A law firm that represents Tesla and Elon Musk has written proposed legislation that would alter Delaware corporate law, according to a person directly familiar with the drafting of the bill who asked to remain unnamed in order to speak about the matter.
The proposed legislation, drafted by Richards, Layton & Finger, or RLF, would amend Delaware General Corporation Law, and if adopted, could pave the way for the reinstatement of Musk’s 2018 CEO pay package at Tesla, worth tens of billions of dollars in options.
RLF confirmed its involvement to CNBC.
“Statutory changes are necessary to restore the core principles that have been the hallmark of Delaware for over a century and ensure that Delaware remains the preeminent jurisdiction for incorporation,” Lisa Schmidt, president of RLF, said in a statement.
A spokesperson for the law firm said RLF’s role in the legislation draft was not done on behalf of any specific client.
The bill was introduced in the Delaware General Assembly on Monday and would require approval by the state’s two chambers as well as Gov. Matt Meyer before it could become law.
The bill did not go through the normal procedures for legislation that seeks to change Delaware corporate law, according to Boston College corporate law professor Brian JM Quinn. For decades, such legislation has been drafted, debated and reviewed by the Delaware State Bar Association’s Corporation Law Council before it goes to the legislature, he said. The council, which includes attorneys with a wide range of clients and interests, was not consulted on this bill before it was filed, Quinn said.
After CNBC published this story, Delaware Secretary of State Charuni Patibanda-Sanchez said in an e-mailed statement that Meyer has requested a review of the proposed legislation and “looks forward to viewing a final product that meets the evolving needs of all our stakeholders.”
The pay package Tesla granted to Musk in 2018 was the largest CEO compensation plan in public corporate history, with a potential $55.8 billion maximum value, but the Delaware Court of Chancery in early 2024 ordered it to be rescinded.
In her ruling, Chancellor Kathaleen McCormick wrote that the pay plan was inappropriately set by Tesla’s board, which was controlled by Musk, and that it was approved by shareholders who were misled by Tesla’s proxy materials before they were asked to vote on it.
Under the proposed legislation, Musk might no longer be considered a “controller” of Tesla, Quinn said. That’s because Musk does not currently hold one-third of Tesla’s voting securities, which would be the requirement under the proposed legislation. Those transactions range from going-private deals, to mergers and acquisitions, to board and executive compensation decisions.
“The real role of corporate law is to protect minority investors,” Quinn said. “With this bill, the legislature is saying, ‘Now, you know what? Protect them less.'”
The proposed legislation would also limit the kinds of documents that minority stakeholders are able to obtain through “books and records” inspection requests, Quinn said. Those stakeholders would be limited to formal items such as a certificate of incorporation or minutes of stockholder meetings but they’d lose access to informal communications such as emails or other messages between board members and executives, Quinn said.
After the Court of Chancery’s ruling last year, Musk started a campaign to persuade companies not to incorporate in Delaware and moved the site of incorporation for his businesses out of the state. He has aimed his ire at McCormick with repeated and disparaging posts about her on X, his social network.
Other business leaders have also criticized the Delaware judiciary. Pershing Square CEO Bill Ackman and Coinbase CEO Brian Armstrong both complained about Delaware’s “activist judges” earlier this month on X.
“Delaware has taken some heat for supposedly being too hard on controller transactions,” said Renee Zaytsev, partner at Boies Schiller and co-chair of the firm’s securities and shareholder dispute practice.
“These amendments seem to be a course correction that would make it significantly easier for boards and controllers to avoid judicial scrutiny of their transactions,” she said.
Tesla and Musk did not respond to requests for comment.
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