Latest / Bloomberg Law / Judge Voids Musk's Multibillion Dollar Pay Package Again

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Judge Voids Musk's Multibillion Dollar Pay Package Again · Bloomberg Law

0:03
Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.
0:09
Speaker 2: For a second time, a judge has voided the multi
0:13
Speaker 2: billion dollar pay package awarded by Tesla to Elon Musk
0:17
Speaker 2: in twenty eighteen. The stock options package would be the
0:21
Speaker 2: highest pay package ever for a US corporate executive, worth
0:25
Speaker 2: fifty six billion dollars when Delaware Chancery Court Judge Kathleen
0:30
Speaker 2: McCormick first canceled it in January, and worth one hundred
0:35
Speaker 2: one point five billion when she voided it a second
0:38
Speaker 2: time on Monday. The judge ruled that Tesla's board was
0:42
Speaker 2: improperly influenced by Musk and capitulated to his terms when
0:47
Speaker 2: it adopted the billionaire's plan in twenty eighteen. But not
0:51
Speaker 2: to worry. Even without those billions, Musk is still the
0:55
Speaker 2: wealthiest person in the world. In fact, his wealth hidden
0:58
Speaker 2: all time high last month. Joining me is business law
1:02
Speaker 2: professor Eric Tally of Columbia Law School. Eric, this is
1:06
Speaker 2: the second time she rejected the pay package as excessive.
1:10
Speaker 2: Explain how we got here?
1:11
Speaker 3: Well, Remember, in January twenty twenty four, Chancellor McCormick issued
1:16
Speaker 3: a ruling on the merits after a full blown trial
1:19
Speaker 3: that basically said the twenty eighteen grant of the compensation
1:23
Speaker 3: package to mister Musk was invalid because it breached various
1:27
Speaker 3: types of fiduciary duties and it was not cured by
1:30
Speaker 3: an informed shareholder vote, and at that moment the Chancellor said,
1:36
Speaker 3: this means that the pay package is boyd. However, the
1:39
Speaker 3: case wasn't done yet, because at the end of any
1:42
Speaker 3: of these cases, sometimes they settle, sometimes they make it
1:44
Speaker 3: to a final adjudication on the merits. The lawyers for
1:47
Speaker 3: the plaintiff have to make a fee pedition because most
1:50
Speaker 3: of the time litigation in these areas is not kind
1:54
Speaker 3: of the standard private party litigation, but you actually have
1:57
Speaker 3: to get up an approved feel from the court and
2:02
Speaker 3: that makes it kind of like class action litigation. It's
2:05
Speaker 3: effectively a type of a contingency fee, but it's all
2:08
Speaker 3: up to the court. And so that was the one
2:10
Speaker 3: thing remaining to have happened, and it typically doesn't happen
2:13
Speaker 3: at the same time. So while Chancellor McCormick was waiting
2:17
Speaker 3: for briefing on how much of a fee the lawyers
2:21
Speaker 3: for the plaintiffs should get, that's when Tesla decided that
2:24
Speaker 3: they were going to put the same compensation package up
2:27
Speaker 3: for a revote, which they'd ended up doing in June,
2:31
Speaker 3: just weeks before the hearings on the the allocation was
2:34
Speaker 3: supposed to be conducted, and stockholders in those June meetings
2:39
Speaker 3: voted overwhelmingly both to move the company to Texas and
2:43
Speaker 3: to ratify or re ratify the pay package. So this
2:47
Speaker 3: threw kind of an interesting, you know, kind of wrench
2:50
Speaker 3: in the works with respect to the one thing that
2:53
Speaker 3: was left to have happened, which is a few award,
2:55
Speaker 3: Because now Tesla was saying, hey, this new stockholder vote
2:59
Speaker 3: indicates that, you know, there really wasn't any benefit to
3:03
Speaker 3: this outcome, and in fact, you should revisit the prior
3:06
Speaker 3: holding in the light of the fact that our stockholders
3:08
Speaker 3: have just chimed in again and said, you know, seventy
3:11
Speaker 3: two percent said we we approve it. So that ended
3:14
Speaker 3: up making this more complicated and pushed the release of
3:17
Speaker 3: this opinion into the Monday after Thanksgiving. I'm just going
3:22
Speaker 3: to guess that Chancellor McCormick did not have a leisurely
3:25
Speaker 3: and fundal places giving weekend.
3:27
Speaker 2: Did she revisit her whole opinion from before, or did
3:30
Speaker 2: she just look at the question of whether the second
3:34
Speaker 2: shareholder vote gave grounds for her to reassess her earlier ruling.
3:39
Speaker 3: Yeah, her opinion that she released the most recently. The
3:42
Speaker 3: second opinion kind of did two things. First of all,
3:44
Speaker 3: it had to take on this question about whether this
3:47
Speaker 3: new shareholder vote was going to have any bearing on
3:51
Speaker 3: her original opinion, and if it didn't, didn't have any
3:55
Speaker 3: bearing on the nature and the amount of compensation that
3:59
Speaker 3: she was going to give to the plaintiffs attorneys. And
4:01
Speaker 3: in both cases she basically pushed back on the motions
4:05
Speaker 3: that Tesla had filed, saying, no, this does not cause
4:08
Speaker 3: me to go back and revise my January opinion. In fact,
4:12
Speaker 3: that cow has long been out of the barn, and
4:16
Speaker 3: as of the time it was issued, this fact didn't
4:19
Speaker 3: even exist. So it's not like, oh, we're finding out
4:21
Speaker 3: new information that really should have been part of the
4:23
Speaker 3: original case. This is a response to the original case,
4:27
Speaker 3: and therefore it doesn't affect that outcome.
