Document Type

Article

Publication Date

11-2025

Abstract

Following the Delaware Court of Chancery’s invalidation of Elon Musk’s fifty-six- billion-dollar compensation package, Tesla moved its incorporation from Delaware to Texas. Shortly thereafter, Delaware’s legislature, seeking to protect Delaware’s dominant incorporation position, passed the most sweeping corporate law amendments in fifty years.

Both supporters of Musk and defenders of Delaware’s judiciary have accused each other of partisanship, but neither side has addressed the central question: What is the role of specialized corporate courts?

This Essay presents a novel theory of why such courts are necessary. Corporate disputes are distinct because they arise within ongoing relationships between shareholders and management, governed by incomplete contracts. To address managerial disloyalty or incompetence, shareholders can replace managers or sue for breaches of fiduciary duties. In this dynamic, courts become third-party participants in these incomplete contracts when they decide which claims merit judicial intervention, and which do not. Judicial review in corporate law thus culminates in claim-dismissal specialization.

The business judgment rule, this Essay reveals, is designed to enable specialized courts to limit intervention to conflicts of interest while referring mismanagement cases to shareholders. This Essay demonstrates that Delaware’s judiciary has largely fulfilled its intended role while highlighting the constraints it faces regarding both shareholders and legislatures in correcting errors. Meanwhile, with its recent home reincorporation in Texas, Tesla can gain insulation from hostile takeovers and activism, prioritizing long-term business strategies and the broader community. Finally, this Essay provides the policy blueprint for over twenty other states that have already adopted specialized corporate courts.

Disciplines

Business Organizations Law | Law | Litigation | Securities Law

Comments

This article originally appeared in 125 Colum. L. Rev. 2077 (2025). Reprinted by permission.

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