Tornetta Update: Musk & Co. File Their Appeal Briefs

Mostly the same trial arguments warmed over, but a famous U.S. Supreme Court advocate trying to fashion a Constitutional claim adds some spice.

Last month, Elon Musk and his confederates in Tornetta v. Musk filed their opening briefs with the Delaware Supreme Court. The Tornetta team will respond by April 25, and the challengers will have the last word on May 16.

Given the magnitude of the case, the court is likely to grant oral argument, with a decision some time later in the summer.

While the opening briefs largely repeat arguments already made at the Court of Chancery, I write here about a few new points that deserve attention, most especially the effort to raise a Constitutional claim.

Those familiar with the Tornetta case can skip to Part II.

(The top dog at DOGE with Secretary of Commerce Howard Lutnick who, days after urging Americans to buy Tesla stock, put the finishing touches on Donald Trump’s tariff plans.)

I. Background

In Tornetta, a Tesla shareholder challenged a 2018 stock options grant (the 2018 Grant) made by Tesla’s board of directors to Musk that, at the time I am publishing this, would be worth about $74 billion. After lengthy proceedings, Chancellor Kathaleen St. Jude McCormick of Delaware’s Court of Chancery invalidated the 2018 Grant in a 200-page January 30, 2024 ruling.

Having ruled in plaintiff’s favor, it remained for the Chancellor to award legal fees, and her ruling instructed the parties to file briefs regarding the size of the award. While that briefing was underway, Tesla secretly began planning a gambit to undermine the Chancellor’s ruling. Tesla would ask its shareholders to “ratify” the 2018 Grant despite the defects found by the Chancellor.

Tesla’s shareholders voted in favor of “ratification” vote in June; Tornetta challenged the legal effect of the vote; and so the parties also filed briefs about whether the ratification vote was legally sufficient to restore the 2018 Grant.

In a December 2, 2024 opinion, the Chancellor ruled that the ratification vote was ineffective for multiple reasons and awarded Tornetta’s attorneys $345 million in legal fees.

(I have written extensively about Tornetta. A more detailed summary of the events in the case can be found at Part II of this June 6, 2024 post. Some of my writings (including those found here, here, here, and here) detail why the “ratification” gambit was dishonest and, indeed, rapacious.)

II. The Challengers on Appeal

The appellants filed three separate briefs; one from each of:

• Four shareholders (the Objectors) who sought to intervene in the trial proceedings regarding the “ratification” vote and the award of legal fees (three of those shareholders are individuals, and the other is Cathie Wood’s ARK Investment Management LLC¹) (brief here);

• Tesla directors Elon Musk, Robyn Denholm, Antonio Gracias, James Murdoch, Linda Rice Johnson, Brad Buss, and Ira Ehrenpreis (the Directors) (brief here); and

• Tesla (which was a so-called nominal defendant in the Chancery Court trial) (brief here).

III. The Objectors’ Brief: Constitutional Due Process!

In their Tornetta pleadings, neither the Directors nor Tesla raised any claims under the U.S. Constitution. Consequently, there was simply no chance that the U.S. Supreme Court would ever agree to review a Delaware state case on corporate governance.

That seemed unfortunate. The prospects in Delaware for Musk and his fellow defendants appeared dim. The facts were not flattering, and the Chancellor had written pellucid opinions with unimpeachable logic and powerful precedential underpinnings.

But the Musk team was resourceful. They knew they had a potentially powerful weapon: Donald Trump. They figured that, with Musk having developed his partnership with Trump, the Trump connection might somehow induce the “conservative” Supreme Court majority to overturn Delaware’s rulings.²

To have a crack at the nation’s highest court, the Musk team needed to overcome two problems: (1) raising a Constitutional claim even though they had never raised such a claim in their trial pleadings, and (2) finding the right lawyer to assert that claim.

The Musk team solved the first problem by having the Objectors appear after the “ratification” vote to complain about two post-trial events: (1) the Chancellor’s refusal to give effect to the “ratification” gambit and (2) the legal fees sought by plaintiff’s counsel.

