ProfessorBainbridge.com

A Critique of California's Overly Burdensome Climate Disclosure Regulation

California's new climate laws—SB 253 (Climate Corporate Data Accountability Act) and SB 261 (Climate-Related Financial Risk Act)—mandate stricter greenhouse gas (GHG) emissions and climate risk reporting for companies operating in the state, significantly impacting how businesses address sustainability and climate risks.

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SB 253: Climate Corporate Data Accountability Act

Overview:
SB 253 is the first U.S. law requiring companies to publicly disclose GHG emissions (scopes 1, 2, and 3). It aims to increase transparency and accountability for businesses’ climate impact.

• Applicability:

  • Public and private companies operating in California with annual revenues over $1 billion.
  • Estimated 5,300+ companies must comply.

• Requirements:

  • Scope 1 and 2 Reporting: Direct emissions and indirect emissions from energy use (starting 2026).
  • Scope 3 Reporting: Indirect supply chain-related emissions (starting 2027, under a "safe harbor" provision to allow flexibility and avoid penalties for good-faith errors until 2030).
  • Reporting must follow Greenhouse Gas Protocol (GHG Protocol) standards.

• Process:

  • Companies must submit annual reports to the California Air Resources Board (CARB) via a digital platform (to be created by Jan. 2025).
  • Third-party verification of reports is required to ensure accuracy.
  • Companies may report emissions data obtained directly from suppliers.

• Penalties and Safe Harbor:

  • Misreporting emissions (except for scope 3 under safe harbor) may lead to fines up to $500,000.
  • No penalties for scope 3 errors reported in good faith until after 2030.

• Significance:

  • No other U.S. policy mandates scope emissions reporting.
  • Companies like Amazon, Walmart, and Apple are already incorporating scope 3 data into supply chain practices.

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SB 261: Climate-Related Financial Risk Act

Overview:
SB 261 focuses on assessing and reporting climate risks businesses face and contribute to, requiring financial risk disclosures consistent with global standards.

• Applicability:

  • Businesses with annual revenues over $500 million and operations in California.

• Requirements:

  • Climate risk reports must assess risks and opportunities, modeled after Task Force on Climate-Related Financial Disclosures (TCFD) recommendations.
  • Reports are due biennially, starting January 2026.

• Process:

  • Entities submit reports to CARB and make them available online.
  • Parent companies may file consolidated reports for subsidiaries.

• Third-Party Verification:

  • Climate risk disclosures must be independently verified if they include claims about GHG emissions or mitigation efforts.

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SB 219: Adjustments to SB 253 and SB 261

On September 27, 2024, Governor Gavin Newsom signed SB 219, amending SB 253 and SB 261. Key changes include:

• Delayed Timeline:

  • CARB rules for reporting postponed until July 2025.
  • Scope 3 emissions reporting phased in starting 2027.

• Consolidated Reporting:

  • Parent companies can file single, consolidated reports.
  • CARB may contract third-party organizations, like CDP, to manage reporting.

• No Changes to Initial Deadlines:

  • Scope 1 and 2 emissions reporting and climate risk disclosures still required in 2026.

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Critique

SB 253's comprehensive Scope 1, 2, and 3 emissions reporting requirements impose substantial compliance costs on covered businesses. Scope 3 emissions tracking is particularly onerous, as it requires companies to gather data from their entire value chain, including suppliers, distributors, and end-users. Many companies lack the existing infrastructure to collect this data accurately.

Second, the verification requirements from independent auditors create additional direct costs. Companies must hire third-party verifiers approved by the state board, which represents a recurring annual expense. The limited pool of qualified verifiers may drive up costs further.

Third, the Act creates significant operational complexity. Companies must develop new systems, train personnel, and potentially restructure supplier relationships to enable emissions tracking. This diverts resources from other business activities and innovation.

Finally, the $500,000 civil penalty provision for violations creates material financial risk, especially given the complexity of accurate emissions reporting. This could lead companies to over-invest in compliance measures out of an abundance of caution.

The USC Schwarzenegger Institute estimated compliance costs with SB 253 as folllows:

• Initial compliance costs between $300,000 to $900,000 per company
• Ongoing annual costs of $100,000 to $300,000
• Additional verification costs of $30,000 to $100,000 annually

The California Chamber of Commerce projected higher costs:

• Initial setup costs potentially exceeding $1 million for larger companies
• Annual compliance costs of $300,000 to $900,000
• Additional costs for supply chain data collection and verification

Turning to SB 261, the requirement for companies to assess both direct and indirect material financial risks from climate change demands extensive analysis across multiple business dimensions. Companies must evaluate risks from physical impacts, transition impacts, and liability concerns - a complex undertaking requiring specialized expertise many firms don't currently possess.

