Musk Has Triggered A Corporate Deregulation Bomb

Elon Musk with his arms raised overlaid on a screenshot from Wayne’s World showing a dejected Wayne and Garth in Delaware. (AP Photo/Alex Brandon)

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In an effort to appease Elon Musk, Delaware’s Democratic-controlled legislature is expected to vote on a bill this month that would not only award Musk the largest compensation package in history, but also shield many of the country’s most powerful corporate executives from accountability for their companies’ misbehavior. 

If lawmakers don’t enact the law, which was written by Musk’s own lawyers, the billionaire mogul and his allies are threatening a mass exodus of companies out of the state. This pressure campaign is part of a long-running race to the bottom between states competing to attract businesses with offers to shield corporate executives from scrutiny by their companies’ own shareholders and workers.

Delaware, which has long been perceived as a billionaire playground and corporate tax haven, is the incorporation home to more than 60 percent of all Fortune 500 companies. That means, if enacted, the wide-ranging regulatory handouts in the bill will have sweeping consequences for corporate behavior across the country. 

Shareholder lawsuits — used to hold corporations accountable for misconduct — would become much more difficult to bring to court. The law could wipe out many Delaware legal practices, a major state industry, and it could disempower company stakeholders including regular everyday stockholders and workers via their pension funds.

The law would set an extremely high bar for plaintiffs to obtain internal company documents, records, and communications — the core pieces of evidence needed to build a lawsuit against a company. Corporate executives and investors with a controlling stake in a firm would no longer be required to hold full shareholder votes on various transactions in which management has a direct conflict of interest. 

“This law would basically end civil litigation as a mechanism for holding fiduciaries accountable and to ensure that they act in the best interests of shareholders and don’t just line their own pockets,” said Joel Fleming, a partner at Equity Litigation Group, a boutique Delaware-based firm that takes on shareholder lawsuits. 

The bill amounts to a wishlist of reforms advocated for by a radical fringe of Silicon Valley titans and corporate defense lawyers. If enacted, experts say similar legislation will likely spread across the country as other states like Texas and Nevada compete to hobble their own shareholder protections, fundamentally eroding corporate governance in America. 

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“Dropping A Nuclear Bomb To Kill A Fruit Fly”

Delaware is inordinately responsive to business backlash because of its economic reliance on the homegrown “incorporation industry.” Nearly two million LLC entities are registered in the state — double the population of actual residents. 

Most of these companies keep their headquarters elsewhere but exist on paper as a legal entity in Delaware, so they can benefit from the streamlined incorporation process, low taxes, lax regulations, and an extremely business-friendly court system to adjudicate legal disagreements. 

The state’s 200-year-old Court of Chancery system, designed as a specialized court with expertise to handle business cases, is known for being amenable to corporate interests, most notably in bankruptcy cases. After serving in judiciary roles for 12-year terms, many judges go on to work for big law firms representing the very clients whose cases they were previously ruling on. 

For example, former Chancery Court Judge William Chandler now works for major law firm Wilson Sonsoni and helped craft the Musk bill currently before the legislature. Wilson Sonsoni represented Tesla during the 2018 botched negotiations with Musk over his $56 billion dollar pay package, which a judge ruled were not deliberated in good faith, sparking Musk’s calls to leave Delaware. 

The legislature is equally accommodating to business groups. All updates to corporate law that come before the legislature are first pre-vetted and approved by the Corporate Law Council, an arm of the Delaware State Bar Association and voice of the legal establishment and corporate interests. The council is made up almost entirely of defense lawyers at major law firms. Critics say this unelected body gets more say over Delaware’s legislative agenda than its lawmakers. 

Even the most corporate-friendly of judicial systems, however, took issue with Musk’s compensation package, siding in favor of a Tesla shareholder lawsuit that alleged he misled investors about his actual compensation. In her December 2024 ruling, Judge Kathaleen McCormick found that Musk abused his dual role as both the CEO and controlling shareholder of Tesla, posing a conflict of interest. Her ruling states that Musk was not forthright in presenting the full scope of the compensation deal he was awarding himself when it was brought before shareholders for a vote in 2018. 

