As expected, Elon appealed and is taking this to the Supreme Court of Delaware. No matter how low his odds are, he will delay the inevitable outcome and fight to the bitter end.
I honestly don't know, I think from Elon's perspective delaying lawsuits, especially those in which odds are stacked against him, has worked pretty well in the past, and given the stakes here, there's no reason to pursue every avenue possible to fight back to the bitter end.
Okay, I'm a little unclear on why the supersedeas bond has to be posted immediately unless the defendants have already notified the Chancellor of their intention to appeal?
While unlikely for Mr. Musk, couldn't the defendants accept the judgement, pay the $345 million, and ride off into the sunset negating the need for the bond?
The supersedeas bond needs to be posted immediately to protect plaintiff. Courts don’t want losing litigants facing a judgment to hide assets while the loser makes up its mind about whether to appeal.
Yes, defendants could pay the $345 million right away, negating the need for a bond and avoiding the inevitable legal expense associated with an appeal (though that expense is comparatively trivial here).
If Musk and Tesla decided not to appeal the decision, there would be no need for a supersedeas bond. It was also possible, though about as likely as my possession of a winning lottery ticket, for Musk and Tesla to pay the $345 million to Tornetta and nonetheless file an appeal. On the amazingly slim chance that Musk and Tesla prevailed on appeal, Tornetta would have to cough up the $345 million and return the cash to Musk and Tesla.
Thinking about appeals, bonds, sureties, etc. led me to wonder how this plays out if Musk decided he wanted to appeal, but the individual directors and the company (represented by the board) did not want to appeal. (Yes, I know, but I'm thinking about a hypothetical which is standard fare in American law schools.) I'm sure the issue has arisen before in the annals of American corporate law, but for it to arise in this case would be quite amusing.
You raise an interesting question. Which is MORE likely...the "independent" directors electing to proceed in a different direction from the CEO OR Musk & Tesla paying the $345 million judgement hoping to reclaim it on a winning appeal?
Recall that in this case, there are no "independent" directors, a factual finding reached by the Chancellor in her January 2024 decision and reaffirmed by her in the December 2024 decision. The likelihood that Tesla's directors would choose a strategy different than any decided by Musk is so close to zero as to be beyond human comprehension. As you framed the question, that would mean it's more likely that Musk and Tesla would pay the $345 million, expecting to recover the cash if they prevailed on appeal. But to the extent that a litigant's personality affects his litigation decisions, I can't see Musk writing the check to Tornetta; it would be an admission of failure on his part. It's more palatable to have his attorneys make the arrangements with the surety company.
I've been wondering whether Delaware law allows indemnity for the breach of fiduciary duty at issue here. I haven't really dug into it... Any thoughts?
Separately, what sane carrier would continue to write D&O insurance for this board?
Corporate law wasn’t my specialty so I’ve had to spend some time acquainting myself with title 8 of the Delaware Code.
As far as Delaware law is concerned, in most cases a corporation can choose to indemnify, or not indemnify, officers, directors (and others) who (1) acted in good faith and (2) reasonably believed that their conduct was in or not opposed to the best interests of the company. That principle is set out in section 145 of title 8. Section 145(a) deals with indemnification in the context of actions brought by a third party. Section 145(b) covers indemnification in the context of actions “by or in the right of the corporation to procure a judgment in its favor….”
Section 145(b), however, prohibits indemnification “in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation” unless the Court of Chancery determines on application that such person is fairly and reasonably entitled to indemnity. Section 145(c) requires a corporation to indemnify “a present or former director or officer of a corporation to the extent that [the individual] has been successful on the merits or otherwise in defense of any action, suit or proceeding” covered by section 145. In other words, a successful defense is always indemnified.
Section 145(d) requires the indemnity decision, with respect to anyone who is a director or officer at the time of the decision, to be made by:
(1) By a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum; or
(2) By a committee of such directors designated by majority vote of such directors, even though less than a quorum; or
(3) If there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion; or
(4) By the stockholders.
“But Glanvill,” one shouts, “how can a corporation be allowed to pay the defendants’ expenses in a case in which even a first year law student would have thought ‘something is rotten in the state of Denmark’?” [Hamlet, Act I, sc. 4] The Delaware Supreme Court has made it pretty clear that the state’s public policy favors indemnification as set out in section 145. RSUI Indemnity Co. v. Murdock, No. 154, 2000, slip op. at 29-33 (Del. Mar. 3, 2021) (available at https://law.justia.com/cases/delaware/supreme-court/2021/154-2020.html). If the corporation desires to limit the circumstances in which indemnity must be made, it can do so in the context of any insurance it purchases under section 145(g). Conversely, the corporation, under section 145(g), can obtain Insurance to cover situations in which it would otherwise not “have the power to indemnify such person against such liability under this section.”
