Seven days after they should have filed briefing on ratification, Defendants instead ask for more time. Plaintiff, meanwhile takes square aim at the gambit.
Lawrence, another absolute banger post. I have absolutely no knowledge about law other than reading your posts and the files on Plainsite. I had two questions regarding this case.
1. You talked in a previous post about the Chancellor's shot across the bow to the defense council. What are the chances defense council might face 'disciplinary action' and what do those usually entail?
2. I feel like this is a Superbowl of business lawsuits and is going to be written about in books. What are some other absolute banger court cases related to the Delaware chancery court or corporate law in general?
1. Based on conduct to date, I don't see any reason why defense counsel would face any disciplinary action. The possibility of such action would arise if the Defendants, or any of them, later attempt any "collateral attack" on the Delaware court's rulings by, for example, attempting to persuade a Texas court to claim jurisdiction over the case (with the goal of having the Texas court make a ruling at odds with the ruling in Delaware). The Delaware court would then want to know whether the attorneys representing the Defendants in Delaware were aware of what their clients were planning. If it turns out they were aware, they could be barred from ever practicing in Delaware again. Possibly, there are other disciplinary actions the Delaware court could take. I haven't researched it. I doubt the reach of the Delaware court would extend to state bars outside of Delaware.
2. I love the idea that Tornetta v. Musk is the Super Bowl of business lawsuits. That honor used to belong to Twitter v. Musk. Interesting how Musk is at the center of both the lawsuits. Many lawsuits in Delaware (and elsewhere) are of great importance in terms of shaping behavior in the business world, but don't receive much publicity (or any at all) either because the issues seem arcane to non-business people, or because they don't involve a lot of money, or because they don't have charismatic characters at their center.
One current example is West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., (sometimes called “Moelis II”), in which Vice Chancellor Laster of the Delaware Court of Chancery recently ruled that a number of provisions in a stockholder agreement between a company and its founder are invalid because they unlawfully constrain the discretion of the board of directors in violation of Section 141 of Delaware's General Corporation Law. The case is on appeal to the Delaware Supreme Court.
The provisions found invalid by the Vice Chancellor (1) required the board to obtain the founder’s consent before the board could take certain important actions, (2) limited the board’s discretion over its own composition, and (3) required that the founder be granted represention on all corporate committees. The Court held that, under Section 141, those constraints on the board’s exercise of its judgment could be implemented only by means of amending the certificate of incorporation.
The case strikes at the kinds of stockholder agreements that are becoming more common because "founders" and venture capital or private equity investors want them, and often implement them before the company "goes public." Delaware's legislature just voted to amend Section 141 with language which, while somewhat confusing, will be interpreted to allow such agreements. The legislation, not yet signed by the Governor, is very controversial. It is, in my view, exceptionally harmful special interest legislation that could undermine Delaware's established reputation as the most desirable forum for resolving corporate governance disputes.
So, there we have a case few people are aware of that is, perhaps, even more important than Tornetta in its long-term implications.
Lawrence, thank you for such detailed answers. Insane that thanks to the internet this kind of content is just available for essentially free.
1. The way I'd read the defense's most recent filing, it sounded like they were expressing interest/asking to file a motion to somehow challenge the legitimacy of the rescission. Especially this line, "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)". I just can't fathom a strategy meeting occurring sometime in Feb/Mar that wouldn't have included this intent.
2. Thank you so much for that case. It struck pretty hard at something common in my industry, IT. Founders give themselves a pretty big chunk of shares, go public, then in the process of going public give themselves their own class of voting shares so they can still run the joint like it's private. Pretty cool crossover. If there are any other cases that you have a high opinion of I'd love to read their: I don't know if opinions or rulings is the right word here, but the final thing the judge writes like the ~200 page smash hit that McCormick wrote for Tornetta.
I can't really give odds on what the Delaware Chancellor will do, but I have gone out on a limb and surmised that she will rule that the ratification gambit fails, that her order rescinding the stock options remains in effect, that Plaintiff is entitled to some substantial attorneys' fee award, and that Musk & Co. can take it up with the Delaware Supreme Court if they want to try to change that outcome. Always dangerous to make predictions, especially (as they say) about the future, but I've done it.
I'm sorry about the legalese. I try to write so that non-lawyers can understand the ins and outs, but I sometimes fail.
I don't think there's any valid way for any court outside of Delaware to wrest jurisdiction of this case, or of the other "derivative" cases already filed in Delaware against Tesla, Musk, and the other Tesla directors that involve corporate governance. That's not to say Musk won't try and, if he fails, that he won't have the Board purport to recognize his rescinded stock options as still valid, then exercise those options, and pay the strike price, and demand delivery of the 303,960,630 shares of Tesla stock. And, given what we know about this Board, it would go along with it.
But, were that to happen, unimaginable chaos of many sorts - tax, accounting, and financial reporting among them - would ensue, accompanied by a flood of litigation of Biblical proportions.
Lawrence, another absolute banger post. I have absolutely no knowledge about law other than reading your posts and the files on Plainsite. I had two questions regarding this case.
