Elon Musk Told Corporations to Leave Delaware. Here’s What Happened Next.

“Our budget is being held hostage and we're supposed to just listen to the demands, but we have not been told who they’re coming from.”

The next big test of oligarchs’ power is coming this week — not in D.C., but about two hours northeast in Dover, Delaware.

There, state lawmakers will cast a final vote as soon as this week on changes to Delaware’s longstanding corporate code, which critics say will embolden the wealthiest corporations and their founders. Although the reforms have the full backing of the state’s Democratic leadership as well as the Republican minority, they are drawing unusually fierce opposition due to their connection to the biggest oligarch of them all: Elon Musk.

When a judge ruled last year that there was a conflict of interest when Tesla's board awarded Musk an astronomical $56 billion pay package, he encouraged companies to “never incorporate” in Delaware. Now, fearful that more companies are following Tesla and SpaceX out of the state, legislative leaders are readying a series of changes that critics say will empower the wealthiest corporations to the detriment of shareholders and the state’s own reputation.

“This is a surgical attempt to kill the best cases, the most meritorious cases. The biggest types of conflict transactions that are most in need of judicial scrutiny,” Mark Richardson, a Delaware-based lawyer who represents shareholders in corporate governance cases, told More Perfect Union. “It’s those types of cases that over the past 10 to 20 years have resulted in saving billions of dollars for pension funds and ordinary investors and public stockholders.”

The proposed bill, SB 21, passed the state Senate unanimously last week. It would effectively limit shareholder lawsuits by creating “safe harbors” for controlling shareholders and directors. The legislation would also limit which records shareholders can seek from company executives that could show wrongdoing.

The bill was drafted in part by a lawyer working for a firm that represented Tesla and Musk in the high-profile defeat in the Delaware Court of Chancery last year. Delaware Gov. Matt Meyer told Business Insider in February that it’s “really important we get it right for Elon Musk or whoever the litigants are in Delaware courts.”

Supporters of the legislation have steadfastly maintained that the sole purpose of the bill is to protect Delaware’s “competitive advantage” over states like Nevada and Texas. Much of the state’s revenue also depends on corporate taxes and fees; the state collected more than $1,800 per capita in corporate licensing fees in 2021, far above the average of $29 per state, according to the Urban Institute.

“We have evidence of several companies departing Delaware in the past two years or, if forming anew, choosing other jurisdictions in the first instance,” Senate Majority Leader Bryan Townsend, the lead sponsor of the bill and himself a corporate attorney, told More Perfect Union in an email. “Rather than wait until this foregone revenue increases even more, we are taking this opportunity to reaffirm Delaware's commitment to balanced, clear, and predictable frameworks for stockholder protections and fiduciary duties.”

Asked if corporations are telling lawmakers the legislation is necessary to keep them in Delaware, Townsend responded: “Yes.”

Critics, however, say that state lawmakers are playing with fire. A group of institutional investors, including dozens of union and public employee pension funds, sent a letter to Delaware lawmakers last week saying the proposal “will encourage value-destroying behavior and place our beneficiaries’ investments at great risk.” (In just three months, Tesla’s stock has plummeted from a high of $479 in December to $227 as of Tuesday.)

Other recent high-profile cases in the Court of Chancery where pension funds have taken on corporations include Paramount’s merger with Skydance, as well as a data privacy lawsuit against Meta over the Cambridge Analytica scandal.

In January, a Delaware Chancery judge leveled sanctions against former Facebook executive and board member Sheryl Sandberg for deleting emails related to the Meta case. Just days later, the New York Times and the Wall Street Journal separately reported Meta was considering leaving Delaware as well. CNBC reported Wednesday that Facebook has been the subject of a books and records investigation that could be derailed if the law were to pass, and that Meta’s lawyers — among other officials and firms — met with Meyer multiple times after the Journal story was published.

“For Americans that are closer to retirement... it's really scary to think that somebody who founded a company and isn't considered a controller, but has this charisma and has the ability to get people to make decisions that benefit them, will have the ability to just raid companies and just use them as a personal piggy bank,” said Rep. Madinah Wilson-Anton, a House Democrat who said she’ll likely oppose SB 21 when it comes up for a vote.

If the bill clears the House Judiciary Committee on Wednesday, the final vote could come as early as this week, with support from two-thirds of the Delaware House needed for passage.