As to what carrier might issue coverage for this particular set of directors, I’ll simply observe that there was a surety company willing to issue a $175 million appeal bond to stay enforcement of the judgment of the NY Supreme Court obtained by the NY Attorney General against Donald J. Trump. To my mind, that suggests that if the policyholder is willing to pay the premium, there's a carrier out there who will issue the policy.
The cash makes the whole process a lot simpler and cleaner.
I too see no payback at all in a lawsuit. None. But it depends on what Musk wants to admit and when. If they don't file an appeal, the next set of financials will have to reverse all this.
Yes, the cash certainly does. Imagine the machinations going into adjusting the bond amount if it were posted with shares, given the crazy volatility of Tesla stock. It would create more opening for more expensive and time-consuming wrangling, along with opportunities for defendants to accuse the plaintiff's lawyers of bad faith manipulation, etc.
I have been fascinated by the whole case and your writings about it.
One thing still escapes me:
When a board of directors puts a suggestion in front of shareholders (maybe flawed the first time, and including all the things a court deemed flawed corrected the second time)
Why is it legally sound to say: The person with 9 shares is correct even though all requirements of the contract have been met and the two confirming votes of shareholders don't matter.
I am not asking this for this specific case - especially with all the nastiness going back and forth (which by the way includes, IMHO totally inappropriate arguing about the wealth of the person who was to benefit from the contract equally to the inappropriate titillations by defendants.
If I am shareholder of a company registered in Delaware and a founder has become rich because the company is successful, why do I not, going forward, constantly have to fear that things the board negotiated, and put to an affirming vote successfully, will be turned over by the Delaware court?
To a lesser extent I also wonder what Delaware has left if many new forming companies and many of the existing ones decide not to be willing to take the risk that any shareholder might successfully overturn the majority of all shareholders votes, especially when it comes to executive compensation?
1. Please read the first 44 pages of the December 2 opinion, linked to in the article. The answer your question very clearly. It's a relatively quick read if you skip the footnotes.
2. Corporations whose management is intent on looting and misbehavior will, perhaps, now incorporate in Nevada or Texas. Corporate management teams who want their shareholders to know that governance will be adjudicated with a reliable body of case law applied by jurists with expertise will continue to choose Delaware.
OK, thank you Lawrence. I read it and I better understand now that I read it again.
Two things I see (and it’s my personal opinion, and I am not a lawyer):
At the time this pay package was voted on and approved by the majority of the shareholders everybody in the financial world called the conditions that would have to be met to ever have a chance to get paid everything from comical, ludicrous, crazy and many other words with similar meaning. All of the criteria were met or exceeded and all shareholders, even Torretta made great profits. I fail to see where the looting is. I guess my brain is too small.
I guess management teams could act as you describe. In my lifetime, companies never started with management teams and rarely with BOD. Almost none start as publicly traded companies. So one reaction could be what you describe in your second point or founders could decide not only to incorporate in other states than Delaware but just not take companies public and keep the public out. I am not advocating for it and given that choice I would rather have them go public and be registered outside of Delaware.
You should go back and re-read some of his writings then because your exact question is covered extensively. The original vote was deemed invalid for multiple reasons. This was decided in the the lawsuit earlier this year and only the outstanding issue of compensation remained.
It was at that time that Tesla decided to try to ratify the prior decision. Not make a new award, but ratify the vote that was already found to be invalid.
There is nothing extraordinary about this ruling despite what Musk would like you to believe. There is not and will not be a mass exodus of companies from Delaware.
The question I have is not directly related to the Tesla case.
I am mainly wondering where the line is in the future if I have a publicly traded company, the board negotiates a contract for executive compensation and one shareholder finds a court in Delaware to decide that the board did not do the process right even though shareholders voted to affirm.
My point is that the minutia the judge had all the time in the world to look up is never what is the reality for shareholder votes commonly.
In most cases a presentation is made to explain what is being voted on and what the consequences will be and shareholders vote.
To me the reasoning of this case says: Shareholders need to have or be lawyers to evaluate if the board gave them everything they could possibly need to know to decide how they vote to protect against a single shareholder who wants to bring a case to overturn the original vote, even if all the goals that were provided as criteria to award money were met.
I am too old to ever be in that situation but I would not invest in a company registered in Delaware anymore. The court has clearly shown that at no point can either the executive or other shareholders be sure that their votes are final.
I know people will say:
“Well, just make the contract and the board decisions watertight.”
Based on this case I don’t see that that will ever be possible in Delaware again - but I am probably too simplistic.
For me this ended when the wealth of the executive entered the reasoning of the judge I was done immediately.
Allow me to explain why I believe the Delaware standard is not difficult to meet.
Delaware long ago adopted the "business judgment rule" which gives very, very wide latitude to corporate decisions. In most instances, Delaware courts will not second guess decisions made by a corporate board if relatively simple corporate formalities are adhered to.
