Latest / Bloomberg Law / Google's Huge Antitrust Loss & Musk Pay Package

Transcript

Google's Huge Antitrust Loss & Musk Pay Package · Bloomberg Law

0:03
Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.
0:10
Speaker 2: A huge defeat for Google and a huge win for
0:13
Speaker 2: the government In its first major anti trust case against
0:17
Speaker 2: a tech giant in more than two decades, a federal
0:20
Speaker 2: judge has ruled that Google is a monopolist that illegally
0:24
Speaker 2: monopolized the online search market through exclusive deals, and the
0:29
Speaker 2: sanctions for Google those could range from a breakup to
0:32
Speaker 2: unwinding exclusive search deals, but that won't be decided until
0:37
Speaker 2: after another trial, which has yet to be scheduled, and
0:40
Speaker 2: of course Google says it will appeal the decision. Joining
0:44
Speaker 2: me is anti trust expert William Kavassk, a professor at
0:48
Speaker 2: the George Washington University Law School and the former chair
0:51
Speaker 2: of the Federal Trade Commission. Will this decision stand as
0:56
Speaker 2: a landmark, along with say, the AT and T, Stay
1:00
Speaker 2: and Oil and Microsoft cases.
1:03
Speaker 3: It's the beginning of a process that could become a landmark,
1:07
Speaker 3: but there's still many rivers to cross before this specific
1:10
Speaker 3: contest is over. We have a proceeding coming up this
1:13
Speaker 3: fall on the remedy to be issued. Judge Meta will
1:16
Speaker 3: be writing an opinion on what that remedy should be
1:18
Speaker 3: probably issues that by the end of the year. But
1:21
Speaker 3: then we go through the inevitable process of appeals where
1:24
Speaker 3: Google and maybe the government, point is, decide to appeal
1:28
Speaker 3: different issues raise different points about Judgemta's decisions on liability
1:32
Speaker 3: and remedy. So this promising first step for the government
1:36
Speaker 3: is only the first step in the process that will
1:38
Speaker 3: lead through a fairly difficult gauntlet of appeals. And I
1:42
Speaker 3: think ultimately this is a case that gets to the
1:44
Speaker 3: US Supreme Court. The Supreme Court hasn't informed me about
1:47
Speaker 3: whether that's the case, So this is speculation that I
1:51
Speaker 3: can't defend in any scientific way, but it's a case
1:54
Speaker 3: of such significance both were with respect to doctrine and commerce,
1:58
Speaker 3: that it's a natural candidate to be reviewed by the
2:01
Speaker 3: Supreme Court, and that process could take us well into
2:04
Speaker 3: twenty twenty six. So your crucial question about what kind
2:07
Speaker 3: of landmarks this is I will answer with the typical
2:10
Speaker 3: academics evasion. It depends on the final resolution of the
2:16
Speaker 3: matter through the appeals, an answer that won't come to
2:19
Speaker 3: us probably for two more years.
2:21
Speaker 2: Judge Meta found the Google is a monopolist and has
2:24
Speaker 2: acted as one to maintain its monopoly. Can you explain
2:28
Speaker 2: broadly how he came to that conclusion.
2:32
Speaker 3: On the crucial question of monopoly, the government has to
2:36
Speaker 3: show that the company exercises tremendous power within an area
2:40
Speaker 3: of commerce, and in anti trust language, that's usually called
2:42
Speaker 3: a relevant market. It's a technical term that refers to
2:46
Speaker 3: products that people regard as good substitutes for each other.
2:50
Speaker 3: And the government, to judge Metta's satisfaction, proved that in
2:54
Speaker 3: that market consisting of general search services that Google and Danism,
3:00
Speaker 3: it does not have effective competitors, that it accounts for
3:03
Speaker 3: an overwhelming share of activity of searches that are carried out,
3:07
Speaker 3: and as a consequence, its power is not only significant today,
3:10
Speaker 3: but the court concluded it's going to be durable. But
3:13
Speaker 3: in any trust law, it's not enough to simply be big.
3:16
Speaker 3: There are lots of expressions by courts over time that's
3:18
Speaker 3: saying achieving a position of preeminence is a mark of distinction,
3:22
Speaker 3: it's not a badge of shame. So you have to
3:24
Speaker 3: do something more. You have to show that that power
3:27
Speaker 3: was achieved to means that are improper, that you achieved
3:31
Speaker 3: it through improper means, you protected it through improper means.
3:34
Speaker 3: A colleague once told me that it means in US
3:37
Speaker 3: law that you need not only be big, you have
3:39
Speaker 3: to be bad as well. And on that point, Judge
3:42
Speaker 3: Betta found that Google's behavior in a number of instances
3:45
Speaker 3: was improper, that it excluded rivals from having access to
3:50
Speaker 3: business opportunities that they needed to compete, and it did
3:53
Speaker 3: it through a variety of different forms of exclusivity agreements
3:57
Speaker 3: that gave it the sole access to a crucial asset
4:01
Speaker 3: in dealing with third parties such as Apple and the Menta.
4:04
Speaker 3: Competitors didn't have the opportunity to use that valuable asset
4:07
Speaker 3: to compete effectively with Google. So for those two core
4:11
Speaker 3: elements of the monopolization case, Judge Meta validated the heart
4:16
Speaker 3: of the government seriod not in all respects. Google has
4:19
Speaker 3: some things in this opinion that that I'm sure liked.
4:22
Speaker 3: Disappointed with the larger outcome, I imagine the government did
4:25
Speaker 3: not get everything it wanted here, but it got validation
4:29
Speaker 3: of its core interpretation of this crucial principle of monopolization
4:33
Speaker 3: law that the firm in question must indeed have tremendous
4:38
Speaker 3: power within a specific part of the marketplace and must
4:42
Speaker 3: have achieved or protected that position through improper means on
4:45
Speaker 3: those larger themes. Judge Meta concluded that the government had
4:49
Speaker 3: proven its case.
4:51
Speaker 2: Google plans to appeal no surprise, and in a statement
4:55
Speaker 2: said that this goes to your point that Meta's opinion
4:58
Speaker 2: recognized Google as the inter net's best search engine quote,
5:02
Speaker 2: but concludes that we shouldn't be allowed to make it
5:05
Speaker 2: easily available. Do you think Google has a lot of
5:09
Speaker 2: ammunition for appeal?
