November 18, 2024 Chancery Consolidates 2 Musk, Derivative Damage Suits
Law360 (November 18, 2024, 7:49 PM EST) — Delaware’s chancellor on Monday combined two class suits that separately targeted Elon Musk’s massive sales of Tesla Inc. stock and alleged diversions of Tesla talent to Musk’s spun-off artificial intelligence venture, while ordering coordination with a suit seeking damages arising from alleged insider trading in late 2022.
The decision, affecting three of what had been four separate Tesla-focused actions dating to 2022, followed arguments that saw Chancellor Kathaleen St. J. McCormick press an attorney during a hearing Monday for Tesla to explain the company’s opposition to a litigation rollup.
“Explain to me why it benefits Tesla to deal with these arguments in four different lawsuits as opposed to one,” the chancellor said to Brian T. Frawley of Sullivan & Cromwell LLP, counsel to Tesla.
“The whole case itself is going to be more unwieldy, more difficult for Tesla,” Frawley said, arguing in part that consolidation would lead to multiday depositions. “It creates more discovery dispute situations where witnesses are going to have to provide discovery about issues that have nothing to do with them.”
Consolidated by the decision Monday were claims lodged by the Employees’ Retirement System of Rhode Island and the Cleveland Bakers and Teamsters Pension Fund, with Tesla stockholder Michael Perry’s Brophy suit to be coordinated.
“We believe there is a full story to this, not only what Elon is alleged to have done at any particular moment in time,” Marcus E. Montejo of Prickett Jones & Elliott PA, counsel to Rhode Island, told the chancellor.
Perry, Montejo said, “wants to litigate a single chapter of this story” with the insider trading claims.
Left to go forward on its own for now was a suit filed in 2022 by stockholder David Wagner seeking damages for Musk’s multiyear string of allegedly disruptive public statements and tweets regarding his businesses, which came under U.S. Securities and Exchange Commission scrutiny.
During the hearing, Chancellor McCormick said she was unsure about what to do with Perry’s insider trading, or Brophy, claims, which focused on a rush of stock sales in the fourth quarter of 2022.
Lee Squitieri of Squitieri & Fearon LLP, counsel to Perry, told the chancellor that the Perry case was filed ahead of the Rhode Island and Cleveland Bakers claims
“It’s not a slice at all. It’s not part of the story, and it’s not small at all. It’s a multibillion-dollar insider trading claim that should be dispatched as quickly as possible,” Squitieri said.
Each of the three cases, the motions argued, points to Musk as Tesla’s controller and challenges the conduct of the company’s board of directors under Delaware law in the face of Musk’s alleged breaches of fiduciary duty and self-interested actions.
The largest of the three suits, led by the Employees’ Retirement System of Rhode Island, accused Musk of concealing his true intent to sell $16 billion worth of Tesla stock as his Twitter takeover took shape, allegedly allowing the shares to go for inflated prices to buyers kept in the dark about the true purpose.
Tesla’s stock price dropped after the public learned of Musk’s plan to buy Twitter, triggering reports that he and his brother, Kimbal Musk, a board member, would have made $2 billion less on their sales had the plan come to light.
The chancellor has been presiding over a string of closely watched cases and decisions that included her Jan. 30 voiding of Elon Musk’s proposed stock-based, 10-year compensation plan, then valued at around $56 billion.
The compensation shutdown triggered a stockholder vote to reincorporate in Texas, although mountains of litigation remained in Delaware. Still pending, too, is a shareholder bid for a stock-based fee for the voided pay plan, potentially worth billions.
Frawley said “the question for the court is, ‘What’s in the best interest of the company, whose rights asserted here bear the brunt of discovery costs, brunt of the costs of litigation?'”
The Employees’ Retirement System of Rhode Island is represented by Marcus Montejo, Bruce Jameson, Kevin Davenport, John Day and Seth Ford of Prickett Jones & Elliott PA, and Daniel Chiplock, John Nicolaou, Sean Petterson, Richard Heimann, Katherine Benson and Bruce Leppla of Lieff Cabraser Heimann & Bernstein LLP.
The Cleveland Bakers and Teamsters Pension Fund, Daniel Hazen and Michael Giampietro are represented by Christine M. Mackintosh, Vivek Upadhya and William G. Passannante II of Grant & Eisenhofer PA, Thomas Curry, David J. Schwartz, David L. Wales and Adam D. Warden of Saxena White PA, and Brian Schall of The Schall Law Firm.
Perry is represented by P. Bradford deLeeuw of DeLeeuw Law LLC, Lee Squitieri of Squitieri & Fearon LLP and Fletcher Moore of Moore Law PLLC.
Wagner is represented by Kurt M. Heyman and Gillian L. Andrews of Heyman Enerio Gattuso & Hirzel LLP, and Gustavo F. Bruckner, Samuel J. Adams and Ankita Sangwan of Pomerantz LLP.
Elon Musk, Kimbal Musk, Ira Ehrenpreis, James Murdoch, Robyn Denholm, Kathleen Wilson-Thompson, Joe Gebbia, JB Straubel, Larry Ellison, Hiromichi Mizuno and Tesla are represented by: Rudolf Koch, Kevin M. Gallagher and Andrew L. Milam of Richards Layton & Finger PA; John L. Reed, Caleb G. Johnson and Daniel P. Klusman of DLA Piper LLP (US); and Boris Feldman, Doru Gavril, Rebecca Lockert, Jon Fougner and J. Mia Tsui of Freshfields Bruckhaus Deringer LLP.
The cases are Employees Retirement System of Rhode Island v. Elon Musk et al., case number 2024-0631, Michael Perry v. Elon Musk et al., case number 2024-0560, Cleveland Bakers and Teamsters Pension Fund et al. v. Elon Musk et al., case number 2024-0646, and David M. Wagner v. Elon Musk et al., case number 2022-0953, all in the Court of Chancery of the State of Delaware.
–Editing by Melissa Treolo.
Update: This article has been updated to add counsel information.