Musk and Shareholder Democracy

Whatever happened to Shareholder Democracy? That’s the question unfolding in a Delaware court after Tesla’s owners — its shareholders — defied a judge over how much to pay their chief executive, Elon Musk. The judge is flummoxed — “This has never been done before,” she stammered at a hearing — and the case may go to the First State’s high court. It also reflects ferment over corporate law in Delaware, a haven for big American companies.The case arose after Tesla awarded Mr. Musk — the world’s richest man — a compensation deal worth north of 50 billion spondulix. Enter a Tesla shareholder, Richard Tornetta, a former heavy metal drummer who held but nine shares in the electric auto maker. He argued that Tesla’s board had failed to act independently when it struck the pact with Mr. Musk, and that the huge salary wasn’t in the company’s best interest.The judge in the case, Chancellor Kathaleen St. Jude McCormick, sided with Mr. Tornetta. Say what you will about her, the jurist has a ready wit. “Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” she wrote in her ruling voiding the Tesla compensation deal. “The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall.”Judge McCormick seemed well aware that she was treading in uncharted waters in this dispute, noting that her decision “dares,” she wrote, to “boldly go where no man has gone before” — as per “Star Trek” — or “at least where no Delaware court has tread.” Mr. Musk did not seem amused. “Never incorporate your company in the state of Delaware,” he warned. Yet more than two-thirds of the companies on the Standard & Poors 500 do just that — for now.Mr. Musk sought to pull up stakes in Delaware and reincorporate in the friendlier climes of Texas. Other companies are weighing similar moves. And Chancellor McCormick’s decision did indeed raise questions about the role of government — and courts — in the affairs of the private sector. “If the precedent set in the First State stands, after all, what state would be safe for corporate self-rule?” these columns asked after her ruling came down. As for Mr. Musk and Tesla, they rebuffed Chancellor McCormick’s decision by putting the question before the shareholders. In June, some 77 percent of them agreed to restore the pay package in what the Press Association called “strong vote of confidence in his leadership of the world’s largest electric vehicle maker.” A lawyer for Tesla said “this was stockholder democracy working.” That put the ball back in Chancellor McCormick’s court.At a hearing the other day, there were some signs that the jurist might reconsider her opposition to Mr. Musk’s salary deal. “There is no Delaware law on this, correct?” was her query to Tesla’s lawyers. Yet she also wondered if “stockholders can ratify an adjudicated breach of the duty of loyalty,” the Times reported. That’s legal Jabberwocky for a board member acting in his or her own interest, at the expense of the company’s shareholders. Tesla’s lawyers seemed impatient with such philosophical musings on the part of the chancellor. One of them quipped that he was not asking the jurist “to make new law.” Plus, too, even if Chancellor McCormick refuses to abide by the will of Tesla’s shareholders, the state’s high court might be more sympathetic. If not, there’s always the state legislature. That body, the Financial Times reports, has increasingly been overruling state courts to favor corporations.At a time when the state risks losing its reputation as a business-friendly place to incorporate, the FT writes, legislators have recently taken steps, when needed, to “enact changes to the Delaware General Corporation Law” to nullify court rulings that are unfavorable to companies headquartered there. One former Delaware judge lays out the logic of the legislation: “As chancellor, I will tell you, I was taught judges need to stay in their own lane.”

Musk and Shareholder Democracy

Musk and Shareholder Democracy

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