Elon Musk's Pay Package and the Threat to the Delaware Corporation

Summary

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Odd Lots Podcast Summary

Episode: Elon Musk's Pay Package and the Threat to the Delaware Corporation
Date: September 18, 2025
Hosts: Joe Weisenthal and Tracy Alloway (Bloomberg)
Guest: Professor Ann Lipton, Law Professor at the University of Colorado, Lawrence D. W. DeMuth Chair

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Overview

In this episode, Odd Lots delves into the supremacy of Delaware as the state for corporate incorporations, recent challenges to its dominance—including high-profile exits like Tesla’s move to Texas—and the broader implications for shareholder rights and US corporate law. The discussion examines the history and unique features of Delaware law, the impact of Elon Musk’s pay package case, and the potential for a “race to the bottom” among states to attract corporations at the expense of shareholder protections.

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Key Discussion Points & Insights

Delaware’s Unusual Corporate Dominance

• Fun Fact: Delaware has 2.1 million registered businesses, nearly two for every resident (02:00).
• Why Delaware?:
  • Deliberate strategy since the late 1800s to attract incorporations via business-friendly, flexible, manager-centric laws.
  • Built political insulation into its system (e.g., politically balanced judiciary, 2/3 legislative majority needed for code changes).
    • Professor Lipton: “Trying to insulate their corporate law from political pressures, and then they just made their corporate law very flexible and very manager friendly.” (05:00)
  • Precedent and “network effects” have made Delaware the de facto standard for corporate legal disputes.

The Structure and Culture of Delaware Corporate Law

• Legal Precedent: Having decades of case law provides predictability for companies and their attorneys, but can be tough for outsiders to parse (09:08).
• Chancery Court Explained: Specializes in corporate disputes, rooted in principles of equity and fairness, no jury—judges are corporate law experts (12:33).

Historical Challenges to Delaware’s Dominance

• Past Shocks:
  • Van Gorkum Case (1980s): Board held liable for not seeking the best deal during a sale. Delaware then limited director liability, which other states eventually copied (16:55).
  • Hostile Takeovers (1980s): Delaware initially restricted board defenses, but relaxed rules after threat of corporate exodus (19:00).

The Elon Musk Pay Package Case

• Tesla’s Move from Delaware to Texas:
  • Seen as a big deal given Musk's iconic status—signals new viability of alternatives (21:18).
• Case Details:
  • Conflict of interest: Musk and his brother were on both sides of Tesla's compensation decision (22:30).
  • Delaware courts require true independence for transactions involving conflicts—Tesla’s board and process did not pass muster, shareholder vote lacked full disclosure.
    • Professor Lipton: “The problem here was that the unconflicted board members were not unconflicted... and there were all these facts about how he [Musk] interfered with the committee’s deliberations...” (22:56)
• Shareholder Rights and Litigation:
  • Core issue: Some boards now feel Delaware has become too friendly to shareholder lawsuits over conflicted transactions (20:09).
  • Evidence about market reaction to moves away from Delaware is mixed, with little statistical proof of value consequences (25:04).

Implications of Companies Leaving Delaware

• Network Effects and Influence:
  • The exit of a major, high-profile company like Tesla could set precedent—“if he can do it, others may follow” (21:18).
  • Musk’s outsized influence means his actions are especially watched by CEOs and VCs.
• Effect on Shareholders:
  • Why do minority shareholders agree to move to less protective jurisdictions? Often about reducing litigation costs (29:03).
    • Lipton: “There is a huge debate about whether shareholder litigation is, in fact, the best way to handle this problem.” (29:03)
• Race to the Bottom:
  • Competition from states like Texas and Nevada to attract businesses by reducing shareholder rights and litigation risks (32:02).
    • Lipton: “All three states have made it much, much harder, if not virtually impossible ... for anything but in the most fraudulent circumstances, shareholders to bring claims. So I think we're at that race. We're watching it right now.” (32:25)

What’s Next for Corporate Law, Startups, and Shareholder Protections

• Startups:
  • Delaware’s dominance mainly pertains to public and VC-backed companies, not small family businesses or LLCs (35:14).
    • Lipton: “Delaware dominates in public companies and VC backed companies ... But it doesn't dominate in small, like your average family business ... and its law is not designed for that.” (35:14)
• Global Context:
  • Unlike the US, most countries assign corporate law jurisdiction according to location of operations, not by corporate “shopping” (36:16).
• Regulatory Arms Race:
  • Bloomberg’s hosts and guest express concern over states increasingly weakening shareholder protections to attract incorporations, especially as Delaware subtly follows the trend (32:02, 38:09).

