WEBVTT - Google's Huge Antitrust Loss & Musk Pay Package 0:00:03.200 --> 0:00:08.000 This is Bloomberg Law with June Brusso from Bloomberg Radio. 0:00:10.440 --> 0:00:13.800 A huge defeat for Google and a huge win for 0:00:13.880 --> 0:00:17.160 the government In its first major anti trust case against 0:00:17.200 --> 0:00:20.560 a tech giant in more than two decades, a federal 0:00:20.680 --> 0:00:24.439 judge has ruled that Google is a monopolist that illegally 0:00:24.520 --> 0:00:29.120 monopolized the online search market through exclusive deals, and the 0:00:29.200 --> 0:00:32.720 sanctions for Google those could range from a breakup to 0:00:32.880 --> 0:00:37.320 unwinding exclusive search deals, but that won't be decided until 0:00:37.479 --> 0:00:40.800 after another trial, which has yet to be scheduled, and 0:00:40.880 --> 0:00:44.440 of course Google says it will appeal the decision. Joining 0:00:44.520 --> 0:00:48.040 me is anti trust expert William Kavassk, a professor at 0:00:48.080 --> 0:00:51.720 the George Washington University Law School and the former chair 0:00:51.800 --> 0:00:56.120 of the Federal Trade Commission. Will this decision stand as 0:00:56.160 --> 0:00:59.960 a landmark, along with say, the AT and T, Stay 0:01:00.040 --> 0:01:02.920 and Oil and Microsoft cases. 0:01:03.640 --> 0:01:07.160 It's the beginning of a process that could become a landmark, 0:01:07.240 --> 0:01:10.319 but there's still many rivers to cross before this specific 0:01:10.319 --> 0:01:13.200 contest is over. We have a proceeding coming up this 0:01:13.360 --> 0:01:16.520 fall on the remedy to be issued. Judge Meta will 0:01:16.560 --> 0:01:18.880 be writing an opinion on what that remedy should be 0:01:18.959 --> 0:01:21.360 probably issues that by the end of the year. But 0:01:21.440 --> 0:01:24.520 then we go through the inevitable process of appeals where 0:01:24.680 --> 0:01:28.120 Google and maybe the government, point is, decide to appeal 0:01:28.160 --> 0:01:32.559 different issues raise different points about Judgemta's decisions on liability 0:01:32.560 --> 0:01:35.679 and remedy. So this promising first step for the government 0:01:36.000 --> 0:01:38.560 is only the first step in the process that will 0:01:38.640 --> 0:01:42.000 lead through a fairly difficult gauntlet of appeals. And I 0:01:42.000 --> 0:01:44.080 think ultimately this is a case that gets to the 0:01:44.160 --> 0:01:47.560 US Supreme Court. The Supreme Court hasn't informed me about 0:01:47.600 --> 0:01:51.080 whether that's the case, So this is speculation that I 0:01:51.160 --> 0:01:54.880 can't defend in any scientific way, but it's a case 0:01:54.920 --> 0:01:58.480 of such significance both were with respect to doctrine and commerce, 0:01:58.600 --> 0:02:01.280 that it's a natural candidate to be reviewed by the 0:02:01.320 --> 0:02:04.280 Supreme Court, and that process could take us well into 0:02:04.320 --> 0:02:07.800 twenty twenty six. So your crucial question about what kind 0:02:07.800 --> 0:02:10.800 of landmarks this is I will answer with the typical 0:02:10.840 --> 0:02:16.120 academics evasion. It depends on the final resolution of the 0:02:16.120 --> 0:02:19.440 matter through the appeals, an answer that won't come to 0:02:19.520 --> 0:02:21.239 us probably for two more years. 0:02:21.520 --> 0:02:24.799 Judge Meta found the Google is a monopolist and has 0:02:24.919 --> 0:02:28.200 acted as one to maintain its monopoly. Can you explain 0:02:28.440 --> 0:02:31.840 broadly how he came to that conclusion. 0:02:32.240 --> 0:02:35.680 On the crucial question of monopoly, the government has to 0:02:36.040 --> 0:02:40.200 show that the company exercises tremendous power within an area 0:02:40.240 --> 0:02:42.840 of commerce, and in anti trust language, that's usually called 0:02:42.880 --> 0:02:45.680 a relevant market. It's a technical term that refers to 0:02:46.000 --> 0:02:50.000 products that people regard as good substitutes for each other. 