With its beige brick exterior and brown roof, the building at 1209 North Orange Street in Wilmington, Del., is so aggressively bland that it almost begs not to be noticed. That might be the point. From the outside, you would certainly never guess that it has served as the legal address for hundreds of thousands of companies, including Walmart, Coca-Cola, American Airlines and General Motors. Few if any of them were headquartered in Delaware. But all were incorporated there.
Why Delaware? Under our system of government, corporate oversight was left to the states, and in time it became permissible for a company based in one state to register its business in another. Pint-size Delaware, with the incentives it offered, proved to be an especially popular choice. These days, it is the legal domicile for two-thirds of the companies in the Fortune 500. Including limited liability companies, or L.L.C.s, there are more than two million business entities incorporated in Delaware, which is more than double the number of people.
While the federal government now exercises oversight in certain areas, like securities trading, the job of regulating corporate governance — of trying to ensure that executives don’t violate their fiduciary obligations — falls mainly on Delaware because of all the publicly traded companies incorporated in the state. Shareholder litigation is the enforcement mechanism, and over the decades, Delaware has established such a rich and influential body of case law that it has become the de facto arbiter of U.S. corporate law.
But thanks in no small part to the wrath of Elon Musk, that may be changing. In 2024, a Delaware court struck down a compensation package worth an estimated $55 billion that Tesla, the electric automaker, had awarded Musk, its chief executive. He responded with fury. He switched Tesla’s legal home to Texas, did the same with his rocket and satellite company, SpaceX, and encouraged others to follow suit. “Never incorporate your company in the state of Delaware,” he wrote on X, the social media platform that he owns.
In declaring war on Delaware, Musk tapped into simmering discontent with the state’s legal climate. Many corporate executives believed that Delaware judges were applying excessive scrutiny to proposed mergers and other transactions and were all but inviting litigation, in part because of the large fees that they were sometimes granting plaintiffs’ attorneys. The Musk case was emblematic: An individual who owned just nine shares of Tesla filed a lawsuit challenging Musk’s compensation, and the court not only found in his favor but also awarded his lawyers $345 million in fees.
A number of companies have since joined Musk in leaving Delaware, including Andreessen Horowitz, the venture-capital giant; Coinbase, the cryptocurrency exchange; and Dropbox, the cloud storage provider. Most have moved to Texas or Nevada. Eager to take advantage of the incipient revolt against Delaware, the two states have signaled, through legislation and public messaging, that companies can expect gentler treatment in their respective jurisdictions, and the pitch seems to be working. “Delaware’s dominance appears more in doubt than at any time in memory,” the Yale Law School professor Jonathan R. Macey wrote in a recent paper.
In Delaware, the possibility of an exodus has caused alarm. The state is heavily dependent on revenue from corporate chartering, which is referred to locally as “the franchise.” To prevent a wave of departures, the State Legislature last year enacted a bill, S.B. 21, making it harder for judges to rule against tycoons like Musk and making it harder for investors to sue them. But it is far from clear whether the legislation is having the desired effect. Although Delaware has not yet experienced a net outflow of companies, big names are continuing to flee. The latest: Dell Technologies. Its board has approved a plan to reincorporate in Texas, and the proposal will be put to a shareholder vote on June 25.
Legal experts fear that Delaware is being drawn into a competition with Texas and Nevada that will result in ever weaker checks on boardroom malfeasance. That is a troubling prospect at a time when corporate power seems otherwise unbound, when billionaire chief executives chafe at any constraints and when federal agencies and regulations are being cut. It could very well lead to an orgy of misconduct that harms the economy and undermines confidence in the markets. While there has always been something incongruous about the outsize power that Delaware wields over corporate law and, by extension, American capitalism, the alternative might be worse.
New Jersey could be forgiven for viewing the threat to Delaware as an instance of poetic justice. In the late 19th century, the Garden State was the legal home for many major companies. Hoping to steal some of that business, Delaware introduced a corporate statute that copied New Jersey’s almost verbatim. In 1913, New Jersey enacted antitrust laws that angered business leaders, and Delaware pounced. By soliciting disaffected companies with the promise of greater leniency — exactly what Texas and Nevada are doing now — Delaware eventually supplanted New Jersey. (Interestingly, one company that opted to remain in New Jersey, the energy giant now known as ExxonMobil, has at long last decided to leave, but not for Delaware: It is reincorporating in Texas.)
