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Your (3) and (4) are (chronologically speaking) in the wrong order. The award was granted in Jan 2018 and the lawsuit was filed in June 2018, long before the performance targets were hit. The lawsuit has taken a long time to resolve in part because shareholder suits like this in Delaware put a heavy burden on plaintiffs looking to reverse corporate decisions.
I hate to break it to you but this is every jurisdiction in the nation depending on the terms of the contract and (crucially for this case) how they were reached.
Fair enough. I guess the difference is the quality of the judges.
As someone pointed out recently, the Constitution was seen as a work of genius when applied to the United States. When essentially the same constitution was applied to Liberia, the results were quite different.
There is no law written so well that it can't be bent to any purpose. Roe v. Wade stood for nearly 50 years and was based on almost nothing but the desire of the Supreme Court to have abortion legal. Here in Washington State the Supreme Court ruled that a capital gains tax was not an "income tax". I'm sure they wrote pages and pages of legal justifications.
Well, no, it's not about the quality of the judges. The entire concept of a corporation is underpinned by the idea that the corporation exists as an independent entity from the owners, and that the owners, in turn, have a fiduciary duty to act in the best interests of the corporation. If this concept didn't exist then there would effectively be no corporations at all. Consider the following example: The founders of a company want to expand, and raise money by selling 49% of the company's stock and retaining a controlling interest among themselves. The founders hold key executive positions and the majority of the board seats. The stock sale raises 20 million dollars of investor money. Instead of investing it in the company, however, they split the 20 million among themselves as bonuses. Then, they go even further and vote to liquidate the company's assets and use the proceeds to pay themselves bonuses.
Obviously, if companies could do this nobody would invest in them. The Tesla situation isn't this egregious but the circumstances were enough to trigger additional court scrutiny. It isn't controversial to suggest that Musk has a disproportionate influence over Tesla; no judge is buying the "I just work here" argument. and the amount of the bonus was far, far beyond anything within the realm of what could be considered reasonable. It's easy to lose sight of thing when the numbers get this big and we're talking about the superwealthy, but 54 billion is a lot of money. It's about 25% larger than Ford's total market cap. It's in the neighborhood of the market caps of major companies like Allstate, Target, and Phillips 66. You can understand why the court might be concerned that paying an amount of money that could be used to create a Fortune 500 company from scratch as a bonus might not be in the best interest of the company, and why there might have been a bit of self-dealing involved.
It didn't end there, though. Musk still could have won the suit had he simply disclosed his relationship with certain key players, but he didn't, which raised the question of whether the shareholders were sufficiently informed, and was enough to void the transaction. The fact that the shareholders voted to uphold the deal at a later date is irrelevant, because there's no mechanism in the law for it.
I don't think there's an argument that the judge viewed the $56 billion compensation as too large due too its absolute size.
Why? Because if we're using the absolute size of the reward as the metric (and not relative size) then the same logic must apply to the plaintiff's lawyers. But it clearly didn't as they stand to be so enriched by this lawsuit that it will rank among the largest awards ever given to a legal team. (Possibly even the highest payment ever for a non class-action suit). Clearly, the judge is not against gigantic rewards in principle.
Nor should she be. The market cap of a dying company like Ford has little bearing on the market cap of Tesla. There's little doubt that Tesla's market cap is almost entirely dependent on Musk's involvement with the company. Getting 5% of the market cap gains for himself does not seem unreasonable.
I grant that there are legal peculiarities here that make the judge's ruling sensible on some level. But, on another level, it's clearly a miscarriage of justice since there was no harm done to shareholders (in fact, they have done extremely well) and the reward was also clearly what the shareholders wanted (having voted on it).
I suppose we can debate the twists and turns that led to this decision (and the monstrous reward given to the lawyers) but the end result is still the same: it's the wrong result. It doesn't fill me with confidence in the supposedly great legal environment of Delaware. Although I do agree with a different poster that a judge trial, even in deep blue Delaware, is likely to have a better result than a jury trial in a case like this.