There are exceptions in which the so-called MFW Doctrine is applied. The MFW Doctrine arose out of a case called Kahn v. M&F Worldwide Corp. That case involved a “squeeze-out” merger whereby the company’s controlling stockholder sought to forcibly cash out the company’s remaining investors at a price set by the controlling stockholder.
The Delaware Supreme Court said that, in such an instance, it would apply the business judgment rule only if two procedural safeguards were in place from the start. Those safeguards are:
(1) an independent, fully functioning special committee of independent directors, and
(2) a fully-informed, uncoerced vote of a majority of disinterested stockholders.
What the Delaware Supreme Court was doing in MFW was designed to replicate arm’s-length bargaining by removing the inherent conflicts that come from the controlling stockholder’s influence over the company and the board.
If those two procedural safeguards were not in place from the start, then rather than applying the lax business judgment rule in evaluating the transaction, the court will instead apply the much more strict "entire fairness" standard.
After MFW was decided, Delaware courts began using the MFW standard not simply in squeeze-out merger cases, but also to evaluate transactions where a controlling shareholder receives a "non-ratable benefit" (that is, something not received by all shareholders generally). After the recent Delaware decision in the so-called Match case, there is no doubt that the MFW standard applied in Tornetta, and that the Chancellor was correct in her use of it.
In Tornetta, the facts showed very, very clearly that Musk controls Tesla, and that Musk essentially negotiated the pay package -- larger than any pay package in history -- with himself. He proposed the terms, he set the timetable for the discussions, etc. And, the committee that supposedly negotiated with him was far from independent; its members had very close personal and/or financial relationships with Musk.
So, the entire fairness standard applied. One (but only one) of the factors the Chancellor considered in determining that the 2018 grant was not entirely fair was that Musk *already* had a huge incentive to see Tesla's operational performance improve and share price increase. He owned close to 20% of the company at the time of the 2018 grant. The CEOs at Amazon, Meta, and Microsoft, for instance, take no compensation at all because they recognize that their stock ownership is already a material incentive.
Rather than go back to square one, set up the correct procedural safeguards, and negotiate a new deal, the Tesla board -- no doubt at the bidding of Musk -- called for a shareholder vote to "ratify" the defective deal. And that, quite simply, is utterly contrary to MFW. Many lawyers looking at the ratification attempt while it was underway were, as I was, convinced it was legally defective for multiple reasons. I'm sure Musk was warned that by his lawyers, but he elected to plow ahead anyway.
And, of course, having obtained the predictable result, Musk now seeks to vilify the Court of Chancery.
Thanks for taking the time to explain. I really appreciate it Lawrence.
The reasoning you provided is probably why in the future founders who considered taking their company public will consider keeping it private much longer or never go public.
That influencing stake is often applicable.
In other companies you referenced founders have special stock that allows them to remain on top of core decisions, which Tesla does not have.
Your point of Musk negotiating with himself I have heard before.
I don’t doubt that that is an option/possibility, but it begs the question why any sane person would set criteria that anybody, literally anybody, considered unachievable.
This to me, being not a lawyer is to argue after the fact that anybody could see Roger Bannister was massively motivated to break the 4-minute barrier for the 1-mile run, so any benefit he negotiated, potentially with himself is null and void.
He knew in his heart of hearts that he could probably do it, so he does not deserve the reward.
That’s just how it looks to me using that argument.
What I was mainly pointing towards is the understanding that, like you did to help me understand, in the future, other shareholders can now look and find cases where they feel what happened in the Torretta case applies to them, even years after the fact and based on knowing the outcome.
By the way, had Musk really negotiated with himself and had set criteria much easier to achieve - those that the experts said could be reasonably expected, it follows (I hope you would give him at least that much foresight) the term of the contract would have been much shorter.
Being able to look at the actual development, a 2-3 year term would have meant he would have negotiated with the BOD or himself another contract from a much stronger position for probably even higher awards.
The case was brought as I understand it because a shareholder felt he and the other shareholders are harmed by such a large award of shares to the top executive.
With less stringent criteria I would argue, using the same logic, that shareholders would be significantly more harmed by mulitple contracts with ever increasing rewards between 2018 and 2025.
I realize that this is a case that is wonderful to talk about, learn about the legal system and learn from you how to interpret what’s going on. I am very thankful for that and you being willing to take the time to educate.
I am personally sure that regardless how this case ends, Musk will get compensated in one way or another and one thing that is now gone, independent of the case, is the possibility to wonder if the originally set and as ridiculous described targets will be met.
I think it is very probable that a new BOD negotiating a new contract will answer the questions: Does Musk deserve 12% of the shares as a reward for work already performed and still to be performed till the end of 2025 is: Yes.
