Updated Feb 1, 2024 - Business

Musk's threat to re-incorporate Tesla boosts Texas' challenge to Delaware

Elon Musk holds microphone while speaking at a convention

Elon Musk speaks at a political convention on Dec. 15, 2023, in Rome, Italy. Photo: Antonio Masiello/Getty Images

Elon Musk said Thursday that Tesla would "move immediately to hold a shareholder vote" to transfer the electric vehicle maker's state of incorporation from Delaware to Texas.

Why it matters: Musk's eye on re-incorporating the automotive company comes as the Lone Star State works on setting up its own business court network — which could challenge Delaware's preeminence.

Catch up quick: A Delaware Chancery Court judge on Tuesday voided Musk's $56 billion compensation package, ruling that the world's richest man "failed" to prove the compensation package was fair.

  • Musk then took to his platform X, advising his followers to "never incorporate your company in the state of Delaware."
  • Shortly after, Musk polled his nearly 171 million followers on whether Tesla should change its state of incorporation to Texas, home to its physical headquarters in Austin.
  • Texas Gov. Greg Abbott also chimed in on Musk's poll, saying: "Elon, it's over. The election desk is declaring a landslide victory for Texas."

What's new: An overwhelming majority, at 87.1%, voted "yes" to having Tesla re-incorporate in Texas, per the poll, which garnered over 1.1 million total votes.

  • "The public vote is unequivocally in favor of Texas," Musk said, adding that Tesla would be holding the shareholder vote.

Zoom in: The Delaware Chancery Court is the preeminent business court in America. That has pushed a large majority of companies to incorporate in Delaware, along with the state's extremely business-friendly tax and privacy laws.

Yes, but: Tesla's potential re-incorporation in Texas could set the stage for "a bit of legal competition" between Delaware and the Lone Star State, according to Garland Kelley, a Texas-based partner at Looper Goodwine PC.

  • A new Texas law, signed by Abbott in June 2023, establishes business courts in the state that will deal with complex commercial disputes. Those courts open Sept. 1, according to the law firm Sidley Austin LLP.
  • "If you are a new company or an existing company like Tesla and you're unhappy with the legal product that the court in Delaware is producing, do you have an alternative?" said Kelley, who believes "the Texas Business Court represents that alternative."

However, it could be years before these Texas cases play out in the new courts, leaving its legitimacy compared to Delaware unknown for several years, according to JD Reed, partner at Holmes Firm PC, based in Texas.

  • With the possibility of appeals, it could take anywhere from "five to six years before you can really tell whether the [Texas] business courts are doing what they're supposed to and whether they're any good," Reed said.
  • "We're a long way out from being able to determine whether the business courts have real legitimacy in comparison to Delaware courts," he added.

Our thought bubble, via Axios' chief financial correspondent Felix Salmon: Just because Musk is posting on X about this does not mean he will act on it. The overwhelming likelihood is that Tesla will not re-incorporate.

Go deeper: Judge voids Elon Musk's $56 billion Tesla compensation package

Editor's note: This story has been updated with more details about the shareholder vote.

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