Delaware’s Court of Chancery adjudicates disputes involving companies that are incorporated in the state. Established in 1792, it is an equity court, meaning that its judges, referred to as chancellors, enjoy broad discretion and can reach resolutions that involve more than just monetary damages. They can force a merger or acquisition to go forward; they can rescind a compensation plan. Delaware law also gives them the power to determine not just the legality of transactions but whether shareholders have been treated fairly. Chancellors are appointed by the governor, but under state law, neither political party can control more than four of the court’s seven seats.
The court has long been guided by a presumption that executives act in good faith and in the best interest of their companies, and as a general principle, it is disinclined to second-guess their decisions. But at the same time, it hasn’t hesitated to punish breaches of fiduciary duty, and in recent decades, it has arguably become slightly less deferential to corporate management while also issuing several landmark rulings on behalf of minority shareholders. In the 1996 Caremark case, for instance, the court decreed that board members could be held personally liable if they fail to adequately monitor a corporation’s actions and investors are harmed. With its quick resolutions — there are no juries, just bench trials — and expert opinions (the chancellors typically have backgrounds in corporate law), the court is widely considered the world’s pre-eminent business tribunal.
Not surprisingly, Delaware’s status as a corporate haven has been immensely profitable for its legal community, where a fraternal spirit known as “the Delaware way” has long prevailed. The judges and lawyers tend to belong to the same country clubs and send their children to the same private schools, and courtroom battles have seldom poisoned relationships, in part because it is understood that everyone is ultimately on the same side. Above all, the goal is to ensure that Delaware remains corporate America’s preferred jurisdiction.
For the state of Delaware, that is an existential necessity, because corporate chartering is a critical source of revenue. Although Delaware charges relatively modest fees — large companies pay only $250,000 per year — it adds up to around $2 billion annually, which accounts for roughly one-third of the state’s budget. The money helps fund public education and other essential services and also allows Delaware to eschew a sales tax (which, I should acknowledge, benefits me personally, as I happen to be a Delaware resident).
With the loss or diminished footprint of some key employers, including the DuPont Corporation, Delaware has grown increasingly reliant on corporate registration. If “DExit,” as it is being called, really happens and enough companies leave, it would be catastrophic.
The fight with Elon Musk was so perilous in part because it cast an unwanted spotlight on Delaware’s privileged position. In a blog post last year, the University of Colorado law professor Ann Lipton noted that Delaware is home to less than 0.5 percent of the U.S. population yet has “an enormous role in regulating our economy.” It would be bad for Delaware, she wrote, if other Americans started asking “why they don’t get a say.”
In January 2018, Tesla’s board of directors proposed a new compensation package for Musk. It consisted of stock options, with no salary and no cash bonuses, and would fully vest only if he raised Tesla’s market capitalization by $600 billion and hit other targets. Musk stood to earn around $55 billion, a record payout — by far — for the head of a publicly traded company. At the time, Tesla itself was worth $59 billion. In a proxy statement filed with the S.E.C., the company indicated that the giant award was necessary to ensure that Musk would “continue leading the company over the long term.”
Two months after Tesla announced the compensation plan, the company’s shareholders approved it. But in June 2018, an investor named Richard Tornetta filed a lawsuit in Delaware seeking to block the deal. He claimed that Tesla had deceived investors by exaggerating the difficulty of meeting the targets it had set for Musk. He also claimed that Musk had stacked Tesla’s board with people who had close personal and financial ties to him and that he had dictated the terms of the pay package.
The resulting case, Tornetta v. Musk, went to trial in November 2022. It hinged in part on Tornetta’s assertion that Tesla was a “controlled” company. These are publicly traded entities in which one person or a group of people — or another company — commands more than 50 percent of the voting power. They attract particular scrutiny and are subject to special rules, because of the obvious risk of self-dealing. Controlled companies are increasingly prevalent in Silicon Valley, where so-called founders are granted super voting shares to ensure that they remain firmly in charge even after their companies go public. Meta, Alphabet and Snap are controlled companies.
