Business Law Prof Blog

A Recent Snapshot on American Retirement Readiness

Senator Sanders recently released the Majority Report for the Senate's Health, Labor, Education, and Pensions Committee.  That report has some grim findings about American retirements.  About half of people 55 and older have no retirement savings.  As we all know, defined-benefit pensions have become increasingly rare.  Unfortunately, defined-contribution pensions are often unavailable for a huge chunk of the workforce.  About 50 million workers don't have a way to save for retirement through their payroll.

The report and its figures has to be part of any conversation now about how to think about efforts to improve the quality of financial advice and retirement savings.

There is much more in the report than this quick summary, and if you write or think about retirement issues, you should check it out.

Status and Corporate Stakeholders

Check out High-Status Versus Low-Status Stakeholders, an intriguing paper authored by one of our business school brethren, Justin Pace.  In this work, Justin approaches an important, yet difficult, topic at the intersection of corporate governance and the class divide.  The SSRN abstract follows.

The literature on stakeholder theory has largely ignored the difficult and central issue of how judges and firms should resolve disputes among stakeholders. When the issue is addressed, focus has largely been on the potential for management to use stakeholder theory as cover for rent seeking or on disputes between classes of stakeholders. Sharply underappreciated is the potential for disparate interests within a stakeholder class.

That potential is particularly acute due to a (largely education-driven) stark and growing class divide in the United States. There is a substantial difference between the interests of a highly educated professional and managerial elite and a pink-collar and blue-collar working class who mostly do not hold four-year degrees. Despite their smaller numbers, the professional and managerial elite will frequently win out in intra-stakeholder disputes with working class stakeholders due to their greater status, power, and influence.

Because this class divide is cultural, social, and political as well as economic, these disputes will go beyond financial pie splitting to culture war issues. This threatens to be destabilizing for both the republic and individual firms and undermines both the practical and ethical arguments for the stakeholder theory.

I also have been engaged by the idea that no class of stakeholders is homogeneous.  Business law scholars certainly could do a lot more work fleshing our salient differences of interest among stakeholders of a single type (including shareholders).  I (along with many others) have been known to note that not all shareholders have the same interests, for example. 

I look forward to digging into Justin's article in more depth.  Based on my review so far, there are insights in it for many different business law scholars.  (Co-blogger John Anderson might enjoy his references to virtue theory, for example . . . .)  Anyway, give it a look.

Counseling Creators: Influencers, Artists and Trendsetters Negotiation Competition and Conference

If you happen to be in Miami or think it's worth it to fly there next week, this is for you. I'll be moderating the panel on regulatory considerations for promoters and influencers and we have student teams competing from all over the country. 

February 29 - March 1
University of Miami

Content is king. We live in the golden age where content creators, artists, and influencers wield power and can shift culture. Brands want to collaborate. Creators need to be sophisticated, understand deal points and protect their brand and intellectual property. Miami Law will be the first law school in the country to pull together law students with leading lawyers, influencers, artists, creatives and trendsetters for a negotiation competition and conference.  

Negotiation Competition - Thursday, February 29 

Where

Shalala Student Center, 1330 Miller Drive, Coral Gables, FL 33146

Who Should Participate

This competition is ideal for law and business students. THE. TEAMS ARE FINALIZED ALREADY.

What to Expect

Participants will have the chance to represent influencers, brands, artists, fashion companies and other creators in the first ever Counseling Creators: Influencers, Artists and Trendsetters Negotiation Competition

• Register a team of law students (can include business school students)
  1. Team of up to 4
  2. Individual registrants will be placed on a team
• In advance of the competition, you will be assigned two negotiations where you may be representing your favorite influencer, brand, artist, or fashion company negotiating the compensation, deliverables, and key deal points
• Industry judges will grade your negotiation and provide feedback
• Top teams will advance to the final negotiation to be held live during the conference 

Conference - Friday, March 1 

Where

Lakeside Village Auditorium, 1280 Stanford Dr, Coral Gables, FL 33146

Who Should Attend

This conference appeals to all lawyers, law students, brands, influencers, artists and creators for the first ever law school conference on Counseling Creators: Influencers, Artists and Trendsetters.  

What to Expect

• Panel conversations + Keynotes
• Topics such as: The Business of Content Creation, Fair Use for Content Creators, Clearances for Creators, The Brand Deal, Compliance and Regulatory Considerations for Creators, Promoter Liability
• Opportunity to network and learn from industry leading creators, brands, and lawyers and more

PROGRAM (Subject to change)

9:00am - 9:15am         Opening Remarks

9:15am - 10:15am       The Brand Deal

Moderator: TBA

Speakers:

Jennifer Karlik, Director of Business Development, CAA Brand Management
Michael Calvin Jones, SVP, Creators, Wasserman
Mark Middlebrook, VP, Legal Affairs, Fanatics Collectibles
Michael Isselin, Partner, Entertainment & Media Group, Reed Smith
Jonathan Seiden, Senior Vice President, Associate General Counsel, Endeavor

10:20am - 11:20am    Fair Use and Clearances for Creators

Moderator: Vivek Jayaram, Founder, Jayaram Law and Co-Director, Arts Track, Entertainment, Arts and Sports Law Program at Miami Law

Speakers:
John Belcaster, General Counsel, MSCHF and Miami Law Entertainment, Arts and Sports Law Program Advisory Board Member
Katie Fittinghoff, Creative, MSCHF
Matt Rayfield, Creative, MSCHF

11:30am - 12:30pm    Athletes as Content Creators 

Moderator: Greg Levy, JD ’10, Associate Dean & Director Entertainment, Arts & Sports Law Graduate Program, Miami Law

Speakers:
Kirby Porter, Founder, New Game Labs
Michael Raymond, Founder, Raymond Representation
Bob Philp, Sr. Executive, Sports Partnerships & Talent Management, Roc Nation Sports
Darren Heitner, Founder, Heitner Legal

12:30pm -1:30pm      LUNCH
 

1:30pm – 2:20pm      Creator Fireside Chat

2:25pm - 3:25pm       Regulatory Considerations and Promoter Liability for Creators

Moderator: Marcia Narine Weldon, Director of Transactional Skills Program, Miami Law

Speakers:
Toam Rubinstein, JD ’13, Senior Associate, Entertainment & Media Group, Reed Smith
Mr Eats 305, (@MrEats305), Food, Travel, & Lifestyle Creator & Law School Graduate
Tyler Chou, Founder and CEO, Tyler Chou Law for Creators

3:30pm - 4:30pm       The Fashion Collaboration

Moderator – Carolina Jayaram, CEO, The Elevate Prize and Co-Director, Arts Track, Entertainment, Arts and Sports Law Program at Miami Law

Speakers:
Demeka Fields, Counsel for Global Sports Marketing, New Balance
Danielle Garno, Partner and Co-Chair of Entertainment Practice, Holland & Knight and Miami Law Entertainment, Arts and Sports Law Program Advisory Board Member
Matthew Growney, Founder, Thermal Brands; Sr. Advisor (Fashion/Creative), PUMA & Stella Artois

 
4:40pm - 5:30pm       Competition Final

 

For More Information

Contact [email protected] or 305-284-1689.

