Tesla's Shareholder Vote Will Prove a Futile & Stupid Gesture

With the Tornetta briefing now complete, the case for undoing the rescission of Musk's options looks legally feeble.

I. In Search of ‘Kill Shots’

With an invaluable assist from my collaborator, a Silicon Valley corporate attorney who has served on the boards of several well-known tech companies, I have written extensively about the ratification fight in Tornetta v. Musk.¹

Nominal Defendant Tesla, Inc. and the individual Director Defendants filed their reply briefs on July 19, so the briefing has concluded. Also, the Chancellor has granted leave to both Professor Charles Elson and the U.S. Chamber of Commerce to file their amicus curiae briefs.² The Court will hear oral argument on ratification on August 2 and then, at some point in the weeks or months ahead, issue a ruling on ratification and on the pending legal fees issue.

Today, we take a look at Defendants’ reply briefs on ratification, but with a focus only on what we have called the “kill shots’ — legal arguments that do not depend on reopening the trial record for further factual development.

II. It Was Extensive & Expensive, But Was It Useful?

Tesla’s massive “ratification” gambit was presaged by Musk’s public temper tantrum less than an hour after Chancellor McCormick published her January 30, 2024 Post-Trial Opinion rescinding the 2018 grant of stock options (the 2018 Grant). Over the course of the following 10 weeks, the gambit’s details were formulated in secret by a platoon of lawyers and consultants who labored over a proxy statement that is as notable for its immense length as for its many material misstatements and omissions and its palpably defective process.

Musk & Co. sprang the surprise on the Court, the Plaintiff, and shareholders with the filing of Tesla’s proxy statement on April 17. There followed an intensive, expensive, two-month campaign to round up favorable votes for reincorporation and ratification at the June 13 annual meeting.

A. Just One Tiny Problem…

But there was always this problem: a shareholder vote occurring in 2024 cannot erase a breach of fiduciary duty that occurred in 2018. This is hardly shocking. The lawyers counseling Musk undoubtedly understood this and, indeed, in drafting the proxy statement they cautioned that an affirmative vote might be legally ineffective to reverse the Chancellor’s rescission ruling.

After slogging through some 107 pages of Defendants’ briefing on ratification, another 70 pages of Plaintiff’s response, and numerous Delaware statutes and cases cited in those briefs, my conclusion is that Plaintiff has, by far, the stronger legal arguments on the question of whether the ratification vote was effective to undo the Chancellor’s rescission ruling.

In other words, all the anger, energy, time, and money expended by Musk, Tesla, and the puppet directors on the ratification issue were useless. The entire effort brings to mind this snippet of dialogue from the movie, Animal House, with Elon as Otter and the puppet directors as Bluto & Co.:

Elon Musk: I think that this situation absolutely requires a really futile and stupid gesture be done on somebody's part!

Tesla Directors: We're just the guys to do it.

They are, indeed, just the guys (and gals) to do it. Indeed, I believe they’ve done it.

B. Not Simply Futile, But Affirmatively Counterproductive

Well, there was at least something Musk & Co. accomplished. Come what may with the ratification ruling, Tesla at least managed to reincorporate in Texas. Where future governance disputes will be decided by a court that does not yet exist, and may not even be legal under that state’s constitution. Such a species of certainty seems perfectly suited to Tesla’s style of corporate governance.

Oh, and while this six-month battle over ratification has proceeded, Plaintiff’s legal team has been forced to invest much more time into the case, justifying an even higher legal fee. And because Plaintiff’s lawyers have the case on a contingent fee basis, Delaware law stipulates that all that extra time will be rewarded with some sort of premium rate (in comparison with a standard hourly billing rate).

So, the Musk-led campaign wasn’t just futile and stupid. It was counterproductive, in much the way that Musk’s effort to weasel out of the Twitter deal was counterproductive.

III. The Reply Briefs: Long on Rhetoric, Short on Precedent

As was also the case with the Defendants’ opening briefs, their reply briefs are long on rhetoric (“uncoerced shareholders” whose “fully informed” vote offers their “disinterested owners’ collective business judgment”) but short on relevant legal precedent.

