Friday, June 7, 2024

In Which Elon Musk (Again) Illustrates Basic Corporate Law Concepts

I swear I wasn’t going to blog about Elon Musk this week; I had several other ideas planned, but then someone went ahead and filed a new complaint in Delaware and I just can’t help myself.

In Ball v. Tesla, the plaintiff challenges both the upcoming pay ratification vote, and the Texas redomestication.  The arguments against pay ratification are pretty much the ones you’ve already heard in this space (as well as ones advanced by Prof. Elson in his proposed amicus brief), and we’ve pretty much exhausted those so I’ll skip it.

As for the Texas redomestication vote, the plaintiff claims that the required threshold to leave Delaware is 2/3 rather than a simple majority of outstanding shares due to certain provisions in Tesla’s charter.

I’ve previously blogged about this issue at Tesla; it has a staggered board and keeps trying reduce the stagger, but it can’t get the required 2/3 outstanding vote, because so many shareholders do not cast ballots at all. 

When Tesla drafted its charter way back when, it set about minimizing shareholder rights as much as it could under Delaware law.  It instituted a staggered board, it prohibited shareholders from acting by written consent – they can only act at a duly called meeting – and prohibited them from calling a meeting themselves.  And then, to ensure shareholders couldn’t amend the charter and remove the protections, it insulated those provisions with a two-thirds voting requirement to amend them (and a two-thirds vote requirement to amend the voting standard to amend them):

Notwithstanding any other provision of this Certificate of Incorporation … the affirmative vote of the holders of at least 66 2/3% of the voting power of all then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision as part of this Certificate of Incorporation inconsistent with the purpose and intent of, Article V, Article VI, Article VII or this Article IX …

Now Tesla wants to move to Texas.  But Texas guarantees more shareholder rights than Delaware.  Specifically, in Texas, corporations cannot eliminate either the right of shareholders to act by written consent, nor the right of shareholders to call special meetings.  So when Tesla drafted a new Texas charter, it tried to minimize those rights as much as possible.  Specifically, the Texas charter permits action only by unanimous written consent, and permits shareholders to call a special meeting only if 50% of shareholders demand it (the highest threshold Texas permits).  Additionally, as Tesla notes in its proxy, under Texas law, even if shareholders call a special meeting, the Board may still postpone or reschedule it.

So, in Ball v. Tesla, the shareholder claims that these new charter provisions expand the rights granted in the original charter, and therefore, can only be amended – and the redomestication can only be approved – with the approval of two-thirds of the outstanding shares.

What happens next?

Well, I’m assuming Ball will be in some way consolidated with Tornetta.  I also assume the good attorneys at BLBG will be not at all happy about the challenge to the pay package, because they want to maintain control over the litigation.  If nothing else, their fee depends on the “benefit” they provided to Tesla shareholders, and Tesla has already telegraphed that if shareholders vote to ratify, the company plans to argue that the attorneys did not provide any benefit to Tesla shareholders, and therefore the fee should be reduced or eliminated.  So the Tornetta team already has a very strong incentive to argue that the ratification has no effect, and they will not be pleased that an interloper is trying to seize control of the issue.

With respect to the Texas redomestication, the vote’s in a week.  Chancellor McCormick cannot risk the company redomesticates and then she somehow has to reel it all back, which means she either has to decide this issue very quickly, or she has to make sure Tesla won’t move while there are (plausible) arguments outstanding.  That said, the Texas move is not self-executing once the vote occurs; even if shareholders vote in favor, Tesla will still have to file the appropriate forms with the Texas Secretary of State.  So, if Chancellor McCormick believes the complaint has merit, she does not have to block the vote (which is not something Ball has asked for anyway); she can enjoin Tesla (or seek a promise, which she seems to prefer), from filing the forms until the matter is sorted out.

Which brings us to – does the complaint have merit?

