Friday, January 26, 2024

The Specter of Twitter v. Musk Keeps Reappearing

So, there was a lot going on in Twitter v. Musk, some of it in the actual case, but much of it in the speculation of we legal types as we gamed out various potential scenarios.

One scenario that kept recurring was whether Delaware would in fact have the ability to actually enforce a judgment against Elon Musk, should he choose to simply defy court orders.  That was never a likely scenario; Musk is a repeat player in Delaware and it was never feasible for him to remain the CEO of a public company organized in Delaware while running from the Delaware courts.

But if that happened, it seemed one solution would be for Delaware to seize his Tesla shares, and his SpaceX shares, and then either sell them or more likely simply hold them until he complied with the judgment.  The logic was that, according to DGCL §169, shares of a Delaware corporation exist, in the abstract, within the state of Delaware, and Court of Chancery Rule 70 says:

If a judgment directs a party to execute a conveyance of land or to deliver deeds or other documents or to perform any other specific act and the party fails to comply within the time specified… On application of the party entitled to performance, the Register shall issue a writ of attachment or sequestration against the property of the disobedient party to compel obedience to the judgment. The Court may also in proper cases adjudge the party in contempt. If real or personal property is within the jurisdiction of the Court, the Court in lieu of directing a conveyance thereof may enter a judgment divesting the title of any party and vesting it in others and such judgment has the effect of a conveyance executed in due form of law. When any order or judgment is for the delivery of possession, the party in whose favor it is entered is entitled to a writ of execution or assistance upon application to the Register in Chancery. The provisions of this paragraph shall not be construed to replace any statutory authority granted this Court to compel performance by a substitute.

…For failure to obey a restraining or injunctive order, or to obey or to perform any order, an attachment may be ordered by the Court upon the filing in the cause of an affidavit showing service on the defendant, or that the defendant has knowledge of the order and setting forth the facts constituting the disobedience. …

Which, as I read it, grants Chancery pretty wide latitude to force compliance with court orders by seizing property within its jurisdiction.

And, in fact, on October 3, 2022 – right before Twitter v. Musk settled – VC Laster issued an opinion in In re Stream TV Networks Omnibus Agreement Litigation doing just that.

Now a big difference between that case and Twitter was, in that case, the shares themselves were the subject of the dispute.  SeeCubic had been ordered to transfer its assets to Stream, and instead of doing so, it arranged matters to ensure that certain shares of a Delaware company were seized by another company, Hawk.  Stream filed an emergency motion to get the shares back, and VC Laster relied on Section 169 and Chancery Court Rule 70 to order that Hawk be divested of the shares, and that they be vested in Stream.  So yes, it seemed a Delaware Chancery court could in fact simply order that shares of a Delaware company be transferred to someone else or sequestered to ensure compliance with a court order, and there did not seem to be a reason why the same principle wouldn’t apply to assets unrelated to a particular dispute.

But then!  In May 2023, then-Superior Court Judge LeGrow (now on the Delaware Supreme Court) decided Deng v. HK XU Ding.  There, Plaintiff Deng sold shares of iFresh, a Delaware corporation, to Defendant HK.  HK never paid the full purchase price, however, and Deng sued in New York for the remainder of the purchase price.  He won a default judgment of around $2.5 million, and then went to Delaware to execute.  The assets available to satisfy the monetary judgment were, of course, the iFresh shares, so Deng sought to attach them.

The problem was that these shares actually had been certificated, and the physical certificates had been seized by Chinese authorities.  Deng argued that didn’t matter; Judge LeGrow held that it did.

Relying on DGCL §324(a) and 6 Del. C. §8-112, Judge LeGrow held that when certificates of the stock exist, they may be attached to satisfy a debt only if the physical shares are seized.  The Delaware Supreme Court heard oral argument on that question earlier this month.

So, I’ll openly admit I don’t know how far the two situations interact; maybe not at all.  Sections 324 and 8-112 are about creditors satisfying debts, not about seizing for the purpose of forcing compliance with a court order/as a sanction for contempt, and possibly those are different scenarios.  (If you are a Delaware law maven who has a definitive answer, please drop a comment.)  But if LeGrow’s interpretation holds up across all scenarios, that would mean future Musks could, if they wanted to, evade sanction in Delaware by I guess going to DTC and getting physical certificates of their shares, and then sticking them in a vault in another state.  Or Bermuda or the Cayman Islands.  Of course, that would make them hard for anyone to seize, and I have no idea whether that would interfere with attempts to use them as security for personal loans, as Musk and many other executives do.

Edit:  I should add that another complexifying factor here is that the Chinese government obviously thinks it has possession of the shares. If Delaware holds that you do not need the physical certificates, is it challenging the claim of the Chinese government?  That presumably is a fight Delaware does not want to have; the problem is, there is a difference between the owner refusing to turn over the certificates to avoid a judgment, and another creditor/claimant refusing to turn them over.  The plaintiff in Deng admits there is a bona fide purchaser exception, but not every certificate seizure will involve those.

https://lawprofessors.typepad.com/business_law/2024/01/the-specter-of-twitter-v-musk-keeps-reappearing.html

Ann Lipton | Permalink

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