The Battle For Musk’s Evil Lair

As the federal government reduces criminal prosecution of white-collar crime, states are now courting businesses by competing with one another to further shield corporate executives from legal actions that aim to hold them accountable for wrongdoing.

Aiming to attract companies to the state, Nevada has changed its laws to shield executives from personal liability for misconduct and to limit the power of activist investors. In Texas, Republicans recently created a separate new court system for corporations stacked with judges who once worked for Big Oil. And Wyoming advertises its specialized laws that help secretive trusts shield information about their ownership.

And now this quarter-century deregulatory race has been put into overdrive thanks to tech billionaire Elon Musk and his crusade against America’s longtime incorporation capital, Delaware — which is now being bludgeoned into changing its laws to benefit Musk and other oligarchs.

For decades, much of corporate America saw the tiny East Coast state as the best place for companies to incorporate, thanks to its legal system that offers companies secrecy and courts with expertise in corporate law.

Yet ever since Delaware courts refused Musk a historic $55.8 billion compensation package from Tesla last year, the billionaire has been on a crusade against the state.“Never incorporate your company in the state of Delaware,” Musk wrote last January on X, the social media platform he owns. He suggested two alternatives: Texas and Nevada.

Musk kicked off what has been dubbed “DExit” — a growing corporate exodus from Delaware. Major companies like Dropbox and Tripadvisor say they plan to reincorporate in Nevada. Over the last month, both Meta and billionaire Bill Ackman’s hedge fund have said they are considering leaving Delaware. Musk himself has reincorporated his rocket company SpaceX in Texas and is fighting to move Tesla to Nevada, despite some shareholder opposition.

Nevada in particular was well prepared to welcome the new arrivals. Over the past decade, the state has quietly stripped away shareholder protections and loosened its corporate laws — a push, records show, crafted by corporate lobbyists in the state who hoped to lure more companies to Nevada.  

In turn, Delaware has felt pressure to yield to Musk’s protests. Last week, Delaware lawmakers introduced a sweeping package of legislation that could restore Musk’s multibillion-dollar compensation package eroding shareholder rights in the state and roll back long-standing transparency requirements for companies. Consumer watchdogs quickly spoke out against the proposal. 

“This seems to have been sprung out of the ether in response more to politics and political pressure from Elon Musk than some kind of thoughtful process,” said Jon Golinger, the democracy advocate for Public Citizen, a consumer rights group. “That’s a grave concern.”

The legislation, Golinger explained, “puts a heavy weight on the scale in favor of large controlling shareholders, who tend to be billionaires and wealthy individuals” — eroding protections afforded to smaller investors who tend to have a greater interest in rooting out misconduct and corruption in companies.

These investor protections have allowed shareholders to sue companies over their role in the climate crisis or demand internal records to investigate suspected fraud or self-dealing by corporate executives. Activist investors can be a powerful tool, proponents say, to force change in corporations from within. 

The story of Nevada, Delaware, and Texas’ deregulatory gamesmanship has long been called a “race to the bottom,” as lawmakers vying for companies to relocate offer perks like secrecy, tax benefits, and protection for corporate executives from investor lawsuits.

“Nevada has consistently, over the years, tried to make itself attractive through its laws, and it’s had slow and steady success,” said Keith Bishop, a corporate lawyer at California-based law firm Allen Matkins. 

What’s changed, Bishop said, is Elon Musk. “For better or for worse, Elon Musk has made it OK for mainstream, publicly traded companies to talk about and move out of Delaware,” he said. “I think it’s probably spooking Delaware.”

“A Den Of Thieves”?

Competition over where companies are incorporated long precedes Musk and the fight over his Tesla billions. This is a fight that “has been going on for centuries,” explained Benjamin Edwards, a law professor at the University of Nevada, Las Vegas.

There are real, tangible benefits if your state wins the incorporation game. Regardless of where companies decide to put their headquarters, they can choose to make any state their legal home by filing incorporation paperwork there for a fee. In 2022, the state of Delaware collected $2 billion in revenue from taxes and fees paid by companies incorporated in the state. And it sees broader economic benefits from the hordes of corporate lawyers, accountants, and registered agents that make their home there.

“Their people drive on better roads, their kids go to better schools, they pay lower taxes, all because of this enormous volume of revenue,” Edwards said of Delaware. Nevada lawmakers see the potential for billions in new revenue if more and more companies flock to the state — a major potential boon for a state that is still struggling to rebound economically from the pandemic.