1. You talked in a previous post about the Chancellor's shot across the bow to the defense council. What are the chances defense council might face 'disciplinary action' and what do those usually entail?
2. I feel like this is a Superbowl of business lawsuits and is going to be written about in books. What are some other absolute banger court cases related to the Delaware chancery court or corporate law in general?
Hi, Nathan, thanks for the kind words.
1. Based on conduct to date, I don't see any reason why defense counsel would face any disciplinary action. The possibility of such action would arise if the Defendants, or any of them, later attempt any "collateral attack" on the Delaware court's rulings by, for example, attempting to persuade a Texas court to claim jurisdiction over the case (with the goal of having the Texas court make a ruling at odds with the ruling in Delaware). The Delaware court would then want to know whether the attorneys representing the Defendants in Delaware were aware of what their clients were planning. If it turns out they were aware, they could be barred from ever practicing in Delaware again. Possibly, there are other disciplinary actions the Delaware court could take. I haven't researched it. I doubt the reach of the Delaware court would extend to state bars outside of Delaware.
2. I love the idea that Tornetta v. Musk is the Super Bowl of business lawsuits. That honor used to belong to Twitter v. Musk. Interesting how Musk is at the center of both the lawsuits. Many lawsuits in Delaware (and elsewhere) are of great importance in terms of shaping behavior in the business world, but don't receive much publicity (or any at all) either because the issues seem arcane to non-business people, or because they don't involve a lot of money, or because they don't have charismatic characters at their center.
One current example is West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., (sometimes called “Moelis II”), in which Vice Chancellor Laster of the Delaware Court of Chancery recently ruled that a number of provisions in a stockholder agreement between a company and its founder are invalid because they unlawfully constrain the discretion of the board of directors in violation of Section 141 of Delaware's General Corporation Law. The case is on appeal to the Delaware Supreme Court.
The provisions found invalid by the Vice Chancellor (1) required the board to obtain the founder’s consent before the board could take certain important actions, (2) limited the board’s discretion over its own composition, and (3) required that the founder be granted represention on all corporate committees. The Court held that, under Section 141, those constraints on the board’s exercise of its judgment could be implemented only by means of amending the certificate of incorporation.
The case strikes at the kinds of stockholder agreements that are becoming more common because "founders" and venture capital or private equity investors want them, and often implement them before the company "goes public." Delaware's legislature just voted to amend Section 141 with language which, while somewhat confusing, will be interpreted to allow such agreements. The legislation, not yet signed by the Governor, is very controversial. It is, in my view, exceptionally harmful special interest legislation that could undermine Delaware's established reputation as the most desirable forum for resolving corporate governance disputes.
So, there we have a case few people are aware of that is, perhaps, even more important than Tornetta in its long-term implications.
Lawrence, thank you for such detailed answers. Insane that thanks to the internet this kind of content is just available for essentially free.
1. The way I'd read the defense's most recent filing, it sounded like they were expressing interest/asking to file a motion to somehow challenge the legitimacy of the rescission. Especially this line, "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)". I just can't fathom a strategy meeting occurring sometime in Feb/Mar that wouldn't have included this intent.
2. Thank you so much for that case. It struck pretty hard at something common in my industry, IT. Founders give themselves a pretty big chunk of shares, go public, then in the process of going public give themselves their own class of voting shares so they can still run the joint like it's private. Pretty cool crossover. If there are any other cases that you have a high opinion of I'd love to read their: I don't know if opinions or rulings is the right word here, but the final thing the judge writes like the ~200 page smash hit that McCormick wrote for Tornetta.
So likely (50-75%) the Delaware court does not change the ruling. Then what?
Fight to keep jurisdiction from Texas? What are the odds there?
A very fascinating story - buried in legalese
Hi, Donato,
I can't really give odds on what the Delaware Chancellor will do, but I have gone out on a limb and surmised that she will rule that the ratification gambit fails, that her order rescinding the stock options remains in effect, that Plaintiff is entitled to some substantial attorneys' fee award, and that Musk & Co. can take it up with the Delaware Supreme Court if they want to try to change that outcome. Always dangerous to make predictions, especially (as they say) about the future, but I've done it.
I'm sorry about the legalese. I try to write so that non-lawyers can understand the ins and outs, but I sometimes fail.
I don't think there's any valid way for any court outside of Delaware to wrest jurisdiction of this case, or of the other "derivative" cases already filed in Delaware against Tesla, Musk, and the other Tesla directors that involve corporate governance. That's not to say Musk won't try and, if he fails, that he won't have the Board purport to recognize his rescinded stock options as still valid, then exercise those options, and pay the strike price, and demand delivery of the 303,960,630 shares of Tesla stock. And, given what we know about this Board, it would go along with it.
But, were that to happen, unimaginable chaos of many sorts - tax, accounting, and financial reporting among them - would ensue, accompanied by a flood of litigation of Biblical proportions.
Tesla’s legal."defense" is so shockingly pathetic that I don't understand why they bother. Not even a million to one odds they succeed.
I guess it comes down to the Musk playbook... keep vomiting BS and keep the plates spinning in the air, keep the cult of personality alive.