Delaware faces exodus of tech companies

https://www.newsweek.com/delaware-exodus-tech-meta-dropbox-elon-musk-2024596

by ksec • 1 year ago

45 78 1 year ago

User23• 1 year ago

Delaware throwing away its reputation as a reasonable, reliable, and above all predictable place for corporate law is an incredible own goal that more people should be talking about.

butter999• 1 year ago

Their reputation is being friendly to shareholders.

Shareholders brought a suit alleging Musk's pay package was inappropriate. It came out in the lawsuit that the people charged with negotiating with Musk were actually taking direction from him.

However you feel about that, I think it's easy to acknowledge that if the people negotiating on your behalf were being instructed by the counterparty, you probably didn't get the best deal you could. The court's decision was reasonable and probably would've been similar in any jurisdiction.

This exodus appears to me to be part petty feud and part cargo cult.

richwater• 1 year ago

Their reputation is being friendly to shareholders.

And then the shareholders voted and it passed...?

bradley13• 1 year ago

Ad I understand it, after the initial ruling, the shareholders voted and passed the package again. The judge still disallowed it.

She appears to be ruling based on ideology instead of law.

92834092322• 1 year ago

What's the own goal? All I know is that a judge vetoed Elon paying himself an absurd amount. Is that really what this is all about? Billionaire mad he didn't get more billions?

adastra223• 1 year ago

If you're on this site, surely you know the difference between a stock option and a stock grant? Elon's pay package was options, and was only evaluated at ~$2bn over many years in 2018, and even then assuming significant growth. At the time of grant, the options were worth $0.

The only reason the pay package is so astronomical now is because the Tesla stock has risen astronomically in value. Which benefits the shareholders, no? This dilution in shareholder value is already factored into the rising price.

JumpCrisscross16• 1 year ago

a judge vetoed Elon paying himself an absurd amount

Not technically correct. Tesla is allowed to gift Elon everything it owns. The problem was Tesla didn’t follow the rules in how to do it such that the shareholders were ensured an honest negotiation between themselves and management. The Board was not independent, and the shareholders at the time of the grant didn’t approve it.

A later cohort signed off on it, but it was still backdated. The only downside to making a new grant are the tax implications.

dkjaudyeqooe10• 1 year ago

The judge vetoed a pay packed designed by directors who were not independent of Musk.

Musk was just sloppy and greedy. He could have got it if he had acted within the law, but then he probably wouldn't have gotten as much.

bouncing• 1 year ago

The same could be said of America in general. It’s totally unpredictable, and the people in charge are not especially reasonable.

kittikitti• 1 year ago

This is because Delaware stopped Elon's pay package, is there anything else I'm missing? I think incorporating in Texas or Nevada will net short term wins but there's a lack of long term infrastructure. This signals the decline of the American tech companies as they make their decisions based on vibes not engineering.

JumpCrisscross16• 1 year ago

is there anything else I'm missing?

We’re seeing a shift away from shareholder sovereignty to cult of the founder. Texas is an alternative to the former, which is the Delaware default.

matthewdgreen• 1 year ago

There will be a major market correction in the next few years and we'll see how this all goes.

graeme2• 1 year ago

The Delware Court of Chancery in 2023 made corporate officers personally liable. Huge policy shift.

https://www.cov.com/en/news-and-insights/insights/2023/04/fo...

jfengel• 1 year ago

Lack of infrastructure doesn't matter. These companies weren't physically located in Delaware anyway. It can be a pure matter of paperwork.

adastra223• 1 year ago

Have you followed the Elon pay package suit in detail? It was quite clearly an activist judge and the ruling is suspect on many levels. The first ruling might have been ok, as there was some irregularities with how the original pay package was approved. The second ruling was after Tesla dotted their i's and crossed their t's, getting ~80% shareholder approval, with Musk and his brother abstaining from the vote. Basically they fixed everything the judge said was wrong/irregular about the original pay package.

The judge still threw it out, in December of last year, pretty much on vibes. Even legal experts well versed on Delaware law were confused by this. It is a rather unprecedented action by an activist judge in a state that is specifically known for clarity of the law.

It really did undermine all trust in Delaware, and the very foundation of why people incorporate there in the first place.

coliveira• 1 year ago

There's no place in the world where a $50B pay package is justified. He's just ransacking the other investors. The board (if it had any spine) should tell him to stop or go away.

JumpCrisscross16• 1 year ago

second ruling was after Tesla dotted their i's and crossed their t's, getting ~80% shareholder approval, with Musk and his brother abstaining from the vote. Basically they fixed everything the judge said was wrong/irregular

They didn’t. It was still a backdated package being voted on by a different set of shareholders than the ones who owned the stock when the package is backdated to.

The dotting the i’s move would have been a new package in that amount, adjusted upwards to account for the higher taxes that would have had to have been paid due to it being granted up front. They didn’t do the dotting the i’s move.

kyledrake• 1 year ago

Given extremely recent events, as a controller I would be far more nervous about locating my company in hostile states (regardless of ideological bent) that actively persecute companies for culture war nonsense, fabricated claims of censorship, books that the government thinks people should not be allowed to read, requiring drivers license storage for adult content viewing, abortion criminalization (have fun fighting those John Doe subpoenas!), "save the kids from addiction" laws enforced by arbitrary interest group censors, etc.

