'Coercion' Is the Nice Word. 'Extortion' Is More Accurate.

Our final post about the the Tornetta v. Musk ratification fight discusses Musk's threat to steal Tesla's AI and robotics opportunities.

I. The Artwork for Today’s Post

We’ll put this first so that it is the graphic associated with today’s post:

(Thank you, Adam Warden, who you can find on Threads as madamwarden.)

II. The Wall Street Journal’s Video Essay on Autopilot

Let’s start with the truly important stuff: this 11-minute video essay on page 1 of the July 30, 2024 Wall Street Journal:

The video essay is entitled The Hidden Autopilot Data That Reveals Why Teslas Crash. It is devastating. Alas, for now, it is behind a paywall.

Do I hope this intrepid reporting will finally awaken America’s Secretary of Transporation and the leaders of the National Highway Transportation Safety Administration? Yes, I do so hope.

But do I expect this intrepid reporting will lead to such a result? Sadly, experience has been a painful teacher. I have seen stunning news story after stunning news story about the dangerous lies of Tesla and Elon Musk in newspapers as influential as The Washington Post (most there written by the courageous Faiz Siddiqui) and The Los Angeles Times (many by the magnificent Russ Mitchell). Yet those news stories have hardly registered in the share price or, more importantly, with transportation regulators. Consequently, I no longer harbor such vain expectations.

All that said, do I believe this latest essay from The Wall Street Journal will give valuable ammunition to the scores of people suing Tesla over the endless “Full Self-Driving” and “Autopilot” fraud? Yes, I do.

The overriding point, of course, is that Elon Musk is a liar. He lies with unthinking regularity and effortless ease. Lying comes as naturally to him as breathing. He lies about big things. He lies about small things. He lies about all things.

And ever so many of his consequential lies are about the incredible “safety” Autopilot and FSD.

III. The Final Tornetta Hearing

We are approaching what almost certainly will be the final hearing in Tornetta v. Musk¹, scheduled for this Friday, August 2.

Counsel for the parties, having already filed extensive briefing on the “ratification” issue, will argue before the Chancellor about whether the June 13 Tesla shareholder vote was legally effective to “ratify” the 2018 grant to Elon Musk of stock options (the 2018 Grant), and consequently to effectively reverse the Chancellor’s ruling in January rescinding that grant.

Let’s take one final look at Defendants’ briefing. In our last post, we focused on the issue of the $25 billion coercive threat. This time, the topic is again coercion, but the threat is Musk’s warning that unless he receives all the stock he demands, he will develop business opportunities now belonging to Tesla at other companies (likely, X.AI Corp., which does business as xAI) in which he owns a much larger percentage interest.

IV. Plaintiff’s Coercion Argument

Plaintiff, in its answering brief, cited case law holding that coercion invalidates a shareholder vote where the shareholders are induced to approve a transaction “for some reason other than the economic merits,” or where the vote is arguably to avoid “the transaction the fiduciaries have created, rather than a free choice to accept or reject the proposition voted on.”

Plaintiff then detailed two separate ways in which the June 13 shareholder vote was coerced: first, by Musk’s threats to steal Tesla’s artificial intelligence (AI) and robotics opportunities; and second, by the Tesla board’s threat to saddle Tesla with a $25 billion (or more) compensation expense if the vote to “ratify” the 2018 Grant failed.

We covered the $25 billion extortion gambit in our most recent post. Here, we focus on the theft of Tesla’s corporate opportunities. Plaintiff hammered at Musk’s coercive threats regarding AI and robotics. Plaintiff’s July 19 brief:

• detailed how (thanks to Musk insisting that investors should cease viewing Tesla as an automobile manufacturer) AI and Robotics have become integral to Tesla’s business plan;

• quoted Musk’s January 25 tweet in which he wrote, “I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control . . . .Unless that is the case, I would prefer to build products outside of Tesla”;

• reprinted Musk’s May 18 tweet responding “Yes” to a tweet from a well-known Tesla cultist stating: “If Elon gets 25% voting power, Tesla is reincorporated in Texas, and the compensation package is approved, then AI & Robotics stays [sic] within Tesla and the company can march on forward to become the largest company in the world;” and

• described how Tesla’s board, in Robyn Denholm’s letter that introduces the proxy statement itself, discussed Tesla’s development of “revolutionary technologies” in AI and “our progress in artificial intelligence via full self-driving and Optimus.”