4:29
Speaker 1: Now.
4:29
Speaker 3: The second thing that she also did, she said, you know,
4:32
Speaker 3: the stockholder vote itself doesn't somehow vitiate the idea that
4:37
Speaker 3: when the plaintiffs brought this case and won it, that
4:41
Speaker 3: they created value for the stockholders and for the company
4:46
Speaker 3: by basically causing what would have been a very large
4:49
Speaker 3: chunk of the company's value to be paid out to
4:52
Speaker 3: Elon Musk. So the first part of the opinion, she
4:54
Speaker 3: basically says that stockholder vote is not going to have
4:58
Speaker 3: an effect on how I decided the original opinion or
5:02
Speaker 3: whether I think the outcome created a benefit to stockholders.
5:05
Speaker 3: And then the second part of the opinion she had
5:07
Speaker 3: to turn to the task which was all along the
5:10
Speaker 3: original task that she was going to have to take on,
5:12
Speaker 3: which is how much to compensate the attorneys for you
5:17
Speaker 3: know what was really kind of an outright win at
5:19
Speaker 3: the trial court level that resulted in, you know, essentially
5:22
Speaker 3: a clawing back or a failure to let go of
5:26
Speaker 3: I guess, you know, just around fifty billion dollars worth
5:29
Speaker 3: of options that we're going to go in the direction
5:32
Speaker 3: of mister Musk.
5:33
Speaker 2: The plaintiff's lawyers wanted billions of dollars. As I recall,
5:38
Speaker 2: how did the judge make that determination?
5:41
Speaker 3: That was itself kind of an interesting dance off because
5:45
Speaker 3: in Delaware there's there's traditionally this this approach to saying okay,
5:50
Speaker 3: look we've got to figure out what is fair compensation
5:53
Speaker 3: to lawyers, and there are kind of two ways to
5:55
Speaker 3: do it. One way is just to figure out, okay,
5:57
Speaker 3: what's a good hourly fee for lawyers, and then just
6:01
Speaker 3: figure out how many hours they worked and give them
6:03
Speaker 3: the multiplication or the product of those two things. And
6:06
Speaker 3: that's what's known as a load storm approach. And Delaware
6:09
Speaker 3: has long resisted that, I think in part because they
6:12
Speaker 3: don't want to create incentives to just work like crazy
6:15
Speaker 3: on very very low value lawsuits and say, well, here's
6:18
Speaker 3: our hourly rate and we've got a success. You know,
6:20
Speaker 3: we won a dollar and fifty cents, and we should
6:22
Speaker 3: get you know, our full hourly fees to do it.
6:26
Speaker 3: So what Delaware has largely opted for is what's known
6:29
Speaker 3: as a percentage of the benefit approach, you know, and
6:33
Speaker 3: it's a monetary payment, it would be a percentage of that.
6:36
Speaker 3: In this case, it was a cancelation of an options
6:39
Speaker 3: package worth around fifty billion dollars at least it has
6:42
Speaker 3: measured at the time of the litigation. And so that's
6:45
Speaker 3: kind of where, you know, as clear as she was
6:47
Speaker 3: going to have to head. But the problem is that
6:50
Speaker 3: this was such a large magnitude event, right, the avoiding
6:55
Speaker 3: of around a fifty billion dollar pay package. That when
6:57
Speaker 3: you kind of plug that into the usual and customary
7:01
Speaker 3: formulas for how much should plane's attorney get, it was
7:05
Speaker 3: going to yield something, you know, probably around eighteen to
7:09
Speaker 3: twenty billion dollars for the plaintiffs because they saw it
7:11
Speaker 3: all the way through to the very end, and that's
7:13
Speaker 3: when you get the most attractive type of compensation. So
7:17
Speaker 3: even the plane's attorneys realized that that probably was not
7:19
Speaker 3: going to have legs and was going to get beat back.
7:22
Speaker 3: So they kind of did a little bit of sort
7:24
Speaker 3: of self flagellation of their own to try to you know,
7:27
Speaker 3: beat that number down into something that was at least
7:30
Speaker 3: a little closer to what we've seen historically, which has
7:32
Speaker 3: never been in the billions of dollars. And they came
7:35
Speaker 3: up with a figure of about five and a half
7:37
Speaker 3: billion dollars that was still huge, in an order of
7:40
Speaker 3: ninety tude more than we'd seen in any other case
7:43
Speaker 3: in Delaware. And that's even after you know, sort of
7:45
Speaker 3: tying their hands behind their back, you know, tying bean
7:48
Speaker 3: bags to their legs, and you know, kind of weighing
7:51
Speaker 3: themselves down, and they still only got it down to
7:53
Speaker 3: about five billion dollars, and obviously Tesla was resisting that heavily.
7:58
Speaker 3: They tried to argue that the stockholder boat in the
8:01
Speaker 3: summer was further evidence that there wasn't any value from
8:05
Speaker 3: the cancelation, and the court pushed back on that, but
8:08
Speaker 3: it then sort of gave rise to this hard dilemma
8:13
Speaker 3: about whether you go with that five billion dollars, and
8:17
Speaker 3: Chanceer McCormick sort of post holes in the plaintiffs attorney's
8:21
Speaker 3: theory about how to get there, because you know, she said, look,
8:24
Speaker 3: they're clearly trying to get themselves to a smaller number
8:27
Speaker 3: that's more palatable, but the way that they're getting there
8:29
Speaker 3: just seems kind of arbitrary. But then the defendants, from
8:32
Speaker 3: from their perspective, Tesla was offering some other approaches that
8:38
Speaker 3: seemed a little bit ad hoc to Chancellor McCormick as well.