 

 

 

 

The Materiality of Audit Opinions

A while back, I posted about an eyebrow-raising opinion out of the Second Circuit holding that clean audit opinions may not be material to investors because they use generic language.  Happily, the Second Circuit has agreed to take a second look at the issue, and invited the SEC to file an amicus brief, which it did.  (Alison Frankel has a column on the case here; the brief is linked here)

The brief is simple and makes the obvious point that the language of a clean audit opinion may be standardized, but its use reflects an industry understanding regarding the procedures used in the audit and the auditor’s conclusions.

One thing worth highlighting: As I explained in my original post, the way we seem to have gotten here is that the defendant auditor conducted a shoddy audit, but then argued that there was no link between its own audit deficiencies and the actual flaws in the underlying financial statements – i.e., even a proper audit would not have caught the problems.

The SEC argues that, even if true, that would not make the audit opinion immaterial; it might, however, affect the analysis of loss causation.  The distinction matters a lot to the SEC, because loss causation is only an element for private litigants; materiality, however, is an element that the SEC must prove in its own enforcement actions.

I agree with the SEC: a claim that the auditor would have issued a clean opinion – and missed the problems in the underlying financials – even if it had used proper procedures, is more properly characterized as a claim about loss causation, i.e, whether the false statement resulted in losses to the shareholders.

I like to use a little rule of thumb on the distinction between transaction causation (materiality) and loss causation.  Transaction causation asks, what would have happened if investors knew the truth?  Loss causation asks, what would have happened if the lie had been true? 

If investors would have done nothing differently, even had the truth been disclosed, the lie is immaterial. (This is, by the way, precisely what the Second Circuit has previously said about materiality). 

If the same losses would have occurred even if the allegedly false statements had been truthful – i.e., if there was some intervening cause that tanked the stock price – there is no loss causation.

In this case, it is impossible to believe that investors would have had no reaction had they been told the company was incapable of presenting a clean audit opinion.  Therefore, the Second Circuit should hold that the opinion was material.

And okay fine since I can’t resist…

As Ben Edwards blogged on Thursday, VC Laster came down with his long-awaited opinion in TripAdvisor.  The case was fascinating enough as it was – could it be a violation of fiduciary duty for a Delaware corporation to leave Delaware? – but in light of Elon Musk’s latest threats, it took on a heightened significance.

Most interestingly, VC Laster found, first, yes, a controller’s choice to relocate to a state that scrutinizes conflict transactions less closely than Delaware may itself be a conflict transaction.  And, second, damages rather than an injunction would almost certainly be the correct remedy.  Damages, he claimed, could be assessed by watching stock price movements; and not even necessarily at the moment of a shareholder vote, but even upon announcement of an intention to hold one.  (Which works for a public company, I guess; I assume we won’t see these disputes in private companies but that context would make a damages remedy much harder to fashion).

But here’s the thing.  To get there, he had to distinguish some prior cases that concluded that the elimination of litigation rights did not state a claim for breach of fiduciary duty.  This issue had come up, for example, in the context of charter amendments adding an exculpation clause under Section 102(b)(7), and in a reincorporation to California.  VC Laster was pretty clear that he simply thought some of them were wrongly decided, but his main point was that in those cases, the amendments were immaterial – i.e., it was not clear that the change conferred a non-ratable benefit on existing directors.  By contrast, he held, in this case, the differences between Nevada law and Delaware law are sufficiently plain – and the controller’s reasons for wanting the move sufficiently blatant – that the stockholder plaintiffs had at least, for pleading purposes, established they were losing a valuable right.

So … Texas?  As I previously wondered, Texas’s law might be different than Delaware’s but it is not obvious that it is so different – especially with respect to conflict transactions – that plaintiffs would be able to plead the same case.  And Musk may believe the Texas judges will less receptive to stockholder claims than Delaware judges, but, in TripAdvisor, VC Laster held that stockholders’ loss of access to any particular forum does not confer a material benefit on fiduciaries.

But!  If plaintiffs were able to plead that the move to Texas conferred a material benefit on Elon Musk, and then they had to prove damages via stock price movements – well, Musk gave them quite a boon by tweeting on January 30, in the middle of a dramatic slide in Tesla’s stock price due to the Tornetta verdict, that he hoped to reincorporate out of state.  That will sufficiently muddy the waters about price impact so as to give plaintiffs plenty of runway. 

Once again, foiled by bad tweets.

But finally, I think it will take quite a while to get that far, because if Tesla ever files a proxy statement for a shareholder vote, we will see some truly popcorn-worthy litigation over the completeness of the disclosures.  Will the proxy admit – or deny – the move was based on a Twitter poll?  How will the purposes of the move be characterized?  What was the board’s process for recommending the move, and how independent were the directors?  According to the WSJ, the directors intentionally keep concerns about Musk’s drug use out of the board minutes – can shareholder plaintiffs use §220 to get emails, then?  Etc, etc.

Delaware's TripAdvisor Decision

Vice Chancellor Laster has issued his opinion in the TripAdvisor case.  I'm still digesting it, but the overall framework does not surprise me.  As I can't improve on the opinion's recitation of the basic factual situation, here it is:

A Delaware corporation has two classes of stock. The CEO/Chair owns highvote shares carrying a majority of the outstanding voting power, giving him hard majority control. The board decides to convert the Delaware corporation into a Nevada corporation, and the CEO/Chair delivers the necessary stockholder vote. The board does not establish any protections to simulate arm’s length bargaining. The conversion is not conditioned on either special committee approval or a majority-ofthe-minority vote.

A stockholder plaintiff challenges the conversion.1 The plaintiff argues that Nevada law offers fewer litigation rights to stockholders and provides greater litigation protections to fiduciaries like the directors and the CEO/Chair. The plaintiff alleges that the directors and the CEO/Chair approved the conversion to secure the litigation protections for themselves. In support of those assertions, the plaintiff cites the materials the board considered, disclosures in the company’s proxy statement, the work of distinguished legal scholars about the content of Nevada law, and public statements by Nevada policy makers about the direction Nevada law has taken.

I appreciate that the opinion gives a neutral framework under Delaware law for how to assess liability for changes in governance and litigation rights.  Although it's Nevada today, Tesla might be jumping to Texas tomorrow.  This decision provides guidance for how to think about that problem.  This passage does a good job presenting the issue:

Holding that the plaintiffs have stated a claim on which relief can be granted does not discriminate against Nevada entities. The same reasoning would apply if a Delaware corporation converted into another Delaware entity in a transaction with comparable implications. Using the contractual freedom conferred by the Delaware Limited Liability Company Act, entity planners can implement a wide array of governance schemes that provide fewer rights to investors than what stockholders in a Delaware corporation enjoy. If a Delaware corporation converted into a Delaware LLC where the governing agreement had eliminated all fiduciary duties, then the same reasoning would hold. Entity planners could even design a Delaware LLC that mirrors the internal governance structure of a Nevada corporation. If a Delaware corporation converted into that LLC, the outcome would be the same.