5:11
Speaker 3: It enjoys a couple of the potential advantages on appeal,
5:15
Speaker 3: and a couple of that aren't merely potential, they're real.
5:18
Speaker 3: The law, the jurisprudence of US antitrust law going back
5:23
Speaker 3: over a period of since the late seventies, has tended
5:26
Speaker 3: to error on the side of dominant firms and evaluating
5:28
Speaker 3: their behavior. It has not told them they can do
5:31
Speaker 3: anything they want, but it's imposed fairly severe burdens on
5:34
Speaker 3: government and private planets trying to attack the behavior of
5:37
Speaker 3: dominant firms, so that the arena in which the appeals
5:40
Speaker 3: will take place is one in which the doctrine is
5:44
Speaker 3: generally sympathetic to the kinds of arguments that Google has
5:47
Speaker 3: offered about its own work in just the last twenty
5:50
Speaker 3: four hours and developed during the trial. Another advantage is
5:54
Speaker 3: that they'll point to the evidence in the record that
5:57
Speaker 3: suggests that people turn back to Google when they have
6:00
Speaker 3: a choice, When the starting point of their experience is
6:03
Speaker 3: another product, they switch to the default, they abandoned that
6:06
Speaker 3: product and turn back to Google. So Google's going to stay.
6:08
Speaker 3: There's evidence in the case that says people come back
6:11
Speaker 3: to us because we're offering them the better experience. Those
6:14
Speaker 3: aren't silly arguments. Those are arguments that enjoy some philosophical
6:18
Speaker 3: and doctrinal support and what courts have done in the past.
6:22
Speaker 3: So Google would be standing before the Court of Appeals
6:25
Speaker 3: saying that the practices that the government complains about cannot
6:29
Speaker 3: appropriately be deemed to be improper. And the remedial hearings
6:33
Speaker 3: will focus a lot on what Google should be allowed
6:36
Speaker 3: to do in the future. How much should it be
6:38
Speaker 3: able to bid for, say the placement on the iPhone
6:41
Speaker 3: when it comes to the famous rectangle on the iPhone?
6:44
Speaker 3: Should it be more cautious and how it bids, Should
6:46
Speaker 3: it bid less aggressively? What exactly should its position be.
6:50
Speaker 3: Those are hard issues to be resolved in the remedial proceedings,
6:53
Speaker 3: and Judge meta in a couple of places is an
6:56
Speaker 3: opinion expressed a concern that has appeared in earlier Supreme
6:59
Speaker 3: Court decisions about the difficulty judges face in trying to
7:05
Speaker 3: tell companies whom they must deal with and on what
7:07
Speaker 3: terms they must deal with them, and express concern about
7:11
Speaker 3: mandating a general obligation on the part of dominant firms
7:15
Speaker 3: to deal with other companies, anxiety about the role that
7:18
Speaker 3: courts would undertake, and becoming a referee that examines and
7:22
Speaker 3: evaluates each of these interactions between the dominant firm and
7:26
Speaker 3: a third party. Court said, we're not wealth suited to
7:29
Speaker 3: do that. The intervention that we have to undertake has
7:31
Speaker 3: to be much cleaner and not involve such long term,
7:35
Speaker 3: ongoing entanglements. We can't do that. You know, during the
7:38
Speaker 3: remedy proceedings and probably in the appellate process, Google will
7:42
Speaker 3: be saying, well, in light of that express concern, how
7:47
Speaker 3: do you write an order or an injunction that tells
7:50
Speaker 3: us what we can and can't do without in some
7:52
Speaker 3: crucial ways just disabling us. How do you do that?
7:56
Speaker 3: So those would be very live and important issues for
7:59
Speaker 3: debate during the and as you mentioned before, you know
8:03
Speaker 3: we're probably about two years away from a final decision.
8:07
Speaker 3: If I'm right about the likelihood of Supreme Court review
8:12
Speaker 3: as the last stage of the process.
8:14
Speaker 2: It sounds as if, and I could be wrong here,
8:16
Speaker 2: that you think that Google has the better arguments on appeal.
8:20
Speaker 3: I don't know in substance that they have the better
8:22
Speaker 3: arguments on appeal. I just think a caution to keep
8:27
Speaker 3: in mind in some ways, amid the the euphoria that
8:32
Speaker 3: many felt yesterday about the outcome those who wanted the
8:36
Speaker 3: judge define liability, the caution I deimpinitely expressed is that
8:40
Speaker 3: there's a lot of hard work to be done in
8:42
Speaker 3: defining what it is Google can't do in the future.
8:45
Speaker 3: And Google's operating in a judicial environment, a duct final
8:49
Speaker 3: environment built up especially since the late nineteen seventies that
8:54
Speaker 3: tends to be sympathetic to some of the kinds of
8:56
Speaker 3: arguments that Google has been making. So it's really a
9:00
Speaker 3: caution that, you know, notwithstanding the exceptional result that the
9:05
Speaker 3: government achieved yesterday, that there are many rivers to cross
9:09
Speaker 3: before the final outcome validates the approach that they've been taken,
9:12
Speaker 3: and Google is not yet defeated in its efforts to
9:15
Speaker 3: persuade the appellate judges that it didn't behave improperly.
9:19
Speaker 2: So you mentioned the remedies and judgment US scheduled a
9:23
Speaker 2: hearing for next month to decide the timing for the
9:26
Speaker 2: separate trial. And the remedies and potential remedies mentioned have
9:29
Speaker 2: been everything from ordering a breakup of Google to unwinding
9:33
Speaker 2: exclusive search deals everything in between. What do you see
9:37
Speaker 2: as the most likely potential remedy or remedies.