Delaware has not always been the preferred home of corporate America. Back in the early 1900s, that was New Jersey, which had some of the first permissive corporate laws in the country. But in 1913, under federal pressure, New Jersey tightened its corporate laws, sending many of the state’s corporations fleeing to Delaware, which copied New Jersey’s earlier legal code to attract business.

Since then, it’s been difficult to imagine that most publicly traded companies would choose anywhere else to incorporate. Delaware’s venerable business court, the Court of Chancery, is considered the country’s foremost court for corporate law, a major draw for companies that want predictable, efficient courts and experienced corporate lawyers and judges.

Typically, if a company was not incorporated in Delaware, it often chose the state where its headquarters were located. Dollar General, for example, is both headquartered and incorporated in Tennessee.

Even if companies are incorporated in Delaware, they can end up in court in other states. But their internal disputes — primarily clashes between company investors and the company’s executives — are heard only in Delaware courts and under Delaware law. So when a Tesla investor took issue with Musk’s multibillion-dollar payout, he sued the company in Delaware business court.

It’s why states that offer executives greater protection from shareholder lawsuits, which have been used to hold corporate America accountable on everything from climate change to fraud, could become viable alternatives to Delaware’s incorporation monopoly.

That’s where Nevada comes in.

“Scoundrels Can Move Here”

Nevada, which has for a long time attempted to establish itself as a “Delaware of the West,” has for decades provided corporate executives broad personal immunity if they violate their fiduciary duties — their responsibility to act in the best interest of their company. 

That law dates back to 1987. But a real push by Nevada to distinguish itself from Delaware came in 2001 amid concerns about a $130 million state budget shortfall. As one scholar writes,  Nevada legislators unveiled legislative proposals that year to significantly weaken liability for company executives in an effort to bring companies — and new revenue — to the state.

At the time, lawmakers worried that the new law would encourage misconduct. One lawmaker said at the time that corporate officers would soon be able to “commit virtually any act and get away with it, and waste your money.” 

“Scoundrels can move here,” he added.

Researchers say that in the decades since, companies have been slowly “lured to Nevada because of its lax corporate law,” and in particular the protection the state offers from shareholder lawsuits. Shareholder activism and litigation, Golinger argues, can prove “key mechanisms holding corporate insiders accountable and deterring bad behavior.”

For Edwards at the University of Nevada, who is an advocate of the state’s approach to corporate law, this is a question of balance. “We don’t want to host a den of thieves,” he said. Delaware’s legal system certainly protected shareholders, Edwards argued, but had put corporate officers at greater risk of frivolous or overly aggressive litigation — to which Nevada offered a counterweight.

When the ice cream company Blue Bell Creameries suffered a listeria outbreak in 2015 — killing three people who ate the contaminated ice cream — some of its investors sued the company in Delaware court, arguing the company’s executives should be held personally accountable for failures in the company’s quality control system. The Delaware Supreme Court ultimately agreed, finding that company executives were indeed liable.

In Nevada, such a case would be nearly impossible to bring, Edwards said. “Under Nevada law, it strikes me as extremely unlikely that for that kind of case, you’d have liability,” he said.

In Delaware, though, such cases have been used to hold corporate officers accountable for major tragedies. A similar case was brought against Walmart executives for the company’s role in the opioid crisis and against Boeing’s board of directors after the fatal crashes that killed 346 people in 2018 and 2019. The latter case settled for a historic $238 million.

Nevada and Delaware’s legal systems diverge in other ways, too: Nevada is more encouraging of mergers, even when they are meant to squeeze out minority shareholders. And it is far more difficult for shareholders to get access to corporate records in Nevada, which is often an important precursor to litigation. 

While some of these differences — and Nevada’s attempts to draw more companies to the state — are long-standing, in recent years, a little-known lobbying effort to capitalize on Nevada’s lenient corporate laws and attract more companies to the state has picked up steam, setting the stage for Musk’s “DExit” crusade.  

Back in 2016, Lorne Malkiewich, a lobbyist for the moving company U-Haul, brought a proposed bill to Nevada state lawmakers in Carson City, the state’s capital. The bill was intended to ensure that Nevada’s courts did not defer to Delaware corporate law when deciding cases — cementing the state’s protections for corporate officers.

“The Nevada corporate laws are very good,” Malkiewich told lawmakers at a hearing in May 2017, as the bill was finalized. “Companies like U-Haul that incorporate in Nevada like them. They want to see that those statutes are enforced as written.” 

For more than a decade, until around 2012, U-Haul and its parent company Amerco were subject to a series of messy, long-running shareholder lawsuits as members of the Shoen family, which owned U-Haul, fought over control of the company and alleged that Amerco was taking advantage of shareholders.