The second problem was solved by engaging a very famous lawyer: Donald B. Verrilli, Jr., who as the Solicitor General for five years during the Obama Administration, argued 50 cases before the U.S. Supreme Court. The “Verrilli” name would be instantly recognizable to every judge in the nation.

(He needs no introduction.)

Verrilli, in concert with three other law firms and a law professor from Stanford, could be relied upon to find a way to transform the Objectors’ complaints into Constitutional challenges.

A. Standing? Falling…

To get to the U.S. Supreme Court, Verrilli first had to get past the Delaware Supreme Court.

In his brief to the Delaware Supreme Court on behalf of the Objectors, Verrilli faced a threshold problem: the Chancellor had ruled that his clients lacked “standing” to challenge the legal fees award because the payment of those fees was sought from Tesla, not his clients.

Verrilli twists himself into knots, arguing that Tornetta’s legal fee will diminish the value of his clients’ shares, and thus is the same thing as seeking the payment from the clients themselves.

That’s quite a stretch. Even if Verrilli could sell that pitch, the fact remains that by wiping out Musk’s 2018 Grant, Tornetta increased the value of his clients’ shares by more than five magnitudes relative to the decrease in value from the legal fees award.

Verrilli, understandably, does not mention that.

B. Due Process: Mr. Tornetta ‘Endorsed an Outlandish Fee’

Having offered a theory, however shaky, about why his clients have standing, Verrilli argues that plaintiff Tornetta demonstrated he was not an “adequate” representative to bring claims against Musk and the Directors on behalf of Tesla because Mr. Tornetta “endorsed” his attorneys’ “outlandish” request for legal fees.

Because Tornetta “endorsed” that request, he had a “conflict of interest” with other shareholders, and consequently the Chancellor should not have allowed him to continue as Tesla’s representative in the derivative litigation.

That the Chancellor allowed Tornetta to continue as the company’s representative, claims Verrilli, was not only wrong, but it implicated the due process clause of the 14th Amendment of the United States Constitution:

By refusing to remedy that conflict of interest, the court failed to safeguard the interests of those “on whose behalf [Tornetta] purport[ed] to litigate,” and thus violated not only Rule 23.1(c) but also stockholders’ federal due-process rights.

And, voilà! There we have it, our Constitutional claim!

The “outlandish” fee that plaintiff’s counsel originally sought (in Tesla shares, not cash) amounted to 11% of the value of the shares recovered. The problem Verrilli has is that the 11% value was within the range of other contingent fee awards in similar Delaware cases. There are, to be sure, complexities and nuances about the proper methodology for measuring damages in a case such as this, but Tornetta’s lawyers had credible authority for the methodology they chose.

The Chancellor ultimately decided to award only about 7% of what Tornetta’s lawyers sought (and she made the award in cash rather than stock). In doing so, she cited a recent Delaware Supreme Court case counseling that even though an enormous award of legal fees might be justified under the rules outlined in cases with much less at stake, prudence dictates that courts recognize that the public might not understand the work and risk involved in derivative cases.³

What would be nice for Verrilli is if he were able to cite even a single case, in Delaware or in any other jurisdiction, holding that an otherwise qualified representative in a derivative action is deemed to “endorse” his attorneys’ claim for legal fees, or can become disqualified when his lawyers seek a fee that the court ultimately determines is too high.

But there is no such case, and Tornetta won’t be the first.

C. Due Process: Mr. Tornetta ‘Disenfranchised’ Other Shareholders

Near the end of his brief, Verrilli also argues that, with the ratification vote having received support from 70% of the shareholders, Tornetta should have dropped the case:

[A]fter Tesla stockholders overwhelmingly ratified the Grant, Tornetta sought to disenfranchise them, arguing that the ratification vote was a “gimmick” that should be given no effect.

And that, too, says Verrilli, violated the other shareholders’ due process rights.

While Verrilli’s brief cites various cases, none of the cited legal authority comes close to supporting his arguments. Everything is a long, long stretch.

