Odd Lots - Elon Musk's Pay Package and the Threat to the Delaware Corporation

Episode Date: September 18, 2025

If you look at prospectuses and earnings documents for almost any company, you're going to see a Delaware address. For more than a century, the state has been the place to go to if you're setting up a business. And in fact, Delaware has catered to these corporate clients, setting up an efficient chancery court to settle corporate disputes and producing a huge backlog of case law to act as reliable and efficient precedent. But suddenly, some companies are choosing to leave the state. Most prominent among them is Elon Musk's Tesla, which opted to re-incorporate in Texas after a Delaware judge invalidated his $56 billion pay package. States like Nevada and Texas are now also actively courting companies by enticing them with management-friendly laws. In this episode, we speak with Ann Lipton, University of Colorado law professor and Lawrence W. Demuth Chair, to find out what's at stake in the fight for incorporations and if there's a risk for a race to the bottom in terms of shareholder accountability. Read more:Why Tesla’s Chinese Rival BYD Faces a Raft of TroublesUS Panel Probes Huawei Affiliate’s Presence on Nvidia Campus Only http://Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at  bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

Bloomberg Audio Studios, Podcasts Radio News. Hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. Joe, I have a fun fact for you. Go on. Are you ready? Yeah. Okay. So Delaware has a population of about 1.05 million, a little over a million.

Okay. It's one of the least populous states. Yeah. I think it has fewer people than a lot of big cities in the U.S. For sure. However, Delaware has 2.1 million businesses registered in the state. So basically two businesses for every person. This is a legit fun fact. This is like a legit.

I did not know this. I mean, I knew that it was not a very big state population-wise. I know that so many corporations or businesses or whatever incorporate in Delaware. But there's sort of two-to-one ratio. Excellent fun fact, Tracy. Well done. Yes. For your next dinner party, you can trout that one out.

But I mean, obviously, maybe you could argue that Delawareans are just phenomenally entrepreneurial. I don't think so. No, as you mentioned, no more than anyone. I'm not dismissing them. I just know that that's not really what's going on. Right. There's something else going on here, which is that Delaware has become the de facto state for companies incorporating. Yeah.

This is like the main thing that we know about Delaware. We don't really, I mean. That and chicken farms. The chickens. Right. Not the chickens. But you don't hear much about Delaware except typically when they're. There is some sort of corporate fight playing out in its courts. And of course, it has a dedicated court system for corporate fights and so forth. And there's some prominent examples over the years where we learn about what the chancery is and then I forget what the chancery is or where that word comes from. But people seem to like their simplistic, streamlined legal system for corporate things. And it seems to have paid off reasonably well.

People seem to like it, but that might be changing. So you mentioned corporate fights. We had a very prominent example. of this relatively recently when there was the court fight over Elon Musk's compensation at Tesla, and eventually Elon just said, you know, I'm going to pick up my company and move it to Texas and incorporate there. And in fact, we are seeing a few examples of companies choosing to move away from Delaware and to places like Texas or Nevada. And I know this isn't maybe a top-of-mind news development for many people right now. There's a lot going on. But I think it's really interesting. It's kind of slow moving, and it does have implications for shareholder rights.

Totally. I actually think it's a very important, relevant topic. And I'll say this is the reason why, which is that in a sense, a legal system is this network effect. And people respect the legal system. And even if maybe there are decisions that go against them, they're like, okay, this is a high-quality legal system. It is very hard to rebuild that somewhere else. It also is the sort of thing that if there is some poll elsewhere, then it's interesting to see what. What does it take to pry entities away from this network where there is years and years and thousands and thousands of decisions upon which to build something resembling a shared law?

And so, you know, when I think about the United States, when I think about these bigger questions about how do you move dollars, how do you move entities, industries to other jurisdictions that are maybe younger and don't have the same level of historical jurisprudence, maybe there is a microcosm, a story to be told about the Delaware history. how it built up and if there are any threats to it over the medium term. Absolutely. Very well put. Thank you. So I am happy to say we have the perfect guest. We're going to be speaking with Professor Anne Lipton. She is a law professor at the University of Colorado and Lawrence W. Demuth chair. So, Anne, thank you so much for joining us.

