In October 2022, Tesla founder Elon Musk grudgingly completed the $44bn acquisition of Twitter, a transaction he had spent the summer trying to wriggle out of.
Chancellor Kathaleen McCormick, the Delaware judge who adjudicated in the dispute between Musk and Twitter’s shareholders, was lauded for her finesse in guiding the litigants to settle a resolution between themselves, without recourse to an expensive trial.
The efficiency of the Delaware Court of Chancery, where the Twitter merger contract stipulated any disagreement between the parties must be heard, meant that within just a few months Musk got his day in court and then Twitter shareholders got their money, as per the original terms of the buyout.
The Twitter-Musk saga may yet represent the high-water mark for a judiciary that has arbitrated in the affairs of corporate America for more than a century and helped make the state of Delaware the legal home to two-thirds of S&P 500 companies.
Yet, less than two years after holding Musk to account, the legal establishment in Delaware is reeling. And it is in part because of another high-profile case involving the world’s richest person and McCormick.
The judge in January invalidated a $56bn pay award granted to Musk six years previously by the Tesla board. She determined that the grant was approved by directors beholden to Musk and that the pile of equity options was, in her judgment, wildly excessive.
Musk’s response was terse but furious. “Never incorporate in Delaware,” he wrote in one post on X, the new name for Twitter that he chose.
Delaware is the domicile of choice for most S&P 500 companiesCount of S&P 500 companies by location of incorporation
A bar chart titled "Delaware is the domicile of choice for most of the S&P 500" showing a count of S&P 500 companies by location of incorporation. It shows 323 of 500 companies are headquartered in Delaware, with 21 in Maryland, 12 in New York and Ohio, 11 in Virginia, 8 in New Jersey, 8 in Pennsylvania, 79 in all other US states and 26 outside of the US.
0300200100Outside USOther statesPennsylvaniaNew JerseyVirginiaOhioNew YorkMarylandDelaware32321121211887926
Source: DealPointData
FT graphic: Sam Learner
That public fight was only the prologue to a messier struggle playing out in Delaware that many fear could undermine its position as the preferred state of incorporation for US companies and damage an economy that is in part reliant on that business. Other states, notably Texas, are already stepping up efforts to lure companies away.
Over the past autumn and winter, the Chancery trial court ruled on three highly esoteric matters of corporate law, making certain long-accepted dealmaking practices impermissible.
But, this summer, the state’s legislature and governor were quickly persuaded by the influential law firms that represent big companies to enact changes to the Delaware General Corporation Law that nullified the rulings. The convention of waiting for the Delaware Supreme Court, often a tempering mechanism, to hear any appeals was ignored.
Lawyers representing pension funds, asset managers and individual shareholders fret that the changes will unduly limit their ability to bring lawsuits against misbehaving corporate boards and overmighty founders.
And many law professors worry that the foundations of Delaware corporate law have been carelessly erased without an understanding of the broader consequences.
I’ve never seen it this bad. I’m shocked at how far it has gotten away from how it used to be done
The hard feelings that developed during the legislative debate bubbled to the surface in an otherwise tight-knit legal community. In June, a distinguished former chancellor turned corporate lawyer, William Chandler, publicly criticised McCormick and another chancery judge over both their jurisprudence and their criticism of the legislation.
“The corporate market?.?.?.?t’s not feeling good about Delaware because of the uncertainty and unpredictability of a few decisions by just two judges,” he said in public testimony before the Delaware House of Representatives. “As chancellor, I will tell you, I was taught judges need to stay in their own lane.”
A more fundamental divide has also been exposed. One view holds that Delaware’s prestige and dominance is the result of its bench, technocratic judges applying even-handedness in deciding matters between companies and shareholders.
Another is a more transactional approach: so-called Delaware Inc. A large chunk of the state’s operating budget is funded by revenues from corporation fees and taxes, enough that Delaware does not need a sales tax. And in return companies expect a certain amount of accommodation from the law in order to keep their business from migrating.
Delawareans themselves worry about the fraying of the state’s fabric. “The Delaware Way”, the traditional decorum between legal adversaries, has for now broken down.
“I’ve never seen it this bad,” says one prominent lawyer about the poisoned atmosphere. “I’m shocked at how far it has gotten away from how it used to be done.”
The so-called internal affairs doctrine that applies in America dictates that state rather than federal law governs relationships between companies and their directors and stockholders.
New Jersey dominated incorporations at the beginning of the 20th century. But starting in 1913 its progressive-era governor, Woodrow Wilson, began to tighten up lax rules on how corporations could operate.
