Elon Musk revives century-old controversy by vowing to pull Tesla out of Delaware after state high court judge invalidates Tesla's $56 billion compensation package I let it happen. Mr. Musk was, in effect, asking, “Who needs Delaware?”
The answer is surprisingly complex, and legal scholars have been debating it ever since this small state began to become America's corporate capital. More than half of the Fortune 500 companies are incorporated in Delaware, and 30% of his $5 billion budget comes from corporate fees and taxes. California is the fifth largest economy in the world, but its share is small in comparison.
powerful mix
The traditional explanation is that Delaware gained the upper hand. According to the established theory, in the race to the bottom in terms of corporate articles of incorporation, Delaware won by offering tax cuts and business-friendly laws.
However, that theory doesn't hold true. If Delaware is so business-friendly, how did Mr. Musk get tagged with a pay package erasure ruling? And don't tell Ronald Perelman about Delaware's respect for corporate executives. please. Several important decisions from the Delaware Court of Chancery came as a rebuke of Perelman's attempts to line his pockets at the expense of minority shareholders. Many states have stricter anti-takeover laws, which generally benefit stubborn business owners more than investors.
A frequently cited paper by Roberta Romano, a professor at Yale Law School, found that companies become more valuable after reincorporating in Delaware. That may be because the small state of Delaware pays close attention to its court system, offering companies and investors relatively quick and predictable resolutions to disputes. In the words of Bob Dylan, Delaware knows what businesses need, not what their owners want.
The inevitable next question is, if it's so easy to supply businesses with what they need, why aren't all states doing it? The answer involves politics, deliberate calculation, and historical coincidence.
For most of their history under U.S. and British law, corporations were one-time creations appropriated by the Crown or state governments to carry out specific tasks, such as banking or building canals. Many had close ties to the officials who gave them power. In 1816, Pennsylvania received 40% of its revenue from dividends on stocks held by state-chartered banks.
That changed with the rise of interstate commerce. An 1845 pamphlet stated that Philadelphia businessmen established manufacturing operations in New Jersey because of the “possibility of obtaining a more liberal charter from New Jersey.” To encourage such activity, states abandoned special charters requiring separate laws and proposed general corporations with few conditions.
cross the border
In 1888, New Jersey legislators came up with the idea of selling corporate charters to raise money and using a combination of lower taxes and simplified paperwork to attract businesses from New York. It was no surprise that John D. Rockefeller consolidated his own vast Standard Oil Trust in 1899 into his single company in New Jersey.
Elsewhere, angry lawmakers called New Jersey a “traitor state.” Therefore, it might have remained if not for the political ambitions of the governor at the time. After Woodrow Wilson was elected president in 1913, he pushed for reforms to state laws that alienated his corporate leaders.
Delaware was waiting. Lawmakers there had already copied most of New Jersey's corporate codes, so when New Jersey tightened regulations, Delaware welcomed corporate refugees with open arms.
Will Mr. Musk cause a similar exodus? Most legal scholars think otherwise. Delaware has successfully balanced the needs of management and shareholders and has invested in a court system skilled at resolving corporate disputes. For most businesses, the second smallest state will likely remain home.
