Chancellor McCormick Is About To Rain on Elon Musk's Ratification Parade

The briefing just concluded on Tornetta's effort to thwart Musk's brazen attempt to evade the Delaware ruling rescinding his 2018 compensation package. Tornetta turned in some brilliant work.

Let’s start with some relevant background in Tornetta v. Musk, the case in which the January 30 ruling by Chancellor Kathaleen St. Jude McCormick, rescinding Tesla’s 2018 grant to Elon Musk of a munificent stock option package (the 2018 Grant), angered Musk so deeply that he has become even more vindictive and reckless than usual. (Interested readers can learn lots more about the background by reading my prior posts.)

(generated from gencraft)

The Devilishly Clever Secret Plan

On April 17, Musk and his cabal of captured lickspittle director co-defendants blindsided both the plaintiff and the Court of Chancery. Ever since early February, Musk & Co.¹ were, on the one hand, secretly planning their “ratification” and reincorporation gambits by drafting the extensive preliminary proxy statement that would call for a shareholder vote on June 13. It appears that Musk’s intent was to conduct a surprise attack on both Tornetta² and the Court of Chancery by (1) pretending the “ratification” vote would be effective to restore the 2018 Grant³, and (2) immediately reincorporating Tesla in Texas to put the matter outside the reach of the Delaware court.

All the while, Musk & Co., keeping very quiet about how devilishly clever they imagined themselves to be, were negotiating a briefing schedule for the only issue remaining in the case: legal fees. That schedule pushed the final hearing on the legal fees to July 8 — in other words, three weeks after the June 13 shareholder meeting.

That kind of sneaky behavior, dear readers, is frowned upon by courts everywhere. It is especially frowned upon in the Delaware Court of Chancery, which has, perhaps, the most collegial bar and the highest standards of honesty and courtesy in the entire United States.

The Tornetta Reaction

The cat finally emerged from the bag with the April 17 filing of the preliminary proxy statement. Tornetta’s lawyers were quick to react. Only six days later, they filed four impressively researched and argued motions, seeking:

1. an “anti-suit injunction” to stop Musk & Co. from filing any legal action anywhere outside of Delaware relating to the 2018 Grant;

2. sequestration and a constructive trust, to gather into the Court’s keeping the 304 million Tesla shares underlying the stock options in the 2018 Grant;

3. an “implementing order” to make clear that, as regards the rescission of the 2018 Grant in the January 30 decision, there is nothing further to be decided even if the legal fees issue remains open; and

4. expedited consideration of all the motions so that they could be considered and ruled upon in advance of Tesla’s June 13 annual meeting.

Musk to Court: ‘Hey, Tornetta Is Just a Paranoid Nut’

Two weeks ago, Musk & Co. filed papers opposing the Tornetta motions. Boiled down to the essentials, Musk & Co. made two arguments:

First, poor Mr. Tornetta is just imagining things. Why, Musk & Co. would never ever even dream of trying to make an end run around the Chancellor’s January 30 ruling. The idea that they are engaged in such an attempt is “rank speculation” or “entirely illusory” based on a “contrived fear.”

Second, Tornetta, by means of the emergency motions, was trying to influence the shareholder vote.

Tornetta to Musk: ‘If You’re Sincere, How About We Stipulate?’

Tornetta yesterday (May 21) filed its “omnibus” reply brief.

Tornetta has two lines of attack, both impressively potent.

First, on May 10, Tornetta’s lawyers wrote to the lawyers for Musk & Co. saying, essentially, that if they really believe Tornetta is just imagining things, and if good old Elon Musk would certainly never do something as underhanded and devious as try to submarine the Court of Chancery’s ruling, then how about we agree on, and file with the Court, a stipulation to make all that clear? (Stipulations are common in litigation; they are means by which opposing parties can advise the court of matters on which there is agreement.)

The stipulation proposed by Tornetta has six points, all of which would be unobjectionable if Musk & Co. meant what they said. Here are three of those points:

• Neither Defendants nor [Tesla] will seek to litigate any matter related to or arising from this Action anywhere but the Delaware Court of Chancery or the Delaware Supreme Court.

• Neither Defendants nor [Tesla] will take the position, between now and the date on which the Court of Chancery enters its Final Order in this Action, that the decision by the Court on the merits as set forth in the Court’s [January 30] Post-Trial Opinion is not final and effective for all purposes other than immediate appeal.

