Arjun Singh: Arjun from the Lever. Reader supported newsroom, this is lever time. I'm Arjun. Singh, if you own a fortune 500 business, chances are it was incorporated in Delaware, the state's long been a favorite of corporate America, mainly because of its corporate friendly tax system. But that era might be over. In January, a Delaware judge blocked Elon Musk from getting a $56 billion pay package from Tesla, referring to it as unfathomable. Since then, Musk's appealed the ruling and railed against the state, and his activism has inspired other companies, like meta to consider leaving for less regulated waters too. That led to a controversial vote in Delaware State Capitol this week, in the wake of musk and Zuckerberg threats, Delaware's democratic control legislature sent a bill to the governor that could shield some of the country's most powerful corporate executives from legal accountability. Today on lever time, I'll sit down with two of the Levers reporters, Katya Schwenk and Luke Goldstein, to get the inside story of what happened. You
Arjun Singh1:12 Outside the Mid Atlantic, Delaware is probably most well known for two things. One is being the home state of Joe Biden. The other is that it's technically the headquarters of almost every major corporation in America. Delaware can say that CVS, Apple, Google and Comcast all claim the state as their home, and that goes for more than 60% of the companies on the fortune 500 list, and that's because Delaware has for a long time been one of the most corporate friendly states in the country, but that might change today, states like Nevada and Texas are trying to claim the mantle for themselves, and right now, all three states seem to be in a bidding war to get one of Elon Musk's companies incorporated in the state. That's what led the Delaware legislature to approve a bill that would give corporate executives an incredible amount of protection from accountability, and it seemed to be an effort to lure Musk back to the state, at least. That's what Delaware's Governor Matt Meyer seemed to imply when he said in an interview that the state needed to get it right for musk. But later he claimed to have no idea who Elon Musk is.
News Footage2:17 If Elon's watching right now, what would you tell them? Elon, who? Musk.
Arjun Singh2:22 We'll get more into this Delaware situation later in the show. But first we need to get some context of how this bill came to be, and that story starts in Nevada.
Lorne Malkovich2:37 I know time is short, so I will get right to the point Nevada corporate laws are very good companies like U haul that incorporate in Nevada, like them in 2017 Lauren Malkovich, a lawyer for U haul, was sitting in front of the Nevada House Judiciary Committee. Malkovich argued that in order to compete with Delaware, the state of Nevada should forge its own course
Lorne Malkovich2:59with the large amount of litigation coming out of Delaware, with two thirds of the Fortune 500 companies incorporated there, there may be a tendency to look to those laws or other laws. What we've done with this bill is we've gone into two sections and try to clarify and reinforce some basic principle.
Arjun Singh3:21 What didn't make it into that committee hearing is that, prior to 2016 the moving and storage company U haul and its parent company Americo, were subject to a series of messy shareholder lawsuits. Members of the Schoen family, which owned U haul, took Americo to court for over a decade, claiming they were taking advantage of shareholders, wanting to prevent this kind of drawn out litigation from ever happening again, u haul looked to the court system itself and worked with lawyers to write a brand new bill that would make it more difficult to hold corporate executives liable for misconduct. And Nevada's state legislature ended up passing that. U haul sponsored bill unanimously, and as I learned from the levers reporter Katya Schwenk, lobbyist pushes for deregulation have been gaining momentum for centuries,
Katya Schwenk4:04 originally in the 1800s like New Jersey was the preferred home of corporate America, and then sort of Delaware took over at the beginning of the 20th century, and ever since, there has been sort of an ongoing competition. But what Musk did, though, is sent this all into overdrive.
Arjun Singh4:24 This competition to attract companies has been called a race to the bottom by experts and academics. So I asked Katya to come talk to us here on lever time and explain what this tug of war over corporate America means for the rest of us.
