If Musk hoped to escape the gravity of Planet Chancellor McCormick by means of his “ratification” & reincorporation gambits, the Chancellor’s May 28 ruling has extinguished any such possibility.
Very nice write-up, explaining things well, it seems, even though you have strong views yourself. One thing you don't talk about is the possibility of appeal of the legal fees decision. Let me tell a story and see if it looks like something that might happen.
1. The shareholders ratify the $56 billion pay plan for Musk.
2. The Chancellor awards $8 billion in fees to Tornetta's law firm, saying that the award is not affected by the ratification.
3. Tesla appeals the Chancellor's $8 billion fee award to the Delaware Supreme Court, saying it should be $50 million because Tornetta obtained no benefit for the shareholders, as shown by new evidence arising after the Chancellor's fee award decision.
This is all tied in with the Delaware Supreme Court appeal on the merits, of course. One reason I like this Substack post is because you do help with procedure a lot-- telling us the dates the fee briefs are due, for example.
Thanks for the kind words, Eric. Yes, I have strong views about Elon Musk.
The appeal to the Delaware Supreme Court would be based on the trial court "record" -- that is, the testimony received and documents and other evidence admitted at trial -- and nothing else. So, evidence of the "ratification" vote would have to be part of the record.
My guess is that, if the "ratification" goes forward, the Chancellor will entertain the challenges to its legal effectiveness in the existing case. It could be resolved quickly (summary judgment based on the limits of Section 204 of the DGCL), or it might devolve into an evidence-heavy proceeding with a challenge to disclosure deficiencies in the proxy and the failure to abide by Match Group and MFW requirements.
But, it could be a separate proceeding. Things really do get wrapped around the axle with Musk's attempt to undo the rescission.
Thanks for this update. This explanation clears up a lot. And how typical of Musk to include the option of the Board ratifying in the event the “advisory” shareholder vote fails.
"obtained no benefit for the shareholders" - If I understand matters correctly, this reverses the pay package hence TESLA now has some 300m shares extra that they can sell in the open market and thus provide cash for the balance sheet, or make the shares void and in such a case you financial metrics greatly improve.
The shares are not yet issued; just reserved in the treasury. So, if Tornetta stands, the shareholders have the benefit of an approximately 9% to 10% boost in the share of the company that they own. Am I addressing your point, or are you getting at something else?
alone, that the Post-Trial Opinion is unenforceable or lacks legal effect; the defendants will not file a state or federal action collaterally attacking the Post-Trial Opinion; and the defendants will not argue that rescission is unachievable solely by reason of any successful stockholder vote on the Texas Proposal." But does this still allow defendants to ask the Chancellor to reconsider, or to re-open the case, based on critical new evidence? This would allow the ratification to go into the record.
There is no "critical new evidence." The Chancellor knows all about the June 13 vote.
There is no doubt that the parties will be contesting the issue of whether the "ratification" is legally effective. And, I believe, that fight will happen before the Chancellor, in the Delaware Court of Chancery. Whether it is part of the existing Tornetta v. Musk case, or a new action, I do not know because I am not well versed in nuances of Delaware Chancery procedural rules & customs.
Even so, the Tesla Board is still not independent and the conditions by which the award was denied by the Chancery still exist. I guess I'm not really sure what this "ratification" vote accomplishes. Why are they doing it?
I think any affirmative ratification vote is likely to be ruled as legally ineffective for any one of a number of reasons.
So, why are they doing it? Some lawyer involved on the Defendants' side in Tornetta v. Musk hatched the idea of the "ratification" and, realizing it would probably not fly in Delaware, proposed alongside it the idea of reincorporation in Texas, where Musk has many politicians who like him.
The entire plan was a most assuredly a long shot, and no doubt Musk was told that proceeding with such a plan would almost certainly lead to yet more expensive litigation. But, Musk simply despises Chancellor McCormick, and he acts out of spite, anger, and vindictiveness.
And, of course, as it always has done, the Tesla Board did exactly what Elon demanded, with no real discussion or argument.
Thank you for writing this article, and for all the others. 🙏
Thanks Mr. Fossi...I've been waiting for this one.
While previously not understanding the impact of the Chancellor's letter, her use of the term "great comfort" was unmistakable.
