# Courts Out of Money & Delaware Law Challenged

An episode of [Bloomberg Law](https://invisiblenetwork.ai/podcast/277975394), 5 Nov 2025, 37 min.

Audio: https://podtrac.com/pts/redirect.mp3/traffic.omny.fm/d/clips/e73c998e-6e60-432f-8610-ae210140c5b1/7c892d84-801f-4c0b-b0e9-ae2b0012ff5f/667ebd4b-fb50-4abf-a658-b38c0001c1b8/audio.mp3?utm_source=Podcast&in_playlist=91224201-26a6-429d-ac3c-ae2b0012ff6d

Business law professor Eric Talley of Columbia Law School, discusses why the Delaware Supreme Court will review the constitutionality of a law passed in response to fallout from a trial court’s rejection of Elon Musk’s blockbuster pay package. Then Bloomberg Law reporter Suzanne Monyak discusses how the federal courts are dealing with the shut down. June Grasso hosts. See omnystudio.com/listener for privacy information.

## Transcript

[0:02] Speaker 1: This is Bloomberg Law with June Grossel from Bloomberg Radio.
[0:08] Speaker 2: Delaware's Supreme Court is going to address the fallout from
[0:12] Speaker 2: a trial judge's rejection of Elon Musk's blockbuster pay package,
[0:17] Speaker 2: a corporate law overhaul in the state that took effect
[0:20] Speaker 2: in March that narrowed the definition of controlling stockholder, making
[0:25] Speaker 2: it easier to avoid scrutiny of potentially conflicted transactions. The
[0:30] Speaker 2: High Court will decide the constitutionality of that law, as Musk,
[0:35] Speaker 2: meta CEO Mark Zuckerberg, and other corporate leaders publicly discussed
[0:41] Speaker 2: moving their companies from Delaware to Texas and Nevada. My
[0:45] Speaker 2: guest is business law professor Eric Talley of Columbia Law School.
[0:50] Speaker 2: So Eric, Delaware Supreme Court is going to decide the
[0:53] Speaker 2: constitutionality of SB twenty one.
[0:56] Speaker 3: What is SB twenty one.
[0:59] Speaker 1: See was a legislative reform that, by historical standards, rocketed
[1:05] Speaker 1: through the Delaware General Assembly back in February and March
[1:09] Speaker 1: of this year. And substantively, what it did was it
[1:13] Speaker 1: basically intervened to push back and on some level to
[1:17] Speaker 1: overturn some of the decisions that had been made by
[1:22] Speaker 1: Delaware's Chancery court. It's much vaunted corporate law court that
[1:27] Speaker 1: deal with how do you sort of judge actions that
[1:31] Speaker 1: are taken by someone who is a controller of a
[1:34] Speaker 1: company and might be actions that are kind of self
[1:38] Speaker 1: serving or have a conflict of interest. So probably the
[1:41] Speaker 1: most famous of these was Elon Musk's first compensation package,
[1:46] Speaker 1: which was famously overturned by Delaware Chancery Court judge Kathleen
[1:51] Speaker 1: McCormick in early of twenty twenty four. There were some
[1:54] Speaker 1: other cases that also involved controllers that were, you know,
[1:58] Speaker 1: basically litigating a transaction that had a conflict of interest
[2:02] Speaker 1: that lost. And that's what this set of reforms did,
[2:05] Speaker 1: and it did into it. The first is it basically said,
[2:08] Speaker 1: it's much harder for stockholders to challenge various types of
[2:13] Speaker 1: conflicts involving that controller, and the traditional protections that had
[2:17] Speaker 1: been put up that would allow stockholders an easier rout
[2:21] Speaker 1: into court, those were going to get sort of heightened
[2:24] Speaker 1: a little bit and the wall was going to be
[2:26] Speaker 1: higher to surmount to get into court. And another related
[2:29] Speaker 1: reform was that the typical way that some of these
[2:32] Speaker 1: stockholders would bring a case against any corporate fiduciary is
[2:36] Speaker 1: to use historical rights that they have to get the
[2:40] Speaker 1: books and records of the corporation, and that's kind of
[2:43] Speaker 1: how they figure out what's going to go into their complaint.
[2:46] Speaker 1: And this is a long standing stockholder right. There was
[2:49] Speaker 1: a statute that allowed pretty easy access to those things,
[2:52] Speaker 1: and that statute itself got amped up to make it
[2:54] Speaker 1: harder to get access. So both of these big reforms
[2:58] Speaker 1: were a large reform that were pretty much in a
[3:01] Speaker 1: pro controller probe defendant direction, and probably as controversially, they
[3:09] Speaker 1: not only were so called prospective in nature, but they
[3:14] Speaker 1: also applied to any historical cases that involved some conflict
[3:19] Speaker 1: of interest a year ago, for example, in which the
[3:22] Speaker 1: case hadn't been brought in court yet, so it had
[3:25] Speaker 1: this retroactive application as well.
[3:28] Speaker 2: Plaintiffs are challenging the law on two constitutional grounds. Explain
[3:33] Speaker 2: those challenges.
[3:35] Speaker 1: The first is that it was an overreach by the
[3:37] Speaker 1: Delaware General Assembly to have a retroactive application of law.
[3:43] Speaker 1: The idea is, hey, listen, everyone knew what the rules
[3:46] Speaker 1: of the road were when they were acting back in
[3:50] Speaker 1: the pre SB twenty one days, and they either complied
[3:55] Speaker 1: or they didn't. But to suddenly say the rules of
[3:57] Speaker 1: the road have now changed, and we're going to use
[3:59] Speaker 1: the new rules to assess prior conduct seemed a little
[4:03] Speaker 1: bit off the rails, at least according to the plaintiffs
[4:06] Speaker 1: that are challenging this case. And then the second, which
[4:09] Speaker 1: in some ways is much more historical, has to do
[4:13] Speaker 1: with the fact that what the Delaware Assembly basically did
[4:16] Speaker 1: in overturning these chancery court opinions. If you read the
[4:20] Speaker 1: text of the statute, it basically says that under certain circumstances,
[4:24] Speaker 1: we're not even going to allow the Delaware Court of
[4:27] Speaker 1: Chancery to exercise its legal or equitable powers over certain
[4:32] Speaker 1: of these cases. And that is an interesting wording because
[4:36] Speaker 1: there's some old cases in Delaware, but says, if the
[4:40] Speaker 1: Delaware General Assembly tries to limit the equitable jurisdiction of
[4:46] Speaker 1: the Court of Chancery, it is a court of equity
[4:49] Speaker 1: after all. That's on constitutional under the Delaware Constitution, at
[4:53] Speaker 1: least if it's trying to do things that caused the
[4:56] Speaker 1: Court of Chancery to have fewer powers than it had
[4:58] Speaker 1: in and get this to back in seventeen ninety two,
[5:02] Speaker 1: back when the original Constitution was drafted. So those are
[5:05] Speaker 1: effectively the two constitutional challenges that the retroactive effect was unconstitutional,
[5:11] Speaker 1: and that the handcuffing of the Delaware chance Re Court
[5:15] Speaker 1: and the walling off of its ability to exercise equitable
[5:19] Speaker 1: powers was also unconstitutional under the Delaware Constitution.