Imma stop you right there on the written consent thing.  The two-thirds requirement only applies to actions that are “inconsistent with the purpose and intent of” the original charter provisions, and there is no possibility of getting unanimous written consent in a public company (plus, Elon Musk owns shares; if he’s consenting, the point is moot anyway since he can call a special meeting).  Ball’s not going to succeed on that one.

What about the 50% threshold for calling a special meeting?

I’m going to start by saying I have not actually researched any caselaw on this, which might very well exist, and that obviously supersedes anything I’m about to say, but – I’d still rather be Tesla than Ball.  Fifty percent is still almost impossible to achieve in a public company outside the context of a shareholder meeting; moreso now that Tesla’s shareholder base is in the ballpark of 45% retail, and especially taking into account that Musk himself owns 13% (20% if you count the unexercised options, which number includes the ones in dispute).

So I think the real action here is over the pay ratification.

But I promised a lesson about corporate law, and here it is.

What if this challenge presented more of a threat to redomestication?  What if, for example, Texas set the maximum threshold for shareholders to call a special meeting at 25% – which is the MBCA standard – rather than 50%?

In that event, we can imagine a scenario.  Suppose Elon Musk called up his good buddy Governor Greg Abbott, and told him, “Greg, Tesla would love to reincorporate to Texas, but your law is blocking us!  Can you do something about that?”

How much do you think Texas cares about that maximum vote threshold for shareholders to demand a meeting – especially if, in my hypothetical, Texas just adopted the MBCA as written?

Probably not much.

So we can imagine that, at the next legislative session, a bill sails through the legislature to amend Texas’s corporate code to eliminate the right of shareholders to call special meetings, and voila!  Tesla freely reincorporates.

All of this is a thought experiment for Tesla but it’s a real-world thing that happens with companies all the time.  For example, this paper tells the story of the time that Massachusetts actually changed its corporate law in the middle of an active proxy fight in order to protect the management of a local firm.  And that’s not even unusual.

But, corporations and shareholders assume, it doesn’t happen in Delaware.  Why?  Partly because Delaware cares a lot more about its corporate code, but also because Delaware doesn’t have local firms.  I mean, you know, not really.  So it’s pretty much neutral ground.

At least, that’s what everyone’s always thought.

But right now, there’s a proposal to amend Delaware’s corporate code rather dramatically (prior posts here, here, herehere, and here), and as far as I can tell, that’s largely to protect a group of specific companies that got a bit over their skis with aggressive shareholder agreements when they went public, and now some faction of the Delaware bar is seeking to change the law in order to retroactively validate those arrangements.

So, you know.  We’ll see what happens.

Edit: In the comments, it's proposed that the complaint fails for a simpler reason regarding the terms of Delaware's redomestication statute, which overrides specific supermajority charter provisions.  That may be right.  Interestingly, Tesla recommends against shareholder proposals seeking declassification on the ground that they are impossible to implement without a two-thirds majority, but it cagily does not say that it could not implement them in conjunction with redomestication.  ISS reports that when it raised the possibility of declassification in conjunction with the Texas move, Tesla simply stated it preferred to keep the new Texas charter as close in form to the old one as possible and committed to revisiting the issue of declassification when it achieved sufficient shareholder participation at a meeting.

Ann Lipton | Permalink


I'm not sure I get the plaintiffs' argument. Tesla isn't trying to amend its certificate; it's trying to redomesticate. Section 390 of the DGCL says how that's done. Subsection (b) provides that you need a board resolution etc. approved by > half of the eligible shares. That resolution etc. can include a plan covering items enumerated in subsection (j), one of which is "the document, instrument, agreement or other writing, as the case may be, governing the internal affairs of the resulting entity and the conduct of its business." That's the new, Texas charter. Subsection (k) offers a limit to the voting rule stated in subsection (b): to the extent the certificate of incorporation restricts mergers/consolidations beyond what the DGCL does, that restriction can override the 50% eligible votes standard. Does the Tesla charter do that? I don't see the plaintiffs even cite 390.

Posted by: VSJB | Jun 7, 2024 6:56:48 AM

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