WEBVTT - Trump's Business Empire at Risk 0:00:03.200 --> 0:00:08.000 This is Bloomberg Law with June Brusso from Bloomberg Radio. 0:00:10.520 --> 0:00:15.360 It's a stunning, perhaps unprecedented decision that puts Donald Trump's 0:00:15.360 --> 0:00:19.360 business empire at risk of dissolution and strips control of 0:00:19.480 --> 0:00:23.200 key properties from the former president. Judge Arthur and Goren 0:00:23.280 --> 0:00:27.160 ruled that Trump repeatedly committed fraud by inflating the value 0:00:27.200 --> 0:00:30.840 of his assets by billions of dollars on financial records 0:00:30.840 --> 0:00:35.760 submitted to banks and insurers. He wrote scathingly about Trump's defenses, 0:00:35.880 --> 0:00:39.720 saying they were a fantasy, not reality. The documents do 0:00:39.840 --> 0:00:42.600 not say what they say. There is no such thing 0:00:42.760 --> 0:00:46.720 as objective value. Essentially, the court should not believe its 0:00:46.760 --> 0:00:50.520 own eyes, even quoting a famous line from the Marx 0:00:50.560 --> 0:00:58.200 Brothers Movieyes. The judge concluded by saying that New York 0:00:58.240 --> 0:01:02.160 Attorney General Letitia James is now entitled to a court 0:01:02.280 --> 0:01:07.240 order dissolving any certificates issue to Trump's LLC's, putting his 0:01:07.319 --> 0:01:11.839 ability to continue operating his sprawling Manhattan based company at risk. 0:01:12.120 --> 0:01:15.400 Joining me is former federal prosecutor Robert Mintz, a partner 0:01:15.480 --> 0:01:23.120 Maccarter and English. Would you say this decision is unprecedented, rare, uncommon, 0:01:23.319 --> 0:01:25.200 how would you describe it? 0:01:25.200 --> 0:01:28.360 It certainly is a rare decision. There is not a 0:01:28.400 --> 0:01:30.200 lot of history in the New York State of a 0:01:30.360 --> 0:01:36.319 judge actually dissolving a company under these circumstances. Usually companies 0:01:36.720 --> 0:01:40.280 tivily die in bankruptcy cases. So this is something where 0:01:40.280 --> 0:01:42.280 there is not a lot of precedent, and it has 0:01:42.400 --> 0:01:45.920 spawned a lot of confusion, not only by people who 0:01:45.959 --> 0:01:48.520 are looking at this case from the outside, but even 0:01:48.560 --> 0:01:51.160 by the lawyers who are involved in the case. There 0:01:51.160 --> 0:01:53.640 are a lot of questions as to exactly how the 0:01:53.640 --> 0:01:56.000 court is going to try to implement this decision. 0:01:56.400 --> 0:01:59.480 Let's talk about the substance of the decision. Tell us 0:01:59.560 --> 0:02:02.640 why the judge decided that Trump had committed fraud. 0:02:03.200 --> 0:02:06.880 The essence of the judge's decision is that Donald Trump 0:02:07.520 --> 0:02:11.680 and his two oldest sons and his businesses orchestrated what 0:02:11.720 --> 0:02:15.880 the judge called a persistent and repeated fraud in which 0:02:15.880 --> 0:02:20.120 they vastly exaggerated the extent of the former president's wealth 0:02:20.560 --> 0:02:24.320 to procure favorable loans. And they did that in order 0:02:24.400 --> 0:02:28.959 to try to benefit the financially these companies and get 0:02:28.960 --> 0:02:32.560 these very favorable loans based upon collateral ements that the 0:02:32.639 --> 0:02:34.800 judge found was highly inflated. 0:02:35.280 --> 0:02:40.560 Trump's penthouse in Manhattan that's been used as an example 0:02:40.680 --> 0:02:42.880 of the exaggeration or inflation. 0:02:43.560 --> 0:02:47.359 In that case, the judge found that former President Trump 0:02:47.400 --> 0:02:51.960 had engaged in fraud by repeatedly claiming that his penthouse 0:02:52.040 --> 0:02:56.880 at Trump Power, which according to most records, is slightly 0:02:57.000 --> 0:03:00.640 under eleven thousand square feet. According to the judge, former 0:03:00.680 --> 0:03:04.320 President Trump and his businesses would assert that the apartment 0:03:04.400 --> 0:03:07.840 is nearly three times bigger than it was in reality. 