Musk Begs for More Time While Tornetta Clobbers the 'Ratification Gambit'

Seven days after they should have filed briefing on ratification, Defendants instead ask for more time. Plaintiff, meanwhile takes square aim at the gambit.

The dam holding back the “ratification” dispute in Tornetta v. Musk¹ has finally broken. Yesterday, Defendants filed a motion to set aside the existing scheduling order so they can brief the ratification issue at their leisure. And today, Plaintiff, in accordance with the schedule already agreed to by the parties on April 11, filed its reply brief on legal fees, directly addressing why it asserts that the ratification vote at the June 13 Tesla annual meeting is legally ineffective.

(Defense counsel’s extra finger courtesy of Microsoft Designer AI)

I. Defendants’ Motion: We Want More Time & Lots of Words

Defendants’ motion to set aside the existing scheduling order and to allow further briefing on the “ratification” vote (the “More Words & More Time Motion”), filed by nominal defendant Tesla, Inc. and by all the individual defendants, is not a motion asking the Chancellor to vacate her January 30 Post-Trial Opinion that rescinded the Tesla Board’s 2018 award to Elon Musk of a stock option compensation package (the 2018 Grant).

Instead, the More Words & More Time Motion asks the Court to delay any ruling on Plaintiff’s request for an award of legal fees, vacate the current scheduling order, and “enter an order setting forth an expeditious schedule to address the impact of Ratification.”

Defendants ask that they be allowed to file a motion seeking vacation of the January 30 rescission order on June 28, to be accompanied by an opening brief of up to 14,000 words. They propose that Plaintiff would respond by July 12, Defendants would file their reply brief by July 19, and a hearing would thereafter take place at the Court’s convenience.

In other words, Defendants ask that final resolution of the six-year-old case be pushed at least several weeks past the July 8 date now set for the final hearing.

Defendants note that they have discussed the schedule with Plaintiff, and that Plaintiff (1) opposes any alteration of the existing scheduling order, and (2) is agreeable to a limit of only 2,500 words per brief for the supplemental briefing on ratification.

Defendants claim that adhering to the existing scheduling order “is not an efficient use of the Court’s and the parties’ resources” in view of the shareholder vote that occurred after the April 11 schedule order was set. They assert that Plaintiff’s proposed word limit is unfair because the proposed amicus brief by Professor Charles Elson, which Plaintiff has in the past referred to, already has more than 2,500 words.²

The remainder of the eight-page More Words & More Time Motion is given over to rhetoric about how the June 13 vote was a “fully informed” exercise in “stockholder democracy” that should be respected by the Court in view of “the complementary roles of this Court and [Tesla] stockholders in overseeing the acts of corporate fiduciaries.” The motion leans heavily on the favorable votes at the annual meeting of Blackrock and Vanguard, two “of the most sophisticated institutional investors in the world.”

The More Words & More Time Motion does not cite even a single case or other legal authority that might support the idea the a “ratification” vote could cure the breach of fiduciary duty detailed in the Court’s January 30 Post-Trial ruling.

II. What Will the Chancellor Do?

I expect Plaintiff will lose little time in responding to the More Words & More Time Motion. But, how will the Court rule?

A. More Words? Maybe

I can easily imagine the Court allowing a higher word limit than the 2,500 words per brief to which Plaintiff was agreeable. (But I’m guessing that 5,000 words, rather than 14,000, is more in the ballpark.)

B. More Time? Maybe Not

However, it is quite possible that the Court will be unwilling to vacate the April 11 scheduling order, or (consequently) to further defer any ruling on legal fees and the entry of a final order.

Why is that? Because, as I detailed in an earlier Substack post, Defendants in effect pulled a fast one on both the Court and Plaintiff by keeping quiet about Tesla’s elaborate ratification gambit preparations (including the drafting of a massively long preliminary proxy statement) without ever telling the Court or Plaintiff about their plans at the time the April 11 scheduling order was negotiated and agreed to.

Defendants have known since February that they would attempt this ratification gambit. And they certainly could have filed a motion to vacate the January 30 ruling by June 13 (the date on which Elon Musk publicly announced that the ratification and reincorporation proposals had passed).

Consequently, Defendants’ motion and brief on ratification should have been fully written and ready to file well in advance of June 13. And yet, Defendants have been dilatory in acting and, even yesterday, have filed only a motion to allow them more time to file yet another motion.

III. Plaintiff Dismantles the ‘Ratification Gambit’

Plaintiff’s reply brief on legal fees is 54 pages in length, with extensive exhibits and appendices. Almost the entirety of the brief is given over to arguments about the exceptionally complex legal fees argument. However, six pages near the end of the brief, under the heading “Tesla’s Ratification Gambit Fails,” go right to the ratification issue.

Plaintiff makes the following arguments:

A. An ‘Extrajudicial Scheme’ Can’t Challenge the Ruling

Under Delaware’s procedural rules 59 and 60, Defendants can challenge the Court’s January 30 order rescinding the 2018 Grant only (1) through appeal or (2) by means of a motion for a new trial or to correct a clerical error. Defendants cannot do so by means of the “extrajudicial scheme” of the shareholder vote.

