Elon Musk Isn’t the Only Billionaire Fighting Delaware

Three powerful shareholders are trying to loosen Delaware’s long-held grip over public companies.

Tripadvisor, under media executive Greg Maffei, wants to reincorporate in Nevada, over the objection of minority shareholders. Billionaire Barry Diller is awaiting a ruling that could relax Delaware’s scrutiny of transactions like the 2020 split of some of his online businesses. And Elon Musk, who reincorporated Twitter as X in Nevada last year, has said he would ask shareholders about reincorporating Tesla in Texas.

“I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters,” Musk posted on X on Jan. 30, the day a Delaware court threw out his $55.8 billion Tesla pay package. On Thursday, Neuralink, Musk’s closely held brain-implant company, incorporated in Nevada, state records show.

Delaware, of course, has long held primacy in the world of U.S. corporate law, including the scrutiny devoted to transactions between a public company and any shareholder who effectively controls it. Nevada and Texas are among the states that want a piece of that business and are hoping to appeal to at least some companies by setting up an alternative legal environment.

Companies most commonly register in their home state or Delaware. Still, states are doing more to compete. Four have created new statewide business courts since 2019, joining about two dozen that had them. A specialized business court in Texas, among the newest, is scheduled to open in September.

Nevada has been at it for years, passing legislation designed to lower litigation costs and offer greater protections for directors and executives. One tally ranks Nevada second to Delaware in attracting corporations.

“Nevada has clearly made a play to take on Delaware and try to attract companies, either from the beginning or getting them to move,” said Adam Chodorow, an Arizona State University law professor.

The ferment isn’t likely to unseat Delaware immediately. The small state remained the legal home of just over two-thirds of Fortune 500 companies in 2022, up slightly from five years earlier, state records show. Nearly 80% of initial public offerings in 2022 were registered there, slightly below 2019 levels.

Lawyers say they prefer the simplicity of a single state with decades of precedent covering nearly any corporate development. Also, most corporate law in Delaware is handled by a group of specialized judges in nonjury trials.

Destination Nevada

Last spring, online travel company Tripadvisor asked shareholders to support a plan to reincorporate in Nevada. So did its parent company, Liberty TripAdvisor, also publicly traded. Investors obliged: Two-thirds of the Tripadvisor vote supported the move; 80% did at the parent.

Most of those votes essentially reflected one shareholder’s stance, that of Maffei, chairman of both companies and CEO of the parent. He held 43% of the vote at the parent, which in turn held 56% of the vote at Tripadvisor, largely through supervoting shares, securities filings show. Maffei is a longtime lieutenant of media billionaire John Malone.

Two minority shareholders sued the travel companies in Delaware, where both are incorporated, accusing Maffei and directors of the companies of steering the outcome to benefit themselves. Absent Maffei’s vote, reincorporation won just 5.4% support at Tripadvisor and 30% at Liberty TripAdvisor, the lawsuit argues.

Delaware courts typically defer to a company’s board on many kinds of decisions under what is called the business judgment rule. A tougher standard applies when companies pursue transactions that stand to disproportionately benefit a controlling shareholder. In lawsuits over those transactions, companies generally must show the transaction was “entirely fair” to other shareholders.

Nevada, by contrast, has broad protections for directors and officers in many cases that Delaware wouldn’t, including involving improper personal gain. Moving to Nevada, then, benefits Tripadvisor directors and executives at the expense of minority shareholders, who should be compensated, the Tripadvisor plaintiffs alleged.

Maffei also has a history of being sued over allegations of seeking to benefit at the expense of minority shareholders, the plaintiffs argued, pointing to a half-dozen cases alleging conflicts of interest in recent years in which Delaware’s Chancery Court ruled against the executive. Settlements yielded about $300 million in four of those cases, the lawsuit says.

In court, Maffei and the companies deny wrongdoing, saying the lawsuit fails to show they benefited improperly or will benefit from Nevada’s litigation protections. They also say Nevada law adequately protects minority shareholders and that past settlements in Delaware don’t mean Maffei or other defendants breached their fiduciary duties.

In a securities filing, Tripadvisor said reincorporating in Nevada would save about $250,000 a year in taxes and could cut down on legal costs and “provide potentially greater protection from unmeritorious litigation for directors and officers.”

A spokesman for Tripadvisor declined to comment.

The court heard arguments in November and is expected to render a decision this month. Tripadvisor and its parent have held off reincorporating until the litigation is resolved.

Divorce court

Match Group, which owns dating services Match and Tinder, isn’t trying to move to Nevada. Instead, it has asked the Delaware Supreme Court to ease the scrutiny companies receive when engaging in some transactions with a major shareholder.

Known as IAC/InterActiveCorp until June 2020, the company was previously headed by Diller, who at the time was chairman and held just under half its voting power. That month, Match split from what is now IAC Corp., in which Diller and his family held just over 40% of the voting power.

A group of pension funds sued over the breakup, alleging that Diller and Match’s directors approved a transaction that improperly benefited themselves and IAC. The plaintiffs argued that the transaction favored what became IAC over other shareholders, including by transferring cash.

In court and securities filings, the defendants argued that the transaction was fair and expanded minority shareholders’ stake in Match, which also no longer was controlled by a dominant shareholder. The Delaware court dismissed the case, calling the separation process fair enough to gain Diller and the directors the benefit of the doubt under the business judgment rule.

The pension funds appealed to the Delaware Supreme Court. In responding, Diller and other defendants argued that such transactions should benefit from lighter court scrutiny if approved by either an independent board committee or by minority shareholders. They argued that in recent years, Delaware judges have required both approvals in too many circumstances.

While competition from other states might not sway any court decisions, “I certainly think there is a political realization in the background that some people are complaining that Delaware has become more unfriendly to management,” said Renee Zaytsev, a partner at law firm Boies Schiller Flexner.

Musk’s frustrations

Musk has a mixed record in Delaware’s courts.

He won a key case there in 2022, when a judge ruled Tesla paid a fair price for SolarCity while Musk helped run both companies. He also fought a long and unsuccessful battle there to abandon his $44 billion deal to buy Twitter. After he took over Twitter, Musk in 2023 changed it to privately held X Corp. and moved its domicile from Delaware to Nevada.

On Jan. 30 another Delaware judge struck down his massive stock award and said the process for securing its approval in 2018 was deeply flawed. “Never incorporate your company in the state of Delaware,” Musk tweeted after the decision.

Phil Shawe, chief executive of New York-based translation services company TransPerfect, moved its incorporation from Delaware to Nevada in 2018. Like Musk, Shawe was frustrated with Delaware’s business court after lengthy litigation there over his privately held company that booked revenue of $1.2 billion last year.

Shawe said more corporations will see that they have other options, which could be more beneficial and less expensive. “Delaware is a very powerful institution and it does a lot to keep the corporate disputes for public and private companies,” Shawe said. “It’s a lucrative business: what gambling is to Las Vegas.”

Write to Theo Francis at [email protected] and Erin Mulvaney at [email protected]

Corrections & AmplificationsA Delaware judge struck down Elon Musk’s Tesla pay package on Jan. 30. An earlier version of this Feb. 11 article said the decision was last week. (Corrected on Feb. 11)