0:03:08.120 --> 0:03:11.280 The judge said that Trump's annual statements of financial condition 0:03:11.560 --> 0:03:16.200 used this false square footage to inflate its network by 0:03:16.240 --> 0:03:19.400 as much as two hundred and seven million dollars in 0:03:19.440 --> 0:03:22.240 twenty twelve, when Trump valued the penous that is staggering 0:03:22.280 --> 0:03:25.120 one hundred and eighty million dollars. According to the judge, 0:03:25.280 --> 0:03:28.040 no apartment sold in New York City had ever approached 0:03:28.080 --> 0:03:31.320 that price, and the judge essentially said that while there 0:03:31.320 --> 0:03:35.760 may be some subjectivity in terms of evaluating the square 0:03:35.800 --> 0:03:38.960 footage and the value of an apartment, this was on 0:03:39.080 --> 0:03:41.880 an order of magnitude that, in his mind, showed a 0:03:41.960 --> 0:03:46.480 clear attempt to simply inflate numbers and a knowing violation 0:03:46.640 --> 0:03:49.960 of the law, and the judge found that former President 0:03:49.960 --> 0:03:53.400 Trump had fraudulently inflated the value of this department to 0:03:53.480 --> 0:03:54.800 a staggering degree. 0:03:55.120 --> 0:03:59.240 The judge's tone was scathing. He wrote, at one point 0:03:59.560 --> 0:04:03.040 in defense tenants world rent, regulated apartments are worth the 0:04:03.080 --> 0:04:07.200 same as unregulated apartments. Restricted land is worth the same 0:04:07.240 --> 0:04:11.960 as unrestricted land. Restrictions can evaporate into thin air. And 0:04:11.960 --> 0:04:15.000 then he said that is a fantasy world, not the 0:04:15.000 --> 0:04:16.080 real world. 0:04:16.200 --> 0:04:19.479 Well, the judge was clearly incensed by the conduct here 0:04:19.760 --> 0:04:23.479 and did go through numerous examples of where he thought 0:04:23.600 --> 0:04:27.400 that the conduct was simply not tethered to reality. He 0:04:27.440 --> 0:04:30.960 even went so far as to sanction the lawyers for 0:04:31.080 --> 0:04:34.479 making some arguments on behalf of former President Trump on 0:04:34.520 --> 0:04:38.120 the Trump organization, arguments that he said had already been 0:04:38.400 --> 0:04:43.000 discredited and were simply frivolous. That the judge clearly was 0:04:43.080 --> 0:04:45.720 not at all accepting of the defenses that were being 0:04:45.720 --> 0:04:49.040 put forward by the Trump organization, and wrote a very 0:04:49.160 --> 0:04:53.760 very aggressive decision here, going through in great detail examples 0:04:53.800 --> 0:04:57.039 of what he felt was conduct that was clearly fraudulent. 0:04:57.680 --> 0:05:02.560 Bob that seventy five hundred dollars sanctioned for Trump's lawyers 0:05:03.080 --> 0:05:07.279 for making arguments he'd previously rejected. I mean, don't lawyers 0:05:07.440 --> 0:05:11.240 repeat arguments that have lost in court all the time? 0:05:11.680 --> 0:05:14.600 Yeah, that is a bit of an unusual ruling. Usually 0:05:14.720 --> 0:05:18.560 judges do give defense lawyers latitude to make arguments, which 0:05:18.560 --> 0:05:21.680 they do repeatedly. Sometimes, if a lawyer finds that they 0:05:21.720 --> 0:05:24.560 make an argument that's unsuccessful, they try to make it 0:05:24.600 --> 0:05:27.040 in a slightly different way to give the judge another 0:05:27.080 --> 0:05:30.640 opportunity to perhaps rule differently, so to thanks to them 0:05:30.640 --> 0:05:33.240 for making an argument simply on the basis that they 0:05:33.279 --> 0:05:35.520 had previously made it to something that you do not 0:05:35.640 --> 0:05:36.640 see very often. 0:05:36.880 --> 0:05:38.080 What was the defense. 0:05:38.800 --> 0:05:41.440 The heart of the defense by the Trump organization and 0:05:41.520 --> 0:05:45.679 by former President Trump's lawyers was that the banks in question, 0:05:45.839 --> 0:05:48.080 including Deutsche Bank in this case, these are the banks 0:05:48.080 --> 0:05:53.040 that made the loans allegedly based upon these inflated valuations 0:05:53.040 --> 0:05:55.920 of the collateral. The defense argued that these banks were 0:05:55.960 --> 0:05:59.160 not defrauded at all, because all of the loans were 0:05:59.200 --> 0:06:01.599 ultimately repaid and the banks in fact made quite a 0:06:01.600 --> 0:06:04.520 bit of money on those loans. The judge did not 0:06:04.680 --> 0:06:07.640 buy that argument, saying