At bottom, what Verrilli is arguing is not that Tornetta did a bad job for the shareholders. He’s arguing that Tornetta did too good a job, and that Tornetta should have surrendered the massive amount of stock he had clawed back from Musk (thereby benefitting all other Tesla shareholders, whose ownership share in Tesla increased by 10% or so).

So, yes, Verrilli is an exceptionally capable and famous advocate. And given the facts and law he had to work with, I suppose he did what he could. But he can hardly be proud of this one.

IV. The Directors’ Brief: ‘Return on Investment’

The Directors briefing at the Court of Chancery was well written, and their opening brief to the Delaware Supreme Court has rhetoric that is, if anything, even higher octane.

However, with that rhetoric comes some potential danger. Consider this sentence from the introduction, arguing that the 2018 stock options grant, made at a time when Tesla’s market capitalization was about $30 billion, was a brilliant “investment”:

Under Musk’s motivated and exceptional leadership, Tesla stockholders have since received a return of more than $700 billion on that investment, catapulting Tesla into the ranks of the world’s most valuable companies.

For several reasons, focusing on Tesla’s market capitalization (which is the share price multiplied by the number of shares) is a risky way to frame Musk’s supposed achievements.

A. $1.4 Trillion Yesterday, $700 Million Today, How Much Tomorrow?

As even a casual observer of Tesla’s share price knows, that share price and, consequently, the company’s market cap, are extraordinarily volatile. Pick a different date and you may get a wildly different result.

If, for instance, the briefing schedule had required the Directors to file their opening brief in mid-December, that “more than $700 billion” phrase would have been “more than $1.3 trillion.” Today, it would be “more than $800 billion.”

However, had the schedule set the opening brief for March 9, when Tesla’s share price dipped to $222, that “more than $700 billion” would have shrunk to “more than $680 billion.” And last April, Tesla’s market cap dipped to about $460 billion.

Tesla’s report yesterday of its first quarter delivery numbers showed dramatic shrinkage, both relative to last quarter’s disappointing numbers and to those of a year ago. The immediate negative market reaction was offset by a report (later denied) that Musk would be scaling back his DOGE involvement and spending more time at Tesla.

On the heels of that report came Trump’s “Liberation Day” tariff announcement, which today sliced $45 billion or so off the market cap.

Moreover, on April 22, three days before the due date of Tornetta’s brief, Tesla will issue its quarterly financial results, followed by the usual conference call with analysts. Those quarterly results, which are likely to show declining revenues, slimmer margins, and shrinking profits, will almost surely affect the market cap, as will the tenor of the conference call.

In other words, Tesla’s market cap will continue to be a rapidly moving target. There’s a chance that, before the appellate briefing concludes, the $700 million figure will underestimate the market cap bump. But there’s at least an equal chance that the Directors will come to regret the “more than $700 billion” boast.

B. The Options Grant Incentivized Stock Pumping

Musk earned each of the eight tranches under the 2018 Grant by achieving a higher market cap in combination with either one of two operational metrics: one based on revenues and the other on “adjusted EBITDA” (which excluded not only interest, depreciation, and amortization expense, but also stock-based compensation expense).

The operational metric by which Musk earned most of the tranches was adjusted EBITDA. That’s because, as the Chancellor’s January 30, 2024 opinion explained, the “adjusted EBITDA” metric was based on an unrealistically low percentage (8%) of revenues, and consequently was easy to achieve.

If Musk were forced today to rely only on the revenue-based operational metric, four of the eight tranches he earned would disappear. And it’s quite possible that Q1’s financial results will show that even the “adjusted EBITDA” number has melted enough to preclude the award of some of the later tranches.

The simple fact is that the 2018 Grant encouraged short-term stock pumping. It encouraged promises such as imminent Full-Self Driving, robotaxis that would earn money for their owners while they slept, Cybertrucks with wildly unrealistic prices and specifications, and a new economy car priced near $25,000. In other words, promises that Musk knew, or should have known, he could never keep.

By encouraging short-term thinking, the 2018 Grant eschewed any incentives for durable growth and profitability. Incentives matter, and Musk (who designed the 2018 Grant) responded quite capably to the pernicious incentives he created for himself.