0:02:50.240 --> 0:02:54.280 And the government, to judge Metta's satisfaction, proved that in 0:02:54.320 --> 0:02:59.880 that market consisting of general search services that Google and Danism, 0:03:00.720 --> 0:03:03.640 it does not have effective competitors, that it accounts for 0:03:03.720 --> 0:03:07.280 an overwhelming share of activity of searches that are carried out, 0:03:07.400 --> 0:03:10.880 and as a consequence, its power is not only significant today, 0:03:10.919 --> 0:03:13.280 but the court concluded it's going to be durable. But 0:03:13.520 --> 0:03:16.280 in any trust law, it's not enough to simply be big. 0:03:16.400 --> 0:03:18.960 There are lots of expressions by courts over time that's 0:03:18.960 --> 0:03:22.000 saying achieving a position of preeminence is a mark of distinction, 0:03:22.160 --> 0:03:24.880 it's not a badge of shame. So you have to 0:03:24.919 --> 0:03:26.920 do something more. You have to show that that power 0:03:27.320 --> 0:03:31.680 was achieved to means that are improper, that you achieved 0:03:31.680 --> 0:03:34.880 it through improper means, you protected it through improper means. 0:03:34.920 --> 0:03:37.280 A colleague once told me that it means in US 0:03:37.400 --> 0:03:39.720 law that you need not only be big, you have 0:03:39.840 --> 0:03:42.320 to be bad as well. And on that point, Judge 0:03:42.320 --> 0:03:45.360 Betta found that Google's behavior in a number of instances 0:03:45.480 --> 0:03:50.200 was improper, that it excluded rivals from having access to 0:03:50.320 --> 0:03:53.600 business opportunities that they needed to compete, and it did 0:03:53.600 --> 0:03:57.440 it through a variety of different forms of exclusivity agreements 0:03:57.520 --> 0:04:01.400 that gave it the sole access to a crucial asset 0:04:01.720 --> 0:04:04.200 in dealing with third parties such as Apple and the Menta. 0:04:04.240 --> 0:04:07.840 Competitors didn't have the opportunity to use that valuable asset 0:04:07.880 --> 0:04:11.720 to compete effectively with Google. So for those two core 0:04:11.880 --> 0:04:16.520 elements of the monopolization case, Judge Meta validated the heart 0:04:16.600 --> 0:04:19.560 of the government seriod not in all respects. Google has 0:04:19.600 --> 0:04:22.280 some things in this opinion that that I'm sure liked. 0:04:22.480 --> 0:04:25.800 Disappointed with the larger outcome, I imagine the government did 0:04:25.800 --> 0:04:28.560 not get everything it wanted here, but it got validation 0:04:29.200 --> 0:04:33.760 of its core interpretation of this crucial principle of monopolization 0:04:33.960 --> 0:04:38.600 law that the firm in question must indeed have tremendous 0:04:38.720 --> 0:04:42.040 power within a specific part of the marketplace and must 0:04:42.080 --> 0:04:45.800 have achieved or protected that position through improper means on 0:04:45.839 --> 0:04:49.720 those larger themes. Judge Meta concluded that the government had 0:04:49.720 --> 0:04:50.480 proven its case. 0:04:51.080 --> 0:04:55.120 Google plans to appeal no surprise, and in a statement 0:04:55.240 --> 0:04:58.080 said that this goes to your point that Meta's opinion 0:04:58.240 --> 0:05:02.520 recognized Google as the inter net's best search engine quote, 0:05:02.640 --> 0:05:05.359 but concludes that we shouldn't be allowed to make it 0:05:05.480 --> 0:05:08.920 easily available. Do you think Google has a lot of 0:05:09.160 --> 0:05:11.120 ammunition for appeal? 0:05:11.720 --> 0:05:15.160 It enjoys a couple of the potential advantages on appeal, 0:05:15.440 --> 0:05:17.880 and a couple of that aren't merely potential, they're real. 0:05:18.320 --> 0:05:23.240 The law, the jurisprudence of US antitrust law going back 0:05:23.320 --> 0:05:26.400 over a period of since the late seventies, has tended 0:05:26.440 --> 0:05:28.960 to error on the side of dominant firms and evaluating 0:05:28.960 --> 0:05:31.000 their behavior. It has not told them they can do 0:05:31.040 --> 0:05:34.359 anything they want, but it's imposed fairly severe burdens on 0:05:34.480 --> 0:05:37.640 government and private planets trying to attack the behavior of 0:05:37.680 --> 0:05:40.719 dominant firms, so that the arena in which the appeals 0:05:40.760 --> 0:05:44.000 will take place is one in which the doctrine is 0:05:44.080 --> 0:05:47.760 generally sympathetic to the kinds of arguments that Google has 0:05:47.880 --> 0:05:50.800 offered about its own work in just the last twenty 0:05:50.839 --> 0:05:54.200 four hours and developed during the trial. Another advantage