Did Elon Musk Just Get Thuggish With Chancellor McCormick?
Which "legal judgments" from which "single state" is Musk complaining about? Could it be the only state whose court has had the courage to actually enforce the law against him?
(The main characters in today’s drama)
A. That Didn’t Take Long
Only 36 hours after it was clear Donald Trump has won the presidential election, his newest favorite poodle tweeted this:
To which state is Musk referring? To which “judgments”? Rather than having the courage to be specific, Musk elected to remain cravenly clever.
Lacking details from Musk, it’s not unreasonable to conclude he is referring to rulings handed down by the Court of Chancery of the State of Delaware. Musk loathes the Court of Chancery with a white hot passion, and he particularly loathes its leading jurist, Chancellor Kathaleen St. Jude McCormick.
1. Musk’s Unhappy Twitter Adventure
Why the Musk animus toward the Court of Chancery?
It began with Musk’s acquisition of Twitter, Inc. You will recall that in April 2022, Musk (after brazenly violating securities laws while acquiring Twitter stock with market purchases) made his take-it-or-leave-it buyout offer at $54.20 per share. Before the month ended, the Twitter board accepted the offer, and several days later Musk signed an acquisition agreement in which he waived almost all of the “due diligence” investigation that is typically a crucial part of such a transaction.
By mid-May, however, Musk began looking for ways to escape. First, he unilaterally claimed the transaction was “on hold.” Then, he claimed the Twitter board had misled him about the number of “bots” on its platform. In early July, Musk purported to terminate the agreement.
The Twitter board, spurred into action, filed suit to enforce the agreement in Delaware’s Court of Chancery, where Chancellor McCormick took responsibility for handling the matter. Hoping to accommodate the agreement’s closing date, the Chancellor set an accelerated schedule with a trial date of October 29. There followed, over the next three months, a frenzied sequence of discovery requests, objections, and motions to compel.
Things did not go well for Musk. It became clear during court hearings that the Chancellor was unimpressed with Musk’s arguments about the fake accounts, especially given his waiver of due diligence, and seemed similarly unimpressed with his argument that he could escape his obligations by making a cash payment of a fraction of the $44 billion purchase price.
Even worse, it emerged that Musk had played fast and loose with his obligations to turn over evidence to the plaintiff. The Chancellor’s rulings on discovery abuses were ominous, including a September 7 ruling in which she found “glaring deficiencies” in Musk’s document production (with the implication that Musk may have destroyed potentially material evidence) and that Musk’s answers to interrogatories “left much to be desired.”
Musk and his lawyers began to appreciate that Musk ran the risk of not only losing at trial, but also becoming liable for interest and attorneys’ fees. Consequently, Musk caved. On October 28, the very eve of trial, he closed the transaction by paying the $44 billion purchase price.1
For the business world’s biggest bully to have to swallow that kind of medicine had to be intensely painful.
After acquiring Twitter, Musk engaged in the wholesale firings of employees, drove away users and advertisers, ran into legal problems in various European countries, and all but destroyed the company’s value. The consortium of banks holding the $13 billion in debt are unable to unload that debt at anything other than a steep discount, and consequently have been forced to hold onto it, hoping for better days ahead. Given the distressed nature of the debt, it is doubtful the equity has any value at all.
2. Musk’s Miserable Tornetta Fiasco
If the outcome of Twitter v. Musk angered Musk, the rulings in Tornetta v. Musk have positively infuriated him. I have written extensively about the Tornetta case; you can find a summary of the case happenings in Part II of this June 6 Substack post.
In the very briefest of terms, the Court of Chancery, in a 200-page opinion handed down on January 30 of this year, ruled that the Tesla board of directors award to Musk in 2018 of a stock option package (the 2018 Grant) violated the board’s fiduciary duty and failed Delaware’s so-called “entire fairness” test. Thus, the award was void, and Musk would not receive the 304 million Tesla shares inherent in the options.
In her January 30 ruling, the Chancellor instructed the parties to brief the issue of the legal fees (to be awarded to the prevailing plaintiff) so she could make an appropriate legal fees award and enter a final judgment.
Instead, secretly, the Musk forces set to work at devising a plan to circumvent the Chancellor’s ruling. Musk and his fellow directors sprung their surprise on April 17 with the filing of a preliminary proxy statement that solicited shareholder votes at a June 13 annual meeting on proposals to, among other things, (1) “ratify” the 2018 Grant and (2) move Tesla’s state of incorporation from Delaware to Texas.