[5:23] Speaker 2: Did the Delaware Supreme Court fast track this case?
[5:27] Speaker 1: Well, everything about SB twenty one has been fast tracked.
[5:31] Speaker 1: So one of the things that that's interesting about the
[5:34] Speaker 1: legislation itself is that, you know, corporate law is a
[5:37] Speaker 1: pretty technocratic enterprise, and a lot of times, in fact,
[5:41] Speaker 1: during the last quarter century, every time that the law
[5:44] Speaker 1: has been amended, it's gone through this what's known as
[5:47] Speaker 1: the Delaware Council, and it's part of the Date Bar Association,
[5:51] Speaker 1: and it's got a bunch of defendant side attorneys and
[5:54] Speaker 1: plaintive side attorneys and transactional attorneys and former judges and
[5:58] Speaker 1: made debate these things. This particular set of provisions bypassed
[6:03] Speaker 1: that Council, went straight into the Assembly, and within a
[6:07] Speaker 1: month pretty much had been passed by both houses of
[6:10] Speaker 1: the Assembly and signed in to law by the governor.
[6:13] Speaker 1: So it was already being fast tracked on the legislative basis.
[6:17] Speaker 1: The plaintiff in this case, a company called clearway. Well,
[6:21] Speaker 1: the shareholders of that company filed suit shortly thereafter, complaining
[6:25] Speaker 1: of conduct that predated all these statutes. And so the
[6:29] Speaker 1: plaintiff attorney said, hey, these things are unconstitutional, they shouldn't
[6:32] Speaker 1: apply to us, and we want to challenge the constitutionality
[6:36] Speaker 1: of the amendments. That is above the pay grade of
[6:39] Speaker 1: any of the judges in the Delaware Chancery Court, and
[6:42] Speaker 1: which Chancellor basically said, I'm going to just certify this
[6:45] Speaker 1: question the Delaware Supreme Court. It had made so much
[6:48] Speaker 1: news it really would have been shocking to me June
[6:51] Speaker 1: had the Delaware Supreme Court decided they were going to
[6:53] Speaker 1: sit on it for ten months or a year, they
[6:55] Speaker 1: pretty much had to say, Okay, we're going to take
[6:58] Speaker 1: briefing on this reform and we're going to hear argument
[7:01] Speaker 1: before year's end so that we can add some clarity
[7:05] Speaker 1: to exactly what is Delaware law going forward.
[7:07] Speaker 2: So, was this rush to pass the law and then
[7:11] Speaker 2: you know, to litigate it. Is it because Delaware fears
[7:15] Speaker 2: losing corporations to Texas or Nevada?
[7:19] Speaker 1: It certainly had an anxiety vibe to issue. So after,
[7:23] Speaker 1: you know, right after the original opinion on Elon Musk's
[7:26] Speaker 1: compensation package came out, he took to Twitter, which of
[7:30] Speaker 1: course is his right since he owns the company, and said,
[7:33] Speaker 1: never incorporate your company in the state of Delaware. And
[7:37] Speaker 1: he followed up with several other you know, sort of
[7:39] Speaker 1: Delaware hating Delaware rage type of tweets. And you know,
[7:44] Speaker 1: mister Musk is a pretty influential person, knows a lot
[7:47] Speaker 1: of people, and so all of his friends and associates
[7:52] Speaker 1: and prospective associates started saying, wow, I wonder whether he's
[7:56] Speaker 1: onto something, started asking their own corporate counsel, should we
[7:59] Speaker 1: reincorporate rate outside of Delaware? And my sense is that
[8:03] Speaker 1: those questions at least started to really pick up velocity
[8:07] Speaker 1: after he started to tweet rage a little bit against
[8:10] Speaker 1: the state of Delaware. It never really picked up a
[8:14] Speaker 1: huge sense of momentum in terms of actual reincorporations. It
[8:19] Speaker 1: was more like a handful of companies decided to reincorporate,
[8:24] Speaker 1: and some transactional lawyers reported I would assume truthfully that oh,
[8:29] Speaker 1: they were being inundated with questions about it. But when
[8:32] Speaker 1: the rubber hit the road, there wasn't an awful lot
[8:34] Speaker 1: of empirical support for a rushout of Delaware, though. That
[8:38] Speaker 1: clearly was the vibe that was animating both the governor
[8:42] Speaker 1: and the General Assembly, and in their view, they just
[8:46] Speaker 1: needed to do something, and something quickly to preempt what
[8:49] Speaker 1: they had at least become convinced was going to be
[8:53] Speaker 1: a mass exodus out of Delaware. Since the statute was passed,
[8:57] Speaker 1: you know, it's been constitutionally challenged. Its official status, I
[9:01] Speaker 1: guess is still being kicked around a little bit. There
[9:04] Speaker 1: really hasn't been that big of an upswelling of companies
[9:08] Speaker 1: that have left Delaware to incorporate in Nevada or Texas,
[9:12] Speaker 1: which are the two biggest states. You know, you can
[9:15] Speaker 1: definitely see a handful of companies that have done so,
[9:18] Speaker 1: but it's not been like a gigantic rush. It may
[9:22] Speaker 1: actually have picked up even a little bit compared to
[9:24] Speaker 1: where it was before the reform. Interestingly enough, a couple
[9:28] Speaker 1: of the companies that have reincorporated out of Delaware since
[9:31] Speaker 1: the reform said that they were doing so because these
[9:34] Speaker 1: new reforms had so many words in them and they
[9:37] Speaker 1: were so complicated. They just wanted to sit that dance out.