Some of the thorniest issues in corporate law revolve around controlled companies. Their chief executives are often extraordinarily wealthy individuals who don’t wish to be encumbered by rules and norms. From a legal standpoint, though, an even bigger problem is that what constitutes “control” is not as clear-cut as the definition might suggest. Corporate executives can sometimes wield majority power even if they don’t hold a majority of the company’s voting shares. This was the argument in the Tornetta case. When Tesla shareholders approved Musk’s compensation, he owned 21.9 percent of the automaker’s stock. But Tornetta’s attorneys argued that Musk was such an overbearing figure that he was effectively a controller.
The judge who heard Tornetta v. Musk, Chancellor Kathaleen McCormick, determined that Musk’s large equity stake in Tesla, as well as his influence over the company’s board and his status as a “superstar C.E.O.” with a cultlike following among investors, made him a controlling shareholder, at least when it came to his compensation. Her ruling, handed down in January 2024, said that board members, who included Musk’s brother, were beholden to Musk; that he had pushed the board to grant him the enormous payout; and that his power and celebrity had created what she called a “distortion field” that made it impossible to rebuff his demands. (Musk acknowledged during a deposition that at certain points he had been “negotiating against myself.”) She also found that Tesla had failed to apprise its shareholders of the conflicts of interest involving board members and of the extent to which Musk had driven the process.
She also went a step further and rejected Tesla’s claim that the $55 billion package — “an unfathomable sum,” in her words — was necessary to ensure that Musk remained chief executive. She said that his equity stake should have been sufficient motivation for him. On the basis of these findings, she voided the package.
Eric Talley, a law professor at Columbia University, says that McCormick delivered “a textbook decision” if Musk was indeed a controlling shareholder. But he adds that the “superstar C.E.O.” designation was “very subjective” and could reasonably be construed as “a charisma tax.” Some observers were also troubled by the fact that McCormick rendered a verdict with such far-reaching consequences in a lawsuit filed by a plaintiff who owned barely any Tesla shares.
The verdict was also controversial because Musk had satisfied the terms of the compensation plan. When McCormick issued her ruling, Tesla’s stock was trading at around $200, up from just $24 when the deal was announced, and Musk had hit all of the milestones, including the most ambitious one: raising Tesla’s market capitalization by $600 billion. Even if his pay was outrageous and unjustified, it would have been hard to argue that Tesla shareholders got a raw deal — and when given the chance, they made it abundantly clear that they didn’t feel shafted.
In June 2024, Tesla took the unusual step of holding a second shareholder vote on Musk’s compensation, and it was approved — again — by an almost three-to-one margin. But McCormick was unmoved; she said that no court could allow “defeated parties to create new facts for the purpose of revising judgments.” She also used the opportunity to award Tornetta’s attorneys a fee of $345 million.
McCormick’s refusal to reconsider her decision, coupled with the hefty payout, resulted in outrage. Musk stepped up his attacks on Delaware and also took aim at McCormick personally, calling her a “radical far-left activist cosplaying as a judge.” (McCormick and Musk had a history: In 2022, she was the presiding judge in a lawsuit over Musk’s proposed acquisition of Twitter and refused to let him back out of the deal.) Other prominent voices in the business community, including the venture capitalist Bill Gurley and the hedge fund manager Bill Ackman, joined Musk in denouncing the outcome.
To them and others, the Tornetta ruling epitomized a wayward turn in Delaware corporate law: There were too many lawsuits and too many seemingly capricious judgments. The same court that deemed Musk a controlling shareholder previously rejected a similar claim toward Larry Ellison, Oracle’s co-founder and executive chairman, even though he held nearly 30 percent of his company’s stock. The fees being granted to plaintiffs’ attorneys were also a sore point.
Larry Hamermesh, a retired Delaware attorney and former law school professor who is an influential figure in Delaware legal circles, told me that he personally believed that McCormick had made the right decision in Tornetta and that he was fine with Musk reincorporating his businesses in Texas (“Don’t let the door hit him on the way out”). But Hamermesh said that there was “a perception that the litigation environment here is toxic, particularly for controlling shareholders,” and that Delaware had an obligation to address those concerns.
