The messy split between the world’s richest person and America’s corporate capital cleared another hurdle this week when a judge dismissed the last
If Delaware’s top tribunal upholds the April 13 decision after a likely appeal, the tech titan will get his prize: home court advantage in a jurisdiction jury-rigged to kill shareholder suits in the cradle. Texas now lets businesses restrict so-called derivative litigation to investors owning at least 3%, which for Tesla means just Musk.
“It’s time for the Delaware-Musk relationship to be severed,” said University of Richmond law professor Jessica Erickson. “It’s not healthy for anyone involved. It needs to end. But the outcome here certainly raises questions about whether other companies might try the same tactics.”
Despite Musk’s efforts to incite a mass “DExit,” Delaware still holds corporate law’s gold standard. That means his scorched-earth victory may inflict collateral damage on investors in the nearly 70% of Fortune 500 companies chartered there, not to mention constituencies worldwide that rely on the thought leadership of its judiciary, Erickson said.
It’s hardly the first time Delaware’s legal system has been accused of giving way to the destabilizing barrage that culminated in Musk’s bias gambit. Lawmakers spooked by the attacks raced last year to weaken the guardrails around powerful founders—opening ruptures across the corporate community—and the state’s justices later issued an unsigned opinion overturning a landmark ruling against the billionaire.
“What I think this reflects is that at least one Delaware judge just doesn’t want to be in the business of policing Elon Musk anymore,” said Colorado Law professor Ann Lipton.
No Bright Lines
The remaining shareholder claims concern Musk’s AI venture,
The consolidated litigation fell to Vice Chancellor Bonnie W. David after Musk’s latest volley against Chancellor Kathaleen St. J. McCormick scored a hit. She stepped aside when he alleged she’d endorsed a LinkedIn post gloating about his loss in a separate case.
McCormick—who’s said she engaged accidentally if at all—used Scrabble tiles to reassign the dispute April 3. Another judge will handle lingering cleanup issues related to an older case that’s all but over.
David took just 11 days to clear her docket.
She avoided bright lines based on litigation chronology—the lawsuits predated the Texas bylaw—pointing instead to the wider context. That included clear indications Tesla would adopt the provision, overwhelming investor approval, the preliminary status of the cases, and the company’s concession that Delaware law applies either way.
Given the “zone of indeterminacy around transitions,” it makes sense to look beyond technicalities, according to University of Nevada, Las Vegas law professor Benjamin Edwards.
“When stockholders overwhelmingly vote to leave, you don’t want that to be a signal for them to be targeted by litigation which would plainly be prohibited in the destination jurisdiction,” Edwards said.
Political Heat
David’s holistic approach is a hallmark of Delaware’s “equitable” business court, which focuses on disputes that defy categories. But the flexibility leaves room for motivated reasoning, according to Lipton, who said it departs from decades of practice for Delaware’s “possessive” judges to give up cases hinging on Delaware law.
She drew a parallel to litigation during the 2008 financial crisis over
“This reads like another attempt to take the political heat off,” she said. “It’s a Delaware company sued under a Delaware forum selection clause under a Delaware law that says Delaware shareholders have the right to sue in Delaware.”
The decision may pose incentive problems given the structure of shareholder litigation in Delaware, which usually follows a bid for corporate files. A company that gets a potentially damaging document demand could swiftly move to reincorporate before any derivative suit, according to Erickson.
“Do I think it made political sense for the court to get rid of these cases? Absolutely,” she said. “I also worry, when we think past Elon Musk, about changing bylaw provisions to get rid of cases after they’ve been filed.”
Substance or Procedure?
Judges retain wide latitude to guard against that kind of gamesmanship, said Widener University law professor Lawrence Hamermesh. But Tesla’s move was about Musk’s anger at McCormick for voiding his $56 billion pay plan, not pushing the pending cases to Texas, according to Hamermesh.
“When the equities work in the other direction, presumably they’ll be given effect,” he said.
Assuming the Delaware Supreme Court lets the Musk case go, its weird posture would raise novel questions for a Texas Business Court still getting its bearings.
Most notably: the 3% derivative requirement, which this week’s ruling didn’t mention. Even if Delaware substantive law applies, the dispute would be subject to Texas procedures, and no one seems to know if the 3% rule is substantive or procedural.
“I wouldn’t want to predict how that comes out in Texas,” Hamermesh said.
David’s logic—emphasizing the obvious relocation ahead—suggests she’d feel differently about a 3% threshold that wasn’t even proposed until almost a year later, according to Christine Hurt, a law professor at Southern Methodist University in Dallas.
“They had no idea—and probably could not have foreseen—that Tesla would adopt this,” Hurt said. “It seems like that would have been a relevant distinction to Vice Chancellor David. That doesn’t mean it will matter to the Texas Business Court.”
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