8:42
Speaker 3: And so at the end what she had decided to
8:44
Speaker 3: do is she ended up kind of doing something interesting.
8:46
Speaker 3: She said, Look, what I'm going to do is I'm
8:49
Speaker 3: going to base only for the attorney compensation part. I'm
8:53
Speaker 3: going to base that on what as of the date
8:56
Speaker 3: of the grant of the options back in twenty eighteen,
9:00
Speaker 3: kind of the best estimates at that period of time
9:03
Speaker 3: are going to yield, which is sort of in the
9:05
Speaker 3: low two billions, like two point three billion dollars. And
9:08
Speaker 3: then she said, and then I'm going to apply kind
9:11
Speaker 3: of the low end of the standard percentages as you
9:13
Speaker 3: get from that, which is fifteen percent, and that out
9:16
Speaker 3: landed her on a number of three hundred and forty
9:19
Speaker 3: five million dollars. Now, the way that she got there,
9:22
Speaker 3: you know, even other parts of her opinions that you
9:24
Speaker 3: shouldn't be reaching back to the grant date to figure
9:26
Speaker 3: out stuff. But it turns out that if you did
9:29
Speaker 3: that and got that number and took fifteen percent of
9:31
Speaker 3: it and got three hundred and forty five million dollars,
9:34
Speaker 3: that puts you in the ballpark of some of the
9:36
Speaker 3: larger fee awards that have been on the books. It's
9:39
Speaker 3: within spitting distance of a bunch of them. So the
9:42
Speaker 3: number at least under the finger and the wind approach
9:45
Speaker 3: kind of looks closer than what either the plaintive attorneys
9:48
Speaker 3: or the defendant attorneys were offering up as alternatives.
9:51
Speaker 2: So let me ask you this about her decision as
9:54
Speaker 2: a whole. Was she saying that no matter what the
9:58
Speaker 2: second vote was, no matter how it was conducted, that
10:01
Speaker 2: it wouldn't change her opinion, or was she saying that
10:05
Speaker 2: there was a problem with the second vote, that shareholders
10:08
Speaker 2: were given misleading information. I mean, which was it?
10:12
Speaker 3: As much as I disliked this statement, June, it's yes.
10:15
Speaker 2: And so.
10:18
Speaker 3: There was a part of her opinion that said, look,
10:20
Speaker 3: the idea that even if this was a fully you know,
10:23
Speaker 3: sort of coherent and solid stockholder vote, the idea that
10:27
Speaker 3: you would put this forward after we've had a full
10:31
Speaker 3: adjudication on the merits just doesn't make sense from the
10:34
Speaker 3: standpoint of Delaware law, first of all, or really no
10:37
Speaker 3: procedural precedents for you know, putting the toothpaste back in
10:41
Speaker 3: the tube with later occurring facts like a later shareholder's vote,
10:46
Speaker 3: And the only sort of situations where that has actually
10:50
Speaker 3: happened that you can find in Delaware law often relate
10:53
Speaker 3: to facts that existed at the time of trial, but
10:56
Speaker 3: somehow they didn't make it into the record, and maybe
10:59
Speaker 3: there was some kind of a defect in discovery or
11:01
Speaker 3: someone's withholding facts or something like that. And so there
11:04
Speaker 3: are some precedents that will essentially say, Okay, we're going
11:07
Speaker 3: to revisit the holding because we learned something later on.
11:10
Speaker 3: But it's always been something that you could have known
11:12
Speaker 3: at the time of trial, and this is something that
11:14
Speaker 3: didn't occur until five months at least after the opinion
11:17
Speaker 3: came out. The other thing is that this idea of
11:20
Speaker 3: a stockholder vote basically helping to fix a fiduciary duty issue.
11:25
Speaker 3: That's what's known amongst lawyers as an affirmative defense, and
11:28
Speaker 3: what that means is planets are going to come forward
11:31
Speaker 3: with whatever claim they're going to have, and then you
11:34
Speaker 3: can bring this forward to basically say, yeah, that might
11:37
Speaker 3: have happened, but we got this stockholder vote and that
11:40
Speaker 3: should either protect us or in some cases immunize us
11:43
Speaker 3: from having to bear liability. And therefore it's kind of
11:47
Speaker 3: an interesting thing with an affirmative defense. It's up to
11:50
Speaker 3: the defendants to put forward that defense at the time
11:53
Speaker 3: of trial, and you've got to do it in a
11:55
Speaker 3: timely way, and historically, if you don't raise it at
11:58
Speaker 3: the time of trial, can't raise it later on. And
12:01
Speaker 3: so she said, look, this is something that didn't even
12:04
Speaker 3: happen at the time or before trial. It happened five
12:07
Speaker 3: months after trial. You obviously didn't and couldn't raise it
12:11
Speaker 3: at the time, and now you're doing this thing and
12:14
Speaker 3: raising it five months later. But it wasn't part of
12:16
Speaker 3: your defense of the trial itself, and therefore it doesn't
12:19
Speaker 3: really count. And then the last reason why, she sort
12:22
Speaker 3: of said, look, you know, independent of whether it was
12:24
Speaker 3: a misleading or not, the best a stockholder vote can
12:27
Speaker 3: do in this case, because remember her original opinion found
12:31
Speaker 3: that mister Musk was a controlling stockholder. It turns out,
12:35
Speaker 3: under Delaware law, stockholder approval of some transaction with a
12:39
Speaker 3: controlling stockholder doesn't get you completely out of the woods