is 0:05:54.240 --> 0:05:57.000 that they'll point to the evidence in the record that 0:05:57.120 --> 0:06:00.200 suggests that people turn back to Google when they have 0:06:00.200 --> 0:06:03.280 a choice, When the starting point of their experience is 0:06:03.320 --> 0:06:06.039 another product, they switch to the default, they abandoned that 0:06:06.120 --> 0:06:08.840 product and turn back to Google. So Google's going to stay. 0:06:08.839 --> 0:06:11.200 There's evidence in the case that says people come back 0:06:11.240 --> 0:06:14.839 to us because we're offering them the better experience. Those 0:06:14.839 --> 0:06:18.680 aren't silly arguments. Those are arguments that enjoy some philosophical 0:06:18.720 --> 0:06:22.080 and doctrinal support and what courts have done in the past. 0:06:22.200 --> 0:06:24.800 So Google would be standing before the Court of Appeals 0:06:25.320 --> 0:06:29.440 saying that the practices that the government complains about cannot 0:06:29.480 --> 0:06:33.520 appropriately be deemed to be improper. And the remedial hearings 0:06:33.800 --> 0:06:36.279 will focus a lot on what Google should be allowed 0:06:36.320 --> 0:06:38.120 to do in the future. How much should it be 0:06:38.120 --> 0:06:41.200 able to bid for, say the placement on the iPhone 0:06:41.560 --> 0:06:44.240 when it comes to the famous rectangle on the iPhone? 0:06:44.440 --> 0:06:46.640 Should it be more cautious and how it bids, Should 0:06:46.640 --> 0:06:50.120 it bid less aggressively? What exactly should its position be. 0:06:50.480 --> 0:06:53.440 Those are hard issues to be resolved in the remedial proceedings, 0:06:53.720 --> 0:06:56.000 and Judge meta in a couple of places is an 0:06:56.000 --> 0:06:59.720 opinion expressed a concern that has appeared in earlier Supreme 0:06:59.760 --> 0:07:05.039 Court decisions about the difficulty judges face in trying to 0:07:05.120 --> 0:07:07.800 tell companies whom they must deal with and on what 0:07:07.960 --> 0:07:10.880 terms they must deal with them, and express concern about 0:07:11.560 --> 0:07:15.400 mandating a general obligation on the part of dominant firms 0:07:15.440 --> 0:07:18.640 to deal with other companies, anxiety about the role that 0:07:18.720 --> 0:07:22.240 courts would undertake, and becoming a referee that examines and 0:07:22.280 --> 0:07:26.040 evaluates each of these interactions between the dominant firm and 0:07:26.080 --> 0:07:28.920 a third party. Court said, we're not wealth suited to 0:07:29.000 --> 0:07:31.800 do that. The intervention that we have to undertake has 0:07:31.840 --> 0:07:35.440 to be much cleaner and not involve such long term, 0:07:35.480 --> 0:07:38.400 ongoing entanglements. We can't do that. You know, during the 0:07:38.440 --> 0:07:42.760 remedy proceedings and probably in the appellate process, Google will 0:07:42.800 --> 0:07:47.360 be saying, well, in light of that express concern, how 0:07:47.360 --> 0:07:50.160 do you write an order or an injunction that tells 0:07:50.240 --> 0:07:52.520 us what we can and can't do without in some 0:07:52.600 --> 0:07:55.680 crucial ways just disabling us. How do you do that? 0:07:56.240 --> 0:07:58.960 So those would be very live and important issues for 0:07:59.000 --> 0:08:02.800 debate during the and as you mentioned before, you know 0:08:03.080 --> 0:08:07.120 we're probably about two years away from a final decision. 0:08:07.720 --> 0:08:11.720 If I'm right about the likelihood of Supreme Court review 0:08:12.160 --> 0:08:13.760 as the last stage of the process. 0:08:14.080 --> 0:08:16.000 It sounds as if, and I could be wrong here, 0:08:16.200 --> 0:08:19.280 that you think that Google has the better arguments on appeal. 0:08:20.640 --> 0:08:22.840 I don't know in substance that they have the better 0:08:22.960 --> 0:08:27.400 arguments on appeal. I just think a caution to keep 0:08:27.440 --> 0:08:32.000 in mind in some ways, amid the the euphoria that 0:08:32.120 --> 0:08:35.920 many felt yesterday about the outcome those who wanted the 0:08:36.000 --> 0:08:40.560 judge define liability, the caution I deimpinitely expressed is that 0:08:40.640 --> 0:08:42.520 there's a lot of hard work to be done in 0:08:42.559 --> 0:08:44.920 defining what it is Google can't do in the future. 