Introduction
To infinity . . . and Texas? Following an adverse decision in the Delaware Court of Chancery, Elon Musk announced his hope that Tesla would leave Delaware and reincorporate in the state of Texas.
In a post announcing a similar move for SpaceX, Musk warned others, “If your company is still incorporated in Delaware, I recommend moving to another state as soon as possible.”
And, indeed, in its June 13, 2024, shareholder meeting, Tesla shareholders approved the move of the company to Texas.
The Delaware litigation sparking Tesla’s move south centered around a compensation package that promised its prominent CEO 1% of the company’s shares for every $50 billion increase in Tesla’s value.
Musk accomplished all the milestones set for him by Tesla’s board of directors and became entitled to shares valued at nearly $56 billion.
An objecting shareholder brought suit in Delaware court, which subsequently blocked Tesla from paying Musk the promised shares.
Nevertheless, in the same June 13 shareholder meeting, Tesla shareholders ratified the compensation package the Delaware Chancery Court invalidated.
Musk’s vindication, however, was only temporary: In a later ruling, the Chancery Court doubled down on its earlier position and rendered the ratification invalid.
And even prior to this latest decision, Musk’s compensation saga had already pushed him from state competition to federalism: “When there are egregiously wrong legal judgments in a single state that substantially harm American citizens in all other 49 states, the Federal government should take immediate corrective action.”
While Musk’s ire over his withheld bonus payment may be understandable, the benefits of reincorporating in Texas are not as obvious. Nor is it clear whether Delaware’s Chancery Court has truly taken a wrong turn away from its position as a trustworthy corporate law court. Then again, Tesla was not alone in its desire to reincorporate out of Delaware. For instance, Tripadvisor attempted to reincorporate in Nevada but was stopped by a striking decision by Delaware’s Chancery, which was later reversed by Delaware’s Supreme Court.
Despite being one of the smallest states in the union, Delaware has long been the preferred state for incorporation, even though most companies do not maintain a headquarters or significant facilities there.
Scholars have offered many reasons why Delaware has maintained a position atop the incorporation hierarchy, but all have centered around either the existence of judicial expertise or the uniqueness of Delaware corporate law.
These analyses are undoubtedly important, but they have also left a gaping hole in our understanding of corporate courts and corporate law: What is so special about corporate law that we couch it in judicial expertise and specialized courts? While other legal areas like tax,
patents,
and bankruptcy
have specialized courts, other complex fields like medical malpractice do not. This discrepancy indicates that complexity alone is insufficient to warrant specialization. Each specialized area has unique reasons justifying its need for specialized courts.
Therefore, understanding the specific rationale for corporate law’s specialization, beyond just its complexity, is critical. This Essay answers these questions by offering a novel theory of the connection between corporate law and specialized courts.
Unlike most state courts in the United States, the Delaware Chancery Court’s jurisdiction focuses nearly exclusively on equity cases, a focus that evolved into a specialty for corporate disputes.
For decades, it has been the gold standard for resolution of complex business and corporate governance disputes.
As of 2020, twenty-five states have come to appreciate the benefits that specialized business courts can bring and have created their own specialized courts.
Texas joined this trend in 2023, endorsing the creation of the Texas Business Court.
Like Delaware’s Court of Chancery, this court exclusively hears business and corporate governance disputes.
Strikingly, Tesla and SpaceX decided to reincorporate in Texas shortly after this announcement, even though the court would not begin operating until September 2024.
Even to this day, the court remains in its infancy.
This raises the question: What benefits does reincorporating in Texas bring?
As the Texas court is still developing, its doctrinal form is uncertain. While practical and political considerations may help mold the court over time, relying on a newly created court to settle high-stakes business suits comes with a certain amount of unpredictability and risk.
The lack of established precedents also means corporate managers face uncertainty about potential liability for their desired plans of action.
In other words, the Texas Business Court represents a blank canvas—an opportunity to offer its own vision for handling corporate law and governance suits. But can Texas structure this vision to be as successful as Delaware’s established system? Can Nevada, which has similarly proposed to establish a business court in February 2025,
do the same? To answer these questions, we need to examine why specialized business courts are necessary to resolve corporate governance disputes.
Assessments of corporate courts exist within corporate law’s broader political economy: States compete with one another to attract incorporations to their state—a significant source of franchise taxes and other benefits.
And as Musk is clearly acutely aware, this competition is not just interstate: States like Delaware must also weigh the threat that the federal government will intervene and take over the laws they develop, as it has in the past, particularly in the context of laws regarding shareholder votes.
Within this regulatory context, traditional justifications for creating specialized courts can be described as either “public-facing” or “business-facing.” Public-facing arguments claim that specialized courts will attract businesses, creating economic benefits such as jobs, revenue, and enhanced incorporation tax income for public services.
Business-facing justifications highlight the advantages specialized courts bring to incorporated businesses
: Judges overseeing only business disputes develop expertise, leading to quicker resolutions and more predictable, higher-quality decisions over time.
While valid, these justifications do not fully explain why specialized courts are necessary to resolve complex corporate governance disputes. The main issue is that the cited benefits lack a clear connection to the specific subject matter of these courts. In other words, these justifications could apply to specialization in any legal area.