The judge did apply the same logic to the attorney's fees. The Plaintiffs were originally asking for a contingency fee based on 11% of the amount of money they saved the shareholders, which came out close to 7 billion. It should be noted that they were already applying a significant discount factor to the 33% they would be entitled to under the standard formula. The judge knocked this amount down even further, precisely for the reason that the total dollar amount was so high, even if what they were asking for wasn't a lot in comparison to the total amount at issue. She went on to explain that while courts have adopted various guidelines to determine reasonable compensation, the judge has the ultimate authority to make that determination. She then adopts the alternative valuation formula that Tesla asked for.
The court doesn't doubt this, but the defendants made this argument, and it was rejected nonetheless. The problem the court noted was the absence of any element of bargain from the transaction. In a typical executive compensation package, the idea is that you want the CEO or whoever to have some skin in the game, and at the same time you don't want to lose him to another company, so you offer a compensation package wherein he gets stock options commensurate with increases in the company's valuation. the shareholders benefit because the CEO has skin in the game and they won't lose a good CEO to a better offer. The record in this case doesn't support the contention that that was an issue. The first thing they noted was that since Musk already had a 20% stake in the company, he already had sufficient incentive to meet the benchmarks. But beyond that, he never gave any indication that he'd leave the company or dedicate less time to it without additional compensation. The defense tried to argue that the additional compensation was needed to keep Musk from getting distracted by other ventures, but Musk himself testified that the package had no influence on how much time he spent working on Tesla. The court also noted the absence of any concurrent obligation for him to dedicate any amount of time to Tesla.
Beyond that, though, the biggest problem the court seemed to have with the package is that there was no real negotiation. From the record, it looks like Musk decided what he wanted, drew up the terms for it, asked the board for it, and got it without any pushback. No one on the Compensation Committee ever offered any counterproposals or questioned any of the terms. Musk himself made several changes backing off the amount of compensation, but he admitted that these were of his own volition and not because anyone at the company suggested that his initial proposal was too rich. When you admit that you were "negotiating with yourself" in court, it doesn't create the impression of an arms-length transaction.
The defense tried to make this argument, too, and it failed, for reasons related to those above. The fact that the shareholders have done well is irrelevant to the argument since the defense failed to show that the compensation agreement had anything to do with the increase in share price. Musk wasn't even working at the company full-time throughout the relevant time period. If the shareholders would have got rich anyway, then the harm is that 55 billion that could be invested into the company is going to one person who can do whatever he wants with it. As for the stockholder vote, you need to understand the posture of the case:
If this is a normal company where the CEO and board are independent and no one person holds a disproportionate amount of stock, the deal is going to be presumed valid so long as there is a reasonable business justification. In this case, though, it was clear that everyone in the company was more or less subordinate to Musk, as was evidenced by numerous examples presented in the record. Since he had so much influence, the court has to exercise a heightened standard of scrutiny where it determines if the deal was fair.
The burden of proving the deal was fair initially rests on the defendant, but it can shift that burden to the plaintiff if it can show that the shareholders approved the deal. This is what Tesla tried to do. The problem was that the company didn't disclose all of the inherent conflicts to the shareholders. This may seem like a petty, technical argument, but the court makes it clear that this isn't some kind of gotcha where they forgot to list one thing and their whole case goes to shit. It finds that there were numerous, material failures to disclose serious conflicts.
Since they failed to make the required disclosures, the stockholder vote was rendered meaningless, and the defendants retained the burden of having to independently prove that this was a fair business deal. Since, for the reasons stated above, they couldn't do that, they lost the case.
You need to get the idea out of your head that there's some sort of tribal component to this and that the judge just ignored the law to spite Elon Musk. Corporate law is incredibly complicated and can't be boiled down to a few common sense rules like "if there was a vote then it should stand", because that's not how it works. This level of complexity is precisely why companies choose to not only incorporate in Delaware but usually specify in the corporate bylaws that the Delaware Chancery Court has exclusive jurisdiction over claims arising thereunder, and why they will continue doing so. Yes, you can incorporate in other states, and for smaller companies it makes sense to just incorporate where you do most of your business. But if you get past a certain size or plan on going public then it makes sense to incorporate in Delaware, for the simple reason that the law there is well-developed and the Chancery Court is experienced in handling complex corporate cases. Say you incorporate in Pennsylvania. Venue rules are pretty loose here, and there's a decent chance that that derivative suit will be filed in a remote county and heard by a hick judge who's never handled a corporate case involving a public company before.
