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Business Law Today

February 2024

February 2024 in Brief: Business Litigation & Dispute Resolution

Sara E Bussiere and Armeen Mistry Shroff

February 2024 in Brief: Business Litigation & Dispute Resolution
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Business Litigation

Delaware Court of Chancery Holds Musk’s $55.8 Billion Tesla Compensation Plan Is Not Entirely Fair, Orders Rescission

By K. Tyler O’Connell, Morris James LLP

Tornetta v. Musk, C.A. No. 2018-0408-KSJM, 2024 WL 343699 (Del. Ch. Jan. 30, 2024).

In both 2009 and 2012, Tesla, Inc. and its founder and Chief Executive Officer Elon Musk agreed to compensation plans with significant stock option grants that would vest in tranches if Tesla achieved certain operational and financial milestones. Although the 2012 grant had a ten-year term, by 2017, Tesla already was nearing completion of those milestones. Tesla’s board of directors and its stockholders other than Musk then approved a new compensation plan with up to $55.8 billion in total value. As the Delaware Court of Chancery described, this was the largest compensation plan the parties could identify “in the history of public markets.” In this post-trial decision, the Court examined Tesla’s decision to adopt the compensation plan and held that Musk and the other defendants failed to prove that decision was entirely fair to Tesla.

The stockholder-plaintiffs argued that Musk was Tesla’s controlling stockholder, and therefore that the adoption of the compensation plan should be subject to entire fairness review. The Court found that at a minimum Musk exercised control in connection with this specific transaction. The Court reasoned, inter alia, that Musk owned 21.9% of Tesla’s outstanding stock, and he was the paradigmatic “Superstar CEO” regarded as critical to a company. He also made the initial compensation plan proposal.

Relatedly, the Court found that the compensation plan was not approved by a majority of independent directors, which similarly prevented deferential review under the business judgment rule. The Court pointed to Musk’s long-standing friendships and business relationships with Tesla’s outside directors, and it also found the record supported that the outside directors in fact acted with a “controlled mindset.”

The compensation plan was approved by an affirmative vote of a majority of disinterested stockholders (i.e., excluding Musk and his affiliates). The defendants argued this supported that the transaction was fair. The Court disagreed, reasoning that the stockholder vote was not fully informed because Tesla’s proxy statement omitted material information, including the directors’ potential conflicts of interest and that Musk proposed the material terms of the compensation plan.

The defendants argued the plan was “all upside” for Tesla and its stockholders other than Musk because of the significance of the plan’s milestones. The Court reasoned, however, that in virtue of his 21.9% ownership, Musk already had “every incentive to push Tesla to levels of transformative growth.” The record evidence did not support that the plan was necessary to keep Musk as CEO.

The Court also rejected what it called a “hindsight defense”—that the fact Tesla had grown immensely and achieved the milestones supported that the plan worked. The Court reasoned this post hoc argument could not make up for the absence of contemporaneous evidence supporting the fairness of the compensation plan.

Because Musk’s compensation plan was not entirely fair to Tesla, the Court ordered that it be rescinded. The Court accordingly entered judgment in the plaintiff’s favor and directed the parties to confer on an order addressing the issue of attorneys’ fees payable to the plaintiff’s counsel.

Tyler O’Connell is a Partner at Morris James LLP in Wilmington, Delaware. Any views expressed herein are not necessarily those of the firm or any of its clients.

For a more detailed discussion of this decision, please see Business Law Today’s related full-length article.

Massachusetts Supreme Judicial Court Reconsidering Uber’s Pop-Up Terms & Conditions

By Marisa K. Roman, McGlinchey Stafford, PLLC

In January 2024, the Massachusetts Supreme Judicial Court (“SJC”) heard oral arguments in Good v. Uber Technologies, Inc. At issue are Uber’s terms and conditions that the ridesharing application provides its users in a pop-up screen and whether this provides customers “reasonable notice” of Uber’s terms, including a binding arbitration clause. Starting in 2021, users were given a pop-up notification upon launching the app that advised of Uber’s “updated” terms. Customers could then click a link to review Uber’s revised terms; however, they were not required to click the link or agree to the terms before booking a ride.

Uber’s binding arbitration clause could significantly limit the amount of damages a plaintiff can seek in litigation. In Good, the plaintiff seeks to recover approximately $63 million from Uber following a car accident that left him permanently quadriplegic. Uber had moved to compel Good to arbitration after he filed suit, but the lower court denied the motion after holding that the arbitration “agreement” was not sufficient.

The Good matter is the first real test of Uber’s terms and conditions since the company was forced to revise them following the SJC’s 2021 decision in Kauders v. Uber Technologies, Inc., 486 Mass. 557 (2021). In Kauders, the SJC ruled that Uber must provide its customers reasonable notice of the company’s binding terms and obtain customers’ reasonable manifestation of assent to those terms. However, during the oral arguments in Good, the justices remained skeptical of Uber’s argument that it had done its due diligence and that its revised terms and conditions were sufficient to create an enforceable contract between the company and its users. While the decision is forthcoming, its impact on other rideshare and online companies could be significant, as Massachusetts, as well as other states, may force all online companies to provide more clarity and direction in their clickwrap agreements to bind their customers to enforceable contracts.