Katya Schwenk4:35 For decades now, Nevada has been trying to compete with Delaware as to become like the more favored legal home for Fortune 500 companies, because that brings in a lot of revenue for the state, and the way that they have done this is by offering a legal system for issues around control of companies and misconduct for. Company executives are accused of misconduct, offering a legal system that reduces liability for CEOs and for really big investors, so that when corporate executives are accused of misconduct, and their company is based in Delaware, they might be held liable for that misconduct, whereas in Nevada, they would not be so they're creating this lower liability environment, and that's simplifying it a bit, but essentially that is sort of how Nevada's court system has worked to compete with Delaware's. And what this means, in total is that when companies move to Nevada, they are getting access to a legal system where it will be much harder for small investors to work to hold, you know, corporate executives accountable, and companies accountable for misconduct, for their actions on climate change or inaction on climate change, and, you know, for fraud and on all these other things interesting
Arjun Singh5:54 was that kind of at the heart of the $55 billion pay package situation. And how does Delaware treat minority shareholders differently than say, Nevada, right
Katya Schwenk6:05 So in the case of Elon Musk, it was, you know, a minority shareholder that sued over this billion, you know, $55 billion pay package saying that, you know, it was, you know, not fair to the company as a whole. And in Nevada. So these kinds of shareholder suits brought by minority shareholders, they're a really important way that investors, like a method investors have used to hold corporate America accountable, and that's when, you know, small people who own smaller a small amount of the company, or minority shareholders, are suing, you know, the company's board of directors and officers in order to hold them accountable for whatever the company is doing. And in Delaware, there are, you know, like far more protections for minority shareholders than there are in Nevada, and that has become increasingly true as Nevada has positioned itself as an alternative to Delaware for people like Elon Musk who might want to get billion dollar pay packages without them being challenged and struck down in court? Well, and then
Arjun Singh7:09 there's a little more to what these investors sometimes do than just blocking pay packages like sometimes they're actually holding companies accountable for wrongdoing. I know there was one case in 2015 where the ice cream makers, blue belt creameries. Surprise, they're not based in Texas. Apparently, they're headquartered in Delaware, like everything else is, as I'm learning. But they had a situation back in 2015 where actually minority shareholders were able to hold the company accountable, right? Could you explain what happened and how the significance of it being incorporated in Delaware relates to how these shareholders were able to achieve their goal. Yeah,
Katya Schwenk7:47 yeah. So as you said, this is an ice cream company, Bluebell creameries, that back in 2015 had a really serious listeria outbreak. Several people died after eating the contaminated ice cream. And you know, this is obviously horrible for the consumers, bad for the company. And also, you know, shareholders said this is really bad for us as investors to this company, because now people are going to associate this company with poisoned ice cream. And our, you know, our share value is going to go down. The company's value is going to go down, right? So in Delaware court, what shareholders were able to do in this case was Sue company executives and say, not only, like they have, you've breached your duty to the company by not having a better quality control process in place to prevent something like this, right? And we're actually going to sue you, to hold you personally liable financially for the damage this has caused such shareholders. And this is the kind of suit that it would not you would, most experts say, and legal experts told me, as I was reporting out this story, that you couldn't bring this kind of case in Nevada, because the bar for holding executives personally liable financially for misconduct or for failure to have good quality control processes is much higher than it is in Delaware, and this kind of case is something that's brought pretty frequently to hold company executives accountable for misconduct. And you know, in some cases, shareholder lawsuits are about just getting more value to shareholders, right? But in some cases, like this one, they are about trying to hold you know, they're about value for the shareholders, but they're also about holding companies accountable for damage they did to the public.
Arjun Singh9:35 I guess I'm trying to understand, then, why has Delaware been like the spot to incorporate your companies. If it sounds like it's actually an effective place for people to hold companies accountable, why would so many corporations want to incorporate there?
Katya Schwenk9:50 Yeah, it's a great question. I mean, I think part of it is that, you know, this is really the notion that Delaware is the place to incorporate your company has gone relatively unchallenged for many decades, like a. Originally, back like really, really, way back when at the beginning of the 20th century, companies all flocked to Delaware because they had really lax laws for corporations who, you know, Incorporated there. And over the years, Delaware has kept up this reputation by still offering bonuses and secrecy and all of this to companies, but also offering, like a court system that's extremely, you know, well known and well regarded. There are all of these, you know, different kinds of defense attorneys and corporate law attorneys there that there's this whole like legal infrastructure, basically, for companies in Delaware and so that has helped keep companies from leaving, because they have sort of access to that and that kind of stability.
