Tesla CEO Elon Musk announced on Thursday that the company will hold a shareholder vote to transfer its state of incorporation from Delaware to Texas. This decision comes just days after a Delaware judge invalidated Musk's staggering $56 billion pay package, labeling it as "an unfathomable sum" and unfair to shareholders.
Judge Kathaleen McCormick determined that Tesla directors, involved in negotiating the 2018 pay package, may have been influenced by Mr. Musk's "superstar appeal," characterizing them as "perhaps starry-eyed" and suggesting they did not adequately inform shareholders.
Legal experts express skepticism about Musk's plan, emphasizing that such a move to Texas could invite lawsuits from investors. They argue that if perceived as an attempt to secure Musk's pay package rather than benefit Tesla, it may face considerable legal challenges.
Market Response and Concerns on EV Demand
Following Musk's announcement, Tesla's shares reversed course, trading down 1.2%. The company's shares have experienced a 25% decrease this year, attributed to growing concerns about soft electric vehicle (EV) demand after a remarkable doubling in 2023.
This isn't the first setback for Musk in Delaware. The same judge, Kathaleen McCormick, who oversaw Twitter's lawsuit against Musk in 2022, has once again ruled against him. Analysts speculate on Musk's belief in Texas judges being more "business-friendly" than their Delaware counterparts.
Delaware has long been a preferred state of incorporation for businesses, with over 65% of Fortune 500 companies and more than half of all U.S. publicly traded companies choosing it. The state's business-friendly legal framework and tax policies make it an attractive choice for corporations
TripAdvisor and its parent company currently face a shareholder lawsuit for their plans to re-incorporate in Nevada from Delaware. Musk's potential move prompts concerns about similar legal battles for Tesla.
Musk's Vision and Shareholder Reaction
Musk has expressed discomfort with growing Tesla without maintaining at least 25% voting control, doubling his current stake. Shareholders are urged to carefully consider the implications of transitioning out of Delaware on their rights and the company's governance.
I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control. Enough to be influential, but not so much that I can’t be overturned.
— Elon Musk (@elonmusk) January 15, 2024
Unless that is the case, I would prefer to build products outside of Tesla. You don’t seem to understand…
Musk's connection with Texas runs deep. He shifted Tesla's corporate headquarters to Austin in 2021, citing issues with California's regulations and taxes. Tesla's gigafactory, a lithium refinery, and Musk's other companies, SpaceX and The Boring Company, all have operations in Texas.
Musk, as in the past, sought public opinion through a poll on social media. Claiming an 87% "yes" vote out of 1.1 million total votes, Musk declared that the public is unequivocally in favor of Texas, stating, "Tesla will move immediately to hold a shareholder vote to transfer the state of incorporation to Texas."
Investment analysts view Musk's plan as typical behavior, seeking alternatives when faced with obstacles. As Musk aims to garner shareholder support, independent business advisers stress the need for shareholders to carefully evaluate the potential impact on their rights and the company's governance.
Related Article: Disneyland Park California ReOpens Astro Orbitor, Ambitious $1.9 Billion Project to Include 'Frozen,' 'Tangled,' and More!