12:43
Speaker 3: of sort of the most intensive standard of review, it's
12:47
Speaker 3: sometimes known as the entire fairness doctrine. It helps you
12:50
Speaker 3: a little bit, it'll flip a burden in that case,
12:54
Speaker 3: but it's not going to basically be caused to dismiss
12:57
Speaker 3: the action. So based on just kind of pretty standard
13:00
Speaker 3: approaches under what's known as the ratification doctrine, none of
13:05
Speaker 3: these things really worked. And then adding on top of it,
13:09
Speaker 3: she said, look, in this new vote in June, there
13:12
Speaker 3: were problems with that as well. Right, the original vote
13:15
Speaker 3: back in twenty eighteen, she said didn't count because there
13:18
Speaker 3: were not adequate disclosures to the stockholders. Well, she went
13:22
Speaker 3: through this new set of disclosures, this new set of
13:25
Speaker 3: proxy materials from the spring of twenty twenty four and
13:28
Speaker 3: said that the way that the vote was being characterized
13:31
Speaker 3: to stockholders was just just inaccurate. That it would fix
13:35
Speaker 3: or it would cure or it would remedy the prior
13:38
Speaker 3: finding of a breach of the duciary duty. And it
13:41
Speaker 3: doesn't under Delaware law right as I said earlier, it
13:43
Speaker 3: only flips the burden. If anything, I mean, it may
13:47
Speaker 3: not have any effect at all. So you know, she
13:49
Speaker 3: basically used the first part of that section to say
13:52
Speaker 3: this has no effect, and then when you made a
13:54
Speaker 3: disclosure to stockholders saying this would have complete effect, you
13:58
Speaker 3: were actually materially misstating law. So she ends up also
14:01
Speaker 3: saying that the proxy materials themselves were also inaccurate and misleading.
14:07
Speaker 2: Coming up next, but will Elon Musk get his pay
14:10
Speaker 2: package anyway? This is bloomberg. For the second time, a
14:14
Speaker 2: Delaware Chancery Court judge has voided the multi billion dollar
14:19
Speaker 2: pay package awarded by Tesla to Elon Musk. I've been
14:23
Speaker 2: talking to Columbia Law School professor Eric Tally. Tesla's board
14:27
Speaker 2: says it will appeal the ruling to the Delaware Supreme Court.
14:31
Speaker 2: Do you think her decision will stand up on appeal?
14:35
Speaker 3: Well, it's an interesting thing. Look everything about Chancellor McCormick's
14:38
Speaker 3: original decision, you can justify it, right, it's on reasonably
14:42
Speaker 3: solid ground. Yeah, a lot of people been talking about
14:44
Speaker 3: this case, and you know, there's definitely room for disagreement
14:48
Speaker 3: on some of the issues in that January twenty twenty
14:52
Speaker 3: four liability opinion. But you know, the factual findings that
14:56
Speaker 3: she made are going to be very hard for the
14:59
Speaker 3: Supreme Court to unseat. So it's really a question about
15:02
Speaker 3: whether she adequately described the law or whether the Delaware
15:06
Speaker 3: spreing Court decides they want to change the precedent on
15:10
Speaker 3: the occasion of this case. I think in terms of
15:13
Speaker 3: kind of you know, articulating Delaware law, for the most part,
15:16
Speaker 3: she kind of stuck the landing in this January twenty
15:19
Speaker 3: twenty four opinion. There's new stuff in the newest opinion,
15:23
Speaker 3: and particularly you know the question of whether the stockholder
15:27
Speaker 3: vote has any effect and would cause a judge under
15:31
Speaker 3: Delaware law to have to go back and revisit the
15:34
Speaker 3: liability finding. And so there's a possibility that the Dellar
15:38
Speaker 3: Spreme Court could reverse some component of the original There's
15:42
Speaker 3: probably two or three places where I would expect to
15:45
Speaker 3: push on that original holding, and then they might push
15:48
Speaker 3: once again on this question of whether a later occurring
15:51
Speaker 3: stockholder vote can somehow kind of you know, get us
15:54
Speaker 3: back to the future as it were, and be treated
15:57
Speaker 3: as a contemporaneous stockholder vote. Their possibility, quite frankly, is
16:02
Speaker 3: that Tesla, now that it's a Texas company, they just
16:05
Speaker 3: submit to the stockholders a proposal that, out of gratitude,
16:08
Speaker 3: we should give mister Musks formally voided compensation award back
16:12
Speaker 3: and have yet a third vote. To the extent that
16:15
Speaker 3: that gets challenged, it would have to be challenged. In Texas.
16:17
Speaker 3: We don't know an awful lot about the brand new
16:20
Speaker 3: Texas business courts, but one thing that's been true about
16:22
Speaker 3: the courts is they've been courting Elon Musk, and so
16:26
Speaker 3: it may well be that he's got a more friendly
16:28
Speaker 3: venue and that will be allowed to go through. And
16:30
Speaker 3: you know, quite frankly, even under Delaware law, I think
16:33
Speaker 3: it's arguably the case that if they put this in
16:36
Speaker 3: front of the stockholders as a brand new package as
16:38
Speaker 3: opposed to an attempt to fix a previously invalidated package,
16:44
Speaker 3: they're not going to be putting toothpaste back in the tube.
16:47
Speaker 3: It's just a brand new transaction. If they did it right,
16:49
Speaker 3: even under Delaware law. My sense is that they probably
16:52
Speaker 3: could manage to make it enforceable.
16:55
Speaker 2: That sounds easier, So why appeal. Then?