Arjun Singh10:46, Is thiswhy? Like when other states, like in Nevada, are trying to introduce laws to encourage business, or, you know, do different things, like people are calling this a race to the bottom? Can you explain that?
Katya Schwenk10:57Yeah. I mean, I think you know what, some scholars and researchers who've been watching this over the years have observed is that, like in order to compete with Delaware, places like Nevada, like Texas, Wyoming are offering more and more perks to company executives. They're offering more and more lax liability statutes around corporate governance, and that has sort of devolved into this race to the bottom where, you know, everyone is trying to compete for these companies to be incorporated there, and they're doing so by, like, reducing accountability for, you know, CEOs and big investors, and that's happening even in Delaware too now, as Delaware tries to, you know, quell the Exodus that's happening.
Arjun Singh11:45Like, in my head, I kind of want to just say, like, oh, so Nevada is trying to be like the Delaware, the West, or the new Delaware. But at the same time, it sounds like what they're doing is a little bit different from Delaware. And actually, what you're describing sounds a little bit like they're being more favorable to like wrongdoing, not just tax advantages. So what would you think of that idea? Like, is Nevada the Delaware of the West, or has it become just like its own corporate kind of Haven, right?
Katya Schwenk12:13 I mean, there's a way in which you could frame this as like Delaware is becoming like Nevada, right? In that like, I think Nevada has put pressure on Delaware now to, like, copy its own lower liability code of corporate law, or at least the corporate law that's, like, more deferential to like lawmakers and gives less way to judges and the judicial system, which is harder for big companies to control. But at the same time, I think that Delaware's dominance. You know, we don't want to overstate how much this has shifted. I think Musk wants us to believe that Delaware is like about to fall, you know what I mean. But the fact remains that it is still, you know, relatively pretty few companies that have left. And I think it sort of remains to be seen what exactly will be the outcome of all of this.
Arjun Singh13:09 After the break, we're going to hear from the lawyer that helped lead the case against Elon Musk's pay package and how Delaware's Democratic legislature could make it easier for companies to steal from their shareholders.
GGreg Varallo13:20Economists call it tunneling. I call it grant larceny.
Arjun Singh13:23 We'll be right back.
Arjun Singh13:37 Greg verrallo has been a corporate attorney in Delaware for the past 42 years, he's also represented the shareholder plaintiffs that sued Musk over his $56 billion pay package that led him to the cross examination stand facing Elon himself.
Speaker 113:53One of the things I've observed over a long career is that very often a CEO or a leader of the company will feel the need to assert control. I kind of call it CEO itis
Arjun Singh14:07 Elon Musk wanted to assert control over the courtroom. So varello Let Musk talk himself into a hole
Speaker 114:13 very early in the cross. I asked him a very simple question. You know, was it night out or was it day out? Whatever it was, it it was a binary yes or no, simple answer question. And he began to tell me everything he had ever thought about from the moment he emerged, you know, on the planet. And my instinct immediately was to try to cut him off. And then something said. I just stepped back, and I said, Well, you know what? He wants to try to establish control. The easiest way to show him he's not in control is just let him blabber on and ignore him.
Arjun Singh14:51 This goes on for about another five minutes, and then the judge asks Musk to basically just answer the question.
SSpeaker 114:56And Musk had to admit that he had forgotten the question as well. All, and the court very politely said something like, you know, would you try to answer the questions? And from that point forward, he was so embarrassed by that that he actually did answer my questions.
Arjun Singh15:14 The lower Court of Chancery in Delaware found Elon Musk's salary to be unfair because he negotiated with himself and set the $56 billion number without consulting with independent directors. IfSSpeaker 115:25I'm doing a deal with myself, that's the deal you should look most carefully at, not least carefully at, right?