that it's not fair to suggest 0:06:07.680 --> 0:06:10.600 that no harm had been done to these banks when 0:06:10.640 --> 0:06:13.800 they loan money to the Trump organization. The judge pointed 0:06:13.839 --> 0:06:18.200 out that the first principle of loan accounting is that 0:06:18.279 --> 0:06:22.000 as the risk rises, so to the interest rates. So essentially, 0:06:22.000 --> 0:06:24.240 what the judge was saying is that while in this 0:06:24.400 --> 0:06:27.200 case the loans were repaid and the banks in fact 0:06:27.240 --> 0:06:30.040 did make money on loaning money to the Trump organization, 0:06:30.440 --> 0:06:33.360 had they known what the real value of the collateral was, 0:06:33.720 --> 0:06:35.919 they would have raised the interest rates and the banks 0:06:35.960 --> 0:06:38.640 would have made even more money. So that's where they 0:06:38.640 --> 0:06:41.800 were victimized here, and the judge's eyes, the banks were 0:06:41.839 --> 0:06:44.520 misled in order to make a loan at a lower 0:06:44.600 --> 0:06:47.000 rate than they should have made it if the true 0:06:47.040 --> 0:06:49.039 value of the collateral were known to them at the 0:06:49.040 --> 0:06:51.400 time that the loan was extended to the Trump organization. 0:06:51.760 --> 0:06:55.799 A lawyer for Trump, Christopher Keyes, said that he would 0:06:55.839 --> 0:06:59.120 likely appeal the decision that's expected, which he called out 0:06:59.279 --> 0:07:03.359 rageous and completely disconnected from the facts and governing law. 0:07:03.640 --> 0:07:06.599 He said the judge ignored an early appeals court ruling 0:07:06.680 --> 0:07:10.840 and also ignored basic legal accounting and business principles. Do 0:07:10.840 --> 0:07:12.440 you think they have a good chance on appeal? 0:07:13.000 --> 0:07:15.600 Well, this is an aggressive decision, so it's going to 0:07:15.640 --> 0:07:18.200 be interesting to see what the appeals court does. One 0:07:18.200 --> 0:07:20.280 thing we can know for sure that once they file 0:07:20.360 --> 0:07:23.600 us appeal, it will likely stay the judges ruling, which 0:07:23.640 --> 0:07:26.320 means that nothing will really be done for quite a while, 0:07:26.400 --> 0:07:29.040 could be even years, while the appeals court takes this 0:07:29.160 --> 0:07:32.800 decision up. In the meantime, the judges' decision does require 0:07:32.840 --> 0:07:35.680 the appointment of a receiver, so we'll see whether that 0:07:35.760 --> 0:07:37.680 proceeds even while the appeal is pending. 0:07:38.320 --> 0:07:42.200 So describe the remedy that the judge has ordered or 0:07:42.240 --> 0:07:44.240 the punishment. I'm not sure what we call it. 0:07:44.640 --> 0:07:48.840 Well, the judges sweeping decision ordered that several of Trump's 0:07:48.840 --> 0:07:52.480 businesses be dissolved, and he ordered that a receiver be 0:07:52.680 --> 0:07:56.720 appointed to help in the dissolution of these entities. A 0:07:56.720 --> 0:07:59.840 lot of the decision is not entirely clear because the 0:08:00.000 --> 0:08:04.000 Trump organization itself is really just a shell organization, and 0:08:04.080 --> 0:08:09.280 it's composed of about five hundred various LLC's, all holding 0:08:09.320 --> 0:08:13.280 different properties and serving different purposes, and so exactly what 0:08:13.320 --> 0:08:15.720 the impact of the judge is ruling on these various 0:08:15.920 --> 0:08:20.760 LLC's is unclear. The Trump organization's lawyers, for example, raised 0:08:20.800 --> 0:08:24.880 the fact that former President Trump's two sons, Donald Junior 0:08:24.920 --> 0:08:28.280 and Eric live in homes which are in fact owned 0:08:28.360 --> 0:08:31.920 by these LLC's, and so the question was do they 0:08:31.920 --> 0:08:34.440 have to be removed from the homes? Do those homes 0:08:34.480 --> 0:08:37.920 have to be liquidated? They also asked whether mister Trump 0:08:37.920 --> 0:08:41.600 would have to sell assets including Trump Tower and forty 0:08:41.640 --> 0:08:45.040 Wall Street, which is a downtown commercial property, or whether 0:08:45.080 --> 0:08:48.480 those properties could be managed by an independent receiver rather 0:08:48.600 --> 0:08:51.520 than being dissolved and have to be sold. So there's 0:08:51.559 --> 0:08:54.839 lots of unanswered questions here as to how this order 0:08:54.880 --> 0:08:57.960 will be implemented, and even the judge acknowledged that he 0:08:58.040 --> 0:09:00.880 was not entirely certain as to how his order would 0:09:00.880 --> 0:09:03.320 be implemented and wanted to take more time in order 0:09:03.360 --> 0:09:05.720 to evaluate the implementation of its own order. 