever they want, again.
But should this pass, it would be an astounding betrayal not just of the United States but of Delaware itself, and threaten to spark wholesale looting of retirement and pension funds across the country. (It’s why the state’s Working Families Party is collecting signatures for a petition against it.)
At the risk of stating the obvious, there are more important things going on right now than Delaware state government’s corporate revenue. An unelected hyper-billionaire has seized control of the American government, he is illegally firing federal workers by the tens of thousands, and his cabal of neo-Nazi teenagers is rooting around in IRS and Social Security databases. To pick one potential catastrophe out of many, bird flu is currently festering in American dairy cattle, which unlike poultry have no federal containment protocol. Rather than creating one, Musk is illegally gutting the USDA and CDC, including their disease-fighting programs.
Giving this guy $55 billion so he can have even more power to set himself up as dictator borders on treason.
Delaware has developed deep specialization in corporate law so that legal disputes can be adjudicated quickly, consistently, and easily.
In any case, it’s not like Delaware would be rendered a smoking ruin if corporations decamped for Texas or wherever. It is a rich state directly on the Acela corridor, next to Philadelphia and between D.C. and New York. The on-paper headquarters generate a lot of revenue, but it also has strong in-person financial and pharmaceutical sectors. It also doesn’t have much property or sales tax. It would be painful in the short term, but it’d be fine in the end.
Beyond that, this move actually undercuts much of what makes Delaware attractive for corporations, which isn’t just the low corporate tax and lax regulations. The state has developed deep specialization in corporate law so that legal disputes can be adjudicated quickly, consistently, and easily; it’s why for 50 years the corporate code has been written by a panel of experts rather than legislators.
The reason is that doing business requires a baseline of fairness and consistency—for contracts to mean anything, for instance, you must be able to take them to a court and expect a reasonably honest ruling. If one party can simply breach the contract, and then if they lose in court, run to the state legislature with a sack full of cash and get the decision reversed, contracts mean nothing. One could violate property rights—steal things—in the same way. Any serious company doing real business (i.e., not a hype-based fraud like Tesla) would be well advised to incorporate in another, less corrupt state.
Incidentally, Texas does not have anything like this kind of reliable corporate law or experienced judicial bench. Companies following in Musk’s wake may find themselves regretting it. Indeed, even Musk must be hedging a bit if he’s trying to get Delaware to change its laws, rather than taking his chances with Texas’s corporate jurisprudence.
Worse still, Musk’s utterly preposterous pay package—which is more than two orders of magnitude larger than the already-bloated previous record, or about 1.2 million times the pay of a Tesla production associate—strikes directly at the foundation of American capitalism. The reason he has been losing in Delaware court is because the package violates the board’s fiduciary duty. Tesla is legally owned by its shareholders, and 87 percent of the company is not owned by Musk. From a shareholders’ perspective, it is outrageous to pay the CEO far more money than the entire company has ever made in profit in its existence—particularly given Tesla’s slumping sales and imploding brand reputation. Delaware judges were rightly concerned that Musk had far too much influence over the board, and the board did not provide a good argument for why the pay package was so large, even if Musk had won a shareholder vote over it.
Greatly restricting the ability of shareholders to sue executives who loot the companies they run practically abolishes the very idea of publicly owned corporations. If a CEO can run roughshod over the actual owners of the company and take their money, they can’t be said to meaningfully own it after all.
And it sets a horrendous example. Should Musk succeed, the door will be opened to every other CEO of a Delaware-based company to ransack their companies to fund titanic compensation packages. If shareholders file suit, well, just threaten to leave the state and get the law changed.
Now, shareholder capitalism has many problems. But replacing it with outright CEO looting is much worse. There is something like $60 trillion in publicly traded American stocks, much of it owned by pension funds, college endowments, and individuals saving for retirement. Should even a fraction of that disappear into executive pockets, lives will be ruined by the tens of millions. That Delaware Democrats are even considering this is criminal negligence on a world-historic scale.
