Delaware’s Quiet Retreat: Tesla and the Controlling Shareholder Doctrine

INTRODUCTION

In 2024, the Court of Chancery held that the world’s richest man was a controlling shareholder of his company and his compensation package was impermissible.^[1] The decision summoned a cacophony of heated debate.^[2] The argument was settled by legislative intervention, dramatically restricting the ability of the court to define a controlling shareholder.^[3] Under the new law (commonly known as SB 21), those who control a corporation but possess fewer than 33% of its shares will not be restricted by fiduciary duties.^[4]

 

Although legislative intervention to reverse judicial decision making is not unprecedented in Delaware’s courts of equity,^[5] the method by which SB 21 was passed was very unorthodox.^[6] The sanctioning of this new modus operandi in Teslastarkly departed from Delaware’s creative and unique corporate law history, aligning it with its newfound competition for incorporation.^[7]

 

      1. WHO IS A CONTROLLING SHAREHOLDER

 

      a. THE HISTORICAL CONTROLLING SHAREHOLDER

To be a controlling shareholder with fiduciary duties to the corporation in Delaware, the shareholder must own a majority interest in or exercise control over the business affairs of the corporation.^[8] For the latter category, “[the analysis] must take into account whether the stockholder, as a practical matter, possesses a combination of stock voting power and managerial authority that enables him to control the corporation, if he so wishes.”^[9]

 

Historically, this seemingly loose definition has given way to a particularized understanding of a controller. For example, the court in In re Morton’s Restaurant Group, Inc. Shareholders Litigation held that a shareholder with 27.7% holdings and two employees on the ten-person board of directors was not a controller.^[10] However, other cases have recognized that smaller substantial minority blocks of shares may evince control or at least render the holder closer to controller status, reinforcing Delaware’s fact-specific analysis.^[11]

 

      b. EXPANDING THE DOCTRINE

The increasing expansion of the doctrine^[12] came to a head in Tornetta, where the Court of Chancery held that while Musk did not control the company in general, he was a controller in regards to the specific transaction complained of,^[13]with a mere 21.9% of Tesla’s voting power.^[14] The court heavily weighed the facts of the case including Musk’s status as visionary founder,^[15] as well as his family’s close ties to multiple board members.^[16]

 

Musk’s public dissatisfaction with the Tornetta ruling sparked fear that Delaware corporations would follow his lead and reincorporate elsewhere (commonly referred to as DExit).^[17]

 

      2. THE COURT’S DEAFENING SILENCE IN TESLA

 

      a. SB 21 AND TESLA

Critics of Tornetta and the expansion of controller doctrine had their wishes granted in the form of SB 21. The legislation strictly defines a controlling shareholder, restricting it to those with more than 33% voting control, with no mention of transaction-specific control.^[18]

 

Tesla, the decision on defendants’ appeal after Tornetta,^[19] was in no small part the court acquiescing to the processes that created SB 21. While the court did not materially address the defendants’ contentions that it was inappropriate to find Musk a controlling shareholder, it is hard not to read the SB 21 debate between the lines of the opinion.^[20]

 

By acquiescing, Delaware courts allowed political actors to erode two of what academics and practitioners alike consider to be its uniquely advantageous qualities: its well-developed caselaw, and its nonpartisan nature.^[21] Firstly, “the dynamism inherent in the common law” allows judges to treat “slightly different factual contexts differently” to achieve just results.^[22] Without this flexibility, Delaware risks creating a lack of trust in its unique developed caselaw.^[23]Additionally, while Delaware judges have “conversation[s]” with powerful players in the corporate arena, they are not beholden to monied interests in the same way that politicians are.^[24] If the political branches become the highest appeals court in Delaware, lobbyists and donors will function as a jury,[25] driving business away.[26]

 

      c. DEXIT IN THE CONTEXT OF CORPORATE LAW HISTORY

In 1899, half of the nation’s largest corporations were domiciled in New Jersey.^[27] Other states began to copy New Jersey’s corporation laws, with Delaware allowing even greater freedom than New Jersey in regards to the issuance of stock and legal flexibility.^[28] However, Delaware failed to achieve the dominance it is known for today until New Jersey enacted a series of antitrust amendments, causing many companies to look toward Delaware’s more permissive framework.^[29] Even after New Jersey removed the prohibitions from the corporate code a few years later, corporations did not return, likely understanding that the state was too inclined to unstable electoral politics,^[30] whereas Delaware had cast itself as an impartial mediator of corporate disputes.^[31]

 

 

Tesla could be Delaware’s antitrust amendments. By failing to speak out in Tesla, the court has eschewed its longstanding practice which could cause incorporators to do a cost assessment and decide to incorporate in the jurisdiction whereincorporation fees and business taxes are lowest.^[32] Additionally, by raising the threshold to be considered a controller, the legislature has abrogated its celebrated protections for minority shareholders.^[33] While Delaware may be able to attract some of its turncoats (although this is an uncertainty),^[34] companies seeking early investments without the looming threat of a sub-33% controller may not be as interested in incorporating, costing Delaware its dominance with IPOs.^[35]

