Corporate Governance

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On January 30, 2024, the Delaware Court of Chancery struck down Tesla CEO Elon Musk’s $55 billion performance-based stock option package, ruling that Tesla’s directors did not satisfy the stringent “entire fairness” standard in approving his compensation. This case comes on the heels of a $735 million settlement in which Tesla directors disgorged previously-received compensation following shareholder claims of unjust enrichment and breach of fiduciary duty.[1] The court applied the entire fairness standard because of Musk’s enormous control over the transaction, referring to him as a “Superstar CEO”[2] who wielded maximum possible influence over the board. While the compensation package was approved by a majority of disinterested shareholders, the court concluded proxy disclosure was deficient and therefore shareholders were not fully informed.[3] Ultimately, the Tesla board was not able to prove the benefit received from Musk’s leadership was worth the $55 billion Tesla paid for it.

Continue Reading It’s Not DE, It’s You: 55 Billion Reasons Tesla is Not ‘Your Company’

As 2024 gets off to a busy start, companies, boards and management teams are facing a host of new and developing business issues and a large array of regulatory developments, from new and growing risks and opportunities from the adoption of artificial intelligence, to ever-changing ESG issues and backlash, as well as enhanced focus on government enforcement and review. As has become a tradition, we have asked our colleagues from around our firm to boil down those issues in their fields that boards of directors and senior management of public companies will be facing in the coming year, yielding focused updates in eighteen topics that will surely feature at the top of board agendas throughout the year.

Continue Reading Selected Issues for Boards of Directors in 2024

Delaware law provides parties with significant flexibility to restrict or eliminate fiduciary duties in LLC agreements.  Sophisticated parties regularly take advantage of this flexibility by eliminating fiduciary duties of members and directors of LLCs.  These same parties, however, often choose not to extend these waivers to officers of the LLCs, often stemming from a desire to ensure that officers still have a fiduciary duty to be loyal to the LLC.  A new ruling from the Delaware Court of Chancery highlights the unintended consequences of excluding officers from the scope of the fiduciary duty waiver.

Continue Reading New Delaware Ruling Highlights Unintended Consequences of Excluding Officers from Fiduciary Duty Waivers

Much has been written lately about a circuit split on the question whether a company’s forum selection bylaw mandating shareholder derivative lawsuits be brought in Delaware state court trumps a federal lawsuit asserting a derivative claim under Section 14(a) of the Securities Exchange Act of 1934 (which can only be asserted – if at all – in federal court).  The Seventh Circuit answered this question “no”[1] while the Ninth Circuit sitting en banc answered “yes,”[2] in both cases over vigorous dissents.  Many have speculated that the U.S. Supreme Court may weigh in to resolve this clear circuit split.

Continue Reading Bringing an End to “Derivative” Section 14(a) Claims – Without Waiting for the Supreme Court to Weigh In

Earlier this week, the New York State legislature passed a bill banning all non-competes entered into on or after 30 days past the bill’s enactment, including those entered into by employees or in connection with the sale of a business.  If the bill becomes law, it would make New York the fifth state in the U.S. to enact a ban on non-competes.  California, Minnesota, North Dakota, and Oklahoma have also enacted bans on non-competes, but theirs do not go as far as New York’s full ban, instead banning only employee non-competes, but preserving those that are entered into in connection with the sale of a business.

Continue Reading New York Advances Towards Banning All Non-Competes

Minnesota bans new employee non-competes beginning July 1, 2023, and the United Kingdom intends to cap their duration at 3 months

Minnesota Becomes the 4th U.S. State to Ban Employee Non-Competes

Following in the footsteps of California, North Dakota and Oklahoma, Minnesota has banned all employee non-competes beginning July 1, 2023, and bars employers from utilizing choice-of-law or choice-of-venue clauses in an attempt to use a more favorable state’s law as a workaround.  Importantly, the new law is not retroactive and does not affect other employee restrictions, such as confidentiality and non-solicitation covenants. 

Continue Reading Updates on Non-Competes

NLRB GC’s Action Potentially More Far-Reaching than Federal Trade Commission’s Proposed Rule Banning Non-Competes Altogether

On May 30, 2023, the General Counsel to the National Labor Relations Board (the “NLRB”), Jennifer A. Abruzzo, issued a memorandum stating that most non-compete agreements violate the National Labor Relations Act (the “Act”).  In doing so, General Counsel Abruzzo directed the NLRB’s regional offices to investigate employers using non-competes to determine whether their usage is “overbroad” or not.  General Counsel Abruzzo also directed the regional offices to seek make-whole relief for employees who lost employment opportunities because of a non-compete agreement, even where the employer did not enforce the agreement and, if necessary, present evidence of such lost opportunities at trial.

Continue Reading NLRB General Counsel Unleashes Regional Offices to Clamp Down on “Overbroad” Non-Competes

On February 9, 2023, NGO ClientEarth sued all eleven members of the board of directors of Shell plc before the English High Court, for allegedly failing to take steps to protect Shell against climate-change-related risks (see our alert memorandum of February 22, 2023). Our follow-up alert memorandum of April 17, 2023, also set out some answers to some common questions on derivative claims in the context of ESG litigation.

Continue Reading Derivative Claim Against Shell’s Board by Climate-Change Activist Shareholder is Refused Permission to Proceed

In a recent decision, the Delaware Court of Chancery grappled with the question whether—and to what extent—claims for breach of fiduciary duty can be waived ex ante in a corporate shareholder agreement.  Specifically, in New Enterprise Associates 14 LP v. Rich, the court denied a motion to dismiss claims for breach of fiduciary duties brought against directors and controlling stockholders of Fugue, Inc. (the “Company”) by sophisticated private fund investors who had agreed to an express waiver of the right to bring such claims.[1]  Importantly, the court found that fiduciary duties in a corporation can be tailored by parties to a shareholders agreement who are sophisticated, and were validly waived by the voting agreement in this case (which specifically addressed the type of transaction at issue).  The court, however, held that public policy prohibits contracts from insulating directors or controlling stockholders from tort or fiduciary liability in a case of intentional wrongdoing, which the court found was plausibly alleged in this case. The court’s opinion has implications for sophisticated investors in venture capital and other private transactions involving Delaware corporations. The opinion cautions against overreliance on express contractual waivers, on the one hand, while also serves as a reminder that at least in some circumstances sophisticated parties can contract around default legal principles (including fiduciary duties), even with respect to corporations.

Continue Reading Delaware Chancery Court Highlights Tension Between Freedom of Contract and Corporate Fiduciary Duties