I have already written about how Defendants’ ratification narrative rests on a foundation of lies. I am confident that, were the trial record reopened, Plaintiff would develop overwhelming evidence on these points:

• Far from being detached from the ratification process, with no general control over Tesla, Musk completely controls the company; its directors are Musk’s utterly beholden stooges who allow him to do exactly as he pleases while they wallow in the colossal wealth he has showered upon them; and Musk himself orchestrated the ratification and reincorporation gambits.

• Far from being “independent,” the sole Special Committee member, Kathleen Wilson-Thompson, has been vastly enriched by Musk for doing exactly as he commands, and was merely a puppet on a string in recommending the ratification vote.³

• The proxy process was deeply flawed and the proxy materials contain many material falsehoods and omissions.⁴

• The June 13 shareholder vote was coerced by Musk’s threat to misappropriate Tesla’s artificial intelligence (AI) and robotics opportunities (which he has already begun doing). It was also coerced by the threat from the Tesla directors to saddle the company with a $25 billion compensation expense if the shareholders failed to vote in favor of ratification.

I intend to write more about the coercive threats. But, in this post, I will focus on why I believe Defendants have been unable to evade Plaintiff’s “kill shots.”

IV. Rules 59(a) & 54(b) — Weak Answers to Powerful Arguments

Plaintiff’s first argument is that the Court should not even bother to determine what legal effect the ratification vote has because under Delaware Court of Chancery Rule 59(a), the Court should not reopen the trial record at all. Defendants’ reply briefs attempt to parry Plaintiff’s arguments by citing some reported rulings on motions, but none comes close to addressing Plaintiff’s arguments.

With no real defense against the Rule 59(a) arguments, Defendants lean hard into Delaware Court of Chancer Rule 54(b), which allows a Court, at any time before entry of final judgment, to revise any order “that adjudicates fewer than all the claims” in the case. Here, the Chancellor’s Post-Trial Opinion included the order rescinding the 2018 Grant, but the concluding paragraph expressly acknowledged that it was not a final order (footnote omitted):

For the foregoing reasons, judgment is entered in Plaintiff’s favor. 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.

Noting that a finding of “good cause” can justify revising an earlier order, Defendants urge that the June 13 shareholder vote is a “fundamental change in circumstances of this lawsuit” and consequently presents “good cause.”

This argument seems exceedingly weak. The Court did enter what amounts to a final order on the merits on January 30. She did not at the same time enter a final order on the entire case because of the ancillary issue of legal fees.

In earlier briefing, Plaintiff detailed how, only a few days after the January 30 rescission ruling, Defendants began dragging their feet about a schedule to resolve the legal fees issue. Meanwhile, unbeknownst to either the Court or Plaintiff, Tesla’s directors (including Musk) had begun meeting to devise a plan to undermine the Court’s rescission ruling.

Defendants’ delay tactics ultimately resulted in a schedule that, conveniently for them, pushed the hearing date on legal fees well past the June 13 date of the shareholder vote Tesla was planning. It was only after the hearing date had been set that Defendants’ filed their April 17 proxy statement announcing the reincorporation and ratification proposals.

Given the history here, and given that the Court is vested with wide discretion about whether to revise any earlier order, I think it exceedingly unlikely that the Court will do so.

V. Section 204 - Defendants Raise the White Flag

In its April 17 preliminary proxy statement, Tesla offered its shareholders two reasons why their vote might be legally effective to ratify the 2018 Grant: (1) common law ratification and (2) statutory ratification under Section 204 of the Delaware General Corporate Law:

The Ratification is being sought for any purpose permitted under Delaware law, including but not limited to Delaware common law and Delaware statutory provisions such as Section 204 of the DGCL.

I wrote earlier about how Plaintiff’s arguments struck me as persuasive refutations of Defendants’ statutory ratification pitch. In the reply briefs, it’s pretty clear that Defendants have thrown in the towel on that argument.

A. ‘We Really Weren’t Making a Section 204 Claim’

The individual Defendants, who have the longer and more comprehensive brief, mention Section 204 only twice. The first instance is in a single paragraph near the end of their brief, where they essentially claim they were never actually relying on Section 204. (An odd thing to say given the clear language in the proxy statement.)

B. ‘We’re Not Ratifying the Theft; We’re Ratifying the Thieves’ Decision to Keep the Loot’

The second instance is in a footnote where Defendants assert Tesla was not asking shareholders to ratify any loyalty breach, but rather to ratify “the underlying transaction” (presumably, the 2018 Grant). In making this argument, Defendants implicitly concede that Plaintiff is correct: Section 204 cannot ratify any loyalty breach (such as the making of the 2018 Grant by the Tesla directors).