Second, the mandatory disclosure of adaptation and mitigation strategies forces companies to develop and publicize detailed climate planning, even when such planning may be premature or based on uncertain projections. This creates potential liability risks if actual climate impacts differ from disclosed plans.

Third, the biennial reporting requirement creates recurring compliance costs. Companies must regularly:

• Engage external consultants and climate risk specialists
• Conduct detailed scenario analyses
• Develop comprehensive risk assessments
• Prepare extensive documentation
• Update mitigation strategies

Fourth, the Act's broad definition of covered entities ($100M+ in annual revenue) captures many medium-sized businesses that may lack the resources and sophistication to conduct thorough climate risk analyses. The compliance burden falls disproportionately heavy on these smaller covered entities.

Fifth, the requirement to follow TCFD recommendations imposes a rigid framework that may not suit all business models. The standardized approach could force companies to analyze and report on risks that aren't material to their specific operations.

Notably, this burden compounds existing climate reporting requirements under SB 253, creating overlapping but distinct compliance obligations for California businesses. This regulatory layering significantly increases the total cost of climate-related compliance.

Business groups and industry analyses suggest companies will incur substantial compliance costs:

• First-time compliance costs of $300,000 to $750,000
• Recurring biennial costs of $150,000 to $500,000
• Additional costs for external expertise and risk modeling tools

Considering both bills together, California's aggressive regulatory stance may deter business investment and operations in the state. Companies may choose to limit their California presence or restructure operations to avoid triggering regulatory thresholds, potentially harming the state's economic interests.

In addition, there is a considerable risk of future problems of jurisdictional overreach and economic inefficiency. These concerns are not inconsistent with a commitment to federalism and subsidiarity. Recall that Louis Brandeis praised federalism because it allows states to experiment: "It is one of the happy incidents of the federal system, that a single, courageous State may . . . serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” Implicit in Brandeis' praise, however, is the assumption that state experimentation does not have negative externalities that put the rest of the country or even the world at risk.

Unfortunately, California's regulations often have de facto extraterritorial effects that put other states and nations at risk. When California requires companies to report on global supply chain emissions or worldwide climate risks, for example, it effectively extends its regulatory reach far beyond state borders. This creates legitimate questions about one state's authority to compel disclosure of business activities occurring entirely outside its jurisdiction.

In addition, California's climate regulation is replete with negative externalities. First, as noted above, state-level regulation of multinational enterprises creates problematic regulatory fragmentation. As climate disclosure regimes proliferate both nationally and globally, absent harmonization, companies will face duplicative but also potentially inconsistent regimes. When individual states impose distinct compliance regimes on businesses operating across multiple jurisdictions, it thus creates a complex patchwork of obligations. This fragmentation increases compliance costs as companies must track and adhere to potentially conflicting requirements across different states. If the EU, the US, Canada, and California, for example, all decide that companies (many of which will operate in all four) must file disclosures that differ from one another, companies will have to generate separate reports for each authority. 

Second, state-level regulation of global businesses can interfere with federal authority over international commerce and foreign affairs. Climate and environmental issues often intersect with international agreements and federal policy. State intervention in these areas risks creating conflicts with federal objectives and complicating international business relationships.

On a Personal Note

I wanted to let my readers know how we’re doing given the Los Angeles fires. The two main fires are the Palisades and Eaton fires. The Palisades fire is about 15 miles west of us out in the Pacific Palisades and Malibu. It is mainly moving away from us. Sadly, however, many of my work colleagues do live in that area and have been evacuated. Several lost their homes.

The Eaton fire is about 15 miles northeast of us, up above Pasadena. It has not moved in our direction, thankfully.

Last Wednesday night a brush fire broke out in a canyon just northwest of us. It was about a quarter-mile away. We could see and smell the fire quite distinctly. Almost immediately, Helen and I were ordered to evacuate. We threw some stuff together, grabbed our dog Harry, and headed out. I’ve since bought us each a duffel bag and we’re organizing go bags to have essentials ready to grab if we go through this again.

We were able to find a hotel in Santa Monica that was outside the fire evacuation zones. Everyone at the hotel was incredibly welcoming, but we were quite worried about our home. A neighbor who evacuated after we did reported that the fire was almost to our house. So we were hoping and praying but preparing mentally for being burnt out.