Arjun Singh15:37 What happens next is your typical Musk style meltdown on X he criticized the judge who made the ruling and retweeted a post calling her an activist. Then he looked for friendlier terrain, and last month, moved the legal home of his brain computer interface company neurolink to Nevada. Moves like that are what appeared to inspire people like Delaware's newly elected governor, Democrat Matt Meyer, to pass the state's new law that would benefit people like musk at the expense of shareholders in their companies, and that's pretty much how Meyer summed it up, too, when he said the law he signed will help preserve Delaware's corporate brand and stop companies from leaving the state.SSpeaker 116:15What the governor has said is that he's worried about companies leaving Delaware. It's been termed exit by the wonks, right? That's cute term. What doesn't add up is that the data doesn't support the idea that companies are leaving Delaware.
Arjun Singh16:36
As many as 15 large corporations are reportedly considering leaving Delaware following the ruling against musk.M
Madinah Wilson-Anton16:43You know, I'm Muslim, so I don't gamble, but if I was gambling, my money would be on the worst thing possible is what happens in 2025 American politics.
Arjun Singh16🕠That's Delaware State Representative Medina Wilson Anton, who recently sat down with the levers Luke Goldstein on a busy legislative day, she's a member of the Working Families Party, which formed a coalition in Delaware State Legislature that's most critical of the bill, known as SB 21 she said she's never seen a bill get this much grassroots opposition. I mean,
MMadinah Wilson-Anton17:15over the weekend, and like late last week, a few of my constituents texted me Tiktok videos that they'd seen about the topic, and they're like, What's your stance on this? There
TTikTok Video17:25is a bill moving through the Delaware State House that wants to change how these rich fucks can get even richer, and if you live in Delaware, you might have a chanceMMadinah Wilson-Anton17:38to stop it. One person texted me and was like, do I need to ask? And I was like, No, I've been paying attention to it. Don't worry.
Arjun Singh17:47Wilson Arjun says that reps are rightfully afraid of businesses leaving and being the victims of Musk's backlash as the head of Doge.
MMadinah Wilson-Anton17:56This is oligarchy, you know, where all it takes is enough money, and you get to change the rules so that you can do what you want. It's scary to think about how this really imperils our financial outlook, because there are 1000s of companies that are like, Wait, we're incorporated in Delaware, because Delaware is predictable. It's balanced, it's stable, it's consistent, and the past couple of years, they've been passing bills that the minority want, because they lost
Arjun Singh18:29 after the bill was signed, I was curious what the bigger lesson from all of this was, Does what happens in Delaware stay in Delaware, and how did the backroom dealing around this bill play out for that, I turned to the levers. Reporter, Luke Goldstein,
LLuke Goldstein18:42 you know, I think at a top level, the best way to understand this bill is it's essentially this big power grab by corporate executives and the controlling shareholders, just the largest investors in a company, over minority shareholders regularly people. It's pension funds, retirement savings and what have you. But for years and years, if you were a shareholder, you suspected that there may be some kind of wrongdoing, breach of companies fiduciary duty. You get a law firm, you file what's called a books and records request, which is just a kind of basic disclosure the company, in most cases, if you make a general enough case, they have to hand over some kinds of documents, but that could entail even communications, internal emails. Oftentimes, that forms the kind of evidentiary basis for a future lawsuit, if there's anything that's been going on behind the scenes, what this bill does is it makes the bar extremely high for any of these shareholders to file books and records requests, and it also pretty much limits. The amount of documents that a company has to hand over to the shareholder. So you're basically only going to get what's called like meeting from the board of directors making decisions about certain transactions if you speak to outside plaintiffs. So those kinds of investigations are used for just all kinds of shareholder lawsuits, class actions and such. This bill then separately changes the nature of a specific kind of set of corporate deal making, which are called conflicted transactions. So the easiest one to understand is an executive compensation package, right? You have the head of a company who wants to award himself shareholders money. So there's a clear kind of self interest there, and in many cases, that would be considered a conflicted transaction. So what you had to do was you had to bring those kinds of deals before both the shareholder vote and then also a vote by a committee assembled by the board of directors on the kind of executive side. Now, under this bill, all you have to do for some of these conflicted transactions is just get a committee that's assigned by the board of directors to kind of rubber stamp this and sign off on it doesn't have to go to a shareholder vote. And if you go through that, it's going to be really difficult for a court to really ever strike that down. So you really are just having decades of shareholder protection laws that are being stripped out by this new bill in Delaware. What's
