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

Ann Lipton (0:02)

Bloomberg Audio Studios, Podcasts, Radio, News.

Tracy Alloway (0:18)

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

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:23)

Joe, I have a fun fact for you.

Joe Weisenthal (0:27)

Go on.

Tracy Alloway (0:27)

Are you ready? Okay, so Delaware has a population of about 1.05 million, a little over a million. It's one of the least populous states. I think it has fewer people than a lot of big cities in the US. However, Delaware has 2.1 million businesses registered in the state, so basically 2 businesses for every person.

Joe Weisenthal (0:51)

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 2 to 1 ratio, excellent fun fact, Tracy. Well done.

Tracy Alloway (1:06)

Yes, for your next dinner party, you can trout that one out. But I mean, obviously, maybe you could argue that Delawareans are just phenomenally entrepreneurial. But as you mentioned-

Joe Weisenthal (1:17)

I don't think so. I'm not dismissing them. I just know that that's not really what's going on.

Tracy Alloway (1:21)

There's something else going on here, which is that Delaware has become the de facto state for companies incorporating.

Joe Weisenthal (1:28)

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

Tracy Alloway (1:32)

That and chicken farms.

Joe Weisenthal (1:33)

The chickens, right. 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 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 (2:02)

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

Joe Weisenthal (2:45)

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 pull 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 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 (3:42)

Absolutely. Very well put. 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 W. Demuth chair. So, Ann, thank you so much for joining us.

Ann Lipton (3:57)

Thank you so much for the invite.

Tracy Alloway (3:59)

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?

Ann Lipton (4:09)

Because Delaware actually strategized that it wanted to attract incorporations. 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 ex-state. Delaware made a conscious decision to make its state and its law friendly to corporations that wanted to incorporate there. 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. Delaware adopted a constitutional amendment that its judges would have to be politically balanced. You couldn't have more than half, more than a bare majority of one party or the other. For a seven-member court, no more than four can be a member of one party or another. They also put constitutional amendment that any changes to the corporate code required a two-thirds, three-quarters 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.