Thank you so much for the invite. I'll start with the obvious question, which is, how did we end up with Delaware as the de facto place for corporate incorporation? Why Delaware? Because Delaware actually strategized that it wanted to attract incorporations. And this was back in the late 1800s, early 1900s. A number of states actually thought that they could make money by having corporations incorporate in their state and pay fees. You could actually open a newspaper at that time and see advertisements for come incorporate in ex-state. And Delaware made a conscious decision to make its state and its law friendly to corporations that wanted to incorporate there. So among other

things at the time, one of the main concerns of businesses was that corporate law would be used politically, that the rules would change to effectuate some kind of political policy. So Delaware adopted a constitutional amendment that its judges would have to be politically balanced. So you couldn't have more than half, more than a bare majority of one party or the other. So for a seven-member court, no more than four can be a member of one party or another. They also put a constitutional amendment that any changes to the corporate code required a two-thirds vote of the law. legislature. So trying to insulate their corporate law from political pressures. And then they just made their corporate law very flexible and very manager-friendly. Managers could kind of do what they wanted

with it. And it just sort of took off from there. This is really fascinating. This idea of creating the corporate legal system in this sort of glass enclosure through which the political system cannot break. And this is a theme that seems to come up over and over again. We talk about it when we talk about the Federal Reserve. And it's nominal or de facto independent. This came up when we talked to the Alaska sovereign wealth fund guys and the difficulty that the political system has in accessing the corn seed, so to speak. Talk to us a little bit more about the structures in place and how strong they are to insulate the court system from politics and how durable and thick those glass walls are. Yeah. So they can't insulate the court from politics in the sense of the legislature acting and so forth. And that's actually what we've just been seeing.

But they are fairly insulated from partisan politics. Partisan politics doesn't play out in the same way that we would understand it in other parts of the country or other areas. But so the idea here, well, first of all, I mean, one thing to note, though, is that Delaware is obviously it's a very blue state voting behavior. And judges do things other than decide corporate cases. We do forget that. But they do, in fact, have other things to decide. But still, the judges are politically balanced in order to benefit this corporate system. So what happens with the way law is made in Delaware, corporate law is made, is that it actually doesn't really come from the legislature, which really most of the legislature isn't, they're not corporate experts. They don't know much about corporate law necessarily. They're just legislators. So what happens is there's the Delaware State Bar Association has a corporation law section. And they actually generate the proposed statutes on the theory that they can do it in a sort of nonpartisan, very technocratic way. And then the legislature tends to sort of rubber state.

the stuff that comes out of the corporation law section. So, you know, Joe mentioned that sort of network effect earlier. And I think this is really important in law especially because a lot of legal battles are based on precedent, right? And so we have Delaware as the de facto in corporation state and decades and decades of precedent for judges and lawyers to actually look at. How does that sort of, I guess precedent or first mover advantage help Delaware? Well, it's always been assumed that that would help Delaware because you would have the statute and you have decades of precedent so that companies would kind of know how questions

would be answered if they came up. So there are a lot of areas where other states, you just simply do not have information on like how a court would treat particular kinds of claims or particular kinds of disputes. Some of the obvious things are things like activists takeovers or are proxy contests and take over defenses because we know how that looks in Delaware because Delaware incorporates most of the public companies where you have those kinds of fights. We don't know how that looks in other states because you don't tend to have as many activist situations in those other states. So that's always thought to be sort of an advantage of Delaware that everything plays out there. And most other states, they very often look to Delaware when they're deciding

their own corporate law. Sometimes they contrast their corporate law with Delaware. But Delaware is always kind of where they look to deal with these questions. And that's always considered to be a real advantage of Delaware. You at least know what's going to happen. But it also means that because this is case law, it's mostly not in this, or hasn't been mostly in the statute, it's judge by judge decisions. And that can also mean that sometimes it's sort of hard to penetrate because it's really you've got to read this decision. Well, don't forget this other decision and don't forget this decision too. And that can be sort of hard to figure out if you're just looking at it for the first time. Yeah, I'm really interested in this tension, right? Because in theory, okay, you write down laws on paper and they're all visible and say, okay, this is consistent. We know what's going to happen. But also decisions are made by judges and people dispute them. Otherwise, they wouldn't have to have cases in the first part if judges didn't have to exercise some sort of agency. How do the judges feel about their own responsibility when deciding these cases to think about consistency or?

