A while back, I posted about an eyebrow-raising opinion out of the Second Circuit holding that clean audit opinions may not be material to investors because they use generic language.  Happily, the Second Circuit has agreed to take a second look at the issue, and invited the SEC to file an amicus brief, which it did.  (Alison Frankel has a column on the case here; the brief is linked here)

The brief is simple and makes the obvious point that the language of a clean audit opinion may be standardized, but its use reflects an industry understanding regarding the procedures used in the audit and the auditor’s conclusions.

One thing worth highlighting: As I explained in my original post, the way we seem to have gotten here is that the defendant auditor conducted a shoddy audit, but then argued that there was no link between its own audit deficiencies and the actual flaws in the underlying financial statements – i.e., even a proper audit would not have caught the problems.

The SEC argues that, even if true, that would not make the audit opinion immaterial; it might, however, affect the analysis of loss causation.  The distinction matters a…

Vice Chancellor Laster has issued his opinion in the TripAdvisor case.  I’m still digesting it, but the overall framework does not surprise me.  As I can’t improve on the opinion’s recitation of the basic factual situation, here it is:

A Delaware corporation has two classes of stock. The CEO/Chair owns highvote shares carrying a majority of the outstanding voting power, giving him hard majority control. The board decides to convert the Delaware corporation into a Nevada corporation, and the CEO/Chair delivers the necessary stockholder vote. The board does not establish any protections to simulate arm’s length bargaining. The conversion is not conditioned on either special committee approval or a majority-ofthe-minority vote.

A stockholder plaintiff challenges the conversion.1 The plaintiff argues that Nevada law offers fewer litigation rights to stockholders and provides greater litigation protections to fiduciaries like the directors and the CEO/Chair. The plaintiff alleges that the directors and the CEO/Chair approved the conversion to secure the litigation protections for themselves. In support of those assertions, the plaintiff cites the materials the board considered, disclosures in the company’s proxy statement, the work of distinguished legal scholars about the content of Nevada law, and public statements by Nevada policy makers about

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Fights over advance notice bylaws are becoming more common; I previously posted about Paragon Technologies v. Cryan, and right after that, VC Will decided Kellner v. AIM Immunotech.  In both situations, boards were found to have been overly aggressive in drafting and enforcing their bylaws, and VC Will went case by case to determine which actions were permissible and which were not.  And since the dissidents had not fully complied with even the permissible bylaws, VC Will would not order that their nominees be permitted to stand for election.

This strikes me as such a difficult problem.  On the one hand, there are good reasons for these bylaws, as both the Paragon and AIM disputes make clear.  In Paragon, the dissident really was playing games about providing information regarding its plans; in AIM, the contest was a continuation of one spearheaded a year earlier by a convicted felon who tried to conceal his involvement.  So yeah, boards have really legitimate interests in ensuring that shareholders have full information.

On the other hand, the blue pencil approach – where the noncompliant bylaws are severed and the legitimate ones remain standing – strikes me as having the…

Look, it’s not like I want to post about Elon Musk every week, it’s just that he keeps doing things that result in interesting corporate governance conundrums.  So this week’s post covers several things, only one of which is a Musk thing.

The Musk Thing

After Chancellor McCormick struck down his Musk’s 2018 pay package, one bit of speculation that floated about was whether Musk could sue Tesla to recover the package, on some kind of restitution/quantum meruit theory.  My suspicion is that such a claim would be unlikely to succeed because Musk’s own fiduciary breaches are what led to the original forfeiture, and he who comes into equity must do so with clean hands.  Or, as the famous jurist Leo Rosten put it, it would be like “a man who, having killed his mother and father, throws himself on the mercy of the court because he is an orphan.”

But despite the dubious merit such a claim would have, given the close ties McCormick identified between Tesla’s board and Elon Musk, there would be a risk that the board would take a dive and settle unnecessarily.

(More under the cut)

Given all the news about Governor Abbott’s pitch to create a business law infrastructure that will compete with Delaware, and Musk’s threat to decamp there, it’s worth pointing out that this is an amendment that was recently proposed to the Texas Business Organizations Code:

BURDEN OF PROOF IN CERTAIN DERIVATIVE PROCEEDINGS. Notwithstanding any other law, in a derivative proceeding by a shareholder that alleges an act or omission related to the improper consideration of environmental, social, and governance criteria in the performance of the act or omission, the burden of proof is on the corporation to prove the act or omission was in the best interest of the corporation.

In 2022, Texas legislators proposed amending its law to permit shareholders to bring a fiduciary duty claim against the managers of any public company that provided women employees with travel benefits for abortion care (though, to be fair, in that case, the proposal would have applied even to non-Texas organized companies).

Texas Attorney General Ken Paxton has been very vocal about his objections to ESG – he is among those suing to block a Department of Labor rule, among other things – and as Attorney General, he would, as I…

So, anything interesting happening in corporate law this week?

I kid, I kid. On Tuesday, Chancellor Kathaleen McCormick of the Delaware Court of Chancery issued her long-awaited opinion in Tornetta v. Musk, where she took the extraordinary step of holding that Elon Musk’s Tesla pay package from 2018 was not “entirely fair” to Tesla investors, and ordered that it be rescinded.  In practical effect, she ordered the cancelation of stock options worth about $51 billion, or, according to news reports, about a quarter of his current wealth.  Put that together with the Twitter purchase, the State of Delaware and Chancellor McCormick have cost Musk about $90 billion, give or take (though a contrary take would involve the words “actions” and “consequences”).

The legal standards

Normally, the decision of what to pay a corporate CEO – like any other business decision – is controlled by the board of directors, and not subject to second-guessing by a court.  But, like any other business decision, that changes if the executive pay package can be seen as self-dealing, namely, the decisionmakers have a financial interest in the arrangement.

In a normal company, that isn’t a problem; the corporate directors act at arm’s length…

So, there was a lot going on in Twitter v. Musk, some of it in the actual case, but much of it in the speculation of we legal types as we gamed out various potential scenarios.

One scenario that kept recurring was whether Delaware would in fact have the ability to actually enforce a judgment against Elon Musk, should he choose to simply defy court orders.  That was never a likely scenario; Musk is a repeat player in Delaware and it was never feasible for him to remain the CEO of a public company organized in Delaware while running from the Delaware courts.

But if that happened, it seemed one solution would be for Delaware to seize his Tesla shares, and his SpaceX shares, and then either sell them or more likely simply hold them until he complied with the judgment.  The logic was that, according to DGCL §169, shares of a Delaware corporation exist, in the abstract, within the state of Delaware, and Court of Chancery Rule 70 says:

If a judgment directs a party to execute a conveyance of land or to deliver deeds or other documents or to perform any other specific act and the party

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