Getting back to the “more than $700 billion” phrase, the trouble with stock-pumping is that it has a finite shelf life. The pumping has worked so far, but with Musk now so closely tied to Trump, and with Trump behaving with staggering recklessness, times are changing. The Directors’ lawyers run the risk that the expiration date will have passed before the Delaware Supreme Court sits down to write its opinion.

C. Tesla Is Ridiculously Overvalued.

Musk’s cult of personality and endless stock-pumping with unachievable promises has resulted in the most absurdly overvalued stock of my lifetime. Pick whatever number you anticipate will be the earnings-per-share this year (assuming, that is, that there are earnings).

I’ll go with $1.50 per share, which I believe is optimistic. As I prepare to publish this, that works out to a price-to-earning (P/E) ratio of about 180. By comparison, most auto manufacturers have P/E ratios between 5 and 7. Were Tesla valued like other auto companies, its market cap would be about $30 billion. (Post-publication note: By making a math error, I originally wrote $10 billion.)

You can believe that, somehow, Trump will somehow come riding to the rescue of the Tesla growth story. Or that Optimus will. Or FSD. Or robotaxis.

Or, you can instead believe that, inevitably, fundamentals will matter and gravity will have its way.

It is always dangerous to underestimate Musk’s ability to pump Tesla’s share price, or to understand the mysterious options trading that frequently elevates that price. It is impossible to say when reversion to the mean will bring Tesla’s share price down to earth.

However, it surely possible that by the time the Delaware Supreme Court is ready to issue its decision, Tesla’s market cap will be lower than $700 billion, and perhaps far lower.

V. Tesla’s Brief: Same Old, Same Old

Tesla’s briefing to Delaware’s high court was merely a restatement of its arguments at the trial court — old wine in new bottles, as it were — with nothing new worth discussing.

VI. Delaware Code Amendments: No Escape Hatch

I recently wrote about a proposal to amend provisions of the Delaware General Corporation Law. The proposed legislation, known as SB 21, and drafted in an unorthodox fashion by lawyers who represent Musk in Tornetta, was in my judgment substantively unwise.

Since I wrote about it in early March, Delaware’s legislature passed SB 21 and Delaware’s governor signed it into law.

If applied retroactively, SB 21 likely would have required the Delaware Supreme Court to overrule the Chancellor and reinstate the 2018 Grant. But in its original form, SB 21 was by its terms not retroactive. Its Section 3 stated that the amendments did not apply to any action completed or pending as of February 17, 2025.

However, a few days before I wrote my March 5 article, SB 21’s sponsors added a final sentence to the proposed Section 3:

The lack of retroactivity to pending actions and proceedings shall not in any way affect the ability of a court, by reference to existing case law, to reach an outcome that would be consistent with one dictated by this Act.

What, exactly, does it mean to say that the lack of retroactivity doesn’t stop a court from reaching a decision that is retroactive? The new language struck me as sufficiently ambiguous to open the door for Musk’s lawyers to argue that SB 21, if passed, would operate to overrule the Chancellor’s rescission of the 2018 Grant. Indeed, one might suspect the sentence was added precisely for that purpose.

However, the ever deepening unpopularity of Elon Musk and the fact that it was Democrats rather than Republicans who were promoting SB 21 caused sufficient embarrassment that the proponents of the legislation deleted the ambiguous sentence from the bill’s final draft. Driving home the point that SB 21 would not affect the Tornetta case, several proponents of the bill made clear during public hearings that SB 21 was not intended to, and would not, apply to the Tornetta case.

In view of that deletion and of the emphatic insistence by it proponents that SB 21 would not apply retroactively to Tornetta, it is now clear that the Delaware Supreme Court, in deciding the appeal, will be consulting the same body of law and precedent on which Chancellor McCormick relied in the first instance.

1. Ms. Wood’s funds have distinguished themselves by incinerating $14.3 billion in investor value over the past decade, thereby topping Morningstar’s list of “wealth-destroying ETF issuers.”

2. In my judgment, a mistaken belief, but time will tell.

3. The case is called In re Dell Technologies Inc. Class V Stockholders Litigation.