[9:40] Speaker 1: They didn't want to have to bear the risk of
[9:42] Speaker 1: figuring out how this new statute was going to get
[9:44] Speaker 1: interpreted over the years. So it's been a really interesting
[9:48] Speaker 1: debate amongst people who are corporate law nerds, and I
[9:51] Speaker 1: unfortunately include myself in that club, June, and maybe you
[9:54] Speaker 1: as well. But it really has been kind of an
[9:56] Speaker 1: interesting thing to see how this plays out. I think
[10:00] Speaker 1: a lot of people, you know, if you ask them
[10:02] Speaker 1: two years ago, would have told you, oh, you know,
[10:05] Speaker 1: this race, this dance off between different states to attract incorporations,
[10:10] Speaker 1: it's not a real thing. Delaware won it seventy five
[10:13] Speaker 1: years ago and it's not going to let go of
[10:15] Speaker 1: its winning margins. I think that a lot of people,
[10:17] Speaker 1: including myself, think, well, you know what, at least the
[10:21] Speaker 1: discussion about, you know, effective competition amongst other types of
[10:26] Speaker 1: states or other jurisdictions has now become a real thing.
[10:30] Speaker 1: You hear it on a regular basis. So it probably
[10:33] Speaker 1: is the case that Delaware is more vulnerable than it
[10:36] Speaker 1: was two years ago. Where people might differ is whether
[10:39] Speaker 1: the vulnerability is due to the cases like the musk
[10:43] Speaker 1: compensation case, or is it due to the fact that
[10:46] Speaker 1: the Assembly was putting together a slapdash set of statutes
[10:49] Speaker 1: that no one knows exactly they're going to work, right,
[10:52] Speaker 1: and it might be a combination of both things.
[10:55] Speaker 2: Was there another law that had an overhaul because of
[10:58] Speaker 2: an unpopular chance re court ruling?
[11:02] Speaker 1: There is, interestingly enough, about six months before this SB
[11:06] Speaker 1: twenty one reform, there was another reform in around August
[11:11] Speaker 1: of twenty twenty four. Now that was a case that
[11:15] Speaker 1: itself was responding to a different case, a case involving
[11:19] Speaker 1: the Molus Corporation and some side contracts that its founder,
[11:23] Speaker 1: Ken Molis had reached with the company that protected him
[11:27] Speaker 1: against a whole bunch of different fiduciary duty allegations. The
[11:30] Speaker 1: judge in that case basically said, you know, you might
[11:33] Speaker 1: be able to do these things, but you can't do
[11:35] Speaker 1: it in a side contract. You got to do it
[11:36] Speaker 1: in the corporate charter or the bylaws, and basically invalidated
[11:40] Speaker 1: those side contracts. And so the twenty twenty four reforms
[11:44] Speaker 1: were another, you know, essentially a legislative overturning of a
[11:50] Speaker 1: different case. This Molus case came about around the same
[11:53] Speaker 1: time as the Musk case came out, and you know,
[11:57] Speaker 1: at the time it was quite controversial, but it did
[11:59] Speaker 1: go through the Comptle, and it had the sort of
[12:01] Speaker 1: the ordinary schedule in being passed. It didn't sort of
[12:04] Speaker 1: have this kind of fire alarm exit rush that SB
[12:09] Speaker 1: twenty one had. And while people were you know, I guess,
[12:12] Speaker 1: busy clutching their pearls over this twenty twenty four reform,
[12:16] Speaker 1: which is called SB three thirteen if you're interested in
[12:19] Speaker 1: the alphabet soup, suddenly this SB twenty one thing comes
[12:23] Speaker 1: along and steals everyone's attention from it. But you are
[12:26] Speaker 1: correct that that twenty twenty four reform is still in
[12:31] Speaker 1: the mix, and it has some interesting interaction effects with
[12:35] Speaker 1: SB twenty one because it basically says, look, regardless of
[12:39] Speaker 1: what Delaware is doing in its corporate code, it is
[12:43] Speaker 1: now possible to enter into a side contract that might
[12:47] Speaker 1: allow you to get around most of the Delaware corporate code.
[12:51] Speaker 1: In fact, I've just written an academic paper with my
[12:53] Speaker 1: colleague Dorothy Lund that basically says, you know what, Delaware
[12:57] Speaker 1: may actually prevail in its first place position in this
[13:01] Speaker 1: race because it is basically empowered a bunch of corporations,
[13:05] Speaker 1: if they don't like what was happening to Delaware, just
[13:08] Speaker 1: to go private and just privatize their entire governance structure
[13:12] Speaker 1: coming up next.
[13:13] Speaker 2: But is it a bad look for Delaware? You're listening
[13:17] Speaker 2: to Bloomberg. In response to a trial judge's rejection of
[13:23] Speaker 2: Elon Musk's blockbuster pay package, Delaware's legislature passed a corporate
[13:28] Speaker 2: law overhaul SB twenty one narrowed the definition of controlling stockholder,
[13:34] Speaker 2: making it easier to avoid scrutiny of potentially conflicted transactions. Now,
[13:40] Speaker 2: Delaware's highest court will decide the constitutionality of that law.
[13:45] Speaker 2: I've been talking to Eric Tally, an expert in business
[13:48] Speaker 2: law and a professor at Columbia Law School. Eric, is
[13:52] Speaker 2: it a bad look that the legislature changes the law
[13:56] Speaker 2: to make it friendlier to corporations so those core operations
[14:00] Speaker 2: don't leave the state.
[14:02] Speaker 3: It seems like a bad look to me.
[14:05] Speaker 1: Well, there are aspects of that are a bad look.
[14:07] Speaker 1: I do want to defend the enterprise of Delaware in
[14:11] Speaker 1: trying to keep the franchise alive.
[14:13] Speaker 3: Right.
