Musk Can Conceal & Delay, But What's His Argument?

With the Chancellor poised to decide the timing of final briefing in Tornetta v. Musk, we peek at Defendants' attempts to hide the ball, and also wonder whether they have any legal arguments at all.

I. Introduction

My Substack post last Friday (June 21), in the continuing series on Tornetta v. Musk,¹ I summarized what I called the More Words & More Time Motion filed by Defendants on Thursday (June 20),² which included the following requests:

• That the Court permit the parties to brief the issue of whether the June 13 shareholder vote was legally effective to ratify the Tesla board’s 2018 stock option compensation package to Elon Musk (the 2018 Grant) under a new scheduling order that would replace the one negotiated and agreed to on April 11.

• That the briefing schedule allow Defendants to file their opening brief on June 28, with Plaintiff’s response due July 12, Defendants’ reply due July 19, and a hearing thereafter at the Court’s convenience. That schedule would push the final hearing, now scheduled for July 8, to a date in late July or beyond.

• That the word limit for the opening briefs be up to 14,000 (which works out to a quite lengthy 55 or so pages).

Plaintiff wasted no time opposing Defendants’ motion, filing its response (Plaintiff’s June 21 Response) on Friday .

A. Concealment & Delay

In Friday’s post, I pointed out that Defendants had tried to conceal, for as long as possible, their ratification gambit from both Plaintiff and the Court. In Part II of today’s post, I discuss how Plaintiff’s June 21 Response reveals that Defendants’ delay tactics have been even more determined than I had imagined.

B. Chest-Thumping Instead of Case Citation

In Part III, I take a look at the single legal authority cited by Defendants in their Motion for More Words and More Time. That authority seems. . . thin. I discuss why I believe Defendants are going to rely heavily on populist rhetoric rather legal precedent in attempting to persuade the Chancellor to give legal effect to the “ratification” vote.

(Searching for ‘Ratification’ Authority. Image by Microsoft Designer AI)

II. The Games Defendants Played

You can read Plaintiff’s June 21 Response here. I think it’s fair to say that the tone is scathing, beginning with the opening paragraph (footnote omitted; emphasis in original):

Within minutes of the Court’s January 30, 2024 post-trial opinion (“Opinion”) and continuing to the present, Elon Musk and the beholden Tesla Board have denigrated, attacked, and actively sought to circumvent this Court and its Opinion. Rather than reward—and provide further opportunity for—such behavior by granting Defendants’ request to divert and prolong the proceedings, this action should proceed to the “conclusion at the trial level” that the Court requested nearly five months ago.

The request to which Plaintiff refers is in the final line of the Court’s monumental 200-page opinion:

The parties are to confer on a form of final order implementing this decision and submit a joint letter identifying all issues, including fees, that need to be addressed to bring this matter to a conclusion at the trial level.

The “fees” are the legal fees for the prevailing Plaintiff. The immense value of the 304 million shares recovered by Plaintiff meant that determining the size of the award would be contentious. That determination would require further briefing, beginning with a so-called Fee Petition from Plaintiff, followed by Defendants’ response brief and Plaintiff’s (much shorter) reply brief, and finally culminating in oral argument at a hearing (the Final Hearing).

Only after the Final Hearing concludes can the Court can enter its final order and judgment, clearing the way for an appeal to the Delaware Supreme Court.

A. The Stall Tactics in February and March

Plaintiff’s June 21 Response provides new details about Defendants’ delay tactics, documenting them in several exhibits that reprint various email chains. Those emails show Plaintiff repeatedly attempting, in February and March, to reach agreement on a briefing schedule for the legal fees issue and to elicit comments on Plaintiff’s proposed form of final order and judgment. In response, Defendants confect excuse after excuse about why they need more time.

Why the excuses? Because, Defendants were secretly planning their ratification and reincorporation gambits, which required the preparation of the massive preliminary proxy statement. Defendants were playing for time, hoping to delay the entry of any final order until they were ready to announce the shareholder vote on the ratification and reincorporation proposals.³

It was only on April 17 that Defendants finally revealed what the Court has called “a plot twist” — their plan to conduct a shareholder vote on “ratification” at a June 13 Tesla annual meeting. The exigencies of scheduling a vote and furnishing proxy materials to shareholders meant Defendants could conceal their intentions no longer.

