The thing about Elon Musk is that whatever it is he’s involved with, the guy wants you to think it’s about something else, something bigger. Tesla isn’t about cars — it’s about the future or the environment or innovation. SpaceX isn’t a rocket-maker; it’s a save-the-human-race-from-extinction company. With Twitter v. Musk, the suit isn’t just about whether the world’s richest man can save $43 billion or so by backing out of an agreement to buy Twitter. There’s a deeper question, one Musk may not like observers asking: Does Elon Musk think he’s bigger than the law?
Law is often made through unusual cases, and there’s a trail of them behind Musk, going as far back to his days with Zip2, his first internet mapping company from shortly after dropping out of Stanford. Since then, he has been challenging corporate law in bigger and weirder ways. There’s Tesla’s 2016 acquisition of SolarCity, of which Musk was chairman and the major shareholder. There’s the “funding secured” tweet two years later about taking Tesla private, which ended with a settlement with the Securities and Exchange Commission and his resignation as Tesla’s chairman. Despite settling, Musk continues to say that he actually didn’t do anything wrong with the tweet — and earlier this year, he won a suit against a group of shareholders that challenged the SolarCity deal even though Tesla’s directors settled.
So when I saw that UCLA Law professor Stephen M. Bainbridge was offering a course next year called “Law of Elon Musk,” I reached out to get his thoughts on Musk’s past brushes with courtroom drama and what this may reveal about what’s in store as the Twitter trial nears. We spoke just days before a whistleblower complaint from Twitter’s former head of security, Peiter “Mudge” Zatko, became public. Since then, Musk has begun to change tactics, using Zatko’s complaint as a basis for new arguments. Whether the judge will let him do so, or whether that change will be effective, still remains to be seen.
Bainbridge’s expertise is in corporate and securities law, and he has been blogging about the law (and Catholicism, wine, and ethics) since before Martha Stewart was accused of insider trading.
How did you get the idea of starting a class about Elon Musk and his effect on the law?
He’s generating a lot of really interesting case law out of Delaware. Tesla’s acquisition of SolarCity is an excellent case to teach students. And then there is a pending case on his Tesla CEO-compensation package, which is a great case because it’s what will strike the students as an egregious amount of money — billions of dollars in CEO compensation — in excess of anything we’ve ever seen. It’s a great case to talk about: Is this a situation in which it would be rational for a company to put together that sort of a compensation package?
There are all these cases from different areas that all involve Musk, and given how high profile he is this year with Twitter and everything, I thought this would be a way of really grabbing the students’ attention.
In the materials that you sent me, it says, “Musk constantly faces the temptation to pursue his own interests and goals, rather than focusing on the welfare of those who have entrusted him with their savings.” And I think there are a lot of people who would say that that’s actually not a contradiction — that because Musk is interested in something, that’s what makes it so valuable.
I think that’s exactly right. One of the things students often have a hard time grasping is that a conflict of interest is not necessarily a crime, a bad thing, unethical. A conflict of interest is simply a state of being. It’s a status that you have, and the question is, Have you allowed your conflict of interest to influence your thinking on how you conduct whatever the transaction is?
So there really are two questions. No. 1 is, in any given situation, does Musk have a conflict of interest? And certainly his executive compensation is a good example. Obviously it’s a conflict of interest there. But then you have to ask the question, Did they handle this in a way where Elon’s conflict ended up resulting in him engaging in self-dealing? Or did the independent directors negotiate a deal that while it’s going to pay an enormous amount of money, he’s going to have to generate an enormous amount of value for the shareholders? So that’s exactly right. And that’s sort of the point: to get the students to see that just because he’s a controlling shareholder, and just because he probably has an enormous amount of power, that doesn’t necessarily make what he’s doing a legal problem — and he could very well have used appropriate processes involving independent directors and so forth.
So over the course of looking at Elon Musk’s legal dramas, do you see a narrative here? Is he becoming, for instance, more aggressive in his treatment of the law and what he is trying to get away with?
The story that I see is the story of an incredibly smart and adventurous guy who’s capable of generating ideas that produce enormous amounts of value but who would be a pain in the butt as a client because he often leaps before he looks. He has not shown a tremendous amount of respect for the Delaware courts in terms of dotting all the I’s and crossing all the T’s in some of these transactions.
What you’ve seen in the case law is a continual pattern of not wasting a lot of Elon’s time on process. One of the things that I think is very difficult for both students and for nonlawyers to understand is how process oriented the law is. How the court analyzes, for example, the SolarCity-acquisition process: Did you have a committee of independent directors that was empowered to conduct the negotiations? Did they have separate legal counsel? Did they have the ability to say, “This is a bad deal. We’re not gonna let it go forward”? The law in this area is very, very intensely focused on process issues.