We’ll see
This case is a great lesson, and I would, if for no other reason than the precedence that’s been now set in Delaware, not incorporate there.
On the other hand I only have a small S-Corp registered in Nevada, so I don’t have to worry. 😉😁
The line is in the same spot it was before this case. There were several deficiencies with the initial vote, in no small part due to the negotiation process .
Had the judge ruled that the initial vote was valid she would have effectively been saying "it was improper, but since the majority got rich it's ok". Shareholders are not a homogeneous group, but they are all protected.
Then, had the judge ruled that the ratification vote was valid, THAT would have been serious upheaval and flown in the face of all reason.
Musk has an immense incentive to make Tesla work. It is the only one of his companies that throws off cash.
The big problem with Tesla is that, because of his cynical stock pumping through lies such as Full Self-Driving, robotaxis, Optimus, AI, and Trump-will-save-me-from anything, the stock is now at a ridiculous valuation. Something like 180 times forward earnings. There is bound to be an epic fall. I blame Musk and, especially, the Tesla Board of Directors, which allowed this to happen.
Lawrence, as much as I love the discussion about the legal case, I totally disagree with this position.
Sure, one can argue that the valuation in the trader’s casino is totally wrong.
That has nothing to do with the company.
It has only to do with what people believe will happen in the future and how much they are willing to pay to be part of it (or short to show everybody how wrong they are 😁😁)
As far as I know SpaceX is fundamentally profitable both through Starlink and other launch contracts and would be much more so if Musk would not want to develop Starship.
We have the luxury to watch and wait.
Will FSD work and how soon?
Will Optimus work and how soon
Will X.ai work and what will the impact on AGI be if it does?
Will Neuralink get approved for full market penetration and what can be charged to let people walk or see or hear again?
To me these are all related.
FSD will work (if at all) due to the massive datacenter clusters and all the data collected by the cars. (or maybe it doesn’t)
Optimus will use what’s learned in FSD and apply to all functions it can be used for
AI, if it works will change our lives in ways we can’t even imagine - and its probably going to be AGI. Will that come through Tesla and X.ai or OpenAI, or Amazon, or others we don’t know yet, we’ll see.
Neuralink will probably gain functions based on all the AI and AGI developments as our way to interact with compute will change.
I can’t wait till typing is no longer needed and I can just speak (and should I be brave enough to get a Neuralink device) think what I want to say - or does that even make any sense anymore?
If I think it directed to an Optimus in my house or an Alexa that speaks it, or some other system we can’t even imagine yet at speeds our fingers or our speech can never reach, how will the world look like?
I realize that all of this happening with a great outcome is probably unrealistic, but with so many companies beside all the Musk companies working on it, I fail to see how to give a proper valuation.
I am remined of Amazon. Yes, this is an unfair comparison because what FSD, Optimus, AGI, etc. would mean to live is massively more impactful than digital books and ordering online.
Still, for so many years people have accused Jeff Bezos about the company only producing losses and predicting it would never turn into something meaningful - and then it did and the shareholder who bought between 1997 and 2015 (18 years) we called stupid got rich.
Now people wish they had bought when the company (AMZ) was 20 years old at about $47/share.
If some of what could happen at Tesla happens, we will look back the same way. I know they are not yet 20 years old yet, but I would argue that anybody wished they bought in 2020 at the 10-year anniversary.
We’ll see where it is at it’s 20 year and 30 year anniversary - I believe it will be at least similar to the Amazon story - but maybe they fail at everything and have disappeared by 2040
"How about defendants? They are, by my estimation, 99.96% certain to lose on appeal." How about an even money bet for $10,000 that the decision below is not affirmed? Seems like easy money for you.
As you may know, and would know if you read my latest piece, the proposed legislation may change everything. It’s very crooked. Maybe you’re part of the gang promoting it?
Do you (or the Chancellor) really believe that shareholders only voted for Musk's compensation because they were not fully informed about his influence over the board? If politicians could invalidate an election for the same reason, there would be endless litigation by the losers. In any event, how is it equitable to tell Musk he worked for nothing since 2018 because of a faulty proxy statement even though shareholders that stuck with him profited greatly from his work? The Chanceller justified that by pointing out that his stock increased in value. So, if a CEO owns a lot of shares, he does not deserve any other compensation? Where does Delaware law say that? for Seems like a non sequitur to me.
For the “That works out to $33,637,500 for the first 90 days” isn’t this the annual amount not the quarterly amount?
The cost of delays will still be sizeable at 1/4 the rate but not as high.
Ouch. I neglected to divide by four. I’ve corrected it on line and dropped a footnote to acknowledge my thanks to you.
As expected, Elon appealed and is taking this to the Supreme Court of Delaware. No matter how low his odds are, he will delay the inevitable outcome and fight to the bitter end.
The Delaware Supreme Court will likely issue its opinion within six to eight months.