Musk went ballistic. He berated the judge on his social media platform X, announced he’d move his brain–computer interface company Neuralink’s incorporation status from Delaware to Nevada, and encouraged other CEOs to do the same. Meta and Dropbox along with the activist investor and Musk political ally Bill Ackman followed suit, saying they’d consider leaving the state. Walmart’s lawyers reportedly told lawmakers they might too. But those are the only known high-profile Delaware exits so far. 

Then, at the start of this year, the Delaware legislature took up Senate Bill 21, which explicitly seeks to override the Chancery judge’s ruling on Musk’s pay package. Democratic Gov. Matt Meyer urged lawmakers to do so at the start of the year to purportedly “stop the bleeding” of businesses fleeing the state. 

A self-professed movement called “Leave Delaware,” registered as an opaque nonprofit, has mobilized in recent months to defend Musk’s honor while his allies lobby for the bill in the state legislature. Leave Delaware runs a social media account and has a website that offers legal assistance to companies looking to unincorporate from the state. The threats do carry some teeth: Delaware to some extent relies on keeping its business community or risk facing a budget shortfall. 

But political observers in the state believe that the “DE-Exit” phenomenon is overblown. Lobbyists, in their view, are weaponizing lawmakers’ fears about a capital flight to pressure them to pass Musk’s bill. 

“We haven’t been presented any actual evidence to support fears of a mass business exodus,” said State Rep. Madinah Wilson-Anton’s (D-Newark). “It’s been a lot of anecdotes from leading lawyers who represent firms that would benefit from the recommended changes.” 

For one, the numbers don’t add up. Nearly a quarter of the state’s revenues come from the corporate franchise tax, a flat annual fee capped at $250,000 for the largest companies. That revenue base is pretty evenly distributed across over a million businesses. As Dael Norwood, a history professor at the University of Delaware explained, the incorporation industry is a “volume business, not a value business.” 

“Delaware has — or rather, should have — an interest in appealing to the largest number of corporate registrants, not the wealthiest billionaires,” said Norwood in a blog post. Musk leaving the state draws headlines, but it’s not materially different than if a medium-sized company left the state from a revenue standpoint. 

There are other concerns, however. Multiple sources say that lawmakers behind closed doors worry that Musk could leverage his political power as the head of President Donald Trump’s new Department of Government Efficiency to cut off federal funding to the state if they don’t bend the knee. At a caucus meeting earlier this month, sources say that Delaware’s Secretary of State, Charuni Patibanda-Sanchez, told lawmakers that the state can’t afford any other budget shortfalls given the federal funding cuts they already anticipate will be coming from DOGE. 

Still, critics of the bill argue that its risks outweigh any short-term political benefits. 

“You’re basically dropping a nuclear bomb to kill a fruit fly,” said Christine Mackintosh, a plaintiff lawyer at Grant & Eisenhoferr. 

Other business leaders have threatened mass corporate exits from Delaware in recent years to get what they want, and yet the state’s incorporation rate has only increased with no signs of abating, according to public data cited by Norwood. 

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“You Might As Well Burn The Corporate-Law Textbooks”

The real financial headwinds to the state’s existing local economy may come from Senate Bill 21 being signed into law. By gutting shareholder safeguards, the legal industry that makes up a substantial amount of the workforce in the state could take a massive hit, especially plaintiff firms representing shareholders. 

“If this passes, you might as well burn the corporate-law textbooks because they won’t matter anymore, it’ll be an entirely new day,” said Mackintosh. 

Of course, the plaintiffs themselves would also face an extinction-level event. The bill would revoke disclosure requirements for shareholder requests for all kinds of company documents, records, and internal communications. All plaintiffs would be entitled to would be minutes from board meetings, which reveal very little. These alterations would make it almost impossible for shareholders to build any viable lawsuits that could even reach the discovery fact-finding stage of a court case. 

