The Key to Tesla’s Legal Fight Over Musk’s Contract? Location, Location, Location!

May 3, 2024Supply Chain Chronicles

If you’ve failed to strategize at each step of your operation, you may have strategized to fail. And if you’ve landed in a legal conundrum and want to know how looking back to your humble origins may be the key.

Imagine a deal soundly struck between your board and CEO on the latter’s terms of compensation, only to have a judge strike it down as “excessive” and scrutinize every step of the arrangement.

This is the current plight of Tesla after some disgruntled shareholders successfully sued in the Delaware Court of Chancery over Elon Musk’s pay package. Tesla must now appeal and try again, risking another possible lawsuit and a litigation cycle that could continue ad inifinitum.

What do you think it’s like to be on this board, to feel like you aren’t in control of your own business, can’t operate on your own judgment, making the deals you want to make? It’s your vessel sailing the high seas, but it’s not you at the helm. It’s others, with a relative fraction of skin in the game.

And how would it feel to realize that it didn’t have to be this way, that it all could have been avoided by a simple matter of where you are incorporated?

Tesla is seeking to move their operation to Texas in the midst of this controversy. Why?

Texas recognizes the Business Judgement Rule, a legal doctrine that defers to corporate boards of directors, giving them a wide berth to conduct their own affairs and even granting them immunity from lawsuits like the present one. Delaware, conversely, does not recognize this rule, leaving the companies much more at the mercy of judges.

Musk and Tesla are now learning the hard way that it would be a great mistake to stick to their guns and suffer the legal slings and arrows of the jurisdiction they happen to be in, so they’re adapting as best they can by attempting this move.

But the REAL mistake was made when they first set up their business. No one can foresee every problematic lawsuit or legal complication that will befall them, but there are certain business decisions that MUST be a matter of legal strategy and are overlooked by far too many business leaders.

One such decision is WHERE TO INCORPORATE. If you base this on factors like “everybody else is doing it here,” (more on this below) “this is where we started making sales and getting clients” “this is the city I grew up in” and “this is where our office/ warehouse/ depot/ favorite café is located, then that’s NOT a matter of sound corporate strategy, and you’re leaving yourself open for legal calamities down the road.

The difference between incorporating in one state versus another can be night and day. It could LITERALLY mean the life or death of a $47 billion deal.

Many companies incorporate in Delaware because it certainly has its advantages. BUT, there could always be elements and circumstances that supersede those advantages. These must be known to the founders and acted upon at the outset if you want to avoid a deal-killing lawsuit that could bring your whole enterprise to a screeching halt.

It’s understandable that, especially at the beginning, your attention is on the business practices that got you there, and not every legal intricacy that could later blow up into a catastrophe. But the potential fallout from missing these things needs no restatement.

Who is Watching Your Back?

Having a legal risk management team on your side dedicated to watching your back while you do your thing can keep you in the clear from the type of derailing that the richest man in the world is currently going through.

Contact Commerce Law Partners today and Prepare to Win.

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