0:08:45.200 --> 0:08:49.840 And Google's operating in a judicial environment, a duct final 0:08:49.960 --> 0:08:54.080 environment built up especially since the late nineteen seventies that 0:08:54.160 --> 0:08:56.840 tends to be sympathetic to some of the kinds of 0:08:56.920 --> 0:09:00.520 arguments that Google has been making. So it's really a 0:09:00.679 --> 0:09:05.880 caution that, you know, notwithstanding the exceptional result that the 0:09:05.920 --> 0:09:09.520 government achieved yesterday, that there are many rivers to cross 0:09:09.679 --> 0:09:12.800 before the final outcome validates the approach that they've been taken, 0:09:12.840 --> 0:09:15.600 and Google is not yet defeated in its efforts to 0:09:15.640 --> 0:09:18.920 persuade the appellate judges that it didn't behave improperly. 0:09:19.160 --> 0:09:23.120 So you mentioned the remedies and judgment US scheduled a 0:09:23.200 --> 0:09:26.160 hearing for next month to decide the timing for the 0:09:26.200 --> 0:09:29.640 separate trial. And the remedies and potential remedies mentioned have 0:09:29.679 --> 0:09:33.640 been everything from ordering a breakup of Google to unwinding 0:09:33.760 --> 0:09:37.560 exclusive search deals everything in between. What do you see 0:09:37.600 --> 0:09:41.079 as the most likely potential remedy or remedies. 0:09:41.440 --> 0:09:44.040 A starting point is like to be controls on conduct, 0:09:44.200 --> 0:09:46.960 that is, to define the types of agreements that Google 0:09:46.960 --> 0:09:50.400 cannot enter into in the future, to indicate that certain 0:09:50.520 --> 0:09:54.440 types of existing agreements or practices are no longer permissible 0:09:54.800 --> 0:09:58.640 with the caveat that writing, the injunction that prohibits those 0:09:58.679 --> 0:10:01.760 practices will require are a lot of further attention and 0:10:02.120 --> 0:10:04.320 thought in light of some of the concerns that we've 0:10:04.320 --> 0:10:07.520 just been talking about the Boulder. In some sense the Boulder, 0:10:07.679 --> 0:10:11.400 the more visually striking solution is to force the company 0:10:11.440 --> 0:10:14.640 to divest asset. That's the breakup solution. Theoretically, it's in 0:10:14.679 --> 0:10:18.080 the solution set. It's a well established anti trust remedy 0:10:18.120 --> 0:10:21.559 for monopolization. Going back to the earliest phase of enforcement 0:10:21.600 --> 0:10:24.040 of the Sherman Act in the late nineteenth and early 0:10:24.080 --> 0:10:26.960 twentieth centuries. It's also been a remedy the courts have 0:10:27.000 --> 0:10:30.120 applied with some reluctant, some anxiety on the part of 0:10:30.160 --> 0:10:34.840 individual federal judges about whether they are performing surgery of 0:10:34.880 --> 0:10:37.520 a sort that's going to make the commercial system better 0:10:37.760 --> 0:10:40.559 or worse off. So I would say there's an implicit 0:10:40.720 --> 0:10:44.760 additional burden that government plaintiffs carry when they're trying to 0:10:44.960 --> 0:10:50.680 argue for divestiture remedies in monopolization cases. It's not impossible 0:10:50.840 --> 0:10:54.720 to bear that burden. And the famous DOJ prosecution of Microsoft, 0:10:55.000 --> 0:10:58.600 DOJ succeeded in persuading the trial judge to mandate to 0:10:58.640 --> 0:11:03.120 the separation of Microsoft into two parts, an operating systems 0:11:03.160 --> 0:11:06.920 company and an applications company. The Court of Appeals rejected 0:11:06.960 --> 0:11:09.400 that remedy for a variety of reasons, but one of 0:11:09.440 --> 0:11:12.040 them was that Judge Jackson, the trial judge in the case, 0:11:12.120 --> 0:11:14.640 held an adequate set of hearings on the remedy. He 0:11:14.720 --> 0:11:17.480 basically had a two hour conversation with the parties in 0:11:17.520 --> 0:11:19.440 the court room and that was it. That he should 0:11:19.480 --> 0:11:23.480 have done more. But the Court also did not uphold 0:11:23.640 --> 0:11:26.720 the full scope, but the finding of liability that the 0:11:26.720 --> 0:11:29.680 district judge had found at the trial, and it said 0:11:29.720 --> 0:11:32.920 that we've narrowed the footprint of the finding of liability. 0:11:33.240 --> 0:11:35.840 You have to take that into account in designing the remedy. 