0:09:06.480 --> 0:09:10.560 Doesn't that point to a successful issue on appeal for Trump? 0:09:10.559 --> 0:09:14.920 If the judge himself, if this order is so novel 0:09:15.160 --> 0:09:17.520 that the judge himself doesn't know how it's going to 0:09:17.520 --> 0:09:21.040 be implemented, that the lawyers are confused. There are more 0:09:21.160 --> 0:09:22.559 questions here than answers. 0:09:22.760 --> 0:09:24.920 Yeah, there are a lot of unanswered questions. I mean, 0:09:24.960 --> 0:09:28.560 I think it's clear from the judges ruling that he 0:09:28.760 --> 0:09:32.480 is not intending or ordering that mister Trump's company be 0:09:32.640 --> 0:09:35.680 dissolved completely. But what it does do is it affects 0:09:35.760 --> 0:09:39.760 these LLC's, and by taking away the business certificates, it 0:09:39.800 --> 0:09:43.160 will make it impossible for those various LLC's to operate, 0:09:43.360 --> 0:09:46.679 which ultimately can have a crippling effect on the Trump organization. 0:09:47.080 --> 0:09:50.760 So this is a very significant decision. It's highly controversial. 0:09:51.000 --> 0:09:53.320 It's going up on appeal, and we'll have to see 0:09:53.320 --> 0:09:55.599 what the appeals court does here. I think there is 0:09:55.640 --> 0:09:59.280 certainly a possibility that the appeals court may overturn this decision, 0:09:59.480 --> 0:10:02.480 just because it's so unprecedented and because the effects of 0:10:02.520 --> 0:10:06.240 this decision are so sweeping on a major organization like 0:10:06.280 --> 0:10:09.320 the Trump organization, which employs hundreds of people on holds 0:10:09.360 --> 0:10:12.480 millions and millions of dollars in real estate, not only 0:10:12.520 --> 0:10:14.440 in New York State but also around the world. 0:10:14.880 --> 0:10:18.120 Apparently trial is starting next week. What's left to try. 0:10:19.000 --> 0:10:22.000 The essence of the judge's decision was that no trial 0:10:22.120 --> 0:10:25.960 was needed to determine that the Trump organization had fraudulently 0:10:26.040 --> 0:10:30.320 secured favorable terms on loans and insurance deals. But what 0:10:30.559 --> 0:10:33.640 exactly is left for the trial is not entirely clear. 0:10:34.000 --> 0:10:37.000 Even the state's lawyers had not worked out what was 0:10:37.080 --> 0:10:39.560 needed to go to trial at this point. But what 0:10:39.600 --> 0:10:41.920 we do know is that the judge will have to 0:10:41.960 --> 0:10:44.960 determine the extent of the fine he's going to order. 0:10:45.320 --> 0:10:47.480 The Attorney General has asked for as much as two 0:10:47.559 --> 0:10:50.720 hundred and fifty million dollars. The judge could also decide 0:10:50.760 --> 0:10:53.520 a trial whether to borrow the former president and his 0:10:53.600 --> 0:10:56.440 sons from running a business in the state. Ever again, 0:10:56.760 --> 0:10:58.960 those seem to be the issues that are remaining, but 0:10:59.000 --> 0:11:01.840 that will have to be worth out by the state lawyers, 0:11:01.840 --> 0:11:03.280 the defense, and the judge. 0:11:03.480 --> 0:11:07.320 Putting aside the financial consequences of this decision. For Trump, 0:11:07.720 --> 0:11:12.319 this attacks his persona, his brand, you know, being the 0:11:12.360 --> 0:11:15.800 billionaire real estate magnet. It's what he's all about. 