My translation is 'If you 'Eff with me, you'll regret it"
FAFO
Very nice write-up, explaining things well, it seems, even though you have strong views yourself. One thing you don't talk about is the possibility of appeal of the legal fees decision. Let me tell a story and see if it looks like something that might happen.
1. The shareholders ratify the $56 billion pay plan for Musk.
2. The Chancellor awards $8 billion in fees to Tornetta's law firm, saying that the award is not affected by the ratification.
3. Tesla appeals the Chancellor's $8 billion fee award to the Delaware Supreme Court, saying it should be $50 million because Tornetta obtained no benefit for the shareholders, as shown by new evidence arising after the Chancellor's fee award decision.
This is all tied in with the Delaware Supreme Court appeal on the merits, of course. One reason I like this Substack post is because you do help with procedure a lot-- telling us the dates the fee briefs are due, for example.
Thanks for the kind words, Eric. Yes, I have strong views about Elon Musk.
The appeal to the Delaware Supreme Court would be based on the trial court "record" -- that is, the testimony received and documents and other evidence admitted at trial -- and nothing else. So, evidence of the "ratification" vote would have to be part of the record.
My guess is that, if the "ratification" goes forward, the Chancellor will entertain the challenges to its legal effectiveness in the existing case. It could be resolved quickly (summary judgment based on the limits of Section 204 of the DGCL), or it might devolve into an evidence-heavy proceeding with a challenge to disclosure deficiencies in the proxy and the failure to abide by Match Group and MFW requirements.
But, it could be a separate proceeding. Things really do get wrapped around the axle with Musk's attempt to undo the rescission.
Thanks for this update. This explanation clears up a lot. And how typical of Musk to include the option of the Board ratifying in the event the “advisory” shareholder vote fails.
Very nice article.
Thanks, Keubiko. Coming from you, that means a lot.
"obtained no benefit for the shareholders" - If I understand matters correctly, this reverses the pay package hence TESLA now has some 300m shares extra that they can sell in the open market and thus provide cash for the balance sheet, or make the shares void and in such a case you financial metrics greatly improve.
The shares are not yet issued; just reserved in the treasury. So, if Tornetta stands, the shareholders have the benefit of an approximately 9% to 10% boost in the share of the company that they own. Am I addressing your point, or are you getting at something else?
I believe that we are in full agreement, to me the shareholders stand to gain a lot.
The May 28 letter from the Chancellor is at https://courts.delaware.gov/Opinions/Download.aspx?id=364630 . It says "defendants will not argue, based on the lack of an implementing order
alone, that the Post-Trial Opinion is unenforceable or lacks legal effect; the defendants will not file a state or federal action collaterally attacking the Post-Trial Opinion; and the defendants will not argue that rescission is unachievable solely by reason of any successful stockholder vote on the Texas Proposal." But does this still allow defendants to ask the Chancellor to reconsider, or to re-open the case, based on critical new evidence? This would allow the ratification to go into the record.
There is no "critical new evidence." The Chancellor knows all about the June 13 vote.
There is no doubt that the parties will be contesting the issue of whether the "ratification" is legally effective. And, I believe, that fight will happen before the Chancellor, in the Delaware Court of Chancery. Whether it is part of the existing Tornetta v. Musk case, or a new action, I do not know because I am not well versed in nuances of Delaware Chancery procedural rules & customs.
Even so, the Tesla Board is still not independent and the conditions by which the award was denied by the Chancery still exist. I guess I'm not really sure what this "ratification" vote accomplishes. Why are they doing it?
I think any affirmative ratification vote is likely to be ruled as legally ineffective for any one of a number of reasons.
So, why are they doing it? Some lawyer involved on the Defendants' side in Tornetta v. Musk hatched the idea of the "ratification" and, realizing it would probably not fly in Delaware, proposed alongside it the idea of reincorporation in Texas, where Musk has many politicians who like him.
The entire plan was a most assuredly a long shot, and no doubt Musk was told that proceeding with such a plan would almost certainly lead to yet more expensive litigation. But, Musk simply despises Chancellor McCormick, and he acts out of spite, anger, and vindictiveness.
And, of course, as it always has done, the Tesla Board did exactly what Elon demanded, with no real discussion or argument.