(Do you think that, by then, the world of TrumpMusk may have changed a bit? And not in good ways for either of them? I do.)
I honestly don't know, I think from Elon's perspective delaying lawsuits, especially those in which odds are stacked against him, has worked pretty well in the past, and given the stakes here, there's no reason to pursue every avenue possible to fight back to the bitter end.
Okay, I'm a little unclear on why the supersedeas bond has to be posted immediately unless the defendants have already notified the Chancellor of their intention to appeal?
While unlikely for Mr. Musk, couldn't the defendants accept the judgement, pay the $345 million, and ride off into the sunset negating the need for the bond?
The supersedeas bond needs to be posted immediately to protect plaintiff. Courts don’t want losing litigants facing a judgment to hide assets while the loser makes up its mind about whether to appeal.
Yes, defendants could pay the $345 million right away, negating the need for a bond and avoiding the inevitable legal expense associated with an appeal (though that expense is comparatively trivial here).
If Musk and Tesla decided not to appeal the decision, there would be no need for a supersedeas bond. It was also possible, though about as likely as my possession of a winning lottery ticket, for Musk and Tesla to pay the $345 million to Tornetta and nonetheless file an appeal. On the amazingly slim chance that Musk and Tesla prevailed on appeal, Tornetta would have to cough up the $345 million and return the cash to Musk and Tesla.
Thinking about appeals, bonds, sureties, etc. led me to wonder how this plays out if Musk decided he wanted to appeal, but the individual directors and the company (represented by the board) did not want to appeal. (Yes, I know, but I'm thinking about a hypothetical which is standard fare in American law schools.) I'm sure the issue has arisen before in the annals of American corporate law, but for it to arise in this case would be quite amusing.
You raise an interesting question. Which is MORE likely...the "independent" directors electing to proceed in a different direction from the CEO OR Musk & Tesla paying the $345 million judgement hoping to reclaim it on a winning appeal?
Recall that in this case, there are no "independent" directors, a factual finding reached by the Chancellor in her January 2024 decision and reaffirmed by her in the December 2024 decision. The likelihood that Tesla's directors would choose a strategy different than any decided by Musk is so close to zero as to be beyond human comprehension. As you framed the question, that would mean it's more likely that Musk and Tesla would pay the $345 million, expecting to recover the cash if they prevailed on appeal. But to the extent that a litigant's personality affects his litigation decisions, I can't see Musk writing the check to Tornetta; it would be an admission of failure on his part. It's more palatable to have his attorneys make the arrangements with the surety company.
"...so close to zero as to be beyond human comprehension" is well put.
I've been wondering whether Delaware law allows indemnity for the breach of fiduciary duty at issue here. I haven't really dug into it... Any thoughts?
Separately, what sane carrier would continue to write D&O insurance for this board?
Corporate law wasn’t my specialty so I’ve had to spend some time acquainting myself with title 8 of the Delaware Code.
As far as Delaware law is concerned, in most cases a corporation can choose to indemnify, or not indemnify, officers, directors (and others) who (1) acted in good faith and (2) reasonably believed that their conduct was in or not opposed to the best interests of the company. That principle is set out in section 145 of title 8. Section 145(a) deals with indemnification in the context of actions brought by a third party. Section 145(b) covers indemnification in the context of actions “by or in the right of the corporation to procure a judgment in its favor….”
Section 145(b), however, prohibits indemnification “in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation” unless the Court of Chancery determines on application that such person is fairly and reasonably entitled to indemnity. Section 145(c) requires a corporation to indemnify “a present or former director or officer of a corporation to the extent that [the individual] has been successful on the merits or otherwise in defense of any action, suit or proceeding” covered by section 145. In other words, a successful defense is always indemnified.
Section 145(d) requires the indemnity decision, with respect to anyone who is a director or officer at the time of the decision, to be made by:
(1) By a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum; or
(2) By a committee of such directors designated by majority vote of such directors, even though less than a quorum; or
(3) If there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion; or
(4) By the stockholders.
“But Glanvill,” one shouts, “how can a corporation be allowed to pay the defendants’ expenses in a case in which even a first year law student would have thought ‘something is rotten in the state of Denmark’?” [Hamlet, Act I, sc. 4] The Delaware Supreme Court has made it pretty clear that the state’s public policy favors indemnification as set out in section 145. RSUI Indemnity Co. v. Murdock, No. 154, 2000, slip op. at 29-33 (Del. Mar. 3, 2021) (available at https://law.justia.com/cases/delaware/supreme-court/2021/154-2020.html). If the corporation desires to limit the circumstances in which indemnity must be made, it can do so in the context of any insurance it purchases under section 145(g). Conversely, the corporation, under section 145(g), can obtain Insurance to cover situations in which it would otherwise not “have the power to indemnify such person against such liability under this section.”