0:11:16.520 --> 0:11:20.400 In pre trial hearings before this ruling, one of former 0:11:20.480 --> 0:11:24.040 president trump lawyers told the judge that former President Trump 0:11:24.120 --> 0:11:26.880 is an investment genius and probably one of the most 0:11:26.920 --> 0:11:31.319 successful real estate developers in the country. Clearly, this judge 0:11:31.320 --> 0:11:36.240 disagreed and actually said that he's a genius only in 0:11:36.280 --> 0:11:38.559 a fantasy world. So one of the things that's really 0:11:38.600 --> 0:11:42.240 an issue here is the Trump brand, is the perception 0:11:42.440 --> 0:11:45.560 of the Trump organization and the question of whether it 0:11:45.640 --> 0:11:49.760 is really one of the great successful real estate empires 0:11:49.800 --> 0:11:52.520 in Manhattan and even in the United States and around 0:11:52.559 --> 0:11:55.760 the world, or whether it was built on a basis 0:11:55.880 --> 0:11:59.320 of fraud and fraudulent statements, and in fact, as the 0:11:59.400 --> 0:12:03.600 judge said, the empire is really simply a fantasy based 0:12:03.679 --> 0:12:08.000 upon false information that was provided to give favorable loans 0:12:08.000 --> 0:12:11.240 to which the Trump organization was ultimately not entitled. 0:12:11.440 --> 0:12:14.400 It's also interesting that everyone's been paying attention to the 0:12:14.480 --> 0:12:19.120 criminal cases against Trump, but significant punishment was meted out 0:12:19.160 --> 0:12:20.800 here in a civil case. 0:12:21.559 --> 0:12:24.880 In the array of criminal and civil charges that former 0:12:24.920 --> 0:12:28.319 President Trump is facing, this is the first actual penalty 0:12:28.520 --> 0:12:30.880 that's been imposed upon him, and now we'll have to 0:12:30.920 --> 0:12:33.800 see whether it actually stands up on appeal, and we'll. 0:12:33.720 --> 0:12:36.800 See what happens at the trial next week. Thanks so much, Bob. 0:12:37.280 --> 0:12:41.240 That's former federal prosecutor Robert Mintz, a partner Maccarter and English. 0:12:41.559 --> 0:12:45.880 Coming up next, elon Musk's many lawsuits. I'm Jrean Grosso 0:12:45.920 --> 0:12:50.520 and you're listening to Bloomberg. Elon Musk's leadership at Twitter 0:12:50.559 --> 0:12:54.040 and Tesla is the subject of three major face offs 0:12:54.120 --> 0:12:57.320 coming up in the Delaware Chancery Court next month. It's 0:12:57.360 --> 0:13:00.280 been a year since Musk, after months of court room 0:13:00.320 --> 0:13:04.800 and social media drama, purchase Twitter now renamed as X 0:13:05.080 --> 0:13:08.560 for forty four billion dollars. That deal allowed him to 0:13:08.600 --> 0:13:12.319 avoid a trial in the country's premiere venue for corporate litigation. 0:13:12.880 --> 0:13:15.320 But October will be a busy month for Musk. In 0:13:15.360 --> 0:13:18.760 that Delaware court. He'll face suits from a stockholder and 0:13:18.880 --> 0:13:23.600 pension funds questioning his lavish Tesla pay package, and further 0:13:23.720 --> 0:13:26.960 legal fallout from his Twitter By joining me to sort 0:13:27.000 --> 0:13:30.320 it all out? Is business law expert Eric Talley, a 0:13:30.400 --> 0:13:34.520 professor Columbia Law School. Let's talk first about his record 0:13:34.559 --> 0:13:38.440 breaking pay package of fifty five billion dollars. 0:13:38.960 --> 0:13:41.640 Yeah, that's good work if you can get it, isn't it. 0:13:41.760 --> 0:13:43.800 I'm going to conjecture June that if either you or 0:13:43.840 --> 0:13:46.800 I had a fifty five billion dollar pay package, this 0:13:46.800 --> 0:13:48.199 call wouldn't be happening right now. 0:13:48.360 --> 0:13:50.320 You are definitely right on that one. 0:13:50.600 --> 0:13:52.840 So, yeah, this is an interesting case. It's a case 0:13:52.840 --> 0:13:55.800 that was brought years and years ago and was you know, 0:13:55.880 --> 0:13:59.480 essentially taken over by Chancellor McCormick. It ended up in 0:13:59.520 --> 0:14:03.600 a hearing some months ago. There definitely is a doctrine 0:14:03.640 --> 0:14:08.480 out there about, you know, fiduciary duties and whether exorbitant 0:14:08.559 --> 0:14:12.960 pay packages have the effect of breaching fiduciary duties, and 0:14:13.000 --> 0:14:16.720 this is sort of within that cluster of cases. The 0:14:16.840 --> 0:14:20.560 hard part about this is that, you know, in many respects, 0:14:20.680 --> 0:14:25.400 Elon Musk's compensation package, as it was fashioned back in 0:14:25.720 --> 0:14:29.440 you know, twenty seventeen or