9:41
Speaker 3: A starting point is like to be controls on conduct,
9:44
Speaker 3: that is, to define the types of agreements that Google
9:46
Speaker 3: cannot enter into in the future, to indicate that certain
9:50
Speaker 3: types of existing agreements or practices are no longer permissible
9:54
Speaker 3: with the caveat that writing, the injunction that prohibits those
9:58
Speaker 3: practices will require are a lot of further attention and
10:02
Speaker 3: thought in light of some of the concerns that we've
10:04
Speaker 3: just been talking about the Boulder. In some sense the Boulder,
10:07
Speaker 3: the more visually striking solution is to force the company
10:11
Speaker 3: to divest asset. That's the breakup solution. Theoretically, it's in
10:14
Speaker 3: the solution set. It's a well established anti trust remedy
10:18
Speaker 3: for monopolization. Going back to the earliest phase of enforcement
10:21
Speaker 3: of the Sherman Act in the late nineteenth and early
10:24
Speaker 3: twentieth centuries. It's also been a remedy the courts have
10:27
Speaker 3: applied with some reluctant, some anxiety on the part of
10:30
Speaker 3: individual federal judges about whether they are performing surgery of
10:34
Speaker 3: a sort that's going to make the commercial system better
10:37
Speaker 3: or worse off. So I would say there's an implicit
10:40
Speaker 3: additional burden that government plaintiffs carry when they're trying to
10:44
Speaker 3: argue for divestiture remedies in monopolization cases. It's not impossible
10:50
Speaker 3: to bear that burden. And the famous DOJ prosecution of Microsoft,
10:55
Speaker 3: DOJ succeeded in persuading the trial judge to mandate to
10:58
Speaker 3: the separation of Microsoft into two parts, an operating systems
11:03
Speaker 3: company and an applications company. The Court of Appeals rejected
11:06
Speaker 3: that remedy for a variety of reasons, but one of
11:09
Speaker 3: them was that Judge Jackson, the trial judge in the case,
11:12
Speaker 3: held an adequate set of hearings on the remedy. He
11:14
Speaker 3: basically had a two hour conversation with the parties in
11:17
Speaker 3: the court room and that was it. That he should
11:19
Speaker 3: have done more. But the Court also did not uphold
11:23
Speaker 3: the full scope, but the finding of liability that the
11:26
Speaker 3: district judge had found at the trial, and it said
11:29
Speaker 3: that we've narrowed the footprint of the finding of liability.
11:33
Speaker 3: You have to take that into account in designing the remedy.
11:36
Speaker 3: The Court of Appeals didn't say you can't mandate the vestiture,
11:39
Speaker 3: but be cautious, be careful in designing the remedy because
11:42
Speaker 3: our finding of liability is narrower than the one that
11:45
Speaker 3: you found. That was perhaps an oblique way of the
11:48
Speaker 3: court saying, don't come back to us with a breakup solution.
11:51
Speaker 3: So conceptually, legally, theoretically it's part of the solution. Set
11:56
Speaker 3: in practice, it's been a challenging remedy in some instances
11:59
Speaker 3: for the government to obtain, I say, to get the remedy,
12:03
Speaker 3: the government has to do two things. Wants to say
12:05
Speaker 3: that the misconduct created serious competitive clause in the relevant
12:11
Speaker 3: line of commerce, seriously retarded competition, and that the structural
12:16
Speaker 3: solution is vital to restoring competition and making it effective
12:20
Speaker 3: in the future. That impossible, but very challenging, which tends
12:23
Speaker 3: to mean that a more likely outcome, perhaps is some
12:26
Speaker 3: set of controls on conduct rather than mandated divestitures.
12:30
Speaker 2: In a statement, Attorney General Merrick Garland said, this victory
12:34
Speaker 2: against Google is a historic win for the American people.
12:39
Speaker 2: I mean, is it really a win for consumers who
12:42
Speaker 2: seem to be happy with Google even when presented with alternatives?
12:47
Speaker 3: It could be, but we don't know yet. First, it's
12:49
Speaker 3: too early to stay because this case isn't over. There
12:52
Speaker 3: are other rounds for this contest to be played out.
12:55
Speaker 3: In that sense, it's hardly over. But embedded in all
12:58
Speaker 3: of these cases in some ways is an active faith
13:01
Speaker 3: that the intervention is indeed going to spur a greater
13:04
Speaker 3: level of innovation than would have happened otherwise. You know,
13:07
Speaker 3: there are some good historical examples to show that that
13:10
Speaker 3: act of faith was justified. Sometimes it doesn't quite turn
13:13
Speaker 3: out that way. I suppose if I were the Attorney General,
13:16
Speaker 3: i'd make the same claim. But he can't know that yet.
13:19
Speaker 1: We don't know that yet.
13:20
Speaker 3: It's certainly a possible outcome, but it's a very strong claim,
13:23
Speaker 3: and if I were him, I'd be making that claim too,
13:26
Speaker 3: But perhaps keeping in mind quietly and privately that we
13:30
Speaker 3: don't know. And part of what's difficult about the whole
13:32
Speaker 3: field is that uncertainty is is real and significant.
13:35
Speaker 2: Do you think this decision will in any way influence
13:38
Speaker 2: the other government anti trust lawsuits against big Tech.
13:42
Speaker 3: I think that the decision is likely to have some
13:44
Speaker 3: favorable spillovers to the other government monopolization cases running now
13:49
Speaker 3: involving tech. I think that judges in the other cases
13:52
Speaker 3: will read Judge Meta's decision very carefully. It's a very
13:54
Speaker 3: thoughtful opinion. I think that they'll refer to it, they'll
13:57
Speaker 3: think about it, so it it's likely to exercise some
14:00
Speaker 3: influence over there. Thinking internationally, Google is the subject of
14:04
Speaker 3: a myriad collection of regulatory and anti trust law interventions globally,
14:11
Speaker 3: everything from the Digital Markets Act and the European Union
14:14
Speaker 3: to monopolization cases and investigations in Asia and Africa and
14:19
Speaker 3: Latin America, in Australia and now of course in North
14:22
Speaker 3: America too. This case provides them some encouragement to carry on.
14:26
Speaker 3: It says that the US government thought this was a
14:29
Speaker 3: serious problem that required intervention, and they intervened. A federal
14:33
Speaker 3: judge thought there were serious problems here and found in
14:36
Speaker 3: an infringement. It helps blunt the argument that the countries overseas.
14:40
Speaker 3: They're simply picking on American companies, and they're doing it
14:43
Speaker 3: for protectionist treats. It gives them the ability to say,
14:46
Speaker 3: we are operating in a mainstream of policy already occupied
14:49
Speaker 3: by the government of the United States, and we're not
14:52
Speaker 3: doing anything different from what they're doing. It gives them
14:55
Speaker 3: some encouragement, It gives them some reinforcement for the path
14:59
Speaker 3: they've taken, and it enables them to say, if the
15:01
Speaker 3: US government is taking this step, if the US courts
15:05
Speaker 3: they're coming up with these decisions, how can you claim
15:07
Speaker 3: that we're operating, in some sense in an extreme radical fashion.