I know God always answers prayer but I also know that sometimes the answer is “no.” But not this time. This time the answer was a resounding yes. We were able to connect to the security camera system at our house late Wednesday night and were overjoyed to see that the LAFD had stopped the fire before it reached our home.

We were able to return home Thursday afternoon and were again overjoyed to see that the house was intact.

The Sunset fire ended up burning only 43 acres, mostly of brush in undeveloped canyons. As far as I know, no structures in our neighborhood took fire damage.

Like a lot of our neighbors, however, our house took some water damage. The firefighters were using planes and helicopters to drop water on the fire and apparently quite a lot hit our house.  It also appears that they hosed down the house to keep embers from igniting. We’ve had to arrange to a home remediation service to come in and repair some damage. Fortunately, our insurance will cover most of that cost. All in all, compared to what others suffered, we feel very blessed.

Crossing the Threshold of Hope: A Transformative Encounter with John Paul II's Thought

Pope John Paul II's book Crossing the Threshold of Hope was published 30 years ago, but I'm finally reading it. It's been a tremendously impactful experience.

In Crossing the Threshold of Hope, John Paul II offers readers far more than a mere collection of theological musings. Through a series of probing questions posed by journalist Vittorio Messori, the pope engages in a remarkable intellectual journey that bridges faith and reason, tradition and modernity, and the eternal questions that haunt the human heart.

What makes this work particularly compelling is how John Paul II addresses contemporary challenges to faith while drawing upon his deep philosophical training. His discussion of human dignity and the relationship between faith and human freedom resonates powerfully with Catholic social teaching, yet remains accessible to readers of all backgrounds. The pope's phenomenological approach, influenced by his early scholarly work, brings fresh insight to age-old questions about God's existence, human suffering, and the Church's role in modern society.

The book's treatment of religious pluralism and interreligious dialogue reflects both courage and wisdom. While firmly grounding his responses in Catholic tradition, John Paul II demonstrates remarkable openness to truth wherever it may be found. His exploration of other faith traditions shows profound respect while maintaining clear conviction about his own beliefs.

Perhaps most striking is the deeply personal nature of the work. Despite his role as Supreme Pontiff, John Paul II speaks with disarming directness about his own spiritual journey and encounters with God. This combination of intellectual rigor and personal witness makes Crossing the Threshold of Hope a uniquely valuable contribution to modern religious thought.

For those seeking to understand both the challenges and opportunities facing faith in our time, this book remains an indispensable guide. Its enduring relevance speaks to John Paul II's remarkable ability to engage the deepest questions of human existence with both intellectual depth and pastoral sensitivity.

Bainbridge and Alon-Beck debate Tornetta v. Musk

I was pleased to participate in Seth Oranburg's podcast Organized: The Business Law Breakdown:

In this episode of Organized, Professor Seth Oranburg is joined by UCLA Law Professor Stephen Bainbridge, one of the nation’s foremost corporate law theorists, and Case Western Reserve Professor Anat Alon-Beck, a leading expert on corporate governance, to unpack Tornetta v. Musk, a case that has sparked debates about power, process, and the future of Delaware corporate law.

It was a lot of fun. Seth and Anat are both smart and knowledgeable, which made for an informative and provocative discussion.

 

Ravioli with Mushroom, Pancetta, and Sage Sauce

• 10 ounce package of Rana Mushroom Ravioli
• 1 tablespoon olive oil
• 4 ounces pancetta, diced
• 8 ounces fresh cremini mushrooms, thinly sliced
• 1 ounce dried porcini mushrooms, reconstituted and diced
• 3 garlic cloves, minced
• 6 fresh sage leaves, finely chopped
• ½ cup white wine 
• 1 cup porcini reconstituting broth
• ½ cup evaporated milk
• 1 teaspoon Worcestershire sauce
• ¼ cup Parmesan cheese, freshly grated (plus extra for garnishing at the table)
• Salt and black pepper
• 1 tablespoon truffle butter
• 2 tablespoons Italian fresh parsley (or two teaspoons dried), chopped

Bring 1½ cups chicken broth to a boil. Remove from heat. Add porcini mushrooms. When softened, drain the mushrooms, reserving the liquid in a measuring cup. Rinse and dice the mushrooms, setting them aside and reserving. Allow grit to settle to bottom of measuring cup. Pour 1 cup of liquid off the grit and reserve. 

Bring pot of salted water to a boil. Cook ravioli 3 minutes. Drain.

Heat olive oil in a large skillet over medium heat.