whatever, it was a lottery ticket, 0:14:29.680 --> 0:14:32.360 and who knew whether that lottery ticket was going to 0:14:32.400 --> 0:14:34.920 pay off and by how much it paid off? And 0:14:35.240 --> 0:14:38.040 you know, he essentially did the billionaire's version of hitting 0:14:38.080 --> 0:14:41.400 the powerball on this lottery ticket. It paid off almost 0:14:41.560 --> 0:14:44.800 to its maximal amount. And you know, I think part 0:14:44.840 --> 0:14:47.600 of the issue in the case, and probably what's going 0:14:47.680 --> 0:14:50.600 to feed into the opinion is, you know, to what 0:14:50.760 --> 0:14:55.520 extent should we or should we not use that sort 0:14:55.560 --> 0:14:59.520 of you know, twenty twenty hindsight to try to get 0:14:59.560 --> 0:15:01.760 a sense of whether everyone knew that this was going 0:15:01.840 --> 0:15:04.720 to be a a powerball ticket that paid off, or 0:15:05.000 --> 0:15:07.320 it really just turned out that, you know, the fortunes 0:15:07.360 --> 0:15:11.520 of Tesla outshine just about any conceivable picture that anyone 0:15:11.600 --> 0:15:14.800 would have painted at the time. Musk agreed to a 0:15:14.920 --> 0:15:18.400 lower fixed component of his salary for this lottery ticket 0:15:18.480 --> 0:15:21.560 version and it paid off. That's clearly the argument that 0:15:21.640 --> 0:15:24.680 Musk is going to make that in fact, incentive contracts 0:15:24.680 --> 0:15:27.200 are there for a reason this happened to hit the 0:15:27.200 --> 0:15:30.480 powerball lottery, but at the time there was no reason 0:15:30.560 --> 0:15:32.040 to expect that it would. 0:15:32.640 --> 0:15:36.000 Does it even factor in that they claim he's essentially 0:15:36.040 --> 0:15:40.360 a part time leader with other companies to run, strengthened 0:15:40.400 --> 0:15:42.040 by the fact that he seems to be spending a 0:15:42.040 --> 0:15:43.760 lot of time at X. 0:15:44.640 --> 0:15:46.680 He kind of has to now, right, because that's a 0:15:46.720 --> 0:15:50.760 particularly thorny situation he's in having closed that deal. Here's 0:15:50.800 --> 0:15:54.880 the interesting thing about this compensation litigation or dispute is 0:15:54.920 --> 0:15:59.760 that there have effectively been two defenses that Tesla has 0:15:59.800 --> 0:16:03.160 made to try to justify this package. One is the 0:16:03.160 --> 0:16:05.280 lottery ticket version. Right that we didn't know at the 0:16:05.280 --> 0:16:07.360 time whether this is going to pay off big or 0:16:07.360 --> 0:16:08.880 not pay off at all, and if it went the 0:16:08.920 --> 0:16:12.000 other direction, then Musk ends up walking away with a 0:16:12.000 --> 0:16:14.800 pretty minuscule salary. So that's one part of it. The 0:16:14.920 --> 0:16:17.800 other part of it, though, Tesla's argument is that they 0:16:18.200 --> 0:16:20.360 kind of the board had to give him a high 0:16:20.400 --> 0:16:25.000 powered incentive contract to keep his attention because he's sort 0:16:25.000 --> 0:16:28.480 of as distractable as a six month old labrador puppy, 0:16:28.600 --> 0:16:31.000 and if you don't keep his attention on a really 0:16:31.040 --> 0:16:33.760 shiny bouncing ball, then he's going to run off and 0:16:33.840 --> 0:16:37.080 do other things. Well, they gave him that compensation contract. 0:16:37.280 --> 0:16:39.680 It was a big one. He ended up running off 0:16:39.720 --> 0:16:43.800 and getting distracted by SpaceX and Twitter and the boring 0:16:43.880 --> 0:16:46.680 company and so forth. I guess I'm trying to figure 0:16:46.680 --> 0:16:48.680 out which way that cuts. Does that mean that they 0:16:48.680 --> 0:16:51.080 really should have given a bigger package to keep his 0:16:51.120 --> 0:16:54.240 attention on things or not? So it's hard to tell 0:16:54.280 --> 0:16:56.920 exactly which way that cuts. The fact that he is 0:16:56.960 --> 0:17:01.240 so distractable almost feeds into the argument that it would 0:17:01.280 --> 0:17:04.359 make sense to have a high powered incentive contract to 0:17:04.480 --> 0:17:08.000 keep his eyes focused on the fortunes of Tesla and 0:17:08.040 --> 0:17:12.439 not to get too waylaid by other shiny lights and 0:17:12.480 --> 0:17:13.280 bouncing balls. 