Tesla’s (TSLA) CEO Elon Musk has called for a shareholder vote to move Tesla’s incorporation to Texas. What would he want to move Tesla to the "Lone Star State"?
Ann Lipton, Tulane Law Associate Professor joins Yahoo Finance Live to discuss what this move could look like for the EV giant—and why Delaware has been a popular state for incorporation. Lipton explains that Delaware became a preferred choice in the early 1900s, and that due to its courts and its offering of “a very up-to-date corporate law that responds to the latest trends,” it has maintained that status. Delaware is unique in that it has a specialized court that hears business disputes only—where only chancellors who are experts preside.
This system, according to Lipton allows for “reliable decisions,” in a shorter time. Delaware has been able to create a “network effect,” notes Lipton, who states that precedence has been set to the point that generally outcomes are clear and easier to reach.
Related Videos
Acknowledging Nevada as a comparable to Delaware in some ways, Lipton sees it as “attractive” to some, but flexibility and freedom is limited for investors. “Nevada has carved out a little niche for itself,” according to Lipton.
Speaking on the process to incorporate in Texas, Lipton expects there would be “some hold ups." Lipton does not see Musk gaining any wiggle-room apart from the greater possibility of “friendly judges” in Texas, and states that “it's definitely a risky move,” for Musk.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Eyek Ntekim
Video Transcript
- Well, Tesla CEO Elon Musk calling for a shareholder vote to transfer the company's incorporation to Texas from Delaware-- that coming after a Delaware judge voided his nearly $56 billion pay package. The question many people are asking is, why incorporate in Delaware in the first place? And it turns out it's very popular. Roughly 2/3 of the Fortune 500 are, indeed, incorporated in Delaware.
Joining us now is Ann Lipton, Tulane Law professor, to help us explain why and what it might take to move Tesla away from Delaware. Ann, thanks so much for being here. I should say I'm an admirer of your work on Twitter and elsewhere. And so how did Delaware get to be the place to incorporate?
ANN LIPTON: It actually dates back to the early 1900s. Different states offered different kinds of corporate law. And Delaware offered the most flexible corporate law. It basically made it very easy to incorporate there and do what you want with your company.
There were placed much fewer limits on what you could put in your corporate charter than other states did. And it became the popular place to incorporate. And after that, Delaware has worked very hard to maintain its position as a popular place to incorporate by creating a stellar system of courts to resolve business disputes and a very up-to-date corporate law that responds to the latest trends.
- You mentioned their judicial system. And we got an inside view of how Chancery Court, also with Musk-- and how Chancery Court operates when he was going through his battle to obtain or not obtain Twitter, now known as X. Could you just speak as to the way the Delaware court system for corporations, Chancery Court, is a bit different than you might see in other jurisdictions?
ANN LIPTON: Yeah. So it's got this Chancery Court. It's a specialized court that hears all-- almost all the business disputes. It sits without a jury. There are seven-- one chancellor and six vice chancellors-- so seven judges. They are all experts in business law. They hear cases. They-- very, very quickly. So they will actually go to trial very quickly, as we saw, actually, in the Twitter case. That case was moving along at a lightning speed. Because the judges are so expert and because they sit without a jury, they don't need the time to parse things that another court, a more generalist court, might need.
They are extremely well versed, obviously, in Delaware law. So they're very reliable in terms of understanding what the precedent is. You know what you're going to get. After they've made a decision, it gets appealed straight to the Delaware Supreme Court. There's no intermediate appellate court. So that also helps with speed. And while the Delaware Supreme Court handles the whole state-- so handles things beyond business law, they handle all kinds of disputes that a state would hear-- their judges, as well, are extremely well versed in corporate law. So you get quick decisions, reliable decisions, and a very consistent body of law.
- Does any other state have anything like this, either the set of laws or the Chancery Court, sort of set up?
ANN LIPTON: No. I mean, no. Some states have tried. I think North Carolina set up a Chancery Court. And Texas has announced that it's going to try to set up a specialized business court. But no state has really done anything like Delaware has, which has been investing in creating these-- this court system for, essentially, over 100 years.
