Never incorporate your company in the state of Delaware | Hacker News Reader

Never incorporate your company in the state of Delaware

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26 pointslopkeny12ko42 comments

If total lawlessness is what you want, I don't think you can incorporate your company in any state in the US.

There's a crypto company out there that will sell him a "legal" business formation on the blockchain

If total lawlessness is what you want, why are you even trying to incorporate your company?

Because otherwise when you sell stocks you get prosecuted by the SEC.

Attempting to apportion voting rights suggests that one is at most gesturing half-heartedly in the direction of lawlessness.

Context for those out of the loop.

https://www.cnbc.com/2024/01/30/tesla-shares-slide-after-jud...

Don't companies usually incorporate in Delaware because there is so much precedent for case law that it makes the business-law intersectionality more predictable than that in a state with less corporate case law?

It's not to say cases like this won't happen (obviously as evidenced by this) but it's still way more predictable than say Rhode Island or New Mexico.

Yes, and this is a strange decision for the Chancery court to make, since they enjoy being business-friendly and having a reputation for such. I'm not going to say the judge is biased, but...

Elon will likely take his own advice, and we'll probably see Texas offer incentives for companies to incorporate there in the near future.

Isn't Texas the state where most patent trolls sue from?

There's that one judge they have out there that is real favorable to the trolls iirc

Not "Texas" but "the Eastern District of Texas" specifically. Things supposedly have changed after a supreme court ruling limiting where such cases can be filed [1,2]. The top location for this type of lawsuit now seems to be Delaware.

[1] https://www.dallasnews.com/business/technology/2017/05/22/su...

[2] https://arstechnica.com/tech-policy/2017/10/patent-cases-in-...

How is it strange? I am unfamiliar with the chancery and precedent.

The decision hinges on factors that aren't usually a big deal or thought much about.

1. The judge's opinion that the compensation package is "unfair", and

2. Elon's brother being on the board, which some shareholders may not have known about, despite it being very public information.

This is apparently enough to overturn a rather old pay package. This reeks of a shareholder saying "Yeah right" at the time when it was voted on, and getting mad when Elon pulled off the seemingly impossible and skyrocketed Tesla's stock, meeting the lofty targets.

This is a gross misrepresentation of the ruling. Elon's brother being on the board was little more than a footnote because he wasn't involved in the relevant decision. I don't think the shareholders being aware of that or not was even a footnote.

The part of the board that did participate in the relevant decisions (not including Elon or his brother) being beholden to Elon, while holding themselves out as independent, was a major factor.

It's a perfectly decent representation, if you're used to reading judgements (rulings are in motion practice, the outcome is a judgement) and understand how to read between the lines.

You're leaving out a lot of information.

> The judge's opinion that the compensation package is "unfair"

This leaves out a fair bit of reasoning as to why. Under Delaware law, Tesla/Musk bore the burden of proof to show that the compensation package was entirely fair - that is, both the process and the price were fair. She ruled that neither were fair, and so under Delaware law the compensation plan was improperly granted and a remedy must be chosen.

> 2. Elon's brother being on the board, which some shareholders may not have known about, despite it being very public information.

That is a pretty minor factor, and I'm curious why you picked this specific one out. Just having a personal relationship with the beneficiary of the compensation plan is not necessarily improper in and of itself, and the opinion states as much. The issue is that a majority of the board and the Compensation Committee were not independent from Musk both in principle and in practice, and this was not disclosed to shareholders before the vote.

> This is apparently enough to overturn a rather old pay package. This reeks of a shareholder saying "Yeah right" at the time when it was voted on, and getting mad when Elon pulled off the seemingly impossible and skyrocketed Tesla's stock, meeting the lofty targets.

The lawsuit was filed on 2018-06-05. The stockholder vote for the compensation plan was on 2018-03-21, less than 3 months before.

It’s only strange if you ignore everything except the name Elon Musk.

Why wouldn't the business friendly court side with shareholders?

Like if I were an prospective investor that he cared about, I would tell Elon to move his company from Texas to Delaware before I gave him like a quarter.

> Why wouldn't the business friendly court side with shareholders?

Because the majority of the shareholders thought this was a very fair pay package when it was passed (73% voted yes, IIRC). Produce massive value, you get massive rewards.

And they did so after the board omitted and misrepresented material facts in their disclosure to the shareholders, making the vote worth approximately nothing (as the court correctly found).

But it doesn't materially matter if SolarCity was a bad investment, or board members went on vacations together. The shareholders got their money's worth, and then some. The damages should be punitive for any misrepresentations, which is how this case would typically be resolved.