V. Musk: Let’s Pretend Plaintiff Meant Something Else

Defendants’ response is a big game of make-believe. They pretend that Musk, in his January 25 and May 18 tweets, was threatening to leave Tesla. Here is the key passage from the individual Defendants’ brief (footnote and internal citations omitted):

Stockholders understood the central importance of Musk’s motivation to continue his work at Tesla and the risk of his potential departure. The Court’s opinion drew analogies to corporate founders Zuckerberg, Bezos, and Gates, two of whom stepped back mid-career to pursue other passions. Tesla’s investors would have known the risk that Musk would follow that path, and the importance of keeping him motivated. This was simple economics, not a coercive “threat.”

As we explained in our post about the $25 billion threat, it would be very bad if Musk were threatening to leave Tesla because that would amount to the kind of improper “manipulation” that the Court stepped back from finding in its rescission ruling.

But that is not what Musk was threatening in those two tweets. Quite obviously, the coercion Plaintiff pointed to is Musk’s threat to divert Tesla’s business opportunities to one or more of Musk’s private companies.²

What Musk was threatening in suggesting he would develop AI and robotics outside of Tesla is a clear and obvious violation of the corporate opportunity doctrine (which is well-established not only in Delaware’s corporate law, and the in corporate law of every other state in the United States as well).

Defendants implicitly acknowledge Musk had no right to make such a threat by arguing that Plaintiff must have misunderstood Musk’s “Yes” answer to the May 18 tweet. That tweet does not mean Musk would divert AI and robotics opportunities, argue Defendants, but merely means that affirmative reincorporation and ratification votes “would collectively be immensely positive for the future of AI and robotics products at Tesla.” (emphasis in original)

Well, I suppose Defendants’ lawyers had to say something. And I suppose that tortured interpretation was the best they could do. But it’s not persuasive.

As a thought experiment, imagine Musk had threatened that if he didn’t receive the 25% ownership interest he was demanding, then he would surrender Tesla’s land grant of the Shanghai factory back to the Communist Chinese Party. Would have been coercive? Obviously yes.

Instead, Musk was threatening to steal Tesla’s valuable (according to Musk, at least) AI and robotics opportunities. According to Musk, the AI and robotics are far more important to Tesla than any car factory because, as he reiterated during the most recent earnings call, Tesla should no longer be valued as an auto manufacturer, but rather as a pioneer at the leading edge of AI and robotics.

Musk’s threat to deprive Tesla of what he himself believes are its principal foundations of value is, quite obviously, coercive. It is extortionate.

VI. The Most Recent Governance Outrage

Last week, Musk posted a poll on Xitter:

Earlier this week, he announced he will seek Tesla board approval to invest $5 billion in xAI.

These events are not part of the evidence the Chancellor will be considering. But it speaks volumes that Musk would seek to divert cash from Tesla (which is profitable) into a private company startup in which he owns a far larger percentage interest (though exactly how much larger is undisclosed). A private company whose existence he revealed to Tesla shareholders only months after he formed it. A private company which, ineluctably, is competing with Tesla.

There would seem to be immense potential for litigation resulting from any Tesla board approval for such an investment. But I’m guessing the entire Delaware judiciary will be happy to let the Texas courts deal with this, and with all future Musk shenanigans.

VII. I Get Pushback!

In my last post, I suggested that if the rescission of the 2018 Grant is upheld, and Tesla’s directors decide to award Musk an economically equivalent package which would result in a compensation expense of at least $25 billion, then Tesla would be in peril of being removed from the S&P 500 for failing to meet the requirement of positive GAAP income for the trailing four quarters as well as in the current quarter.

I received some intelligent pushback from readers who noted that the S&P Trustees would have discretion about whether to remove Tesla from their indices, and would be unlikely to do so given Tesla’s monster market capitalization.

Okay, I take the point. Perhaps I got too carried away. Still, by the time the S&P Trustees would be faced with such a decision, much can have happened.

The market cap of this absurdly overvalued company may have descended. Musk may have faced further SEC litigation for his securities violations in failing timely to disclose his acquisition of Twitter stock. He may have faced such SEC litigation for his violations of the earlier consent decree.

Further, Tesla and Musk may actually be facing consequences for their lies about Autopilot and FSD. The various derivative actions pending against Tesla and Musk may have come to a boil. Some of the many personal injury and wrongful death lawsuits against Tesla may have begun to bite. Musk himself may face not only civil peril, but also criminal.

Time will tell.

1. Readers not already familiar with the background of Tornetta v. Musk, or wanting a refresher on some points, can find a summary in Part II of this Substack post.

2. In a similar vein, for purposes of the $25 billion threat, the fact that Bill Gates and Jeff Bezos “stepped back in mid-career to pursue other passions” ignores the fact that neither Gates nor Bezos (unlike Elon Musk) ever attempted to extort a massive options package from his company despite already owning more than enough equity to amply incentivize him.