[14:13] Speaker 1: The secret sauce of Delaware for a long time was, Hey, look,
[14:16] Speaker 1: we're a small state. We don't have a lot of
[14:19] Speaker 1: like operating industries in our state that are going to
[14:21] Speaker 1: capture our general assembly. So we can basically focus on,
[14:25] Speaker 1: you know, trying to formulate the best possible operating corporate
[14:29] Speaker 1: law that is possible, and in fact, Delaware benefits quite
[14:33] Speaker 1: a bit from that because it's a small state. In
[14:35] Speaker 1: corporation fees alone, you know, probably pave half the roads
[14:38] Speaker 1: in Delaware, so they really do benefit from the revenues
[14:41] Speaker 1: that are raised. On the other hand, in this particular instance,
[14:46] Speaker 1: the fact that it was so procedurally irregular, the fact
[14:49] Speaker 1: that it really seemed even though the you know, the
[14:52] Speaker 1: governor and the state legislators deny this, it seems pretty
[14:55] Speaker 1: obvious that the pressure initially was coming from Elon Musk
[14:59] Speaker 1: himself and attempting to change law by himself. And the
[15:03] Speaker 1: fact that it rocketed through the Delaware legislature incredibly fast,
[15:08] Speaker 1: with very few opportunities for critics to, you know, to
[15:13] Speaker 1: raise their concerns or to voice their concerns. One of
[15:16] Speaker 1: my colleagues testified in front the General Assembly and was
[15:18] Speaker 1: literally shouted down and was told to leave the lectern
[15:22] Speaker 1: So it really is kind of an interesting moment for Delaware.
[15:26] Speaker 1: I don't think the look has been particularly good with Delaware,
[15:29] Speaker 1: and that's in some ways one of the dangers is
[15:32] Speaker 1: that you can fail to compensate for things that may
[15:35] Speaker 1: be emerging problems in the state, but you can also overcompensate.
[15:39] Speaker 1: And you know, to add even another complicating factor. The
[15:43] Speaker 1: two big cases that were being you know, sort of
[15:46] Speaker 1: responded to with these reforms, the Molus case and the
[15:49] Speaker 1: Elon Musk case, they still had not at that point
[15:53] Speaker 1: gotten to even an appeal before the Delaware Supreme Court.
[15:57] Speaker 1: They were still active live cases in the Delaware Assemble
[16:00] Speaker 1: was effectively responding to a trial court opinion. If you know,
[16:04] Speaker 1: there's a chance a trial court opinion makes a mistake,
[16:07] Speaker 1: and sometimes they do. The usual root is okay, appeal
[16:10] Speaker 1: it and see what the Delar's Supreme Court does with it.
[16:12] Speaker 1: And only then would you want to step in and say, okay,
[16:14] Speaker 1: we still don't like what the Delar's Preme Court is
[16:16] Speaker 1: going to do, and so we're going to change the law.
[16:18] Speaker 1: And so there really was a bit of a rushed
[16:21] Speaker 1: kind of atmosphere to this entire ordeal, and I think
[16:25] Speaker 1: on some level that probably caused the urgency to escalate.
[16:30] Speaker 1: As opposed to the signal that I suspect the governor
[16:33] Speaker 1: was trying to send, which is now we're going to
[16:34] Speaker 1: move really really quickly to you know, to put this
[16:37] Speaker 1: fire out, and putting the fire out, they may have
[16:40] Speaker 1: started inadvertently three or four other fires.
[16:42] Speaker 2: I mean, it's it's expensive to incorporate in a different state,
[16:46] Speaker 2: isn't it?
[16:47] Speaker 3: To move states?
[16:49] Speaker 1: It can be in a lot of these states. In
[16:52] Speaker 1: Nevada and Texas, the expense is actually lower than in Delaware,
[16:56] Speaker 1: and Delaware has you know, doesn't charge a ton. The
[16:59] Speaker 1: most you're going to pay in an annual franchise tax
[17:03] Speaker 1: is like two hundred and fifty thousand dollars, which is peanuts.
[17:06] Speaker 1: And it's smaller if you're not a big company. So
[17:10] Speaker 1: it really is a scale business. It's not a Delaware
[17:14] Speaker 1: does not make all its money from three or four companies.
[17:17] Speaker 1: It makes it from the millions of companies that are
[17:20] Speaker 1: incorporated there and pay annual franchise taxes. And that's been
[17:24] Speaker 1: their entire design. One thing that's kind of interesting about
[17:27] Speaker 1: this new competition from Texas and kind of a pre
[17:30] Speaker 1: existing but newly invigorated competition from Nevada is that it's
[17:35] Speaker 1: not really clear that they are in this game to
[17:38] Speaker 1: make money. It seems like they're more in this game
[17:42] Speaker 1: almost to rejoin where are you incorporated and where are
[17:45] Speaker 1: you doing business? The folks at Texas say, oh, yeah,
[17:48] Speaker 1: we want people to incorporate in Texas because we want
[17:50] Speaker 1: their factories to be in Texas. And that's kind of
[17:54] Speaker 1: a quaint approach, at least by historical standards, because the
[17:58] Speaker 1: big innovation that Delaware introduced to the world is you
[18:01] Speaker 1: don't have to do any business in Delaware to be
[18:04] Speaker 1: incorporated there, and what they specialize in is incorporate law.
[18:08] Speaker 1: So some of the most recent competition I think has
[18:10] Speaker 1: been hard for Delaware to match up to because it
[18:14] Speaker 1: seems to be not about making money, and a lot
[18:17] Speaker 1: of these states seem to be interested in kind of
[18:19] Speaker 1: keeping the cost down of incorporating. Now, if you're going
[18:22] Speaker 1: to reincorporate and you're a public company, that's a very
[18:25] Speaker 1: costly process. You've got to put it out in front
[18:28] Speaker 1: of the stockholders, you've got to solicit their votes, you
[18:31] Speaker 1: have to have long disclosures, and there's a fair amount
[18:34] Speaker 1: of rigmarole that goes into trying to figure out how
[18:37] Speaker 1: am I going to reincorporate in a different state.
[18:39] Speaker 2: So now, as far as SB twenty one, do you
[18:42] Speaker 2: think it's unlikely that the Delaware Court will find it unconstitutional.
[18:49] Speaker 1: This is a really interesting issue. So the case from
[18:53] Speaker 1: which a lot of this comes is a case from
[18:55] Speaker 1: the nineteen fifties actually, and that case itself was a
[19:00] Speaker 1: controversial case when it first came down. It hasn't really
[19:03] Speaker 1: been tested very much, and so I think probably, you know,
[19:07] Speaker 1: if are replacing odds, I'd say the chances are probably
[19:11] Speaker 1: that the Delaware Supreme Court is going to find a
[19:13] Speaker 1: way to either uphold the statute or say, okay, look,
[19:18] Speaker 1: technically the statute is not constitutional, but if you put
[19:21] Speaker 1: in a small fix to it, like make it an
[19:24] Speaker 1: opt in statute or something like that, it would be constitutional.