After deciding that the entire fairness standard will apply, the decision also clearly charts a path to leave Delaware without any liability:

Nor does this decision mean that a corporation can never leave Delaware without litigation risk. If a board proposed a similar conversion for a corporation without a stockholder controller, and if the fiduciaries fully disclosed the consequences of the change in legal regimes, including the effect on stockholder litigation rights, then the stockholders’ approval of the conversion would be dispositive, triggering an irrebuttable version of the business judgment rule. If directors proposed a similar conversion for a corporation with a stockholder controller, and if they properly conditioned the transaction on the twin MFW protections, then the dual approvals would be dispositive, again triggering an irrebuttable version of the business judgment rule.

For some public companies, Nevada may be a better fit than Delaware simply because of the cost issue.  Controlled corporations can exit with a two-step process and corporations without a controlling stockholder can make the move with a simple shareholder vote.

Going forward, a real challenge will be deciding how to value the change in litigation rights.  The opinion sketches out a possible market method:

The standard legal remedy is money damages. It seems quite likely that the court can craft a monetary remedy in this case that would be adequate. The remedial challenge will be to quantify the extent of the harm, if any, that moving from Delaware to Nevada imposes on the unaffiliated stockholders.

One way to determine the quantum of harm would be to value the Company pre-conversion as a Delaware corporation, then value the Company post-conversion as Nevada corporation, subtract the Nevada value from the Delaware value, and calculate a per share amount. That would be hard.

But there is another way to get at the delta. The Company’s stock has a trading price. In the conversion, nothing will change except the Company’s corporate domicile. Maffei’s control will remain constant. The Company’s business will remain constant. The only independent variable is the law governing its internal affairs.

Given that set-up, the change in the Company’s trading price should help quantify the harm, if any, caused by the conversion. As long as the market for the Company’s common stock is semi-strong-form efficient, then the price reaction should be indicative. Note that the stock price need not fairly approximate a pro rata share of the Company’s intrinsic value for the price reaction to matter. As long as any pricing disconnects remains consistent across variables other than the governing law, the price impact should provide insight.

From a Nevada perspective, the state will hope that companies trade up after these moves.  I previously proposed using markets to evaluate governance changes.  Although this method might shed some light on the valuation question, it's going to be a challenge.  Of course, this may also open the door to some disclosure gamesmanship.  It seems possible that a corporation announcing or completing this kind of move to Nevada might also selectively reveal some positive information at the same time.  That would increase the likelihood the stock would trade up and perhaps cloud or mask any impact from investors selling on the loss of their governance rights. 

It's probably worth also taking a look at other corporations that have made this move and what happens with their stock price.  If Delaware law and Nevada law are somewhat constant, you could likely get a better sense of the effect these moves have on valuation by getting a bigger dataset together.

If we're looking at changes in litigation rights and using this framework here when a company shifts from Delaware to Nevada or from a Delaware Corp. to a Delaware LLC, would we also use it for other governance changes?  What about a move to amend the bylaws in some way that affects litigation rights or a move to add a 102(b)(7) provision to a corporate charter?  My first thought is that the same framework should apply.  

In any event, this is going to be fun to watch.

Northwestern Law School Workshops on Research Design for Causal Inference

Dear BLPB Readers:

For those of you who might be interested in strengthening your knowledge of empirical methods, Northwestern Law School is offering two summer workshops on Research Design for Causal Inference.  An overview of the main workshop and its target audience is below.  The complete details of the main and advanced workshops are here.

"Main Workshop Overview

We will cover the design of true randomized experiments and contrast them to natural or quasi experiments and to pure observational studies, where part of the sample is treated, the remainder is a control group, but the researcher controls neither which units are treated vs. control, nor administration of the treatment. We will assess the causal inferences one can draw from specific "causal" research designs, threats to valid causal inference, and research designs that can mitigate those threats.

Most empirical methods courses survey a variety of methods. We will begin instead with the goal of causal inference, and how to design a research plan to come closer to that goal, using messy, real-world datasets with limited sample sizes. The methods are often adapted to a particular study.

Target Audience

Quantitative empirical researchers (faculty and graduate students) in social science, including law, political science, economics, many business-school areas (finance, accounting, management, marketing, etc.), medicine, sociology, education, psychology, etc. –  anywhere that causal inference is important.

We will assume knowledge, at the level of an upper-level undergraduate econometrics or similar course, of multivariate regression, including OLS, logit, and probit; basic probability and statistics including confidence intervals, t-statistics, and standard errors; and some understanding of instrumental variables. This course should be suitable both for researchers with recent PhD-level training in econometrics and for empirical scholars with reasonable but more limited training."

Call for Papers - Global Conversations in International Business Transactions

Richmond Law Seeking Spring 2025 Business Law Visitor

From friend-of-the-BLPB Jessica Erickson:

The University of Richmond School of Law is looking for a visitor next spring (2025) in the business law area.  Specifically, we are looking for coverage for our Mergers & Acquisitions course, as well as either Securities Regulation or Business Associations. If you might be interested, please reach out to Kristen Osenga, our Associate Dean for Academic Affairs, at [email protected].  I am also happy to answer any questions about the school and our fabulous students and faculty.

Baiardi Endowed Law Speaker Series - Wayne State Law

I have the privilege and honor to be in Detroit today to present the second annual Baiardi lecture at Wayne State University Law School.  Wayne Law is a bit of a second home for me (a status it enjoys with several other law schools).  I have presented at two symposia here (publishing twice, as a result, with the Wayne Law Review).  Also, Wayne Law was the academic pied à terre of Peter Henning, who was a trusted and dear mentor (and an accomplice in reasoning through insider trading and applied corporate governance questions) until his untimely death.

My lecture addresses aspects of a joint project I previewed at the National Business Law Scholars Conference at Tennessee Law last June.  The project is the brainchild of my Tennessee Law colleague Tomer Stein and involves taking a new approach to the ongoing debate about federalizing corporate law.  The talk offers some practical applied thoughts on the project and is entitled "Visioning (Not Advocating or Discounting) Federal Corporate Law." I undoubtedly will have more to say on this topic as our work on the project progresses.  But if you think of or come across anything you deem relevant to the cause and have time to contact me or Tomer, I know we would be grateful for your insights and suggestions.

[Please note that, although the notice above says the day of the week is a Thursday, I am speaking today--Monday.]

Seeking Applicants for the Executive Director of the Lowell Milken Institute for Business Law and Policy

POSITION OVERVIEW

Position title: Executive Director of the Lowell Milken Institute for Business Law and Policy

Salary range: A reasonable estimate for this position is $200,000 to $250,000

APPLICATION WINDOW

Open date: October 30, 2023

Most recent review date: Sunday, Jan 7, 2024 at 11:59pm (Pacific Time)
Applications received after this date will be reviewed by the search committee if the position has not yet been filled.