He was part of a group of Delaware lawyers and legislators who drafted the bill, known as S.B. 21, that placed curbs on the court. By codifying the definition of a controlling shareholder — an executive must either hold a majority of voting power; own at least one-third of the outstanding stock and exercise managerial authority over the company; or control most of the appointments to the board of directors — it took away the court’s right to decide that question on a case-by-case basis. It also limited scrutiny of board members for possible conflicts of interest and restricted the ability of would-be litigants to obtain emails, text messages, contracts and other potential evidence. S.B. 21’s sponsors said the aim was simply to provide more clarity and predictability for corporations. The legislation was enacted in March 2025.
Critics, which included major public pension funds and investor advocacy groups, denounced S.B. 21 as an assault on judicial independence that also stripped away vital protections for shareholders. They dismissed claims of excessive litigation as overblown, and there is now some empirical evidence supporting that view: A study published last year in The Vanderbilt Law Review found that between 2004 and 2019, just under 3,000 separate fiduciary-duty complaints were filed in Delaware, which doesn’t seem unreasonable.
Notably, S.B. 21 didn’t cap attorneys’ fees. The decision to punt on that issue was not necessarily surprising, though. For one thing, there is disagreement about whether Delaware awards eye-popping fees as a matter of course. According to a widely cited paper by Joseph Grundfest, a law professor at Stanford University, the Court of Chancery gives plaintiffs’ lawyers payouts substantially larger than their normal hourly rates to a degree virtually unmatched in any other jurisdiction. But a colleague of his, Michael Klausner, has challenged those findings, saying that Grundfest relied on “minimal data” and focused on “extreme outliers” like Tornetta.
The reluctance to limit fees may have just been a matter of economic and legal exigency. Shareholder lawsuits are good for Delaware: They bring lots of business to the state and are often very lucrative for members of the local bar. And without that litigation, corporate law can’t really evolve. Moreover, plaintiffs’ attorneys typically work on contingency and often have to invest significant resources to build cases. The prospect of a large payday serves an incentivizing function. Take that away, and fewer lawsuits are likely to be filed.
Ann Lipton suggests that the backlash over Tornetta was, at heart, a reflection of the transgressive spirit that now prevails in Silicon Valley and other elite strongholds. Delaware’s rules are hardly onerous, she says, but figures like Musk no longer feel the need to “put on a performance of procedural regularity.” Some legal experts believed that S.B. 21 was an overreaction — that a handful of billionaires stomping their feet in protest was unlikely to lead to a stampede of companies from Delaware.
But S.B. 21’s proponents insisted otherwise. While the bill was under consideration, I met with Bryan Townsend, the majority leader of the State Senate and a practicing corporate litigator himself. As we talked in a local Starbucks, he read me an email that a law school classmate, an attorney in Silicon Valley, had sent to him: “I thought you might be interested to know that phones are ringing off the hook at my firm and our peer firms in Silicon Valley with tech companies who want to reincorporate from Delaware to Nevada or Texas.” The threat was real, Townsend said, and it was essential that Delaware act. “You don’t want a run on the bank.”
Although Texas is already an economic colossus, accounting for around one-tenth of the country’s economic output, Gov. Greg Abbott has even bigger ambitions for his state: He wants it to be America’s financial and corporate capital. To that end, Texas recently established a business court of its own. Musk’s decision to domicile Tesla and SpaceX in Texas was a major boost for the state. According to The Texas Tribune, Abbott told a law school audience at the University of Texas that when Musk called him to discuss the idea, he assured Musk that the state “would have his back.”
He was true to his word. Last May, Texas legislators passed a bill, S.B. 29, that allows companies incorporated in the state to bar investors who own less than 3 percent of their stock from pursuing shareholder litigation against their executives. Under S.B. 29, Richard Tornetta would not have been able to bring his complaint. In fact, when it comes to Tesla, only three outside investors meet that threshold, and all three are multibillion-dollar money management companies: State Street, BlackRock and Vanguard. A day after Abbott signed S.B. 29, Tesla enacted a bylaw prohibiting shareholders with less than 3 percent of the company’s stock from suing its directors and officers over fiduciary claims.