[19:28] Speaker 1: We'll see what happens. But it's interesting that it's had
[19:31] Speaker 1: the kind of legs that it has, and in some
[19:33] Speaker 1: ways not surprising because really the whole sort of you know,
[19:37] Speaker 1: last seven or eight months in corporate law has kind
[19:40] Speaker 1: of forced us back into this kind of existential moment
[19:43] Speaker 1: of trying to figure out, you know, what is valuable
[19:46] Speaker 1: in corporate law and what is it.
[19:47] Speaker 3: Do you think we'll see a decision soon on this.
[19:50] Speaker 1: We'll see where this goes. My guess is we're probably
[19:52] Speaker 1: going to have to wait till the beginning of the
[19:53] Speaker 1: new year to see a judgment from the from the
[19:56] Speaker 1: Delaware Supreme Court, but they may move relatively quickly given
[19:59] Speaker 1: the state involved.
[20:01] Speaker 2: Before I let you go, I want to get your
[20:02] Speaker 2: input on something totally different.
[20:05] Speaker 3: Open Ai is laying the.
[20:07] Speaker 2: Groundwork for an IPO that could value the company at
[20:11] Speaker 2: one trillion dollars.
[20:13] Speaker 1: You can't see me, but I've got my little Austin
[20:16] Speaker 1: Powers pinky up against the corner of my mouth for
[20:19] Speaker 1: one trillion dollars. So so yeah, so this is this
[20:22] Speaker 1: has been a long brewing situation with open ai. You know.
[20:27] Speaker 1: When the company began, uh, it had a unique structure, right,
[20:32] Speaker 1: and I think some of the founders were quite worried about,
[20:35] Speaker 1: you know, the general intelligence of artificial decision makers and
[20:40] Speaker 1: whether that caused a risk and so uh they deliberately
[20:44] Speaker 1: built into the original structure of open ai what is
[20:48] Speaker 1: essentially a ceiling on how profitable it could be for
[20:50] Speaker 1: its investors. It was a company and owned by a
[20:54] Speaker 1: nonprofit foundation, and it basically said that if you're an
[20:57] Speaker 1: investor in the for profit company, as soon as you've
[21:00] Speaker 1: made back one hundred times your investment, you don't get
[21:03] Speaker 1: anything more, all right, And so that that seemed at
[21:06] Speaker 1: the time like one hundred times by investment, that's great,
[21:08] Speaker 1: well open ai. Open ai is shot well past that
[21:12] Speaker 1: now and and that creates a problem, particularly given that
[21:17] Speaker 1: it is sitting side by side with a bunch of
[21:20] Speaker 1: other generative AI companies that are investing heavily in improving
[21:24] Speaker 1: their project. The only way that you can kind of,
[21:27] Speaker 1: you know, do that and stay in competition is to
[21:30] Speaker 1: try to figure out a way to raise more money.
[21:33] Speaker 1: But when the existing investors have already hit their one
[21:36] Speaker 1: hundred times cap, there's no easy way to do it.
[21:39] Speaker 1: So open ai was in a clearly a conundrum in
[21:44] Speaker 1: you know, the highly competitive environment it now finds itself
[21:48] Speaker 1: and it's still the market leader, but you know, a
[21:50] Speaker 1: bunch of these other big players didn't have a hand
[21:53] Speaker 1: tied behind their back, and so there's been a longstanding,
[21:56] Speaker 1: you know, kind of internal debate and discussions that been
[22:00] Speaker 1: taking place across the board on how and whether open
[22:03] Speaker 1: ai could be transitioned to a place where it'll have,
[22:07] Speaker 1: you know, better ability to raise money from outside investors,
[22:11] Speaker 1: but still have some controls in place that were pretty
[22:16] Speaker 1: much envisioned by the founders that set up open ai
[22:20] Speaker 1: to begin with, and so under that existing structure, it's
[22:23] Speaker 1: not going to be easy to raise money from anyone,
[22:26] Speaker 1: including an IPO, and so they kind of felt that
[22:29] Speaker 1: they had to somehow transition to something different, and that's
[22:32] Speaker 1: what they've done. They are a Delaware company and they
[22:36] Speaker 1: have basically announced that they have transitioned into something known
[22:40] Speaker 1: as a public benefit corporation. And these are relatively new
[22:46] Speaker 1: structures that basically say you can be a for profit
[22:49] Speaker 1: company and have kind of a do good goal at
[22:52] Speaker 1: the same time. And Delaware opened up its own statutes
[22:55] Speaker 1: to allow these types of companies in about ten fifteen
[22:59] Speaker 1: years ago. There haven't been that many takers, quite frankly June,
[23:02] Speaker 1: particularly in the in the publicly traded company space, but
[23:06] Speaker 1: there are some and so open Ai basically said, well,
[23:10] Speaker 1: if we did that, then through that conversion, we could
[23:14] Speaker 1: get rid of this one hundred times your investment cap
[23:18] Speaker 1: that's been you know, tying our hands. We could still
[23:21] Speaker 1: make the foundation, the nonprofit, a big player in the
[23:27] Speaker 1: post conversion company. And they have basically you know what,
[23:32] Speaker 1: It's been reported that the foundation is going to have
[23:34] Speaker 1: a significant amount of stock in the company and is
[23:37] Speaker 1: also going to have special rights to fire board members
[23:41] Speaker 1: if they don't like what the board members are doing.
[23:43] Speaker 1: That is a non trivial amount of control. But by
[23:46] Speaker 1: the same token, the handcuffs are now off the ability
[23:50] Speaker 1: of investors to to generate a return, and so that
[23:54] Speaker 1: has absolutely sowed the seeds for a possible public offering
[23:59] Speaker 1: of Open AI. And you know, it's still early days,
[24:02] Speaker 1: so we don't know when that's going to occur, what
[24:04] Speaker 1: it's going to look like, but it seems pretty clear
[24:07] Speaker 1: that if they were going to do a type of
[24:09] Speaker 1: a public offering of their stock ownership, this was the
[24:12] Speaker 1: type of move that they had to make. And so
[24:15] Speaker 1: that's kind of where things are pointing right now. Because
[24:18] Speaker 1: Opening is not a publicly traded company, they have not
[24:21] Speaker 1: made all kinds of long disclosures about exactly what those
[24:25] Speaker 1: different levers of control are. That will happen eventually if
[24:29] Speaker 1: they file paperwork for having an initial public offering, but
[24:33] Speaker 1: it hasn't happened yet, and you'll be.
