Elon Musk’s decision to move Twitter’s corporate headquarters from Delaware to Nevada could add fuel to a growing trend: companies ditching the First State for the Silver State to seek a friendlier jurisdiction from investor lawsuits and cheaper fees.
“In Nevada, it’s a high bar for liability — directors and executives will only be liable for ‘intentional misconduct, fraud, or a knowing violation of law,’” Benjamin Edwards, law professor at the University of Nevada, Las Vegas told On The Money. “That insulates company leadership from a lot of claims.”
For a West Coast-based CEO like Musk — who has faced a slew of shareholder lawsuits, and found little luck contesting his overpriced Twitter deal in Delaware Chancery Court — the move to Nevada could save time, legal costs and numerous headaches.
The Tesla boss had battled a $13 billion shareholder lawsuit for seven years that claimed the EV maker’s $2.6 billion acquisition of SolarCity was a violation of Musk’s fiduciary duty.
The suit claimed that Musk was “conflicted” in the 2016 purchase because his cousins started the company, which has now become Tesla energy.
Musk won the suit this year, but he likely spent hundreds of hours in deposition, preparing to testify and traveling to Delaware for the suit.
The attorney behind the class-action suit recently announced he was challenging the ruling and seeking to re-open the litigation.
Twitter — now renamed X. Corp — is private but Musk could be worried about investors with an equity stake seeking to sue him down the line, Edwards said.
The reincorporation in Nevada will likely make that more difficult to do, another expert said.
“There is little doubt that Nevada has been seeking to make itself the most lenient jurisdiction for corporations that incorporate there by reducing the ability of shareholders to sue its managers and directors,” Columbia Law professor and securities expert John Coffee told On The Money.
“Delaware and other jurisdictions provide for broader liability,”
While Judge Kathaleen McCormick — the Delaware judge who ultimately forced Musk to acquire Twitter — likely would’ve made the same ruling in Nevada, it may not have even gotten to that point in the case, attorneys noted.
“It’s possible Twitter’s board would have been able to refuse the deal in the first place since they’d have more ground for holding off on transactions they dislike,” one legal expert said.
Musk has yet to signal whether Tesla or SpaceX, which are both incorporated in California, will follow Twitter to Nevada.
For smaller companies that are more price sensitive than large corporations, Nevada also offers cheaper fees.
“Its goal, which it has announced publicly, is to thereby maximize its corporate franchise taxes by encouraging companies to locate or relocate there,” Coffee said.
Language and translation services company TransPerfect — which faced protracted litigation in Delaware — was one of the first companies to announce a move to Nevada in 2018, which it referred to as “Dexit,” a cheeky play on Brexit.
“I would not be surprised if TransPerfect’s ‘Dexit’ becomes part of a larger trend… Nevada has a reputation for a rational and predictable judiciary, as well as one that operates with lower litigation costs and promotes settlements,” shareholder Shirley Shawe said at the time.
Since then, Light & Wonder, which has a market cap of more than $5 billion, fled Delaware for Nevada.
Ron Perelman built up and later divested his stake in the company, which was previously named Scientific Games Corp.
DraftKings Inc. also moved from Delaware to Nevada when it merged with Diamond Eagle Acquisition Corp. in a SPAC.
But even as the idea of reincorporating in Nevada is increasingly popping up on executives’ radar, Delaware still remains the overwhelming choice for companies to incorporate.
“Nevada receives a billion plus in corporate and LLC fees right now,” Edwards said. “In Delaware, 1/5 of the state’s entire budget comes from those fees.”
Delaware also has an established legal infrastructure, experts said.
“In the event of litigation there is a greater amount of history in Delaware,” former SEC enforcement attorney Ron Geffner said. “More corporate attorneys are familiar with Delaware law than Nevada law.”
“Nevada is up and coming but Delaware has fully arrived.”
The Silver State does have one enticement that the FIrst State has a hard time topping.
“If you have to appear in court, wouldn’t you rather do it in fabulous Las Vegas? I don’t know anyone who comes from around the world to visit Wilmington,” Edwards quipped.