The clubby insular world of corporate law has entered the culture war.
First, Elon Musk started railing against Delaware, which for more than a century has been known as the home of corporate law, after the Delaware Chancery Court chancellor, Kathaleen McCormick, rejected his lofty pay package last year.
Eventually he switched where Tesla is incorporated to Texas.
Now, Dropbox has announced shareholder approval to move where it is incorporated to outside Delaware, and Meta is considering following suit. Others are also evaluating whether to make the move, DealBook hears.
Musk’s ire against the state where
nearly 70 percent of Fortune 500 companies are incorporated brought what would usually be an esoteric issue to the national stage and framed it, alongside hot button issues like diversity, equity and inclusion programs, as one further example of overreach.
“You can blame McCormick or you can blame Musk — or you can say it’s a combination of the two of them — but it has turned it into a highly ideologically charged political issue, which it never, ever was before,” said Robert Anderson, a professor at the University of Arkansas School of Law.
The drama over court rulings could have huge consequences for the economy and politics of Delaware, which counts on
corporate franchise revenue for about 30 percent of its budget — and more, if you count secondary impacts like tax payments generated by the legal industry.
At issue is a longstanding question in corporate America: How much say should minority shareholders have, especially in a controlled company? One side argues that founders like Mark Zuckerberg are given controlling shares, which give them outsize influence in a company, with the belief that they know what is best for a company. And minority shareholders buy into a company knowing their limitations. The other side argues these controlling shareholders are not perfect.
The disagreement has now been amplified as founders have become increasingly comfortable voicing their own views loudly. At a time when Trump has promised reduced government regulation, they’d also like to minimize the power of minority shareholders in corporate governance.
This isn’t the first time Delaware has come under heat. Phil Shawe, the chief executive of the language and business services company TransPerfect, mounted a multiyear campaign against Delaware after the court effectively seized his business during a fight
with his former partner and co-owner. That campaign included a lawsuit against one of the Delaware court judges,
a $2 million advertising campaign and support for
a $1 million PAC opposing Bethany Hall-Long, a candidate for governor last year, arguing that Hall-Long had “failed to support judicial diversity” in her time as state lieutenant governor. (Hall-Long
lost in the Democratic primary.)
But Musk has made the spotlight brighter. McCormick, who first sparred with Musk over his $44 billion acquisition of Twitter,
rejected the entrepreneur’s massive compensation in January, arguing that shareholders had not been properly informed and that Tesla’s board members were not sufficiently independent. In December, she again ruled against the package, even
after shareholders showed their support by voting in favor of it.
That latter decision, in particular, got some pushback from the legal community. And, unsurprisingly, Musk and Tesla shareholders descended. “
Absolute corruption,” Musk wrote of the decision.
Other blows followed. In a major decision last year, a Delaware court’s vice chancellor, J. Travis Laster, ruled that company boards cannot contractually hand over power on key issues — like deals and executive compensation — to a shareholder. That ruling, which centered on the power bequeathed by board members to Ken Moelis, the controlling shareholder of the investment bank Moelis, put Delaware and its advisers into a tizzy.
Then, in an extraordinary move, the legislature effectively undid that decision, passing an amendment this summer that allowed companies to enter such agreements. A heated debate over that amendment on the floor of the state legislature soon evolved into a contentious argument about the direction of Delaware’s corporate law.
“Right now, the corporate market is not feeling good about Delaware,” a former state judge, William Chandler, said on the House floor, pinning that sentiment on “the uncertainty and unpredictability of a few decisions by just two judges,” referring to McCormick and Laster.
That debate has turned into a soap opera of corporate interests. Law school professors, who feel ardently about the law — and, perhaps, more cynically, about their relationship with Delaware judges — wrote passionate defenses. The judges, facing inordinate glare, threw
social media punches.
And Delaware’s Democratic governor, Matt Meyer, who has been studying ways to handle the backlash legislatively, has gone on a
media spree assuring companies Delaware is working to remain hospitable for their business.
The stakes for Delaware are huge. A mass exodus of businesses “would be crippling,” said Jonathan Macey, a professor at Yale Law School.
Moving a company’s incorporation is not prohibitively expensive. And it was just made easier by a ruling involving TripAdvisor’s decision to move away from Delaware, which declared that controlling shareholders
would not be liable for damages that shareholders argue are incurred by the move if they moved their incorporation out of the state. (The message: Delaware isn’t Hotel California.)
Delaware’s governor has been trying to underline the nonfinancial costs, in particular the risk of losing Delaware’s bounty of case law and experience.
And he is offering the prospect of potential concessions, like the once inconceivable possibility that judges could get less discretion over the cases they choose. (As the head of the Delaware Chancery Court, McCormick gets first dibs on all cases.)
Companies and their lawyers “feel like they get the same judge every time when they come to Delaware business court, and they don’t feel like they’re getting a fair hearing,” Governor Meyer
told CNBC.
“If you feel like every day you’re getting the same recess proctor no matter what — when there are a number of people who can preside over the case — maybe we need to look at that.”