Final date: Sunday, Mar 31, 2024 at 11:59pm (Pacific Time)
Applications will continue to be accepted until this date, but those received after the review date will only be considered if the position has not yet been filled.

POSITION DESCRIPTION

The Lowell Milken Institute for Business Law and Policy (“Institute”) is seeking an Executive Director with substantial practical experience in business law and policy to plan, oversee and execute the work of the Institute. The Institute is, by design, a dynamic one and the Executive Director will have significant opportunity to creatively shape the Institute’s mission and initiatives together with key faculty and leaders at UCLA School of Law. The Institute supports and expands educational opportunities, job-search support, academic scholarship, and policy analysis in business law and tax law. The goals of the Institute are to train the next generation of leaders in business law and to be an important resource for both scholars and practitioners in analyzing current issues in business law and tax law and developing policy solutions in response to those issues. The Executive Director will lead a talented team, and will oversee the Institute’s core programs, fundraising, and operation.

The full position description can be found here. Hat tip to friend-0f-the-BLPB Andrew Verstein.

Cincinnati Law - Corporate Law Center Director Search

The University of Cincinnati College of Law is currently undertaking a search for a new director of our Corporate Law Center. A description is below.  Hat tip to Kate Jackson.

About the Center

The Corporate Law Center at the University of Cincinnati College of Law was founded in 1987.  Its mission is to carry out  programs related to the education and training of students and others in the field of corporate law.  The Center has historically fulfilled its mission in a variety of ways, including the following: Awarding CLC fellowships to incoming law students, hosting an annual symposium devoted to trending topics in business law, supporting research, coursework, and other academic activities related to corporate law, sponsoring the student-led Business Law Society at the College of Law, supporting the Entrepreneurship and Community Development Clinic, which provides transactional legal services to start-ups, small businesses, and non-profit organizations; supporting the Patent & Trademark Clinic, which provides intellectual property legal services to individuals and businesses throughout the Cincinnati entrepreneurial ecosystem, and administering the Business Law Concentration for current law students.

Many of these activities continue to be enormously valuable. As part of the creation of a vision and strategic plan, the new Director will undertake a full programmatic review of the CLC and determine what kind of restructuring and reimagining is necessary to bring the CLC to the next level, as the leading national center of its kind.  Additional activities in this regard may include the creation of additional educational opportunities for students, a mentoring program, the establishment of an advisory board, and roundtables and seminars for members of the bar.

Job Overview

The College of Law seeks an innovative and dynamic leader to reinvigorate and reimagine its storied Corporate Law Center ("CLC").  Reporting directly to the Dean and working closely with its Academic Director, the new Director of the CLC will be responsible for defining a vision for the CLC, developing the resources to carry the vision out, and raising the profile of the CLC so that it is properly recognized as one of the premier centers of the College of Law. 

The ideal candidate will be collaborative and visionary, with experience in transactional law and a passion for the educational mission of the College of Law.  The candidate's background will reflect the potential to build strong and lasting partnerships with various constituencies both within and outside the institution to advance the mission of the Corporate Law Center.  The ideal candidate will also demonstrate the capacity to tailor academic and nonacademic programming to meet the unique needs of law students interested in transactional law.  Finally, the candidate will have a demonstrated track record of bringing a vision from its original conception through to full implementation.  

The position is structured as a two-year term, with the potential for extensions if the CLC is successful in obtaining funding to support the position for a longer period. 

Standard Days Worked: M-F
Type of Appointment: Full-Time (12 Months)
Work Location:  In-person.  The office location is University of Cincinnati College of Law, 2925 Campus Green Drive, Cincinnati, Ohio 45221.

Essential Functions

• Undertake a full programmatic review of the CLC's current activities.
• Create a vision and a long-term strategic plan for the CLC.
• Develop the resources necessary to carry out the plan. 
• Build partnerships across campus and to the Cincinnati business community.
• Research, design, and implement high quality programming in the area of corporate law.
• Provide educational outreach to the transactional legal community through events, workshops, and collaboration with applicable partners.
• Collaborate with College of Law leadership, faculty, and staff, as well as campus and community members.
• Maintain data and provide reports on Center activities, as well as assessment of outreach and other efforts.
• May provide direct and/or indirect supervision to exempt and non-exempt staff (i.e., hiring/firing, performance evaluations, disciplinary action, approve time off, etc.).
• Perform related duties based on the needs of the Corporate Law Center.

Minimum Requirements

• Demonstrated capacity for developing a vision and creating and carrying out a strategic plan.
• Substantial capacity for fundraising.
• Commitment to working collaboratively and building partnerships to advance the mission of the CLC and the College.
• Strong communication skills.
• Deep commitment to creating a culture of inclusive excellence and belonging.
• Five years post-J.D. work experience in corporate legal practice or a related field.
• Juris Doctor.

Additional Qualifications Considered

• Experience with law teaching.
• A record of published scholarship in corporate law and related fields.

Application Information

• Interested and qualified applicants must apply online and include (i) a cover letter of interest, and (ii) a resume.  
• Applications without a cover letter and resume will not be considered for the position. Please use the additional documents feature as needed for these items.

More thoughts about advance notice bylaws

Fights over advance notice bylaws are becoming more common; I previously posted about Paragon Technologies v. Cryan, and right after that, VC Will decided Kellner v. AIM Immunotech.  In both situations, boards were found to have been overly aggressive in drafting and enforcing their bylaws, and VC Will went case by case to determine which actions were permissible and which were not.  And since the dissidents had not fully complied with even the permissible bylaws, VC Will would not order that their nominees be permitted to stand for election.

This strikes me as such a difficult problem.  On the one hand, there are good reasons for these bylaws, as both the Paragon and AIM disputes make clear.  In Paragon, the dissident really was playing games about providing information regarding its plans; in AIM, the contest was a continuation of one spearheaded a year earlier by a convicted felon who tried to conceal his involvement.  So yeah, boards have really legitimate interests in ensuring that shareholders have full information.

On the other hand, the blue pencil approach – where the noncompliant bylaws are severed and the legitimate ones remain standing – strikes me as having the same problem that’s been identified in the context of noncompetition agreements.  In the employment context, Chancery does not blue pencil, because:

To blue-pencil the provision creates a no-lose situation for employers, because the business can draft the covenant as broadly as possible, confident that the scope of the restriction will chill some individuals from departing. If someone does challenge the provision, then the worst case is that the court will blue-pencil its scope so that it is acceptable. It also enables employers to extract benefits at the expense of employees by including unenforceable restrictions in their agreements. The logical result of such a system is sprawling restrictive covenants.  Accordingly, “[w]hile, in some circumstances, a court may use its discretion to blue pencil an overly broad non[1]compete to make its restrictions more reasonable, this court has also exercised its discretion in equity not to allow an employer to back away from an overly broad covenant by proposing to enforce it to a lesser extent than written.”

