It’s a safe bet that Elon Musk won’t ever forget the name Kathaleen McCormick. The Delaware court of chancery vice chancellor just handed him his second defeat, following the earlier mandate to honor his $44 billion buyout of Twitter in October 2022.
McCormick now rules that Musk’s record-breaking $55.8 billion pay package from 2018 is null and void, over a year after the trial’s end. The stock options he received must be renegotiated transparently to ensure fairness for shareholders.
“Never incorporate in Delaware,” Musk posted on Tuesday to his social media site X, formerly Twitter, before adding he recommended Nevada or Texas “if you prefer shareholders to decide matters.”
Never incorporate your company in the state of Delaware
— Elon Musk (@elonmusk) January 30, 2024
He then put the issue to a user poll in which he asked whether Tesla should move its state of incorporation to Texas, in line with where its headquarters are situated.
More than 750,000 accounts cast their vote with 88% in support of the idea, at the time of writing.
If Musk follows through, it wouldn’t be the first time he has taken such a measure.
After McCormick compelled Musk to fulfill his obligation to buy Twitter, he incorporated the social media site’s parent company in Nevada.
Tesla’s HQ itself is only located in Texas because he moved it from California after repeated clashes with health officials that barred him from compelling shopworkers to build cars during the 2020 pandemic lockdowns.
What are the business benefits for Musk in Texas?
Musk has extensive ties to the state going back to the operation of SpaceX’s Boca Chica launch site called Starbase.
But its government is also friendly to the tycoon.
Attorney general Ken Paxton, recently impeached on corruption charges but acquitted by the state legislature, has already gone after Musk’s declared enemies.
Musk has in turn publicly supported Texas in its standoff with the federal government over immigration.
While Delaware’s chancery court has a reputatation for rigorously enforcing corporate law, it would be premature for Musk to find fault solely because McCormick overruled his 2018 pay package.
His legal team failed to defend the negotiation process in a court of law despite extensive testimony and over 1,700 exhibits logged as evidence.
Furthermore, Musk cited no such concerns over Delaware corporate law or the chancery court when it ruled in his favor in the case of his SolarCity acquisition challenged by Tesla shareholders.
Texas is absolutely right.
This administration is deliberately breaking the law by aiding and abetting illegal immigration at an unprecedented scale!
— Elon Musk (@elonmusk) January 25, 2024
Why Delaware ruled against Musk and Tesla’s board
Tuesday’s 200-page opinion by McCormick offers a scathing indictment of Tesla’s board.
It described seven out of eight directors marching in lockstep with Musk and all too willing to acquiesce to whatever wishes he demanded—either because of long-standing personal ties or the “life-changing” wealth they amassed by enabling him.
That is assuming they were even consulted on important decisions before the CEO unilaterally took them.
Even Musk’s own deposition testimony included a remark that it “was me negotiating against myself.”
When asked to describe the process, none of the defendants on the board viewed the process as an arm’s length negotiation.
“The testimony from the key witnesses is perhaps as close to an admission of a controlled mindset as a stockholder-plaintiff will ever get,” she found.
Only Linda Johnson Rice, who ran her own publishing company, had no compromising ties to Musk, and she departed the board after just two years while allowing her stock options to expire unexercised.
“Ultimately, the key witnesses said it all—they were there to cooperate with Musk, not negotiate against him,” wrote McCormick, concluding Musk “wielded the maximum influence that a manager can wield over a company.”