[24:35] Speaker 3: The one we call when they do.
[24:36] Speaker 2: Thanks so much, Eric, as always, that's Professor Eric Talley
[24:40] Speaker 2: of Columbia Law School. The federal judiciary hasn't had defurlough's
[24:45] Speaker 2: staff during a shutdown in three decades until now. For
[24:51] Speaker 2: the first two and a half weeks of the shutdown,
[24:53] Speaker 2: the Judiciary tampt into other sources of funding to keep
[24:57] Speaker 2: the courts fully functioning.
[24:59] Speaker 3: And to keep keep employees paid.
[25:02] Speaker 2: But that money has now run out and the federal
[25:04] Speaker 2: district courts are using different strategies to manage staffing and caseloads.
[25:09] Speaker 2: Joining me is Bloomberg Law reporters Suzanne Monnac So, Suzanne,
[25:14] Speaker 2: the federal courts have run out of money.
[25:16] Speaker 4: Yes, the Judiciary ran out of funds in mid October.
[25:20] Speaker 4: This was the first time that the Judiciary had been
[25:22] Speaker 4: required to do shutdown related furloughs of their employees in
[25:25] Speaker 4: thirty years. And that's just because they didn't have the
[25:28] Speaker 4: reserves that they've had in the past. They've said underfunding
[25:31] Speaker 4: by Congress. So we have now entering multiple weeks of
[25:34] Speaker 4: a shutdown and the Judiciary employees, if this continues, are
[25:38] Speaker 4: going to see their first miss paycheck this coming Friday.
[25:41] Speaker 2: Before the Judiciary was able to prevent these furloughs and
[25:46] Speaker 2: court closures during a shutdown, why weren't they able to
[25:51] Speaker 2: this time?
[25:51] Speaker 4: The Judiciary has in the past had the reserves to
[25:54] Speaker 4: float payroll during shutdowns, and for example, it managed to
[25:57] Speaker 4: avoid having to furlough any employees during the five weeks
[26:00] Speaker 4: shut down during President Donald Trump's first term. But Judiciary
[26:04] Speaker 4: employees have blamed the furloughs that they've had to have
[26:07] Speaker 4: quite a bit sooner this year on tighter margins. They've
[26:10] Speaker 4: gotten flat funding from Congress the last few years, and
[26:13] Speaker 4: that's effectively a cut due to inflation. So they've just
[26:16] Speaker 4: said that this has given them less cushion. So while
[26:18] Speaker 4: of course federal workers stop getting paid October first, at
[26:21] Speaker 4: the start of the fiscal year, the judiciary had just
[26:24] Speaker 4: two weeks of additional funding to keep themselves going, but
[26:27] Speaker 4: then after that they haven't had the ability to continue
[26:31] Speaker 4: paying employees.
[26:32] Speaker 2: So the federal district courts are handling the lack of
[26:35] Speaker 2: funds in different ways. For example, some are having the
[26:39] Speaker 2: courts close for a day tell us about some of
[26:42] Speaker 2: the measures they're taking.
[26:43] Speaker 4: That's right, federal courts across the country. The federal districts,
[26:46] Speaker 4: i should say, do really operate quite independently. So while
[26:50] Speaker 4: we're seeing both furloughs kind of on the administrative side
[26:52] Speaker 4: of the judiciary in Washington. We're also seeing different responses,
[26:56] Speaker 4: really varying by every single district in the country. Federal courts,
[27:00] Speaker 4: as you mentioned, have been closing or limiting services on Fridays.
[27:04] Speaker 4: For example, the Middle District of Alabama has said that
[27:07] Speaker 4: its courthouses will be closed and its employees furloughed every
[27:10] Speaker 4: Friday while this continues. The Federal Court House in Connecticut
[27:14] Speaker 4: will be furlowing its clerk's office staff on Fridays. And
[27:18] Speaker 4: we're also just seeing a number of courts putting out
[27:20] Speaker 4: notices that they're going to be suspending things like travel
[27:23] Speaker 4: training programs, and of course many are postponing civil trials
[27:27] Speaker 4: that involve the Justice Department. As Low's lawyers are also
[27:30] Speaker 4: not getting paid.
[27:31] Speaker 2: We should just mention that judges get paid because it's
[27:33] Speaker 2: required under the constitution. How are they deciding which workers
[27:38] Speaker 2: to furlough and which to keep on the job without pay.
[27:41] Speaker 4: There seems to be some discretion and making those decisions.
[27:44] Speaker 4: There is a course shutdown guidance under the Anti Deficiency
[27:47] Speaker 4: Act which the judiciary is operating under in terms of
[27:50] Speaker 4: how to identify who is essential and who is not essential. Activities,
[27:54] Speaker 4: for example, include criminal cases, so those cases must continue
[27:58] Speaker 4: during shutdowns because they involve liberty of people, and so,
[28:02] Speaker 4: for example, the federal defenders are generally classifying their employees
[28:06] Speaker 4: as essential since they handle those cases. And of course,
[28:09] Speaker 4: since courts have to continue those cases, we are seeing
[28:12] Speaker 4: a lot of court staff being deemed essential and having
[28:15] Speaker 4: to continue to work, hopefully for back pay later. And
[28:19] Speaker 4: so I just think that it's one of those things
[28:20] Speaker 4: where courts do have to continue operating during a shutdown.
[28:23] Speaker 4: So even though they have run out of money, I
[28:25] Speaker 4: think the furloughs are still going to remain somewhat limited
[28:27] Speaker 4: since they do have to be able to continue to
[28:29] Speaker 4: process cases in some capacity. And some civil cases are
[28:32] Speaker 4: continuing as well if the judge considers them important enough
[28:35] Speaker 4: to do so.
[28:35] Speaker 2: Yeah, I was going to say that a lot of
[28:37] Speaker 2: the cases involving Trump administration policies are continuing. For example,
[28:43] Speaker 2: we have those two cases over the funding of snap benefits.
