Tesla (TSLA) CEO Elon Musk recently expressed his intention to move his company's incorporation from Delaware to Texas, weeks after the Delaware Chancery Court rejected his pay package. Columbia Law Professor John Coffee joins Yahoo Finance Live to discuss the implications.

Coffee urges Tesla shareholders to understand Musk "may have different interests than their own." He notes some CEOs seek states with "very little judicial oversight", which can harm shareholders in the long run.

Coffee points to Delaware's response to Tripadvisor (TRIP) as a possible precedent, allowing its exit to avoid feeling companies are locked in. He expects that Musk aims to move his firms out of Delaware but hopes "the cosmetics look a lot better."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video Transcript

RACHELLE AKUFFO: "Move your company out of Delaware before they lock the doors." That's what Elon Musk posted to his social media platform, X. This comes as the Tesla CEO continues his campaign to reincorporate Tesla in Texas instead of Delaware. Now, two weeks ago, a Delaware judge invalidated the $56 billion compensation package that Musk earned as CEO of the EV company. Now, Musk then vowed to move immediately to hold a shareholder vote on Texas incorporation.

The vote hasn't been scheduled. But if it is, what do Tesla investors need to know? Well, joining us now on this is John Coffee, Columbia Law School professor and director of the Center on Corporate Governance and our very own legal reporter, Alexis Keenan. Big welcome to you here, John. So first, for people who are trying to get up to speed here, what is it that shareholders need to know when they're being asked about reincorporating in Texas?

JOHN COFFEE: Well, they need to know, first of all, that the CEO or the controlling shareholder may have interests different than their own, and Delaware will put them under some degree of scrutiny. Other jurisdictions like Nevada are advertising that there'll be very little judicial oversight. And that's what some CEOs want.

Institutional investors, however, often hold the majority of the stock. The cases where we're seeing this kind of migration to the new jurisdiction are cases in which the controlling shareholder has the vote locked up. Either he owns 50% or he has de facto control because many shareholders do not vote. And a 40% block is actually a de facto controlling shareholder.

ALEXIS KEENAN: John, Alexis here. I'm curious to know if Musk, if he does want to and if the company wants to put up a vote to the shareholders for an incorporation move to Texas, is he going to need a group of new independent board members in order to effectuate that to not run into the same problem that he ran into in the case over his pay?

JOHN COFFEE: Well, that is a good point. Now, there's just been this case involving Trip Advisors where the Delaware Chancery Court and Supreme Court decided not to interfere with the movement outside of Delaware. They don't want to look like they are locking you in. So if you come to Delaware, you can never get out.

And they permitted Trip Advisors to move, even though Trip Advisors did have a controlling shareholder. I would advise someone in Mr. Musk position to make sure the cosmetics look a lot better and that you have one or two more independent directors. But the Delaware courts did permit Trip Advisors to move out.

BRAD SMITH: What is the likelihood of success for Musk in this move and the legal proceeding?

JOHN COFFEE: I mean, I think Musk has already determined he wants out of Delaware at all costs. He immediately moved Twitter out once he got control of that and turned it into a private company. Is he going to try first to get a new transaction approved? He could decide to do that. But I think Musk, ever since the Twitter case, wants out of Delaware for all his companies. And I don't think he'll let anything stop him if he can do it.