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Notable Quotes & Memorable Moments

• On Delaware’s Strategy:
  “Delaware made a conscious decision to make its state and its law friendly to corporations that wanted to incorporate there.”
  — Professor Ann Lipton (05:39)

• On Precedent as Network Effect:
  “You would have the statute and you have decades of precedent so that companies would kind of know how questions would be answered if they came up.”
  — Lipton (09:10)

• On the Musk Pay Case:
  “The problem here was that the unconflicted board members were not unconflicted. ... The committee still had close ties to Musk.”
  — Lipton (22:56)

• On Potential for Race to the Bottom:
  “Nevada and Texas are essentially selling their law as creating barriers to shareholder lawsuits... All three states have made it much, much harder, if not virtually impossible for anything but in the most fraudulent circumstances, shareholders to bring claims.”
  — Lipton (32:24)

• On Shareholder Litigation:
  “There is a huge debate about whether shareholder litigation is, in fact, the best way to handle this problem.”
  — Lipton (29:03)

• On Startups and Delaware:
  “If you, I mean you guys are professionals but you know, in a small relationship back company, Delaware law is in, in some ways too ruthless.”
  — Lipton (35:14)

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Important Timestamps

• Delaware’s Corporate Numbers: 02:00
• Why Delaware Became the State for Incorporation: 05:39
• Chancery Court Explained: 12:33
• Big Legal Shocks of the 1980s: 16:55
• Tesla/Elon Musk’s Move and Pay Case: 21:18 – 24:42
• Shareholder Litigation Debate: 29:03
• Race to the Bottom Begins: 32:02
• Delaware vs. Other States for LLCs and Small Businesses: 35:14
• International Comparison: 36:16
• Final reflections on shareholder lawsuits and race to bottom: 38:09

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Conclusion

The episode highlights the fragility of Delaware’s dominance as the go-to for corporate incorporations, especially in the wake of high-profile cases challenging shareholder litigation and executive compensation. With influential players like Elon Musk leading the move to alternative jurisdictions, the legal landscape could be poised for significant change—potentially at the expense of shareholder rights, as states compete to offer corporations greater protections from lawsuits. The rise of this regulatory competition prompts questions about the future of US corporate law and how well the balance between management flexibility and shareholder protections will be maintained.

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Transcript

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[Professor Ann Lipton]

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[Tracy Alloway]

Bloomberg.

[Professor Ann Lipton]

Audio Studios Podcasts Radio News.

[Tracy Alloway]

Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal.

[Tracy Alloway]

And Joe, I have a fun fact for you.

[Joe Weisenthal]

Go on.

[Tracy Alloway]

Are you ready?

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

Okay, so Delaware has a population of about 1.05 million. A little over a million.

[Joe Weisenthal]

Okay.

[Tracy Alloway]

It's one of the least populous states. Yeah, I think it has fewer people than a lot of big cities in.

[Professor Ann Lipton]

The US for sure.

[Tracy Alloway]

However, Delaware has 2.1 million businesses registered in the state. So basically two businesses for every person.

[Joe Weisenthal]

This is a legit fun fact. This is like a legit. I did not know this. I mean I knew that it was not a very big state population wise. I know that so many corporations or businesses or whatever incorporate in Delaware, but this sort of two to one ratio. Excellent fun fact, Tracy. Well done.

[Tracy Alloway]

Yes. For your next dinner party you can trot that one out. But I mean, obviously maybe you could argue that Delawareans are just phenomenally entrepreneurial. But as you mentioned, no. As you mentioned, no more than I knew.

[Joe Weisenthal]

I'm not dismissing them. I just know that that's not really.

[Tracy Alloway]

What'S going on right there's. Something else going on here which is that Delaware has become the, the de facto state for companies incorporating.

[Joe Weisenthal]

Yeah, this is like the main thing that we know about Delaware. We don't really.

[Tracy Alloway]

I mean that and chicken farms.

[Joe Weisenthal]

The chickens, right? Not the, the chickens. But you don't hear much about Delaware except typically when there is some sort of corporate fight playing out in its courts. And of course it has a dedicated court system for corporate fights and so forth. And there's some been prominent examples over the years where we learn about what the chancery is. And then I forget what the chancery is or where that word comes from. But people seem to like their simplistic, streamlined legal system for corporate things. And it seems to have paid off reasonably well.

[Tracy Alloway]

People seem to like it, but that might be changing. So you mentioned corporate fights. We had a very prominent example of this relatively recently when there was the court fight over Elon Musk's compensation at Tesla. And eventually Elon just said, you know, I'm going to pick up my company and move it to Texas and incorporate there. And in fact we are seeing a few examples of companies choosing to move away from Delaware and to places like Texas or Nevada. And I know this isn't maybe a top of mind news development for many people right now. There's a lot going on.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

But I think it's really interesting. It's kind of slow moving and it does have implications for shareholder rights.

