Delaware faces exodus of tech companies
newsweek.com
newsweek.com
https://www.cov.com/en/news-and-insights/insights/2023/04/fo...
> Although some scholars and practitioners have long argued that officers should or do owe a duty of oversight, and as a practical matter many officers likely assume that they have such an obligation, McDonald’s marks the first time this duty was explicitly acknowledged by a Delaware court.
To me this seems to imply that the ruling was incorporating the already existing practice into law, which would seem to imply that it isn't a big shift.
Most people would have assumed this is already the case. It's not exactly shocking.
The state is what it is today because bussiness-friendly New Jersey raised their state taxes in 1911, so corporations fled to Delaware. Another important piece of background information is that there exists a council of the Delaware bar which is a group of 27 lawyers — who often have very close ties to industry — that craft proposals. The council then passes their proposals to the state legislature who rubber stamp them into law because these politicians can’t speak the necessary legalese to audit the bills, but more importantly, because these legislators don’t want to cross the power brokers sitting on the council. Effectively, the Delaware’s legislature is run by 27 unelected corporate lawyers who (over many decades) have turned the state into the Cayman Islands.
Moreover, I agree the laws are consistent in Delaware, but its not like New York doesn’t have just as strong, if not stronger, history of legal precedent. Favoring Delaware because its “large amount of precedence and case law” is a euphemism for “large amount of precedence and case law in favor of corporate interests”.
Source: https://freakonomics.com/podcast/why-does-one-tiny-state-set...
Edit: the podcast I mention also discusses a lot about the looseness of Delaware’s laws. One example they bring up is how little effort it takes to incorporate in the state, leading to criminals choosing to incorporate in Delaware to legitimize their illicit operations. This is just one example.
Tech companies are foolish if they think they're going to be harassed more by quiet, stable, corporate tax shelter Delaware than the Yosemite Sams that run Texas. They're practically drowning in the evidence already.
Do you have any examples of this? Which books would I not be allowed to walk into a bookstore and buy, or order off of Amazon, and in which states?
You're looking in the wrong places.
Try asking the same question but for schools and libraries.
https://tsta.org/teaching_and_learnin/hb900/
https://www.texastribune.org/2023/10/11/texas-library-book-b...
https://www.dallasobserver.com/news/list-of-texas-banned-boo...
"You're holding it wrong".
I have a question. It's an honest question. I really am curious about this.
The question is "Which books would I not be allowed to walk into a bookstore and buy, or order off of Amazon, and in which states?".
Do you have an answer to that question? Please don't go all Stack Overflow on me and tell me I'm asking the wrong question, OK?
The fun thing about the Moelis case is that the Delaware Court of Chancery in 2024 sided with a minority shareholder against Ken Moelis. Which is kind of wild when you think about it. You’re a minority shareholder. You invest in Moelis & Company, an investment bank that Ken Moelis—yes, that Ken Moelis (https://en.wikipedia.org/wiki/Ken_Moelis), the famous dealmaker whose name is literally the brand—controls through majority voting power and ownership. And then you go, “Wait a second, Ken Moelis has too much control over the board of Moelis & Company!” Yeah, that’s sort of the whole point.
And this is where people start saying, “Huh, maybe this court is getting a little too activist.” Wasn’t the whole idea of incorporating in Delaware that it’s business-friendly? That it streamlines governance and makes it easier to run a company?
1. Were you aware that the stock you were buying was founder-controlled? In the Moelis case, this was fully disclosed to shareholders.
2. In a free market, shouldn’t investors be able to decide for themselves whether founder-controlled companies offer better returns—and invest accordingly? There are plenty of companies with traditional governance structures for those who prefer them.
3. If you own one share with one vote, should that give you the power to dictate the corporate structure for everyone else?
I completely agree that shareholder protections matter. The question is whether these lawsuits are really about protecting shareholders—or if they’re more about generating profits for attorneys through litigation.
Ultimately, the market provides options. We have 50 states, each with the ability to set its own corporate governance laws. Companies aren’t locked into one approach—they can choose the legal framework that best aligns with their needs. Delaware has long been the preferred choice, but as its legal environment shifts, states like Nevada, with their statute-driven approach, may become more attractive for businesses looking for stability. Competition among states is a feature of the system, not a flaw.
Shareholder friendly.
