June 21, 2024

Why so many companies incorporate in Delaware

Tesla’s (TSLA) CEO Elon Musk has called for a shareholder vote to move Tesla’s incorporation to Texas. What would he want to move Tesla to the “Lone Star State”?

Ann Lipton, Tulane Law Associate Professor joins Yahoo Finance Live to discuss what this move could look like for the EV giant—and why Delaware has been a popular state for incorporation. Lipton explains that Delaware became a preferred choice in the early 1900s, and that due to its courts and its offering of “a very up-to-date corporate law that responds to the latest trends,” it has maintained that status. Delaware is unique in that it has a specialized court that hears business disputes only—where only chancellors who are experts preside.

This system, according to Lipton allows for “reliable decisions,” in a shorter time. Delaware has been able to create a “network effect,” notes Lipton, who states that precedence has been set to the point that generally outcomes are clear and easier to reach.

Acknowledging Nevada as a comparable to Delaware in some ways, Lipton sees it as “attractive” to some, but flexibility and freedom is limited for investors. “Nevada has carved out a little niche for itself,” according to Lipton.

Speaking on the process to incorporate in Texas, Lipton expects there would be “some hold ups.” Lipton does not see Musk gaining any wiggle-room apart from the greater possibility of “friendly judges” in Texas, and states that “it’s definitely a risky move,” for Musk.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor’s note: This article was written by Eyek Ntekim

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