Can Elon Musk do ‘whatever he wants’? Why moving Tesla out of Delaware may spook investors.

‘The real issue is that you have a board that is not independent,’ one investor says

As he seeks to reincorporate Tesla in Texas, Elon Musk “is not dealing with the problem at hand, which is good corporate governance,” one investor said.

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Tesla Inc. Chief Executive Elon Musk’s push to reincorporate the electric-vehicle maker in Texas after a legal defeat in Delaware may have broader implications for the company.

The move could reinforce the image of Musk as a mercurial chief executive acting on yet another whim while shying away from improving Tesla’s TSLA, +0.84% corporate governance.

Musk tweeted on his social-media platform X, the former Twitter, late Wednesday that Tesla “will move immediately to hold a shareholder vote” on whether to transfer the company’s state of incorporation to Texas.

Texas last year formed a business court fashioned after Delaware’s 231-year-old Chancery Court, and the new trial court is slated to begin hearing cases in September. Musk set up a poll on X earlier this week asking whether the company should reincorporate in Texas or in Nevada, and he later said that Texas had won.

Danilo Kawasaki, co-founder and chief operating officer of Gerber Kawasaki Wealth and Investment Management in California, said that his concerns would remain the same regardless of where the company reincorporates.

“We think that the big concern is Elon Musk thinking that he can do whatever he wants,” bypassing “common sense and rules,” no matter where Tesla is incorporated, Kawasaki said.

Gerber Kawasaki holds about $100 million in Tesla shares and has about $2.6 billion in assets under management. The firm’s other co-founder, Ross Gerber, ended a run for a seat on Tesla’s board last year.

“The real issue is that you have a board that is not independent,” Kawasaki said.

Musk is “not dealing with the problem at hand, which is good corporate governance,” he said, and is not accepting the Delaware judge’s decision “as an opportunity to make Tesla better for shareholders.”

A Delaware judge late Tuesday voided Musk’s $56 billion compensation package in a far-reaching decision that quoted Mary Shelley, Shakespeare and Star Trek and called the process of arriving at that sum “deeply flawed.”

Tesla’s shares have fallen in the two days since, dropping another 1% on Thursday. In the past 12 months, the company has gained around 2%, compared with an advance of about 18% for the S&P 500 index SPX.

A replay of 2020?

Investors have seen a version of this movie before.

“We saw Elon make a very similar pledge” when he vowed to move Tesla out of California, “and we saw that happen,” Seth Goldstein, an analyst with Morningstar, said in an interview.

In the spring of 2020, an upset Musk said he would reopen Tesla’s Fremont, Calif., plant, then the company’s sole U.S. car-production facility, in defiance of a regional shutdown order aimed at curbing the spread of COVID-19.

He went on to rail against the state of California, file a lawsuit to keep the factory open and promise to move Tesla’s headquarters as well as the company’s “future programs” to Texas and Nevada. He made good on the promise a little over a year later, headquartering Tesla in Austin.

Delaware is the gold standard for corporate law

Delaware’s Chancery Court, which deals specifically with corporate-law cases, sets the highest bar in the nation when it comes to resolving legal business matters. Inc. AMZN, +2.63% incorporated in Washington state in 1994 and reincorporated in Delaware in 1996. Alphabet Inc. GOOG, +0.64% incorporated in California in 1998 and reincorporated in Delaware in 2003.

According to the state, nearly 70% of Fortune 500 companies chose Delaware as “the domicile of choice” in 2022, and about 79% of all U.S. initial public offerings that year were registered in Delaware.

The state “charges significant fees, but it also provides an extraordinarily high-quality service through the Secretary of State’s office and Chancery Court, both of which are widely regarded as the nation’s pre-eminent business court despite Musk’s differences with it,” said Benjamin Edwards, an associate professor of law at the University of Nevada, Las Vegas.

How would a reincorporation in Texas work?

Usually, shareholders have to agree with a company’s plan to reincorporate, with the requirements depending on the state where the company is currently incorporated.

An ongoing lawsuit involving Tripadvisor Inc. TRIP, +1.76% provides clues about how the process could play out in Delaware.

From that suit, filed on behalf of a group of Tripadvisor shareholders hoping to persuade the Delaware Chancery Court to stop the online travel company from going ahead with board-approved plans to reincorporate in Nevada, “we know … that Delaware may have a say in the conditions” under which a company could exit the state, Edwards said. The Tripadvisor ruling is pending and will set a precedent, he added.

When companies leave Delaware and reincorporate in western states such as Nevada, it’s primarily to save costs, Edwards said, adding that some publicly traded companies could cut fees pretty dramatically by moving to Nevada, from around $300,000 a year to less than $10,000.

For large companies such as Apple Inc. AAPL, +1.33%, he noted, that would be a “rounding error, but for smaller companies, the costs can be material over time.”

Tesla is large enough that cost alone would not be driving a decision, he said. If it comes to a vote, the board would issue a recommendation, add it to proxy materials and then ask shareholders for a vote.

Would such a move spook institutional investors?

Tesla shares fell after the Delaware ruling largely because it stoked fears that it could lead Musk to leave his current role at Tesla, Morningstar’s Goldstein said.

Musk is no longer needed to manage the day-to-day operations at Tesla, and he has surrounded himself with a team of executives that is seen as “very strong,” the analyst said.

But Tesla’s stock still moves based on Musk’s actions. “He’s still the face of the company,” Goldstein said, adding that while the decision to void the compensation package could still be appealed, “I don’t think he’s going to leave even if the decision stands.”

Maybe the end result will be a more independent Tesla board, one in which larger institutional shareholders may want to play a greater role, he said. But for stockholders, reincorporating the company elsewhere might ultimately be “not too much of a change.”

The court decision sends the Tesla board back to the drawing board regarding a new compensation package to be voted on at the next shareholder meeting. A new package could “get Musk directly to the 25% voting share bogey he has discussed over the past few weeks,” Wedbush analyst Dan Ives said in a recent note.

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“We ultimately believe this decision will be a catalyst for the board to take the situation into its own hands and come up with a new comp package that could satisfy both shareholders and Musk, helping put this 2018 comp package noise in the rearview mirror,” Ives wrote.

“Musk is Tesla and Tesla is Musk,” he said.