Neighbouring Delaware, which modified its own constitution to facilitate its emerging incorporation business, was an immediate beneficiary. Its chancery court dates back to the 18th century and is a court of equity, a concept inherited from English law that empowers judges to resolve cases based on principles of equity rather than simply the letter of the law, allowing for creative solutions.
As the US economy expanded and more companies went public, the second-smallest state in the union by land area developed a rich body of case law and each year attracted thousands of corporate registrations.
Incorporation activity funds a large share of Delaware’s state budget, while its equity courts handle over 1,000 cases a year
Division of Corporations' general fund revenue as % of operating budget
202320222021202020192018201720162015040302010
Court of Chancery case load
Filings
Dispositions
2023202220212020201920182017201620152014010005001500
Sources: Government of Delaware; Delaware Judiciary annual report
The 1980s takeover wave, featuring corporate raiders using junk bond finance, forced Delaware law to adapt to a more adversarial environment, where fights for control of corporate boardrooms would become commonplace.
It also survived the dotcom bust and the 2008 financial crisis, debacles that its vaunted corporation law did little to anticipate or prevent.
The Delaware Supreme Court, arbiter of final resort in corporate disputes, became at least partially a political body, sensing when to soften chancery court rulings that might unnecessarily harm the state’s commercial interests.
A decade ago it gave companies more avenues to earn the benefit “business judgment rule”, a doctrine that assumes directors act in good faith and cannot be second-guessed unless there is evidence of conflicts of interest. It also largely outlawed junk lawsuits against the directors of companies that are acquisition targets, a then-frequent feature of takeovers.
In exchange, it instructed lawyers for shareholders to spend their time prosecuting matters involving genuine corporate governance failings. As an incentive, the courts would grant big legal fee awards in successful cases. For example, the lawyers who successfully argued to cancel Musk’s $56bn bonus are requesting the court award them $5bn in fees.
If you went back to the ‘80s, [the Bar] was really old white guys who went to the Wilmington Club. The practice has opened up
These changes came just as companies backed by private equity and venture capital firms were going public in large numbers, often with complex structures including dual share classes.
Judges were then left to make rulings about which entanglements among Wall Street and Silicon Valley luminaries represented genuine conflicts of interests with ordinary shareholders.
The landscape of law firms in Delaware itself was also changing. While big New York corporate firms have always practised in Delaware, they typically shared courtroom responsibilities with one of the prominent local law firms.
“If you went back to the ‘80s, [the Bar] was really old white guys who went to the Wilmington Club,” says one Delaware insider. “The practice has opened up. That is fantastic. It is a more diverse Bar with a different perspective. But it’s brought a lot of competition and put stress on lawyers.”
Several national corporate law firms have opened Delaware branches, notably Quinn Emanuel and Silicon Valley’s Wilson Sonsini, the latter going as far as hiring two former chancery judges.
That prompted Michael Hanrahan, a veteran Delaware lawyer, to dryly observe that “chancery judges are only experts when their opinions comply with the alleged practices of transactional lawyers at national or international firms, most of whom are not members of the Delaware Bar”.
Several national law firms representing shareholders have also planted flags in the state, increasing competition to be lead counsel and eligible for the biggest slice of the fees.
This changing industrial organisation has helped put company and shareholder lawyers on a collision course.
Travis Laster has become perhaps the most polarising jurist in Delaware, willing to, when necessary, write detailed opinions that excoriate the conduct of what he regards as conflicted board members or wayward investment bankers and lawyers.
Of the three controversial chancery rulings in the past year, Laster authored the one that has most roiled the Delaware establishment.
In February, he ruled that the listed financial services firm, Moelis & Co, had in 2014 wrongly ceded too much power to its founder, chief executive and largest voting shareholder, Ken Moelis, allowing him to veto its board on important company decisions.
Such stockholder agreements are commonplace among companies led by founders or by investment funds, leading to concerns that the Laster decision immediately nullified perhaps thousands of existing governance agreements at public and private companies.
 Ken Moelis, founder of the financial services firm Moelis & Co, smiles on the floor of the New York Stock Exchange after his company went public in 2014. Delaware jurist Travis Laster ruled this year that the firm had granted Moelis too much power © Lucas Jackson/Reuters
Few believed his reasoning — that boards of directors cannot give up certain powers through contract — was technically incorrect. But to his critics, it was the latest evidence that he did not understand how companies actually conduct their day-to-day affairs.
