Delaware vs. Texas: Corporate Law Battle Heats Up.

Elon Musk’s call for U.S. companies to follow Tesla’s lead and move from Delaware to Texas has sparked a high-stakes battle between the two states over corporate law.

This clash, fueled by Musk's criticisms of Delaware, has seen legislators in both states introduce new bills to reshape corporate governance. Critics argue that the proposals may favor powerful shareholders at the expense of smaller investors.

Delaware’s Corporate Law Reforms: A Response to Musk’s Influence

Delaware has long been the legal home for most U.S. companies, despite its small size and limited operations. The state’s corporate laws govern key relationships between boards of directors and shareholders, making it attractive for companies looking to minimize legal risk.

Following Elon Musk’s criticism of Delaware’s corporate laws, especially after a judge rescinded his $56 billion Tesla pay package, the state has experienced a slow but noticeable departure of some companies.

In response, Delaware lawmakers proposed significant changes to corporate law in February. These reforms include creating "safe harbors" for transactions involving controlling shareholders and making it harder for investors to challenge board decisions.

The legislation is intended to provide companies with more confidence in structuring deals without the fear of costly legal challenges.

The Debate Over the Delaware Bill: Protecting Shareholders or Billionaires?

Critics of Delaware’s new bill argue it gives too much power to controlling shareholders, such as Meta Platforms’ CEO Mark Zuckerberg, while limiting the ability of public shareholders to monitor potential conflicts of interest.

The bill allows transactions approved by boards with a majority of independent directors or unconflicted shareholders to avoid judicial review, which some say creates loopholes that could be exploited by powerful corporate figures.

Christopher Foulds, a Delaware attorney representing shareholders, spoke out against the bill, stating that it would prevent investors from challenging conflicted transactions. He argued that it could allow a controlling shareholder to manipulate board decisions, potentially putting the interests of ordinary investors at risk.

Texas Takes Aim at Corporate Law with New Bill

Meanwhile, across the country in Texas, state legislators are pushing for a bill that would make the state an even more attractive destination for businesses.

Texas House Bill 15 enshrines the "business judgment rule," which protects board decisions made in good faith, even if those decisions result in negative outcomes for the company. The bill seeks to limit derivative lawsuits to only those brought by investors holding at least 3% of a company’s stock.

Governor Greg Abbott has expressed support for the bill, which could position Texas as a top choice for businesses looking to incorporate in a state with fewer legal challenges. Notably, Musk’s controversial pay package case was a derivative lawsuit, and the Texas bill aims to reduce such legal actions in the future.

The Growing Tension Between Delaware and Texas

For decades, Delaware’s corporate laws have been seen as the gold standard for corporate America. The introduction of these new bills in both Delaware and Texas has led to an unprecedented competition between the two states.

This battle, fueled by the influence of high-profile figures like Elon Musk, has ignited a larger conversation about corporate governance, shareholder rights, and the future of corporate America.

As states like Delaware and Texas jockey for position, corporate law experts warn that this could be the beginning of a wider trend of states competing over laws that benefit large companies and shareholders. While Delaware still holds significant sway, Texas is positioning itself as a strong alternative for corporations seeking a more business-friendly legal environment.