Musk is seeking a Tesla shareholder vote on moving incorporation to Texas

Musk is seeking a Tesla shareholder vote on moving incorporation to Texas

Written by Shubham Kalia, Maria Ponnizath and Samritha A

(Reuters) – Tesla CEO Elon Musk The electric car maker said Thursday that the company will hold a shareholder vote to move its state of incorporation to Texas from Delaware, days after a judge invalidated the electric car maker's $56 billion pay package.

On Tuesday, Delaware Judge Kathleen McCormick called the 2018 stock-based pay package, the largest in corporate America, an “unfathomable amount” and unfair to shareholders, finding that it was negotiated by directors who appeared to be in debt. For a mask.

“Never incorporate your company in Delaware,” Musk posted on social media X shortly after the ruling.

Musk's idea, if the vote goes ahead, is not without risks. Legal experts said investors would almost certainly file a lawsuit against Musk if he tried to move incorporation jurisdiction to Texas, especially if it was seen as a move to secure his salary package rather than gain some benefits for Tesla.

“Elon Musk’s plan to change Tesla’s state of incorporation from Delaware to Texas is typical behavior of an entrepreneur who is always looking for an alternative if he can’t get what he wants,” said Dan Coatsworth, investment analyst at AJ Bell.

Engaging shareholders may be another hurdle for Musk.

“Shareholders need to take a hard look at how the move out of Delaware will impact their rights and corporate governance,” independent business consultant Keith Donovan said.

The company's shares reversed course to trade down 1.2%. They are down nearly 25% this year due to growing concerns about weak demand for electric vehicles after doubling in 2023.

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This ruling is not the first time Musk has suffered a setback in Delaware.

McCormick was the same judge who oversaw the lawsuit Twitter filed in July 2022 against Musk after he tried to back out of his contract to buy the social media platform for $44 billion. The judge rejected his dilatory tactics, and Musk finally completed the deal to buy the company.

“Musk must believe that Texas judges are more ‘business friendly’ than their counterparts in Delaware… Musk must assume that Texas judges, with the discretion they have to evaluate executive pay, will take a more relaxed approach to this issue.” Of the Delaware judges. Brian Chevens, professor of corporate law at the University of Cambridge, said:

“It's not clear that Texas judges would do that.”

More than 65% of Fortune 500 companies and more than half of all publicly traded U.S. companies are founded in Delaware, attracted by the state's business-friendly legal framework and tax policies, according to Harvard Business Services, a company that provides business formation services in Delaware.

US public corporations looking to incorporate in Delaware have access to state courts. Its corporate law places greater restrictions on management and is more protective of investors from states like Nevada, making it cheaper for Delaware companies to raise capital.

TripAdvisor and its parent company are currently defending a lawsuit brought by its shareholders, who have challenged the company's plans to reincorporate in Nevada from Delaware.

Musk also recently said he would not be comfortable growing the automaker into a leader in artificial intelligence (AI) and robotics without having at least 25% voting control in the company, nearly double his current stake.

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His stake was larger before he bought Company

Musk and Texas

Musk has a keen interest in Texas.

He moved Tesla's headquarters from Palo Alto, California, to Austin, Texas, in 2021 after criticizing California regulations and taxes, and also clashed with health officials at the start of the COVID-19 pandemic over reopening a factory in Fremont.

One of the electric vehicle manufacturer's massive factories is located in Texas, where it is also planning a more than $750 million expansion. It is also building a lithium refinery in the state, with the goal of producing enough for about 1 million electric cars by 2025.

Musk's other companies – SpaceX and The Boring Company – also have operations in Texas.

Musk, as he has done in the past, conducted a poll on X, and declared that a yes vote of 87% of the 1.1 million total votes was a deciding factor.

“The public vote is unequivocally in favor of Texas! Tesla will immediately move to hold a shareholder vote to move its state of incorporation to Texas,” Musk said on X's website.

(Reporting by Maria Ponnizath, Shubham Kalia and Samarhitha Arunasalam in Bengaluru, Tom Hulse in Wilmington and Martin Coulter in London; Editing by Savio D'Souza and Soumyadeep Chakrabarti)

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