the underlying deep principles of Delaware corporate law and the long-term implications for the state of Delaware and for the state of when they make their decisions. Yeah, so there's a tension there. So you just identified like attention, a tension between the state of Delaware versus general corporate theory and corporate law. And I think you don't become a judge and you don't go into this area unless you really do appreciate the law and enjoy it. And I mean, the Delaware judges are extremely thoughtful about corporate law and what the right answer is and how corporations should work. They don't always. have exactly the same theories, but they definitely have a point of view. And they care very much

about how corporate law operates. But, and this is where some of the tension is today, if corporate boards are unhappy with their decisions over and over and over again, then Delaware may lose corporations to other states. And how that plays out between sort of fidelity to a vision of what corporate law should be, a couple with the straight-up reality that if managers are unhappy and incorporate elsewhere, Delaware doesn't have, doesn't get to do much anymore. That's a tension that's been playing out for just as long as Delaware's been incorporating companies. I mean, that's always, I don't think judges are usually consciously making that decisions based on that or they're certainly trying not to, but that tension is always present and has been present in the past.

Before we get to why companies, some companies seem unhappy with Delaware at the moment, I'm going to go ahead and ask Joe's classic question whenever this comes up, which is What is a Chancery Court? Well, it's just the name for the Delaware courts that hear corporate cases. So, I mean, this is a very technical legal point. But historically, there were two types of courts in the world. There were the courts of law and the courts of equity. The courts of law followed sort of these stringent rules and the courts of equity.

We're literally sort of about fairness and dealing with what's the right answer and doing justice as opposed to according to technical rules that were laid down. And so there was two separate courts, and that was from England, and that was true in the United States. And then the United States, in the 30s or so, melded the two courts at the federal level, and most states did the same. So there would just be one court that heard all the cases, law cases and equity cases. But Delaware never did that. So it still has the separate court of law and the court of equity, which is the chancery court. So its historical origins are essentially rooted in this idea of fairness and commanding people to take.

take the proper actions. And it doesn't sit with a jury. The cases are heard just by the judges. The judges find facts. Otherwise, juries would do that. But the judges find facts in the Delaware Court of Chancery. They're very expert. They are, you know, they're all drawn from corporate practice before they get on the bench. And that's what they do. I mean, they hear other things besides corporate cases. Other things fall into this category of equity. But the main thing, obviously, these the corporate cases. So I want to eventually get into the Elon pay case and maybe get your read on it, et cetera. But before we do that, you mentioned that this is nothing new. Some of these there are these longstanding questions about the Delaware and its persistence. Can you give us a

little history? What are, you know, what were the Elon cases pre the Elon cases that sort of maybe had people questioning the sort of durability of the Delaware system? The long, long, long ago, before Elon. Elon avant the letter. It's in the 80s. It was that long ago. It was the 80s. There were two big incidents.

So one case of, like, these are the basic law cases that you learn if you're in any kind of basic corporate law class. So one case was called Ben Gorghum. Basically, a company was selling itself, and they settled on a price, and shareholder sued, claiming that the board didn't take proper care in setting this price. Nobody suggested they were acting in bad faith, but they just didn't take the time to make sure that they got the best price. And the Delaware Supreme Court agreed, and it held that the directors could be held personally liable for damages for essentially not getting the right price for the

company. And that terrified boards, because these boards could be acting in good faith and still could be, I mean, not selling the company for enough. That's serious money and damages. So Delaware amended its corporate code so that companies can now add a provision to their charter that says directors will not be held liable for monetary damages for negligence. And that really also boosted companies incorporating in Delaware after that. And by now, every state has adopted a similar thing. But at the time, that was done essentially because they knew that they had just scared the bejesus out of boards. And another issue that came up, this was also in the 80s, was during the hostile takeover era. This was like, you know, the deal decade. There were lots and lots of hostile takeover attempts.