Malkiewich was joined in his support for the bill by Nevada’s business lobby, including the Henderson Chamber of Commerce and the Las Vegas Metro Chamber of Commerce, both of which sent letters to lawmakers urging them to pass the bill, saying it would help protect businesses from “frivolous” litigation.

Ultimately, the Nevada legislature passed the law unanimously — a milestone in its battle with Delaware.

The 2017 law “reflects Nevada’s rejection of certain Delaware precedents, in effect stating that ‘When the Nevada code says something different than the approach in Delaware, we really mean it,’” Wendy Couture, a professor of securities law at the University of Idaho, wrote in an email to The Lever. The bill was a “significant turning point” for Nevada, she said.

The move helped cement Nevada laws that make it more difficult to hold corporate executives liable for misconduct than in Delaware. 

The law, Couture said, was “a bit of a shot across the bow by the Nevada Legislature to the Nevada judiciary” — a sign from lawmakers that Nevada’s courts should not lean on Delaware and instead chart out their own path, deferring to the Nevada state house.

For Bishop, the corporate lawyer, this is a central distinction between Nevada and Delaware. “The fundamental difference between Nevada and Delaware, in my mind, is not low liability versus high liability, but is a difference of approach — a statutory, legislative approach” — Nevada — “versus a judicial court making up the rules as they go along,” Bishop said.

In his campaign against Delaware, Musk has clashed the state’s judicial approach to corporate law, calling the judge who ruled against his multibillion-dollar pay package, “an activist posing as a judge.”

Delaware Fights Back

While Nevada has been positioning itself as a competitor of Delaware, Texas has also emerged as a potential rival. Musk, after all, opted to reincorporate SpaceX in Texas, not Nevada — and Meta, too, is said to be eyeing the state.

Texas does not offer the same kind of immunity to executives as does Nevada. But in some cases, that’s a benefit: As scholar Michel Barzuza has argued, a move to Nevada can itself draw ire from shareholders, who, as in the case of Tesla, have sued and claimed that the move amounts to self-dealing. Texas may be a less risky choice.

Texas has chosen to market itself by creating a new system of business courts to compete with Delaware’s Court of Chancery. The system is unusually deferential to the Texas governor and, as The Lever reported, is stacked with judges who have in the past worked for Big Oil. The new courts were bankrolled by the state’s fossil fuel industry and could offer companies a more favorable legal system as they contend with litigation over climate change.

Ever since Musk sent corporate America fleeing from Delaware, experts have worried that the competition “could pressure Delaware to relax its corporate law.” That warning now appears to be coming true.

Even before Musk came on the scene, Delaware was insulating corporate executives from liability. In 2022, the Delaware legislature adopted a law allowing companies to exculpate corporate officers from liability for certain kinds of misconduct — copying a similar policy in Nevada. Since then, hundreds of publicly traded companies in the state have adopted this “legal armor” for their executives, according to a report published last fall.

Last summer, Delaware lawmakers — facing pressure from corporate America over a business court decision related to shareholder activism — quickly drafted amendments to Delaware law to assuage their concerns. Among other things, the changes allow corporations to grant CEOs new veto powers.

Now, recently proposed legislation in the state would roll back longstanding investor protections and grant new power to majority shareholders. One key feature of the bill weakens longstanding “books and records” rights for shareholders that allow them to obtain internal company documents. In a statement, Lisa Gilbert, the copresident of Public Citizen, called this provision “glaring in its pullback from transparency.”

Observers say the bill, which could give billionaire investors and CEOs even more power over the country’s biggest companies, is the most dramatic move yet in the ongoing race to the bottom. The bill has bipartisan support and the backing of the state’s governor.

Delaware lawmakers have insisted the effort has nothing to do with Musk’s departure. But the sudden proposal — introduced without any input from the Delaware State Bar Association, as is standard for proposed changes to corporate law, and with the help of a law firm that has represented Musk and Tesla — seems a clear response to billionaire pressure, Golinger said.

“This proposal was not thought through in the light of day,” Golinger said. “It seems to have come as some kind of rapid response to something. And while no one has yet said, ‘This is designed to appease Elon Musk,’ certainly, that’s what it smells like.”

“We are responding to an urgency here,” one of the bill’s sponsors told Delaware Public Media last week, “An urgency to protect the state of Delaware and not have these other states swoop in and take our companies.”

Delaware’s legislation might not be the last instance of states eroding shareholder protections and giving the Elon Musks of the world ever more protections from their shareholders, regulators, and the public. Bishop, for one, thinks the race to the bottom hasn’t yet hit its nadir.