[Joe Weisenthal]

Totally. I actually think it's a very important, relevant topic. And I'll say this is the reason why, which is that in a sense a legal system is this network effect and people respect the legal system. And even if maybe there are decisions that go against them, they're like, okay, this is a high quality legal system. It is very hard to rebuild that somewhere else. It also is the sort of thing that if there is some poll elsewhere, then it's interesting to see what does it take to pry entities away from this network where there is years and years and thousands and thousands of decisions upon which to build something resembling a shared law. And so, you know, when I think about the United States, when I think about these bigger questions about how do you move to dollars, how do you move entities, industries to other jurisdictions that are maybe younger and don't have the same level of historical jurisprudence. Maybe there is a microcosm, a story to be told about the Delaware history, how it built up and if there are any threats to it over the medium term.

[Tracy Alloway]

Absolutely. Very well put, thank you. So I am happy to say we have the perfect guest. We're going to be speaking with Professor Ann Lipton. She is a law professor at the University of Colorado and Lawrence D. W DeMuth Chair. So, Anne, thank you so much for joining us.

[Professor Ann Lipton]

Thank you so much for the invite.

[Tracy Alloway]

I'll start with the obvious question, which is how did we end up with Delaware as the de facto place for corporate incorporation? Why Delaware?

[Professor Ann Lipton]

Because Delaware actually strategized that it wanted to attract incorporations. And this was back in the late 1800s, early 1900s, a number of states actually thought that they could make money by having corporations incorporate in their state and pay fees. You could actually open a newspaper at that time and see advertisements for come incorporate in X state. And Delaware made a conscious decision to make its state and its law friendly to corporations that wanted to incorporate there. So among other things at the time, one of the main concerns of businesses was that corporate law would be used politically, that the rules would change to effectuate some kind of political policy. So Delaware adopted a constitutional amendment that its judges would have to be politically balanced. So you couldn't have more than half of more than a bare majority of one party or the other. So for a seven member court, no more than four can be a member of one party or another. They also put a constitutional amendment that any changes to the corporate code required a 2/3 vote of the legislature. So trying to insulate their corporate law from political pressures, and then they just made their corporate law very flexible and very manager friendly. Managers could kind of do what they wanted with it and it just sort of took off from there.

[Joe Weisenthal]

This is really fascinating, this idea of creating the corporate legal system in this sort of glass enclosure through which the political system cannot break. And this is a theme that seems to come up over and over again. We talk about it when we talk about the Federal Reserve and it's nominal or de facto independent. This came up when we talked to the Alaska Sovereign Wealth Fund guys and the difficulty that the political system has in accessing the corn seed, so to speak. Talk to us a little bit more about the structures in place and how strong they are to insulate the core system from politics and how durable and thick those glass walls are.

[Professor Ann Lipton]

Yeah, so they can't insulate the court from politics in the sense of the legislature acting and so forth. And that's actually what we've just been seeing. But they are fairly insulated from partisan politics. Partisan politics doesn't play out in the same way that we would understand it in other parts of the country or other areas. But so the idea here. Well, first of all, I mean, one thing to note though is that Delaware's obviously, it's very blue state voting behavior, and judges do things other than decide corporate cases. We do forget that. But they do in fact have other things to say. But still the judges are politically balanced in order to benefit this corporate system. So what happens with the way law is made in Delaware, corporate law is made, is that it actually doesn't really come from the legislature, which really most of the legislature isn't. They're not corporate experts. They don't know much about corporate law necessarily. They're just legislators. So what happens is there's the Delaware State Bar association has a corporation law section, and they actually generate the proposed statutes on the theory that they can do it in a sort of nonpartisan, very technocratic way. And then the legislature tends to sort of rubber stamp the stuff that comes out of the corporation law section.

[Tracy Alloway]

So, you know, Joe mentioned that sort of network effect earlier. And I think this is really important in law, especially because a lot of legal battles are based on precedent, right? And so we have Delaware as the de facto incorporation state and decades and decades of precedent for judges and lawyers to actually look at. How does that sort of, I guess, precedent or first mover advantage help Delaware?

[Professor Ann Lipton]

Well, it's always been assumed that that would help Delaware because you would have the statute and you have decades of precedent so that companies would kind of know how questions would be answered if they came up. So there are a lot of areas where other states you just simply do not have information on, like how a court would treat particular kinds of claims or particular kinds of disputes. Some of the obvious things are things like activist takeovers or proxy contests and takeover defenses, because we know how that looks in Delaware because Delaware incorporates most of the public companies where you have those kinds of fights. We don't know how that looks in other states because you don't tend to have as many activist situations in those other states. So that's always thought to be sort of an advantage of Delaware, that everything plays out there. And most other states, they very often look to Delaware when they're deciding their own corporate law. Sometimes they contrast their corporate law with Delaware, but Delaware is always kind of where they look to deal with these questions. And that's always considered to be a real advantage of Delaware. You at least know what's going to happen. But it also means that because this is case law, it's mostly not in the store, hasn't been mostly in the statute. It's judged by judge Decisions. And that can also mean that sometimes it's sort of hard to penetrate because it's really, you've got to read this decision. Well, don't forget this other decision and don't forget this decision too. And that can be sort of hard to figure out if you're just looking at it for the first time.