As to what carrier might issue coverage for this particular set of directors, I’ll simply observe that there was a surety company willing to issue a $175 million appeal bond to stay enforcement of the judgment of the NY Supreme Court obtained by the NY Attorney General against Donald J. Trump. To my mind, that suggests that if the policyholder is willing to pay the premium, there's a carrier out there who will issue the policy.
The cash makes the whole process a lot simpler and cleaner.
I too see no payback at all in a lawsuit. None. But it depends on what Musk wants to admit and when. If they don't file an appeal, the next set of financials will have to reverse all this.
Yes, the cash certainly does. Imagine the machinations going into adjusting the bond amount if it were posted with shares, given the crazy volatility of Tesla stock. It would create more opening for more expensive and time-consuming wrangling, along with opportunities for defendants to accuse the plaintiff's lawyers of bad faith manipulation, etc.
I have been fascinated by the whole case and your writings about it.
One thing still escapes me:
When a board of directors puts a suggestion in front of shareholders (maybe flawed the first time, and including all the things a court deemed flawed corrected the second time)
Why is it legally sound to say: The person with 9 shares is correct even though all requirements of the contract have been met and the two confirming votes of shareholders don't matter.
I am not asking this for this specific case - especially with all the nastiness going back and forth (which by the way includes, IMHO totally inappropriate arguing about the wealth of the person who was to benefit from the contract equally to the inappropriate titillations by defendants.
If I am shareholder of a company registered in Delaware and a founder has become rich because the company is successful, why do I not, going forward, constantly have to fear that things the board negotiated, and put to an affirming vote successfully, will be turned over by the Delaware court?
To a lesser extent I also wonder what Delaware has left if many new forming companies and many of the existing ones decide not to be willing to take the risk that any shareholder might successfully overturn the majority of all shareholders votes, especially when it comes to executive compensation?
1. Please read the first 44 pages of the December 2 opinion, linked to in the article. The answer your question very clearly. It's a relatively quick read if you skip the footnotes.
2. Corporations whose management is intent on looting and misbehavior will, perhaps, now incorporate in Nevada or Texas. Corporate management teams who want their shareholders to know that governance will be adjudicated with a reliable body of case law applied by jurists with expertise will continue to choose Delaware.
OK, thank you Lawrence. I read it and I better understand now that I read it again.
Two things I see (and it’s my personal opinion, and I am not a lawyer):
At the time this pay package was voted on and approved by the majority of the shareholders everybody in the financial world called the conditions that would have to be met to ever have a chance to get paid everything from comical, ludicrous, crazy and many other words with similar meaning. All of the criteria were met or exceeded and all shareholders, even Torretta made great profits. I fail to see where the looting is. I guess my brain is too small.
I guess management teams could act as you describe. In my lifetime, companies never started with management teams and rarely with BOD. Almost none start as publicly traded companies. So one reaction could be what you describe in your second point or founders could decide not only to incorporate in other states than Delaware but just not take companies public and keep the public out. I am not advocating for it and given that choice I would rather have them go public and be registered outside of Delaware.
You should go back and re-read some of his writings then because your exact question is covered extensively. The original vote was deemed invalid for multiple reasons. This was decided in the the lawsuit earlier this year and only the outstanding issue of compensation remained.
It was at that time that Tesla decided to try to ratify the prior decision. Not make a new award, but ratify the vote that was already found to be invalid.
There is nothing extraordinary about this ruling despite what Musk would like you to believe. There is not and will not be a mass exodus of companies from Delaware.
Exactly right, thank you. If I have a bit more time, I may answer our good friend, the doctor, more extensively.
I know what you are referring to.
The question I have is not directly related to the Tesla case.
I am mainly wondering where the line is in the future if I have a publicly traded company, the board negotiates a contract for executive compensation and one shareholder finds a court in Delaware to decide that the board did not do the process right even though shareholders voted to affirm.
My point is that the minutia the judge had all the time in the world to look up is never what is the reality for shareholder votes commonly.
In most cases a presentation is made to explain what is being voted on and what the consequences will be and shareholders vote.
To me the reasoning of this case says: Shareholders need to have or be lawyers to evaluate if the board gave them everything they could possibly need to know to decide how they vote to protect against a single shareholder who wants to bring a case to overturn the original vote, even if all the goals that were provided as criteria to award money were met.
I am too old to ever be in that situation but I would not invest in a company registered in Delaware anymore. The court has clearly shown that at no point can either the executive or other shareholders be sure that their votes are final.
I know people will say:
“Well, just make the contract and the board decisions watertight.”
Based on this case I don’t see that that will ever be possible in Delaware again - but I am probably too simplistic.
For me this ended when the wealth of the executive entered the reasoning of the judge I was done immediately.
I appreciate the thoughtful engagement.
Allow me to explain why I believe the Delaware standard is not difficult to meet.
