Last week, automaker Tesla filed paperwork with the Secretary of State’s office to reincorporate the company here in Texas.
The company used to be incorporated in Delaware, but in January CEO Elon Musk was denied a $56 billion compensation package by a Delaware judge. So Musk asked shareholders to vote on moving Tesla to the Lone Star State, which they approved, along with the pay package.
Aaron Klein is a senior fellow with the Brookings Institution. He joined the Standard to discuss the move. Listen to the interview above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: I just want to be clear about that Delaware decision – the decision by the shareholders to move Tesla to the Lone Star State and that pay package – that doesn’t change where that court in Delaware stands, right?
Aaron Klein: No, not at all. It just means that the company is not subject to that court. Instead, they’re moving to Texas to be subject to the Texas judiciary.
Why exactly would Musk propose such a move?
Well, historically, Delaware has been the most business-favorable state. They’ve carved a niche among the 50 states in being very corporate-friendly.
Yeah, something like 60% of the S&P 500 have – even no matter where they are actually located, physically – they are incorporated in Delaware.
Right, they are.
Delaware sells its incorporation. There’s certain things you have to do. You have to have a registered agent in Delaware. It’s like a cottage industry in that state.
In exchange, you get a very favorable legal structure, particularly liability as it comes to these big lawsuits. Now, it sounds like Texas.
Yea, this seems like there’s a similarity – at least in perception. Of course, Delaware has these chancery courts, which are specialized in trying to move business lawsuits and business disputes around pretty quickly. And they have a certain business expertise. Why Texas? Because I don’t believe we’ve had anything quite like that.
I don’t think you have. And one of the benefits of the Chancery is that it’s decided by judges, not juries. You know, sometimes juries can give very large settlements in class action and other lawsuits and getting Delaware is a way to try and escape some of that big class-action risk from juries.
Look, Texas may be drifting further and further to the political right where it’s trying to sell itself for even greater business-friendly liability and shields and judges that will go along with corporations. On the federal level, Texas is run by the Fifth Circuit, and the Fifth Circuit has been so far to the right of the mainstream that even this conservative Supreme Court just reversed them on a major case involving the Consumer Financial Protection Bureau.
And so what you’re seeing here in Fifth Circuit, all sorts of companies are going to the Fifth Circuit filing suit in Texas to challenge regulation in Washington because they have the most anti-regulation, anti-government circuit court in all of America. And there are only so many times the Supreme Court is going to overturn them.
So everybody is running to Texas. Every corporation is running to Texas to try and file suit against government actions in Washington. And I think incorporating in Texas may give them a higher standard, because sometimes judges are saying, “wait a second. Why, if you’re a Delaware credit card company, are you filing a lawsuit in Texas against a Washington regulation?”
» RELATED: Hedge funds’ latest weapon against regulation is a Texas address
Well, in fact, this is about the choice of venue for a lot of these companies. They’re looking for a favorable venue. And frankly, this is a task that faces virtually all attorneys in one respect or another.
But what seems to be happening – and I notice that the Wall Street Journal is also picking up on this with this victory from shareholders to reincorporate in Texas –it seems like this may be a shot over the bow of the state of Delaware that we may see a kind of a venue war between these two states. Is that what seems to be developing?
It’s definitely possible. And that ought to be concerning, because when you get to a race to the bottom of which judiciary can be more business-friendly…
Look, the rules of judges is to follow the law, not bend it to try and help a state and cottage industry. And let’s be clear, you don’t want to be in a race to the bottom with Delaware. Historically, they’ve always been low.
Well, when you say “low,” you mean not friendly to plaintiffs suing corporations?
Being as business-friendly as possible.
» RELATED: Texas judge moves late fee case from Fort Worth to D.C., accuses banks of forum shopping
Is there another way of reading this? That, in fact, Tesla simply has a big operation with its Cybertruck facility down at “Giga Texas” in the Texas capital city. You’ve got SpaceX incorporated. Does it really make sense to incorporate in Delaware? I mean, for all of these companies, if you look at it…
It never makes sense to be in Delaware. But there’s a reason that 60%, as you say, of the S&P 500 is.
The reason to be in Delaware isn’t because you have business in Delaware. It’s a tiny state, right? The reason to be in Delaware is it has a cottage industry of being business-friendly. And maybe Texas is trying to compete with that. And that ought to concern not just Texans, but all Americans.
What does this mean just as a matter of realpolitik when it comes to Texas, if in fact Texas becomes this magnet for reincorporation, as it seems like we may be headed toward. I mean, we are talking about more revenue, I would imagine, for Texas now.
Well, look, Delaware leans into this cottage state because otherwise it’s pretty tiny. Whereas Texas has a massive economy. And unlike Delaware – whose most economic activity is in cities like Philadelphia or New Jersey or Maryland – right now, the Texas economy is mostly in Texas, right? Texas has major cities Austin, Houston, Dallas, San Antonio.
So, you know, there are legitimate reasons to be headquartered in Texas for the purpose of your business. But that’s not why Tesla was doing this, or else they would have been in Texas already. They’re doing it in order to get a more favorable judiciary.
Now, in the case of shareholders deciding to vote on how much their CEO gets paid, that’s one issue that’s just among Tesla’s stockholders and its management. But where I start to get more concerned is when you’re trying to undo safety regulation, consumer protection regulation, environmental regulation, and you’re running to venues that are trying to compete not in enforcing the law, but in reading the law as favorable as possible for businesses – often in a way that’s inconsistent with law, as you’ve seen with the Fifth Circuit being reversed by the Supreme Court recently. And the Supreme Court is by no means a liberal entity at this moment.