Some corporate-law experts believe the emergence of legitimate rivals to Delaware could be beneficial: In the same way that states are considered laboratories of democracy, the argument goes, they can perhaps become laboratories of corporate governance, too. Talley, of Columbia University, suggests that “regulatory competition” among states might yield a more robust corporate governance environment. In contemplating how best to apply oversight to multibillion-dollar corporations — “the most capitalist enterprises known to humankind,” as Talley puts it — he thinks there is a case to be made for subjecting “the way we regulate them to a market test, as well.”
But the risk is that states will compete to attract companies by lowering standards. Michal Barzuza, a law professor at the University of Virginia, says that this is already happening and that it is being driven not so much by Texas but, rather, by Nevada, which has attracted several notable refugees from Delaware, including the aforementioned Andreessen Horowitz, the online travel platform Tripadvisor and Roblox Corporation.
Barzuza’s reading of Nevada law suggests that the state has effectively eliminated the possibility of shareholder litigation by denying potential plaintiffs access to any internal corporate documents, including board minutes. She also contends that Nevada broadly shields corporate officers and directors from being held liable for violations of fiduciary duties. In a recent paper, Barzuza wrote that Nevada’s emergence signals “a turning point for American corporate law” that will very likely result in what she called “cascading degradation.”
In her view, S.B. 21 was proof that Delaware has been dragged into a race to the bottom with its two rivals. Additional proof arguably came in December, when Delaware’s Supreme Court restored Musk’s pay package. The justices didn’t take issue with McCormick’s findings; in fact, they awarded Richard Tornetta $1 in damages, a token sum that nevertheless signified that his claims had merit. Likewise, while they reduced the fee for his attorneys, they still granted them more than $50 million. The court simply said that rescinding the entire compensation plan was too extreme a remedy and that because it couldn’t figure out a way to properly value Musk’s services, he had to be paid the full amount.
In the nearly two years between the Court of Chancery’s initial ruling, in January 2024, and the Supreme Court’s decision, the stock options due to be awarded to Musk almost tripled in value, to $139 billion. With his victory, Musk’s net worth now exceeded $700 billion. On X, he greeted the news with a one-word message: “Vindicated.” It was a triumphant period for Musk: A few weeks earlier, Tesla shareholders had approved a new compensation plan that could pay him close to $1 trillion.
One obvious conclusion from Tornetta is that America’s second-smallest state was no match for the world’s richest person. But the case also invited a question: Constitutional prerogatives aside, in an age of trillion-dollar companies and centibillionaires, should the job of policing corporate insiders really be left to any state, no matter how large or small? Shouldn’t that be a federal function? It is an idea that has been debated in political and legal circles going back more than a century, and Washington has, in fact, been steadily encroaching on the power given to the states. For instance, the regulation of securities markets was once a matter for the states; that changed after the 1929 stock-market crash, which led to the creation of the S.E.C.
More recently, following the accounting scandals at Enron and WorldCom, Congress enacted the Sarbanes-Oxley Act, which brought several aspects of corporate governance under federal oversight. It imposed stricter disclosure requirements on publicly traded companies and mandated that corporate boards be composed primarily of independent directors, standards further tightened by the Dodd-Frank act of 2010. Major stock exchanges have also promulgated corporate governance standards that listed companies must comply with.
In 2018, Senator Elizabeth Warren proposed establishing a federal charter for corporations with annual revenue in excess of $1 billion. Her bill never came to a vote, however, and in the current political environment, it is hard to imagine full federalization happening anytime soon. And as a practical matter, federalizing corporate law would be challenging. It would almost certainly require a new, specialized court system. Plus, there’s no guarantee that it would actually solve the problem it was meant to address: Regulatory capture would be a very real possibility. Musk and other tech oligarchs wield as much power in Washington as they do in state capitals, and perhaps even more.
But Joel Fleming, a plaintiffs attorney who has argued numerous cases in Delaware, thinks that at a time of mounting public anger at billionaires and corporate influence, federalization would appeal to a lot of Americans. “If you explain to a lay person,” Fleming says, “that there is no government regulator when it comes to corporate governance and that corporate insiders can choose whichever states offer laws most favorable to them — most people would say that’s a crazy system.”
Michael Steinberger is a contributing writer for the magazine and the author of “The Philosopher in the Valley: Alex Karp, Palantir, and the Rise of the Surveillance State.”
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