Add the diced pancetta and cook until crispy, about 5-7 minutes. Remove with a slotted spoon and set aside, leaving the rendered fat in the pan.

Add the mushrooms to the skillet. Cook over medium-high heat, stirring occasionally, until they release their moisture and turn golden brown, about 8-10 minutes.

Add the shallot, stir in, and cook 2 minutes.

Stir in the minced garlic and chopped sage. Cook for 1 minute.

Add wine to the skillet. Allow the wine to reduce by half, about 2-3 minutes, scraping the bottom to release any browned bits.

Add reconstituting liquid and Worcestershire sauce to skillet and simmer 3 minutes. Add parsley (if using dried).

Add the evaporated milk to skillet and simmer 5 minutes.

Return the reserved pancetta to the skillet.

Season with salt and pepper. Stir in truffle butter and parsley (if using fresh). 

Add ravioli and simmer 1-2 minutes.

What was Kroger's Obligation to Albertsons? The Difference Between Reasonable Best Efforts and Best Efforts

Matt Levine's latest Money Stuff newslegter discusses Albertsons suit against Krogers.  On December 11th, Albertsons explained that:

Albertsons Companies, Inc. (NYSE: ACI) (“Albertsons”) today filed a lawsuit against The Kroger Co. (NYSE: KR) (“Kroger”) in the Delaware Court of Chancery, bringing claims for willful breach of contract and breach of the covenant of good faith and fair dealing arising from Kroger’s failure to exercise “best efforts” and to take “any and all actions” to secure regulatory approval of the companies’ agreed merger transaction, as was required of Kroger under the terms of the merger agreement between the parties (the “Merger Agreement”).

Kroger willfully breached the Merger Agreement in several key ways, including by repeatedly refusing to divest assets necessary for antitrust approval, ignoring regulators’ feedback, rejecting stronger divestiture buyers and failing to cooperate with Albertsons.

The key provision of their merger agreement is section 6.3, which deals with "Regulatory Matters." Subsection (a) states, in pertinent part:

Subject to the terms and conditions of this Agreement (including any differing standard set forth herein with respect to any covenant or obligation, including, with respect to Antitrust Law, as provided below), the Company [i.e., Albertsons], on the one hand, and each of Parent [i.e., Kroger] and Merger Sub, on the other hand, will cooperate with the Other Party and use (and will cause their respective Subsidiaries to use) its reasonable best efforts to (i) take or cause to be taken all actions, and do or cause to be done all things, necessary, proper or advisable to cause the conditions to the Closing to be satisfied as promptly as reasonably practicable and to consummate and make effective, as promptly as reasonably practicable, the Merger, including taking actions necessary to avoid, eliminate, and resolve any and all impediments under any Antitrust Law with respect to the Transactions, including without limitation preparing and filing promptly and fully all documentation to effect all necessary filings, notifications, notices, petitions, statements, registrations, submissions of information, applications and other documents (including filing any Notification and Report Form required pursuant to the HSR Act within fifteen (15) Business Days following the execution of this Agreement) ...

In addition, Kroger took on a further antitrust-related obligation in section 6.d:

Without limiting the generality of the obligations of Parent and Merger Sub pursuant to this Section 6.3, Parent agrees to, and will cause its Affiliates to, use best efforts, to take, or to cause to be taken, any and all actions necessary to avoid, eliminate, and resolve any and all impediments under any Antitrust Law with respect to the Transactions, in each case, so as to enable the Closing to occur as promptly as practicable, including (i) proposing, negotiating, committing to and effecting by consent decree, hold separate orders, or otherwise, the sale, divestiture, transfer, license, or disposition or hold separate (through the establishment of a trust or otherwise) of such of Parent’s assets, properties or businesses or of the Company’s assets, properties or businesses to be acquired by it pursuant hereto ....

Matt explores at some length arguments about whether or not Kroger complied with these obligations. it's a good read. But I want to focus on what those obligations legally required of Kroger. According to Matt, Albertsons argues that:

First, Kroger generally agreed to use “reasonable best efforts” to satisfy all closing conditions “as promptly as reasonably practicable.”

Second, Kroger assumed a more stringent obligation to use its “best efforts” — not limited by any standard of reasonableness — “to avoid, eliminate, and resolve any and all impediments under any Antitrust Law . . . so as to enable the Closing to occur as promptly as practicable.” That “best efforts” provision explicitly required Kroger to divest any assets and make any changes to its operations that were necessary to obtain antitrust approval.