Arjun Singh21:39 the logic for the case for this bill? I know that you know, in the context of what we've been talking about and what we've talked about previously in this episode, is that this was the result of moves by Elon Musk and Mark Zuckerberg kind of threatening the state of Delaware, that they would incorporate their company somewhere else, outside of just trying to appease musk and Zuckerberg, has anyone kind of stated a principled case for this bill outside of just trying to appease these two tech billionaires? So
LLuke Goldstein22:09 the argument that's made, you know, by proponents of the bill, and I mean, I think we should say most of them are either coming from what's called defense side law firms who represent large companies, where it's coming from, the heads of companies themselves, but the argument is that they essentially think there have been too many of these shareholder lawsuits in recent years. It's kind of related to this whole ESG movement that we've really seen pop up over the last decade plus, which takes a more kind of activist stance as shareholders to try to ensure that companies are maybe following certain kinds of reforms and guidelines related to sustainability and other measures. But the main kind of power tool they use are these shareholder lawsuits. Companies feel like it's gone too far, and they feel like the Delaware court system in particular has essentially been too favorable to all kinds of shareholder investigations and lawsuits. And Nevada has changed their legal system, and they think it works much better there, and they get more favorable wrongs from the courts. Now, I'll say on another level, in Delaware, the main thing they're concerned about is that ultimately the political reality was Elon Musk really flipped out about this judge that rejected his pay package. And he went online, he whipped up this whole storm. And you know, as a lawmaker, you have to worry primarily about the state's budget and revenues, and if enough companies do decide that the state is leaning too far in the favor of shareholders, not companies, you know, they will take their business elsewhere. This is just the modern reality of running a state government when you're in competition with other states to attract business, so you have to maybe make some concessions to keep businesses happy.
Arjun Singh24:02 Let's tell a little bit about kind of the politics that were going on behind this bill. It sounds like there was a lot of tension and uncertainty. And, you know, in some ways, it sounds like maybe there is almost a little bit of a cover up with how this bill was being messaged. But tell me about your reporting on kind of the political fight in this bill, and what stood out to you about it?
Luke Goldstein24:24 Yeah, so, I mean, this is a new governor, Matt Meyer, so he just took office in January. I think there's a few things that changed. Initially, in February, he said, direct quote, you know, we have to do this for Elon Musk. And then a month later, he said Elon, who obviously a lot changed in that period. I think in fairness, some of his admission there is a recognition that there was a lot of pushback that maybe he didn't originally expect to the bill. I think what you have to remember also is that this basically all took place in Delaware as. Because Trump was inaugurated, all the doge cuts start, and back then, originally, I don't think even in January, Elon Musk's kind of national image reputation had become, you know, as toxic and kind of tarnished. So right, as the governor goes all in, spends all his political capital and trying to get this bill passed Democrats and you know, even I think, kind of regular voters start to build this real kind of opposition to musk, in particular, his name becomes so inextricably attached to that bill that you saw a huge grassroots revolt on the ground in Delaware. But what happens, I think, then, is the governor has really put all his chips on the table now to get this bill passed, right? It goes before the legislature, and the Senate, which is sort of in the state of Delaware scene, is a little bit more conservative. They're a little bit more favorable to the governor's conditions. They pass it, right? Yeah, the real fight takes place in the house, in the General Assembly, right? In the General Assembly, you have these new lawmakers that have come into office in the last several years who are loosely affiliated with the Working Families Party. Not all of them actually are. But, you know, they kind of stick together in a coalition, which is like a progressive party, right? Yeah, they're more progressive members, so they really band together and try to put up a fight against this bill and try to raise an