Elon Musk Proposes Relocating Tesla’s Incorporation to Texas Following Legal Dispute

ByHuey Yee Ong

Feb 1, 2024 ,

Tesla CEO Elon Musk announced that the electric car manufacturer plans to initiate a shareholder vote on relocating the company’s state of incorporation from Delaware to Texas. This announcement follows Musk’s criticism of Delaware, where Tesla is currently incorporated, due to a court ruling that invalidated his substantial $55.8 billion compensation package.

Key details

  • Elon Musk announced on X that Tesla plans to promptly initiate a vote regarding its relocation to Texas, without specifying a date for the action.
  • Musk justified this move by referring to a poll he conducted on his X account, which indicated overwhelming public support for the company’s shift to Texas.
  • In an informal poll conducted among Musk’s followers, over 1.1 million people participated, with 87% expressing their approval for Tesla changing its state of incorporation to Texas.

Background Information

The decision comes in the wake of a Delaware judge’s ruling against Musk’s record-setting pay package from Tesla, following a lawsuit by a shareholder. The lawsuit contended that the pay package was excessively favorable to Musk at the shareholders’ expense, and that Tesla’s board had breached its fiduciary duties by approving it. Delaware Judge Kathaleen McCormick highlighted Musk’s significant influence over the board that negotiated his pay, necessitating a new compensation strategy for Musk unless Tesla opts for an appeal. Musk’s response was to advise against incorporating businesses in Delaware, a state chosen by many companies for its tax advantages and corporate-friendly legislation due to its pro-business legal environment.

Side Note

Musk has a history of utilizing X polls for major business decisions. Since acquiring X, he has engaged his audience with polls on various significant policy changes, including the reinstatement of former President Donald Trump’s account and whether Musk himself should step down as CEO of the social media firm. While Musk frames these polls as democratizing corporate decision-making, critics argue they are susceptible to manipulation and do not represent a scientifically valid sampling of public opinion. Musk has acknowledged issues with the poll outcomes when they have not aligned with his expectations, pointing to potential brigading or bot activity.

Musk’s net worth is estimated by Forbes to be $182.6 billion, positioning him as the second wealthiest individual on the Forbes Real Time Billionaires list. This ranking followed the Delaware court’s decision, which saw Musk relinquish the title of the world’s richest person to Bernard Arnault, CEO of LVMH.

Legal and Financial Implications

The proposal to shift Tesla’s incorporation to Texas, where its operational headquarters already reside, surfaced after Musk queried his X followers through an informal straw poll. Following the poll’s supportive outcome for relocation, Musk announced plans for a shareholder vote on the matter, subject to Tesla board’s approval.

Musk’s public disapproval of Delaware’s legal stance came after Chancery Court Chancellor Kathaleen McCormick found the 2018 pay package agreement lacking in fairness and negotiation diligence. Musk’s critique of Delaware sparked discussions on the implications of Tesla reincorporating in Texas, known for its more lenient approach towards executive compensation and liability.

Columbia Law School Professor Eric Talley commented on the potential benefits of Tesla’s reincorporation in Texas, including the possibility of awarding Musk a “gratitude” bonus without the fiduciary constraints of Delaware law. However, Talley also noted that the decision to reincorporate could face legal challenges from shareholders, viewing it as motivated by Musk’s personal interests and possibly constituting a breach of fiduciary duty while under Delaware jurisdiction.

As Tesla considers this significant transition, the move to Texas represents not just a geographical shift but a strategic realignment in response to legal and corporate governance landscapes. The forthcoming shareholder vote will determine the future state of incorporation for Tesla, potentially setting a precedent for other corporations contemplating similar changes in the face of legal and financial challenges.

Featured Image courtesy of:
Texas State Logo: Used from Wikimedia Commons
Tesla Photo: hapabapa/Getty Images

Huey Yee Ong

A creative enthusiast who enjoys art, baking, and sports, delivering insightful reporting with a fresh and unique perspective.