In fact, however, the best efforts clause probably will not work the way Albertsons claims. As I explain in my book, Mergers and Acquisitions (Concepts and Insights) (4th Edition 2021):

What does it mean for an agreement to require the target board to use best efforts to accomplish something? Covenants in M&A agreements, as well as other business contracts, sometimes include qualifications regarding how far the party making the covenant must go in pursuing the goal of the covenant. Many practitioners subscribe to the view that such “efforts” standards lie along a continuum on which the standards fall. In order of decreasing level of commitment, these effort levels include “best efforts” (the highest level), “reasonable best efforts,” “reasonable efforts,” and “commercially reasonable efforts.” ...

However, there is no general agreement in case law as to whether the various clauses in fact reflect different standards.^[1] Courts often use the same analysis in determining whether an efforts clause has been breached, regardless of the specific level of effort prescribed in the agreement.^[2] Specifically, courts frequently consider the facts and circumstances of the case and require that the parties act diligently, reasonably, and in good faith in complying with an efforts clause.

Hence, the unadorned "best efforts" clause is not more stringent. Nor does it require Krogers to throw itself on a hand grenade (a metaphor lawyers for companies in Albertsons' shows like to use). It simply requires Kroger to act reasonably and in good faith. 

Recommended Reading: "Delaware Law Mid-Century: Far From Perfect but Probably Not Leaving for Las Vegas" by Jonathan R. Macey

There is a new article by Yale Law Professor Jonathan Macey that tackles a topic we have been discussing here quite a lot lately; name;y, the challenges to Delaware's dominance of corporate law: Delaware Law Mid-Century: Far From Perfect but Probably Not Leaving for Las Vegas, available at SSRN:  https://ssrn.com/abstract=5043887 

Macey sets the stage by observing that Delaware historically has been favored as a state of incorporation due to its efficient legal framework, judiciary, legislature, and executive branch. The state benefits significantly from that status because it derives a significant portion of its revenue from corporate charters.

Macey then notes that Delaware faces a number of emerging challenges, not least of which is increasing dissatisfaction among controlling shareholders, corporate advisors, and lawyers with recent Delaware Chancery Court decisions. These rulings are widely perceived as overly protective of minority shareholders, often to the detriment of controlling shareholders and corporate boards. In Macey’s view, they have undermined confidence in Delaware's predictability and appeal to decision-makers who influence incorporation choices. Worse yet, minority shareholders, who ostensibly benefit from these protections, often do not value them and even oppose such rulings.

According to Macey, the problem is not just that the Delaware courts are getting the law wrong, but that certain judges are adopting a "suspicious or negative" tone toward corporate controllers and boards. Efforts by the Delaware legislature to reverse some of these judicial decisions failed to change the tone, while highlighting internal discord between legislature, courts, and the bar.

Despite these current challenges, Macey concludes that Delaware is unlikely to lose its dominance soon due to the lack of a superior alternative. The state's legal framework still offers a relatively favorable environment for corporate governance compared to other jurisdictions.

Going forward, however, Macey argues Delaware must ensure that its "product" remains appealing to the actual decision makers in incorporation decisions. At present, it can best do so by doing a better job of balancing protections for minority shareholders with the needs of controlling shareholders and corporate advisors.

If I may be so bold, I suggest reading Macey’s article in conjunction with two of my recent articles:

Bainbridge, Stephen Mark, A Course Correction for Controlling Shareholder Transactions (November 15, 2024). UCLA School of Law, Law-Econ Research Paper No. 24-07, Available at SSRN: https://ssrn.com/abstract=5022685

Bainbridge, Stephen Mark,  DExit Drivers: Is Delaware's Dominance Threatened? (July 29, 2024). UCLA School of Law, Law-Econ Research Paper No. 24-04, Available at SSRN: https://ssrn.com/abstract=4909689

Badawi & Bartlett on the Use of ESG Targets in Executive Compensation Plans

I just read a really interesting paper by Adam Badawi and Robert Bartlett,\ESG Overperformance? Assessing the Use of ESG Targets in Executive Compensation Plans, available at SSRN: https://ssrn.com/abstract=4941016.

They examine the integration of environmental, social, and governance (ESG) targets into executive compensation plans among U.S. public companies, with a specific focus on S&P 500 firms during the 2023 proxy season. 