And when there's a hostile takeover attempt, boards put up barriers, usually shareholders. the rights, plans, poison pills to prevent hostile takeovers. And there was a real question as to how far boards could go defend off a hostile acquirer, even if the shareholders wanted this deal. And at first, the Delaware courts were pretty strict about it. After a certain point, they were saying, look, you got to let shareholders decide. The board can't just block beneficial proposals to buy the company if the shareholders want it. And once again, there were threats to that companies would leave, they would leave Delaware so that they could protect against hostile takeover attempts. And at that point, the Delaware Supreme Court backed off. It adopted new standards that

allowed much more deference to boards when they are fighting off hostile takeover attempts. So fast forward to today, I just want to make sure we have our priors correct. We love testing our priors. We love establishing our priors on this podcast. But, you know, those examples aside, does it feel like nowadays there is perhaps more discussion of alternatives to, you know, to Delaware or more companies that seem to be moving away? Yeah. So I don't know if statistically the numbers really move the needle. We've seen definitely some high profile announcements of companies planning to move, but we just don't have enough data right now to see whether this is a serious actual exodus. But there's definitely a lot more discussion. And there's definitely a lot more

boards thinking or lawyers thinking they have to counsel boards whether you want to incorporate in Delaware when before that one wouldn't even have been a question. So that's definitely something that's happening. Well, why? So what is it if a lawyer as counseling boards don't just, because I've, you know, I've known people who have launched startups at times and the idea of incorporation in Delaware, that was just obviously what you did, right? You just did it right away. Absolutely. So what is it that a lawyer might say, well, maybe take a few beats and think about this. What has actually changed that's caused that? Well, Delaware understands fought back and it's changed its law very recently to sort of fight this off. But essentially the issue, most of the issue, is shareholder life.

or liability to shareholders and vulnerability to a shareholder lawsuit. And most of that vulnerability is vulnerability to a shareholder lawsuit over conflicted transactions. That's the main headline thing. There are a few other issues that have come up. But the main headline thing is boards feeling as though Delaware has made it too easy for shareholders to sue over conflicted transaction. What's a conflicted transaction? Just so we know these terms. What is an example of one, either figurative or actual? Actual. Tesla buying Solar City.

Elon Musk was on both sides of that transaction. He's on the board of Tesla, and he's on the board of and running Solar City. And so Tesla is using its resources to buy out Elon Musk company. So that's a classic conflict transaction. That actually reminds me, just speaking of Elon, but how big a deal was Tesla moving from Delaware to Texas? Because we talk about this network effect. Is it the case that one high-profile company moves and suddenly all? all these other companies are like, we're going to do that too.

Yeah, I think it's a big deal. I mean, first of all, you know, we all know that it was inspired by the, that move was inspired by the pay package case, but I think some of the grumblings about Delaware are broader. But I think that was a big deal. If for no other reason then, Elon Musk is very admired by a lot of CEOs, a lot of venture capitalists, a lot of Silicon Valley. They look to him as a real role model. And so when he publicly announces that he's had it with Delaware and shows that it's

possible to take a public company and get shareholder support for moving out of Delaware, even if he is his special and he has a particular relationship with the shareholders that may not be shared by other companies. I think that's the kind of thing that has boards thinking, putting it on the table. Let's talk about the pay package deal. I don't know, like, look, I really don't know much about the law or anything about this stuff at all. But I say, when I say, hey, this was the compensation package she agreed to? Who was this judge to say that He can't get paid intuitively to me. It seems outrageous.

Why is this judge canceling his pay package? But this is my dumb guy just reading ahead. I didn't even read an article probably. I'm being honest here. So why don't you tell me as someone who actually understands this stuff how we should read what that case was all about? Okay. So remember, the issue here is conflicted transactions.

Musk's pay was a standard conflicted transaction in the sense that the board was deciding what it was going to pay its CEO, which is very much well within the board discretion. But the board included Elon Musk and his brother. So therefore, this was your classic conflict transaction. It was a board. But a lot of CEOs are on their board. Yes. Okay. Keep going. So under Delaware law, the general rule is a conflicted transaction will get close scrutiny by a court unless it's cleansed. And how do you cleanse it? You put an independent decision maker in the mix. And then the court will say, well, I'll just defer to the independent decision maker. And you have two options for an independent decision maker, the unconflicted board members or the shareholders.