Also a deeply-developed body of law and efficient courts. There will absolutely be legal arbitrage opportunities between Delaware and Texas. Musk and Mark can sustain them; those who follow them may not.
This isn’t just one case. First, it was Musk’s pay package. Now, it’s TripAdvisor. What comes next? Each ruling seems to reshape long-standing corporate governance norms.
And when that happens, how long will it take Delaware to provide clarity? How much will companies and shareholders spend on legal fees while they wait?
Also who does this all benefit except for plaintiff-litigation attorneys?
Texas is arguably more legally volatile than Delaware. Just look at statutory volume. Put another way, Texan lawmakers make headlines in ways Delaware lawmakers do not.
> who does this all benefit except for plaintiff-litigation attorneys?
Texan courts are slower than Delaware’s. Also, there is now a multi-billion dollar incentive to find the areas of law Texas hasn’t patched that Delaware has. Would be shocked if we don’t see a massive boom in Texan corporate litigation in the coming years.
The proximate cause was the pay package. The root cause is these leaders don’t have influence in Delaware. They do in Texas, and they want to wield that. For their companies’ shareholders, that might wind up a win-win.
The case that bothers me is the Moelis case. The West Palm Beach Firefighters' Pension Fund v. Moelis & Company case is troubling, because it’s a classic example of a Delaware court looking at a company’s governance structure and saying, “Wait a second, this seems bad,” even though it’s exactly what everyone signed up for. On February 23, 2024, the Delaware Court of Chancery ruled in favor of a minority shareholder against Ken Moelis. Yes, that Ken Moelis <https://en.wikipedia.org/wiki/Ken_Moelis>, the well-known investment banker whose name is literally the brand. Analysis of the case is located here: <https://clsbluesky.law.columbia.edu/2024/06/10/does-the-moel...>. The court found that Moelis & Company’s governance structure—where Moelis, through his majority voting power, essentially controls the board—violated Delaware corporate law.
Now, imagine you’re a minority shareholder. You buy stock in Moelis & Company, a firm run by a guy named Moelis, with a governance structure designed to keep him in charge. Then, at some point, you look around and say, “Hey, wait a minute, this Moelis guy has too much control over the board!” Yes. That’s the whole point. That’s why this company was set up in Delaware. And yet, the Delaware court said no, this arrangement is not okay. Which is interesting because Delaware is supposed to be the place where companies go for predictable, business-friendly rules. The whole appeal of Delaware incorporation is that it streamlines governance and makes it easier to run a company. If the court begins second-guessing these structures, is Delaware still the best place to incorporate? It also raises the question of who is the court protecting. Is it protecting minority shareholders, or is it creating ambiguity that fuels the plaintiffs' bar and leads to more litigation?
Why should shareholders be stripped or their rights? If you sell shares to others they should have the rights of owners such as votes on board members.
Shareholders absolutely have rights, but those rights depend on the governance structure they agreed to when they invested. If you buy non-voting shares or shares in a dual-class structure, you don’t get to retroactively demand different terms. The market offers plenty of companies with traditional governance—if that’s a priority, investors are free to choose them.
The real question is: should courts be rewriting corporate structures after the fact, overriding agreements that were clear from day one?
If you want founder control structures then you don't want a public company.
Thinking back to 2022 - the market was ready to throw Meta out with the bath water. The voting protections kept Zuck in place and now we have consistent backing of Llama. When Zuck says he believes in open source and will continue to fund it I believe him because he is a software engineer who wrote Facebook on PHP which is open source.
Shareholders brought a suit alleging Musk's pay package was inappropriate. It came out in the lawsuit that the people charged with negotiating with Musk were actually taking direction from him.
However you feel about that, I think it's easy to acknowledge that if the people negotiating on your behalf were being instructed by the counterparty, you probably didn't get the best deal you could. The court's decision was reasonable and probably would've been similar in any jurisdiction.
This exodus appears to me to be part petty feud and part cargo cult.
And then the shareholders voted and it passed...?
Not the same shareholders. If the new vote had been on a new package, that would have been unambiguous.
The bottom line is Musk and Mark don’t want Boards. That’s honestly fine if everyone agrees ex ante those are the rules they’re playing by. Delaware law requires independent Boards. Sort of like a quorum requirement, the company can’t do certain things if it’s deficient in this respect. Texas law apparently doesn’t.
She appears to be ruling based on ideology instead of law.
