by Few people in the world have the power to order around Elon Musk. One of them is a 44-year-old Delaware judge named Kathaleen McCormick.
When the richest man on the planet tried to back out of buying Twitter in 2022, it was McCormick who stood in the way, taking a relentless approach to law that ended up with Musk backing him up and ending the deal. And last month, it was McCormick who issued a landmark ruling against Musk in a Tesla shareholder lawsuit that could cost him around $50 billion and make him the world’s richest man.
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The decision, which found that Musk’s control of Tesla’s board left him with an unfair compensation contract, left Musk fuming. “Never incorporate your company in the state of Delaware,” he posted on X, before promising to hold a Tesla shareholder vote on moving the company’s incorporation to Texas. The case is ongoing, with both sides to fight over attorneys’ fees before a likely appeal to the Delaware Supreme Court later this year.
Although Tesla does not yet have a shareholder vote, Musk announced on Tuesday that he has filed to move the incorporation of his private space company, SpaceX, from Delaware to Texas.
In her three years since becoming the first woman to preside over Delaware’s influential Court of Chancery, McCormick has quickly established herself as a force to be reckoned with in the high-stakes field of corporate litigation, according to an insider. At a time when multi-billionaires like Musk seem to have few checks on power, McCormick’s sharply worded comments have sent a message: Don’t mess with Delaware.
“The reason Elon Musk often gets away with other judges is because they don’t see through his pantabulating,” said Lauren Pringle, editor of the Chancery Daily, a legal publication that covers Delaware courts. “They get folded and the stars win. Not McCormick. She is as keen as ever, and willing to take the rods and arrows that she knows will come with strict control.”
Those slings and arrows now include a campaign by Musk to achieve Delaware’s special status in the corporate world. But even with X’s 172 million followers and demigod status in some business circles, Musk will likely face a battle to convince Tesla shareholders to relocate the company’s incorporation — not to mention convince other companies to take his lead. continue
“I don’t see it getting much traction,” Lawrence Hamermesh, a professor emeritus at the University of Delaware’s Widener School of Law and an expert on the state’s legal system, said of the call for Delaware companies to abandon it. “It’s a one-time thing.”
With the majority of Fortune 500 companies incorporated in the state, Delaware has enjoyed a decade of dominance in the field of corporate litigation, thanks in part to a unique court system that puts decisions in the hands of judges rather than juries. The state court of chancery prides itself on dealing quickly and predictably with all types of corporate litigation.
Taxes from those corporations make up a significant portion of Delaware’s state budget, adding to the pressure on its courts to maintain the state’s business-friendly reputation.
“One description is that they sell corporate law as a product,” said Edward Rock, a law professor at New York University, referring to a coin coined by legal scholar Roberta Romano. “They market it, they care about it, they keep it up to date.”
For years, that product in Delaware tended to be old, white and male. Now McCormick, a native of sleepy Smyrna, Del. – population 13,000 – who rose to the top of the corporate law world.
Irish Catholic Miss public high school teachers, McCormick underwent spinal fusion surgery at age 15 for scoliosis, but that didn’t stop her from playing softball and running track. Academically inclined, she was the rare Smyrna High student who attended Harvard, where she majored in philosophy—and built an elaborate dorm room bar that was the envy of her classmates.
McCormick has always been tough, her older brother, Sean McCormick, said at a 2019 ceremony where she was sworn in as vice chancellor. “Kate doesn’t suffer fools,” he said. “Don’t be one. If so, she might give you names her brothers gave her while helping her build her character.”
After law school at Notre Dame, she returned to Delaware to start a family and her career at a legal aid foundation, which is not a launch pad for a future judge in the Court of Chancery.
“You do public interest law, and you have real people whose future depends on what the court does,” Rock said, including cases involving evictions. “When you’ve dealt with real problems like that, there’s a sense, it seems to me, that you’re not intimidated by the kinds of things that corporate litigators fight about.”
In a move motivated by family and personal matters, McCormick left the nonprofit sector to become a corporate lawyer at Young, Conaway, Stargatt & Taylor in Wilmington, Del., before being appointed by Gov. John Carney (D) took it to court. vice-chancellor in 2018 and then chancellor in 2021. She took charge of a docket loaded with high-profile lawsuits.