As the legislature sought to overturn his ruling Laster set up a LinkedIn account where, under the curious disclaimer that he is “not posting as a vice-chancellor at Court of Chancery of the State of Delaware”, he repeatedly set out his concerns about the law changes that were being contemplated.
“I hate the platform [LinkedIn] but I have to now check it,” says one top lawyer, referring to Laster’s influence in shaping the public discourse. Even his critics — one top adviser tells the Financial Times she hopes he retires soon — acknowledge that he is brilliant.
Laster declined to comment to the FT but a person familiar with his thinking says he felt the issues were sufficiently important to publicly air concerns he had already registered privately; and to ensure that his views were not misrepresented by others.
The fact that ‘everyone is doing it’ is not a reason to do something
The other two controversial opinions — one involving the allocation of damages from failed mergers, the other on the procedures boards use to approve merger terms — were authored by McCormick. As with the Laster ruling, transactional lawyers felt long-standing protocols had been disregarded even though few thought she was incorrect on points of law.
In April, McCormick privately shared her thoughts on the legislative process under way to negate the rulings, writing a letter to the Delaware State Bar Association criticising the manner and haste in which legislation was being introduced, saying it “was not the product of a cautious and deliberative process”.
She also delicately questioned lawyers blindly observing dealmaking conventions which may have been flawed from the outset.
“The fact that ‘everyone is doing it’ is not a reason to do something,” she wrote. “The question is whether everyone is doing the right thing.”
The interventions of two sitting judges and dozens of law professors who wrote letters and testified before the Delaware legislature were not enough to prevent the changes to corporate governance laws passing easily. They became effective on August 1.
“The vote was just another reminder that most Delaware legislators don’t take the time to understand the gravity of these types of bills and the corporation law council [of the Delaware state Bar] continues to wield too much power in our state,” says state representative Madinah Wilson-Anton, one of the few of Delaware’s majority Democratic legislators who opposed the changes.
“I should have expected private equity and its cronies would be so creative.”
The fallout from the changes continues. Lauren Pringle, a former corporate lawyer who runs an influential trade publication, The Chancery Daily, has sharply criticised the law changes, describing them as more the product of a “smoke-filled backroom discussion than a transparent, free and open debate process”.
She says two prominent law firms who had been longtime subscribers recently cancelled subscriptions to the website, a move she believes is retaliation for her recent criticism.
One well-known plaintiff lawyer says his colleagues may now seek to freeze out two former judges who work at Wilson Sonsini from lucrative work as mediators and arbitrators, a reprisal for the judges’ efforts to enact the law changes.
Corporate lawyers, including those critical of McCormick and Laster, conceded fears that Musk’s decision to redomicile Tesla in Texas could prompt a rush of relocations have proved overblown.
They note that Texas corporate law already relies on Delaware’s rich body of precedent decisions, and that the Lone Star State tries by jury rather than only a specialist judge, introducing an element of unpredictability that many companies are unwilling to risk.
Shareholders in Fidelity National Financial, a specialist insurer, narrowly rejected reincorporation in Nevada, a jurisdiction famous for protecting directors from liability charges.
 Tesla and its founder Elon Musk have asked for his $56bn pay package to be reinstated in an unprecedented legal gambit © Leon Neal/Pool/Reuters
Fidelity lamented in securities filings that it feared “an increased risk of opportunistic litigation for Delaware public companies” and noted its annual director and officers insurance policy premium had recently jumped from $3.7mn to $4.9mn.
But the peril has not abated completely. “Livelihoods depend on the Delaware corporate law machine,” says one lawyer.
Its legitimacy waning could eventually lead to what all sides agree is the nightmare scenario: a federal statute on incorporation that would take corporate internal affairs jurisprudence out of the hands of individual states. Washington has in the past stepped in with federal-level corporate governance reforms, notably the Sarbanes-Oxley and Dodd-Frank acts.
More immediately, Tesla and Musk are not done with chancellor McCormick. They have asked the judge to allow his $56bn pay package to be reinstated after the shareholders voted in favour of it in June, an unprecedented legal gambit that experts say leaves McCormick with no easy escapes.
“Three words: sad, tired, frustrated,” says a friend of McCormick when asked to describe her state of mind amidst the furor and heavy administrative workload as lead Chancery judge.
A prominent Delaware plaintiff lawyer recently wrote on LinkedIn that he hoped for a reconciliation process that could revive “the Delaware Way”.
McCormick offered her own comment under the post: “Fortunately, in our Bar, personal attacks are infrequent and say more about the speaker than the subject.
“I am grateful for that, and our collective commitment to a respectful exchange of ideas.”
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