(Yahoo!Finance) - Elon Musk wants to get away from Delaware as fast as he can. It will take some convincing to get others in the corporate world to follow.
For roughly the last century, Delaware has been the dominant place for companies to file their articles of incorporation because of its corporate-friendly laws, specialized business courts, and ease of filing company documents.
The state likes to tout that it is home to more than two-thirds of all Fortune 500 companies and earns billions each year from the companies domiciled there.
Places like Nevada, Texas, South Dakota, North Carolina, Washington, and Wyoming that want some of this same revenue are trying to chip away at Delaware’s dominance with their own business-friendly incorporation strategies.
Those recruiting efforts got a boost last month from the world’s richest man, Musk, who advocated for Nevada and Texas after a federal judge in Delaware invalidated his $56 billion Tesla pay package.
"Never incorporate your company in the state of Delaware," Musk said on his social media platform X, formerly known as Twitter, adding that "I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters."
Musk pledged to move Tesla (TSLA) to Texas from Delaware if shareholders sign off on the move. He also filed to move the incorporation of his private brain chip startup, Neuralink, from Delaware to Nevada.
'Dexit'
He is not the only one. Other companies have either decamped to other states in recent years or tried to do so. One that made the move to Nevada in 2018 referred to its exit as a "Dexit."
It will be a challenge to loosen Delaware’s grip on where many companies file their initial paperwork.
The state added 58,000 new corporations in 2022, the most recent year for which information was available from Delaware. That was down 6% from 2021, although still up 41% since 2017.
One other measure from the US Census Bureau showed that business applications from corporations in Delaware dropped 8.5% between December 2022 and December 2023, according to IRS filings, after rising in 2021 and 2022.
One company, TripAdvisor (TRIP), is finding it difficult to leave Delaware. After a majority of shareholders approved an incorporation change from Delaware to Nevada last year, some shareholders of the online travel company sued to block it.
They alleged that the CEO of TripAdvisor’s parent company, Greg Maffei, sought out Nevada to reduce his potential for liability claims. Maffei is a controlling shareholder of that parent company, Liberty Media, which also controls voting power over TripAdvisor.
TripAdvisor has said in a filing that the move would save money on taxes and potentially provide “greater protection from unmeritorious litigation for directors and officers.”
Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware, doubts that other states will be able to unseat Delaware in the near future.
"How are they going to do it?" he said.
Delaware has a significant upper hand, he added, because it has "a very smart bar, a very smart judiciary, and a very fair judiciary, with lots of experience in this area. That's why both shareholders and managers appreciate it, because it's fair and balanced."
Delaware's dominance
There was a time when it wasn’t Delaware on top. It was New Jersey. In fact, Delaware changed its corporate laws in 1899 so it could be more like the Garden State.
It got its chance to pass New Jersey in the decades following 1913, when New Jersey lawmakers passed legislation, later signed into law by then-governor Governor Woodrow Wilson, restricting mergers and forbidding the chartering of any new holding companies.
The number of corporations formed in New Jersey "declined precipitously," and Delaware "stood ready to serve as the state of incorporation for the many companies fleeing New Jersey," according to a history of Delaware's business courts authored by a former vice chancellor for the Delaware Court of Chancery and a former judge on the Delaware Superior Court.
The state’s Court of Chancery, originally established in 1792, became the go-to forum to resolve internal corporate controversies. And this became a big source of revenue for the state. The taxes and fees generated by those businesses brought Delaware about $2 billion in 2022.
But other states have been chipping away at Delaware’s standing in recent years by creating their own business courts.
Take Texas, where Musk wants to take Tesla. It passed a new law last year that establishes a set of business-focused courts in the hope that it can attract more companies to incorporate there. Those courts are slated to open in September.
Until then, its business cases will be assigned to elected state court judges who may or may not have the experience level of Delaware's corporate-savvy Chancery Court.
"That could be good. It could be bad," said James Spindler, a corporate and securities law professor for the University of Texas School of Law. "The good aspect of it is that perhaps you'll see Texas judges being less willing to substitute their own judgment for that of corporate management."
On the other hand, he said, Texas courts may not be as seasoned at weeding out spurious cases, which could then end up in front of a jury.
"That may add some risks and some lack of some lack of predictability."
Southern Methodist University law professor Christina Sautter said the legal standards applied to disputes in Texas's new business courts would be similar to those in Delaware because Texas corporate law follows the Model Business Corporations Act.
That act is a general statute drafted by the American Bar Association that largely reflects Delaware law, and that more than 30 states have adopted.
"At some point, we will have a body of law that is going to be looking like the Delaware chancery court," Sautter said. "The big difference for Tesla, or for any company, is about the judges hearing the cases."
For Tesla, however, multiple hurdles still stand in the way of a move. The first is shareholder approval, and the second is the potential for any legal challenges from shareholders who aren't happy about the move.
"Even if they approve, the move could still be considered a self-dealing transaction," University of Virginia Law professor Michal Barzuza said.
Self-dealing, Barzuza said, is a type of legal challenge that shareholders can bring to oppose a transaction they see as benefiting corporate executives and not the corporation itself.
Texas Gov. Greg Abbott has made it clear where he stands on Musk's question about where Tesla should be incorporated.
"Elon, it's over," he said on X. "The election desk is declaring a landslide victory for Texas."
By Alexis Keenan · Reporter
Alexis Keenan is a legal reporter for Yahoo Finance.