B. The Date with Fate: July 8

Meanwhile, on March 18, the parties had finally agreed on a scheduling order for the filing of the briefs on legal fees, with the Final Hearing set for July 8. The scheduling order was amended on April 10, but the Final Hearing date was unchanged.

The Final Hearing date is a crucial event. Once it occurs, the Court is free to enter a final order, and Plaintiff can cease worrying about Defendants’ machinations. Moreover, assuming the Court makes an award of legal fees, Plaintiff’s attorneys will finally be paid for their six years of intensive work. (For their legal fees, the attorneys are seeking, rather than cash from Tesla’s treasury, a portion of the stock they recovered).

Thus, while the Final Hearing date is much later than one might have expected on January 30, that date finally has been set. Now, the clock is ticking.

C. Defendants’ Inexplicable Delay in Filing a Motion

On June 12, the day before the annual meeting, Musk publicly announced that the ratification and reincorporation proposals had already garnered enough votes for approval. So, with the Final Hearing scheduled in only 26 days, and with no party having formally raised the question of whether the ratification vote changed the January 30 rescission ruling, you might imagine that Defendants would be eager to file a motion asking the Court to vacate that ruling. But you would be wrong.

To back up a moment with some context, it’s important to understand that to fully brief a motion on a new legal issue requires several weeks simply to accommodate the typical sequence of opening brief, answering brief, and reply brief. With the clock ticking toward the July 8 Final Hearing, there was no time to waste.

Obviously, Defendants’ legion of lawyers has been intensely focused for months on whether the ratification vote would be legally effective to undo the January 30 order. The lawyers should have had their motion and brief fully researched and drafted far in advance of the annual meeting. Indeed, I am confident those lawyers did have those papers ready to file (and still do), as otherwise they would be guilty of unimaginable malpractice.

Yet, Defendants did not choose to quickly confer with Plaintiff to agree on a schedule for filing those papers. Instead, for them, the name of the game continued to be angling for more delay.

On June 14, Tesla’s counsel, rather than conferring with Plaintiff, instead wrote a letter to the Court baldly stating that the “ratification is now effective” and requesting “a potential revised schedule” so that the parties could brief their respective positions on the vote. Plaintiff immediately responded with its own letter, taking issue with the assertion that any ratification was effective, but offering to consider any supplemental briefing proposal Tesla wished to make, while making clear its wish that the July 8 date for the Final Hearing remain sacrosanct.

After that June 14 letter exchange, with the Final Hearing date now only 25 days away, Tesla’s counsel waited another four days (until June 18) to request a conference with Plaintiff’s counsel. Under the circumstances, another four-day delay was simply bizarre and inexplicable.

Finally, on June 19, Tesla’s counsel proposed a briefing schedule and word-count limit that ultimately appeared in the More Words & More Time Motion (detailed in the bullet points near the top of this post). Plaintiff immediately countered by offering a schedule in which the briefing would be complete by July 3, while preserving the July 8 hearing date. (Plaintiff also proposed a shorter word limit (3,000 words, or approximately 12 pages) for the opening briefs.⁴)

Instead of agreeing to the offered scheduling order, and filing a substantive motion challenging the rescission order, Defendants filed their Motion for More Words & More Time. In other words, a motion to file a motion, rather than the motion itself.

D. What Will the Court Do?

By the time you read this, the Court, appreciating that time is running short, may already have ruled on Defendants’ latest motion.

My guess, and it’s purely a guess, is that the Court will allow more than 3,000 words, though fewer than 14,000, for each opening brief.

Will the Court extend the Final Hearing date? Obviously, I see some sound reasons for declining to do so. Again, it is unimaginable that Defendants do not already have the motion and briefing ready to go.

That said, one can imagine the Court bending over backwards, as it were, to accommodate Defendants, despite (or, perhaps, because of) the acerbic and vicious public attacks from CEO Elon Musk (“She has done more to damage Delaware than any judge in modern history.”⁵) and Chair Robyn Denholm (the rescission ruling was “crap” and “absolute BS.”⁶).

III. Have Defendants’ Already Taken Their Best Shot?

In my last post, I wrote:

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.