The "passed the package again" tried to resurrect the original incentive payments, retroactively. That was disallowed.
The only reason the pay package is so astronomical now is because the Tesla stock has risen astronomically in value. Which benefits the shareholders, no? This dilution in shareholder value is already factored into the rising price.
Not technically correct. Tesla is allowed to gift Elon everything it owns. The problem was Tesla didn’t follow the rules in how to do it such that the shareholders were ensured an honest negotiation between themselves and management. The Board was not independent, and the shareholders at the time of the grant didn’t approve it.
A later cohort signed off on it, but it was still backdated. The only downside to making a new grant are the tax implications.
Musk was just sloppy and greedy. He could have got it if he had acted within the law, but then he probably wouldn't have gotten as much.
Texas gives out goodies. And fewer people want to live in Nevada than Texas.
And what goodies does Texas give out? Like the ones that Disney got?
That's honestly a really big problem.
Why?
Every business is going to be where its customers are not to some degree. That’s just fundamental to trade and, like, hadrons.
Every business should be prepared to deal with legal issues in whatever jurisdiction they're doing business in. Being incorporated somewhere else to avoid or prefer laws (such as taxes, or employment, or shareholders) is therefore reprehensible.
If you go to a different state and break the laws there, you can't magically claim that a different state has jurisdiction just because that's where you were born. Alas, that's exactly what businesses seem to have and abuse.
Yes. This is how it works.
> that's exactly what businesses seem to have
It really isn’t.
Yup. Texas gives out tax breaks and grants more freely than Nevada. Its governor and AG are also more powerful, which is nice if they’re on your side.
That’s the point. Musk and Mark are used to having influence. They don’t in Delaware because they don’t bring that much money to it and don’t control many votes. They have those things in Texas.
This doesn’t give you a seat at the table. Living in Texas, having a large number of employees who pay taxes and vote, that gains you influence with the legislators and governor. Not relevant for most companies. Important for Musk and Mark.
https://cowboystatedaily.com/2024/12/06/wyoming-overtakes-de...
We’re seeing a shift away from shareholder sovereignty to cult of the founder. Texas is an alternative to the former, which is the Delaware default.
https://www.cov.com/en/news-and-insights/insights/2023/04/fo...
The judge still threw it out, in December of last year, pretty much on vibes. Even legal experts well versed on Delaware law were confused by this. It is a rather unprecedented action by an activist judge in a state that is specifically known for clarity of the law.
It really did undermine all trust in Delaware, and the very foundation of why people incorporate there in the first place.
CEO: I agree to the plan Shareholders: I agree to the plan Board: I agree to the plan
Random judge: I don't!
Disallowing adults of sane mind from coming to mutually beneficial agreements and a judge can just throw it out because they don't like the guy is like setting off a nuclear bomb in regards to the rule of law.
Abuses of the legal system like this are why we can't have nice things, and this is only one example, see: medicine.
The board compensation committee is supposed to be independent of the person they are deciding compensation for, and it manifestly was not. That was the basis for her ruling.
He hit most (all?) of those metrics, and as a result Tesla is now among the most valuable companies in the world. Shareholders have gotten a 2800% return on their investment from 2018. In exchange for a 12% dilution in their shares. 12% in new options is on the high end for an executive pay package, but not unheard of. It is only because of the massive success of Tesla under his leadership that this is even an issue.
Shareholders got a good deal.
They didn’t. It was still a backdated package being voted on by a different set of shareholders than the ones who owned the stock when the package is backdated to.
The dotting the i’s move would have been a new package in that amount, adjusted upwards to account for the higher taxes that would have had to have been paid due to it being granted up front. They didn’t do the dotting the i’s move.
I don’t think there is a clear argument for that. Not yet. Maybe protecting shareholder rights drives shareholder value. Maybe tiny monarchs make them richer.
If you want technological and social progress, letting a handful of thin-skinned petulant boy kings run around having mad ideas without oversight isn't the direction you want to go in.
When you see "rules protecting shareholder rights" when you should be reading in this context is "rules inviting massive lawsuits from plaintiff attornies nominally representing super minority shareholders against the express will of the supermajority of shareholders and causing significant legal expenses to companies (and thus their shareholders)".
With that re-framing perhaps its more clear why savvy shareholders are not very interested in this form of "shareholder rights".
This is a good move by tech companies (which should also defund the PSF).