Their main findings are:

1. Prevalence of ESG-Linked Compensation:
• 63% of S&P 500 companies incorporated ESG performance targets into their executive compensation plans.
• These targets were primarily integrated into short-term annual incentive plans (AIAs) rather than long-term incentive plans (LTI).
• Only 2% of companies reported missing all ESG targets, in contrast to 22% missing all financial targets.
2. Structure and Weighting:
• ESG targets in AIAs were given a mean weight of 15% within target award sizes.
• In LTI plans, only 10% of companies incorporated ESG metrics, and their influence on total CEO compensation was relatively minor (6%-7%).
3. Governance and Oversight Issues:
• ESG targets were often less transparent than financial targets, making them easier to achieve.
• High rates of achievement for ESG targets were linked to governance deficiencies rather than actual exceptional ESG outcomes.
• Firms meeting all ESG targets faced more shareholder opposition in say-on-pay votes, suggesting skepticism regarding governance.
4. Performance Analysis:
• High achievement rates for ESG targets did not correlate with improved past or future ESG scores from rating agencies.
• Firms missing ESG targets often used more transparent and quantifiable metrics, such as OSHA-regulated worker safety measures.
5. Theoretical Implications:
• The study challenges the notion that ESG-based compensation drives genuine improvement in ESG outcomes.
• Findings align with the theory that these targets may serve as tools for rent extraction by executives in poorly governed firms.
6. Use of AI in Research:
• The study incorporated GPT-auditing to validate data collection from proxy statements, highlighting both the potential and limitations of AI tools in handling unstructured data.

They conclude that ESG-linked compensation plans often fail to deliver substantial improvements in ESG performance and are associated with governance challenges.

Much of their critique supports the arguments about the role of ESG in executive compensation that I made in my book The Profit Motive.

Tornetta v. Musk: Whatever happened to the shareholder franchise being the ideological underpinning upon which the legitimacy of directorial power rests?

I am not a fan of shareholder democracy. Instead, as I have explained elsewhere:

Recent years have seen a number of efforts to extend the shareholder franchise. These efforts implicate two fundamental issues for corporation law. First, why do shareholders - and only shareholders - have voting rights? Second, why are the voting rights of shareholders so limited? This essay proposes answers for those questions.

As for efforts to expand the limited shareholder voting rights currently provided by corporation law, the essay argues that the director primacy-based system of U.S. corporate governance has served investors and society well. This record of success occurred not in spite of the separation of ownership and control, but because of that separation. 

Many of my fellow corporate law academics, as well as many lawyers and investors, however, are shareholder democracy enthusiasts. 

As such, I wonder how the shareholder democracy enthusiasts feel about Chancellor McCormick's most recent decision in Tornetta v. Musk. After all, as Keith Bishop observes:

In Tornetta v. Musk, 2024 WL 4930635 (Del. Ch. Dec. 2, 2024), Chancellor Kathaleen St. J. McCormick declined to revise her judgment rescinding of Elon Musk's compensation plan with Tesla, Inc.  She concluded that the value of rescinding the plan was  $2.3 billion.  Accordingly, she approved an award of attorneys' fees of $345 million, which according to Professor Stephen Bainbridge works out to nearly $18,000 per hour. 

Thus, it is clear that plaintiff's counsel has clearly benefitted enormously from this case.  Clearly, the Tesla's directors do not think so.  After the plan was rescinded, the directors asked the stockholders to ratify Mr. Musk's compensation.  Clearly, most of Tesla's stockholders disagreed with the plaintiff.  Approximately 72% of all votes cast were voted in favor of the ratification proposal, excluding votes of shares owned, directly or indirectly, by Messrs. Elon and Kimbal Musk.  As it stands, the stockholders will be stuck  footing the bill to effect an action that the vast majority opposed.  

It is hard to see how diverting $345 million in Tesla's cash to the plaintiff's counsel will benefit either the company or its stockholders.  Chancellor McCormick has decided that the defendants may elect to pay the award in "freely tradeable shares", but the issuance of additional shares will dilute the existing shareholders.   The Delaware Court of Chancery is famously a court of equity.  It is hard to see the equity in one judge overturning not once, but twice, the will of directors and shareholders and forcing them to pay hundreds of millions of dollars for a result that they believed was not in their best interests.

Indeed.

To be sure, some will say (as did McCormick) that the Tesla shareholders were misinformed. But Tesla gave its shareholders a copy of McCormick's initial decision as an appendix to the proxy statement for the second vote. They let McCormick's words stand for themselves.

As for the proponents of shareholder democracy, nothing but crickets.

The case for traditional metrics of merit in law school rookie hiring: Grades, law review, class rank, clerkships, practice

I have the sense that law schools (at least in the top tier) have pretty much abandoned the traditional metrics of merit--grades, class rank, law review, clerkships, practice experience--in favor of PhD credentials, visiting assistant professorships, and scholarship in rookie hiring. A few of my colleagues and I have been debating this trend, which (you will probably have guessed) I deplore.