[28:48] Speaker 4: If a judge tells the Justice Department, I know, you
[28:50] Speaker 4: do have to continue showing up and continuing this case,
[28:52] Speaker 4: then the Justice Department has to do so. Guidance that
[28:55] Speaker 4: DJ had given was to generally request a pause in
[28:58] Speaker 4: a case in a civil case where they felt it
[29:01] Speaker 4: was appropriate to do so during the shutdown. But if
[29:03] Speaker 4: the judge says, no, I disagree, we're too far into this,
[29:06] Speaker 4: I want to continue, then those lawyers do have to
[29:08] Speaker 4: continue without pay. So really we're out of point where
[29:10] Speaker 4: the judge is like the only person getting paid in
[29:12] Speaker 4: a courtroom as their staff's not getting paid. Any type
[29:15] Speaker 4: of federal government lawyers are not getting paid. Federal defenders
[29:18] Speaker 4: are not getting paid in a criminal case. So really
[29:20] Speaker 4: it's just the private attorneys in civil cases that are
[29:23] Speaker 4: getting paid for their work at this point in the courtroom.
[29:25] Speaker 2: So let's talk about the cash crunch how it affects
[29:28] Speaker 2: criminal cases. So federal public defenders are not being paid
[29:33] Speaker 2: right at this point.
[29:34] Speaker 5: That's correct.
[29:35] Speaker 4: They did receive a paycheck in October from their work
[29:37] Speaker 4: for the first two weeks of the month that there
[29:38] Speaker 4: was funding for, so they really haven't actually felt the
[29:42] Speaker 4: crunch yet in terms of the paycheck suspension, but they're
[29:45] Speaker 4: going to feel that this Friday if this shutdown is
[29:47] Speaker 4: still going.
[29:48] Speaker 2: So federal public defenders rely on CJA panel attorneys to
[29:54] Speaker 2: take clients in cases involving multiple defendants, etc. Tell us
[29:58] Speaker 2: about what's been happening those attorneys even before the shutdown.
[30:03] Speaker 4: Yes, here the shutdown is really exacerbated an existing underfunding
[30:07] Speaker 4: problem for criminal defense CJA or the Criminal Justice Act
[30:11] Speaker 4: Panel attorneys. These are private attorneys who take on cases
[30:14] Speaker 4: for indigen defendants where federal defenders cannot. Oftentimes that might
[30:17] Speaker 4: be a multi defendant case where the defenders are representing
[30:20] Speaker 4: one of the defendants but then would have a conflict
[30:22] Speaker 4: of interest in representing other ones. There, for example, a
[30:25] Speaker 4: CJA panel lawyer would get tapped.
[30:27] Speaker 5: To step in.
[30:28] Speaker 4: Funding for that panel actually ran out earlier this summer,
[30:31] Speaker 4: back in July, and so they actually haven't been paid
[30:34] Speaker 4: for about four months now. They had hoped to be
[30:37] Speaker 4: reimbursed for their work during that several months period on
[30:40] Speaker 4: October first, when new funding came in, but of course
[30:43] Speaker 4: that isn't what happened, and the shutdown has continued.
[30:45] Speaker 5: So they've been now floading their own.
[30:47] Speaker 4: Expenses, as I said, for about four months, and that's
[30:49] Speaker 4: including expert witnesses that they might want to bring on.
[30:53] Speaker 4: Forensic investigators, those types of people who might be testifying
[30:56] Speaker 4: in a case examining mobile cell phone or computer data
[31:00] Speaker 4: in the case. Those people are also fronting their own expenses. Now,
[31:03] Speaker 4: of course, federal defenders who were previously getting paid I've
[31:06] Speaker 4: now joined them and not getting paid. So we're really
[31:08] Speaker 4: seeing a pretty significant underfunding for criminal defense in that space.
[31:13] Speaker 2: So some lawyers have made motions to have cases dismissed
[31:20] Speaker 2: because of this situation. I mean you wrote about one
[31:23] Speaker 2: lawyer wrote, you prosecute, you pay, you don't pay, you
[31:26] Speaker 2: don't prosecute, complaint, indictment dismissed with prejudice. There are a
[31:31] Speaker 2: lot of lawyers trying to have cases dismissed because of this.
[31:36] Speaker 4: We're certainly seeing them across this country. I've probably seen
[31:38] Speaker 4: close to a dozen at this point, though of course
[31:40] Speaker 4: there may be more. We've seen more success with request
[31:44] Speaker 4: to postpone cases.
[31:45] Speaker 5: Judges seem a little bit more willing.
[31:47] Speaker 4: If the defendant who might be in prison is willing
[31:49] Speaker 4: to postpone their case, I think the judge is a
[31:51] Speaker 4: little bit more willing to do that. I have yet
[31:53] Speaker 4: to see if case fully dismissed for a constitutional violation
[31:57] Speaker 4: as a result of this underfunding. The six and and
[32:00] Speaker 4: My guarantees a right to counsel even if you cannot
[32:03] Speaker 4: for an attorney, and so that's where we're seeing some
[32:05] Speaker 4: of these arguments being brought under that by nature, the
[32:07] Speaker 4: fact that the government hasn't funded criminal defense, and as
[32:10] Speaker 4: long as it hasn't would create a constitutional violation.
[32:13] Speaker 5: Waiting to see if we.
[32:15] Speaker 4: See a judge become receptive to that argument and decide
[32:17] Speaker 4: to fully toss the case. There's a number of motions
[32:20] Speaker 4: that we're keeping an eye on in that respect, and
[32:22] Speaker 4: I think they're only going to continue and proliferate as
[32:25] Speaker 4: criminal defense lawyers are sharing templates with each other and
[32:28] Speaker 4: sharing the motions if they filed, and what they've had
[32:30] Speaker 4: success or not success with.
[32:32] Speaker 2: And what's happening at the Supreme Court.
[32:34] Speaker 4: So the Supreme Court has actually also run out of funding,
[32:37] Speaker 4: and their spokesperson has said that they'll need to make
[32:39] Speaker 4: some changes to its operations, including by closing the building
[32:43] Speaker 4: to the public and some capacity, but keeping it open
[32:46] Speaker 4: for official business, which means that the justices will continue
[32:49] Speaker 4: to hear and decide cases.
[32:51] Speaker 2: So now let's talk a little bit about Lindsay Halligan.
[32:54] Speaker 2: First of all, tell us who Lindsay Halligan is.