0:11:36.320 --> 0:11:39.160 The Court of Appeals didn't say you can't mandate the vestiture, 0:11:39.240 --> 0:11:42.680 but be cautious, be careful in designing the remedy because 0:11:42.760 --> 0:11:45.520 our finding of liability is narrower than the one that 0:11:45.640 --> 0:11:48.320 you found. That was perhaps an oblique way of the 0:11:48.320 --> 0:11:50.800 court saying, don't come back to us with a breakup solution. 0:11:51.160 --> 0:11:55.920 So conceptually, legally, theoretically it's part of the solution. Set 0:11:56.160 --> 0:11:59.720 in practice, it's been a challenging remedy in some instances 0:11:59.760 --> 0:12:02.679 for the government to obtain, I say, to get the remedy, 0:12:03.679 --> 0:12:05.800 the government has to do two things. Wants to say 0:12:05.800 --> 0:12:11.400 that the misconduct created serious competitive clause in the relevant 0:12:11.440 --> 0:12:16.079 line of commerce, seriously retarded competition, and that the structural 0:12:16.120 --> 0:12:20.160 solution is vital to restoring competition and making it effective 0:12:20.200 --> 0:12:23.760 in the future. That impossible, but very challenging, which tends 0:12:23.760 --> 0:12:26.600 to mean that a more likely outcome, perhaps is some 0:12:26.800 --> 0:12:30.520 set of controls on conduct rather than mandated divestitures. 0:12:30.800 --> 0:12:34.840 In a statement, Attorney General Merrick Garland said, this victory 0:12:34.880 --> 0:12:38.640 against Google is a historic win for the American people. 0:12:39.040 --> 0:12:42.360 I mean, is it really a win for consumers who 0:12:42.400 --> 0:12:46.840 seem to be happy with Google even when presented with alternatives? 0:12:47.400 --> 0:12:49.760 It could be, but we don't know yet. First, it's 0:12:49.760 --> 0:12:52.160 too early to stay because this case isn't over. There 0:12:52.200 --> 0:12:55.120 are other rounds for this contest to be played out. 0:12:55.200 --> 0:12:58.679 In that sense, it's hardly over. But embedded in all 0:12:58.720 --> 0:13:01.240 of these cases in some ways is an active faith 0:13:01.400 --> 0:13:04.839 that the intervention is indeed going to spur a greater 0:13:04.960 --> 0:13:07.760 level of innovation than would have happened otherwise. You know, 0:13:07.800 --> 0:13:10.560 there are some good historical examples to show that that 0:13:10.640 --> 0:13:13.800 act of faith was justified. Sometimes it doesn't quite turn 0:13:13.880 --> 0:13:16.320 out that way. I suppose if I were the Attorney General, 0:13:16.400 --> 0:13:19.160 i'd make the same claim. But he can't know that yet. 0:13:19.200 --> 0:13:20.200 We don't know that yet. 0:13:20.440 --> 0:13:23.560 It's certainly a possible outcome, but it's a very strong claim, 0:13:23.800 --> 0:13:25.880 and if I were him, I'd be making that claim too, 0:13:26.920 --> 0:13:30.360 But perhaps keeping in mind quietly and privately that we 0:13:30.400 --> 0:13:32.400 don't know. And part of what's difficult about the whole 0:13:32.400 --> 0:13:35.600 field is that uncertainty is is real and significant. 0:13:35.840 --> 0:13:38.480 Do you think this decision will in any way influence 0:13:38.600 --> 0:13:42.240 the other government anti trust lawsuits against big Tech. 0:13:42.640 --> 0:13:44.840 I think that the decision is likely to have some 0:13:44.960 --> 0:13:48.960 favorable spillovers to the other government monopolization cases running now 0:13:49.320 --> 0:13:52.000 involving tech. I think that judges in the other cases 0:13:52.040 --> 0:13:54.760 will read Judge Meta's decision very carefully. It's a very 0:13:54.800 --> 0:13:57.360 thoughtful opinion. I think that they'll refer to it, they'll 0:13:57.360 --> 0:14:00.160 think about it, so it it's likely to exercise some 0:14:00.240 --> 0:14:04.280 influence over there. Thinking internationally, Google is the subject of 0:14:04.520 --> 0:14:11.079 a myriad collection of regulatory and anti trust law interventions globally, 0:14:11.480 --> 0:14:14.319 everything from the Digital Markets Act and the European Union 0:14:14.440 --> 0:14:19.240 to monopolization cases and investigations in Asia and Africa and 0:14:19.320 --> 0:14:22.400 Latin America, in Australia and now of course in North 0:14:22.440 --> 0:14:26.120 America too. This case provides them some encouragement to carry on. 0:14:26.560 --> 0:14:29.080 It says that the US government thought this was a 0:14:29.120 --> 0:14:33.440 serious problem that required intervention, and they intervened. A federal 0:14:33.520 --> 0:14:35.920 judge thought there were serious problems here and found in 0:14:36.040 --> 0:14:40.480 an infringement. It helps blunt the argument that the countries overseas. 