8 ms·

Never incorporate your company in the state of Delaware

26 points by lopkeny12ko 3y ago

mc32 3y ago
Don't companies usually incorporate in Delaware because there is so much precedent for case law that it makes the business-law intersectionality more predictable than that in a state with less corporate case law? It's not to say cases like this won't happen (obviously as evidenced by this) but it's still way more predictable than say Rhode Island or New Mexico.
- rpmisms 3y ago
  Yes, and this is a strange decision for the Chancery court to make, since they enjoy being business-friendly and having a reputation for such. I'm not going to say the judge is biased, but... Elon will likely take his own advice, and we'll probably see Texas offer incentives for companies to incorporate there in the near future.
  - numbsafari 3y ago
    It’s only strange if you ignore everything except the name Elon Musk.
  - ibero 3y ago
    How is it strange? I am unfamiliar with the chancery and precedent.
    - rpmisms 3y ago
      The decision hinges on factors that aren't usually a big deal or thought much about. 1. The judge's opinion that the compensation package is "unfair", and 2. Elon's brother being on the board, which some shareholders may not have known about, despite it being very public information. This is apparently enough to overturn a rather old pay package. This reeks of a shareholder saying "Yeah right" at the time when it was voted on, and getting mad when Elon pulled off the seemingly impossible and skyrocketed Tesla's stock, meeting the lofty targets.
      - gpm 3y ago
        This is a gross misrepresentation of the ruling. Elon's brother being on the board was little more than a footnote because he wasn't involved in the relevant decision. I don't think the shareholders being aware of that or not was even a footnote. The part of the board that did participate in the relevant decisions (not including Elon or his brother) being beholden to Elon, while holding themselves out as independent, was a major factor.
        rpmisms 3y ago
        It's a perfectly decent representation, if you're used to reading judgements (rulings are in motion practice, the outcome is a judgement) and understand how to read between the lines.
      - aw1621107 3y ago
        You're leaving out a lot of information. > The judge's opinion that the compensation package is "unfair" This leaves out a fair bit of reasoning as to why. Under Delaware law, Tesla/Musk bore the burden of proof to show that the compensation package was entirely fair - that is, both the process and the price were fair. She ruled that neither were fair, and so under Delaware law the compensation plan was improperly granted and a remedy must be chosen. > 2. Elon's brother being on the board, which some shareholders may not have known about, despite it being very public information. That is a pretty minor factor, and I'm curious why you picked this specific one out. Just having a personal relationship with the beneficiary of the compensation plan is not necessarily improper in and of itself, and the opinion states as much. The issue is that a majority of the board and the Compensation Committee were not independent from Musk both in principle and in practice, and this was not disclosed to shareholders before the vote. > This is apparently enough to overturn a rather old pay package. This reeks of a shareholder saying "Yeah right" at the time when it was voted on, and getting mad when Elon pulled off the seemingly impossible and skyrocketed Tesla's stock, meeting the lofty targets. The lawsuit was filed on 2018-06-05. The stockholder vote for the compensation plan was on 2018-03-21, less than 3 months before.
  - verdverm 3y ago
    Isn't Texas the state where most patent trolls sue from? There's that one judge they have out there that is real favorable to the trolls iirc
    - the_third_wave 3y ago
      Not "Texas" but "the Eastern District of Texas" specifically. Things supposedly have changed after a supreme court ruling limiting where such cases can be filed [1,2]. The top location for this type of lawsuit now seems to be Delaware. [1] https://www.dallasnews.com/business/technology/2017/05/22/supreme-court-ruling-threatens-to-shut-down-cottage-industry-for-small-east-texas-town/ https://www.dallasnews.com/business/technology/2017/05/22/su... [2] https://arstechnica.com/tech-policy/2017/10/patent-cases-in-east-texas-plunge-more-than-60-percent/ https://arstechnica.com/tech-policy/2017/10/patent-cases-in-...
  - maxerickson 3y ago