 

      3. THE COMMON LAW SOLUTION

 

The Tesla decision relinquished the perfect opportunity to argue around the legislation and effectively address the path of the Delaware corporate law system.^[36] While the court must of course abide by the decisions of the legislature, for it to survive as the preeminent business court in the United States, it must address similar controversies going forward.^[37]

 

The court could have used this opportunity to decry or endorse the Court of Chancery’s use of transaction-specific control, delineate factors which were indicative of control or lack thereof, or even declare that it would only recognize controllers under a higher bar than SB 21 employs. This would have addressed some of the doctrine’s critics’ contentions without allowing the defense bar to handwrite a solution.[38]

 

If the Delaware Supreme Court is worried about further disrupting the corporate law ecosystem or provoking a struggle between the legislative and judicial branches, it could simply propose a solution to the issues in dicta that have no precedential effect in Delaware.^[39] However, this would not inhibit the value that such suggestions could have in future decision making, as Delaware is no stranger to dicta-based suggestions being acted on in later cases.^[40]

 

CONCLUSION

Delaware is at a pivotal point. Other states are trying to cut into its market share and emulate its success but with a more rigid statute-based model. To prevent itself from being relegated to the dustbin of corporate law history alongside New Jersey, the Court of Chancery should begin to speak out by writing holdings which work around statutory gifts to lobbyists, creating clear and coherent legal standards, and allowing the common law development of Delaware corporate law to continue.

 

^[1] Tornetta v. Musk, 310 A.3d 430, 497, 548 (Del. Ch. 2024).

^[2] Lawrence Cunningham, What is the Furor Behind Delaware SB 21?, ProMarket (April 9, 2025), https://www.promarket.org/2025/04/09/what-is-the-furor-behind-delaware-sb-21/ [https://perma.cc/4PPK-FNKX].

^[3] Michelle J. Annunziata et al., Delaware Changes Its Corporate Law: What Litigators and Clients Need to Know About Senate Bill 21, Mayer Brown (Apr. 3, 2025), https://www.mayerbrown.com/en/insights/publications/2025/04/delaware-changes-its-corporate-law-what-you-should-know-about-senate-bill-21 [https://perma.cc/9AHC-7QD7].

^[4] See S.B. 21, 153rd Gen. Assemb., Reg. Sess. (Del. 2025).

^[5] T. Brady Davey & Mathew A. Golden, What Litigators Need to Know About the Amendments to Section 102(b)(7), Potter Anderson (Aug. 3, 2022), https://www.potteranderson.com/insights/publications/What-Litigators-Need-to-Know-About-the-Amendments-to-Section-102-b-7 [https://perma.cc/BRK6-SLUY] (describing how Section 102(b)(7) was enacted in the wake of Van Gorkom to allow shareholders to control the scope of director duty of care liability).

^[6] Dorothy Lund & Eric Talley, Should Corporate Law Go Private? 31–32 (Eur. Corp. Governance Inst., Working Paper No. 877/2025), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5534959 [https://perma.cc/4JVE-Q3M6] (describing how the process of drafting SB 21 was highly influenced by defense-side interest groups and how it was passed on a very truncated timeline).

^[7] Id. at 26–29 (demonstrating how Texas and Nevada have enacted large legislative and judicial changes to compete with Delaware over the last three years).

^[8] Ivanhoe Partners, 535 A.2d at 1344.

^[9] In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 533 (Del. Ch. 2003).

^[10] See In re Morton’s Restaurant Group, Inc. S’holders Litig., 74 A.3d 656, 660–662 (Del. Ch. 2013).

^[11] See, e.g., Guth v. Loft, Inc., 5 A.2d 503, 506 (Del. 1939); Ansellem v. Shopwell, Inc., No. 5683, 1979 WL 2704, at *5 (Del. Ch. Sep. 6, 1979) (15.8% was enough to carry a “factor of control”).

^[12] See, e.g., Cysive at 533–535, 553; In re Zhongpin Inc. Stockholder Litig., No. 7393, 2014 WL 6735457, at *7–9 (Del. Ch. Nov. 26, 2014).

^[13] See Tornetta v. Musk, 310 A.3d 430, 446 (Del. Ch. 2024).

^[14] Id. at 504.

^[15] See Tornetta at 446.

^[16] Id. at 504–510.