[Joe Weisenthal]

Yeah, I'm really interested in this tension. Right. Because in theory, okay, you write down laws on paper and they're all visible and say, okay, this is consistent, we know what's going to happen. But also decisions are made by judges and people dispute them. Otherwise they wouldn't have to have cases in the first part. If, if judges didn't have to exercise some sort of agency. How do the judges feel about their own responsibility when deciding cases? To think about consistency or the underlying deep principles of Delaware corporate law and the long term implications for the state of Delaware and for the state of. When they make their decisions?

[Professor Ann Lipton]

Yeah, so there's a tension there. So you just identified like a tension, a tension between the State of Delaware vs General Corporate theory and corporate law. And I think you don't become a judge and you don't go into this area unless you really do appreciate the law and enjoy it. And I mean the Delaware judges are extremely thoughtful about corporate law and what the right answer is and how corporations should work. They don't always have exactly the same theories, but they definitely have a point of view and they care very much about how corporate law operates. But, and this is where some of the tension is today. If corporate boards are unhappy with their decisions over and over and over again, then Delaware may lose incorporations to other states. And how that plays out between sort of fidelity to a vision of what corporate law should be coupled with the straight up reality that if managers are unhappy and incorporate elsewhere, Delaware doesn't have, doesn't get to do much anymore. That's a tension that's been playing out for just as long as Delaware's been incorporating companies. I mean that's always. I don't think judges are usually consciously making that decisions based on that or they're certainly trying not to. But that tension is always present and has been present in the past.

[Tracy Alloway]

Before we get to why companies, some companies seem unhappy with Delaware at the moment. I'm going to go ahead and ask Joe's classic question whenever the comes up, which is what is a chancery court?

[Professor Ann Lipton]

Well, it's just the name for the Delaware courts that hear corporate cases. So I mean the fun. This is a very technical legal point, but Historically, there were two types of courts in the world. There were the courts of law and the courts of equity. The courts of law followed sort of these stringent rules, and the courts of equity were literally sort of about fairness and dealing with what's the right answer and doing justice as opposed to according to technical rules that were laid down. And so there was two separate courts, and that was from England, and that was true in the United States. And then the United states in the 30s or so melded the two courts at the federal level, and most states did the same. So there would just be one court that heard all the cases, law cases and equity cases. But Delaware never did that. So it still has the separate court of law and the court of equity, which is the Chancery court. So its historical origins are essentially rooted in this idea of fairness and commanding people to take the proper actions. And it doesn't sit with a jury. The cases are heard just by the judges. The judges find facts. Otherwise juries would do that. But the judges find facts in the Delaware Court of Chancery. They're very expert. They are. You know, they're all drawn from corporate practice before they get on the bench. And that that's what they do. I mean, they hear other things besides corporate cases. Other things fall into this category of equity. But the main thing obviously, is the corporate cases.

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[Joe Weisenthal]

Want to eventually get into the Elon PEG case and maybe get your read on it, et cetera. But before we do that, you mentioned that this is nothing new. Some there are these long standing questions about the Delaware and its persistence. Can you give us a little history or what are, you know, what were the Elon cases pre the Elon cases that sort of maybe had people questioning the sort of durability of the Delaware system.

[Tracy Alloway]

The long, long, long ago, before Elon.

[Joe Weisenthal]

Elon Avant le lettre.

[Professor Ann Lipton]

It's in the 80s. It was that long ago. It was the 80s, there were two big incidents. So one case of like these are the basic law cases that you learn if you're in any kind of basic corporate law class. So one case was called Van Gorkum. Basically a company was selling itself and they settled on a price and shareholders sued, claiming that the board didn't take proper care in setting this price. Nobody suggested they were acting in bad faith, but they just didn't take the time to make sure that they got the best price. And the Delaware Supreme Court agreed and it held that the directors could be held personally liable for damages for essentially not getting the right price for the company. And that that terrified boards because these boards could be acting in good faith and still could be. I mean, not selling the company for enough, that's serious money and damages. So Delaware amended its corporate code so that companies can now add a provision to their charter that says directors will not be held liable for monetary damages for negligence. And that really also boosted companies incorporating in Delaware after that. And by now every state has adopted a similar thing. But at the time that was done essentially because they knew that they had just, just scared the bejesus out of boards. And another issue that came up, this was also in the 80s was during the hostile takeover era. This was like the deal decade. There were lots and lots of hostile takeover attempts. And when there's a hostile takeover attempt, boards put up barriers, usually shareholder rights plants poison pills to prevent hostile takeovers. And there was a real question as to how far boards could go to fend off a hostile acquirer, even if the shareholders wanted this deal. And at first the Delaware courts were pretty strict about it. After a certain point they were saying, look, you gotta let shareholders decide. The board can't just block beneficial proposals to buy the company if the shareholders want it. And once again, there were threats that companies would leave, they would leave Delaware so that they could protect against hostile takeover attempts. And at that point, the Delaware Supreme Court backed off. It adopted new standards that allowed much more deference to boards when they are fighting off hostile takeover attempts.