16:57
Speaker 3: The two downsides I guess from Tesla's and mister m
17:00
Speaker 3: perspective is that the tax treatment won't be the same.
17:02
Speaker 3: Right when you award an options package at the time
17:06
Speaker 3: of the original grant, the tax treatment of it and
17:09
Speaker 3: the valuation of it, it's going to be much lower
17:11
Speaker 3: in terms of its valuation. When you do it after
17:14
Speaker 3: it's realized all of the benefit, it's going to be
17:16
Speaker 3: a much larger tax hit. And the other thing is
17:19
Speaker 3: that if they decided to do that, then that would
17:21
Speaker 3: leave alone the attorney the award, which in this case
17:24
Speaker 3: is you know, almost three and fifty million dollars. That's
17:27
Speaker 3: a big award. It's not as nearly as big as
17:29
Speaker 3: the planets had asked for, so you know, It could
17:32
Speaker 3: be that the test the board just asides, all right,
17:34
Speaker 3: maybe will appeal this. It depends on how much we
17:37
Speaker 3: just don't want the attorneys to be receiving anything in
17:40
Speaker 3: this case, in which case they may continue to fight back.
17:44
Speaker 2: Do you have any doubt that the board is going
17:45
Speaker 2: to get Musk the pay package he wants one way
17:48
Speaker 2: or another.
17:49
Speaker 3: It seems given the nature of the vote in the
17:52
Speaker 3: summer that that it's likely they're going to be able
17:54
Speaker 3: to get it, whether they do it as a new
17:56
Speaker 3: transaction or to try to go back and you know,
17:59
Speaker 3: and appeal. The issue of whether a retroactive vote after
18:05
Speaker 3: an invalidated grant can somehow reach back and fix the
18:09
Speaker 3: infirmities at the beginning, I think that latter course, and
18:12
Speaker 3: you know, it's conceivable the Delaware Supreme Court might go
18:14
Speaker 3: in that direction. But it does seem to me that
18:16
Speaker 3: at least on that issue, Chancellor McCormick has a decent
18:19
Speaker 3: amount of precedent and kind of logic on her side that,
18:22
Speaker 3: you know, like litigation would basically just never end if
18:25
Speaker 3: every time you've got an adverse judgment, you could just
18:27
Speaker 3: have yet another stockholder vote, And if that was problematic,
18:30
Speaker 3: then have another stockholder vote on that. It's kind of like,
18:33
Speaker 3: I guess, it's not turtles all the way down, it's
18:34
Speaker 3: stockholder votes all the way down. So I think she
18:37
Speaker 3: makes a pretty powerful point in the opinion that this
18:39
Speaker 3: would not be the best way to design a system
18:42
Speaker 3: of adjudication. But you know, they proposed this as a
18:45
Speaker 3: brand new package. I can see putting that together in
18:48
Speaker 3: ways that are fully informed and make it completely enforceable.
18:52
Speaker 3: And like I said, it wouldn't even now be under
18:55
Speaker 3: Delaware law. If it or a brand new paypack is
18:57
Speaker 3: it would be granted pursuing to the laws of the
19:00
Speaker 3: state in which Tesla is currently incorporated, which is Texas,
19:04
Speaker 3: outside of.
19:04
Speaker 2: Musk I know that you know Texas is putting on
19:07
Speaker 2: a push with these business courts. Do you see a
19:10
Speaker 2: lot of companies changing their incorporation to Texas from Delaware?
19:15
Speaker 3: Well, certainly there's a lot of kind of puffer fishing
19:17
Speaker 3: about it, right, sort of saying, look, we're going to
19:19
Speaker 3: leave Delaware. It's an odd situation, however, because one of
19:23
Speaker 3: the things that is tough about this case, this specific case,
19:27
Speaker 3: is that you got the CEO of the company who
19:31
Speaker 3: is clearly an iconoclastic and well known and in many
19:36
Speaker 3: ways quite idiosyncratic person who you know, was you know,
19:40
Speaker 3: basically sort of saying, look, I'm just going to bargain
19:42
Speaker 3: with myself and the usual rules of Delaware law shouldn't
19:46
Speaker 3: apply to me, and Chancellor McCormick kind of applied the
19:49
Speaker 3: usual rules of Delaware law to him, and you know,
19:51
Speaker 3: arguably that maybe even more than arguably that precipitated their
19:55
Speaker 3: departure from Delaware. If you were to take a different
19:58
Speaker 3: CEO who was in it is exceptional and quite as
20:01
Speaker 3: idiosyncratic as Elon Musk. There actually may be some value
20:06
Speaker 3: to having some of the some of the strings that
20:09
Speaker 3: Delaware attaches to things like compensation packages or other conflicted
20:14
Speaker 3: sorts of transactions, because almost all these more lesser light
20:18
Speaker 3: CEOs and boards are going to have to be going
20:21
Speaker 3: out and getting investments from people, and they're going to
20:24
Speaker 3: have to be talking people into parting with their money
20:27
Speaker 3: and investing it in this company. And to the extent
20:30
Speaker 3: that those prospective investors are you know, looking into their
20:34
Speaker 3: magic eight ball and saying, well, look, in the future,
20:36
Speaker 3: you know, Delaware law actually does impose some requirements on
20:40
Speaker 3: you that may make them more willing to invest and
20:44
Speaker 3: lock up their money for an extended period of time
20:47
Speaker 3: because of those strings. And so, you know, there is
20:49
Speaker 3: a sense that if Delaware were trying to kind of
20:52
Speaker 3: get it right, so to speak, it's not going to
20:54
Speaker 3: get it right for every company, but it may make
20:57
Speaker 3: a lot of sense to try to get it right
20:59
Speaker 3: for most of the companies that it has, you know,
21:01
Speaker 3: over one hundred years of you know, effectively adjudicating their claims.