Instead, the judge made FSD jokes in the ruling. I will read the appeal with great interest.

The shareholders certainly did not get their money's worth. Yes, Tesla did well, but that's not what the shareholders purchased, what the shareholders purchased was Elon as CEO - something that by all evidence presented was available for free. Moreover they did so after being deceived by a board (unbeknownst to them) controlled by Elon.

Elon tried to scam them out of his money, he failed. I wouldn't want to invest in a company in a state where this sort of scam would succeed.

The shareholders purchased Tesla stock at $18, and voted on Elon getting a ton of money if he made them a ton of money. That's the representation that matters here, and it turned out extremely accurate.

> But it doesn't materially matter if SolarCity was a bad investment, or board members went on vacations together.

It does matter in as much that you could make the case that, had they not bought solar city the company might have performed better.

It doesn't materially matter to the lawsuit.

You want a court that applies the law and applies the law consistently in order to ensure some predictability for business. They should apply the law and not "prefer" one side to the other.

Exactly. This would have been a ~$10m judgement for the solarcity hijinks in a sane court.

Wtf are you on? This case wasn't about solar city. And SolarCity was acquired 2 years before the pay package was in place anyway.

Also, Tesla won the case about SolarCity. Is your objection that they shouldn't have? Because that seems surprisingly reasonable given your other comments.

Yeah, SolarCity was a... stinky acquisition that was mentioned in this case. Some of the relevant false statements related to it.

Full disclosure, I agreed with Elon's current opinions before he had them, and I'm an avid legal nerd. I try to separate them as best I can, but when cases like this come up I can get a bit testy. I could word the same statements in an anti-Musk way, but this judgement is, to use a technical term, bullshit. My point is that this is a ridiculous penalty for the violations alleged, and simple punitive damages for misrepresented information would have been appropriate. A "slap on the wrist", as it were.

> My point is that this is a ridiculous penalty for the violations alleged, and simple punitive damages for misrepresented information would have been appropriate. A "slap on the wrist", as it were.

Is a fine even possible as a remedy here under Delaware law? Tornetta didn't ask for it, there appears to be no discussion of a fine even as a possible remedy in the decision, and I'm not sure whether Delaware law allows for a fine in the first place.

The closest thing is the discussion about the defendants failing to "identify any logically defensible delta between the unfair Grant and a fair one", so the court was basically left with leaving the grant intact or ordering recission, and it seems in that case the general bias is against the wrongdoer.

So what should have been the penalty?

Kick Elon's brother from the board or a fine or when next package is announced then force tesla to follow certain legal guidelines.

There was nothing wrong with the comp package itself, but forcing a re-vote with disclosure of any false information would be the most appropriate strategy. It's still unfair, because it was a gamble then and a sure thing now, but I suspect it would pass again.

This is what fines are for, though, and they work even better with very profit-sensitive companies like Tesla.

I don’t know there there’s been much precedent set anywhere for giving the CEO of a company 9.3% of the company’s market cap, devaluing everyone else.

He did the impossible and made everyone rich, so Delaware shouldn't be getting involved at all.

Sadly, being a current stock owner doesn't mean you were along for the rocket ride. Plenty of people bought in for over $250 (high was ~$293) and lost 20% of their value (current is ~$190).

If you lost 20% of your investment, you might have a different view on the CEO devaluing it another 9%

I'll say my little company has been registered in Delaware for a long time. It's cheap and easy. Not sure what Elon's beef is. My guess would be a ruling he didn't like in their dedicated business legal system.

Edit, seems it was an unfavorable ruling, another top level comment has the details

Let's remember Elon was not a founder of Tesla, just an early investor, and had no say in where it was registered.

What I don’t get about the incorporate in state X schemes, maybe someone can enlighten me, is that you still need to file a foreign corporation to operate in whatever state you’re in. So what exactly are you evading by filing in a different state?

Delaware is a unique state because it has a dedicated business courts and a long history of litigation that makes understanding the likely outcome predictable

Right but whatever state you’re actually operating in still has jurisdiction, right?

It depends on the case.

If it is in regards to shareholders, then I believe the state in which you're incorporated would have jurisdiction.

If it's another type of case, for example one brought by an employee, it might be based on the employment laws of the state they are employed in, so the trial would happen in the state of their employment.

If any of us negotiated this good a deal we'd be saying "good on 'ya". If it really is unfair/illegal the board should be the ones to take the flack.

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