[Tracy Alloway]

So fast forward to today. I just want to make sure we have our priors correct.

[Joe Weisenthal]

We love establishing our priors on this podcast.

[Tracy Alloway]

But, you know, those examples aside, does it feel like nowadays there is perhaps more discussion of alternatives to Delaware or more companies that seem to be moving away?

[Professor Ann Lipton]

Yeah. So I don't know if statistically the numbers really move the needle. We've seen definitely some high profile announcements of companies planning to move, but we just don't have enough data right now to see whether this is a, a serious, like actual exodus. But there's definitely a lot more discussion and there's definitely a lot more boards thinking or lawyers thinking they have to counsel boards whether you want to incorporate in Delaware, when before that wouldn't even have been a question. So that's definitely something that's happening.

[Joe Weisenthal]

Well, why. So what is it? If a lawyer is counseling, boards don't just because I, you know, I've known people who have launched startups at times and the idea of incorporation in Delaware, that was just obviously what you did. Right? You just did it right away.

[Professor Ann Lipton]

Absolutely.

[Joe Weisenthal]

But so what is it that a lawyer might say, well, maybe take a few beats and think about this. What has actually changed that's caused that?

[Professor Ann Lipton]

Well, Delaware understands fought back and it's changed its law very recently to sort of fight this off. But essentially the issue, most of the issue is shareholder liability or liability to shareholders and vulnerability to a shareholder lawsuit. And most of that vulnerability is vulnerability to a shareholder lawsuit over conflicted transactions. That's the main headline thing. There are a few other issues that have come up, but the main headline thing is boards feeling as though Delaware has made it too easy for shareholders to sue over conflicted Transactions.

[Joe Weisenthal]

What's a conflicted transaction? Just so we know these terms, what is an example of one either figurative.

[Professor Ann Lipton]

Or actual actual Tesla buying SolarCity? Elon Musk was on both sides of that transaction. He's on the board of Tesla and he's on the board of and running SolarCity. And so Tesla is using its resources to buy out Elon Musk company. So that's a classic conflict transaction.

[Tracy Alloway]

That actually reminds me, just speaking of Elon, but how big a deal was Tesla moving from Delaware to Texas? Because we talk about this network effect. Is it the case that one high profile company moves and suddenly all these other companies are like, we're going to do that too?

[Professor Ann Lipton]

Yeah, I think it's a big deal. I mean, first of all, you know, we all know that it was inspired by the, that move was inspired by the pay package case. But I think some of the grumblings about Delaware are broader. But I think that was a big deal. If for no other reason than Elon Musk is very admired by a lot of CEOs, a lot of venture capitalists, a lot of Silicon Valley. They look to him as a real role model. And so when he publicly announces that he's had it with Delaware and shows that it's possible to take a public company and get shareholder support for moving out of Delaware, even if he is his special and he has a particular relationship with the shareholders that may not be shared by other companies, I think that's the kind of thing that has boards thinking, putting it on the table.

[Joe Weisenthal]

Let's talk about the pay package deal. I don't know, like, look, I really don't know much about the law or anything about this stuff at all. But I say, when, I say, hey, this was the compensation package he agreed to, who is this judge to say that he can't get paid? Intuitively, to me it seems outrageous. Why is this judge canceling his pay package? But this is my dumb guy just reading ahead. I didn't even read an article. Probably. So why don't you. I'm being honest here. So why don't you tell me as someone who actually understands of this stuff, how we should read what that case was all about.

[Professor Ann Lipton]

Okay, so remember the issue here is conflicted transactions. Musk's pay was a standard conflicted transaction in the sense that the board was deciding what it was going to pay its CEO, which is very much well within the board discretion. But the board included Elon Musk and his brother. So therefore this was your classic conflict transaction. It was a board But a lot.

[Joe Weisenthal]

Of CEOs are on their board.

[Professor Ann Lipton]

Yes.

[Joe Weisenthal]

Okay, keep going.