The Trend

I am not sure why it happened, but top tier law schools have significantly expanded their course offerings and faculty dedicated to interdisciplinary theory, often to the detriment of those with practical relevance. Maybe it was the interdisciplinary inroads by the law & economics and the critical legal theorists. Maybe it was seen as a way to climb the US News rankings. Maybe it was a desire to avoid being treated as second tier citizens by university colleagues in other disciplines where PhDs and peer reviewed scholarship are the coin of the realm. But whatever the reason we now live in a world in which many (most?) law professors concentrate on areas that appear to have minimal direct relevance to the practical responsibilities students will face after graduation.

This is bad for both law schools and graduate schools. Like Judge Harry Edwards, "I see no reason why law professors should write mediocre economics, or philosophy, or literary criticism, when arts and sciences professors could be doing a better job," while getting paid a lot less than law professors. 

Alignment with Legal Education Objectives

In contrast, I contend that the traditional metrics directly relate to the practice of law. Academic credentials like grades and class rank reflect a candidate’s ability to excel in the rigorous and analytical environment of law school—a precursor to the professional challenges students will face.

Clerkships and practice experience provide firsthand insight into the legal profession, making candidates better equipped to prepare students for careers in law. This aligns with the primary purpose of law schools: training practitioners who can succeed in courts, law firms, and public service. Remember, law school is a professional school. It is not a graduate school.

Practical Expertise Over Academic Theory

While Ph.D. credentials and academic scholarship demonstrate a deep engagement with theoretical aspects of law, they do not always translate into the practical knowledge that students require. Legal education benefits from professors who can teach through their lived experiences in practice, such as case strategy, courtroom demeanor, and real-world problem-solving. These skills are honed through practice, not necessarily through theoretical research.

Credibility and Authority in Legal Education

Faculty who have excelled in traditional legal metrics are often more relatable and credible to students. For instance, professors who have clerked for prestigious judges or succeeded in high-pressure legal roles can inspire students by exemplifying attainable goals within the profession. Law schools enhance their reputation by showcasing faculty who have demonstrated mastery in traditional benchmarks recognized by the broader legal community.

Risk of Disconnect from Practical Realities

Overemphasis on Ph.D. credentials and academic publication risks fostering a faculty less engaged with the day-to-day realities of legal practice. This could widen the gap between academia and the profession, resulting in graduates who are less prepared for the actual demands of legal work.

I am reminded here of Judge Edward's lament over “the growing disconnect between legal education and the legal profession,” arguing that “many law schools . . . have strayed from their proper role by prioritizing abstract theory over practical scholarship and teaching.” I stand with Judge Edwards in believing that law "schools should be training ethical practitioners and producing scholarship that judges, legislators, and practitioners can use," not junior graduate students. 

The point is not that we should return to some pre-Realist focus on doctrine. Again, I refer to Judge Edwards, who wrote that "a good 'practical' scholar gives due weight to cases, statutes and other authoritative texts, but also employs theory to criticize doctrine, to resolve problems that doctrine leaves open, and to propose changes in the law or in systems of justice. Ideally, the 'practical' scholar always integrates theory with doctrine." Hence, as I have written before:

Judge Harry Edwards remarked: “Theory wholly divorced from cases has been of no use to me in practice.” My practice experience confirmed that criticism, at least as long as we put strong emphasis on the phrase “wholly divorced.” Theory brought to bear on specific legal issues often can be quite illuminating, as I hope to have illustrated at least from time to time.

Traditional Metrics Reflect Core Competencies

Metrics like class rank and clerkships capture competencies critical to legal success: analytical rigor, legal writing skills, and the ability to synthesize complex information. These competencies are also the foundation of effective teaching and mentorship in legal education.

Conclusion

By focusing on traditional metrics, law schools maintain their commitment to fostering a practice-ready generation of lawyers while ensuring a close connection between legal education and the profession’s practical realities.

Next steps in the Tornetta v. Musk saga: Can Elon leverage his bromance with Donald Trump to take vengeance on Delaware?

A front page headline in today's WSJ explains that: Musk’s Rivals Fear He Will Target Them With His New Power.

Musk’s scorched-earth tactics have sent waves of concern through his lengthy list of business rivals, who over the years have included Microsoft co-founder and philanthropist Bill Gates and Amazon.com founder Jeff Bezos. They have watched him ascend to an unprecedented level of power for a private citizen while continuing to nurse his private business grievances.

