Now that
Next up for the Delaware Supreme Court could be a ruling in a challenge to a new state law (S.B. 21) drafted to address concerns from Musk and other high-profile tech leaders that the state’s elite business court judges were tilting rulings in favor of minority shareholders and against founders and controllers.
Yet Musk and Tesla appeared to learn from their past mistakes when Delaware’s Chancery Court struck down what was then a record-setting compensation package, said Carliss Chatman, a Southern Methodist University law professor. Tesla is now a Texas corporation, but it followed Delaware’s protocols in approving a separate trillion-dollar pay package there.
The contentious public debate over S.B. 21 and whether Delaware deserves to keep calling itself home to the country’s biggest companies may no longer be relevant after the Musk pay reinstatement, Chatman said. Practitioners and their corporate clients make decisions based on their budgets and economic changes, not on reactions to the whims of “superstar CEOs,” she said. “Could this case even happen again?”
Moving Forward
In restoring the compensation package for the world’s richest person, the high court acknowledged the toll Musk’s dispute took on the Chancery Court’s chief judge, Chancellor Kathaleen St. Jude McCormick. It cut the $345 million fee McCormick awarded the attorneys leading the shareholder challenge to no more than $54.5 million, without requiring more decision-making from her.
“Although we would ordinarily remand for a reassessment of fees, we make an exception based on the length of this litigation and not to burden the Court of Chancery, which has devoted enormous time and attention to this case over many years, at great personal sacrifice,” the justices said Dec. 19.
That indicates how much they just wanted the case to go away, said Ann Lipton, a University of Colorado law professor. Tesla’s attorneys argued there hadn’t been any fiduciary breach, and while the opinion doesn’t address whether or not there actually was, the court awarded attorneys’ fees anyway.
“The fact that they over-decided issues that weren’t there, and under-decided the issues that were, tells you how much they wanted to get rid of it without putting any one judge’s name on it,” she said of the decision attributed to the entire five-member panel.
Fee Dilemmas
Greg Varallo of Bernstein Litowitz Berger & Grossmann, representing the Tesla shareholder who challenged Musk’s pay, said “next steps” are being considered. The firm, known for leading massive shareholder cases, is rebuilding after the messy exit of a group of partners from its corporate governance practice.
The shareholder’s attorneys could address their fees and expenses back in Chancery Court, but Chatman said the state Supreme Court’s message to their colleagues is chilling. How much the plaintiffs’ counsel should take home in cases they accept on contingency has been a sore subject in Delaware. The state bar’s corporation law section is preparing recommendations to lawmakers on the issue.
“You get the exact same outcome that Texas gets” with requirements that shareholders must meet to bring derivative cases, Chatman said. “You squash litigation.”
The big issue with attorneys’ fees is the all-or-nothing approach, said Jill Fisch, a University of Pennsylvania law professor. It creates “a problematic incentive system” where plaintiffs’ lawyers risk ending a case with nothing, but then they need bigger fee awards when they win.
Anticipated Rulings
Bloomberg Law analyst Michael Maugans expects Delaware’s justices to find S.B. 21 violates the state constitution’s definition of the Chancery Court’s jurisdiction, in the case Rutledge v. Clearway Energy Grp. LLC.
The Musk pay ruling left intact McCormick’s determination that Tesla’s board was riven with conflicts of interest when it approved the deal. That’s “indicative of a court that is collectively striving to maintain judicial independence,” he said. “This mindset could bleed into Rutledge and spell doom for S.B. 21.”
Retired Widener University professor Lawrence Hamermesh, who helped draft S.B. 21, expects the justices to affirm the law. “There’s still going to be questions about the Court of Chancery exercising its discretion over remedies and making determinations about independence and adequacies of disclosure, and S.B. 21 didn’t change any of that,” he said. “It just set parameters on what it means to be a controlling stockholder.”
Also due: An appeal of a Chancery Court ruling invalidating much of Ken Moelis’ pact with the investment bank he founded appears to hang on how the justices interpret what’s always “void” or only “voidable” in shareholder agreements. There’s also
Most companies can’t relate to the litigation involving Musk and Moelis. But oversight claims worry officers and directors, said John Lawrence of Baker Botts LLP.
Should investor claims against Blue Bell Creameries’ top holding company go to trial as scheduled in February, a decade after a deadly listeria outbreak in its ice cream, the result may have a bigger impact on the “DExit” conversation than lawsuits involving controllers, he said.
A 2019 Delaware Supreme Court decision found investors showed sufficient facts to reasonably claim Blue Bell’s board failed to provide proper oversight—shattering the consensus that oversight claims were difficult for shareholders to win. The trial would be the first of its kind, as similar claims often fail to survive a motion to dismiss.
“If new case law comes out of this that could rein in Caremark claims, I think that would give people some comfort,” Lawrence said, “but anything that makes people believe that Caremark claims may continue to expand and may continue to get past different stages of litigation where they previously weren’t getting to, I think that is going to just continue to cause people to look at their different options.”
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