0:14:40.520 --> 0:14:43.120 They're simply picking on American companies, and they're doing it 0:14:43.160 --> 0:14:46.000 for protectionist treats. It gives them the ability to say, 0:14:46.680 --> 0:14:49.880 we are operating in a mainstream of policy already occupied 0:14:49.920 --> 0:14:52.320 by the government of the United States, and we're not 0:14:52.400 --> 0:14:55.800 doing anything different from what they're doing. It gives them 0:14:55.840 --> 0:14:59.040 some encouragement, It gives them some reinforcement for the path 0:14:59.080 --> 0:15:01.800 they've taken, and it enables them to say, if the 0:15:01.880 --> 0:15:04.960 US government is taking this step, if the US courts 0:15:05.000 --> 0:15:07.680 they're coming up with these decisions, how can you claim 0:15:07.720 --> 0:15:11.480 that we're operating, in some sense in an extreme radical fashion. 0:15:11.520 --> 0:15:13.920 We're not, thanks so much for coming on the show. 0:15:14.160 --> 0:15:19.120 That's Professor William Kovasik of GW Law. Corporate attorneys, and 0:15:19.240 --> 0:15:23.320 perhaps even judges are bracing for the impact of Delaware's 0:15:23.360 --> 0:15:27.160 new corporate law amendments that allow companies to use private 0:15:27.240 --> 0:15:31.520 contracts to grant stockholders the types of control that used 0:15:31.520 --> 0:15:35.320 to require a charter provision or a special class of stock. 0:15:35.840 --> 0:15:39.240 A state bar committee drafted the amendments in response to 0:15:39.320 --> 0:15:43.760 a chancery court decision in February that invalidated a billionaire 0:15:43.880 --> 0:15:48.400 founder's veto rights overboard decisions. Joining me is business law 0:15:48.440 --> 0:15:52.600 expert Eric Talley, a professor at Columbia Law School. Eric 0:15:52.640 --> 0:15:56.480 tell us about this new amendment to Delaware law. 0:15:57.480 --> 0:16:01.360 So, this is a recent statute to the Delaware Code, 0:16:01.400 --> 0:16:05.440 an amendment to the code that on some level seems 0:16:05.640 --> 0:16:08.840 kind of minor and technocratic, but on another level may 0:16:08.920 --> 0:16:11.400 end up proving to be a big deal. And what 0:16:11.440 --> 0:16:16.320 it concerns is something known as shareholder agreements or stockholder agreements, 0:16:16.360 --> 0:16:20.120 which traditionally sort of the OG version of these things 0:16:20.200 --> 0:16:23.840 were exactly what they sounded like, agreements among and between 0:16:24.040 --> 0:16:27.520 stockholders or Delaware companies that basically said, we're going to 0:16:27.520 --> 0:16:29.800 coordinate our actions, we're going to vote together, we're going 0:16:29.840 --> 0:16:33.280 to cooperate together, and so forth. And these have been 0:16:33.280 --> 0:16:36.320 around for a long time, and Delaware Law has bus 0:16:36.480 --> 0:16:40.160 said these are completely fine, and over time they became 0:16:40.280 --> 0:16:44.080 more and more prominent. And then what started to happen 0:16:44.320 --> 0:16:47.720 is that these OG shareholder agreements kind of turned a 0:16:47.720 --> 0:16:49.800 little bit more into what you might call a gen 0:16:49.920 --> 0:16:53.720 Z shareholder agreement, which is that it wasn't just an 0:16:53.720 --> 0:16:56.680 agreement on the shareholders, but now that company was a 0:16:56.840 --> 0:17:01.600 part of the agreement, and the company also or its 0:17:01.680 --> 0:17:06.960 board had duties themselves for actions that boards usually do, 0:17:07.160 --> 0:17:09.880 like whether they're going to pursue financing or a new 0:17:09.920 --> 0:17:13.959 business opportunity or an m and a transaction, or issuing 0:17:14.000 --> 0:17:16.880 new stock or dividends and so forth, and so these 0:17:16.960 --> 0:17:20.720 gen Z agreements often would give shareholders or more often 0:17:20.960 --> 0:17:25.320 