[Professor Ann Lipton]

So under Delaware law, the general rule is a conflicted transaction will get close scrutiny by a court unless it's cleansed. And how do you cleanse it? You put an independent decision maker in the mix, and then the court will say, well, I'll just defer to the independent decision maker. And you have two options for an independent decision maker, the unconflicted board members or the shareholders. And usually, I mean, this doesn't happen. You have to understand how unusual a case was. Usually that's more than sufficient. You have the unconflicted board members decide the pay, or you have the disinterested shareholders vote on the pay. And at that point, Delaware says, I'm out, you guys. God bless. The problem here was that the unconflicted board members were not unconflicted. So they were all like, he stocks Tesla's board with people who are basically his bestest buds. And they created a committee that was supposed to be the independent members of the committee, and the committee still had close ties to Musk. And then the committee formed a working group that would really do the compensation package, and they picked the people with the closest ties to Musk to put in the working group. And there were all these facts about how he interfered with the committee's deliberations, and they just deferred to him. So given that the court felt that, they didn't put actual independent decision makers at the board level. So then they took it to the shareholders, and they had a shareholder vote, but there was not full disclosure in the proxy statement. The shareholders were not fully informed. And for obvious reasons, shareholders can't cleanse anything unless they have full information. So left with a situation where the board was not independent of Musk and the shareholders were not fully informed, that's why the court felt, well, I have to evaluate the pay package because no independent decision maker was put in the mix. And then from there, she decided it was too much.

[Tracy Alloway]

So this might be a tough question to ask, but since we're talking, you know, this. This discussion or debate centers on shareholder liability, as you laid out. Do we have any research that actually tells us what happens to share prices and stocks when a company signals that it's going to move away from Delaware or when it actually does it?

[Professor Ann Lipton]

We have incredibly mixed evidence. The fact is that scholars have been fighting about this forever, whether it makes a difference. And some have found that maybe it's beneficial depending on the type of company. Like, I mean, Delaware is expensive. I mean, the whole point of Delaware having this chartering business is that's how the state funds itself. It gets 25% of its revenues from incorporation fees. No other state does anything like that. So for smaller companies with less resources, it can be beneficial to move away from Delaware. But mostly this is something where different scholars will come up with different things. We just don't know for sure. And that's probably because Delaware has been dominating for so long, at least for public companies, that it's hard to tell if there's a serious movement away now. We'll know.

[Tracy Alloway]

It's interesting.

[Joe Weisenthal]

So let's talk about the allure of, say, reincorporating in Texas. You know, I could see just sort of for vibes in vague ideological things. Elon wants to go to Texas. I'm not surprised. And they're probably the politicians or. Yeah, Elon, come on down. The shareholders are like, oh, we're gonna get, get away from those blue states and the impose communism on you by not letting you get your billion dollar pay package or whatever. All that being said, the goal, it seems to me, or why people like Delaware is right, this idea of balance. Because while there may be an Elon Musk cult that loves to hand him money, and not every shareholder wants to have that relationship with their CEO where they're just forking over a lot of money. And so it seems to me that okay, maybe Texas is a good fit for Elon and his shareholders, but that still in many cases some sort of court system that imposes. Maintains a balance of power between the CEO, the board and the outside shareholders is still what's going to be desirable for most companies.

[Professor Ann Lipton]

Yeah. So this is a complicated question. That is exactly how Delaware has sold itself. That essentially that it maintained a balance that it mostly gave boards incredible amounts of flexibility and incredible amounts of deference, but ultimately there was some basic floor of protections for shareholders. The issue. Well, there are twofold issues. The first is that ultimately corporate managers are the ones who make decisions about where to incorporate when they do a startup. I mean, once you're actually publicly traded, if you want to move, you need a shareholder vote. But before then, you can pick any company you want to. And even if you need a shareholder vote, once you're publicly traded, as we saw with Tesla, if you're a Meta or where you have a controlling shareholder, the shareholder vote's really easy. It's just what the controlling shareholder wants. So moving is not hard. And so the only reason essentially that you wouldn't do it is if you really thought you were going to pay a price price with shareholders, it's not clear how much of a price shareholders are going to inflict for being in a state with fewer protections. So the theory has always been the cost of capital will be higher if you're in a state with fewer protections, but it's not clear how much that plays in. As you just asked, like, is there really a shareholder value price for moving to a different state? It's not clear shareholders really have the power to push back. And Delaware also seeing this move weakened a lot of the shareholder protections that led to verdicts like the Musk pay package case. So now we really don't know if there's a difference.

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[Tracy Alloway]

Shareholder actually approve to move to a jurisdiction where ostensibly they have fewer rights?

[Professor Ann Lipton]

Because remember, 90% of this is about shareholder litigation. There may be or end conflict transactions and suing over conflict transactions. That is most of what this fight is about. It's not the only thing that's most of it. There is a huge debate about whether shareholder litigation is in fact the best way to handle this problem. I mean, there are all kinds of concerns about strike suits. There are concerns that this is just lawyer driven litigation. In the Tornetta case that Elon Musk payp, remember, the shareholder there held nine shares, literally nine shares of Tesla stock. So there's a real question about whether shareholder litigation is in fact a game that's worth the candle. Unquestionably, there are real problematic transactions and shareholder litigation can win very huge payouts for shareholders. But usually those payouts come from the insurance that the company itself paid for in these huge settlements. And whether or not that ultimately is the best way to handle a conflict transaction situation is a very debated question. So shareholders may very well think they can move to a jurisdiction with fewer protections on the theory that ultimately less litigation is better for the company.