The argument about ratifying “the underlying transaction” is simply too cute. If a loyalty breach, which cannot be ratified under Section 204, can all the same be ignored by ratifying the underlying transaction which occurred because of the loyalty breach, then the rule that Section 204 cannot ratify any loyalty breach becomes completely meaningless.

VI. Common Law Ratification — Nothing New

Defendants in their reply briefs continue to rely heavily on a 1952 case called Kerbs v. California Eastern Airways, asserting that “a post-trial ratification was first raised on appeal warranting a remand to adjudicate whether ‘validity of the adoption of the plan by the directors has now become moot by reason of stockholders’ ratification’” (emphasis by Defendants; interior quote from Kerbs).

As I noted in an earlier post, the problem for Defendants is that the Chancellor in Kerbs had upheld rather than voided the profit-sharing plan at issue. In other words, there was no attempt to undo via shareholder ratification an earlier ruling by the Chancellor. Rather, it appears that the attempt was to fortify the earlier ruling. Defendants, conveniently, fail to note that seemingly vital distinction.

Also worth noting is that in Kerbs, there was no controlling shareholder issue, and hence no need to wrestle with the stringent requirements of two important Delaware Supreme Court cases: Kahn v. MF Worldwide Corp. (often referred to as MFW) and In re Match Group, Inc. Derivative Litigation. Here, of course, the Court’s Rescission Ruling is founded on a finding that Musk was a controlling shareholder.

Defendants’ reply briefs continue to struggle mightily in an effort to avoid the implications of MFW. But, at bottom, they have nothing new to say.

VII. The Wilson-Thompson Problem

Kathleen Wilson-Thompson was the sole member of the Special Committee that recommended putting a ratification proposal on the agenda for a shareholder vote. It is vital to Defendants’ case that Wilson-Thompson be “independent” from Elon Musk.

We have already written extensively about how the vast wealth Wilson-Thompson has received from her service as a Tesla director undermines her independence in precisely the way that the Chancellor found that Robyn Denholm’s independence was compromised. And, we have noted that the Denholm, Ira Ehrenpreis, and “management” (Elon Musk?) denied Wilson-Thompson’s request for appointment of additional independent directors to Tesla’s board so that she would have company on the Special Committee.⁵

Plaintiff, of course, has raised both those points in its briefing.

How did Defendants respond? As to the vast wealth (more than $150 million) Wilson-Thompson has received as a Tesla board member, Defendants argue that her equity compensation “aligns her interests with stockholders, reinforcing her independence rather than undermining it.” The same could be said for Denholm, so that argument is going nowhere.

Defendants also argue that because Wilson-Thompson compensation cannot be reduced by any Tesla director or officer, that “means she is not financially dependent on remaining a Tesla director.” Again, the same could be said for Denholm. Indeed, The same could be said for anyone who has already received a munificent bribe to assure future performance. So, sorry, but that’s not much of an argument.

What about Plaintiff’s point that Wilson-Thompson asked for more help from independent directors, but was refused? Perhaps hoping that the Court won’t notice, Defendants don’t even address that sticky wicket.

VIII. More To Come on Coercion

Plaintiff argued that, among other defects of the proxy process, the shareholder vote was coerced by threats both from Musk and Tesla’s Board of Directors. The Chancellor will not need to reach those arguments, which might require further factual development, if she agrees with one of the purely legal points spelled out above.

However, as I mentioned earlier, the coercion arguments, and Defendants’ truly outrageous response to them, are worthy of a separate future post.

1. Readers not already familiar with the background of Tornetta v. Musk, or wanting a refresher on some points, can find a summary in Part II of this Substack post. Readers interested in my earlier posts analyzing the ratification issues can find them at my Substack site, where access is and always will be free.

2. In May, Tesla had churlishly opposed the filing of the Elson brief, forcing Elson to terminate his decades-long consulting arrangement with the Holland & Knight law firm.

3. I believe there may well already be ample evidence on Wilson-Thompson’s lack of independence, without any need to reopen the trial record.

4. I and my collaborator have laid out many of those omissions and lies in this post.

5. For extensive detail on these issues, see Part II.C. of this Substack post.