“Our Court of Chancery is our crown jewel,” Wilson-Anton told More Perfect Union. “It is why companies choose to incorporate here and have for decades, so I’m skeptical of any legislation that removes judicial discretion and imposes new standards. Especially when those standards are being proposed by the Elon Musk world.”

‘Laughably false’

For decades, Delaware has been the dominant state for incorporation for a number of factors: low corporate taxes, a separate Court of Chancery for cases involving business disputes, and an overwhelmingly pro-corporate political climate. More than 90 percent of the companies that went public in 2021 were incorporated in Delaware, according to CNBC.

Musk’s companies were part of that trend, but in recent years, he’s faced a number of high-profile cases in the Delaware Court of Chancery. First, Twitter sued Musk to force him to follow through on his purchase of the platform, before the two parties settled out of court. But the bigger fight came over his $56 billion pay package at Tesla. In that case, Chancellor Katie McCormick, the court’s top judge, found that Musk “controlled Tesla” to such an extent that the board was not independent and investors were misled when they approved the package.

After Tesla and Musk lost that case, Tesla and SpaceX re-incorporated in Texas — a state that recently launched its own business courts — and Musk tweeted that his followers should “never incorporate your company in Delaware,” a state home to fewer than a million people but more than two million corporations, including two-thirds of Fortune 500 companies.

"The effort to say this isn’t about Musk is almost laughably false,” Richardson told More Perfect Union. “It is absolutely a reaction to what Elon Musk has been saying and the fear campaign he seems to want to wage against Delaware and its courts.”

So far, few companies have publicly followed Musk’s lead, but those that have enjoy outsized platforms. Hedge fund manager Bill Ackman and the file-sharing service DropBox have announced plans to re-incorporate their companies in Nevada. Soon after, Delaware lawmakers announced they were working on a “fix” to discourage defections, which in any large number would blow a hole through the state budget.

Changes to Delaware corporate law are usually drafted by a group of lawyers with the Delaware State Bar Association. This time, the bill was authored by a group including John Zeberkewicz, an attorney from Richards, Layton & Finger, a Wilmington-based corporate defense firm that represented Musk in the shareholder case, as well as others including former top judges on the state Supreme Court and Court of Chancery.

‘Stop SB 21’

The bill’s association with the most visible billionaire in the world has driven a surge of opposition. Greg Vallaro, himself a former lawyer with Richards, Layton & Finger who is now an investor-side attorney, wrote an op-ed last week for the Wilmington News Journal saying the legislation “puts Delaware in direct competition with Nevada for the state which gives controllers the clearest and easiest to follow road map to commit grand larceny.”

“I’m definitely noticing it’s much more organized, a much more diverse group of opponents this year,” Wilson-Anton said, in comparison to years past, when she waged lonely fights against changes to corporate law. “Today I was in the neighboring district and on the way back I saw multiple signs on the road saying ‘stop SB 21.’”

Townsend said in an email that pensioners shouldn’t worry about their investments, arguing that Delaware protects shareholders more than Texas or Nevada and that the bill “does not reduce the duty of loyalty” companies’ officers have to shareholders. He also claimed that the bill’s restrictions on books and records protect rather than harm shareholders, saying that “overly broad access to documents on a going basis without requiring a normal lawsuit actually can siphon off corporate resources and decrease the value of pensioners' stock.”

But even as the bill accelerates through the legislature, little evidence is public that the “flight” is really happening. In both 2023 and 2024, just under 90 percent of all startups incorporated in Delaware, according to data from the equity management software Carta.

Although publicly available data is limited, the number of corporations filing franchise taxes in Delaware has continued to rise, even after the Musk cases, University of Delaware professor Dael Norwood found.

Opponents also say the bill would damage Delaware’s economy rather than prop it up. Joseph Mason, a senior fellow at the Wharton School of Business, estimated the bill could cost up to $235 million in decreased economic activity and up to 900 jobs in the legal industry.

“Our budget is being held hostage and we're supposed to just listen to the demands, but we have not been told who they’re coming from,” Wilson-Anton said. “When we continue to pass bills that are catering to a very small minority of companies that have lost in court and are upset they lost in court, it creates an environment where other companies say, ‘You know what, we're just gonna stay in our home state because Delaware is just a state where the highest bidder gets to write the law.”