15:11
Speaker 2: We're not, thanks so much for coming on the show.
15:14
Speaker 2: That's Professor William Kovasik of GW Law. Corporate attorneys, and
15:19
Speaker 2: perhaps even judges are bracing for the impact of Delaware's
15:23
Speaker 2: new corporate law amendments that allow companies to use private
15:27
Speaker 2: contracts to grant stockholders the types of control that used
15:31
Speaker 2: to require a charter provision or a special class of stock.
15:35
Speaker 2: A state bar committee drafted the amendments in response to
15:39
Speaker 2: a chancery court decision in February that invalidated a billionaire
15:43
Speaker 2: founder's veto rights overboard decisions. Joining me is business law
15:48
Speaker 2: expert Eric Talley, a professor at Columbia Law School. Eric
15:52
Speaker 2: tell us about this new amendment to Delaware law.
15:57
Speaker 1: So, this is a recent statute to the Delaware Code,
16:01
Speaker 1: an amendment to the code that on some level seems
16:05
Speaker 1: kind of minor and technocratic, but on another level may
16:08
Speaker 1: end up proving to be a big deal. And what
16:11
Speaker 1: it concerns is something known as shareholder agreements or stockholder agreements,
16:16
Speaker 1: which traditionally sort of the OG version of these things
16:20
Speaker 1: were exactly what they sounded like, agreements among and between
16:24
Speaker 1: stockholders or Delaware companies that basically said, we're going to
16:27
Speaker 1: coordinate our actions, we're going to vote together, we're going
16:29
Speaker 1: to cooperate together, and so forth. And these have been
16:33
Speaker 1: around for a long time, and Delaware Law has bus
16:36
Speaker 1: said these are completely fine, and over time they became
16:40
Speaker 1: more and more prominent. And then what started to happen
16:44
Speaker 1: is that these OG shareholder agreements kind of turned a
16:47
Speaker 1: little bit more into what you might call a gen
16:49
Speaker 1: Z shareholder agreement, which is that it wasn't just an
16:53
Speaker 1: agreement on the shareholders, but now that company was a
16:56
Speaker 1: part of the agreement, and the company also or its
17:01
Speaker 1: board had duties themselves for actions that boards usually do,
17:07
Speaker 1: like whether they're going to pursue financing or a new
17:09
Speaker 1: business opportunity or an m and a transaction, or issuing
17:14
Speaker 1: new stock or dividends and so forth, and so these
17:16
Speaker 1: gen Z agreements often would give shareholders or more often
17:20
Speaker 1: just a select group of shareholders control or veto power
17:25
Speaker 1: over whether that happened. So that's a little bit different
17:28
Speaker 1: of a model than just shareholders saying we're going to
17:31
Speaker 1: agree to coordinate with each other in doing things that
17:34
Speaker 1: shareholders usually do. Now the companies involved, and particularly what
17:39
Speaker 1: the board of the company does, is involved, and that
17:42
Speaker 1: creates attention. It puts these new age sort of shareholder
17:46
Speaker 1: agreements on a collision course with traditional Delaware law, and
17:50
Speaker 1: Delaware law is sort of the standard bearer in corporate
17:53
Speaker 1: law and has been for the last century, even though
17:55
Speaker 1: it's under a little bit of strain recently. And it
17:58
Speaker 1: basically puts forth a model of how companies, at least
18:02
Speaker 1: as a default matter, are going to be governed, and
18:05
Speaker 1: it's going to be centralized through the board of directors.
18:08
Speaker 1: The board of directors is going to have sort of
18:10
Speaker 1: centralized authority and duties to act on behalf of the company.
18:14
Speaker 2: And how or why did Delaware get to this point.
18:19
Speaker 1: Now, there's a reason that Delaware did that. It's long
18:22
Speaker 1: viewed itself as what's known as a contractarian state, which
18:26
Speaker 1: just means if companies want to set up, you know,
18:27
Speaker 1: some sort of tailored governance system for themselves, Delaware will
18:32
Speaker 1: let them do it. And in fact, you almost views
18:35
Speaker 1: these various governance agreements as a bundle of contracts between
18:39
Speaker 1: the companies. But corporations are complex. They have a bunch
18:42
Speaker 1: of different interests, not just stockholders and managers, but employees
18:46
Speaker 1: and creditors and suppliers and customers, and so it would
18:49
Speaker 1: invite havoc. Just to say, let's have a free for
18:52
Speaker 1: all of everyone entering contracts with one another. It would
18:55
Speaker 1: just be a complete mess because the contracts might not
18:58
Speaker 1: even you know, be consistent with one another. So traditionally,
19:01
Speaker 1: the Delaware approach has basically sort of mediated this by saying,
19:07
Speaker 1: we're going to put the board at the center of
19:08
Speaker 1: all things, and there's a hierarchy of contracts that are
19:12
Speaker 1: going to be used. At the top of that hierarchy
19:15
Speaker 1: is something known as the corporate charter, it's almost like
19:17
Speaker 1: the constitution of a company. Then below that is kind
19:20
Speaker 1: of another set of documents called bylaws, and then sort
19:23
Speaker 1: of contracts and board resolutions are at the end. And
19:26
Speaker 1: so if you wanted to change your company in a
19:28
Speaker 1: way that's a little different than the background rules of
19:32
Speaker 1: Delaware would lay out, you could do it for the
19:35
Speaker 1: most part, but you'd have to make sure you did
19:37
Speaker 1: it through an authoritative document, one one of these high
19:41
Speaker 1: in the hierarchy documents like the charter. And that's how
19:45
Speaker 1: this collision occurred because once parties started to enter into
19:49
Speaker 1: these gen Z stockholder agreements not just between shareholders, but
19:54
Speaker 1: also had implications for the board's power, there was kind
19:58
Speaker 1: of a looming armageddon between what was going to win
20:01
Speaker 1: out this traditional hierarchy of hey, now the charter controls
20:05
Speaker 1: everything versus these contracts that are entered into between maybe
20:09
Speaker 1: just a couple of shareholders and the board, or maybe
20:12
Speaker 1: someone who's thinking about becoming a shareholder on board, they
20:15
Speaker 1: may have precedence over those traditional powers of what boards do.