So-- and because so many companies incorporate there, organize there, there's what we call a network effect, meaning that it generates so much law that it's very easy to predict what's going to happen, what the legal tests are for various kinds of scenarios, whereas in other states, it's really uncertain. We don't know how the courts might deal with a particular kind of scenario because it's never come up. But with Delaware, we've just got this very thick body of case law to inform us as to how scenarios are likely to be addressed by the courts.
- Another state where it's become, or at least when I was working in law about 20 years ago-- had become popular was Nevada. And can you speak as to Nevada or any other states which may be popular with shareholders for the ease with which you can file forms there? But substance-wise, what are the differences, if you're owning a company or you're a shareholder, in Nevada versus Delaware, or maybe even another state?
ANN LIPTON: Yeah. So Nevada is-- has set itself up as an alternative to Delaware in a very specific way, which is that it gets a lot more power to the managers, which is to say the founding shareholders, the insiders, a lot fewer rights to the minority shareholders, to the public shareholders. And that's very attractive if you want to incorporate because you know that you won't have pesky shareholders bothering you. So they won't review conflicted transactions as closely. Shareholders don't have as many rights to get information from the company. But on the same time, that's perhaps less attractive to some investors because they know if they invest in a Nevada company, they'll have fewer rights.
So in general, the choice of where to incorporate is kind of this push-pull because managers want a certain degree of flexibility and freedom. But they need to raise capital from investors. And investors may push back if they feel that their rights are not protected. So Nevada has carved out a little niche for itself, but in a sense of penny stocks or stocks that kind of don't inspire blue-chip investors to invest because they don't feel as protected.
- All right, Ann. Let's bring it back to Tesla, shall we, because what will it take, besides a shareholder vote-- I mean, what kind of cost are we talking about? What are the repercussions from changing your incorporation from Delaware to another state, like Texas?
ANN LIPTON: OK. So procedurally, the board has to adopt a resolution that they recommend the shareholders reincorporate. And they have to file forms. Because it's a publicly traded company, there has to be a shareholder vote. And they have to file all kinds of forms with the SEC with detailed information about why they're making this change and what the implications are likely to be.
Then you would hold a shareholder vote. The-- I mean, the absolute fastest I think this could unfold would be 40 to 60 days. But it could easily take longer. You would have a shareholder vote. And if the shareholders, a majority, vote in favor, then you can just immediately reorganize as a Texas company. And then you would be subject to Texas law.
Elon Musk has something like 13% of the shares or so. So that's a good chunk of the way to 50%. But I think there's going to be some hold-ups there because the proxy statement would have to explain why they're doing this and exactly what the purpose was. And right now, the optics are not great for Musk and the board. And it's very possible shareholders would sue to say that this transaction itself was essentially intended to enrich Elon Musk and the board in a way that harms shareholders. And they may sue to actually stop the reincorporation from happening.
- Just like they just sued to get that pay package revoked. So if you were Elon Musk's corporate attorney, would you advise him-- I mean, are there advantages to doing what he's talking about doing besides him just being angry at the Chancery judge?
ANN LIPTON: Well, it's very hard to say. I mean, Texas is, in some ways, sort of holding out its hand and like, promising a more forgiving corporate law. So I think Elon Musk is expecting that if there are disputes in Texas-- that he will come out more victorious than he has so far. And maybe that's right.
But the whole issue with Delaware versus Texas is that we have a very reliable set of law. We know what the standards would be in Delaware. And it's a bit hard to predict exactly what would happen in Texas. But to some extent, Texas has kind of promised him, we're going to give you friendly judges. And obviously, Musk thinks that that's attractive.
On the other hand, he's got a lot of big, serious institutional shareholders who may not be happy with the idea of even having the shareholder vote. And they may push back. So I'm not sure exactly what his counsel is telling him. But it's definitely a risky move. But we of-- just to even try it-- I mean, he may lose the vote. On the other hand, it's not like Elon Musk shies away from risky moves. So we'll see.
- Right. And we know he doesn't always listen to his counsel. Ann Lipton, thank you so much-- appreciate it.