^[17] Stephen M. Bainbridge, Dexit Drivers: Is Delaware’s Dominance Threatened?, Harv. L. Sch. Forum Corp. Governance (Sep. 6, 2024), https://corpgov.law.harvard.edu/2024/09/06/dexit-drivers-is-delawares-dominance-threatened/ [https://perma.cc/3RFG-FD79] (explaining how Musk’s social media post advising his followers not to incorporate in Delaware triggered widespread discussion among lawyers).

^[18] See S.B. 21, 153rd Gen. Assemb., Reg. Sess. (Del. 2025).

^[19] In re Tesla, Inc. Derivative Litig., No. 534,2024, 2025 WL 3689114, at *3–*7 (Del. Dec. 19, 2025).

^[20] Id. at *1–*4.

^[21] See Lund & Talley, supra note 6, at 21–25.

^[22] See Leo E. Strine Jr., The Inescapably Empirical Foundation of The Common Law of Corporations, 27 Del. J. Corp. L. 499, 513 (2002).

^[23] See Daniel Taylor, Delaware’s Manufactured Corporate Crisis, The CLS Blue Sky Blog (Mar. 6, 2025), https://clsbluesky.law.columbia.edu/2025/03/06/delawares-manufactured-corporate-crisis/ [https://perma.cc/53RX-X3YS] (explaining how SB 21 would allow jilted unsuccessful attorneys to “blame the judges and change the law” and would overrule nearly 40 Delaware Supreme Court decisions).

^[24] Strine, supra note 22, at 514 n.44.

[25] J. Travis Laster, An Eras Tour of Delaware Corporate Law, 50 J. Corp. L. 1189, 1261 (2025) (describing Delaware’s current legal “era” as “the Legislative Era,” characterized by an interventionalist legislature).

[26] Katherine M. O’Quinn, Texas and “Dexits”: Can the Texas Business Courts Drive Delaware’s Downfall?, 103 Wash. U. L. Rev. 555, 574–575 (2025) (“[O]perating in ways that undermine the independence and reputation of their judiciary could, in a twist of dramatic irony, be the actual downfall of Delaware’s dominance.”).

^[27] See William Wilson Bratton, A History of Corporate Law Federalism in the Twentieth Century, 47 Seattle Univ. L. Rev. 781, 789 (2024).

^[28] Id.

^[29] Id. at 790.

^[30] Wilson’s Bills Strangle Trusts, New York Times (Jan. 21, 1913) (quoting Governor Wilson’s speech describing the bills as “platform pledges made by the [Democratic] party.”).

^[31] Bratton, supra note 27, at 790.

^[32] See Gaurav Jetley & Nick Mulford, DExit: Reincorporation Data Seem to Support the Hype, Harv. L. Sch. Forum Corp. Governance (Sep. 23, 2025), https://corpgov.law.harvard.edu/2025/09/23/dexit-reincorporation-data-seem-to-support-the-hype/ [https://perma.cc/D6M7-UUTY] (describing the more than $250,000 difference between business license fees in Delaware and Nevada).

^[33] See Guhan Subramanian, Freezeouts in Delaware and Around the World, 24 U. Pa. J. Bus. L., 803, 816 (2022).

^[34] See Bratton, supra note 27, at 790 (“Chartering firms neither forgave nor forgot New Jersey’s defection to the antitrust side.”); but see Jetley & Mulford, supra note 32 (explaining that a large Latin American corporation, withdrew its shareholder-approved reincorporation to Texas after the passage of SB 21).

^[35] See Jetley & Mulford, supra note 32 (demonstrating that Delaware continues to be the home of three-quarters of large domestic IPOs).

^[36] See Assaf Hamdani & Kobi Kastiel, Courts, Legislation and Delaware Corporate Law 36–40 (Eur. Corp. Governance Inst., Working Paper No. 869/2025), http://ssrn.com/abstract_id=5391963 [https://perma.cc/5AR3-ACHC] (describing how recent legislative responses to cases have differed from those past through increased frequency, a decreased gap between court decisions and legislative responses, the reversal of Court of Chancery decisions, and amendments drafted by political actors rather than a Council of corporate lawyers).

^[37] See Lawrence Hamermesh, Jack B. Jacobs & Leo E. Strine Jr., Optimizing the World’s Leading Corporate Law: A 20-Year Retrospective and Look Ahead, 77 Bus. Law. 321, 324 (2022) (discussing how a previous article by the same authors generally successfully counselled Delaware courts to make standards of review clearer and less complex through the common law process).

[38] See Stephen M. Bainbridge, A Course Correction for Controlling Shareholder Transactions, 49 Del. J. Corp. L. 525, 540–46 (2025)(delineating the widespread critiques of Tornetta and its ilk).

^[39] In re MFW S’holders Litig., 67 A.3d 496, 521 (Del. Ch. 2013) (citation omitted).

^[40] See Subramanian, supra note 33, at 804–807 (describing Chancellor Strine’s process of bringing the dual-prong cleansing standard to life from dicta).