21:05
Speaker 3: There's you know, kind of a reason Delaware became the
21:08
Speaker 3: dominant locus for incorporations because of the predictability of their
21:13
Speaker 3: judges and the expertise of their judges. And I'm not
21:16
Speaker 3: aware of any state that at least yet can claim
21:19
Speaker 3: either of those. It takes a long time to build
21:21
Speaker 3: up enough precedent to be predictable, and the expertise is
21:24
Speaker 3: a very hard thing to come by as well. And
21:27
Speaker 3: the location of Delaware kind of situated right between New
21:30
Speaker 3: York and DC and Philly, kind of makes it a
21:33
Speaker 3: reasonably good hub for that type of locational setting for judges.
21:37
Speaker 3: So I don't know how much flight we're going to
21:41
Speaker 3: see out of Delaware based on the merits loan you
21:44
Speaker 3: add to it June. The fact that, look, I've been
21:46
Speaker 3: at this gig for almost three decades, and I've been
21:49
Speaker 3: teaching corporate law.
21:50
Speaker 1: The entire time.
21:51
Speaker 3: I pretty much have taught tens of thousands of students
21:55
Speaker 3: corporate law under the Delaware model. And that's that's just me, right,
21:59
Speaker 3: and that's probably true of just about every other corporate
22:02
Speaker 3: law professor in the country. So there are legions, there
22:04
Speaker 3: are armies of lawyers out there that are trained by
22:07
Speaker 3: one of us who know Delaware law really really well,
22:11
Speaker 3: may know a little bit of another state's law, and
22:13
Speaker 3: that's about it. And so just the you know, the
22:16
Speaker 3: almost like the network effects right of Delaware being kind
22:20
Speaker 3: of a focal point, I think you're going to make
22:22
Speaker 3: it difficult to break that juggernaut. And you know, when
22:25
Speaker 3: it gets to the point where you've gone beyond just
22:27
Speaker 3: kind of doing the sort of pufferfish you know, threats,
22:30
Speaker 3: there will be some companies that will leave. Some of
22:33
Speaker 3: them may quietly come back to the state when they
22:35
Speaker 3: realize it's harder to raise capital in their new and
22:39
Speaker 3: not terribly predictable jurisdiction. And you know, my guess is
22:43
Speaker 3: we'll probably see some experimentation with that over the next
22:46
Speaker 3: few years.
22:48
Speaker 2: Also the body of law that Delaware has, as well
22:52
Speaker 2: as the expertise of the judges. I mean, Texas's business
22:57
Speaker 2: courts are basically just like a startup at this point.
23:00
Speaker 3: You know, another thing that for a long time been
23:02
Speaker 3: kind of a small table topic is this question of,
23:06
Speaker 3: you know, whether corporate law should become more of a
23:09
Speaker 3: federal issue than a state issue. Right, should the sec
23:14
Speaker 3: or the FTC or something like that play more of
23:17
Speaker 3: a role in federalizing corporate law. Now, mister Musk has
23:22
Speaker 3: episodically been in favor of that, but of course to
23:25
Speaker 3: do that, you're going to have dramatically increase the bloat
23:28
Speaker 3: of the federal government, and he's simultaneously trying to decrease
23:32
Speaker 3: the blow to the federal government. I don't know which
23:34
Speaker 3: one wins that pedal war. My guess is state law
23:37
Speaker 3: is going to continue to be pretty much the center
23:39
Speaker 3: of massive most corporate law unlessen until a company is
23:43
Speaker 3: publicly traded, and then it's kind of a you know,
23:45
Speaker 3: both federal securities law and state corporate law kind of
23:47
Speaker 3: share the burden of regulating various types of governance.
23:51
Speaker 2: I'm betting on corporate law not being federalized. Of course
23:55
Speaker 2: I've been wrong before. Thanks so much, Eric, That Professor
23:58
Speaker 2: Eric Tally of Columbia Laws coming up next on the
24:01
Speaker 2: Bloomberg Law Show. Federal prosecutors have brought a two hundred
24:05
Speaker 2: fifty million dollar bribery case against Gautamadani, but first they
24:10
Speaker 2: have to extradite him from India, and they are illegal
24:13
Speaker 2: and political hurdles to that. I'm June Grosso and you're
24:16
Speaker 2: listening to Bloomberg. Gautam Adani, one of the world's richest
24:22
Speaker 2: people and India's most powerful businessman, has been charged by
24:26
Speaker 2: Brooklyn federal prosecutors with helping to drive a two hundred
24:30
Speaker 2: and fifty million dollar bribery scheme. Prosecutors alleged that Adanie
24:35
Speaker 2: and seven other defendants promised to pay more than two
24:38
Speaker 2: hundred fifty million dollars in bribes to Indian government officials
24:42
Speaker 2: to win solar energy contracts and conceal the plan as
24:47
Speaker 2: they try to raise money from US investors. But right
24:50
Speaker 2: now the main question is whether prosecutors can get a
24:54
Speaker 2: Doni into a Brooklyn courtroom to face the charges, and
24:58
Speaker 2: the answer is uncertain, involving legal and diplomatic hurdles in
25:02
Speaker 2: the extradition process. Joining me is Bloomberg Legal reporter David Voriakis.
25:08
Speaker 2: David tell us a little about a Donnie.