    Why wouldn't the business friendly court side with shareholders? Like if I were an prospective investor that he cared about, I would tell Elon to move his company from Texas to Delaware before I gave him like a quarter.
    - mc32 3y ago
      You want a court that applies the law and applies the law consistently in order to ensure some predictability for business. They should apply the law and not "prefer" one side to the other.
      - rpmisms 3y ago
        Exactly. This would have been a ~$10m judgement for the solarcity hijinks in a sane court.
        ahahahahah 3y ago
        Wtf are you on? This case wasn't about solar city. And SolarCity was acquired 2 years before the pay package was in place anyway. Also, Tesla won the case about SolarCity. Is your objection that they shouldn't have? Because that seems surprisingly reasonable given your other comments.
        rpmisms 3y ago
        Yeah, SolarCity was a... stinky acquisition that was mentioned in this case. Some of the relevant false statements related to it. Full disclosure, I agreed with Elon's current opinions before he had them, and I'm an avid legal nerd. I try to separate them as best I can, but when cases like this come up I can get a bit testy. I could word the same statements in an anti-Musk way, but this judgement is, to use a technical term, bullshit. My point is that this is a ridiculous penalty for the violations alleged, and simple punitive damages for misrepresented information would have been appropriate. A "slap on the wrist", as it were.
        3y ago
- Kluggy 3y ago
  I don’t know there there’s been much precedent set anywhere for giving the CEO of a company 9.3% of the company’s market cap, devaluing everyone else.
  - kaliqt 3y ago
    He did the impossible and made everyone rich, so Delaware shouldn't be getting involved at all.
    - Kluggy 3y ago
      Sadly, being a current stock owner doesn't mean you were along for the rocket ride. Plenty of people bought in for over $250 (high was ~$293) and lost 20% of their value (current is ~$190). If you lost 20% of your investment, you might have a different view on the CEO devaluing it another 9%
breadwinner 3y ago
If total lawlessness is what you want, I don't think you can incorporate your company in any state in the US.
- verdverm 3y ago
  There's a crypto company out there that will sell him a "legal" business formation on the blockchain
- thfuran 3y ago
  If total lawlessness is what you want, why are you even trying to incorporate your company?
  - polygamous_bat 3y ago
    Because otherwise when you sell stocks you get prosecuted by the SEC.
    - thfuran 3y ago
      Attempting to apportion voting rights suggests that one is at most gesturing half-heartedly in the direction of lawlessness.
verdverm 3y ago
I'll say my little company has been registered in Delaware for a long time. It's cheap and easy. Not sure what Elon's beef is. My guess would be a ruling he didn't like in their dedicated business legal system. Edit, seems it was an unfavorable ruling, another top level comment has the details
- forgot-im-old 3y ago
  Let's remember Elon was not a founder of Tesla, just an early investor, and had no say in where it was registered.
pg_bot 3y ago
Context for those out of the loop. https://www.cnbc.com/2024/01/30/tesla-shares-slide-after-judge-voids-elon-musks-56-billion-compensation.html https://www.cnbc.com/2024/01/30/tesla-shares-slide-after-jud...
user3939382 3y ago
What I don’t get about the incorporate in state X schemes, maybe someone can enlighten me, is that you still need to file a foreign corporation to operate in whatever state you’re in. So what exactly are you evading by filing in a different state?
- verdverm 3y ago
  Delaware is a unique state because it has a dedicated business courts and a long history of litigation that makes understanding the likely outcome predictable
  - user3939382 3y ago
    Right but whatever state you’re actually operating in still has jurisdiction, right?
    - houston_Euler 3y ago
      It depends on the case. If it is in regards to shareholders, then I believe the state in which you're incorporated would have jurisdiction. If it's another type of case, for example one brought by an employee, it might be based on the employment laws of the state they are employed in, so the trial would happen in the state of their employment.
rkagerer 3y ago
If any of us negotiated this good a deal we'd be saying "good on 'ya". If it really is unfair/illegal the board should be the ones to take the flack.
ChrisArchitect 3y ago
[dupe]/Related: More discussion: https://news.ycombinator.com/item?id=39196390 https://news.ycombinator.com/item?id=39196390