Tech companies are foolish if they think they're going to be harassed more by quiet, stable, corporate tax shelter Delaware than the Yosemite Sams that run Texas. They're practically drowning in the evidence already.

gedy• 1 year ago

The compensation and personal liability for leadership is more expensive to their bottom line vs cultural war shaming, etc. (Which most companies have likely never cared about to begin with)

rufus_foreman2• 1 year ago

> books that the government thinks people should not be allowed to read

Do you have any examples of this? Which books would I not be allowed to walk into a bookstore and buy, or order off of Amazon, and in which states?

inetknght4• 1 year ago

Which books would I not be allowed to walk into a bookstore and buy, or order off of Amazon, and in which states?

You're looking in the wrong places.

Try asking the same question but for schools and libraries.

https://tsta.org/teaching_and_learnin/hb900/

https://www.texastribune.org/2023/10/11/texas-library-book-b...

https://www.dallasobserver.com/news/list-of-texas-banned-boo...

nine_zeros• 1 year ago

Shouldn't this cause shareholders to sell shares in these companies?

JumpCrisscross16• 1 year ago

Shouldn't this cause shareholders to sell shares in these companies?

I don’t think there is a clear argument for that. Not yet. Maybe protecting shareholder rights drives shareholder value. Maybe tiny monarchs make them richer.

TheOtherHobbes• 1 year ago

Tesla's and Twitter's sales trajectories suggests otherwise. So does the billions wasted on the Metaverse.

If you want technological and social progress, letting a handful of thin-skinned petulant boy kings run around having mad ideas without oversight isn't the direction you want to go in.

nullc• 1 year ago

I suspect you're getting fooled by terminology.

When you see "rules protecting shareholder rights" when you should be reading in this context is "rules inviting massive lawsuits from plaintiff attornies nominally representing super minority shareholders against the express will of the supermajority of shareholders and causing significant legal expenses to companies (and thus their shareholders)".

With that re-framing perhaps its more clear why savvy shareholders are not very interested in this form of "shareholder rights".

graeme2• 1 year ago

I was curious to know the context and on 2023 the Delaware Court of Chancery made corporate officers personally liable. Very big shift.

https://www.cov.com/en/news-and-insights/insights/2023/04/fo...

boole1854• 1 year ago

That article states:

Although some scholars and practitioners have long argued that officers should or do owe a duty of oversight, and as a practical matter many officers likely assume that they have such an obligation, McDonald’s marks the first time this duty was explicitly acknowledged by a Delaware court.

To me this seems to imply that the ruling was incorporating the already existing practice into law, which would seem to imply that it isn't a big shift.

dkjaudyeqooe10• 1 year ago

"Based on McDonald’s, officers, like directors, now have a duty of oversight. Officers will be liable for violating that duty if, within their area of responsibility, they consciously fail to make a good faith effort to establish information reporting systems, or they consciously ignore red flags that arise from those reporting systems or otherwise come to their attention."

Most people would have assumed this is already the case. It's not exactly shocking.

immibis• 1 year ago

Not in Delaware where corporations base themselves precisely because the rules are lax.

raverbashing• 1 year ago

As with the RTO mandates, this sounds more like a "everybody is doing it so we should do it" instead of an actual "must do" thing

krupan• 1 year ago

Two companies leaving (out of how many hundreds if not thousands of businesses registered in Delaware) is "an exodus"?

taxman22• 1 year ago

At this point only 2 of the top 8 companies by market cap will be incorporated in Delaware. As Tesla and Meta move, investors in startups will need to be more open to investing in companies formed outside Delaware.

loeg• 1 year ago

Meta is one of the biggest companies in the world and responsible for a significant chunk of S&P500 returns.

miohtama• 1 year ago

Also new companies stop coming

https://cowboystatedaily.com/2024/12/06/wyoming-overtakes-de...

ybfqsgaF• 1 year ago

Delaware is not a level playing field. If someone libeled and defamed by radical PSF representatives would sue the PSF, what chances are there in Delaware?

This is a good move by tech companies (which should also defund the PSF).

JumpCrisscross16• 1 year ago

What’s PSF?

dkjaudyeqooe10• 1 year ago

The Python Software Foundation? Those guys are out of control.

pilingual• 1 year ago

Nevada has long been an alternative to Delaware for C corps. Any ideas what advantage Texas has over Nevada? Or simply: why not Nevada?

JumpCrisscross16• 1 year ago

why not Nevada?

Texas gives out goodies. And fewer people want to live in Nevada than Texas.

dkjaudyeqooe10• 1 year ago

A company's incorporation location has nothing to do with where it does business.