A few law firms closing down may sound trivial, but the suits they bring deliver billions of dollars to shareholders every year and guard against crony dealmaking. For example, one such shareholder lawsuit in Delaware brought $122 million to shareholders adversely impacted by the merger of CBS and Viacom, a deal that had been rigged to favor the parent company. The controller of the umbrella company, National Amusements Inc., had a financial interest in both merging companies and underpaid for the acquired asset. 

While plaintiffs are driving some of the interest group opposition to the law, they’re not alone. 

Even some defense lawyers are spooked by the law’s extremity and how it came to be. 

Musk’s lawyers, for example, initially circumvented the state bar association without seeking the Corporate Law Council’s sign-off on the language. “In Delaware that’s sacrosanct and it’s ruffled a lot of feathers,” said Mackintosh. 

Some plaintiffs have even made the case that this bill goes against the interests of defense councils. After all, you need to have someone on the other side of the courtroom to argue against in order to retain any clients. 

Last week, the Corporate Law Council released a set of recommendations to amend the text of the bill, which will likely be included in the final version of the law. The updates, however, do little to change the substance of the bill and will likely clear the way for it to pass. 

The bill text also strips out basic safeguards currently protecting shareholders. In some ways, say experts, the bill directly undercuts the model of shareholder primacy that’s dominated corporate America for decades. 

In the last several years, there’s been a growing revolt by corporate leaders to take back power, as they see it, from the shareholders who they claim are overrepresented in the corporate governance process. In part, it’s a backlash to environmental, social, and governance (ESG) stakeholder capitalism whose proponents often leverage financial positions in companies to push for corporate governance reforms such as sustainability. 

This power struggle between shareholders and executives has been playing out most visibly in Delaware. Last year, the legislature passed a forerunner to the current bill being debated that similarly overturned a Chancery Court judge’s ruling against an illegal business practice. 

The bill greenlit special privileges granted by corporations for some of their high-value minority shareholders allowing those actors to exert enormous control over the company’s decision-making without actually owning enough shares to do so. These arrangements, which exist in a legal gray area, are often used by private equity firms to stack the deck in their favor in advance of a full company takeover. 

“That bill passing was a dry run to see what they could get away with,” said Fleming. “They got a foot in the door and now they’re trying to tear down the entire house.”

Musk’s bill continues that fight by giving more power to executives over shareholders. 

Companies often want to make transactions where there’s an inherent conflict of interest. Executive compensation is the most common scenario: A CEO wants to award himself money technically owned by the shareholders. Another example are mergers and acquisitions in which an executive or controller may have a financial interest in the targeted asset. Shareholders could thus get screwed by the company either paying too much or too little for the acquisition. 

One recent example involves Jim Dolan, owner of Madison Square Garden in New York City. Dolan wanted to merge two of his own companies, one that owned the Garden and one that negotiated the TV contracts for the events held at the Garden. According to the lawsuit, the acquiring company overpaid for the deal, benefiting Dolan’s bottom line at the expense of shareholders, who eventually settled the case for $85 million. 

When it comes to these forms of conflicted transactions, companies currently need to get approval from two separate bodies: a committee of fully independent directors and then their shareholders. 

The Delaware bill would change state law so that companies only need sign off from one of those two bodies. Naturally, many companies would opt for the independent directors committee, whose members are typically more loyal to executive management. The bill also notes that only a majority of members on these committees need to be independent rather than all members.

The current standards for so-called “independence” on these committees is already quite limited, according to legal experts. That independence is just from the board of directors, not necessarily the controlling shareholder who holds the real power. In the case of Tesla, that would mean Elon Musk. 

Rolling back all these shareholder protections has created growing opposition in the state. Joining plaintiff firms are labor unions such as the state’s AFL-CIO whose members’ pension funds are invested in these large companies. If executives at those firms are shielded from legal liability, Fleming says, it enables them to outright steal from workers under the new law. 

“Erasing forty years of case law would not make Delaware look like a stable or predictable place to do business,” wrote a collection of shareholder counsels in a joint letter to the Delaware General Assembly this month. “It would make Delaware look like a state where Elon Musk can change the law because he lost a case.”

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