Why Should Delaware Care?
About a third of Delaware’s state budget depends on its incorporation industry, which helps to lower taxes on state residents and businesses. That industry has been targeted by some of the nation’s most influential businessmen, such as Elon Musk, in the past year. Now the Delaware Supreme Court is set to weigh in with potentially monumental rulings, impacting its future.
A fight over Delaware’s billion-dollar corporate franchise industry is entering its final chapter with the state Supreme Court set to hear two cases that could reset the rules governing how founders and powerful executives, such Elon Musk, run their businesses.
A year and a half ago, Musk – then the world’s richest person – launched a public relations assault on little Delaware, claiming the state’s business court was unfair to him when it ruled that he could not accept an estimated $56 billion pay package from Tesla.
Musk has served as CEO of Tesla since 2008.
What followed was months of drama for Delaware that featured Musk and other prominent executives moving companies out of the state, and lawmakers responding by passing a controversial change to Delaware’s corporate law that made it harder for mom-and-pop investors to sue the controlling executives of many of the biggest companies in the world.
Because of Delaware’s unique role as the legal home of more than 2 million companies, the rules it sets for corporate governance shape how much of global capitalism gets done. Its court also serves as the venue to resolve high-dollar disputes involving many of the world’s most powerful.
Two Supreme Court cases have resulted from the months of drama – one involving Musk’s appeal over his payment from Tesla; and another challenging the constitutionality of Delaware’s subsequent corporate law change, which became known as Senate Bill 21.
The Delaware Supreme Court is scheduled to hear Musk’s appeal on Oct. 15 in Dover. The justices will hear the Senate Bill 21 constitutionality claim on Nov. 5.
The outcomes of the cases will likely solidify rules governing when small-time investors can sue founders and other business leaders over the deals they strike within their companies.
The justices’ upcoming decisions may also boost or diminish Delaware’s overall brand in the corporate world – one that provides the state’s general fund with more than a third of its annual revenue.
This past spring, Gov. Matt Meyer first intervened in several suits brought to challenge the constitutionality of the months-old law Senate Bill 21.
Earlier this month, private attorneys working for the state said in written arguments that the Delaware legislature had every right to make the law change, arguing that Senate Bill 21 “follows a long tradition of amendments” to the state’s corporate law.
Delaware’s arguments followed those made by the plaintiff, as well as by a team of eight prominent professors who asserted that the credibility of Delaware’s business law rests on the foundation that judges – and not lawmakers – are the ones who should decide what is fair in a business dispute.
Delaware judges “have consistently (and correctly) preserved the Court of Chancery’s equity powers by rejecting legislative efforts to curtail them,” the professors said in their arguments.
On the team of academics is Charles Elson, the founding director of University of Delaware’s Weinberg Center for Corporate Governance, and a frequent critic of recent Delaware corporate law changes.
The ‘premier home’ of global business?
Meyer quickly signed Senate Bill 21 into law last spring, saying then that it aimed to keep Delaware as “the premier home for U.S. and global businesses.”
“The legislation, developed in collaboration with corporate leaders and legal experts, clarifies key governance structures to reinforce Delaware’s reputation for equitable, predictable, and efficient corporate oversight,” Meyer said in a statement at the time.
Yet, beyond those arguments about legal efficacy, supporters also said Senate Bill 21 was needed to pacify executives who were angered by shareholder lawsuits they faced in Delaware.
After Musk had pulled Tesla and his other companies out of the state in 2024, several other executives in January were threatening to do the same.
The highest profile of those was Meta. According to a Wall Street Journal report in January, the parent company of Facebook and Instagram had been in discussions then with Texas officials about moving its legal domicile there. At the time, the company also was facing an expensive years-long shareholder lawsuit in Delaware that had emerged a decade earlier from a scandal surrounding its partnership with a company called Cambridge Analytica.
Following the Wall Street Journal article, Meyer met with Meta executives, among others, to discuss the state’s corporate franchise.
Days after his meeting, Meyer told the business world that Delaware’s substantial corporate law needed some changes to allow the state to remain the pre-eminent legal domicile for millions of companies.
Two weeks after that, on Feb. 17, Meyer and lawmakers jointly introduced those changes as Senate Bill 21 and in just a few weeks it was signed into law.
In July, Meta settled its long-running lawsuit in Chancery Court.
Will Musk get the billions — or a trillion?
During the year before lawmakers passed Senate Bill 21, Delaware judge, Chancellor Kathaleen McCormick, issued pivotal rulings that twice stripped Musk of what was then estimated to be a $56 billion payment package from Tesla.
McCormick first nullified the massive payout on grounds that Musk had effective control over Tesla’s board of directors, whose job it is to negotiate his pay.
After the ruling, Musk launched his offensive against Delaware, posting on X to his tens of millions of followers, “Never incorporate your company in the state of Delaware.”
Months later, Tesla shareholders later voted to uphold the company’s payment to Musk, but in December McCormick again overruled it, calling Tesla’s board “a perpetrator of fiduciary misconduct” that is not allowed to “hit reset through stockholder vote.”
In arguing that Supreme Court justices should overturn McCormick’s ruling, Musk’s attorneys said in written arguments last spring that the court should give “great weight” to Senate Bill 21’s protections against shareholder lawsuits, even though the law “is not expressly applicable retroactively.”
The question of whether SB 21 could be applied to past cases — and specifically to Musk’s pay dispute — was a notable controversy during the legislative debate over the bill earlier this year.
Earlier this month, Tesla’s board proposed another massive stock-based pay package for Musk that similarly ties the compensation to ambitious valuation goals for the company, among other metrics. The New York Times reported that the pay could make Musk a trillionaire, if those goals are met.
Shareholders of Tesla, which now is legally domiciled in Texas, will vote on the pay on Nov. 6.