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)

If that happened, shareholders could bring another derivative claim, alleging that the settlement was tainted and designed to benefit Musk rather than benefit the company.  In fact, there’s precedent for that: As I previously discussed, shareholders are currently suing Meta, alleging that the company settled claims with the FTC and absorbed excess liability for the purpose of shielding its controlling shareholder, Mark Zuckerberg, from paying damages personally.

But it occurred to me: That’s an awful lot of unnecessary procedure.  Wait for the captured board to resolve the litigation, and then bring a whole new lawsuit challenging the resolution.  What if shareholders could intervene from the get-go, establish that the board is too conflicted to defend against a particular action, and step into the board’s shoes in the original (hypothesized) Musk v. Tesla litigation?  After all, a derivative lawsuit involves shareholders acting on behalf of the company to bring claims that the board cannot manage; why not let shareholders act on behalf of the company to defend claims that the board cannot manage?  We can call it a derivative anti-lawsuit.

Anyway, I offered this suggestion on social media, at which point a little birdie pointed out that Canada has exactly this thing, codified in its corporate law, CBCA section 239:

a complainant may apply to a court for leave to bring an action in the name and on behalf of a corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate.

I therefore propose, at least semi-seriously, that Delaware develop a similar equitable tool.  It may not come up much; the Meta case is really the only one like it that I can identify, namely, a company intentionally taking on additional liability in a lawsuit naming the company as a defendant, in order to benefit a controller.  But if we do end up with some version of Musk v. Tesla, it might save some additional legal maneuvering.

The Caremark Thing

As I’ve previously blogged, when it comes to Caremark claims, Delaware courts distinguish between oversight failures that concern business risks, and oversight failures that concern legal risks.  The point being, directors are permitted to choose to take business risks – and therefore choose consciously not react to red flags of a potential problem – but they are not permitted to take legal risks, i.e., risk that they can get away with corporate misconduct, and therefore are prohibited from choosing not to react to a problem.

Which is why VC Zurn’s new opinion in Conte v. Greenberg is striking for what it didn’t do.  There, plaintiffs alleged that corporate officers violated company policy by abusing their corporate jet privileges.  The directors were aware of the problem, even asked management for proposals to amend the policies, but did nothing further, even when those proposals were not forthcoming.  The plaintiffs alleged that the directors’ inaction constituted a failure of oversight under Caremark.

VC Zurn rejected the claim, but did not do so on the grounds that Caremark is limited to violations of law.  Instead, she simply held that under the particular facts of this case, the complaint did not allege that the directors’ failures to act were so egregious as to suggest bad faith.

Hear that dog not barking?  That, I think, is the sound of a potential expansion of Caremark.  We will have to see if future decisions follow in its footsteps.

The Future Thing

Under the federal securities laws, statements that are labeled “forward-looking” – that make predictions about the future – receive special protection that insulate them from fraud claims.  That, of course, only results in disputes about what counts as “forward-looking,” and, as I’ve previously blogged, courts can try to massage the definition to ensure bad actors don’t escape liability.

More common, though, is something like the opinion in In re Lottery.com, Inc. Sec. Litig., 2024 U.S. Dist. LEXIS 20645 (S.D.N.Y. Feb. 6, 2024):

The 10/21/21 Press Release’s statements regarding Lottery’s preliminary revenue results are nonactionable under the bespeaks-caution doctrine because they, too, are “statements whose truth [could not] be ascertained until some time after the time they [we]re made.” In re Philip Morris, 89 F.4th at 428 (citation omitted). Plaintiffs contend that these statements were “simply not forward-looking” because they “concern[ed] revenue results for Q3 2021, a quarter that had already closed when the statement was made.” Lottery Class Opp. at 13. Although this line of reasoning has some intuitive appeal, the Court disagrees. When applying the bespeaks-caution doctrine, courts in the Second Circuit generally treat “corporate statements of projections as to corporate earnings” as forward-looking statements, “without regard to whether the last day of the covered earnings period had passed.” Lopez v. Ctpartners Exec. Search Inc., 173 F. Supp. 3d 12, 39 (S.D.N.Y. 2016).

Lopez is on point. In relevant part, the case involved a press release issued on January 21, 2015, announcing the company’s “preliminary earnings results.” Id. “[T]he release said that the [c]ompany ‘expected’ earnings per share of $0.06 to $0.08 per share for [the fourth quarter of 2014].” Id. The court rejected as “incorrect” the plaintiff’s argument that these preliminary results did not “qualify as a forward-looking statement, because they addressed a quarter that was complete.” Id. It noted that just because “a quarter has concluded does not mean that the quarter’s results have yet been tabulated.” Id. And it explained that the press release’s statement of preliminary results “was a forward-looking projection, insofar as it gave a ‘preliminary’ calculation of what the final quarterly financial results would be ‘based on currently available financial and operating information and management’s preliminary analysis of the unaudited financial results for the quarter.’” Id. at 40 (quoting the press release at issue). “In other words, the preliminary results were a prediction, based on incomplete or provisional information, of what the [c]ompany would ultimately declare its financial performance to have been.” Id.

The Court agrees with Lopez’s reasoning and adopts it here. Accordingly, the Court holds that the 10/21/21 Press Release’s revenue-related statements were forward-looking statements.

Get it?  The announcement of a completed quarter’s earnings are, in fact, projections of the future if the numbers are still being tabulated.  The past is never dead. It's not even past.

The Disney Thing

Disney has put up a website with a short video urging shareholders to back the Disney board in its proxy fight with Trian and Blackwells.  (Pro tip for professors: You can right click to save the video pretty easily, which may come in handy when the webpage goes down after the meeting on April 3). 

What immediately comes to mind is that other time an internet video was used as a proxy solicitation – namely, Third Point’s video criticizing the Campbell’s board.  One big difference between the two, though, is that Disney has a whole staff of professional cinematographers, editors, and animators, and access to a back catalog of culturally-beloved IP, so I imagine its video was a lot easier to produce. (Apparently, the narration is provided by the same dude who does the voiceovers for the Disney theme parks; I really hope someone writes up a full account of who else at Disney worked on this and how they were approached). 

The other difference, though, is audience: Disney’s video is clearly aimed at retail shareholders who – Disney assumes – will be inclined to vote for management, and only need to be instructed how to vote.  The video itself makes no actual case for incumbent management over the dissident slates, and seems to really be intended as instructional, for a particular group of baffled shareholders.  Third Point’s video, by contrast, offered a shallow but substantive critique of Campbell’s management, and may have been aimed at retail, but was also probably intended to catch attention more generally – among institutional shareholders, the business press, and the Campbell’s board itself. 

One thing I’m a little confused about: Disney repeatedly urges its shareholders not only to vote for management nominees, but to use Disney’s proxy card.  It even instructs shareholders to send in a new Disney proxy card if they inadvertently voted on a Trian or Blackwells card.  But in the age of universal proxies, why is this necessary?  Are they just concerned that a pro-incumbent shareholder would be confused by the Trian/Blackwells cards? (Not unreasonable; even with universal proxy, each contestant’s card is different and emphasizes its own nominees).  Or is it an advance access to vote thing – will Disney get a peek at votes coming in on the company proxy, but not those coming in on dissident proxies?  If you know, please comment.

Edit: Meredith Ervine at Deal Lawyers has some answers on the proxy card question.  Thank you!