Obviously, the employment context is not the same as an advance notice bylaw – dissidents are not nearly as vulnerable as employees – but there is, I think, a similar set of concerns.  If Delaware courts blue pencil the bylaws back to what – ex post – is determined to be reasonable, then boards have no incentive not to draft the most lengthy and unreasonable bylaws they can.  The dissident then has to guess at which ones are and are not permissible, and comply with the right set of bylaws – reveal too much and make themselves vulnerable, too little and disqualify themselves – while mounting an expensive court challenge that won’t necessarily create useful precedent for the next set of creative bylaws.

One aspect of the AIM case highlights the problem.  In 2016, the board had adopted a bylaw requiring disclosure of “all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made.”  In 2023, after having dealt with the convicted felon’s earlier contest, the board amended the bylaw to broaden that provision and capture associates and family members in a manner that VC Will found was unreasonable.  When the dissidents challenged the amended bylaw, rather than strike it entirely, Will decided to restore it to the narrower, 2016 version, and measured the dissidents’ compliance against that bylaw – the one that did not exist anymore.  The dissidents had not complied with the bylaw that did not exist, and that was one of the reasons why VC Will affirmed the board’s decision not to permit them to advance their nominees. 

Now, given the peculiar facts of this case, I’m not troubled by that result, but notice the bind this would have placed on a good-faith dissident slate.  They would have found it nearly impossible to guess what information was actually required of them.

I wonder, then, if the solution is to set some kind of blanket rule that certain types of bylaws are almost always going to be permissible.  If the board adopts bylaws that go beyond that floor, it does so at its own risk – if any additions are deemed unreasonable, all are struck, but the floor (to the extent adopted by the board) remains intact.  That way, dissidents know what the floor is for compliance, and there is no risk that, say, a felon gets through without any disclosure just because the board was overzealous.  Meanwhile, if the board has genuine need for information beyond the floor, it has an incentive to be judicious in crafting its additional requirements.

National Business Law Scholars 2024 - Call for Papers

National Business Law Scholars Conference (NBLSC) 

June 24-25, 2024 

Call for Papers 

The National Business Law Scholars Conference (NBLSC) will be held on Monday and Tuesday, June 24-25, 2024, at The University of California, Davis School of Law. 

This is the fifteenth meeting of the NBLSC, an annual conference that draws legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Junior scholars and those considering entering the academy are especially encouraged to participate. If you are thinking about entering the academy and would like to receive informal mentoring and learn more about job market dynamics, please let us know when you make your submission. 

Submission Guidelines: 

Please fill out this form to register and submit an abstract by Friday, March 15, 2024. Please be prepared to include in your submission the following information about you and your work: 

• Name 

• E-mail address 
• Institutional Affiliation & Title 
• Paper title 
• Paper description/abstract 
• Keywords (3-5 words) 
• Dietary restrictions 
• Mobility restrictions 

If you have any questions, concerns, or special requests regarding the schedule, please email Professor Eric C. Chaffee at [email protected]. We will respond to submissions with notifications of acceptance a few weeks after the submission deadline. We anticipate the conference schedule will be circulated in late April. 

Conference Organizers: 

Afra Afsharipour (University of California, Davis, School of Law) 
Tony Casey (The University of Chicago Law School) 
Eric C. Chaffee (Case Western Reserve University School of Law) 
Steven Davidoff Solomon (University of California, Berkeley School of Law) 
Benjamin Edwards (University of Nevada, Las Vegas Boyd School of Law) 
Joan MacLeod Heminway (The University of Tennessee College of Law) 
Nicole Iannarone (Drexel University Thomas R. Kline School of Law) 
Kristin N. Johnson (Emory University School of Law) 
Elizabeth Pollman (University of Pennsylvania Carey Law School) 
Jeff Schwartz (University of Utah S.J. Quinney College of Law) 
Megan Wischmeier Shaner (University of Oklahoma College of Law) 

This Post is Not (Just) About Elon Musk

Look, it’s not like I want to post about Elon Musk every week, it’s just that he keeps doing things that result in interesting corporate governance conundrums.  So this week’s post covers several things, only one of which is a Musk thing.

The Musk Thing

After Chancellor McCormick struck down his Musk’s 2018 pay package, one bit of speculation that floated about was whether Musk could sue Tesla to recover the package, on some kind of restitution/quantum meruit theory.  My suspicion is that such a claim would be unlikely to succeed because Musk’s own fiduciary breaches are what led to the original forfeiture, and he who comes into equity must do so with clean hands.  Or, as the famous jurist Leo Rosten put it, it would be like “a man who, having killed his mother and father, throws himself on the mercy of the court because he is an orphan.”

But despite the dubious merit such a claim would have, given the close ties McCormick identified between Tesla’s board and Elon Musk, there would be a risk that the board would take a dive and settle unnecessarily.

(More under the cut)

Continue reading

Professors Baker and Coleman on Metals Derivatives Markets and the Energy Transition

My coauthor, SMU Law Professor James W. Coleman, recently posted a draft of our article, Metals Derivatives Markets and the Energy Transition, on SSRN.  It's forthcoming in Transactions: The Tennessee Journal of Business Law, and was written in connection with Business Transactions: Connecting the Threads VII, the BLPB-related conference at the University of Tennessee Law School.  I had a wonderful time at the event, which has become one of my yearly favorites, and am truly grateful for UT Law School's consistently outstanding hospitality! 

Here's the abstract of our article:

Despite their escalating importance, thus far, there has been minimal legal scholarship on metals derivatives markets. Given the key role of these markets in the transition to a clean energy future, increased focus on them is imperative. Hence, it is not surprising that the agendas for the last four meetings of the Commodity Futures Trading Commission’s Energy and Environmental Markets Advisory Committee each dedicated a significant portion of the meeting to metals derivatives markets and their role in the transition to a clean energy future.

Fundamentally, the United States and the world are moving from their long-term dependence on the fossil fuels that built the modern world, to dependence on new commodities such as copper and lithium. Coal and then natural gas made the modern economy possible by providing heat, power, and electricity to growing industries and populations in the world’s growing urban centers. Then oil made globalization possible by powering international sea and air travel as well as overland vehicles. As electric vehicles increasingly displace fossil fuel vehicles and renewable energy sources increasingly replace fuels in heating and industry, the economic and geopolitical stakes of metals markets will grow higher and higher. The criticality of metals derivatives markets, such as the dysfunctional market for nickel, will also escalate as governments, businesses, and others seek to hedge risks related to the increasing global dependency on metals.

Our article makes at least two contributions. First, it expands the minimal analysis of metals derivatives markets in the legal scholarship. Indeed, to the best of the authors’ knowledge, this is the first law review article to focus primarily on these markets. Second, it explores the role of metals derivatives in preparing for the transition to a clean energy future. We provide a brief overview of metals derivatives, including new markets in development, and their regulation in Parts I and II, respectively. In Part III, we explore the central role of metals derivatives markets in securing a clean energy future.  

Packin and Alon-Beck on Board Observers

I had the opportunity to attend one of the sessions in the Interdisciplinary Workshop on Corporations, Private Ordering, and Corporate Law last week.  The program was co-hosted by Foundations of Law and Finance (Goethe University Frankfurt, Center for Advanced Studies) and Columbia Law School.  Luckily for me, the piece of the program I attended featured Nizan Geslevich Packin presenting a work-in-progress she is co-authoring with Anat Alon-Beck entitled Board Observers: Shadow Governance in the Era of Big Tech.