just a select group of shareholders control or veto power 0:17:25.440 --> 0:17:28.639 over whether that happened. So that's a little bit different 0:17:28.640 --> 0:17:30.960 of a model than just shareholders saying we're going to 0:17:31.040 --> 0:17:34.280 agree to coordinate with each other in doing things that 0:17:34.400 --> 0:17:39.240 shareholders usually do. Now the companies involved, and particularly what 0:17:39.280 --> 0:17:42.080 the board of the company does, is involved, and that 0:17:42.160 --> 0:17:45.960 creates attention. It puts these new age sort of shareholder 0:17:46.000 --> 0:17:50.119 agreements on a collision course with traditional Delaware law, and 0:17:50.200 --> 0:17:53.159 Delaware law is sort of the standard bearer in corporate 0:17:53.200 --> 0:17:55.719 law and has been for the last century, even though 0:17:55.760 --> 0:17:58.800 it's under a little bit of strain recently. And it 0:17:58.920 --> 0:18:02.960 basically puts forth a model of how companies, at least 0:18:02.960 --> 0:18:05.679 as a default matter, are going to be governed, and 0:18:05.960 --> 0:18:08.120 it's going to be centralized through the board of directors. 0:18:08.280 --> 0:18:10.480 The board of directors is going to have sort of 0:18:10.520 --> 0:18:14.240 centralized authority and duties to act on behalf of the company. 0:18:14.640 --> 0:18:18.560 And how or why did Delaware get to this point. 0:18:19.040 --> 0:18:22.320 Now, there's a reason that Delaware did that. It's long 0:18:22.440 --> 0:18:25.960 viewed itself as what's known as a contractarian state, which 0:18:26.000 --> 0:18:27.879 just means if companies want to set up, you know, 0:18:27.960 --> 0:18:32.160 some sort of tailored governance system for themselves, Delaware will 0:18:32.240 --> 0:18:35.200 let them do it. And in fact, you almost views 0:18:35.320 --> 0:18:39.480 these various governance agreements as a bundle of contracts between 0:18:39.480 --> 0:18:42.720 the companies. But corporations are complex. They have a bunch 0:18:42.720 --> 0:18:46.200 of different interests, not just stockholders and managers, but employees 0:18:46.240 --> 0:18:49.520 and creditors and suppliers and customers, and so it would 0:18:49.600 --> 0:18:52.199 invite havoc. Just to say, let's have a free for 0:18:52.280 --> 0:18:55.600 all of everyone entering contracts with one another. It would 0:18:55.640 --> 0:18:58.399 just be a complete mess because the contracts might not 0:18:58.480 --> 0:19:01.520 even you know, be consistent with one another. So traditionally, 0:19:01.640 --> 0:19:06.800 the Delaware approach has basically sort of mediated this by saying, 0:19:07.119 --> 0:19:08.840 we're going to put the board at the center of 0:19:08.880 --> 0:19:12.640 all things, and there's a hierarchy of contracts that are 0:19:12.720 --> 0:19:15.240 going to be used. At the top of that hierarchy 0:19:15.280 --> 0:19:17.520 is something known as the corporate charter, it's almost like 0:19:17.520 --> 0:19:20.760 the constitution of a company. Then below that is kind 0:19:20.760 --> 0:19:23.640 of another set of documents called bylaws, and then sort 0:19:23.640 --> 0:19:26.240 of contracts and board resolutions are at the end. And 0:19:26.280 --> 0:19:28.840 so if you wanted to change your company in a 0:19:28.880 --> 0:19:32.159 way that's a little different than the background rules of 0:19:32.200 --> 0:19:35.119 Delaware would lay out, you could do it for the 0:19:35.160 --> 0:19:37.520 most part, but you'd have to make sure you did 0:19:37.560 --> 0:19:41.760 it through an authoritative document, one one of these high 0:19:41.760 --> 0:19:45.080 in the hierarchy documents like the charter. And that's how 0:19:45.080 --> 0:19:49.360 this collision occurred because once parties started to enter into 0:19:49.680 --> 0:19:54.119 these gen Z stockholder agreements not just between shareholders, but 0:19:54.200 --> 0:19:58.280 also had implications for the board's power, there was kind 0:19:58.320 --> 0:20:01.399 of a looming armageddon between what was going to win 0:20:01.480 --> 0:20:05.120 out this traditional hierarchy of hey, now the charter controls 0:20:05.119 --> 0:20:09.760 everything versus these contracts that are entered into between maybe 0:20:09.800 --> 