Can We Stop Pretending 'Ratification' Is a Difficult Issue?

In the scheduling debate, Defendants attack Plaintiff's weakest argument (& ignore the strong ones). But the larger 'ratification' issue is an easy one: sound legal arguments v. bombastic rhetoric.

I. Briefing Is Now Complete on the Scheduling Dispute

As detailed in my most recent post, the parties in Tornetta v. Musk¹ are fencing over the schedule for supplemental briefing on the issue of whether the affirmative shareholder vote on “ratification” has the legal effect of invalidating the Chancellor’s January 30 ruling that rescinded the stock options granted to Musk under a 2018 compensation package (the 2018 Grant).

In simplest terms, Defendants want lots of words and a schedule that postpones the final hearing past the July 8 final hearing date agreed to in March. Plaintiff wants fewer words and a schedule that preserves the July 8 date.

Last Friday, Plaintiff filed a brief detailing the history of delay and evasions by Defendants. Today, Defendants fired back with their reply brief.

II. When You Can’t Fight the Strong Arguments, Just Attack the Weak Ones

Defendants’ reply brief takes aim at what I regard as Plaintiff’s weakest argument: that Defendants had earlier committed to the Court that the ratification vote would not affect the outcome of the case.

After reading that argument from Plaintiff, I went back and reviewed the earlier pleadings. It appears to me that Defendants did not make such a commitment. Rather, Defendants had strongly suggested (and then the Court tied them down with its May 28 letter ruling) that regardless of the shareholder votes on ratification and reincorporation, the Court of Chancery would retain sole jurisdiction over the case until a final order is entered, that only the Delaware Supreme Court will decide any appeal, and that Defendants will not try to “collaterally attack” the Delaware rulings in any other court (including a Texas court).

Defendants’ reply brief does a fine job of showing that they never made the commitment that Plaintiff claims. And, the reply brief does a simply superb job of altogether ignoring the other, much stronger, arguments that Plaintiff advanced.

There’s a lesson here for lawyers: if you have two strong arguments, and one weak one, don’t make the weak one. Your opponent will pounce on it, undermining your credibility, while ignoring your best points.

III. We Now Await a Ruling on Scheduling

As readers here know, the order of briefing is: (1) motion and brief of proponent, (2) answering brief from opponent, and (3) reply brief from proponent. All three such briefs have now been filed in the argument over supplement briefing on the ratification issue, and we can anticipate a ruling from the Court very soon.

I continue to expect that the Court will allow opening briefs that are shorter than what Defendants requested (14,000 words) but longer than what Plaintiff wants (3,000 words). Whether the Court extends the July 8 final hearing date is a more difficult question. However, if the Court were to decline to extend that date, it would have sound reasons for such a refusal.

IV. Ratification Is an Easy Issue

Defendants’ arguments about the scheduling order, and the need for supplemental briefing, are, in effect, a huge game of make-believe. Defendants are pretending they have some important legal arguments to lay before the Court that will justify their contention that the shareholder ratification vote is legally effective to “cure” the breaches of fiduciary duty inherent in the 2018 Grant.

Based on everything I’ve seen so far, it appears that Defendants have no such legal arguments. While Plaintiff has laid out numerous reasons why the ratification vote is legally ineffective (discussed at Part III in my June 21 Substack post), Defendants have offered only one tangential legal authority that may actually hurt rather than help them (the Bergstein case, discussed at Part III of my June 24 Substack post).

Instead of legal arguments, Defendants will offer sloganeering and populist rhetoric. We will continue to read much about the “fully-informed vote,” the support from the “sophisticated” BlackRock and Vanguard institutions, the “deal is a deal” argument, and “stockholder democracy.” We might even read complaints about how Plaintiff Richard J. Tornetta owned only nine Tesla shares, and how the high-handed Chancellor will drive corporations from Delaware if she fails to reverse her January 30 decision.

(Microsoft Designer AI imagining the character of Defendants’ ratification arguments)

And, we may continue to read veiled threats that if the Chancellor fails to vacate her rescission ruling, then Elon Musk and his toadies on the Tesla board will simply act in outright defiance of the ruling. How else to interpret this language in a recent brief from Defendants?

The Court should not entertain the pending request by Plaintiff’s Counsel for an award of attorneys’ fees (and whether or to what extent any benefit was conferred by the litigation) in the face of Ratification, as Plaintiff’s Fee Petition is premised on the assertion that Musk would not get paid under the 2018 Compensation Plan and the false proposition that some Tesla shares issued to Musk were returned to Tesla by virtue of this action (which has not happened and will not happen).

What do Defendants’ attorneys mean when they write “which has not happened and will not happen”? Do they mean that, technically, because Musk has not exercised the rescinded options, there are not yet any shares to return to Tesla?

Or do they mean, more ominously, that regardless of the outcome of the lawsuit, Musk will be exercising the options and keeping the shares, and the Chancellor be damned?

What Musk intends remains to be determined. In the meantime, I expect that Defendants’ supplemental briefing on ratification will feature far more bombastic oratory than legal precedent. Absent a decision to bow to political pressure, the Court will have an easy time deciding the ratification issue. The legal fees issue, far more complex but getting hardly any attention, is the difficult one.

More posts to come soon as the drama continues to unfold.

1. For background on the case, see Part II (Where We Are Now, and How We Got There) in this Substack post.