And usually, I mean, this doesn't happen. You have to understand how unusual a case was. Usually that's more than sufficient. You have the unconflicted board members decide the pay, or you have the disinterested shareholders vote on the pay. And at that point, Delaware says, I'm out. You guys, God bless. The problem here was that the unconflicted board members were not unconflicted board members were not unconflicted. So they were all like he stalks Tesla's board with people who are basically his

bestest buds. And they created a committee that was supposed to be the independent members of the committee. And the committee still had close ties to Musk. And then the committee formed a working group that would really do the compensation package. And they picked the people with the closest ties to Musk to put in the working group. And there were all these facts about how he interfered with committee's deliberations and they just deferred to him. So given that, the court felt that like they didn't put actual independent decision makers at the board level. So then they took it to the shareholders and they did a shareholder vote. But there was not full disclosure in the proxy statement. The shareholders were not fully informed. And for obvious reasons, shareholders can't cleanse anything unless they have full

information. So left with a situation where the board was not independent of Musk and the shareholders were not fully informed. That's why the court felt, well, I have to evaluate the pay package because no independent decision maker was put in the mix. And then from there, she decided it was too much. So this might be a tough question to ask, but since we're talking, you know, this discussion or debate centers on shareholder liability as you laid out. Do we have any research that actually tells us what happens to share prices and stocks when a company signals that it's going to move away from Delaware or when it actually does it? We have incredibly mixed. We have incredibly mixed. evidence. The fact is that scholars have been fighting about this forever, whether it makes a difference.

And some have found that maybe it's beneficial, depending on the type of company. Like, I mean, Delaware is expensive. I mean, the whole point of Delaware having this chartering business is that's how the state funds itself. It gets 25% of its revenues from incorporation fees. No other state does anything like that. So for smaller companies with less resources, it can be beneficial to move away from Delaware, but mostly this is something where different scholars will come up with different things. We just don't know for sure. And that's probably because Delaware has been dominating for so long, at least for public companies, that it's hard to tell if there's a serious movement away. Now we'll know. It's interesting. So let's talk about the allure of, say, reincorporating in Texas.

You know, I could see just sort of for vibes in vague ideological things. Elon wants to go to Texas. I'm not surprised and they're probably the politicians or yeah, Elon come on down and the shareholders are like, how we're going to get away from those blue states that impose communism on you by not letting you get your billion dollar pay package or whatever. All that being said, the goal it seems to me or why people like Delaware

is right, this idea of balance. Because while there may be an Elon Musk cult that loves to hand him money and not every shareholder wants to have that relationship with their CEO where they're just working over a lot of money. And so it seems to me that, okay, maybe Texas is a good fit for Elon and his shareholders, but that's still in many cases some sort of court system that imposes, maintains the balance of power between the CEO, the board, and the outside shareholders is still what's going to be desirable for most companies.

Yeah, so this is a complicated question. That is exactly how Delaware has sold itself, that essentially that it maintained a balance, that it mostly gave boards incredible amounts of flexibility and incredible amounts of deference, but ultimately there was some basic floor of protections for shareholders. The issue, well, there are twofold issues. The first is that ultimately corporate managers are the ones who make decisions about where to incorporate when they do a startup. I mean, once you're actually publicly traded, if you want to move, you need a shareholder vote. But before then, you can pick any company you want to.

And even if you need a shareholder vote once you're publicly traded, as we saw with Tesla, if you're a meta or where you have a controlling shareholder, the shareholder vote's really easy. It's just what the controlling shareholder wants. So moving is not hard. And so the only reason, essentially, that you wouldn't do it is if you really thought you were going to pay a price with shareholders. It's not clear how much of a price shareholders are going to inflict for being in a state with fewer protections. So the theory has always been the cost of capital will be higher if you're in a state with fewer protections. But it's not clear how much that plays in, as you just asked, like, is there really a shareholder of value price for moving to a different state?

it's not clear shareholders really have the power to push back. And Delaware also seeing this move weakened a lot of the shareholder protections that led to verdicts like the Musk Pay Package case. So now we really don't know if there's a difference. Why would a minority shareholder actually approve to move to a jurisdiction where ostensibly they have fewer rights? Because remember, 90% of this is about shareholder litigation. There may be a, or conflict transactions and suing over conflict transactions. That is most of what this fight is about. It's not the only thing that's most of it.

There is a huge debate about whether shareholder litigation is, in fact, the best way to handle this problem. I mean, there are all kinds of concerns about strike suits. There are concerns that, you know, that this is just lawyer-driven litigation in the Tornetta case that Elon Musk Pay Package. Remember, the shareholder there held nine shares, literally nine shares of Tesla stock. So there's a real question about whether shareholder litigation. is in fact a game that's worth the candle. Unquestionably, there are real problematic transactions and shareholder litigation can win very huge payouts for shareholders. But usually those payouts come from the insurance that the company itself paid for in these huge settlements.