25:10
Speaker 1: A Donnie is Asia's second richest man and has created
25:15
Speaker 1: this enormous conglomerate that took a hit in January twenty
25:20
Speaker 1: twenty three when short seller Edinburgh Research published a report
25:25
Speaker 1: that alleged fraud and corporate governance issues in his conglomerate,
25:30
Speaker 1: and the company had largely rebounded from that before this
25:37
Speaker 1: indictment by federal prosecutors in Brooklyn.
25:41
Speaker 2: So tell us what he's charged with.
25:43
Speaker 1: He is accused of joining a bribery plot. He is
25:50
Speaker 1: actually charged with a couple of fraud counts, but not
25:56
Speaker 1: a violation of the US Foreign Corrupt Practice is Act.
26:01
Speaker 1: He's charged with securities fraud and conspiracy to commit securities
26:06
Speaker 1: fraud and conspiracy to commit wire frauds. The prosecutors alleged
26:10
Speaker 1: that he met with a government official in India to
26:14
Speaker 1: advance this fride scheme, in which prosecutors alleged that people
26:20
Speaker 1: around A Donnie paid more than two hundred and fifty
26:23
Speaker 1: million too officials in India to help A Donnie Green
26:29
Speaker 1: with its solar energy project. And they also alleged that A.
26:34
Speaker 1: Donnie and others to frauded US investors by not telling
26:38
Speaker 1: them the full story about the bribery plot and the
26:43
Speaker 1: company's anti corruption efforts.
26:46
Speaker 2: So how many are charged altogether?
26:50
Speaker 1: The total of eight people who are charged, none of
26:53
Speaker 1: them are in the United States. This now sets up
26:56
Speaker 1: the process of whether they will be extradited to the
26:59
Speaker 1: United States to face charges in federal court in Brooklyn.
27:03
Speaker 2: Can you explain what the Foreign Corrupt Practices Act is
27:06
Speaker 2: and do we know why he was in charge with that?
27:09
Speaker 1: The Foreign Corrupt Practices Act, which is enforced by the
27:13
Speaker 1: Justice Department and the Securities in Exchange Commission, bans the
27:17
Speaker 1: payment of money or anything of value to foreign officials
27:21
Speaker 1: to obtain or retain business or gain an improper advantage.
27:26
Speaker 1: The prosecutors say that it applies in this case because
27:29
Speaker 1: of Donnie Green raised money in the US to support
27:33
Speaker 1: as solar energy project that gives it a nexus in
27:37
Speaker 1: the United States. It's not clear why Donnie was not
27:43
Speaker 1: charged as others were in the case with violating the
27:47
Speaker 1: Foreign Corrupt Practices Act, but prosecutors do say that he
27:52
Speaker 1: supported the bribery scheme tell us.
27:55
Speaker 2: About extradition and whether the US has a treaty in
27:58
Speaker 2: place with India.
28:00
Speaker 1: Tradition is the legal process by which one country ass
28:04
Speaker 1: another to surrender a person for prosecution or to service
28:08
Speaker 1: sentence after conviction. The US needs to have a treaty
28:11
Speaker 1: in place with the country they're seeking extraditions from. They
28:15
Speaker 1: have a treaty with India, and they sign that treaty
28:20
Speaker 1: in nineteen ninety seven. And so what will happen now
28:26
Speaker 1: is that the US will make its requests to India,
28:29
Speaker 1: and the Indian government will deal with that request and
28:33
Speaker 1: decide how to proceed under its own law. And one
28:38
Speaker 1: of the factors is whether the crimes that are charged
28:43
Speaker 1: match up with Indian law, so that there are comparable
28:47
Speaker 1: crimes under Indian law. And then there's also certain political
28:52
Speaker 1: considerations that will come into play, and it could be
28:57
Speaker 1: that the Trump administes, which is of course coming into
29:02
Speaker 1: place in late January, may decide that this is not
29:07
Speaker 1: in the US interest, to speak, extraditions of one of
29:11
Speaker 1: the most powerful businessmen in Asia, and so they may
29:15
Speaker 1: decide to drop the request back.
29:18
Speaker 2: To the magistrate for a moment, he's going to be
29:20
Speaker 2: looking at also the strength of the prosecution's case, but
29:24
Speaker 2: who makes a final call.
29:26
Speaker 1: The final call is ultimately up to the Indian government.
29:30
Speaker 1: But the magistrate is going to review the case and
29:33
Speaker 1: see whether it's subject to the Indian Extradition Act this case,
29:39
Speaker 1: and so that's a process that's going to take some time,
29:43
Speaker 1: and then there will be some potentially diplomatic wrangling to
29:48
Speaker 1: determine whether ultimately a Donnie should be extradited to the US.
29:53
Speaker 2: Are there implications for Indian business and politics in general?
29:59
Speaker 1: Well, the Adani Group and the Indian government are seen
30:03
Speaker 1: as an important ally in the US efforts to check
30:07
Speaker 1: Chinese hegemony, and so if the US were to pursue
30:13
Speaker 1: this case and follow through, they could lose that important
30:17
Speaker 1: ally in their efforts to check China's power and influence
30:21
Speaker 1: in the region.
30:22
Speaker 2: And speaking of politics, as the leader of India's opposition
30:26
Speaker 2: party demanded parliamentary probe, but I assume that hasn't happened yet.
30:32
Speaker 1: I believe that there will be a local investigation of
30:37
Speaker 1: potential crimes in India which would then put on pause
30:42
Speaker 1: the extradition process. That's a process that could take some time,
30:47
Speaker 1: and my understanding is that that would supersede the request
30:52
Speaker 1: by the US to extradise these individuals.