B. Defendants Are Estopped by Earlier Representation

Defendants are “estopped” by their earlier representations from arguing that ratification can affect the Court’s final judgment. Here, Plaintiff points to Defendants’ opposition to Plaintiff’s April 23 emergency motions in which Defendants told the Court that the ratification gambit would not “interfere with [the] Court’s… ability to enter a final judgment so the case may be appealed.”³

C. Statutory Ratification Cannot Cure Breaches of Fiduciary Duty…

The self-dealing by Elon Musk at the heart of the Court’s rescission of the 2018 Grant is not the type of “Defective corporate act” that Section 204 of the Delaware Corporation General Law is designed to cure. Per the Plaintiff’s brief (footnotes omitted):

The Court “order[ed] rescission of the Grant as a remedy for Defendants’ fiduciary breaches,” not due to a “failure of authorization.” Additionally, Section 204’s synopsis expressly states that it “is not intended to modify...fiduciary duties” and that “[d]efective corporate acts, even if ratified under this section, are subject to traditional fiduciary and equitable review.” Underscoring this view—and exposing the insincerity of Defendants’ statutory ratification ploy—two law firms representing Tesla in this Action have acknowledged: “Sections 204 and 205 only address the technical validity of prior defectively-authorized acts, and do not affect fiduciary duties or any equitable claims against such acts.”

D. …And Neither Can Common-Law Ratification

Defendants’ common-law ratification argument is equally unavailing. Here, Plaintiff points to a ruling in the Tornetta case made almost five years ago, when the Court rejected Defendants’ initial ratification defense at the pleading stage by pointing to the coercion inherent when any conflicted controller (in this case, Elon Musk) asserts that ratification cures the breach of fiduciary duty. Per the Court back in 2019:

[W]hen conflicted controllers are involved, our courts will not allow the controller to rely upon stockholder approval of the transaction at the pleadings stage to ‘cleanse’...well-plead breaches of duty.

Plaintiff asserts that the Court’s statement in 2019 is not merely the law of Delaware, but the binding law of the case, and that Defendants have waived any ratification defense. Moreover, such a defense, if timely pleaded, could, at best, have shifted the burden of proof at trial, but can have “no legal effect after a post-trial judgment on the merits.”

E. The Board’s Approval Was Invalid

The purported “ratification” is also ineffective because it was not validly approved by the Board. Here, Plaintiff notes that half of the Tesla directors who approved the purported ratification had already been found by the Court, in its January 30 post-trial opinion, to be “conflicted regarding the very Grant they voted to ratify.”

F. The Shareholder Vote Was Coerced & Was Not Fully-Informed

Moreover, the vote was neither “non-coercive” nor “fully-informed,” as Delaware law requires. In particular:

• While Musk and Tesla have repeatedly characterized AI and robotics as crucial to Tesla’s future, yet Musk threatened to usurp those opportunities unless given 25% of Tesla. “Acting on this threat, Musk redirected thousands of Nvidia AI chips, previously reserved for Telsa, to X [Corp.] and [X.AI Corp.]”⁴

• Tesla’s directors were (to quote Professor Elson) “threatening stockholders with a $25 billion charge against earnings if they vote against ratification.”

• Tesla’s proxy statement is false and materially misleading by (1) describing directors Denholm, Ehrenpreis, and Murdoch as independent (despite the Court’s finding that they are not), (2) failing to detail how Wilson-Thompson’s more than $135 million in Tesla stock grants compares to her non-Tesla compensation, (3) failing to disclose that Wilson-Thompson had adopted a rule 10b-5 trading plan to sell 36% of her Tesla shares five days before accepting her appointment to the Special Committee,⁵ (4) ignoring the Court’s findings regarding the Grant process by claiming that in 2017 it was the Compensation Committee rather than Musk himself who first put forth the terms of his new compensation plan.

The first five arguments strike me as legal in nature. That is, the Court can rule on them as a matter of law, with no further fact-finding required.

The sixth argument relies on evidence that is not yet in the record, and would require further document discovery and depositions to be properly authenticated. (However, I believe the evidence for the sixth argument is very strong indeed.)

IV. What Happens Now?

Now, we await the Plaintiff’s inevitable opposition to the More Words & More Time Motion, and the Court’s ruling on that motion.

We watch the clock tick down as July 8 approaches.

And we marvel at Defendants’ audacity in having failed, even now, to file any motion and briefing to defend their ratification gambit, while instead playing for more time.

[Note about corrections, June 21, 2024: I originally wrote that Defendants’ motion was filed today, June 21. It was actually filed yesterday, June 20. I have corrected the article.]

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

2. For background on the amicus brief Professor Elson proposes to file, as well as links to the amicus brief itself, see this Substack post.

3. For background on those emergency motions, see this Substack post.

4. For further background on Musk’s threatened usurpation of Tesla’s corporate opportunities, see this Substack post. And, for background on the diversion of the Nvidia AI chips, see this June 4 blockbuster report by Lora Kolodny of CNBC.

5. For further background on Wilson-Thompson’s Tesla-sourced wealth, and its legal implications, see Part III of this Substack post.