Consider, for example, lawsuits arising from brain surgery complications. Such cases can be extremely complex, requiring judges to understand advanced medical concepts.
One could argue for specialized courts in this area too, citing efficiency and predictability. Yet, there has not been a significant push for medical malpractice courts. Similarly, courts adjudicating high-stakes debt agreements with multiple claimants, outside the bankruptcy context, are also not specialized, despite the evergreen impact of debt on corporate America.
The American judicial system is seemingly content to allow courts of general jurisdiction to handle these cases, despite both the judges’ lack of expertise in a complex subject matter and the presence of multiple claimants and high economic stakes. Therefore, citing generic benefits of specialization is insufficient to reveal the distinct rationale for corporate disputes specialization. We must identify the unique characteristics of corporate law and governance disputes that set them apart from other legal matters.
Corporate disputes are not isolated conflicts but rather take place in the context of an ongoing relationship between shareholders and management, among shareholders themselves, and between shareholders and other corporate stakeholders.
The cardinal relationship between shareholders and management can be thought of as an incomplete contract between a principal and an agent.
The principal (the shareholders) invests in the firm, and the agent (the board) manages the firm to create future value.
Beyond the general instruction to “maximize firm value,” there are few (if any) enforceable precepts as to how to manage the firm.
Instead, the parties agree to a general allocation of control rights, which govern the distribution of decisionmaking power over the firm, and cash flow rights, which govern the distribution of firm-generated value.
In this incomplete contract, conflicts may arise as to the allocation and use of these two types of rights.
To begin, the allocation of control rights to agents leads to agent costs that include both competence costs, such as the costs imposed by a loyal but incompetent manager, and conflict costs, capturing the costs imposed by disloyal managers motivated to benefit themselves at the expense of the firm and its shareholders.
Both types of costs reduce firm value. To cope with potential manager–agent costs, the principal-shareholders keep two rights: discretionary control rights such as shareholder voting allowing them to dismiss the manager and duty-enforcement rights such as the right to sue the agent for breach of directors’ fiduciary duties.
When shareholders choose to use discretionary control rights, they may be imposing principal costs that include both competence costs (e.g., mistakenly firing a loyal and competent manager) and conflict costs (e.g., shareholders demanding short-term profits at the expense of long-term value).
Both types of costs harm firm value. Importantly, the use of discretionary control rights is tantamount to a self-help remedy, as shareholders need not explain why, for instance, they replaced the manager.
But when the principals enlist the help of courts by using duty-enforcement rights, they may be imposing adjudication costs that include both competence costs (e.g., honest mistakes made by inexperienced judges while determining whether an agent breached fiduciary duties) and conflict costs (e.g., plaintiffs’ lawyers filing meritless suits).
Both types of costs reduce firm value.
To maximize firm value, the parties need to minimize the total control costs: agent costs, principal costs, and adjudication costs. One important consideration to minimizing control costs is whether to hold an agent accountable through discretionary control rights (and bear the principal costs) or through duty-enforcement rights (and bear the adjudication costs). Obviously, that decision should depend on the relative size of principal costs compared with adjudication costs. Theoretically, the shareholders will decide to sue the manager only when adjudication costs are lower than principal costs.
But shareholders do not decide whether to sue the managers; it is plaintiffs’ lawyers who make this decision.
The plaintiffs’ lawyer’s incentives to litigate are not always aligned with the interest of the shareholders.
Regardless of the relative size of principal costs and adjudication costs, the plaintiffs’ lawyer’s interest is to file a suit whenever there is a positive probability for rewards either through a court’s ruling or a settlement. This reality transfers to the court the role of deciding which issues to accept for litigation and which issues to send back to the shareholders to solve on their own through discretionary control rights. The court’s role of sorting cases transforms it into a third party participant in the incomplete contract governing the ongoing relationship between shareholders and management.
In this triangular arrangement, the agents, principals, and courts are not only concerned with resolving the dispute in front of them, but they are also concerned with how the choice of dispute resolution mechanism (be it discretionary control right or duty-enforcement right) impacts the efficient performance of the firm. Understanding this dynamic is key to understanding the role of specialized corporate courts and why they are necessary.
The crucial point is that the total control costs of managing a firm exist before, during, and after any business harm occurs. This is distinct from other types of legal disputes.
Consider our brain surgery example from before.
The plaintiff and doctor had virtually no relationship before the injury. There is no balancing of rights between them or negotiation over responsibilities and entitlements. Once harm occurs, the plaintiff’s sole recourse is judicial intervention. They lack other mechanisms to address the damage or influence the doctor’s behavior. Similarly, when lenders and borrowers enter into a contract, both their relationship and their recourse is limited by the tenor and express terms of the agreement.
After the suit concludes, judicial interaction likely ends.
Corporate disputes differ from isolated conflicts, such as medical torts or debt contracts, as they involve ongoing relationships between shareholders, management, and the court.
While judicial recourse is the plaintiff’s only option in brain surgery or debt agreement cases, corporate disputes offer alternative mechanisms to address agent costs. Furthermore, courts know that any decision they impose on the corporation will change the corporate arrangement going forward.