Delaware Court of Chancery Holds Laches or Ripeness Defense Cannot Bar Challenges to Statutory Validity of Corporate Documents

By Leona Yazdidoust

In West Palm Beach Firefighters’ Pension Fund v. Moelis & Company (February 12, 2024), the Delaware Court of Chancery determined that a plaintiff’s claim for statutory validity was ripe for adjudication and not barred by the equitable defense of laches.

Plaintiff, a stockholder of Moelis & Company (the “Company”), challenged the validity of certain provisions in a stockholder agreement between the Company and its CEO, Ken Moelis. Plaintiff argued that the provisions violated Section 141(a) of the Delaware General Corporation Law by granting expansive rights to the CEO.

The Company attacked Plaintiff’s claim with two defenses—laches and ripeness. Using the doctrine of laches, the Company asserted that Plaintiff had unreasonably delayed in filing suit upon becoming aware of an infringement of its rights. The Court rejected this defense, finding:

  1. laches cannot validate a void act,
  2. there was no unreasonable delay, and
  3. the Company suffered no prejudice.

First, when addressing justiciability, the Court must assume that the underlying claim is valid. Therefore, if the challenges to the provision were valid, the stockholder agreement provisions would be void and thus not able to be validated by the doctrine of laches. Second, Delaware courts use three methods to determine when a claim accrues: (1) the discrete act method, (2) the continuing wrong method, and (3) the separate accrual method. Analyzing the facts under each method, the Court found there was no unreasonable delay to the facial challenge. Third, the Court held that the Company failed to demonstrate any prejudice.

Besides laches, the Company also argued that Plaintiff sued too early under the theory of ripeness, i.e., that the alleged facts had not given rise to a substantial controversy warranting judicial intervention. The Company argued that before asserting an equitable challenge, Plaintiff should have waited for Moelis or the directors to breach their fiduciary duties. The Court rejected this argument, reasoning that Delaware follows the twice-testing formula: once at law and again in equity. The two tests are separate and distinct, and therefore the potential availability of one claim does not defeat the other. In other words, Plaintiff could bring a ripe facial challenge to the legality of the provisions now with the option to pursue an equitable challenge in the future based on the effects of the challenged provisions.

The Court’s ruling is significant as it affirms that claims contesting the validity of provisions in corporate documents contrary to statutory law are justiciable and cannot be barred by laches or ripeness defenses.

Dispute Resolution

Second Circuit Rejects Use of Mailed Update to Bind Customers to Arbitration Provisions

By Leslie A. Berkoff, Partner and Chair of Dispute Resolution Practice Group, Moritt Hock & Hamroff LLP

In a recent summary order, Lipsett v. Popular Bank, No. 22-3193-cv (2d Cir. Jan. 10, 2024), the Second Circuit found that a bank’s effort to update its existing contract’s terms and conditions by mailing an “update” to its customers was insufficient to establish contractual assent to the changes in the governing arbitration provisions.

The customer had filed a putative class action asserting claims arising out of a fifteen-year-plus banking relationship. The bank moved to compel arbitration, pointing to various updates sent to customers purporting to add a compulsory arbitration clause and class action waiver. The district court denied the motion, focusing on the fact that the bank had not afforded customers an opportunity to opt out. While the Second Circuit affirmed the order denying arbitration, it did so on wholly different set of grounds, finding that the customer had not received “sufficiently clear notice that he was bound by the arbitration provision at issue in this case, as required under New York law.”

The Court noted that the party seeking to compel arbitration has the initial burden to establish that a valid agreement exists and that the agreement was entered into by “a meeting of the minds and a manifestation of mutual assent,” which understanding “must be sufficiently definite to assure that the parties are truly in agreement with respect to all material terms.” The Court made it clear that where the agreement is passive in nature, the question becomes whether the terms were “reasonably communicated to the user” and if the other party has not read the contract, they will only be bound by the terms provided that they “assent[] to them through conduct that a reasonable person would understand to constitute assent.” Further, whether inquiry notice to a party can be viewed as effective to bind them to the underlying terms of an agreement will “turn[] on whether the contract terms were presented to the offeree in a clear and conspicuous way” considering the “totality of the circumstances.”

Applying these rules to the case at hand, the Court found that the customer had not agreed to arbitrate the underlying dispute, for three reasons. First, the notice sent to the customer had stated, in a misleading fashion, that there “continues to be a Mandatory Arbitration Provision,” even though there had been no evidence that the customer had ever previously agreed to arbitrate; the Court found that it was therefore reasonable for the customer to presume this update did not apply to him. Second, the notice contained no provisions notifying the customer of the basis upon which he could opt out of the arbitration provisions. Third, the notice lacked clarity as to whether this was a new agreement or one that amended a prior agreement, leading to confusion for any reasonable customer as to what was the operative agreement. This decision serves as a reminder of issues to consider when attempting to update or modify agreements through general notices.

    Editors