Elon Musk is threatening to move the state of incorporation for Tesla, his half-a-trillion-dollar company, from Delaware to Texas after a judge in the First State voided a $55.8 billion compensation package approved in 2018. “Never incorporate your company in the state of Delaware,” Musk wrote on his social media platform, X, in the aftermath.

It’s an interesting take on a state that does pretty much all it can to appeal to business. It’s no secret that Delaware is a legal low-tax haven for some 2 million companies, including massive public entities like Alphabet, Amazon, Meta, Visa, Walmart, and, yes, Tesla, among others—it is famously said that the state is home to more corporations than people. Those companies collectively save billions of dollars in corporate income taxes thanks to the state’s laws.

“Delaware is the king of corporate law,” says Benjamin Hicks, cofounder of Charlotte-based corporate law firm Wagner Hicks PLLC.

Musk has made many promises that never quite seem to come to fruition. But in this case, the largest payout ever awarded to a corporate executive is on the line, and rescinding it would threaten the wealth of the world’s richest man. Still, what’s best for Musk’s net worth isn’t necessarily what’s best for shareholders. Here’s what to know.

Why was Musk’s compensation package voided?

In 2018, the compensation package for Musk that was approved by almost 75% of Tesla shareholders was largely based on hitting certain performance metrics related to market value, revenue, and adjusted earnings. Tesla hit those lofty goals by the end of 2022—much faster than some thought possible—earning Musk the $50 billion–plus stock option payday.

A shareholder sued to get the agreement nullified back in 2018, arguing that the company’s board of directors misled investors about the agreement and that it had conflicts of interest when it approved the package. Chancellor Kathaleen McCormick, the judge hearing the case in Delaware’s Court of Chancery, agreed, noting in her opinion that the board included people Musk had “thick ties” with, like his brother and longtime vacation buddies, and that the defense did not adequately explain why the “historically unprecedented compensation plan” was imperative for the company to achieve its goals. McCormick also noted the company “misleadingly omitted details about the process” from shareholders.

Her opinion will be a “seminal” decision in corporate finance, says Charles Elson, an expert on corporate governance at the University of Delaware who filed an amicus brief in support of the plaintiff.

“A recision is an extraordinary remedy,” Elson tells Fortune. But McCormick “is a superb judge, and she reached the right decision.”

This isn’t necessarily the end of the saga—Tesla can appeal the ruling to the Delaware Supreme Court. If the company accepts the decision, though, it would have to draft a new compensation plan for the CEO. As of now, Musk has not exercised any of the options he was awarded.

What is the benefit of incorporating in Delaware?

In the U.S., companies can incorporate in a state they aren’t headquartered in—or even have much of a physical presence in, at all—and operate under that state’s tax rules. Delaware has turned that leniency into its raison d’être: Among many business-friendly laws, it can help large companies with just a P.O. box in the state skirt income taxes—causing other states to lose out on billions of dollars in tax revenues. Delaware has been appealing to businesses with its lenient tax code and simplified laws since the early 1900s.

“It’s contributed to a collapse in state corporate income tax revenues over the past five decades,” Hal Weitzman, an adjunct professor at the University of Chicago and author of the book What’s The Matter With Delaware?, said on UC’s Big Brains podcast of the state’s tax structure. All those revenues flow to the companies; Delaware collects fees.

Another benefit of incorporating in Delaware is the state’s Court of Chancery, a separate court system for corporations. Devoid of juries, it instead relies on seven judges, including McCormick, who are well-versed in the state’s corporate law, which, with so many companies incorporated there, includes a rich history of case law for forming judgements. This makes decisions somewhat predictable—the state’s business law is considered a “lingua franca” for corporate lawyers—and, Elson says, creates a neutral playing field for businesses.

All of which makes McCormick’s opinion so unusual. The court rarely overrules a board’s decision, and Elson believes it’s never before rescinded a compensation package for a public company.

“The judiciary historically has been very hostile to these actions,” he says. Throwing out Musk’s package, “that was a wow.”

McCormick noted as much in her opinion: “This decision dares to ‘boldly go where no man has gone before,’ or at least where no Delaware court [has].”

Why move to Texas?

The public vote is unequivocally in favor of Texas!

Tesla will move immediately to hold a shareholder vote to transfer state of incorporation to Texas. https://t.co/ParwqQvS3d

— Elon Musk (@elonmusk) February 1, 2024

Though Texas, where Tesla is headquartered, isn’t as infamous as Delaware when it comes to business-friendly practices, reincorporating there could make it easier for the company to award Musk a large bonus.

But that doesn’t mean it would be simple, says Elson. Shareholders would have to vote to approve the move, and it isn’t apparent that it’s in their, or the company’s, best interests to do so.

“Why in the world would you move to Texas on the recommendation of the CEO who was found to have violated the shareholders’ trust?” he says. “It’s a strange thing to say.”

Elson also notes that Musk was fine with the Delaware court’s decisions when they ruled in his favor, like in a recent case related to Tesla’s acquisition of solar-panel installation company SolarCity.

That said, Texas recently established its own system of business courts, which will open Sept. 1. But Elson says Delaware will still have an advantage because of its 100-plus years of case law.

“If he’s moving because he wishes to avoid oversight,” Elson says, “that’s not good…it’s going to be rather hard to argue that Texas itself is a more effective regulator of corporate conduct. That’s why everything is in Delaware.”