If you’ve ever been interested in starting a business, then you might be aware that Delaware is the place to do it. Almost 70% of Fortune 500 businesses are incorporated in the state, and that’s no coincidence either.
Delaware has business-friendly laws, favorable tax laws for corporations, and flexibility in corporate structures. Plus, the state has a long history of established legal precedents, which makes it ideal for those who don’t like taking risks.
It should come as no surprise then that Elon Musk has his own dealings with Delaware. But what led to his dissatisfaction with the state? Read on to find out.
Elon Musk’s Tesla Pay Plan
As someone with a flair for the dramatic, it should come as no surprise that the world’s richest man made an agreement with Tesla in 2018 to have the largest pay package on record. The amount equaled $56 billion and would span a period of 10 years, which would certainly bolster his wealth ranking.
What Happened?
Tesla investors brought a lawsuit to challenge the pay plan, as they found the amount excessive in comparison to Musk’s existing wealth. To put things into perspective, his pay plan would’ve been still six times more than the combined pay of the top 200 highest-paid executives in 2021.
On January 30, 2024, a Delaware judge determined that the pay package wasn’t fair to Tesla shareholders and ruled in favor of them. This decision can be appealed; if the appeal is successful, then the pay plan must be renegotiated by the Tesla board.
What Now?
Because Musk is displeased with the court’s ruling, his next move is to transfer the state of incorporation from Delaware to Texas, especially after a public vote supported this decision. He’s going to hold a shareholder vote to finalize the decision too. In addition, he’s moved SpaceX from Delaware to Texas, and Neuralink from Delaware to Nevada as well.
The move to Texas may be a smart choice, as a specialized business court system will be established in late 2024. This is thanks to Governor Greg Abbott signing House Bill 19 into law in June 2023, and the courts will open in September 2024. It’s expected that these courts will give Delaware courts a run for their money.
In fact, Musk’s urging other business owners to incorporate anywhere but Delaware. On X (formerly known as Twitter), Musk said, “Never incorporate your company in the state of Delaware,” and in another post, he said, “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters.” This is good news for these states, as this shines the light on their efforts to challenge Delaware’s monopoly over incorporations.
Moreover, a migration of incorporations in Delaware to other states isn’t impossible in the near future. Even without Musk’s input, several companies (including TripAdvisor) have already transferred their state of incorporation, or are in the process of doing so.
Other states are increasingly creating their own business courts to rival Delaware’s Court of Chancery. As there are more and more diminishing benefits of incorporating in Delaware, business owners will find it more advantageous to create companies elsewhere.
How Might This Affect Your Company?
Some people have expressed concern that this Musk situation could lead to increased scrutiny of Delaware LLCs by law enforcement and regulatory agencies. Others have suggested that it could make it more difficult for Delaware LLCs to raise capital or conduct business with other companies. However, it is important to note that these are just potential outcomes, and it is impossible to say with certainty what the actual impact will be.
It is also important to remember that Delaware LLCs are a popular business structure for a reason. They offer a number of advantages, such as limited liability protection and flexibility in management structure. These advantages are likely to continue to attract businesses to Delaware, even if there is some increased scrutiny in the wake of the Elon Musk situation.
If you’re thinking of setting up an LLC – in ANY state – let us help. Business Anywhere can do the hard work and register for you. We also provide the registered agent and mailbox services you’ll need too.