[32:56] Speaker 4: Lindsay Halligan was previously Trump's personal attorney, and she has
[33:01] Speaker 4: been appointed the interim US attorney for the Eastern District
[33:04] Speaker 4: of Virginia based just outside of Washington, DC, and she
[33:07] Speaker 4: is leading the criminal charges against New York Attorney General
[33:10] Speaker 4: Latitia James and former FBI Director James Comey that we've
[33:14] Speaker 4: seen last month or so. She's also come under scrutinized
[33:17] Speaker 4: by the public and within those cases for the way
[33:20] Speaker 4: in which she was appointed. We're seeing those defendants make
[33:23] Speaker 4: arguments in court that she was invalidly serving as interim
[33:27] Speaker 4: US attorney when those indictments against them were filed.
[33:30] Speaker 2: Well, she was hastily installed after the prior interim US
[33:35] Speaker 2: attorney refused to bring indictments against some of those on
[33:39] Speaker 2: Trump's enemies lists.
[33:41] Speaker 5: That's right.
[33:41] Speaker 4: She came to the office after a little bit of turnover.
[33:44] Speaker 4: We had seen the Biden appointed US attorney for that
[33:46] Speaker 4: office resign as is typical, and a new person, Eric Seibert,
[33:50] Speaker 4: was brought in. He'd served as an interim term and
[33:52] Speaker 4: then has had his term renewed by the Federal District Court,
[33:55] Speaker 4: as is the law regarding US attorney appointments. But then
[33:59] Speaker 4: he was pushed out after the Trump administration told him
[34:02] Speaker 4: he'd be removed for not bringing mortgage fraud charges against
[34:05] Speaker 4: Letitia James, even though prosecutors in his office had found
[34:08] Speaker 4: that there wasn't.
[34:09] Speaker 5: Enough evidence for that.
[34:10] Speaker 4: That's when we saw Lindsay Halligan, Trump's former attorney, who
[34:13] Speaker 4: has never been a prosecutor before, be brought in and
[34:16] Speaker 4: she was willing to sign on to that indictment, both
[34:18] Speaker 4: against Letitia James as well as against James Comey, who's
[34:21] Speaker 4: been accused of making a false statement to Congress.
[34:24] Speaker 2: After her appointment was attacked in court papers by both
[34:28] Speaker 2: Comy and James, US Attorney Pam Bondy has given her
[34:33] Speaker 2: a new title.
[34:34] Speaker 5: That's correct.
[34:34] Speaker 4: We're seeing a little bit of maneuvering here on the
[34:36] Speaker 4: part of the Trump administration to try to shore Halligan
[34:39] Speaker 4: up against some of these claims of having been improperly serving.
[34:42] Speaker 4: So we saw just last night court filing where Attorney
[34:46] Speaker 4: General Pam Bondy has signed an order on October thirty first.
[34:49] Speaker 5: But she's backdating. It's a fact.
[34:50] Speaker 4: She's saying it's taking effector retroactively to when Lindsay Halligan
[34:54] Speaker 4: took office in September, to add a new title for
[34:57] Speaker 4: her that she is the Special Attorney. And this is
[35:00] Speaker 4: essentially an effort to try to shore her up against
[35:03] Speaker 4: these claims that she might have been invalidly serving at
[35:05] Speaker 4: the time that the indictments against James Cove and Letitia
[35:08] Speaker 4: James were filed. She's calling it ratifying essentially her appointment
[35:12] Speaker 4: as US attorney and claiming that she had the authority
[35:15] Speaker 4: to issue those indictments when those.
[35:17] Speaker 5: People were charged.
[35:19] Speaker 4: And this is really part of a broader pattern of
[35:20] Speaker 4: maneuvering that we're seeing at US attorney's offices across the country,
[35:24] Speaker 4: particularly in states with two Democratic senators. US attorneys go
[35:27] Speaker 4: through the nomination process in the Senate, and senators do
[35:30] Speaker 4: have veto power under the blue slit process over those nominees,
[35:34] Speaker 4: and so we're seeing in states like Virginia that has
[35:37] Speaker 4: two Democratic senators, California, and New York where the Trump
[35:41] Speaker 4: administration doesn't want to have to come up to deal
[35:43] Speaker 4: with Congress about this, so instead they're kind of taking
[35:47] Speaker 4: creative interpretations of some of the vacancy laws to try
[35:49] Speaker 4: to get people in that they want in acting her
[35:52] Speaker 4: in her own capacities and using things like making them
[35:54] Speaker 4: the second in command at the office, thus allowing them
[35:57] Speaker 4: to have all of the powers as the first command
[36:00] Speaker 4: if that spot is vacant, those types of maneuvering, and
[36:02] Speaker 4: so that's just what we're seeing here, and it's something
[36:05] Speaker 4: we've seen across the country as well.
[36:06] Speaker 3: Though it's quite inventive.
[36:09] Speaker 2: We'd all like to be able to say this is retroactive.
[36:12] Speaker 2: My mistake doesn't count because I'm now retroactively correcting it.
[36:17] Speaker 2: But I doubt that a court is going to allow
[36:20] Speaker 2: her to say, oh, by the way, you.
[36:22] Speaker 5: Know, well, certainly you have to see.
[36:24] Speaker 4: The Justice Department is arguing that Halligan was wildly serving regardless,
[36:28] Speaker 4: and they've sort of portrayed this as well, just in case,
[36:30] Speaker 4: we're doing this extra thing to make our case even stronger.
[36:33] Speaker 4: But we think we have a strong case regardless. That's
[36:35] Speaker 4: essentially what their argument has been. There'll be a hearing
[36:38] Speaker 4: in this in both criminal cases in about two weeks
[36:41] Speaker 4: or in November thirteenth. So interesting to see how the
[36:44] Speaker 4: judge receives.
[36:45] Speaker 2: US Federal judges in other jurisdictions have ruled against the
[36:50] Speaker 2: Trump administration in similar cases. Thanks so much, Suzanne. That's
[36:55] Speaker 2: Bloomberg Law reporter Suzanne Monyac And that's it for this
[36:59] Speaker 2: edition of the Bloomberg Law Show. Remember you can always
[37:02] Speaker 2: get the latest legal news on our Bloomberg Law podcasts.
[37:05] Speaker 2: You can find them on Apple Podcasts, Spotify, and at
[37:08] Speaker 2: www dot bloomberg dot com, slash podcast slash Law, and
[37:13] Speaker 2: remember to tune into The Bloomberg Law Show every weeknight
[37:16] Speaker 2: at ten pm Wall Street Time. I'm June Grosso and
[37:20] Speaker 2: you're listening to Bloomberg

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