Delaware Law Has Entered the Culture War

The clubby insular world of corporate law has entered the culture war.

First, Elon Musk started railing against Delaware, which for more than a century has been known as the home of corporate law, after the Delaware Chancery Court chancellor, Kathaleen McCormick, rejected his lofty pay package last year.

Eventually he switched where Tesla is incorporated to Texas.

Now, Dropbox has announced shareholder approval to move where it is incorporated to outside Delaware, and Meta is considering following suit. Others are also evaluating whether to make the move, DealBook hears.

Musk’s ire against the state where nearly 70 percent of Fortune 500 companies are incorporated brought what would usually be an esoteric issue to the national stage and framed it, alongside hot button issues like diversity, equity and inclusion programs, as one further example of overreach.

“You can blame McCormick or you can blame Musk — or you can say it’s a combination of the two of them — but it has turned it into a highly ideologically charged political issue, which it never, ever was before,” said Robert Anderson, a professor at the University of Arkansas School of Law.

The drama over court rulings could have huge consequences for the economy and politics of Delaware, which counts on corporate franchise revenue for about 30 percent of its budget — and more, if you count secondary impacts like tax payments generated by the legal industry.

At issue is a longstanding question in corporate America: How much say should minority shareholders have, especially in a controlled company? One side argues that founders like Mark Zuckerberg are given controlling shares, which give them outsize influence in a company, with the belief that they know what is best for a company. And minority shareholders buy into a company knowing their limitations. The other side argues these controlling shareholders are not perfect.

The disagreement has now been amplified as founders have become increasingly comfortable voicing their own views loudly. At a time when Trump has promised reduced government regulation, they’d also like to minimize the power of minority shareholders in corporate governance.

This isn’t the first time Delaware has come under heat. Phil Shawe, the chief executive of the language and business services company TransPerfect, mounted a multiyear campaign against Delaware after the court effectively seized his business during a fight with his ex-wife and co-owner. That campaign included a lawsuit against one of the Delaware court judges, a $2 million advertising campaign and support for a $1 million PAC opposing Bethany Hall-Long, a candidate for governor last year, arguing that Hall-Long had “failed to support judicial diversity” in her time as state lieutenant governor. (Hall-Long lost in the Democratic primary.)

But Musk has made the spotlight brighter. McCormick, who first sparred with Musk over his $44 billion acquisition of Twitter, rejected the entrepreneur’s…