Although a draft of the paper is not yet posted, here is the SSRN abstract:

This Article examines the rise in corporate governance practice of appointing board observers, especially in the context of private equity, venture capital (VC), and corporate venture capital (CVC). Board observers are non-voting members attending board meetings to gain knowledge and insight. They arguably also provide valuable feedback, an outside perspective, and can even help ensure corporate operations. In recent years, board observer seats – a notion also existing in the nonprofit sector – have become increasingly popular in the for-profit business world, where investors have various market and business justifications for using board observers, including corporate governance considerations, minimizing litigation exposure, navigating antitrust issues, CFIUS regulation, and ERISA concerns. It was not until November 2023 that mainstream media started paying more attention to the concept of board observers, after OpenAI, the corporate entity that brought the world ChatGPT, gave Microsoft a board observer seat following the drama in OpenAI’s boardroom. But what the mainstream media did not explore in its coverage of the board observer concept was its seemingly less interesting nature as a non-voting board membership, which was an important element in the complex relationship between OpenAI and Microsoft. This signaled deepening ties between the two companies that also eventually got the attention of the DOJ and FTC, as well as the influential role of CVC in funding and governing the research and development of OpenAI.

This Article makes several contributions. First, it provides an account of the board observer phenomenon, which has significantly developed and become a common practice in recent years given antitrust and national security considerations and scrutiny. Second, it presents fresh insights, groundbreaking empirical findings, and data on the scope of this corporate governance vehicle. Third, it considers the theoretical circumstances and implications of these developments. It argues for a shift in contractual innovation in deal-making and regulatory reviews, necessitating the development of corporate culture norms emphasizing disclosure and prioritizing company interests, communication, and trust-building as crucial elements in service of board observers. Finally, the Article considers the practical implications of these developments and explains why more empirical data collection and further research are necessary to determine whether current corporate governance mechanisms require modification in connection with liability, accountability, and fiduciary duties for board observers.

As someone who had to deal with board observer requests and provisions in an earlier corporate finance era, I was fascinated by the work.  So much of what their research is revealing felt familiar (even though much also has changed): what is old can be new again.  I look forward to reading the draft and learning more.

On Texas

Given all the news about Governor Abbott's pitch to create a business law infrastructure that will compete with Delaware, and Musk's threat to decamp there, it's worth pointing out that this is an amendment that was recently proposed to the Texas Business Organizations Code:

BURDEN OF PROOF IN CERTAIN DERIVATIVE PROCEEDINGS. Notwithstanding any other law, in a derivative proceeding by a shareholder that alleges an act or omission related to the improper consideration of environmental, social, and governance criteria in the performance of the act or omission, the burden of proof is on the corporation to prove the act or omission was in the best interest of the corporation.

In 2022, Texas legislators proposed amending its law to permit shareholders to bring a fiduciary duty claim against the managers of any public company that provided women employees with travel benefits for abortion care (though, to be fair, in that case, the proposal would have applied even to non-Texas organized companies).

Texas Attorney General Ken Paxton has been very vocal about his objections to ESG - he is among those suing to block a Department of Labor rule, among other things - and as Attorney General, he would, as I understand it, have the power to seek involuntary dissolution of Texas entities.

We can also throw in Texas’s refusal to do business with financial institutions it perceives as “boycotting” oil companies, with “boycott” defined both capaciously and idiosyncratically.

I think it would be very difficult for Governor Abbott to assure companies that if they organize in Texas, their business decisions will not be second-guessed on political grounds.

The Bill Comes Due

So, anything interesting happening in corporate law this week?

I kid, I kid. On Tuesday, Chancellor Kathaleen McCormick of the Delaware Court of Chancery issued her long-awaited opinion in Tornetta v. Musk, where she took the extraordinary step of holding that Elon Musk’s Tesla pay package from 2018 was not “entirely fair” to Tesla investors, and ordered that it be rescinded.  In practical effect, she ordered the cancelation of stock options worth about $51 billion, or, according to news reports, about a quarter of his current wealth.  Put that together with the Twitter purchase, the State of Delaware and Chancellor McCormick have cost Musk about $90 billion, give or take (though a contrary take would involve the words “actions” and “consequences”).

The legal standards

Normally, the decision of what to pay a corporate CEO – like any other business decision – is controlled by the board of directors, and not subject to second-guessing by a court.  But, like any other business decision, that changes if the executive pay package can be seen as self-dealing, namely, the decisionmakers have a financial interest in the arrangement.

In a normal company, that isn’t a problem; the corporate directors act at arm’s length from the CEO for the purposes of negotiating the pay package. 

In companies with controlling shareholders – like Meta and Mark Zuckerberg, for example, which McCormick namechecks in her opinion – any compensation package would necessarily be tainted with the specter of self-dealing (how seriously can the Meta board bargain against Zuckerberg?), and so controllers tend to forego compensation entirely, which, of course, seems reasonable because they already have so much equity in the company that they are plenty incentivized to come to work every day.

That said, if a company chooses to engage in a conflicted transaction, it is not automatically illegal; it simply is assessed under a complex set of legal standards if it is later challenged in court by a stockholder.

The basic rule is, if an independent decisionmaker interposes themselves in the process, the court will defer to that decisionmaker.  If not, the court will closely examine the transaction to ensure its fairness.

Typically, the independent decisionmaker will be independent board members.  In the process of negotiating an executive pay package, for example, some board members may have close ties to the executive, but others will not, and so the ones who can be objective will make the call.

Alternatively, the independent decisionmaker can be the disinterested shareholders, who can vote to approve the transaction.

In Delaware, however, those rules only hold for conflicted transactions that do not involve a “controlling shareholder,” or controller.  Typically, controllers are those who control more than 50% of the company’s voting power, but control may in fact exist through other means.  More on that in a minute.

Delaware courts have come to coalesce around the rule that if a controlling shareholder is on the other side of a conflicted transaction, both board members and disinterested stockholders may be so intimidated or captured by the controller that they will be hesitant to buck his will.  Hence, those transactions can only be cleansed if both the independent directors, and the disinterested stockholders, approve it.

If only one mechanism is used – just independent directors, or just disinterested stockholders – controlling shareholder conflict transactions will still be assessed for their fairness, but the stockholder plaintiff will have the burden of proving by a preponderance of evidence a lack of fairness, rather than the defendant controller proving fairness.

What McCormick found

Formally, in Tornetta, the court concluded that Elon Musk was a controlling shareholder of Tesla, at least for the purposes of setting his compensation package.  The court considered both his 21% percent stake, and his “ability to exercise outsized influence in the board room” due to his close personal ties to the directors and his “superstar CEO” status.  She recounted the process by which the pay package was set, noting in particular that Musk proposed it, Musk controlled the timelines of the board’s deliberation, and he received almost no pushback – board members and Tesla’s general counsel seemed to view themselves as participating in a cooperative process to set Musk’s pay, rather than an adversarial one.

