Is Delaware still the ’on-shore off-shore state’? Commonly known as the most business-friendly U.S. state, Delaware is the legal home for much of the Fortune 500. Does SpaceX leaving signal an end of an era, or is it a stage in an era when personal pique seems to rule?
On February 16, Elon Musk announced that his space industry company SpaceX had relocated its legal address from Delaware to Texas. The move follows a vote by the company’s shareholders, with 87% of 1.1 million shareholders agreeing with the move. It also follows Musk’s loss of a $56 billion payout as CEO of Tesla. Delaware has earned a reputation as a business-friendly jurisdiction regarding corporate law and taxation. So, if you are incorporating in the U.S., should you still consider Delaware, or are Musk’s personal choices – Nevada and Texas – a better deal?
Delaware in brief
If you are not familiar with Delaware from a business standpoint, you will be. Delaware is small – it is a little smaller than Slovenia, or double the area of Hong Kong. How business friendly is it? Consider this: Delaware grows about 400 chickens per capita per year, but it’s also home to 2 million corporations, or roughly 2 corporations per capita, including over 60% of Fortune 500 companies. The state built its incorporation and corporate tax friendly culture over decades and now is home to over 60% of Fortune 500 companies. State-wide newspaper The News Journal notes that Amazon, owned by Musk’s competitor of a sort in the space launch industry, is among the companies domiciled there.
What makes Delaware unique beyond easy incorporation and low taxes? These are easily matched, and the states Musk refers to are not the only ones to move in those directions. What is harder to replicate is Delaware’s commercial court system. The Delaware Court of Chancery, which was created as a reflection of the Court of the High Chancery when Delaware was a British colony, has the most extensive case law body in America.
The Delaware court’s history and focus might have worked against Musk in this case. The Court of Chancery is focused on determining what is equitable for the corporation, and that a CEO of Musk’s stature might have swayed the board into an inequitable situation. The ruling is a must-read on the junction of science fiction and corporate law.
Nevada in very brief
No state corporate income tax, no corporate franchise tax. Corporate liability protection does exist, and Nevada law protects management against shareholder lawsuits, but the main draw is the lack of taxes.
And Texas
Like Nevada, no state corporate income tax, no corporate franchise tax. Texas is trying to build a commercial law kernel that can imitate Delaware’s, but it lacks Delaware’s depth. Moving its incorporation to Texas might have saved Tesla $750 per year in administrative costs.
Since Musk has put his corporate headquarters in Texas, a legal move there might make sense, as the courts might be more sensitive to his views. However, for him to exhort other companies to do likewise shows just how personal the loss of $56 billion can be taken.