26 points by lopkeny12ko 3y ago

mc32 3y ago

Don't companies usually incorporate in Delaware because there is so much precedent for case law that it makes the business-law intersectionality more predictable than that in a state with less corporate case law? It's not to say cases like this won't happen (obviously as evidenced by this) but it's still way more predictable than say Rhode Island or New Mexico.

rpmisms 3y ago
Yes, and this is a strange decision for the Chancery court to make, since they enjoy being business-friendly and having a reputation for such. I'm not going to say the judge is biased, but... Elon will likely take his own advice, and we'll probably see Texas offer incentives for companies to incorporate there in the near future.
- numbsafari 3y ago
  It’s only strange if you ignore everything except the name Elon Musk.
- ibero 3y ago
  How is it strange? I am unfamiliar with the chancery and precedent.
  - rpmisms 3y ago
    The decision hinges on factors that aren't usually a big deal or thought much about. 1. The judge's opinion that the compensation package is "unfair", and 2. Elon's brother being on the board, which some shareholders may not have known about, despite it being very public information. This is apparently enough to overturn a rather old pay package. This reeks of a shareholder saying "Yeah right" at the time when it was voted on, and getting mad when Elon pulled off the seemingly impossible and skyrocketed Tesla's stock, meeting the lofty targets.
    - gpm 3y ago
      This is a gross misrepresentation of the ruling. Elon's brother being on the board was little more than a footnote because he wasn't involved in the relevant decision. I don't think the shareholders being aware of that or not was even a footnote. The part of the board that did participate in the relevant decisions (not including Elon or his brother) being beholden to Elon, while holding themselves out as independent, was a major factor.
      - rpmisms 3y ago
        It's a perfectly decent representation, if you're used to reading judgements (rulings are in motion practice, the outcome is a judgement) and understand how to read between the lines.
    - aw1621107 3y ago
      You're leaving out a lot of information. > The judge's opinion that the compensation package is "unfair" This leaves out a fair bit of reasoning as to why. Under Delaware law, Tesla/Musk bore the burden of proof to show that the compensation package was entirely fair - that is, both the process and the price were fair. She ruled that neither were fair, and so under Delaware law the compensation plan was improperly granted and a remedy must be chosen. > 2. Elon's brother being on the board, which some shareholders may not have known about, despite it being very public information. That is a pretty minor factor, and I'm curious why you picked this specific one out. Just having a personal relationship with the beneficiary of the compensation plan is not necessarily improper in and of itself, and the opinion states as much. The issue is that a majority of the board and the Compensation Committee were not independent from Musk both in principle and in practice, and this was not disclosed to shareholders before the vote. > This is apparently enough to overturn a rather old pay package. This reeks of a shareholder saying "Yeah right" at the time when it was voted on, and getting mad when Elon pulled off the seemingly impossible and skyrocketed Tesla's stock, meeting the lofty targets. The lawsuit was filed on 2018-06-05. The stockholder vote for the compensation plan was on 2018-03-21, less than 3 months before.
- verdverm 3y ago
  Isn't Texas the state where most patent trolls sue from? There's that one judge they have out there that is real favorable to the trolls iirc
  - the_third_wave 3y ago
    Not "Texas" but "the Eastern District of Texas" specifically. Things supposedly have changed after a supreme court ruling limiting where such cases can be filed [1,2]. The top location for this type of lawsuit now seems to be Delaware. [1] https://www.dallasnews.com/business/technology/2017/05/22/supreme-court-ruling-threatens-to-shut-down-cottage-industry-for-small-east-texas-town/ https://www.dallasnews.com/business/technology/2017/05/22/su... [2] https://arstechnica.com/tech-policy/2017/10/patent-cases-in-east-texas-plunge-more-than-60-percent/ https://arstechnica.com/tech-policy/2017/10/patent-cases-in-...
- maxerickson 3y ago
  Why wouldn't the business friendly court side with shareholders? Like if I were an prospective investor that he cared about, I would tell Elon to move his company from Texas to Delaware before I gave him like a quarter.
  - mc32 3y ago
    You want a court that applies the law and applies the law consistently in order to ensure some predictability for business. They should apply the law and not "prefer" one side to the other.
    - rpmisms 3y ago
      Exactly. This would have been a ~$10m judgement for the solarcity hijinks in a sane court.
      - ahahahahah 3y ago
        Wtf are you on? This case wasn't about solar city. And SolarCity was acquired 2 years before the pay package was in place anyway. Also, Tesla won the case about SolarCity. Is your objection that they shouldn't have? Because that seems surprisingly reasonable given your other comments.
        rpmisms 3y ago
        Yeah, SolarCity was a... stinky acquisition that was mentioned in this case. Some of the relevant false statements related to it. Full disclosure, I agreed with Elon's current opinions before he had them, and I'm an avid legal nerd. I try to separate them as best I can, but when cases like this come up I can get a bit testy. I could word the same statements in an anti-Musk way, but this judgement is, to use a technical term, bullshit. My point is that this is a ridiculous penalty for the violations alleged, and simple punitive damages for misrepresented information would have been appropriate. A "slap on the wrist", as it were.
        3y ago
Kluggy 3y ago
I don’t know there there’s been much precedent set anywhere for giving the CEO of a company 9.3% of the company’s market cap, devaluing everyone else.
- kaliqt 3y ago
  He did the impossible and made everyone rich, so Delaware shouldn't be getting involved at all.
  - Kluggy 3y ago
    Sadly, being a current stock owner doesn't mean you were along for the rocket ride. Plenty of people bought in for over $250 (high was ~$293) and lost 20% of their value (current is ~$190). If you lost 20% of your investment, you might have a different view on the CEO devaluing it another 9%