30:55
Speaker 2: Extradition can take years. Tell us about that Ukrainian businessman.
31:00
Speaker 1: There's a Ukrainian businessman who was indicted in Chicago more
31:05
Speaker 1: than a decade ago, who is still in Austria and
31:10
Speaker 1: has not been extracted yet and has been fighting at
31:13
Speaker 1: every step of the way. He just had the tenth
31:15
Speaker 1: anniversary of his case and his lawyers have asked the
31:21
Speaker 1: US government to drop the case. It has not happened yet,
31:25
Speaker 1: So it's a process that can be quite prolonged if
31:29
Speaker 1: the facts and circumstances are right.
31:32
Speaker 2: And what could a Donnie do or say to fight
31:35
Speaker 2: extradition to the US.
31:37
Speaker 1: Well, he could say that this case is politically charged,
31:41
Speaker 1: which is frowned upon under Indian law. He could say
31:45
Speaker 1: that it's charges that the US alleged does not match
31:48
Speaker 1: up with Indian laws, and I guess he can make
31:52
Speaker 1: a political argument to the central Indian government.
31:56
Speaker 2: What happens if he travels to another country.
31:59
Speaker 1: If there is an Interpol red notice, which we expect
32:03
Speaker 1: will be in place, he could be arrested, which would
32:06
Speaker 1: then put him under the jurisdiction of the country that
32:11
Speaker 1: arrests him and that would trigger a whole new extradition process.
32:17
Speaker 1: There are several individuals criminal defendants in recent years who've
32:22
Speaker 1: been arrested in Spain, which is seen as a very
32:26
Speaker 1: favorable country for US extraditions, and have been sent to
32:30
Speaker 1: the US to face criminal charges in the US courtrooms.
32:33
Speaker 2: How much time does he face? I mean this is
32:36
Speaker 2: years down the road. Obviously, if there is a trial
32:39
Speaker 2: and he's.
32:39
Speaker 1: Convicted, he faces twenty years on each of three counts.
32:45
Speaker 1: Although the reality is the way that white collar cases
32:50
Speaker 1: go is that someone rarely gets the maximum that they
32:53
Speaker 1: face under the statute. There's generally a number of factors
32:58
Speaker 1: that would reduce a sentence, so it's unlikely he would
33:02
Speaker 1: face the ultimate maximum that he's looking at, but it
33:06
Speaker 1: could be a serious amount of time if he's ultimately
33:09
Speaker 1: brought to the US and convicted.
33:12
Speaker 2: Is the SEC also investigating this?
33:15
Speaker 1: Yes, the SEC has also brought a case, a civil
33:18
Speaker 1: case that generally takes a back seat to the criminal proceedings.
33:23
Speaker 1: That's typically how these types of cases go. But nothing
33:27
Speaker 1: has really happened on that case yet.
33:30
Speaker 2: I take it a Donnie has denied the charges.
33:33
Speaker 1: He's denied the charges and denied wrongdoing the other. He
33:37
Speaker 1: has not made a formal appearance in the case in
33:42
Speaker 1: US court where he would plead not guilty, so he's
33:45
Speaker 1: not entered a formal legal plea to the charge, but
33:49
Speaker 1: he has denied wrongdoing.
33:53
Speaker 2: Will the US try to seek extradition of the other defendants?
33:56
Speaker 1: Yes, they're seeking extradition of all eight defendants.
34:00
Speaker 2: David, do you know why this was brought by the
34:03
Speaker 2: Brooklyn U s Attorney's Office?
34:06
Speaker 1: The Brooklyn US Attorney's Office has a history of bringing
34:09
Speaker 1: Foreign Corrupt Practices Act cases, and they have a lot
34:13
Speaker 1: of experience and a lot of seasoned white collar prosecutors.
34:17
Speaker 1: There's questions about venue where the Act took place, but
34:22
Speaker 1: those who be litigated if the case were to move
34:25
Speaker 1: to a US courtroom and the defense starts to put
34:28
Speaker 1: on its challenges to the government's case.
34:31
Speaker 2: It's sort of an unusual time in US attorney's offices
34:35
Speaker 2: because when Trump comes in, they're all going to be replaced,
34:38
Speaker 2: and many of them are leaving sooner rather than wait
34:42
Speaker 2: for that.
34:43
Speaker 1: A Donnie was indicted before the election and they didn't
34:46
Speaker 1: unfeel it for a month. It's not crystal clear to
34:49
Speaker 1: us why they unsealed it when they did. And you know,
34:52
Speaker 1: there's a phenomenon of the so called name and chame
34:56
Speaker 1: cases where they indict someone without a realistic expectation of
35:02
Speaker 1: them showing up in a US courtroom. I mean, this
35:05
Speaker 1: has happened through the years in hacking cases, you know,
35:08
Speaker 1: where they were Russian or Eastern European hackers. It happened
35:12
Speaker 1: to an extent in the Mueller case. I mean, none
35:14
Speaker 1: of those Russian defendants showed up, and.
35:17
Speaker 2: It seems like this is going to be one of
35:19
Speaker 2: those challenging cases for extradition. Thanks so much, David. That's
35:24
Speaker 2: Bloomberg Legal reporter David Voriakis, and that's it for this
35:28
Speaker 2: edition of the Bloomberg Law Show. Remember you can always
35:31
Speaker 2: get the latest legal news on our Bloomberg Law podcast.
35:34
Speaker 2: You can find them on Apple Podcasts, Spotify, and at
35:37
Speaker 2: www dot Bloomberg dot com, slash podcast Slash Law. I'm
35:42
Speaker 2: June Grosso, and you're listening to Bloomberg