0:17:13.880 --> 0:17:19.320 How much does Musk's testimony during that November twenty twenty 0:17:19.320 --> 0:17:22.560 two trial that he played no part in the board's decision, 0:17:23.119 --> 0:17:25.679 So is the independence of the boarding coming to this 0:17:25.840 --> 0:17:27.520 decision important. 0:17:27.680 --> 0:17:29.760 Yeah, it's a big deal. It's it's kind of an 0:17:29.840 --> 0:17:33.880 interesting situation right now with Twitter because just last year, 0:17:34.280 --> 0:17:37.679 a totally different case involved Tesla and its decision to 0:17:37.840 --> 0:17:42.080 purchase a very struggling solar energy company called Solar City. 0:17:42.600 --> 0:17:47.440 That case ended up resulting in an Elon Musk win, 0:17:48.119 --> 0:17:50.679 but it did so in an odd way. The judge 0:17:50.680 --> 0:17:53.320 in that case, you know, everyone sort of expected the 0:17:53.400 --> 0:17:55.879 judge in that case was going to have to decide 0:17:56.000 --> 0:17:59.000 whether he was going to declare that Elon Musk was 0:17:59.040 --> 0:18:04.399 a controlling shareholder of Tesla, and if that was true 0:18:04.440 --> 0:18:06.439 and the only one owns about twenty one twenty two 0:18:06.480 --> 0:18:08.960 percent of the stock or did at the time, if 0:18:09.000 --> 0:18:12.639 that is true, that he's deemed to be a sufficiently 0:18:12.760 --> 0:18:16.479 large stockholder, that he's a controller, that puts a larger 0:18:16.560 --> 0:18:20.560 onus of fiduciary obligation on him. And it also calls 0:18:20.560 --> 0:18:23.359 into question whether he might sort of just dominate and 0:18:23.400 --> 0:18:26.000 control everyone on the board, and therefore you can't just 0:18:26.680 --> 0:18:30.159 trust the board to be making independent judgments. So a 0:18:30.160 --> 0:18:32.600 lot of people thought that in that Solar City case, 0:18:32.920 --> 0:18:36.919 we would learn answers to whether Elon Musk was a 0:18:36.960 --> 0:18:40.120 controller or not. But the judge in that case, Vice 0:18:40.200 --> 0:18:43.240 Chancellor Slights, who has tens left the bench. He crafted 0:18:43.320 --> 0:18:45.919 kind of an interesting opinion that essentially was able to 0:18:46.040 --> 0:18:48.679 dodge that. He said, I'm just going to pretend like 0:18:49.119 --> 0:18:52.680 Elon Musk is a controller, but I'm still now going 0:18:52.760 --> 0:18:55.439 to conclude that the way that they did this solar 0:18:55.480 --> 0:19:00.000 city deal satisfied even the heightened requirements that I would 0:19:00.080 --> 0:19:03.480 otherwise impose on a controller. And by doing that, he 0:19:03.560 --> 0:19:06.520 basically said, look, I'm subjecting Elon Musk, at least for 0:19:06.640 --> 0:19:09.760 argument's sake, to the most rigorous test that we have 0:19:09.880 --> 0:19:12.560 in Delaware, and he passes, and therefore I don't have 0:19:12.640 --> 0:19:15.199 to decide whether he's a controller or not, because he 0:19:15.240 --> 0:19:18.440 would win even if he were a controller. Now that 0:19:18.640 --> 0:19:23.200 left open this question that survives to this case about well, 0:19:23.240 --> 0:19:25.800 what is his status? Does he own enough stock that 0:19:25.880 --> 0:19:28.320 he can pretty much, you know, influence or has a 0:19:28.320 --> 0:19:31.920 good chance of influencing the entirety of the board, And therefore, 0:19:32.080 --> 0:19:34.000 in this case is going to have to be put 0:19:34.080 --> 0:19:36.840 under much more of a microscope, and maybe the board's 0:19:36.920 --> 0:19:40.760 judgment about this compensation package shouldn't be trusted as much, 0:19:40.800 --> 0:19:43.159 and so there will be kind of an interesting question 0:19:43.520 --> 0:19:46.680 about whether Chancellor McCormick in this case, you know, pursues 0:19:46.760 --> 0:19:51.600 the same strategy as Vice Chancellor's light, deciding not to 0:19:51.720 --> 0:19:55.679 decide whether he's a controlling stockholder and saying, assuming that 0:19:55.760 --> 0:20:00.440 he is, this still is okay under Delaware law. Now 0:20:01.000 --> 0:20:05.240 if in her opinion, ah boy, whether he's a controller 0:20:05.320 --> 0:20:07.600 or not really matters for the outcome of this case, 0:20:07.640 --> 0:20:10.919 because if he is a controlling stockholder, then he hasn't 0:20:11.000 --> 0:20:14.160 met his burden to defend this thing. But if he's 0:20:14.160 --> 0:20:16.560 not a controlling stockholder, he gets a lot more different. 