20:19
Speaker 1: And so that is essentially the breach that this new
20:23
Speaker 1: statute dives into, and it ends up putting a pretty
20:26
Speaker 1: strong thumb on the scale on behalf of stockholder agreements,
20:30
Speaker 1: basically saying, even if they are inconsistent with the charter,
20:34
Speaker 1: for the most part, they're going to have effectiveness and
20:37
Speaker 1: enforcement power inside Delaware Corporation. And that's what I think
20:41
Speaker 1: some people are trying to figure out, Well, how far
20:44
Speaker 1: is that going to reach?
20:45
Speaker 2: Was this done to try to tamp down on litigation?
20:49
Speaker 1: Well, maybe or maybe not. Certainly, in the first instance,
20:52
Speaker 1: it appears that it probably was because you know, there
20:55
Speaker 1: was a case that had come out that had been
20:58
Speaker 1: authored by Vice Chancellor Laster, was one of the well
21:01
Speaker 1: known judges on the Delaware Court, and it dealt with
21:03
Speaker 1: a particular company called the Molus Corporation that had its
21:07
Speaker 1: founder as what was one of its big shareholders, and
21:10
Speaker 1: he had entered into an agreement with the company that
21:13
Speaker 1: gave him the good part of twenty different sort of
21:15
Speaker 1: veto and control rights over things that boards usually do,
21:18
Speaker 1: but did it through a contract. And the chance Re
21:21
Speaker 1: Court judge, by chance Hi Laster basically said, look, you
21:24
Speaker 1: can probably do this stuff, but doing it through a
21:28
Speaker 1: side contract and not doing it through the charter is
21:31
Speaker 1: inconsistent with Delaware law. And these provisions are going to
21:35
Speaker 1: be invalid. He held them to be invalid if they
21:37
Speaker 1: weren't included in the charter, that constitution of the company.
21:42
Speaker 1: That this created all kinds of havoc because over time,
21:46
Speaker 1: people had gotten so comfortable with stockholder agreements and they had,
21:50
Speaker 1: you know, essentially conjectured that, yeah, these are going to
21:53
Speaker 1: be totally fine, and so they kind of ended up
21:56
Speaker 1: sort of feeding the beast of creating more and more
21:59
Speaker 1: of them, and a lot of transactional attorneys had basically
22:02
Speaker 1: assumed that they were going to be perfectly enforceable. I
22:05
Speaker 1: think when you step back a little bit, the tension
22:08
Speaker 1: between the traditional way that Delaware law lays out the
22:11
Speaker 1: hierarchy of charters and by laws and contracts made this
22:16
Speaker 1: armageddon point almost inevitable. But by this point, you know,
22:19
Speaker 1: a bunch of transactional attorneys had already advised, you know, hundreds,
22:23
Speaker 1: if not thousands of their clients, Yeah, you can go
22:25
Speaker 1: ahead and do this, and I'll all work one up
22:27
Speaker 1: for you. So I think it became a little bit
22:29
Speaker 1: of an affraded point for many the transactional attorneys who
22:32
Speaker 1: had sort of put their name behind these stockholder agreements,
22:36
Speaker 1: and so the statute ended up doing something that is
22:41
Speaker 1: a little bit unusual. There have been cases in the
22:43
Speaker 1: past where Delaware has changed its law in response to
22:48
Speaker 1: a case that's come out, but usually you wait until
22:51
Speaker 1: the case goes all the way up to the Delaware
22:53
Speaker 1: Supreme Court and the final judgment has entered into and
22:57
Speaker 1: in this case, the Delaware legislation you're basically was lobbied
23:02
Speaker 1: to get in on the action very early on in
23:04
Speaker 1: the process, shortly after the trial court opinion came out
23:08
Speaker 1: and before the Delaware Spreme Court got a chance to
23:11
Speaker 1: review it.
23:12
Speaker 2: Is there a tension between the Chancery court and the
23:15
Speaker 2: state bar or you know, the attorneys from influential firms
23:20
Speaker 2: that you could see when they discussed the amendments in
23:23
Speaker 2: the Delaware House.
23:25
Speaker 1: Yeah, I think that it's fair to say that there was.
23:27
Speaker 1: I mean, one of the things that's worth noting is
23:29
Speaker 1: that there's always going to be a little bit of
23:30
Speaker 1: tension between parties who are either writing or litigating contracts
23:35
Speaker 1: that end up in front of a court and the
23:38
Speaker 1: court itself. The court, you know, basically is not taking
23:41
Speaker 1: side in the issue, but trying to produce a coherent
23:44
Speaker 1: area of law. The thing that probably compounds a little
23:47
Speaker 1: bit is that in Delaware, the job of proposing and
23:52
Speaker 1: putting forward new amendments to the Delaware statutes has largely
23:58
Speaker 1: been delegated out to a non legislative committee called a
24:03
Speaker 1: Delaware Council. And this is essentially a collection of lawyers
24:08
Speaker 1: who either practice in front of the court or do
24:11
Speaker 1: transactional work in the court. It's pretty heavily represented by,
24:15
Speaker 1: you know, folks who would be writing these stockholder agreements.
24:18
Speaker 1: And they were thrown into i guess a little bit
24:21
Speaker 1: of a panic from this trial court opinion, and so
24:23
Speaker 1: you know, they ended up you know, sort of putting
24:26
Speaker 1: out the proposal. The proposal itself was viewed by several
24:30
Speaker 1: folks when it first came out as being you know,
24:33
Speaker 1: pretty radical in the changes that it might end up
24:37
Speaker 1: visiting on the law, and that caused attention and it
24:40
Speaker 1: caused intention in a couple of different areas. There were
24:43
Speaker 1: several people who you know sort of you know, critique
24:46
Speaker 1: the speed with which this reform proposal was coming forward
24:50
Speaker 1: and had not really sort of anticipated all the different
24:53
Speaker 1: ways that it could go sideway. And in fact, there
24:55
Speaker 1: was a group of about almost sixty law professors and
24:58
Speaker 1: I was one of them I should note and also
25:00
Speaker 1: kind of helped author the letter that signed a letter
25:02
Speaker 1: that said, hey, let's slow down this process and try
25:04
Speaker 1: to figure out what makes sense, because this may change
25:08
Speaker 1: a lot of things that you don't intend to change.