What about the stockholder vote?  That, too, was tainted, because – McCormick concluded – the proxy statement delivered to shareholders contained material misrepresentations and omissions.  It described Tesla’s compensation committee as independent when in fact the members had close personal ties to Musk, and it did not accurately describe the manner in which his pay package was set – again, with Musk himself proposing it and the board largely acquiescing.  With those findings in hand, McCormick did not rule on the plaintiff’s additional arguments that the proxy statement was misleading for other reasons (namely, it falsely described the payment milestones as “stretches” when in fact the early ones were already expected within Tesla internally.)

Therefore, McCormick turned to the fairness analysis, with defendants bearing the burden of proof.  McCormick recognized that Musk had delivered extraordinary value for Tesla, but that was only one side of the equation.  The other side was whether his shockingly large pay package was necessary to get that result; given that Musk already held a 21% stake and had no intention of leaving the company, she concluded it was not.  Or, at the very least, the package was flawed because the Board had not even asked whether such sums were necessary.  Moreover, in its deliberations, the Board had identified precisely one particular concern about Musk: Whether he was too distracted by his outside interests to focus on Tesla.  But there was no further discussion of that issue, and no proposal to condition his pay on limiting his distractions. 

McCormick did not specifically so hold, but she must have been aware that, far from incentivizing Musk’s undivided attention, the Tesla pay package enabled Musk’s purchase of another massive distraction that almost certainly is damaging Tesla’s brand.  

And, well. Here we are.

Currently, however, Delaware is in the process of reevaluating its standards for reviewing controlling shareholder transactions.  The argument under consideration is whether certain kinds of transactions – executive pay packages, for example – can be cleansed, and thus insulated from judicial review, through one protective mechanism rather than two (independent board or independent shareholder approval), the same way conflict transactions that do not involve a controlling shareholder usually are.  Even if the Delaware Supreme Court so holds, though, that fact alone would not necessarily save Musk’s pay package, because McCormick concluded Musk’s pay package was not cleansed either way.  She might have to rejigger her findings a little to clarify, but that’s all.

Similarly, if the Delaware Supreme Court were to conclude that Musk did not, in fact, deserve the formal label of controlling shareholder – say it suddenly set a bright line rule that controlling shareholders must have 50% of the vote – that still would not save Musk’s pay package (though, again, McCormick might have to revise her opinion a little), because McCormick made clear that the board’s decisionmaking was tainted by close ties to Musk no matter what label you apply (see fn. 546: “The factual findings that render Musk a controller, however, support a finding that the majority of the Board lacked independence.”), and so was the stockholder vote, so either way, there was no independent decisionmaker.

If, however, the Delaware Supreme Court did two things – say it both concluded that Musk was not a controlling shareholder, and it overturned McCormick’s factual finding that the shareholder vote was tainted – that might save Musk’s $51 billion, though – again, more below – the more likely outcome is McCormick would have to retry certain aspects of the case.

The takeaways

The overriding sense that one gets from this opinion that the bill for Tesla’s open and notoriously poor governance standards just came due.

Tesla shareholders, as well as other commenters, have for years complained about everything from the close personal ties Tesla’s board has to Musk, to the manner in which Musk’s other companies compete for his attention, to Musk’s open defiance of his settlement with the SEC, to the fact that Musk casually conscripts Tesla employees to work at other companies in his empire.  Now, for the first time, all of these aspects of Musk’s reign coalesced into a single, legal conclusion that was fairly obvious to the rest of us but I think has devastating implications for Tesla going forward: Tesla’s board exercises no oversight over Elon Musk.

McCormick even took on the “Technoking” title:

Musk testified that the title was intended as a joke, but that is a problem in itself.  Organizational structures, including titles, promote accountability by clarifying responsibilities. They are not a joke.

McCormick was obviously ruling in the shadow of VC Slights’s previous conclusion that Musk had not exercised control over the board for the purposes of the SolarCity acquisition, and so formally, she limited her own holding to Musk’s control for the purposes of his pay package, but she also drew in the entirety of Musk’s tenure.  And, in a footnote, she pointed out that though Slights had characterized board member Robyn Denholm as a “powerful, positive force,” that particular version of Denholm had not shown up in McCormick’s courtroom: 

this court previously held that Denholm was “an independent, powerful and positive force during the deal process” that led to the SolarCity acquisition. And that was surely true at the time. But it was not a factual finding that carries forward for all time. Moreover, Denholm’s approach to enforcement of the SEC Settlement, including unawareness of one of its key requirements, suggests a new lackadaisical approach to her oversight obligations.

Leaving aside the legal formalities, the obvious question is – was McCormick right?  Whether or not Tesla formally complies with Delaware corporate governance standards, Musk has unquestionably delivered extraordinary value to its shareholders.  The “Technoking” title may very well highlight the casualness with which Tesla directors approach their responsibilities, but also that’s the kind of thing Tesla shareholders value.  It may not improve cash flows, but, at least historically, it improves stock prices by pleasing Musk fans.  Which raises a very interesting doctrinal question – one I think posed in a more academic way in this paper by Charles Korsmo and Minor Myers – is it the duty of a Delaware board to raise stock prices – even by, say, taking Zoom calls with no pants on or buying a gold mine – or is it the duty to improve fundamental value?  

Societally we may prefer the latter but Tesla shareholders individually presumably prefer the former.  On the other hand, even the share-price approach is a bit like catching the tiger by the tail; it only lasts as long as Musk’s star power lasts, and that may not be forever.

I was struck by Antonio Gracias’s testimony that the package was designed to give Musk “dopamine hits,” because I think that is not a bad way to look at it.  Yes, he presumably was internally motivated to boost Tesla’s stock price because of his own 21% stake, but we all know – or we think we know – Musk’s psychology.  What motivates him psychologically isn’t (just) the money, but things he views as outrageous challenges.  Maybe by gameifying his compensation package – presenting him with impossible goals and then, when he met them, ringing bells and showering confetti and gold coins – the board really did extract maximum performance.

On the other hand, as McCormick repeatedly emphasized, there was some evidence that at least the early goals were not particularly challenging.  But that’s just like any game; the first levels are always the easiest.

We could also ask whether McCormick reached the right conclusion about the shareholder vote.  Yes, the proxy statement may not have explained the full extent of Musk’s board ties, but did anyone really not understand the Tesla board’s (lack of) independence?  (An internal document from ISS made pretty clear that ISS, at least, believed the board to be weak, but for whatever reason was hesitant to say so openly).  And once you know all that, did it really matter that the full embarrassing process by which the compensation package was formulated was not laid out in the proxy?  Surely no one thought this was an arm’s length negotiation?

The problem, from my perspective, is that those gut level reactions do not map to the legal standards in a coherent way (you can use concepts like “materiality” or whatnot but there is no way to apply those in the kind of “one ticket only” way that Musk and Tesla require).  And of course, the legal standards have a societal function of professionalizing large, powerful companies, in a way that is important even to nonstockholders, regardless of their specific impact at Tesla, though that’s not something Delaware can formally acknowledge.