0:20:12.640 just a couple of shareholders and the board, or maybe 0:20:12.680 --> 0:20:15.680 someone who's thinking about becoming a shareholder on board, they 0:20:15.720 --> 0:20:19.320 may have precedence over those traditional powers of what boards do. 0:20:19.680 --> 0:20:23.080 And so that is essentially the breach that this new 0:20:23.200 --> 0:20:26.520 statute dives into, and it ends up putting a pretty 0:20:26.600 --> 0:20:29.960 strong thumb on the scale on behalf of stockholder agreements, 0:20:30.000 --> 0:20:33.960 basically saying, even if they are inconsistent with the charter, 0:20:34.560 --> 0:20:37.720 for the most part, they're going to have effectiveness and 0:20:37.920 --> 0:20:41.880 enforcement power inside Delaware Corporation. And that's what I think 0:20:41.880 --> 0:20:44.200 some people are trying to figure out, Well, how far 0:20:44.280 --> 0:20:45.080 is that going to reach? 0:20:45.600 --> 0:20:49.280 Was this done to try to tamp down on litigation? 0:20:49.840 --> 0:20:52.240 Well, maybe or maybe not. Certainly, in the first instance, 0:20:52.320 --> 0:20:55.320 it appears that it probably was because you know, there 0:20:55.400 --> 0:20:58.080 was a case that had come out that had been 0:20:58.359 --> 0:21:01.000 authored by Vice Chancellor Laster, was one of the well 0:21:01.080 --> 0:21:03.840 known judges on the Delaware Court, and it dealt with 0:21:03.880 --> 0:21:07.040 a particular company called the Molus Corporation that had its 0:21:07.040 --> 0:21:10.040 founder as what was one of its big shareholders, and 0:21:10.240 --> 0:21:13.119 he had entered into an agreement with the company that 0:21:13.200 --> 0:21:15.560 gave him the good part of twenty different sort of 0:21:15.640 --> 0:21:18.639 veto and control rights over things that boards usually do, 0:21:18.760 --> 0:21:21.679 but did it through a contract. And the chance Re 0:21:21.760 --> 0:21:24.840 Court judge, by chance Hi Laster basically said, look, you 0:21:24.960 --> 0:21:28.080 can probably do this stuff, but doing it through a 0:21:28.119 --> 0:21:31.080 side contract and not doing it through the charter is 0:21:31.119 --> 0:21:35.040 inconsistent with Delaware law. And these provisions are going to 0:21:35.040 --> 0:21:37.439 be invalid. He held them to be invalid if they 0:21:37.520 --> 0:21:41.720 weren't included in the charter, that constitution of the company. 0:21:42.040 --> 0:21:46.280 That this created all kinds of havoc because over time, 0:21:46.560 --> 0:21:50.880 people had gotten so comfortable with stockholder agreements and they had, 0:21:50.960 --> 0:21:53.359 you know, essentially conjectured that, yeah, these are going to 0:21:53.359 --> 0:21:56.679 be totally fine, and so they kind of ended up 0:21:56.680 --> 0:21:59.160 sort of feeding the beast of creating more and more 0:21:59.160 --> 0:22:02.160 of them, and a lot of transactional attorneys had basically 0:22:02.200 --> 0:22:05.879 assumed that they were going to be perfectly enforceable. I 0:22:05.880 --> 0:22:08.320 think when you step back a little bit, the tension 0:22:08.400 --> 0:22:11.879 between the traditional way that Delaware law lays out the 0:22:11.960 --> 0:22:15.800 hierarchy of charters and by laws and contracts made this 0:22:16.040 --> 0:22:19.680 armageddon point almost inevitable. But by this point, you know, 0:22:19.720 --> 0:22:23.240 a bunch of transactional attorneys had already advised, you know, hundreds, 0:22:23.280 --> 0:22:25.040 if not thousands of their clients, Yeah, you can go 0:22:25.080 --> 0:22:27.080 ahead and do this, and I'll all work one up 0:22:27.119 --> 0:22:29.680 for you. So I think it became a little bit 0:22:29.680 --> 0:22:32.840 of an affraded point for many the transactional attorneys who 0:22:32.840 --> 0:22:36.760 had sort of put their name behind these stockholder agreements, 0:22:36.800 --> 0:22:41.359 and so the statute ended up doing something that is 0:22:41.400 --> 0:22:43.879 a little bit unusual. There have been cases in the 0:22:43.920 --> 0:22:48.000 past where Delaware has changed its law in response to 0:22:48.520 --> 0:22:51.679 a case that's come out, but usually you wait until 0:22:51.720 --> 0:22:53.600 the case goes all the way up to the Delaware 0:22:53.600 --> 0:22:57.560