Matt Levine, Bloomberg’s highly entertaining columnist who fears neither footnotes nor granular analysis, weighs in on Delaware Chancery Court Judge Kathaleen St. J. McCormick’s latest decision.
In the latest proxy vote, shareholders agreed to a) overturn McCormick’s decision and b) move the company from Delaware to Texas, presumably to flee from Fortune 500 friendly Delaware. The original proxy prophetically stated that, “Even a favorable vote by our stockholders to ratify the 2018 CEO Performance Award may not fully resolve the matter.” Apparently not. The ruling gave 4 reasons why shareholders couldn’t overturn this court decision.
There are at least four fatal flaws. First, the defendants have no procedural ground for flipping the outcome of an adverse post-trial decision based on evidence they created after trial. Second, common-law ratification is an affirmative defense that must be timely raised, which means that, at a minimum, it cannot be raised for the first time after the post-trial opinion. Third, what the defendants call “common law ratification” has no basis in the common law—a stockholder vote standing alone cannot ratify a conflicted-controller transaction. Fourth, even if a stockholder vote could have a ratifying effect, it could not do so here due to multiple, material misstatements in the proxy statement. …
Defendants argue that transactions resulting from breaches of the duty of loyalty can be put to a stockholder vote at any time for any purpose—including to extinguish already adjudicated claims or reverse the outcome of a court decision—because “stockholders hold the power to adopt any corporate acts they deem in their own best interests.” That statement is dubious generally and unquestionably false in the context of a conflicted-controller transaction.
Personally I think there’s a case to be made for discouraging massive executive stock option grants under an environment the directors considered to be non-adversarial (!). Also I was not aware that the most recent proxy statement had, “Multiple, material misstatements”. On the one hand, it’s pretty damning that the directors couldn’t get their act together for this latest rubber stamping. On the other hand, Elon Musk is a beautiful person who moved one of the directors to tears during a deposition. Why won’t anybody think of Elmo? Sniff.
Tesla is expected to appeal. What if they lose? Matt Levine:
Well, Tesla’s board could just decide to give him the options again, and ask shareholders to vote to approve them again. This is slightly different from the previous vote this year: There, Tesla asked its shareholders to “ratify” the options that Musk got in 2018, to reverse the judge’s decision and make it so that they were never taken away. This did not work; a shareholder vote, it turns out, cannot reverse a judge’s decision. But giving him a new grant of options — the same amount of the same options as he got in 2018 — would not have that problem.
It would have other problems…
Other problems include a ginormous accounting hit, unfavorable tax treatment relative to the original grant, and the fact that the incentives set up to have Tesla attract Elon’s attention, didn’t work at all. Musk set up a competing and separate AI firm, purchased twitter, and appointed himself best buddy to Donald Trump. Finally, Musk isn’t a great manager: his genius lies in building organizations. That mission is accomplished at Tesla.
Noah Smith:
How does he do it? The exact specifics are probably impossible to pin down, but the general contours are nothing mysterious. Elon isn’t hyperintelligent or hyper-creative. Most of the engineers at SpaceX or Tesla are probably better at their jobs than he could be. His superpower — according to a bunch of people I’ve talked to in the tech industry — is gathering, motivating, coordinating, and setting goals for human talent .
This is the same superpower possessed by Genghis Khan, or Henry Ford, or Vladimir Lenin, or Matsushita Kōnosuke, or any number of other people who built big organizations from scratch. Humanity is a collective organism — directed toward a common goal, we can accomplish incredible things. But our talents are not equal, our motivations are not consistent, and our goals are not naturally aligned. An organization-builder is someone who takes the purposefulness of a single individual and applies it to a group of people.
Matt Levine:
Elon Still Can’t Get His Money - Bloomberg (sub req)
: with 55x the voting power could accomplish the same goals (and could be struck down by its shareholders because the power grab would be too unclothed).
(I hope you dodged