• In the event that Tesla stockholders vote to “ratify” the [2018 Grant], Tesla will continue to comply with the Court’s rescission order and judgment and will not “restore[] to Mr. Musk” any options under the [2018 Grant] unless and until the Court of Chancery (and, in the event of any appeal, the Delaware Supreme Court) has ruled that the legal impact of the “ratification” permits Tesla to “restore to Mr. Musk” any options under the [2018 Grant]. Any litigation relating to the legal effect or effectiveness of any purported “ratification” will take place solely in this Action, solely under Delaware law, and solely before the Court of Chancery or, as necessary or appropriate, the Delaware Supreme Court.

(The quoted language in the third stipulation above is from the April 17 preliminary proxy statement.)

What was the response of Musk & Co. to this invitation to stipulate? Did they want to, perhaps, argue about a particular choice of words? Make some language more clear? Add an additional provision?

None of the above. The response was… silence. Nothing. No response at all.

Tornetta argues that the failure to respond confirms that the Court needs to decide the motions before June 13, and that Musk & Co. are seeking “to engage in self-help through extra-judicial means.” The silence also exposes “as a baseless and transparent pretext” the Musk & Co. conspiracy theory that Tornetta’s motions are an attempt to influence the shareholders by seeking to have the Court make a ruling that could be used to argue for a “no” vote.

Tornetta to Musk: ‘You Speak with Forked Tongue’

Having outlined their proposal to stipulate, and the telling failure by Musk & Co. to respond, the Tornetta lawyers then detailed the many ways in which Musk & Co. have talked out of both sides of their mouth.

For example, Musk & Co. urged to the Court in their opposition briefs that the ratification and reincorporation proposals “are not at issue here.” Further, they are “hypothetical events not at issue in this action” which “seek only to allow Tesla stockholders to express their view on these important topics.”

And yet, on April 17, Musk & Co. told the Court that those proposals will “materially impact these proceedings, including Plaintiff’s [motion for legal fees].”

Tornetta also pointed to language in the proxy statement stating that Tesla disagrees with the January 30 ruling and calling on shareholders to “fix the issue.” That language, says Tornetta, shows that Musk & Co. are attempting to use the extra-judicial device of a shareholder vote to undermine the Court’s ruling.

Tornetta pointed as well to the proxy’s statement that “[t]he Delaware Court, or another court, may find that the Ratification is not fair to stockholders,” and that “[t]he Delaware Court, or another court, may find [Kathleen] Wilson-Thompson [the “Committee of One” who supposedly decided to recommend the ratification vote] was not independent…”

The “or another court” language reveals the hope and intent of Musk & Co. to find a friendlier judge in Ken Paxton’s Texas. (You can read the latest about the ethically-challenged Texas Attorney General Ken Paxton here.)

In a further illustration of how Musk & Co. are pretending that the January 30 ruling is not exactly what it says it is — a ruling that rescinded (past tense) the 2018 Grant — Tornetta pointed to Musk & Co.’s argument that Tornetta has not explained “why rescission should or must happen today.” In other words, Musk & Co. are taking the position that the rescission has not yet happened because the legal fees portion of the case remains to be decided.

The entire reply brief is well worth a read. It completely disassembles all of Musk & Co.’s arguments. It does so clearly, methodically, and with citations to ample and relevant case law that powerfully support each point.

What Happens Next?

When it comes to litigation, nothing is ever certain.

But, I will say this: before I read the Tornetta ominbus reply brief, I wondered whether the Chancellor might wait until after the June 13 shareholder vote to make further rulings in the case. After all, a negative vote on ratification would moot the controversy. (But an affirmative vote could send Musk to Texas, filing a competing lawsuit the very same day.)

After reading the omnibus reply, I think it is likely — indeed, highly likely — that the Chancellor will have something to say before June 13. And I believe that, once Musk reads what the Chancellor has to say, his fury and frustration will grow all the stronger. But, it will be a great moment for the integrity of corporate law. The only such moment in the entire history of Tesla Inc.

1. I refer to Elon Musk, all his co-defendant directors, and nominal defendant Tesla, as “Musk & Co.” because, by now, every intelligent and informed human being in the galaxy knows that Musk completely controls Tesla and that the Tesla directors are merely his devoted sycophants whom he has munificently enriched with stock options, his personal friends, his long-time business associates, and/or his fellow drug users.

2. This is a so-called “derivative” lawsuit. Plaintiff Richard J. Tornetta is acting on behalf of Tesla Inc., asserting that Musk and his fellow Tesla directors have breached their fiduciary duties, and seeking to recover for Tesla and its shareholders the 304 million shares underlying the stock options in the 2018 Grant.

3. The ratification vote will not do what Musk pretends it will do. It is legally defective for a host of reasons I have detailed in prior posts. In holding that opinion, I happen to have distinguished company, including two widely recognized Delaware corporate law experts: Professor Charles M. Elson (whose proposed amicus brief you can read here) and Professor Ann Lipton (whose blog on the topic you can read here).