Elon Musk scored a major victory this month when Tesla awarded him $29 billion, a “first step” in a long-promised payday. It was also a win for Texas, where Tesla is now incorporated. A new law in the state helped pave the way for Musk’s pay package after it was initially blocked by a Delaware judge.
Texas’ low corporate tax rate and employer-friendly labor laws have long made it an attractive place for businesses, but most big companies — two-thirds of the Fortune 500 — still incorporate in Delaware. Corporate America’s backlash to a string of decisions by Delaware courts, including the one voiding Musk’s pay package, has heightened the opportunity for Texas to compete for corporate domicile. Some major companies, including SpaceX, Dropbox and TripAdvisor, have decided to leave (or rather, as the exodus from Delaware has been named, “Dexit”).
Over the past few months, the Texas Legislature has passed several bills that could help attract Delaware’s defectors by shifting more power from shareholders to executives. Under the new laws:
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Businesses incorporated in Texas can ban lawsuits from all but their biggest owners. Companies have the power to pass a bylaw that mandates that shareholders own at least a 3 percent stake in order to sue. That effectively shields companies from shareholder lawsuits, since so few of them meet that criteria. Tesla was quick to take advantage of the new law, passing a bylaw in May that helped clear Musk’s blockbuster payday.
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Corporations incorporated or headquartered in Texas can restrict shareholder proposals to only their largest shareholders. That covers those owning at least $1 million in stock or 3 percent of the company. That helps companies like Exxon Mobil, which is headquartered in Texas but incorporated in New Jersey, avoid activist shareholder proposals on issues like climate change. Last year, Exxon sued the investor groups Arjuna Capital and Follow This over shareholder proposals that pushed the company to limit its greenhouse gas emissions.
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Proxy advisers face hurdles to disagreeing with management. These firms, which make recommendations for how shareholders vote on company issues, must publicly disclose that they incorporated “nonfinancial factors” and “subordinated the financial interest of shareholders” if they take into account environmental, social or governance issues when advising clients to vote against a company. Because nearly all shareholder proposals touch on E.S.G. issues, the measure effectively blocks proxy advisers from siding against management on any shareholder proposal.
The aim is to tell boards and executives in Delaware that “Texas is open for business,” said Nathan Jensen, a government professor at the University of Texas-Austin.
States have been competing for corporate charters since the late 1800s. The incentives are high: About 30 percent of Delaware’s revenue in 2024 came from franchise taxes.
Politicians often claim new charters as a political victory, framing Delaware’s court decisions as examples of unnecessary interference. When Tesla reincorporated in Texas, Gov. Greg Abbott wrote on X: “Congrats Elon on getting the pay you were promised and on your new incorporation in Texas.”
Texas has succeeded in wooing Musk’s Tesla and SpaceX, but it faces competition from Nevada, which offers similarly lax governance laws. In addition to Dropbox and TripAdvisor, the venture capital giant Andreessen Horowitz recently departed for Nevada, announcing its move in a blog post titled, “We’re Leaving Delaware, and We Think You Should Consider Leaving Too.”
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