This unique characteristic of corporate disputes necessitates specialized courts with knowledge and expertise in corporate law, and a capacity to play an integral and ongoing role in corporate arrangements. Knowledgeable courts are aware of their own competence and conflict costs, understanding that legal remedies aren’t always necessary to resolve a corporate dispute. Shareholders and managers can use other mechanisms to handle matters on their own. Accordingly, expert courts limit their intervention to cases in which shareholders exercising legal rights would be more efficient than shareholders addressing the problems themselves. The ability to distinguish these scenarios is rare, uniquely required in corporate law, and drives the need for specialized corporate courts. It is this tripartite allocation of competence and conflict costs across courts, shareholders, and managers that makes specialized corporate courts necessary and important.
Viewed in this context, the business judgment rule
should be seen as a representation of specialized corporate courts’ proper role in the ongoing relationship among management, shareholders, and the courts. The business judgment rule embodies the core reason for specialized courts: limiting judicial intervention to certain types of agent costs. For some types of agent costs, such as those resulting from nonconflicted decisions that did not pan out, the business judgment rule effectively prevents judicial intervention.
This is not because specialized courts are unable to adjudicate these matters but rather because the court recognizes that it would be more efficient for shareholders to address this type of mismanagement instead. In essence, being a specialized court requires knowing when to apply the business judgment rule and when not to. And beyond the business judgment rule, specialized courts understand that even when their involvement is necessary, their enforcement role is not absolute, and they must remain sensitive to the impact of their decisions on principals and agents going forward.
From this perspective, specialized corporate courts function similarly to constitutional courts.
When deciding constitutional matters, a constitutional court recognizes that it is also adjudicating the scope and allocation of its own powers relative to the executive and the legislative branches.
It understands that not every problem requires judicial intervention, as other recourse exists.
Some disputes might better be resolved by turning to the executive or the legislature, indirectly leaving the issue for the voters.
Similarly, specialized corporate courts recognize that adjudicating corporate disputes requires regulating their own powers relative to the shareholders and managers. This expertise goes much beyond resistance to judicial error or bias and the vagaries of politics
—even if our constitutional or corporate judges avoid partisanship, it takes a different skillset to know when judicial intervention is not appropriate despite the judge’s best judgment as to what might be an unbiased understanding of a legal dispute.
In other words, specialized corporate courts are needed not only because of how they resolve corporate disputes but because they know when to do so and, more importantly, when not to do so. Rather than presuming they must resolve all corporate governance disputes, these courts consider what is the most efficient resolution of each dispute. Sometimes direct court intervention is best; other times creating rules that will allow shareholders to resolve the issue themselves is more appropriate. The utility of a specialized corporate court stems from the fact that it views itself not as an adjudicator overseeing a dispute between two distant parties. Rather, specialized corporate courts recognize that they are ongoing participants in a triangular relationship.
To be sure, specialized corporate courts continue to perform the core adjudicatory functions common to all courts, including the efficient management of trial proceedings, the development of precedent, the supervision of settlements, and the evaluation of expert testimony.
The distinguishing feature of specialized corporate courts, however, lies in their capacity to regulate their own institutional role within the ongoing, tripartite relationship among shareholders, managers, and the judiciary. Identifying this salient self-regulatory function is essential to understanding the distinctive role of specialized corporate courts.
Given the necessity of specialization, Tesla’s move to Texas is strategic, even though Texas’s specialized corporate law courts are still in their infancy. While a successful specialized court in Texas, following this Essay’s blueprint, would offer benefits similar to those in Delaware, Texas has a unique advantage: It is Tesla’s home state, hosting some of Tesla’s factories and its headquarters.
Unlike Delaware, which is only interested in collecting incorporation fees, Texas is also interested in the benefits of Tesla’s business activity and its impact on the state’s economy. Texas can provide insulation from hostile takeovers and hedge fund activism, prioritizing not only shareholder profits but also the welfare of employees and other residents.
This environment enables Tesla to pursue long-term, innovative projects that benefit employees and, eventually, shareholders as well.
This Essay offers a novel justification for specialized corporate courts by examining their unique role in regulating corporate affairs. Part I analyzes the participation of the courts in the incomplete contract between shareholders and management, identifies the prototypes of corporate value loss, and explains how the parties would like to address them. Part II discusses “mismanagement” losses, explaining why judicial intervention is inefficient in these cases. Part III contrasts “mismanagement” with “managerial takings,” when shareholders cannot adequately address losses independently, thus warranting judicial intervention. Part IV argues for specialized courts over general courts given their reluctance to adjudicate mismanagement cases and their ability to address takings cases effectively. This Part presents a new rationale for the business judgment rule and related review doctrines, considering specialized corporate courts’ proper role in managing the ongoing management–shareholder relationship, and these courts’ relationship with legislative bodies. Lastly, this Part discusses legislative interventions as a form of correcting judicial mistakes. Using this novel framework, Part V resolves the issues underlying the Tesla jurisdictional dispute and draws out the profound policy implications for the future development of state corporate law.