25:11
Speaker 1: But in addition, two of the judges on the Delaware
25:13
Speaker 1: Chancery Court, Chancellor McCormick herself and by Sensor Laster, both
25:18
Speaker 1: had started to go public about their own reservation about
25:21
Speaker 1: this statutory reform, and that ended up causing a much
25:26
Speaker 1: more heated environment than you usually see with corporate law reform.
25:31
Speaker 1: I don't recall, certainly, in my academic lifetime, anything nearly
25:36
Speaker 1: as contentious as this. Usually this is a pretty sleepy area.
25:40
Speaker 1: Whether you agree or disagree with the new statute, it
25:44
Speaker 1: ends up being sort of a thing that you know,
25:45
Speaker 1: people sort of say, well reasonable by its different. But
25:48
Speaker 1: here I think there really was a much more public
25:51
Speaker 1: debate than the proponent of the statutory reform had anticipated.
25:57
Speaker 2: This amendment. I mean, do you think that it would
26:00
Speaker 2: allow boards to get too creative? Do you think that
26:03
Speaker 2: they'll just stay in the lane that they were in?
26:06
Speaker 1: Yeah, this is actually kind of a sixty thousand dollars
26:09
Speaker 1: question right now to maybe I can use a basketball
26:11
Speaker 1: analogy to please the Olympic. Yeah, so, you know, think
26:15
Speaker 1: about playing defense on a basketball team, and you know,
26:18
Speaker 1: whether you grab your opponent's jersey, and you're not supposed
26:21
Speaker 1: to do that, right, but you are allowed to put
26:23
Speaker 1: your hand on the back of your opponent to kind
26:25
Speaker 1: of take their measure. And you know, when does putting
26:27
Speaker 1: a hand on the back of their jersey become grabbing
26:29
Speaker 1: their jersey. It's sort of a judgment call. And so
26:31
Speaker 1: most people who play basketball, they will sort of try
26:34
Speaker 1: to push the boundaries of that room a little bit
26:36
Speaker 1: and do a little bit of jersey grabbing and it
26:38
Speaker 1: won't get called. And you know, the general idea is that, yeah,
26:42
Speaker 1: we know that this isn't allowed, but if we do
26:44
Speaker 1: it just a little bit, you know, the referee is
26:47
Speaker 1: not going to call us on it. And if the
26:48
Speaker 1: referee in this case is the judge, that might have
26:50
Speaker 1: been the case with these stockholder agreements, right that when
26:53
Speaker 1: you overstep the Delaware pattern just a little bit, it
26:57
Speaker 1: just wasn't worth anyone's time to really challenge in court.
27:01
Speaker 1: But yet kind of knew not to go too far.
27:03
Speaker 1: We now have a Delaware statute that basically says it's
27:07
Speaker 1: not entirely, but it's pretty close to open season to
27:10
Speaker 1: do these things. It's almost like the basketball rules got
27:13
Speaker 1: changed and say, yeah, it's okay to grab someone else's jersey.
27:16
Speaker 1: I mean, don't be too bad about it, but go
27:18
Speaker 1: ahead and grab someone's jersey. I think it's going to
27:20
Speaker 1: change the way that the team plays defense. I think
27:22
Speaker 1: it's going to change the way that these contracts get
27:25
Speaker 1: executed because they have a little bit more of a
27:27
Speaker 1: hall pass now to engage in creative contracting. And that's
27:32
Speaker 1: that's what good transactional attorneys do. So when you know
27:36
Speaker 1: it looks like what they have been doing is now
27:39
Speaker 1: something that the Delaware like legislature says, okay, the next
27:42
Speaker 1: logical thing to do is to try to test the
27:45
Speaker 1: boundaries of that, to try to figure out if there
27:48
Speaker 1: are ways that you can use these contracts in a
27:50
Speaker 1: manner that overrides what sort of fiduciary principles would otherwise entail. Now,
27:56
Speaker 1: the Delaware Assembly basically say we're not changing the doduciary law,
28:00
Speaker 1: and they say so specifically in the statute, but it's
28:03
Speaker 1: really hard to know whether that's going to prove true
28:06
Speaker 1: or not because if you've got a contract in the
28:09
Speaker 1: contract that just getting complied with, and the contract also
28:13
Speaker 1: isn't getting disclosed to other folks, which is a big
28:16
Speaker 1: potential danger here. Who's going to enforce the fiduciary obligations,
28:21
Speaker 1: Who's going to even know about the existence of the contract.
28:25
Speaker 1: And so I think that one of the areas where
28:27
Speaker 1: I was a little bit alarmed isn't as much the
28:30
Speaker 1: idea that you shouldn't be allowed to use contracts, but
28:34
Speaker 1: the fact that this was a change that was made
28:36
Speaker 1: pretty much for every Delaware incorporated company, is it's now
28:39
Speaker 1: okay to do this. It's not clear that the shareholders
28:42
Speaker 1: who invest in those companies had assented to that, and
28:45
Speaker 1: now that's a rule they're going to have to live by.
28:47
Speaker 1: And for many of these companies, particularly the ones that
28:50
Speaker 1: aren't publicly traded, these stockholders may not even know that
28:54
Speaker 1: there's a favored stockholder that has extra influence at the
28:58
Speaker 1: board level, or maybe even prospective stockholder who's not even
29:02
Speaker 1: a stockholder yet, who has that kind of influence at
29:06
Speaker 1: the board level. And so that's one of the things
29:08
Speaker 1: that I think is a bit of a concern is
29:10
Speaker 1: that with this new license to generate these contracts. You know,
29:13
Speaker 1: transactional attorney's going to do what transactional attorneys do, which
29:17
Speaker 1: is they're going to then try to test the next
29:19
Speaker 1: boundary out. And if you didn't do that as a
29:21
Speaker 1: transactional attorney, I say, you're not doing your job.
29:24
Speaker 2: Coming up more with Professor Eric Tally and the latest
29:27
Speaker 2: on the Elon Musk Tesla pay package. You're listening to Bloomberg.