[Joe Weisenthal]

It is a very strange situation because essentially, again, you have this situation in which the shareholders were upset at the state for not allowing more shareholder money to go into the pocket of one individual person. And that's a very strange situation. Et cetera. Shareholder lawsuits always strike me as a little bit Interesting field in general. I remember back 25 years ago when I sometimes used to buy and trade individual stocks and a stock would miss earnings. And then suddenly you get an email. It's like, this company is filing suit. It's like, why do I want to take a part in a lawsuit against this company that I am a co owner of? Does this actually benefit me or does this benefit anyone other than the lawyer? I've never been totally clear on that either. Just in general, even setting aside sort of these conflict questions.

[Professor Ann Lipton]

Yeah, I mean, that's. It's a very debated question. But for most of these suits, I mean, there is a difference between a suit for fraud under the federal securities laws and a state law suit for breach of fiduciary duty, which is what Delaware handles. And there, I mean, when there's a lawsuit like that, any payment is supposed to come from the directors to the shareholders or to the company. So that's the theoretical monetary benefit. Directors usually don't pay out of pocket. They've got insurance. So if they pay, it's the insurance. And guess who pays for the insurance? The corporation does.

[Tracy Alloway]

Now you're going to think about shareholder lawsuits differently, Joe, or just.

[Joe Weisenthal]

Yeah, I still don't. Okay, keep going.

[Tracy Alloway]

All right, so you touched on this earlier, but Delaware isn't exactly standing still while it sees companies move elsewhere. Is this just going to result in a sort of race to the bottom in terms of shareholder rights, where states are just like, well, if you drop your standards or if you alter the balance here, I'm going to do the same thing and everyone just kind of races to the bottom?

[Professor Ann Lipton]

I think that's what we're absolutely seeing. I mean, Nevada and Texas are essentially selling their law as creating barriers to shareholder lawsuits. And that's what Delaware did. It changed its law to put up more barriers. Now it did so more subtly, which is exactly why I think they're still like this race. Because Delaware didn't want to openly say, no, that's it. We're just barring shareholder lawsuits. So they wrote a lot of words.

[Joe Weisenthal]

Words.

[Professor Ann Lipton]

And they're complex words, but ultimately they all come out to the same thing. All three states have made it much, much harder, if not virtually impossible for anything but in the most fraudulent circumstances, shareholders to bring claims. So I think we're at that race. We're watching it right now.

[Joe Weisenthal]

I could understand why a public company board or a public company would say, okay, we want to be in a jurisdiction where it's much harder for shareholders to bring lawsuits, et cetera. Is the calculus different depending on the maturity of the company? And could you say like an early stage startup? Like I said, I've known people in the startup space first. One of the first things they do is incorporate in Delaware in those situations. Maybe from the legal perspective, did the VCs own the company in a more deep way than public company shareholders do? Even though nominally they're all just shareholders and there's a separate board?

[Professor Ann Lipton]

Yes. And shareholder litigation, this kind of shareholder litigation is extremely rare in VC back or smaller companies. And that's because who the shareholders are, I mean, the shareholders are largely insiders or friends of vc. They don't want to anger them. They may have signed arbitration agreements that would prevent any kind of lawsuit anyway. So this issue of litigation is much more of a public company problem. That said, there were some issues that were really bugging the startup community that at Delaware fixed as well. For example, a lot of startups like to have shareholder agreements where one shareholder is given essentially governance rights, not because they're a shareholder and they can vote their shares, but because they have a contractual right to say, board, you're not allowed to merge unless I approve. Board, you're not allowed to take on debt unless I approve. And Delaware a couple of years ago, a court decision, I think very correctly under Delaware law at the time said, well, you can't do that in a corporation. The board has to run the company. You can't just hand over governance for a rights to a shareholder by saying, well, here's your contract, you get to approve all board decisions. That really scared the VC community. And Delaware reacted immediately by authorizing those kinds of shareholder agreements.

[Joe Weisenthal]

Tracy, I think there's going to be some very interesting questions of corporate governance that come up. You know, some of these episodes that we've discussed where AI startups, the company gets acqui hired and not all the value gets accrued to shareholders or different class of shareholders, depending on what employee you are. I bet there will be some, some very interesting corporate governance law that comes.

[Tracy Alloway]

Out of this for sure. And you know, there's going to be some state that tries to pitch itself as like the place to incorporate.

[Joe Weisenthal]

AI startup. Yeah.

[Tracy Alloway]

Okay, so speaking of startups, if Joe and I were going to incorporate and become Odd Lots, I guess we'd be an llc, maybe not llc. Yeah, it probably would be Odd Lots llc. And you were our lawyer, our hypothetical lawyer giving us legal advice.

[Joe Weisenthal]

Hypothetical.

[Tracy Alloway]

What would you advise us to do here? Where should we incorporate?