Delaware long ago adopted the "business judgment rule" which gives very, very wide latitude to corporate decisions. In most instances, Delaware courts will not second guess decisions made by a corporate board if relatively simple corporate formalities are adhered to.
There are exceptions in which the so-called MFW Doctrine is applied. The MFW Doctrine arose out of a case called Kahn v. M&F Worldwide Corp. That case involved a “squeeze-out” merger whereby the company’s controlling stockholder sought to forcibly cash out the company’s remaining investors at a price set by the controlling stockholder.
The Delaware Supreme Court said that, in such an instance, it would apply the business judgment rule only if two procedural safeguards were in place from the start. Those safeguards are:
(1) an independent, fully functioning special committee of independent directors, and
(2) a fully-informed, uncoerced vote of a majority of disinterested stockholders.
What the Delaware Supreme Court was doing in MFW was designed to replicate arm’s-length bargaining by removing the inherent conflicts that come from the controlling stockholder’s influence over the company and the board.
If those two procedural safeguards were not in place from the start, then rather than applying the lax business judgment rule in evaluating the transaction, the court will instead apply the much more strict "entire fairness" standard.
After MFW was decided, Delaware courts began using the MFW standard not simply in squeeze-out merger cases, but also to evaluate transactions where a controlling shareholder receives a "non-ratable benefit" (that is, something not received by all shareholders generally). After the recent Delaware decision in the so-called Match case, there is no doubt that the MFW standard applied in Tornetta, and that the Chancellor was correct in her use of it.
In Tornetta, the facts showed very, very clearly that Musk controls Tesla, and that Musk essentially negotiated the pay package -- larger than any pay package in history -- with himself. He proposed the terms, he set the timetable for the discussions, etc. And, the committee that supposedly negotiated with him was far from independent; its members had very close personal and/or financial relationships with Musk.
So, the entire fairness standard applied. One (but only one) of the factors the Chancellor considered in determining that the 2018 grant was not entirely fair was that Musk *already* had a huge incentive to see Tesla's operational performance improve and share price increase. He owned close to 20% of the company at the time of the 2018 grant. The CEOs at Amazon, Meta, and Microsoft, for instance, take no compensation at all because they recognize that their stock ownership is already a material incentive.
Rather than go back to square one, set up the correct procedural safeguards, and negotiate a new deal, the Tesla board -- no doubt at the bidding of Musk -- called for a shareholder vote to "ratify" the defective deal. And that, quite simply, is utterly contrary to MFW. Many lawyers looking at the ratification attempt while it was underway were, as I was, convinced it was legally defective for multiple reasons. I'm sure Musk was warned that by his lawyers, but he elected to plow ahead anyway.
And, of course, having obtained the predictable result, Musk now seeks to vilify the Court of Chancery.
Thanks for taking the time to explain. I really appreciate it Lawrence.
The reasoning you provided is probably why in the future founders who considered taking their company public will consider keeping it private much longer or never go public.
That influencing stake is often applicable.
In other companies you referenced founders have special stock that allows them to remain on top of core decisions, which Tesla does not have.
Your point of Musk negotiating with himself I have heard before.
I don’t doubt that that is an option/possibility, but it begs the question why any sane person would set criteria that anybody, literally anybody, considered unachievable.
This to me, being not a lawyer is to argue after the fact that anybody could see Roger Bannister was massively motivated to break the 4-minute barrier for the 1-mile run, so any benefit he negotiated, potentially with himself is null and void.
He knew in his heart of hearts that he could probably do it, so he does not deserve the reward.
That’s just how it looks to me using that argument.
What I was mainly pointing towards is the understanding that, like you did to help me understand, in the future, other shareholders can now look and find cases where they feel what happened in the Torretta case applies to them, even years after the fact and based on knowing the outcome.
By the way, had Musk really negotiated with himself and had set criteria much easier to achieve - those that the experts said could be reasonably expected, it follows (I hope you would give him at least that much foresight) the term of the contract would have been much shorter.
Being able to look at the actual development, a 2-3 year term would have meant he would have negotiated with the BOD or himself another contract from a much stronger position for probably even higher awards.
The case was brought as I understand it because a shareholder felt he and the other shareholders are harmed by such a large award of shares to the top executive.
With less stringent criteria I would argue, using the same logic, that shareholders would be significantly more harmed by mulitple contracts with ever increasing rewards between 2018 and 2025.
I realize that this is a case that is wonderful to talk about, learn about the legal system and learn from you how to interpret what’s going on. I am very thankful for that and you being willing to take the time to educate.
I am personally sure that regardless how this case ends, Musk will get compensated in one way or another and one thing that is now gone, independent of the case, is the possibility to wonder if the originally set and as ridiculous described targets will be met.