29:32
Speaker 2: I've been talking to business law professor Eric Tally of
29:35
Speaker 2: Columbia Law School. Eric, let's talk now about a subject
29:39
Speaker 2: that we have discussed once or twice before, Elon Musk's
29:43
Speaker 2: legal fight to save his fifty six billion dollar Tesla
29:47
Speaker 2: pay package. Last week, Musk's attorneys were back in Delaware
29:52
Speaker 2: Chancery Court to ask the judge who blocked the deal
29:56
Speaker 2: to change her ruling, and Chancellor Kathleen McCormick said, this
30:00
Speaker 2: has never been done before. There's no Delaware law on this. Correct.
30:05
Speaker 2: Tell us what Musk's lawyers were trying to pull off here.
30:08
Speaker 1: Yeah, it's sort of an interesting thing. People haven't really
30:11
Speaker 1: tried this approach before. I think largely because no one
30:14
Speaker 1: expected that it would have any traction. But the idea
30:17
Speaker 1: is this is that the compensation package was clearly a
30:22
Speaker 1: situation where this large controlling stockholder and board member and
30:27
Speaker 1: CEO had a conflict of interest, and Delaware often scrutinizes
30:31
Speaker 1: the contracts or transactions with a conflict of interest with
30:35
Speaker 1: a specifically heavy end. And so if you're going to
30:39
Speaker 1: try to defend that contract, there's only a couple of
30:43
Speaker 1: ways to do it, and some of them aren't very clean.
30:45
Speaker 1: They just involved protracted litigation. But one way to do
30:48
Speaker 1: it is to say, hey, we got approval from the
30:53
Speaker 1: stockholders and maybe even independent board members, and even better
30:57
Speaker 1: both of those groups to go forward. One of them
31:00
Speaker 1: would help. And so when Tesla first granted this compensation
31:06
Speaker 1: package to mister Muskin twenty eighteen, they did go out
31:09
Speaker 1: for a vote of the stockholders. But chancelleror McCormick basically said,
31:13
Speaker 1: you know what, it didn't accurately disclose all of the
31:18
Speaker 1: tom foolery and shenanigans that were going on at the
31:21
Speaker 1: board level when it came to putting this package together.
31:25
Speaker 1: And so when the stockholders voted on it, they were
31:27
Speaker 1: voting on an incomplete basis of information. And so you
31:32
Speaker 1: get one chance to do this, you didn't do it right,
31:35
Speaker 1: and she invalidated the contract. So what Tesla did is
31:38
Speaker 1: that it said, Okay, we're going to go back out
31:40
Speaker 1: for another vote of our stockholders. We're going to make
31:43
Speaker 1: all kinds of disclosures to them, including attaching the entirety
31:47
Speaker 1: of Chancellor McCormick's opinion, and get another vote. And that's
31:50
Speaker 1: what happened in June. The stockholders came back and voted,
31:54
Speaker 1: you know, seventy two percent to validate the compensation package.
31:59
Speaker 1: And then, you know, everyone sort of expected that this
32:02
Speaker 1: is going to happen with Tesla attorneys came forward and said, okay,
32:05
Speaker 1: so this really just counts as stockholder approval. Yeah, we
32:08
Speaker 1: got it way after the fact, that after we had
32:10
Speaker 1: already lost with a defective stockholder approval. But it should
32:14
Speaker 1: have the same weight, it should carry the same weight
32:17
Speaker 1: as if we did it right the first time. And
32:20
Speaker 1: this clearly troubled chance for McCormick because there's almost sort
32:24
Speaker 1: of a question of if this were, you know, something
32:27
Speaker 1: that she could sign on to, does it basically give
32:30
Speaker 1: companies license to try, you know, an infinite number of
32:33
Speaker 1: times to try to get stockholder approval, even years after
32:37
Speaker 1: they've gotten, you know, an adverse judgment against them, and
32:40
Speaker 1: that has never been tried before. This particular approach is
32:44
Speaker 1: one that I think probably if most students of Delaware
32:48
Speaker 1: law would say, it's a it's a bit of a
32:50
Speaker 1: long shot. But you know, Elon Musk is known for
32:52
Speaker 1: taking long shots, and so we'll see how this comes out.
32:55
Speaker 1: And you know, I think in some ways, the debate
32:58
Speaker 1: over the new statute in Delaware, you know, bears some
33:02
Speaker 1: relationship to this. It's not really a compensation sort of
33:06
Speaker 1: issue with this new statute, but it does deal with
33:08
Speaker 1: influential stockholders who get into contracts with companies. Delaware came
33:13
Speaker 1: under a lot of fire, at least from mister Musk
33:15
Speaker 1: and his accolytes, for invalidating the contract. You know, on
33:19
Speaker 1: some level, the Delaware legislature might have been, you know,
33:23
Speaker 1: working on a little bit of concern that they wanted
33:26
Speaker 1: to signal to people that now we're friendly to big
33:28
Speaker 1: stockholders and so here's the way we're going to do that.
33:30
Speaker 1: So it'll be interesting to see, you know, how these
33:33
Speaker 1: two things kind of progress simultaneously. The new statute is
33:36
Speaker 1: now law, we don't know exactly how people are going
33:39
Speaker 1: to be responding to it. I will tell you, June,
33:41
Speaker 1: that is someone who you know, basically makes a living
33:44
Speaker 1: studying how different sorts of legal rules change corporate behavior.
33:49
Speaker 1: You know, even though I'm a little concerned for the
33:52
Speaker 1: Delaware franchise here, it's a it's going to be a
33:55
Speaker 1: gold mine of new data to study because this is
33:59
Speaker 1: a fly significant and by some lights risky experiment with
34:03
Speaker 1: Delaware law. And so we're just going to have to
34:05
Speaker 1: see how it plays out. And then at the same time,
34:08
Speaker 1: we've got chance McCormick is going to have to come
34:10
Speaker 1: up with some sort of the allocation, and maybe even
34:13
Speaker 1: she might even be convinced to revisit her ruling. That
34:16
Speaker 1: if she decides not to do so, I suspect she
34:19
Speaker 1: probably won't revisit the ruling, then it'll go up to
34:21
Speaker 1: the Delaware Supreme Court, and so we may have more
34:24
Speaker 1: funding games with elon Block as well.
