Just as Wilmington was getting used to fewer road closures and suited bodyguards downtown following President Biden’s departure for Washington, a new media spectacle arrived in town this month.
Elon Musk, the celebrity CEO of electric car titan Tesla and private space rocket company SpaceX, was called to Delaware to testify in a shareholder lawsuit in the Delaware Court of Chancery. Musk, the world’s third richest man worth more than $160 billion, according to Forbes, was defending his role in Tesla’s controversial acquisition of solar panel company SolarCity.
The arrival of Musk, whose Twitter feed moves markets as quickly as former President Donald Trump’s ever did, also brought dozens of journalists, supporters, and critics to the Leonard Williams Justice Center – and with them the gaze of corporate America.
That’s not to suggest that Delaware hasn’t been the center of corporate America, at least in legal terms, for about a century. More than 1 million business entities have made Delaware their legal home, including more than 60% of the Fortune 500 companies – think names like Facebook, Google, Bank of America, Coca-Cola and, yes, Tesla.
But in the past decade, the dominance of the state’s Court of Chancery has waned just a bit.
The Court of Chancery is unlike most courts in America. It’s presided over by judges known as chancellors, does not use juries, often rules quickly in corporate matters and bases much of its decisions in the voluminous history of prior rulings. Chancery proceedings are often staid affairs with well-versed legal teams needling corporate executives over finer points of disclosure to shareholders.
What it lacks in legal theatrics it has historically made up for in value to plaintiffs and defendants alike. Plaintiffs have the choice of venue between a home state and its incorporated state – essentially Delaware and everywhere else – and for the past four years, more of them have been choosing venues other than Chancery.
Much of that activity is likely due to the 2016 ruling known as Trulia, in which Chancellor Andre G. Bouchard refused to approve a “disclosure-only” settlement of a shareholder class action lawsuit in connection with Zillow’s acquisition of Trulia. Such settlements have become a common way to wrap up shareholder concerns ahead of a merger vote, but the Chancery decision increased scrutiny of such cases.
The next year, securities class action lawsuits filed in federal courts, a competing venue to Chancery, increased 42%. They remained at that level for three years before falling in 2020, likely due to the impact of the COVID-19 pandemic on court proceedings.
Comparatively, civil filings in Chancery fell 25% between the 2016 and 2017 fiscal years, according to court records. The number of rulings that chancellors have issued in cases also fell below 1,000 in the 2018 and 2019 fiscal years, the first time that had occurred since 2010.
So why is Chancery’s prominence and caseload important?
Because the legal community is the lifeblood of Wilmington’s economic engine. At least 1,000 lawyers work at firms in Wilmington, according to Delaware Business Times records. As much as we talk about the financial services sector in Wilmington, law firms and the court system are a major driver of hotel accommodations, catered lunches, fine dining and more.
That climate hasn’t dried up due to the falling number of Chancery filings – in part due to the exploding number of bankruptcy cases filed in the U.S. Bankruptcy Court in Wilmington – but the more cases that are filed here the better for the city and state.
Which brings me back to our bombastic Californian CEO who testified for two days in Chancery this month. While Musk’s coarse put-downs of the opposing counsel grabbed most of the ink in the News Journal, Financial Times and Wall Street Journal, the mere fact that the case was being heard here is a positive development.
At the heart of the case is an interesting question, what determines a “controlling interest”? Musk held only 22% of Tesla’s stock when the company’s board and shareholders approved a $2.1 billion acquisition of the flailing SolarCity that was, coincidentally or not, founded by his cousins. But the plaintiffs, who include several pension funds that own Tesla stock, assert that Musk’s involvement in the deal, his suggestions during the negotiations and the intertwining of Tesla and SolarCity investors and board members led to pressure on parties to sign off on the deal that ultimately turned out to be a lemon.
At stake in the case is a potential $2 billion judgment against Musk personally, which wouldn’t cost the billionaire too much sleep but would be a record-setting judgment against a sole executive. Frankly, a ruling by Vice Chancellor Joseph R. Slights III in favor of the plaintiffs could convince more shareholders to file suit against executives in Delaware. A ruling in favor of Musk could embolden Delaware’s reputation for thoughtful jurisprudence.
“People have a chance to see us at our best, and I think that’s a really good thing,” Charles Elson, the Edgar S. Woolard Jr. Chair in Corporate Governance at the University of Delaware, recently told me. “Any case like this in Delaware is certainly collaterally helpful, because it only will increase the reputation of Chancery in the state.”
Conversely, Lawrence Hamermesh, professor emeritus and former director of the Widener Institute of Delaware Corporate and Business Law, said he didn’t think the case would move the needle too much in terms of Chancery filings.
“I think it’s more the media-worthy characters in this case. The case itself is, from a standpoint of corporate law, kind of interesting but it’s pretty basic,” he told me. “It’s the kind of case where, if the stakes are big enough, somebody would be sensible to bring it in Delaware anyhow.”
We shall see how the SolarCity drama pans out in coming weeks as Slights is expected to pen a ruling, but it likely won’t be the last we see of Musk’s media circus. He’s also facing shareholder lawsuits in Chancery regarding his record compensation package and the impact of his controversial tweeting.