[Professor Ann Lipton]

Well, so first of all, an LLC is not a corporation. So I just want to. You would not be incorporating, you would be organizing an llc. But actually I would tell you not to go to Delaware, Nevada or Texas because Delaware dominates in public companies and VC backed companies like professionalized startups. But it doesn't dominate in small, like you know, your average family business, your average local business, it does not dominate there at all. And its law is not designed for that. That. So if you, I mean you guys are professionals but you know, in a small relationship back company, Delaware law is in, in some ways too ruthless. The other states have a lot more protections for essentially non lawyer, familyish, friendish businesses. That might be more appropriate.

[Joe Weisenthal]

Well, I don't know. We might, it might be, we could be big, it might be a professional operation. I just have one more question. How rare is the US for having this patchwork of, of corporate systems? Like if we went to another country, is there jurisdiction shopping the same way?

[Professor Ann Lipton]

No. Well, see, understand we're like 50 different countries. In Europe it's like, you know, so, so Europe you used to be that you couldn't do what we do in the United States where you incorporate in Delaware, but all your business operations are somewhere else. It used to be in Europe that essentially it was. But it's country by country. If you had your headquarters in a country you were supposed to organize in that you couldn't mix and match. Europe changed the law, but it's still so that you could theoretically jurisdiction shop among European countries, you know, or have your headquarters and all your operations in one place and organize in another place, another country. But they don't, they don't really have that norm. It's just viewed as sort of weird. So for them, where your operations are, are largely going to be the law, the corporate law that governs your entity.

[Tracy Alloway]

Is there transnational jurisdiction, jurisdiction shopping. Could you get you know like a foreign company that wants to incorporate in.

[Professor Ann Lipton]

The U.S. well, yes, but it's much more likely that a U.S. company wants to incorporate outside the country in Ireland or something.

[Joe Weisenthal]

Yeah.

[Professor Ann Lipton]

So for other kinds of, you know, that used to be a big deal for tax reasons and so forth.

[Tracy Alloway]

All right. And Lipton, thank you so much for coming on odd lots. Really appreciate it. That was great.

[Professor Ann Lipton]

Thank you for having me. Joe.

[Tracy Alloway]

That was so interesting. I really think, I think business journalism in general or financial journalism doesn't cover legal stuff enough.

[Joe Weisenthal]

Well, Matt Levine has proved it because there's a huge demand for his newsletter precisely because he's one of the few destinations that actually talks about the chancery and all this stuff. But to your point, right? This proves the point.

[Tracy Alloway]

He's the exception. That proves the point. The entire point. And accounting as well.

[Joe Weisenthal]

Yeah, that too.

[Tracy Alloway]

And insurance.

[Joe Weisenthal]

And insurance.

[Tracy Alloway]

Okay, wait, I'm not going to just criticize our colleagues in financial journalism. No, that was fascinating. I do find the whole race to the bottom idea a little bit concerning for obvious reasons. And I guess like it's sort of that network effect that you were discussing earlier. But one, once the ball gets rolling in that direction, it just seems really hard to stop.

[Joe Weisenthal]

It's just. I agree. And I think this is something very. The sheer influence that Elon has and all the people who look to him and see him as the model is very interesting. On the other hand, there are not many CEOs out there for whom the cult is so strong that people thirst to give him up money. And so the question of whether shareholders of other companies want to be incorporated in states, whether they would actually, unlike the current research, inflict some sort of cost of capital penalty for non Delaware incorporated states is going to be an interesting question. But the ball is rolling.

[Tracy Alloway]

That's going to be so interesting once the sample size gets a little bigger and you can see like the actual impact on stock prices. So I take your point. But there are shareholders who potentially would say, well, if a company doesn't have to deal with a loss lawsuit from like a shareholder who has nine.

[Joe Weisenthal]

Nine shares.

[Tracy Alloway]

Nine shares. Maybe that's a good thing and that's like a trade off worth making.

[Joe Weisenthal]

Yeah, I don't know. I mean, I.9 shares and he had this pay package. Seems like he signed a deal. I'd be so annoyed. Could you imagine, could you imagine how annoyed you would be if your pay package got canceled because of some shareholder with nine shares? I can't.

[Tracy Alloway]

I pay package of millions. I would be annoyed.

[Joe Weisenthal]

It doesn't matter how rich I am. I would cannot imagine my future. I would be the richest person in the world. I would be so annoyed by that.

[Tracy Alloway]

Okay, so now that we've annoyed Joe, shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

Okay. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal. You can follow me at the stalwart. Follow our producers, Kerman Rodriguez at kermanarmondasho Bennett at dashbot and Cale Brooks Alebrooks. For more Odd Lots content, go to bloomberg.com oddlots we have a daily newsletter on and all of our episodes and you can chat about all of these topics 24. 7 in our Discord, Discord, GG Outlaws.

[Tracy Alloway]

And if you enjoy odd lots. If you like it when we dig into legalities in the US legal system, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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