A. The Bergstein Case

And, that’s true. But, I neglected to mention that Defendants did cite one Court of Chancery case: Louisiana Municipal Police Employees Retirement System v. Bergstein, for a somewhat different proposition.

In Bergstein, a Simon Property Group (SPG) shareholder challenged a CEO compensation plan that included $120 million in special stock grants if the CEO remained with SPG for seven years.⁷ The plaintiff argued that New York Stock Exchange rules required that such a “service-based award” (that is, merely remaining with the company) be approved not only by the SPG board, but by a shareholder vote as well.

Before the case proceeded to trial, SPG amended the plan to condition the stock grants on meeting certain targets based on increases in funds from operations (a common metric for REITs such as SPG), and the shareholders ratified the amended plan. The Bergstein plaintiffs’ lawyers sought legal fees based on the value of the original award. But because the amended award mooted the lawsuit, the Vice Chancellor disagreed:

If the plaintiffs had obtained a decision from the court on the merits that invalidated the Original Award, then. . . [t]he plaintiffs. . . would be entitled to have the benefits measured by the value of the full amount of the Original Award.

Instead, held the Vice Chancellor, the “proper comparison” was between the original award and the amended award.

Defendants do not argue that Bergstein is authority for the legal effectiveness of Tesla’s ratification vote because, quite plainly, it cannot bear such weight. Rather, they contend that Bergstein means that Plaintiff’s counsel cannot seek a legal fees award “on the basis of a rescission of the now-ratified 2018 Compensation Plan.”

Plaintiff points to many problems with Defendants’ argument, including that “in Bergstein there was no trial, no post-trial opinion (or other merits decision), and no entry of a post-trial judgment ordering rescission of the compensation plan.”

To which I might add that asserting the 2018 Grant is a “now-ratified” compensation plan skips the rather important step of offering legal authority for why the ratification vote should be given any legal effect.

B. Do Defendants Have Any Legal Authority?

Defendants’ citation of Bergstein raises an obvious question: do they have any legal authority at all to support the argument that the “ratification” vote is legally effective?

Plaintiff has cited a great deal of authority to the contrary. But reading the Defendants’ letters, motions, and briefs to date, it appears Defendants are relying solely on what amounts to sloganeering: “Corporate democracy!” “A deal’s a deal!” “Fully-informed vote.” “Support from BlackRock and Vanguard!” “Tornetta owned only nine shares!”

My guess is that Musk originally had hopes of inducing a Texas judge to make a collateral attack on the Chancellor’s January 30 ruling. But the Chancellor’s artful letter of May 28 has thwarted that effort. So now, Musk, with his lickspittle directors obeying his every command, hopes to bring political pressure to bear on the Court of Chancery with the campaign slogans, and with abominable Robyn Denholm taking to the financial press to denounce the Chancellor’s ruling as “crap” and “BS.”

And if that fails? Will Musk encourage the Tesla board, in outright defiance of the law, to recognize his exercise of the options and issue him the shares?

That would be truly outrageous. But we treat here with Elon Musk.

[June 25: note regarding correction. David Khoo noticed that, in footnote 7, I had written that the 2012 award to the SPG CEO, considered outrageously high at the time, was 50 times higher than the award made to Musk. Mr. Khoo points out that the Musk award is, in actual math fact, 500 times higher. I’ve made the correction, and most assuredly appreciate the careful read. (And, I love that someone is reading the footnotes!) Thank you, Mr. Khoo.]

1. For background on the case, see Part II (Where We Are Now, and How We Got There) in this Substack post. The essential January 30, 2024 Post-Trial Opinion that rescinded the 2018 Grant can be found here.

2. I wrote that the More Words & More Time Motion had been filed on Friday, June 21. In fact, it was filed the day before. I have revised Friday’s post to correct the error, and flagging the correction with an end note.

3. For additional detail on Defendants’ evasions, see this Substack post.

4. Tesla’s More Words & More Time Motion asserted that Plaintiff offered only 2,500 words, a claim Plaintiff disputes.

5. https://x.com/elonmusk/status/1753271394408829106

6. https://www.ft.com/content/aa5464fd-c7c5-4f38-a2df-374a07439d88

7. The $120 million award to the SPG CEO was viewed as astonishingly high when the original award was made in 2012. The award to Musk is almost 500 times larger.