And whether or not that ultimately is the best way to handle a conflict transaction situation is a very debated question. So shareholders may very well think they can move to a jurisdiction with fewer protections on the theory that ultimately less litigation is better for the company. It is a very strange situation because essentially, again, you have this situation in which the shareholders were upset at the state for not allowing more shareholder money to go into the pocket of one individual person. That's a very strange situation, et cetera. Shareholder lawsuits always strike me as a little bit interesting field in general. I remember back 25 years ago and I sometimes used to buy and trade individual stock.

and a stock would miss earnings. And then suddenly you get an email. It's like, this company is filing suit. It's like, why do I want to take a part in a lawsuit against this company that I am a co-owner of? Does this actually benefit me or does this benefit anyone other than the lawyer? I've never been totally clear on that either, just in general, even setting aside sort of these conflict questions. Yeah. I mean, that's, it's a very debated question.

But for most of these suits, I mean, there is a difference between a suit for fraud under the federal securities laws and a state law suit for breach of fiduciary duty, which is what Delaware handles. And there, I mean, when there's a lawsuit like that, any payment is supposed to come from the directors to the shareholders or to the company. So that's the theoretical monetary benefit. But directors usually don't pay out of pocket. They've got insurance. So if they pay, it's the insurance. And guess who pays for the insurance? Corporation does. Now you're going to think about shareholder lawsuits differently, Joe. Or just like, yeah, I still don't. Keep going. All right. So you touched on this earlier, but Delaware isn't exactly standing still while it sees companies move elsewhere. Is this just going to result in a sort of race to the bottom in terms of shareholder rights where states are just like, well, if you drop your standards or if you alter the balance here, I'm going to do the same thing and everyone just kind of races to the bottom.

I think that's what we're absolutely seeing. I mean, Nevada and Texas are essentially selling their law. as creating barriers to shareholder lawsuits. And that's what Delaware did. It changed its law to put up more barriers. Now, it did some more subtly, which is exactly why I think they're still like this race, because Delaware didn't want to like openly say, no, that's it. We're just barring shareholder lawsuits. So they wrote a lot of words and they're complex words, but ultimately they all come out

to the same thing. All three states have made it much, much harder, if not virtually impossible for anything but in the most fraudulent circumstances, shareholders to bring claims. So I think we're at that race. We're watching it right now. I could understand why a public company board or a public company would say, okay, we want to be in a jurisdiction where it's much harder for shareholders to bring lawsuits, et cetera. Is the calculus different depending on the maturity of the company? And could you say like an early stage startup?

Like I said, I've known people in the startup space. One of the first things they do is incorporate in Delaware. In those situations, maybe from the legal perspective, did the VCs own? the company in a more deep way than public company shareholders. Do even though nominally they're all just shareholders and there's a separate board? Yes. And a shareholder litigation, this kind of shareholder litigation is extremely rare in VC back or smaller companies. And that's because who the shareholders are. I mean, the shareholders are largely insiders or friends of VC. They don't want to anger them. They may have signed arbitration agreements that would prevent any kind of lawsuit anyway.

So this issue of litigation is much more of a public company problem. That said, there were some issues that were really bugging the startup community that Delaware fixed as well. For example, a lot of startups like to have shareholder agreements where one shareholder is given essentially governance rights, not because they're a shareholder and they can vote their shares, but because they have a contractual right to say, board, you're not allowed to merge unless I approve. board, you're not allowed to take on debt unless I approve. And Delaware, a couple of years ago, a court decision, I think very correctly under Delaware law at the time, said, well, you can't do that in a corporation. The board has to run the company. You can't just hand over governance rights to a shareholder by saying, well, here's your contract. You get to approve all board decisions. That really scared the VC community, and Delaware reacted immediately by authorizing those kinds of shareholder agreements. Tracy, I think there's going to be some very interesting questions of corporate governance that come up. You know, some of these. episodes that we've discussed where AI startups, the company gets aqua hired and not all the value gets accrued to shareholders or different class of shareholders depending on what employee are. I bet there will be some very interesting corporate governance law that comes out of this. For sure. And you know there's going to be some state that tries to pitch itself as like the place to incorporate AI startups. Okay. So speaking of startups, if Joe and I were going to incorporate and become odd lots, I guess we'd be an LLC maybe, not LLLB.