0:20:16.800 --> 0:20:18.720 If she decides that that's the case, she's going to 0:20:18.800 --> 0:20:21.119 have to make a call on whether having twenty one 0:20:21.200 --> 0:20:24.320 twenty two percent of the stock of Tesla is enough 0:20:24.680 --> 0:20:27.520 to make him a controlling shareholder. I think a lot 0:20:27.520 --> 0:20:29.679 of us that teach in this area are sort of 0:20:29.680 --> 0:20:32.920 hoping that we'll hear something along those lines, but it's 0:20:32.960 --> 0:20:35.600 not clear to me which way it goes. Because Tesla 0:20:35.720 --> 0:20:39.240 did put up, you know, I think some pretty flashy 0:20:39.280 --> 0:20:42.240 testimony about, you know, the idea that this was the 0:20:42.280 --> 0:20:44.879 type of compensation package that's like a lottery ticket, and 0:20:44.960 --> 0:20:47.679 this lottery ticket just happened to pay off, but there 0:20:47.680 --> 0:20:49.600 are all kinds of scenarios in which it might not. 0:20:50.359 --> 0:20:53.879 If it's just a regular CEO, there's no question about 0:20:53.880 --> 0:20:58.080 controlling stock. Are there parameters that the judges used to 0:20:58.200 --> 0:21:01.760 determine whether a CEO's pay is fair or not? 0:21:02.320 --> 0:21:04.119 Yeah, there are. There are a couple things that are 0:21:04.160 --> 0:21:06.439 an issue here. So one is, even if it's just 0:21:06.440 --> 0:21:09.800 the CEO, the CEO still on a director by director 0:21:09.840 --> 0:21:14.480 basis may have extra pull and extra influence, and that's 0:21:14.520 --> 0:21:17.680 something that you have to be mindful of when setting compensation. 0:21:17.960 --> 0:21:20.720 But to the extent that there are directors who are 0:21:20.760 --> 0:21:25.040 sufficiently independent of mister Musk that they can exercise their 0:21:25.080 --> 0:21:27.840 own judgment, and if he's just an ordinary CEO, then 0:21:27.920 --> 0:21:30.560 they're kind of the presumption goes in that direction, then 0:21:30.920 --> 0:21:37.120 their disinterested assessment of the propriety of this compensation package, 0:21:37.280 --> 0:21:41.360 and then their vote amongst the disinterested directors to permit it. 0:21:41.400 --> 0:21:44.840 Gets a lot of deference under Delaware law that in 0:21:44.960 --> 0:21:48.240 order to challenge that, it basically is protected by something 0:21:48.240 --> 0:21:51.119 known as the business judgment rule. Which isn't quite a 0:21:51.240 --> 0:21:54.160 conclusion that Tesla's going to win this case, but it's 0:21:54.480 --> 0:21:57.200 pretty close to that. It's basically saying, boy, you better 0:21:57.240 --> 0:22:00.400 be able to provide us evidence that these directors, even 0:22:00.400 --> 0:22:04.399 though they weren't influenced or dominated or controlled by mister Musk, 0:22:04.720 --> 0:22:07.119 they basically were just phoning it in and they didn't 0:22:07.119 --> 0:22:11.760 really care about the welfare of Tesla or Tesla's stockholders. 0:22:11.800 --> 0:22:14.440 And you know, that's a hard boundary to get over. 0:22:14.520 --> 0:22:18.480 It was famously tested almost a quarter century ago involving 0:22:18.520 --> 0:22:21.320 the then CEO of Disney, Michael Ovitz, who was let 0:22:21.359 --> 0:22:23.800 go and handed one hundred and sixty million dollars on 0:22:23.880 --> 0:22:26.879 his way out the door, and stockholders challenged it. But 0:22:27.240 --> 0:22:30.480 because the board of directors and the compensation committee was 0:22:30.520 --> 0:22:34.800 deemed to be sufficiently independent of him, the court basically said, yeah, 0:22:35.000 --> 0:22:37.560 this doesn't rise to that level of them just basically 0:22:37.600 --> 0:22:40.639 being indifferent about the value to Disney, and there was 0:22:40.680 --> 0:22:43.160 a rationale for what they did. And so the stockholders 0:22:43.160 --> 0:22:46.119