A Delaware judge has ruled that Elon Musk’s 2018 pay package from Tesla, worth around $56 billion, is invalid. In response, Musk has announced plans to move Tesla’s state of incorporation from Delaware to Texas, pending shareholder approval.
Judge Finds “Waste” and “Bad Faith” in Approval of Compensation Plan
Chancellor Kathaleen St. Jude McCormick of Delaware’s Court of Chancery found that members of Tesla’s board acted in “bad faith” and breached their fiduciary duty when structuring CEO Elon Musk’s 2018 pay package. She determined the compensation plan constitutes “waste” and was negotiated by directors who were not sufficiently independent from Musk to satisfy their legal duties.
The pay deal allows Musk to buy 1% of Tesla’s stock at a deep discount each time operational and financial targets are met. Tesla valued the package at $56 billion at the time, although its current value is likely far higher as the company’s market capitalization has soared.
McCormick’s ruling renders the pay package invalid. She did not, however, award the plaintiff investor any damages.
Musk Polls Twitter Followers on Reincorporation
Shortly after the ruling was announced, Elon Musk took to Twitter to poll his followers on whether Tesla should reincorporate in Texas, where it is building a new vehicle assembly facility. With over 2 million responses, over 80% voted “Yes.”
Musk then tweeted that Tesla will be “holding a shareholder vote” to ask investors if they support reincorporating Tesla from Delaware to Texas.
| State | Corporate Tax Rate | Political Leaning |
|---|---|---|
| Delaware | 8.7% | Democrat |
| Texas | 0% | Republican |
Table comparing relevant state policies on corporate taxes and political environment
The potential move to Texas comes as conservatives have been courting Musk in the wake of his acquisition of Twitter and embrace of Republican talking points around free speech. Meanwhile, liberals have soured on the billionaire after initially embracing him as a leader in electric vehicles.
Reincorporating Tesla in Texas could also shield it from shareholder lawsuits, as Texas laws better protect companies and executives from liability. Delaware is seen as more shareholder-friendly.
What’s Next For Tesla and Musk
It remains to be seen whether Tesla shareholders will approve shifting the company’s state of incorporation from Delaware to Texas. The decision could have major implications:
- Musk’s pay package would remain invalidated, depriving him of tens of billions in compensation
- Tesla would pay no corporate income taxes as Texas has no state corporate tax
- Tesla could face less shareholder scrutiny going forward
- Musk himself could save on his personal taxes as Texas has no state income tax
The shareholder vote will also be a test of how much support Musk retains from investors after a turbulent 2023.
While Tesla has been hit with lawsuits and controversies before, the voiding of Musk’s pay deal and potential Texas reincorporation marks a pivotal moment for the electric car maker. How shareholders decide on Musk’s proposals could shape Tesla’s future governance, culture, and relations with investors.
Analysts Chime In on Ruling and Potential Move
Here is what some industry watchers have had to say about the latest developments:
Alex Voigt, longtime Tesla analyst:
“Musk wants to move to Texas to avoid paying taxes himself. He knows he can rally his online followers to vote for anything. This is not in the interest of regular Tesla shareholders.”
Mike Ramsey, automotive analyst at Gartner:
“This is about Elon Musk having more personal freedom to run Tesla without interference. But less oversight could lead to more questionable decisions down the road.”
Dan Ives, Wedbush analyst:
“The courting of Tesla and Musk by Texas makes complete business sense. This move was already in the cards, but the court ruling could accelerate that.”
So in summary, Elon Musk is swiftly seeking to relocate Tesla to Texas after a disappointing court defeat in Delaware, signaling the growing divide between the billionaire and his former allies. The coming shareholder vote will be closely watched as an indicator of how much loyalty Tesla investors still have for its mercurial CEO.
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