Yeah, it probably would be. Yeah, okay. Oddlats LLC. And you were our lawyer, our hypothetical lawyer, giving us legal advice. Hypothetical. What would you advise us to do here? Where should we incorporate? Well, so first of all, an LLC is not a corporation.

Oh, okay. You would not be incorporating. You would be organizing an LLC. But actually, I would tell you not to go to Delaware, Nevada or Texas. Because Delaware dominates in public companies. And these see-back companies, like professionals, But it doesn't dominate in small, like, you know, your average family business, your average local business. It does not dominate there at all. And it's law is not designed for that. So if you, I mean, you guys are professionals. But, you know, in a small relationship back company, Delaware law is in some ways too ruthless. The other states have a lot more protections for essentially non-lawyer, familyish, friendish businesses that might be more appropriate. Well, I don't know. We might, it might be. We could be big.

It might be a professional operation. I just have one more question. How rare is the U.S. for having this patchwork of corporate systems? Like, if we went to another country, is there jurisdiction shopping the same way? No. Well, see, understand. We're like 50 different countries in Europe. It's like, you know, so Europe, you used to be that you couldn't do what we do in the United States where you incorporate in Delaware, but all your business operations are somewhere else.

It used to be in Europe that essentially it was but as country by country. If you had your headquarters in a country, you were supposed to organize in that country and you couldn't mix and match. Europe changed the law, but it's still so that you could theoretically jurisdiction shop among European countries, you know, have your headquarters and all your operations in one place and organize in another place, another country. But they don't. They don't really have that norm. It's just viewed as sort of weird. So for them, where your operations are. are largely going to be with the law, the corporate law that governs your entity. Is there transnational jurisdiction shopping? Could you get, you know, like a foreign company that wants to incorporate in the U.S.? Well, yes, but it's much more likely that a U.S. company wants to incorporate outside the country. In Ireland or something. Yeah, so for other kinds of, you know, that used to be a big deal for tax reasons and so forth.

All right. Anne Lippton, thank you so much for coming on Odd Lots. Really appreciate it. That was great. Thank you for having me. Joe, that was so interesting. I really think I think business journalism in general or financial journalism doesn't cover legal stuff enough. Well, Matt Levine has proved it because there's a huge demand for his newsletter precisely because he's one of the few destinations that actually talks about the chancery and all this stuff.

But to your point, this proves the point. He's the exception that proves the entire point. And accounting as well. Yes, that too. And insurance. And insurance. Okay, wait. I'm not going to just criticize our colleagues in financial journalism.

No, that was fascinating. I do find the whole race to the bottom idea a little bit concerning for obvious reasons. And I guess, like, it's sort of that network effect that you were discussing earlier. But once the ball gets rolling in that direction, it just seems really hard to stop. It's just, I agree. And I think this is something very, the sheer influence that Elon has and all the people who look to him and see him as the model. is very interesting. On the other hand, you know, there are not many CEOs out there for whom the cult is so strong that people thirst to give him money. And so the question of whether shareholders of other companies want to be incorporated in states whether they would actually, unlike their current research, inflict some sort of cost of capital penalty for non-Delaware incorporated states is going to be an interesting question. But the ball is rolling. That's going to be so interesting once the sample size gets bigger.

And you can see the actual impact on stock prices. So I take your point, but there are shareholders who potentially would say, well, if a company doesn't have to deal with a lawsuit from like a shareholder who has nine shares. Nine shares. Maybe that's a good thing. And that's like a tradeoff worth making. Yeah, I don't know. I mean, nine shares and he had this pay package. She was like, he signed a deal.

I'd be so annoyed. Could you imagine how annoyed you would be if your pay package got canceled because of some shareholder with nine shares? My pay package of millions, I would be annoyed. It doesn't matter how rich I am, I would cannot imagine my fury. I would be the richest person of the world. I would be so annoyed by that. Okay. So now that we've annoyed Joe, shall we leave it there? Let's leave it there. Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Allo. And I'm Joe Wisenthal. You can follow me. at the stalwart. Follow our producers, Carmen Rodriguez, at Carmen Armand,

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