'Get it Right for Elon Musk'
Delaware looks to empower corporate insiders.
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This post was written by Laurel Kilgour, research manager at the American Economic Liberties Project.
Delaware holds the dubious distinction of being one of, if not the, most big-business-friendly states in the U.S. It’s a notorious tax haven, both internationally and domestically, and a “litany of bad actors” have taken advantage of Delaware’s lack of transparency requirements to launder money through shell companies. Disputes there are settled in the historically big-business-friendly Delaware Court of Chancery, and its incorporation process is so simple it can take less than an hour.
In the U.S., states are required to allow corporations that are chartered by other states to do business within their borders, incentivizing them to incorporate in whichever state has the most corporate-friendly terms (and the most thoroughly developed body of common law), rather than the state where they are physically headquartered or do the most business.
As a result, two-thirds of Fortune 500 companies are incorporated in Delaware, binding most of the nation to the corporate governance law of a tiny state where the economy has been meticulously engineered to favor corporations over consumers or workers.
And the legislature there is on a path toward making it even worse.
For all its imperfections, Delaware law included features that struck a balance of power between corporate managers and shareholders. Last week, though, the Delaware State Senate passed SB 21, a bill that weakens corporate governance protections by making it harder for shareholders to challenge self-dealing and hold corporate insiders accountable.
Were it to become law, SB 21 would make it easier for corporate boards to insulate directors and controlling shareholders from litigation over conflicts of interest and self-dealing, narrow who qualifies as a controlling shareholder, impose a new presumption that board members are independent no matter who they are appointed by, and make it more difficult for shareholders to discover conflicts by restricting their access to internal corporate records.
SB 21 jeopardizes the ability of investors to protect themselves from harmful board decisions, such as awarding exorbitant executive pay packages that far exceed any rational benchmark, or overpaying to acquire companies in which controlling shareholders have financial stakes.
These checks are important because corporate overspending effectively slashes returns for shareholders. As one critic put it, SB 21 is “a license to steal from institutional investors and pension funds, including pensions of teachers, police officers, and firefighters who’ve worked for the common good every single day. The corporate defense bar knows it and is rushing it through outside the normal process while threatening the new Governor.”
The Delaware effort came about because last year, Elon Musk reincorporated Tesla and SpaceX outside of Delaware, after the Delaware Court of Chancery rejected his $56 billion pay package from Tesla — which would have been largest in the history of public markets. The court ruled that Tesla’s compensation committee was packed with people who had decades-long business and personal ties with Musk, leading to a “deeply flawed” process with no “objective benchmarking data” and “no meaningful negotiation.”
Last month, Delaware Governor Matt Meyer said the quiet part aloud and urged state legislators to “get it right for Elon Musk.” SB 21 likely wouldn’t change that ruling, but it would make it easier for other corporate insiders to evade scrutiny for similarly egregious behavior.
The worst part is that SB21 isn’t even solving a real problem. Although several billionaires have sought to create a perception of a mass corporate exodus from Delaware (“DExit”) in response to the Musk case, Delaware’s secretary of state recently admitted that state data “doesn’t currently show any exodus — massive, middling or minor.”
This is confirmed by other quantitative analyses. The overall number of filers continued an upward trend in 2024, and nearly 90 percent of startups incorporated in Delaware that year, similar to previous years. Delaware’s tiered fees are capped, so the overall number of corporate registrations matters more to Delaware’s budget than retaining any particular firm with a large market cap.
Preemptive capitulation to threats from a few loud billionaires and the corporate defense bar also isn’t free. One economist estimated that “the annual economic activity lost due to SB 21’s passage is $117 million — $235 million in decreased economic activity and 450 – 900 lost jobs, statewide.” That’s because suppressing litigation to protect shareholders also slashes revenue for local law firms. (This estimate does not even include the knock-on impacts to real estate, restaurants, hotels, etc.).
Coming on the heels of another panicked giveaway to the corporate defense bar just last year, approving SB 21 would undermine investor confidence and further erode whatever credibility Delaware still has as a fair corporate forum — and make it harder for residents of other states to hold their own local corporations accountable, as more of them run to Delaware to evade scrutiny.
So what next? Well, the Delaware House has to take up SB 21 and could vote it down — or shove it in a drawer. If you are from Delaware, now would be a good time to pick up the phone and give your State House representative an earful — and if you’re not from Delaware, but have friends or family that are, suggest they do the same.
Meanwhile, some members of Congress have proposed replacing the “race to the bottom” among states with a federal chartering system for firms engaged in nationwide commerce, which could heighten standards for corporate conduct by including labor in corporate governance processes and conditioning corporate political expenditures on shareholder and director approval. That would stop the rest of us from being held hostage to Delaware’s corporate governance industry.
SIMPLY STATED: Here are links to a few stories that caught my eye this week.
Staff at the Federal Trade Commission reaffirmed their opposition to a proposed Indiana hospital merger.
Berkeley, California, became the third U.S. city to ban landlords from using third-party algorithms to coordinate rental housing prices. Similar legislation is pending in 18 states, and passed the Washington State Senate last week.
The Arizona Senate advanced a bill that would “would waive certain state regulations to allow data centers and other large industrial energy users to build small nuclear reactors in rural Arizona.”
28 state attorneys general filed a joint brief in support of a Federal Communications Commission rule to limit robocalls.
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