And what goodies does Texas give out? Like the ones that Disney got?

sanxiyn2• 1 year ago

Immaterial. It's not like people live in Delaware, corps do.

echoangle• 1 year ago

Does it matter where people want to live? Can’t you have all people working in Texas and still incorporate at your company mailbox in Delaware?

sidibe• 1 year ago

Texas isn't a good suggestion for everyone, they don't have any of the structures in place to compete with Delaware or Nevada, but if you're the right person Paxton will do everything in his power or not in his power to accommodate you so it's a no brainer

dkjaudyeqooe10• 1 year ago

Musk's companies plus Meta and Dropbox does not an exodus make. The article is all clickbait.

sanxiyn2• 1 year ago

It also mentions Dropbox.

dkjaudyeqooe10• 1 year ago

Fixed, thanks. But still not an exodus.

patrickhogan16• 1 year ago

Founders of dual-class companies—think Drew Houston at Dropbox or Mark Zuckerberg at Meta—should watch out. Delaware courts are starting to invalidate shareholder agreements where the founder has control of the board thing.

The fun thing about the Moelis case is that the Delaware Court of Chancery in 2024 sided with a minority shareholder against Ken Moelis. Which is kind of wild when you think about it. You’re a minority shareholder. You invest in Moelis & Company, an investment bank that Ken Moelis—yes, that Ken Moelis (https://en.wikipedia.org/wiki/Ken_Moelis), the famous dealmaker whose name is literally the brand—controls through majority voting power and ownership. And then you go, “Wait a second, Ken Moelis has too much control over the board of Moelis & Company!” Yeah, that’s sort of the whole point.

And this is where people start saying, “Huh, maybe this court is getting a little too activist.” Wasn’t the whole idea of incorporating in Delaware that it’s business-friendly? That it streamlines governance and makes it easier to run a company?

fullshark• 1 year ago

What's the point of owning a share of a company if you have no say over its board of directors?

patrickhogan16• 1 year ago

When I look at cases like this, I think about it from the perspective of the investor who is suing:

1. Were you aware that the stock you were buying was founder-controlled? In the Moelis case, this was fully disclosed to shareholders.

2. In a free market, shouldn’t investors be able to decide for themselves whether founder-controlled companies offer better returns—and invest accordingly? There are plenty of companies with traditional governance structures for those who prefer them.

3. If you own one share with one vote, should that give you the power to dictate the corporate structure for everyone else?

I completely agree that shareholder protections matter. The question is whether these lawsuits are really about protecting shareholders—or if they’re more about generating profits for attorneys through litigation.

Ultimately, the market provides options. We have 50 states, each with the ability to set its own corporate governance laws. Companies aren’t locked into one approach—they can choose the legal framework that best aligns with their needs. Delaware has long been the preferred choice, but as its legal environment shifts, states like Nevada, with their statute-driven approach, may become more attractive for businesses looking for stability. Competition among states is a feature of the system, not a flaw.

archagon• 1 year ago

If you don’t want to be beholden to shareholders, don’t make your company public.

JumpCrisscross16• 1 year ago

Wasn’t the whole point of incorporating there that it’s business-friendly?

Shareholder friendly.

Also a deeply-developed body of law and efficient courts. There will absolutely be legal arbitrage opportunities between Delaware and Texas. Musk and Mark can sustain them; those who follow them may not.

nocoiner• 1 year ago

But then after that ruling the Delaware legislature changed the law, so it seems like the “awkward questions” you allude to have been mooted?

patrickhogan16• 1 year ago

Put yourself in Drew Houstons position. You are running Dropbox. Do you want to spend your time navigating legal uncertainty—or focusing on your business?

This isn’t just one case. First, it was Musk’s pay package. Now, it’s TripAdvisor. What comes next? Each ruling seems to reshape long-standing corporate governance norms.

And when that happens, how long will it take Delaware to provide clarity? How much will companies and shareholders spend on legal fees while they wait?

Also who does this all benefit except for plaintiff-litigation attorneys?

dkjaudyeqooe10• 1 year ago

You seem to be reducing corporate governance to "caveat emptor".

Why should shareholders be stripped or their rights? If you sell shares to others they should have the rights of owners such as votes on board members.

patrickhogan16• 1 year ago

It’s not about stripping shareholder rights—it’s about understanding what you’re buying. In the Moelis case, it was clear from the start that the company was founder-controlled. No one was misled. Investors had full transparency and chose to buy in with that structure in place.

Shareholders absolutely have rights, but those rights depend on the governance structure they agreed to when they invested. If you buy non-voting shares or shares in a dual-class structure, you don’t get to retroactively demand different terms. The market offers plenty of companies with traditional governance—if that’s a priority, investors are free to choose them.

The real question is: should courts be rewriting corporate structures after the fact, overriding agreements that were clear from day one?

inetknght4• 1 year ago

That founder control structures were safe?

If you want founder control structures then you don't want a public company.

patrickhogan16• 1 year ago

Meta seems to be doing well with Zuck, as does Dropbox with Drew. I like the freedom to, but not the requirement to, invest in public founder led companies.

Thinking back to 2022 - the market was ready to throw Meta out with the bath water. The voting protections kept Zuck in place and now we have consistent backing of Llama. When Zuck says he believes in open source and will continue to fund it I believe him because he is a software engineer who wrote Facebook on PHP which is open source.

Delaware faces exodus of tech companies

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