Tornetta v. Musk: That's All She Wrote

The Chancellor has entered an Order and Final Judgment confirming the rulings in her December 2 opinion. On to the Delaware Supreme Court?

Today (December 13), Chancellor Kathaleen St. Jude McCormick of the Court of Chancery of Delaware issued an Order and Final Judgment (the Final Judgment) in Tornetta v. Musk.¹

The Final Judgment is, essentially, a formal distillation of the two earlier, and lengthy, opinions (the 200-page January 30 Post-Trial Opinion and the 101-page December 2 Opinion Awarding Attorneys’ Fees and Denying Motion To Revise the Post-Trial Opinion).

With the Final Judgment now on the books, the 30-day clock for filing a notice of appeal at the Delaware Supreme Court has started ticking.

In this post, we’ll take a look at the Final Judgment (Part I), touch upon the Chancellor’s extraordinary work in this lawsuit (Part II), discuss a few points in the Final Judgment that deserve further attention (Part III), and consider whether either side will take an appeal to the Delaware Supreme Court (Part IV).

We’ll also look at another ruling the Chancellor made today, just before the Final Judgment, largely denying the relief sought by some Tesla shareholders who, late in the case, sought to intervene (Part V).

I. The Order and Final Judgment

The five-page Final Judgment recounts the procedural history of the case, and then (employing the time-honored incantation of final judgments) “orders, adjudges, and decrees,” in five numbered paragraphs, as follows:

1. The 2018 grant of stock options to Musk “is rescinded in its entirety”;

2. The June 13 shareholder vote on “ratification” has “no effect” on either the lawsuit or the January 30 Post-Trial Opinion;

3. For the results obtained, plaintiff’s counsel is awarded $345 million, which the Chancellor “finds fair and reasonable, to be paid in cash”;

4. Tesla shall post a bond in the amount of $345 million, “plus post-judgment interest at the legal amounts for one year, compounded quarterly”;

5. Should the bond at any time become less than the amount owed, including interest, Tesla shall post an additional bond to cover the deficiency plus an additional 90 days of interest.

II. A Sigh of Relief

I can imagine the Chancellor felt a great relief at signing the Final Judgment. This case has demanded an immense amount of her time since she began presiding over it almost three years ago (and it took an immense amount of time for Vice Chancellor Joseph R. Slights III before then).

Re-reading the January 30 and December 2 opinions, one is struck by the immensity of the factual detail that Chancellor McCormick had to assimilate, by the prodigiously complex legal arguments she considered, by the vast body of Delaware legal precedent she had to master, and by the brilliance of her organizing all of it into admirably readable and clear opinions.

Similarly, reviewing the transcripts from the various hearings, one is struck by how well-prepared she was, by the cogency of her questions, and by her unwavering courtesy and fairness to all counsel.²

Chancellor McCormick has, as readers know, been rewarded for her efforts with vicious lies and false accusations by Elon Musk and his minions.

However, far and few will be the law professors, practicing lawyers, and jurists who read any of her Tornetta opinions and are not deeply impressed by their craftsmanship and intelligence.

III. A Closer Look at the Final Judgment

A few features of the Final Judgment merit comment.

1. Cash Payment Instead of Stock

Plaintiff had suggested the Chancellor award the legal fee in Tesla stock rather than cash, pointing to a tax advantage to Tesla of doing so. Defendants, however, resisted this, arguing it was unprecedented and “would require ordering Tesla to register and issue new shares—a mandatory injunction that Plaintiff has not proven up.”

In her December 2 opinion, the Chancellor indicated she would give defendants the option of paying the fee in either freely tradable shares or cash. However, in the Final Judgment, she stipulated the fee is payable in cash only.

My best guess is that the Chancellor finally decided on cash only to take away an appeal issue from defendants. One that would be frivolous, of course, but there’s no point in buying trouble.

2. Post-Judgment Interest

In Delaware, the per annum interest rate on judgments is set by statute to be the Federal Reserve discount rate plus 5%.³ The Federal Reserve discount rate, at present, is 4.75%. So, the post-judgment interest rate is 9.75%.

That works out to $8,409,375 for the first 90 days, with that amount growing each quarter thanks to compounding. That’s about $93,000 per day. Let’s hold that thought.

[Post-publication note: the original post neglected to divide the annual interest amount by four. A kind comment from reader David Brown flagged my mistake, which is now corrected here.]

IV. Will There Be an Appeal?

The plaintiff, having sought $5.6 billion in legal fees, and with some credible authority to justify that award (keep in mind that the benefit to Tesla shareholders is the cancellation of options that translate to more than $133 billion based on today’s closing share price).

Plaintiff was awarded, instead, only $345 million. Will plaintiff appeal? Not a chance. The Chancellor acted well within her discretion in setting that amount, and wrote a learned opinion to justify it.

How about defendants? They are, by my estimation, 99.96% certain to lose on appeal. Assuming the appeal takes six months to be decided (it could be more, it could be less), the cost to defendants would be an additional $17 million.

And here’s the punchline: even a successful appeal would likely simply send the case back to the Court of Chancery to decide several issues that the Chancellor determined she did not need to reach because the issues she did decide were dispositive. So, more delay, more chance that another legal fee award would be added to the existing award, and more monstrous interest accruing every day.

So, by my lights, the defendants would save a lot of money (for themselves, for Tesla, or for both, depending on who is saddled with the payment obligation) if they simply paid the $345 million today.

Which, I suppose — given the long history of non-existent corporate governance at Tesla, and given that Elon Musk endorsed an opinion that the Chancellor’s work is “literal corrupt bullshit” and himself called her “a radical far left activist cosplaying as a judge,” — means the Tesla directors will, like lemmings, continue to follow Musk over the cliff with a useless and expensive appeal.

V. The Intervenors

As the “ratification” gambit unfolded, several Tesla shareholders attempted to intervene in the lawsuit. Their several filings said nothing that the defense attorneys had not already said (and said better), but there they were.

Those shareholders included, notably, the well-known Tesla stock pumper, Cathie D. Wood of ARK Invest, whose financial “models” that justify ARK’s Tesla price targets are famously innumerate and dishonest. (Wood’s various ARK funds have incinerated billions of dollars of her investors’ money while enriching her to an immense extent.)

Just before signing the Final Judgment, the Chancellor wrote a 7-page letter opinion detailing why the intervenors’ attempt to insert themselves into the case came far too late, while adding nothing to the arguments made by the capable defense counsel.

The Chancellor granted the motions to intervene for the limited purpose of allowing them to appeal her earlier ruling that concluded they lack “standing” (a legal term of art) and rejecting their challenges to the “adequacy” (another such term of art, this one in the context of derivative litigation) of Tornetta as plaintiff on behalf of Tesla.

And folks, that’s all she wrote.

1. I have written extensively about the Tornetta case at this Substack. Readers wanting a short summary of the background can consult Part II of this June 6 Substack post. Readers wanting a deeper dive can consult any or all of the more than 35 articles I’ve published (all free at my Substack.

2. The August 2 hearing on the “ratification” issue is an excellent example. I’ve written about it here.

3. Thank you, Substack commenter Ranulf de Glanville (by the way, it’s worth googling that nom de plume) for pointing me to the authority on this point.