In this situation, there's a good chance that he's going to be 100% relying on the information presented in your briefs to educate him on what the law is, and there's a 50% chance that he doesn't actually read them and just asks the lawyers to explain everything to him in open court. If it's filed in a big city then you might get a judge with some corporate experience but just enough to think he doesn't have to read the briefs. He'll also have 7,000 cases on his docket and he'll repeatedly tell you to work something out among yourselves, and in the event the case actually goes to trial he'll ask you if you're going to be finished soon five minutes into your opening statement. I exaggerate, of course, but these are both very different environments than working in a court with a limited docket that handles corporate cases almost exclusively. This case generated a 200 page post-trial opinion. File in state court and you'll get "I rule in favor of the plaintiff" and maybe a brief explanation from the bench if you're lucky. In the rare event that the judge feels the need to issue a written opinion it will be a few double-spaced pages that offer only the barest legal analysis.
As far as Musk is concerned, Texas has tried to remedy this with the Texas Business Court, a similar court that is limited to high-value corporate cases and keeps a light docket, but they just started hearing cases in September and it remains to be seen whether it will develop similarly to the Delaware Chancery Court. The enabling legislation doesn't limit jurisdiction to corporate cases, but to any litigation where the amount in dispute is more than 5 million, so it could certainly become a hellhole for mass torts, but maybe that was the intention. And while you mention that a judge is better than a jury, it's worth pointing out that juries are never used in these types of cases. There are technically two types of courts: Courts of law and courts of equity. Courts of law have judges and juries and the only remedy it can impose is money damages. At common law, courts could only award damages, so if you wanted to force someone to do something (or refrain from doing something), it required an order from the king. Kings delegated this authority to chancellors, who established chancery courts who could do things like issue injunctions, orders for specific performance of a contract, and other so-called "equitable remedies". Most jurisdictions have merged these two courts, but Delaware retains the distinction for some purposes. Given that the remedy sought in this case, recission, is equitable rather than legal, only a judge could award it.
During the relevant time period Tesla nearly went bankrupt, they had massive production delays and had set up assembly lines in tents, and Musk was sleeping in the factory. He could have been working at his other companies, namely SpaceX and OpenAI.
Sure, after that things were smooth sailing. But he could have spent his time on other stuff. If this ruling holds, Musk's current 17 or so percent of Tesla is worth about as much as his 40 percent stake in SpaceX given the current evaluation of >350 billion. There was a massive opportunity cost in spending that time at Tesla. Around that time he co-founded OpenAI, perhaps if he had more time to spend on OpenAI it would have been a better use of his time. Since the first ruling he founded a new AI startup that is currently worth over 50 billion dollars. In a very real sense, Musk could have created that much value in numerous other ways, his wealth wasn't necessarily as tied to Tesla as you might think.
More than that, it's unjust. When he made the contract it seemed absurd. He would take this horrible company and get rewarded for every 50 billion dollars he added to the market cap. It was a tremendous deal to the share holders, 1% of the company each time he increases it's starting value by over 100%. We know the opportunity cost of Musk's time. His other companies at the time included openAI, and SpaceX. There was in fact a massive opportunity cost, which is further demonstrated by xAI.
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Heading off on a bit of a tangent, why the fuck are the courts giving legal advantages to fickle mercenaries? The last thing I'd want to do if I was creating a legal system is punish people for being dependable and committed, but here we are: Musk was dependable and committed, therefore he didn't have the right to as much compensation as an outsider would have.
It's because of the rule that for-profit corporations are supposed to
be maximally evilwork only for the profit of their shareholders.This rule is there because without it, there's a major principal-agent problem with executives looting a company and stiffing the shareholders, or abusing company resources for personal/ideological projects (e.g. ESG), and that problem strongly discourages investment which slows down the capitalist engine by a lot. It's a shitty solution, but the other solutions are also shitty (the most-popular alternative is some form of socialism or fascism where private capital doing what it wants is not a thing).
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