I think it is very probable that a new BOD negotiating a new contract will answer the questions: Does Musk deserve 12% of the shares as a reward for work already performed and still to be performed till the end of 2025 is: Yes.
We’ll see
This case is a great lesson, and I would, if for no other reason than the precedence that’s been now set in Delaware, not incorporate there.
On the other hand I only have a small S-Corp registered in Nevada, so I don’t have to worry. 😉😁
The line is in the same spot it was before this case. There were several deficiencies with the initial vote, in no small part due to the negotiation process .
Had the judge ruled that the initial vote was valid she would have effectively been saying "it was improper, but since the majority got rich it's ok". Shareholders are not a homogeneous group, but they are all protected.
Then, had the judge ruled that the ratification vote was valid, THAT would have been serious upheaval and flown in the face of all reason.
Ok
So now, following this reasoning if the executive removes his support all shareholders ultimately lose everything, especially in the case of Tesla.
He has already partially moved on to all the companies he owns privately.
Business will not work if we decide results don’t matter and process is everything
Socialism works that way and has always failed
Musk has an immense incentive to make Tesla work. It is the only one of his companies that throws off cash.
The big problem with Tesla is that, because of his cynical stock pumping through lies such as Full Self-Driving, robotaxis, Optimus, AI, and Trump-will-save-me-from anything, the stock is now at a ridiculous valuation. Something like 180 times forward earnings. There is bound to be an epic fall. I blame Musk and, especially, the Tesla Board of Directors, which allowed this to happen.
Also worth noting: the Tesla board did not condition the 2018 grant on Musk spending any definite amount of time at Tesla.
Lawrence, as much as I love the discussion about the legal case, I totally disagree with this position.
Sure, one can argue that the valuation in the trader’s casino is totally wrong.
That has nothing to do with the company.
It has only to do with what people believe will happen in the future and how much they are willing to pay to be part of it (or short to show everybody how wrong they are 😁😁)
As far as I know SpaceX is fundamentally profitable both through Starlink and other launch contracts and would be much more so if Musk would not want to develop Starship.
We have the luxury to watch and wait.
Will FSD work and how soon?
Will Optimus work and how soon
Will X.ai work and what will the impact on AGI be if it does?
Will Neuralink get approved for full market penetration and what can be charged to let people walk or see or hear again?
To me these are all related.
FSD will work (if at all) due to the massive datacenter clusters and all the data collected by the cars. (or maybe it doesn’t)
Optimus will use what’s learned in FSD and apply to all functions it can be used for
AI, if it works will change our lives in ways we can’t even imagine - and its probably going to be AGI. Will that come through Tesla and X.ai or OpenAI, or Amazon, or others we don’t know yet, we’ll see.
Neuralink will probably gain functions based on all the AI and AGI developments as our way to interact with compute will change.
I can’t wait till typing is no longer needed and I can just speak (and should I be brave enough to get a Neuralink device) think what I want to say - or does that even make any sense anymore?
If I think it directed to an Optimus in my house or an Alexa that speaks it, or some other system we can’t even imagine yet at speeds our fingers or our speech can never reach, how will the world look like?
I realize that all of this happening with a great outcome is probably unrealistic, but with so many companies beside all the Musk companies working on it, I fail to see how to give a proper valuation.
I am remined of Amazon. Yes, this is an unfair comparison because what FSD, Optimus, AGI, etc. would mean to live is massively more impactful than digital books and ordering online.
Still, for so many years people have accused Jeff Bezos about the company only producing losses and predicting it would never turn into something meaningful - and then it did and the shareholder who bought between 1997 and 2015 (18 years) we called stupid got rich.
Now people wish they had bought when the company (AMZ) was 20 years old at about $47/share.
If some of what could happen at Tesla happens, we will look back the same way. I know they are not yet 20 years old yet, but I would argue that anybody wished they bought in 2020 at the 10-year anniversary.
We’ll see where it is at it’s 20 year and 30 year anniversary - I believe it will be at least similar to the Amazon story - but maybe they fail at everything and have disappeared by 2040
"How about defendants? They are, by my estimation, 99.96% certain to lose on appeal." How about an even money bet for $10,000 that the decision below is not affirmed? Seems like easy money for you.
As you may know, and would know if you read my latest piece, the proposed legislation may change everything. It’s very crooked. Maybe you’re part of the gang promoting it?
Do you (or the Chancellor) really believe that shareholders only voted for Musk's compensation because they were not fully informed about his influence over the board? If politicians could invalidate an election for the same reason, there would be endless litigation by the losers. In any event, how is it equitable to tell Musk he worked for nothing since 2018 because of a faulty proxy statement even though shareholders that stuck with him profited greatly from his work? The Chanceller justified that by pointing out that his stock increased in value. So, if a CEO owns a lot of shares, he does not deserve any other compensation? Where does Delaware law say that? for Seems like a non sequitur to me.