outcry about, you know, what it's going to do for regular shareholders and even big investors. I mean, you had several investor groups at the end that represent, I think, $90 trillion combined that, you know, really were trying to halt the brakes on this bill. Because, wow, just as effective as well. What happened was, last week, the bill was supposed to come into a final vote in the House, and the speaker, who's also new, so you have a lot of new players here who don't have as tight of a control over their caucuses, she can't get the votes together. So the bill is delayed until this week, right? And the talk behind the scenes is that the opposition coalition has enough wind in their sails, you know, maybe they can get some concessions right. And the big conversation was this, to add an amendment that would allow companies to either opt into this new corporate governance framework where they could stay with the old model. It would maybe affect things at least around the margins Tesla or meta, where the top executives, Musk and Zuckerberg are the controlling shareholders, they have the largest share, they would be able to opt in anyways. But on a general, broader level, where we're talking about most of the Fortune 500 companies that are incorporated in Delaware that opt in, amendment would have some effect. So that brings us to this week, and there's about a six hour legislative process with hearings and everything. What happens is the working families, party coalition, they push to bring votes on all these different amendments, one being the opt in, but all other kinds to try to at least rein back the worst excesses of what this bill would do for shareholders, and also so they can really make the case. You know, on the floor of the assembly here, Medina Anton Wilson, who kind of leads this fight. Just one thing you have to remember in the background is it's Ramadan right now, and she's Muslim. So everyone who wants to just pass this bill, it's been hours and hours we want to just get this done with they're totally pissed. And she keeps standing up to push for these amendments without having any food or water the entire day. And it is really remarkable to watch the bill ends up passing. But the small concession I feel like you get is that a lot of these lawmakers were totally embarrassed by her because she made them actually go on the record and vote against every one of these amendments that would try to at least blunt the edges of what this bill would do, and everything really kind of made a mockery out of them.
Arjun Singh29:02 You know, Biden represented Delaware for most of his career. He at the end of his presidency, makes this warning in his farewell address about oligarchy and the dangers of oligarchs, now putting aside the ever swirling question of the role of billionaires and very wealthy people inside of democratic politics, but like watching kind of all this happen in Biden's home state, Luke. But as you're sort of watching this, what sort of stood out to you, or what do you think that this whole process said about, you know, the role of oligarchy in American politics right now?
LLuke Goldstein29:35Yeah. I mean, I think your point about Biden here is important. I mean, he was the senator from Delaware. We're talking about different levels, but it's the same political culture that breeds lawmakers. And you don't just get a fight like this out of nowhere, Delaware was not some reformist, progressive Bastion that suddenly, overnight flipped to being kind of a corporate estate. This has been a long tradition of. Lawmakers who've been conditioned into acquiescence, I think it's fair to say, over many years and kind of brought to heel by these major companies, that they've really built their stay around and now are essentially, you know, reliant on for their tax revenues and and such, the implications nationwide for this bill passing are really high because this whole pressure campaign that Elon Zuckerberg and other major billionaires Ran is in some ways, kind of a new playbook that we haven't fully seen. A couple really top executives wealthy individuals did not like some court rulings that they received in one of the most business friendly states in the country, and they threatened by using their megaphones online, just friends, networks, connections and just money and power to pressure the lawmakers to change the law to benefit them, and the fact that it worked means that we will see this deployed many times again, I would expect in other states, if they don't like rulings or the laws that stand there, it's a very different kind of lobbying effort, if you think about it, you know, it's not just we give you a contribution and then we come calling for maybe Some political favors. It's really more the stick. You know, this is a very different way of trying to threaten state governments to bend the knee.
Arjun Singh31:35 Thanks for listening to another episode of lever time. This episode was produced by Ariella Markowitz and Natalie Bettendorf, with help from Chris Walker, it had editing support from Joel Warner and Lucy Dean Stockton. Our theme music was composed by Nick Campbell. You