34:26
Speaker 2: What I thought was really interesting was her concern that,
34:30
Speaker 2: you know, you might have investor votes overturning trial judgments.
34:34
Speaker 2: She said to the Tesla lawyers if shareholder votes aimed
34:38
Speaker 2: at overturning a ruling could occur at any time in
34:40
Speaker 2: the legal process. Quote when does it end in your world?
34:44
Speaker 1: Yeah, and I think the answer may be never. So
34:47
Speaker 1: you know, it's hard to sort of Oh no, it
34:49
Speaker 1: only ends at the second vote. Why would it end
34:52
Speaker 1: at the second vote? If the magic is that you
34:54
Speaker 1: can come in after the fact, clean everything up with
34:58
Speaker 1: a full disclosure and get stockholders to approve it, then
35:01
Speaker 1: if you fail the second time, you know, And there's
35:03
Speaker 1: there's actually an argument that when the stockholders voted this
35:06
Speaker 1: time around, they had a lot of information, They were
35:09
Speaker 1: fully informed, but they were also really concerned, probably about
35:14
Speaker 1: statements that mister Musk had made that he was going
35:17
Speaker 1: to remove the AI assets from Teshwood and them somewhere else.
35:22
Speaker 1: So is the key thing on a stockholder vote is
35:25
Speaker 1: you got to be fully informed and you can't be
35:26
Speaker 1: voting with a metaphorical gun to your head. So there's
35:29
Speaker 1: a chance that this second vote, even if it would count,
35:32
Speaker 1: would be invalidated because of what's known as coercion of
35:36
Speaker 1: the vote. Could they come back with a third vote.
35:38
Speaker 1: If that's what happened, then it's really hard to know
35:41
Speaker 1: what is in store, As it is always hard to
35:44
Speaker 1: know what is in store with Elon Musk, I predict
35:47
Speaker 1: that chance, McCormack is probably going to stick to her
35:49
Speaker 1: guns if for no other reason that you know, there's
35:53
Speaker 1: a developed record, this can be sent up to the
35:55
Speaker 1: Delaware Supreme Court and then they can kind of take
35:57
Speaker 1: a second path on it.
35:59
Speaker 2: Speaking about Delaware judges and the importance of Delaware courts,
36:04
Speaker 2: does the amendment that we were talking about imperil that
36:07
Speaker 2: in any way?
36:08
Speaker 1: Another important question, in addition to whether stockholder agreements can
36:13
Speaker 1: leap frog the charter and the bylaws is who gets
36:17
Speaker 1: to do the enforcing, Because you know, Delaware has long
36:22
Speaker 1: basically been very jealous of using its own court system
36:26
Speaker 1: to enforce corporate law. And that's one of the reasons
36:30
Speaker 1: that Delaware has become such a center for corporate laws,
36:34
Speaker 1: that the judges have so much expertise. Once you start
36:37
Speaker 1: to allow contracts to have this kind of overarching governance power,
36:43
Speaker 1: you may end up kicking into gear things that go
36:47
Speaker 1: beyond Delaware law. What if you have a contract that says, oh,
36:51
Speaker 1: this is going to be heard in California, or in
36:54
Speaker 1: Texas or in New Hampshire. Is that something that's going
36:57
Speaker 1: to basically pull stuff out of Delaware law, including the
37:00
Speaker 1: judgment of whether this contract was consistent with the douciary dudents.
37:04
Speaker 1: So we're going to have a California court deciding that.
37:07
Speaker 1: In addition, there is a federal law that says that
37:10
Speaker 1: if you enter into a contract that says, we're going
37:14
Speaker 1: to have arbitration. Federal law basically requires you to as
37:19
Speaker 1: a court, to surrender jurisdiction to a third party arbitter.
37:23
Speaker 1: So it could be the case that you have one
37:25
Speaker 1: of these stockholder agreements that really does come close, if
37:29
Speaker 1: not does violate fiduciary principles that says, hey, there's an
37:32
Speaker 1: arbitration provision in here. It's not even going to land
37:35
Speaker 1: in front of a Delaware court. This is going to
37:38
Speaker 1: go in front of you know, someone could be you
37:40
Speaker 1: or me. Who's the arbitrary Me? Yeah, well, I kind
37:44
Speaker 1: of hope it's not mean as well to determine not
37:47
Speaker 1: only how do you enforce the contract, but whether the
37:49
Speaker 1: contract is consistent with the duciary principles. And so one
37:53
Speaker 1: of the other areas where this statute could go sideways
37:57
Speaker 1: is that, you know, Delaware may have shot itself in
37:59
Speaker 1: the foot in terms of its ability to keep control
38:03
Speaker 1: over how its companies get adjudicated in courts. If in fact,
38:09
Speaker 1: doing things through contracts cause corporate governance to get adjudicated
38:14
Speaker 1: in front of arbitrators or in front of non Delaware courts,
38:18
Speaker 1: there is no guarantee that those other judicial or sort
38:22
Speaker 1: of judicial actors are going to have the same view
38:25
Speaker 1: of what fiduciary principles entail. And if they don't have
38:28
Speaker 1: the same view, then, you know, even sort of saying
38:31
Speaker 1: don't worry if fiduciary principles are still in play is
38:34
Speaker 1: kind of an empty consolation given that it's not even
38:38
Speaker 1: Delaware judges who are going to be determining whether the
38:41
Speaker 1: contract that's a dispute ends up offending certain piduciary principles
38:45
Speaker 1: and that we just don't know the answer to. But
38:47
Speaker 1: I certainly would expect that one of these creative transactional
38:51
Speaker 1: attorneys might start playing around with arbitration provisions or choice
38:56
Speaker 1: or forum provisions that cause the dispute to wander wellside
39:00
Speaker 1: the borders of Delaware.
39:02
Speaker 2: Thanks so much, Eric, it's always enlightening and fun as well.
39:06
Speaker 2: That's Professor Eric Talley of Columbia Law School. And that's
39:09
Speaker 2: it for this edition of the Bloomberg Law Podcast. Remember
39:12
Speaker 2: you can always get the latest legal news by subscribing
39:15
Speaker 2: and listening to the show on Apple Podcasts, Spotify, and
39:19
Speaker 2: at bloomberg dot com, slash podcast, slash Law. I'm June
39:23
Speaker 2: Grosso and this is Bloomberg