The richest man in the world is poised to have significant influence not only over how his six companies, including X, Tesla and SpaceX, interact with the federal government—SpaceX has accumulated more than $15 billion in federal contracts over the last decade—but also over how the new administration treats his rivals. ...

Trump rode to the White House on promises to use federal power to exact “retribution” against his political enemies. Over his career, Musk has shown a similar taste for revenge, with a long list of perceived foes he has gone after through the courts and with his 200 million followers on X. People who have worked with Musk say he draws energy from the idea of having enemies.

What interests me about the potential ramifications of Musk's new bromance with Donald Trump is its potential impact on corporate law.

We know Elon is no fan of Delaware, its courts, and its corporate law. Recall the famous tweet:

Never incorporate your company in the state of Delaware

— Elon Musk (@elonmusk) January 30, 2024

After a string of losses in the Delaware courts, Musk finally moved Tesla's state of incorporation to Texas and SpaceX to Nevada.

As I explained in my book Corporate Governance after the Financial Crisis, Delaware's dominance of corporate law follows from its success in attracting companies to incorporate under its law. Other states have periodically challenged Delaware, but have routinely failed. My article DExit Drivers: Is Delaware's Dominance Threatened? concludes that Delaware's competitors are unlikely to prevail anytime soon. The  number of reincorporations from Delaware remains minimal compared to the vast number of new incorporations Delaware attracts annually. Given the strong inertia behind the initial incorporation decision and the weak drivers for DExit, it is unlikely to become widespread soon.

As I thus explained in Corporate Governance after the Financial Crisis, Delaware's principal threat is not from other states but from the federal government. Although the federal government has never adopted a national law of corporations that would preempt Delaware law, it has several times considered doing so, and no one doubts its power under the Commerce Clause to do so. As former Delaware Chief Justice Leo Strine observed, “the capacious constitutional authority of Congress over interstate commerce is something that Delaware and other state corporate lawmakers have constantly had to take into account ….” Leo E. Strine Jr., Breaking the Corporate Governance Logjam In Washington: Some Constructive Thoughts on A Responsible Path Forward, 63 Bus. Law. 1079, 1081 (2008).

In his article, Delaware and Washington As Corporate Lawmakers, 34 Del. J. Corp. L. 1, 9 (2009), Harvard Law Professor Mark Roe thus observed that:

The big gorilla of American economic lawmaking is the Congress which, when it wants to, can dwarf the Delaware Court of Chancery, the Delaware General Assembly, and the Delaware Corporate Law Council, which drafts Delaware’s corporate law. They all have considerable freedom to act, but not on a corporate governance issue about which Washington has acted, and not if they upset those who can influence Washington.

Let's pause to emphasize his observation that Delaware could lose its freedom to make corporate law if it upsets "those who can influence Washington." Which is precisely what Delaware has done through Chancellor Kathaleen McCormick's decisions about Musk's Tesla compensation package.

There are already those in Washington who view Delaware corporate law with suspicion, if not outright hostility. Senator Elizabeth Warren favors mandatory federal incorporation of all businesses with more than $1 billion in annual revenue, which would displace Delaware law as to the largest and most prestigious of its companies. In the 2020 Presidential cycle, both Warren and Senator Bernie Sanders proposed expansive regulation of corporate governance at the federal level.

Is it too far fetched to imagine an unholy alliance of Musk and Warren collaborating to bring Delaware's dominance to an end?

Should Delaware Corporate Law be Accessible to Everyday Users?

Keith Paul Bishop writes:

The body of Delaware corporate decisional law is immense and continually evolving.  This fact alone makes Delaware's corporate law inaccessible to everyday users. 

I would argue that being inaccessible to everyday users is a feature not a bug.

Let's start with the cynical rationale. If law is readily accessible to everyday users, who would need lawyers? Speaking as someone who trains lawyers for a living, inaccessibility strikes me as a good thing.

But let's not be cynical. Many of the transactions governed by Delaware corporate law are profoundly complex. Consider a healthcare M&A deal in which Buyer is going to acquire certain drug patents from Seller. The consideration was a mix of cash and poison notes. The deal included earnouts with multiple metrics, including drug development, FDA approvals, and sales, each having multiple milestones. As part of the same deal, Seller could purchase Buyer equity for cash to finance continued development of the drugs in the event that certain milestones were not met. All subject to arbitration clauses. I'm not sure a deal with so many wrinkles can be governed by law accessible to everyday users.