Obviously I’ve never met the guy, but just observing him, he’s not a process guy. He’s also not a guy that you can control. Think about when he tweeted out he was gonna take Tesla private at $420 a share, which I gather is some sort of marijuana reference. The SEC says this is securities fraud. And they entered into an arrangement where Tesla’s lawyer was supposed to look at all of his tweets to make sure that he wasn’t committing securities fraud. There’s litigation where he tried to have that order lifted and the court refused. And shareholders are countersuing, claiming that he’s not complying with that. It’s clear that this is a guy who’s willing to push the edge of the legal envelope and take risks in terms of legalities that most business people wouldn’t. Most of your clients, if you tell them the Delaware courts are not going to let you get away with this, say, “Okay, well, how do we handle that?” He seems to think, But let’s find out. Let’s do it. And let’s see what happens. That’s sort of the impression I have.
It’s funny that you say that he’s so averse to process since he’s essentially making those same claims against Twitter: that they don’t have the processes in place to properly dispose of bots.
That’s a very good point, but let me make a distinction. I think Elon Musk is probably very much interested in sort of how things work, how engineering practices work. And we saw he designed, or helped design, PayPal, which requires both financial processes and also obviously technological processes. We see it with Tesla. There was SolarCity and SpaceX, where there’s a lot of engineering processes, and he seems to be on top of those. It’s more the sort of the guys in the suits saying, “Okay, well, you have to do A, B, C, D,” that he doesn’t seem to be quite as engaged with.
What do you make of his bot arguments so far in the Twitter case? Do you think he has a shot at winning?
I think on the merits, Twitter has a much stronger case. Essentially, what his argument comes down to is that there’s a merger agreement that says that Twitter’s SEC filings are up to date and accurate. And Twitter’s quarterly and annual reports have, for a long time, included a sort of boilerplate statement that their best guess is that about 5 percent of their accounts are bots. He claims that they know that that’s not true, that it might be as high as 20 percent.
He would have to prove two things: First, that the representation was false; and then, secondly, he would have to show that its falsity rises to the level of what lawyers call a material adverse event. Basically, between the time I agreed to buy and the time we got to close, something happened that fundamentally changed the business in a way that means I won’t get the value that I was expecting. And that doesn’t really fit these facts.
You know, people have questioned for a long time — and, surely, they can show that Musk knew, or at least should have known — that there were questions about what percentage of the accounts were bots way before he signed the deal. There’s no evidence to suggest that something happened in the interval between when he signed the deal and now that made the bot situation any worse or any more pertinent.
The merger agreement specifically provides that Twitter is entitled to “specific performance” — they are entitled to force him to go forward. And the Delaware courts have pretty consistently enforced those sorts of clauses in the M&A context. You’ve got sophisticated, experienced commercial parties with high-profile Wall Street lawyers advising them. If they think specific performance is the only appropriate remedy, then the courts will defer to that and give specific performance. So I think Twitter’s got a really strong argument.
The most interesting thing I’ve seen recently is his interrogatories in discovery are asking Wachtell Lipton, which is the principal counsel for Twitter in this case, for any documents relating to any work they may have done for Tesla, SpaceX, or SolarCity. I’m thinking that what he’s doing here is setting up for an argument to conflict-out Wachtell — which would, at the very least, introduce some fairly substantial delay in the process. Even if Chancellor McCormick does ultimately agree that they’re conflicted out, then Twitter would have to bring in new counsel and get them up to speed. He’s got a lot of money to throw at lawyers to drag this thing out.
We were just talking about how conflicts of interest have not really stopped Musk from doing what he’s wanted to do. So why would a conflict work in his favor in this instance?
The legal-ethics rules basically say you can’t represent both sides of a lawsuit. Now, where you’re dealing with somebody who’s a former client, it’s a little more tricky. But what he’s basically, I think, arguing is that through working on transactions involving either Tesla, SolarCity, SpaceX, or some combination of the three that Wachtell got access to confidential information that they would now be able to use in this lawsuit and that they’re not allowed to do that.
So, essentially, because these lawyers are bound by ethical rules, he could push them out even though Elon himself is not really bound to many ethical rules in his own business dealings?
Has Musk changed corporate law, or has he really been someone who’s been more put in his place by the legal system?
Most of the cases that he’s been involved in have ended up being applications of fairly well-settled law. The one area where Elon is making law, and it’s an area that’s still not 100 percent settled, is identifying who is a controlling shareholder of a company. Delaware law says that if you own 50 percent plus one of the voting powers of a company, you are by definition a controlling shareholder.
Elon owns only about 15 percent of Tesla. He’s definitely not a majority owner of Tesla. When you’ve got a 15 percent holder, how do you decide whether or not that person has enough power to be deemed a controlling shareholder? This is a question that’s not well settled. And the law is a standard, not a rule. That’s an area where I think that we may ultimately say that, you know, “Okay, he made new law.” So far, though, most of this is gonna be applications of pretty well-settled rules. Twitter stuff — there’s nothing new happening in the Twitter case. This is all, you know, basic M&A contract law that has been well settled for a long time.
This interview has been lightly condensed and edited.