What happens now?

Now, I assume, Tesla appeals.  I am not going to hazard a guess on outcome, though I will make a couple of quick observations.

First, as I have previously written – twice – Delaware’s standards for determining who gets the label of “controlling shareholder” are very malleable.  However, as I blogged previously, I think in its SolarCity opinion, the Delaware Supreme Court did provide some guidance on that score, suggesting, in a roundabout way, that only the power to elect directors and approve transactions, or possibly block them, should factor in to the analysis.  McCormick did not take that hint, though; she did a more holistic review, which may turn out to be legally vulnerable.  But, as I said above, that’s not enough, standing alone, to knock out her core conclusions.

Another area that might be the focus of an appeal would be the shareholder vote.  Musk could argue that the omissions were, in fact, immaterial to shareholders.  I will not say that is a losing argument, but I will say it would be aggressive if the Delaware Supreme Court were to reverse on that score.  If it did so, however, that – standing alone – would not save Musk’s pay package.  So long as Musk retains the “controlling shareholder” label – and Delaware maintains its double-protection rule for controlling shareholder transactions – a reversal on that score would mean, at most, a remand to shift the burden of proof from defendants to the plaintiff, and I think it’s … unlikely … the outcome would change.  Plus, McCormick did not even rule on arguments that the proxy statement was misleading for other reasons, so a remand would give her another crack at that issue.

And if Delaware both changes its standards for cleansing controlling shareholder transactions (or holds Musk was not one), and holds the shareholder vote was not tainted, that still should result in a remand for McCormick to determine whether the plaintiff’s additional arguments that the proxy statement was false – the ones she did not engage – succeed.  For Musk to get a complete win, in other words, the Delaware Supreme Court would likely have to conclude either that he is not a controller (or that controller-conflicted transactions do not need two levels of protection), and that the shareholder vote was not tainted, and that the claims McCormick did not rule upon have no merit and do not need to be tried.

That is … a tough lift for Musk.

Notice I have not even considered the possibility the Delaware Supreme Court would reverse McCormick’s findings that the board was beholden to Musk because … no.  I mean, Musk could argue that there is nothing bad about a board “cooperating” with a CEO to develop a pay package; he could try to make a parody of McCormick’s findings by claiming that she unfairly seemed to want the CEO and the board to be at loggerheads, but … no.

Which means on the law, I like the plaintiff’s chances.  On the political economy, though – well, Musk is obviously beating some very loud drums about reincorporating out of Delaware, and I have previously asked whether that kind of thing could influence Delaware’s decisionmaking.  On the other hand, the Delaware Supreme Court cannot be seen as capitulating to Musk, which means if it reverses McCormick, it must have a fairly solid basis to do so.

Edit: I suppose the Delaware Supreme Court could reweigh the evidence and conclude the pay package was fair, but that would be extremely aggressive. So aggressive that it literally did not occur to me, which is why I had to edit this post.

Edited again (Feb. 3): The “fairness” inquiry that Delaware courts conduct consists of two aspects: the fairness of the process, and the fairness of the ultimate price.  I went back to the Delaware Supreme Court’s SolarCity opinion, and there, the court was very clear that ultimate question of whether a price was fair (one half of the overall fairness inquiry) is a legal question that rests upon factual conclusions.  As the Delaware Supreme Court put it reviewing the Chancery court’s findings, “We conclude that the record supports the Court of Chancery’s legal conclusion that the price paid was a fair one and that the trial court did not misapply the entire fairness standard.”  That matters because the Delaware Supreme Court will defer to Chancellor McCormick’s factual findings, but does not defer to her legal ones.  So that’s probably one of Musk’s best lines of argument: even if you accept all of Chancellor McCormick’s factual findings about the flaws in the process by which his compensation package was set, the Delaware Supreme Court has the authority to consider anew whether, in light of the huge value Musk was required to deliver to shareholders, the grant was unfair. 

As for the board’s failure to curb Musk’s outside ventures, the response is obvious: it chose to directly compensate him for performance, rather than the methods he used to achieve that performance.  I.e., promise him the moon if he substantively delivers, and let him decide what efforts will be required.

That said, the first tripwire I see for him is McCormick’s conclusion that the early milestones were easy ones.

No, but what happens now to Tesla?

Let’s assume the opinion stands.  That company does not have a lot of great choices.

Assuming Musk does not want to go the Zuckerberg-no-compensation route, any new compensation award will have to be negotiated by the board in the shadow of McCormick’s findings (not to mention Musk’s threat to breach his fiduciary duties by diverting AI opportunities from Tesla to his other companies, which, this post is long enough, I am not going there). 

But the problem extends beyond compensation to a host of other issues. There are already pending cases, that have been stayed, about board oversight of Musk – the failure to monitor his tweets, for example, or to enforce the SEC settlement – at this point, I’ve lost track of them all.  Tesla was just accused of dumping hazardous waste; that’s the stirring of a Caremark claim.  Musk has been using Tesla engineers at Twitter – there’s a claim for self-dealing.  Each new Musk antic will prompt another lawsuit, and every single time, the plaintiff will begin by citing the Tornetta decision as evidence that the board is not independent of Musk and cannot consider a demand.  It’s like a dam has broken, a wall of protection around Musk – the polite fiction, which no one believed to begin with, that he operates under board oversight.

One way out would be to visibly and strongly restructure the board – possibly by appointing new members.  But can anyone imagine Musk tolerating a genuinely empowered board that tried to, among other things, curb his outside ventures?

Another way out would be for Tesla to follow through on Musk’s latest suggestion: Reincorporation to Texas.  That would require a shareholder vote, but Tesla’s stock is, like, 40-50% retail, with another chunk held by Musk and Musk allies, it’s not literally impossible that the vote would succeed.

But can you even imagine what the lawsuit would look like if Musk’s board proposed reincorporation to Texas on the basis of Musk’s Twitter poll, after a shocking indictment of its stewardship? 

There is currently pending a lawsuit challenging a Delaware reincorporation to Nevada.  It’s a novel claim that the controlling shareholder is seeking to avoid Delaware’s strict standards for reviewing conflicted transactions.  I have no idea how that will come out; it’s a dilemma for the Delaware courts.

But in Tesla’s case – and someone correct me if I’m wrong – it’s not quite as obvious that the formal legal standards in Texas are so different from Delaware’s.  They seem pretty MBCA-like: universal demand, there may be some limits on what counts as interested/dependence/independence but nothing a clever plaintiff couldn’t plead around.  That’s not the reason Musk wants to go there; he wants to go there because he expects the judges will be biased in his favor. 

Suing shareholders would argue that the reincorporation was intended to protect Musk’s ego and his power, not shareholder value.  Which brings us back to the question posed by Tornetta: Is shareholder value measured by stock prices alone?

As for me, here’s to another round of edits to my Twitter v. Musk paper, now forthcoming in the Virginia Law & Business Review.