When Twitter sued Musk in 2022 over his attempt to back out of its $44 billion purchase of the company, McCormick assigned the case to herself rather than delegating what was sure to be a high-profile matter to one of her vice chancellors.
She was quick to put her stamp on the proceedings, rebuffing requests from Musk’s lawyers to delay the trial so they could investigate whether Twitter hid evidence from Musk about the prevalence of bots on the platform. “We’ll never know, right? Because the due diligence didn’t happen,” she said, referring to the due diligence that Musk waived by agreeing to the deal.
As the trial unfolded, Musk chose to go through with the purchase.
McCormick also led a lawsuit brought by a Tesla shareholder that alleged Musk’s 2018 compensation package, which was worth more than $56 billion in performance-based stock grants, was too generous. The plaintiff’s lawyers, Richard Tornetta, argued that Musk himself was in charge of the process by which Tesla’s board came to market, and that the board failed to fully inform shareholders of its duty before a vote to sell him. approve. (In the vote, 73 percent of shares represented at the meeting approved the deal; neither Musk nor his brother Kimbal Musk, a board member, were eligible to vote their shares.)
Musk’s lawyers countered that the board followed proper procedures and that Musk’s pay was not so great because his extraordinary leadership sent the company’s stock to incredible heights – leading to huge returns for shareholders.
In a factually detailed 200-page opinion, which McCormick peppered with her trademark panache, she concluded that Musk had effectively set his own terms, enriching himself more than necessary at the expense of other shareholders, and that it was the proper remedy is to set aside the wages. a whole package. In talks with the board about his pay, McCormick wrote, “Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit.”
Disparaging Musk’s argument that the wage negotiations must be thorough because they took nine months and 10 meetings, McCormick wrote, “Time spent is only important when it is well spent.”
McCormick’s role in the case is not over yet. The plaintiffs indicated in a letter to the court on Tuesday that they will seek attorneys’ fees from Tesla, which could oppose paying what Pringle said could be a very large sum. Meanwhile, Musk’s side will seek to stay McCormick’s judgment pending an appeal, which would be filed only after she rules on the legal fees.
Musk’s attorney Alex Spiro did not respond to a request for comment. Greg Varallo, co-counsel for the plaintiffs, said he expected Musk to appeal. But he bristled at the idea that Delaware’s reputation will suffer under McCormick’s ruling.
“Investors in Delaware companies should be applauding this result and demanding that companies incorporate and stay incorporated in Delaware,” he said. “Because the court has shown once again that it exists to protect investors from overbearing regulators.”
Musk and Tesla will also have to decide when and how to proceed with their intention to relocate Tesla’s incorporation from Delaware to Texas, where Musk lives and the company is headquartered. To do so will require another shareholder vote, the outcome of which is uncertain.
Five corporate law experts said that while reasonable people could disagree on aspects of McCormick’s opinion, it was well reasoned and appeared to be broadly consistent with precedent. Because of that, all five agreed that the ruling was unlikely to inspire the outrage from the rest of the corporate world that it did from Musk.
“I don’t expect a massive move of businesses from Delaware,” said Michal Barzuza, a law professor at the University of Virginia who specializes in corporate governance. The state’s judicial expertise and large body of case law, she said, creates a relatively predictable legal environment that most companies — and the lawyers and investors who advise them — tend to be concerned about.
If anything, Barzuza said, the biggest impact on Delaware’s system over the years has been that it’s been too friendly to corporations; the Court of Chancery previously sided with Musk in a shareholder lawsuit challenging Tesla’s $2.6 billion acquisition of solar panel company SolarCity. But she said she worries that states like Nevada could pressure Delaware courts by trying to lure companies with even weaker systems that make it harder to hold directors and officers accountable.
However, Pringle said she doubts many businesses will be eager to make the switch. “Uncharted waters are generally not the best places for lawyers to swim. No general counsel in their right mind would suggest that the company ‘throw it’ in a state where there is very little case law.”
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Faiz Siddiqui contributed to this report.
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