breadwinner 3y ago

If total lawlessness is what you want, I don't think you can incorporate your company in any state in the US.

verdverm 3y ago
There's a crypto company out there that will sell him a "legal" business formation on the blockchain
thfuran 3y ago
If total lawlessness is what you want, why are you even trying to incorporate your company?
- polygamous_bat 3y ago
  Because otherwise when you sell stocks you get prosecuted by the SEC.
  - thfuran 3y ago
    Attempting to apportion voting rights suggests that one is at most gesturing half-heartedly in the direction of lawlessness.

verdverm 3y ago

I'll say my little company has been registered in Delaware for a long time. It's cheap and easy. Not sure what Elon's beef is. My guess would be a ruling he didn't like in their dedicated business legal system. Edit, seems it was an unfavorable ruling, another top level comment has the details

forgot-im-old 3y ago
Let's remember Elon was not a founder of Tesla, just an early investor, and had no say in where it was registered.

pg_bot 3y ago

Context for those out of the loop. https://www.cnbc.com/2024/01/30/tesla-shares-slide-after-judge-voids-elon-musks-56-billion-compensation.html https://www.cnbc.com/2024/01/30/tesla-shares-slide-after-jud...

user3939382 3y ago

What I don’t get about the incorporate in state X schemes, maybe someone can enlighten me, is that you still need to file a foreign corporation to operate in whatever state you’re in. So what exactly are you evading by filing in a different state?

verdverm 3y ago
Delaware is a unique state because it has a dedicated business courts and a long history of litigation that makes understanding the likely outcome predictable
- user3939382 3y ago
  Right but whatever state you’re actually operating in still has jurisdiction, right?
  - houston_Euler 3y ago
    It depends on the case. If it is in regards to shareholders, then I believe the state in which you're incorporated would have jurisdiction. If it's another type of case, for example one brought by an employee, it might be based on the employment laws of the state they are employed in, so the trial would happen in the state of their employment.

rkagerer 3y ago

If any of us negotiated this good a deal we'd be saying "good on 'ya". If it really is unfair/illegal the board should be the ones to take the flack.

ChrisArchitect 3y ago

[dupe]/Related: More discussion: https://news.ycombinator.com/item?id=39196390 https://news.ycombinator.com/item?id=39196390