After an intense publicity campaign mounted by Musk and the lickspittle board members, Tesla shareholders voted in favor of both propositions. The Musk forces then asked the Chancellor to void her earlier ruling and thereby reinstate the 2018 Grant.
Intensive briefing ensued, culminating in a hearing on August 2. In my judgment, the hearing boded ill for Musk & Co., as the Chancellor methodically deconstructed every one of the defendants’ arguments that the ratification vote had any legal effect. You can read about that hearing in this August 13 post.
Had the 2018 Grant not been voided, Musk could have acquired another 304 million Tesla shares for $23.34 each. Based on today’s TSLA closing price of almost $297, the value of the award (before taxes) would have been approximately $83 billion.
Musk, already the richest person in the Galaxy, is dead set on becoming even richer, and consequently is highly vexed about the Chancellor’s January 30 ruling. He and his minions have taken to social media to attack the ruling and castigate the Court of Chancery.
Tesla’s reincorporation in Texas (where corporate governance claims will be heard by a brand-new court of dubious constitutionality) was intended as a slap in the face to Delaware. Musk has encouraged the directors at other public corporations to emulate Tesla’s exit from Delaware (though it appears that none has done so, and I tend to doubt any responsible board would ever do so).
B. Musk to Trump: ‘Do something, Donald!’
So, anticipating an unfavorable ruling on ratification and legal fees in Tornetta, is Musk now ramping up his attack on the Court of Chancery by suggesting that “the Federal government should now take immediate corrective action”?
What kind of immediate corrective action, Elon? Since when does the U.S. federal government have anything to say about the highly developed and widely respected tenets of Delaware corporate law? Where do we find that extraordinary power anywhere in the U.S. Constitution?
Having tied himself ever so closely to Donald Trump, has Musk now concluded that Trump, who has the same low regard for legal rules as Musk, and who is every bit the moral monster that Musk is, will simply issue some sort of diktat, restoring to Musk the billions that Musk views as rightly his?
Or, instead, is Musk hoping that his veiled attack on the Chancellor will intimidate her into changing her mind about the legal ineffectiveness of his ratification gambit?
If that is Musk’s plan, I don’t think it will work, for two reasons. First, unlike Musk, the Chancellor has immense integrity and genuine courage. Second, the Chancellor’s rulings are firmly grounded in the so-called Match decision handed down by the Delaware Supreme Court last April. If anyone is going to overrule Match, it will have to be the Delaware Supreme Court.
Will a single prominent Trump supporter ever have the guts or integrity to question Elon Musk about his “immediate corrective action” tweet, and to criticize him it he admits it was directed at Delaware? Don’t hold your breath.
Almost immediately thereafter, Musk fired Twitter's top executives. He then denied any obligation to pay the executives the severances guaranteed by their contracts. Lawsuits ensued, and they, too, have not gone well for Musk. A tick tock of the Twitter transaction is part of the recently published and enthusiastically reviewed book, Character Limit: How Elon Musk Destroyed Twitter, by Kate Conger and Ryan Mac. My copy arrives any day now.
I do not see Musk's tweets, but I have to admit this one raises a few issues - so thank you for highlighting it. My first take is that the ambiguity is deliberate. Musk wants his readers to think of the NY prosecutorial abuses toward Trump, and then he would hope to extend that to his own situation (a much harder sell).
As you point out, the state governments have constitutional rights, and the federal government cannot do much about proceedings under state law, so long as they do not violate the federal constitution. Perhaps someone should break the news to Musk - a law "no one shall file suit against Elon Musk" does not fit into the framework of the U.S. Constitution?
We all also have to remember that Musk's takes on things frequently make no sense whatsoever, whether it is speeding up welding machines by a factor of ten or doing due diligence after one executes a binding purchase agreement rather than before. So it all may mean nothing!
I could not be surer of anything than that Musk and Trump will shortly be on the outs with each other.
Somehow, "genuine courage" does not seem adequate to describe the valor of the Chancellor. Perhaps no adequate word exists. I do worry for her.
Regarding the Twitter case capitulation by Musk, it seems that something was about to see the light of day in the Discovery process that Musk was desperate to keep hidden...maybe the private server (Atlantica or something like that) that Musk used to communicate with his Consigliere.