In the past 24 months, Delaware’s place as state-corporation-law hegemon has undergone sustained hurricane-force blowback from Court of Chancery and Supreme Court decisions and subsequent legislation, which have shattered the long-standing belief that for most publicly-traded firms, the benefits of incorporating in Delaware exceed the costs, including the costs and risks of stockholder litigation. At the center of Delaware’s existential crisis are the Court of Chancery decision in the Tornetta litigation rescinding Elon Musk’s $57 billion compensation package, the Supreme Court decision in the Match litigation extending MFW1 to all controlling-shareholder-conflicted transactions, and the Delaware legislature’s February 2025 enactment of Senate Bill 21 in reaction to those and related judicial decisions. Fundamental to a meaningful critique of these cases and Senate Bill 21 is an under-the-radar question: how should entrepreneur-influenced or entrepreneur-controlled transactions and decisions fit in a value-optimizing theory of the business judgment rule? Focus on this question, and the nature and role of the entrepreneur have largely been missing from scholarly commentary. A much-needed antidote is now available in a provocative forthcoming article, Zohar Goshen, Assaf Hamdani, and Dorothy Lund, Fixing MFW: Fairness and Vision in Controller Self-Dealing (hereinafter “Fixing MFW”), available at SSRN and forthcoming in the Harvard Business Law Review.
While Fixing MFW’s title suggests a focus only on controller self-dealing, its actual focus is much broader, including, as its poster child, Elon Musk, a quintessential entrepreneur whose stockholding would not treat him as a controlling stockholder under the safe harbor provided by Senate Bill 21. In other words, a central concern of Fixing MFW is how the business judgment rule should apply whenever a powerful entrepreneur, whether a controlling stockholder or not, receives non-ratable benefits in a transaction with the corporation. Such transactions would include the compensation package Musk received from Tesla, or the merger of Musk’s energy company, SolarCity, into Tesla. As Fixing MFW convincingly demonstrates, these transactions should be analyzed similarly, whether Musk falls within the governing understanding of a controlling stockholder or not, because they both involve the insolvable problem of what the authors call “idiosyncratic value.”
As Frank Knight convincingly explained in his seminal opus, Risk, Uncertainty, and Profit (1917), still the leading account of the nature and role of the entrepreneur, the entrepreneur exists to combat the real-world problem of uncertainty – which essentially includes all future contingencies that involve uninsurable risk. It is the role of the entrepreneur in the real world to create and execute a vision for a business enterprise, product, or service that not only does not currently exist, but will be profitable. That is, the envisioned enterprise, product, or service must promise to those who invest in the venture – the corporation’s non-employee shareholders and employees with equity-based compensation – that they will be rewarded with “profit”, with profit being understood as a return on their investment of human or money capital that substantially exceeds what would be returned in an investment facing little or no uncertainty. What Knight calls “profit” or “pure profit”, is what Fixing MFW calls the result of accomplishing an entrepreneur’s “idiosyncratic vision.” In other words, the entrepreneur’s “profit” in Knightian terminology is in the rubric of Fixing MFW, “idiosyncratic value.” Boiled down to its essence, the central claim of Fixing MFW is that Delaware’s judiciary and legislature err in assuming that idiosyncratic value is capable of proof, and compound that error by the standards of review and safe-harbor opportunities that they impose on or make available to a controller attempting to accomplish a transaction in which stockholders do not participate ratably in both the value and type of consideration received.
Fixing MFW begins with a quick recounting of the massive uncertainty that existed at the time of Musk’s compensation award as to the possibility of Musk meeting even one of the vesting milestones. Key experts termed the award a publicity stunt and advised of Tesla’s looming bankruptcy. Likewise, the stock market was flashing serious warning signs as to Tesla’s value. A key passage demands quotation:
When Tesla designed the compensation plan, its outlook was grim. It had recently reported record losses and struggled to meet production targets for its new Model 3 car. By October 2018, several months after Tesla announced Musk’s compensation plan, Tesla’s share price plummeted to below $17, prompting hedge fund manager David Einhorn to alert his investors that Tesla bore a grim resemblance to Lehman Brothers before its 2008 bankruptcy (a collapse that Einhorn had foreseen months before it occurred). By June 2019, Tesla’s shares had plunged further, dropping below $12—a 48% decrease from the date of the plan’s announcement. It was not until December 2019 that the stock price finally rebounded to its initial level of $23.51, where it had stood two years earlier when the plan was introduced. (Pp. 579-580.)
This pithy but compelling description of the massive uncertainty surrounding Musk’s bet on himself, which bet was joined in by Tesla’s directors and authorized by the vote of a majority of its disinterested stockholders, has powerful implications for evaluating SB 21 and the continuing application of cleansing mechanisms to police controller self-dealing in which idiosyncratic vision must be valued, such as non-freezeout mergers and CEO compensation. As Fixing MFW demonstrates, such vision is impossible to value under the typical valuation metrics used by courts and financial experts because it depends on future outcomes that are not subject to current risk assessments in an insurable sense. Such idiosyncratic vision predicts above-market returns that cannot be extrapolated from the current values of the human and money capital to be deployed in pursuit of the vision, because that capital is being deployed not in anticipation of maintaining its current values through the receipt of average market returns, but in the belief that substantially above-market returns will be achieved.
After explaining how MFW was understood prior to SB 21, Fixing MFW explores how Delaware judges recently exhibited differing approaches to the valuation of the idiosyncratic-vision problem and to the role of the entrepreneur. The court in Tornetta, after determining that Musk was a controller, applied existing Delaware jurisprudence and placed on Musk and defendant directors the burden of proving the entire fairness of the compensation award. Asserting that the board should have approached the Musk award with strict arm’s length bargaining and with the aid of traditional compensation analyses comparing the grant to those of comparable CEOs, the court concluded that the director approval process was not entirely fair. The failure to inform stockholders of this deficient process meant that the stockholder vote was not fully informed. The court showed no awareness of the unique role of the entrepreneur or the fact that directors and most stockholders believed in Musk’s vision. In its ruling, the court found nothing to legitimate the presumptions of the business judgment rule, preferring its subjective analysis of how the directors and stockholders should have acted and been treated. Asserting that the Musk award was “unfathomable,” the court found that the defendants had failed to carry their burden of proving that the price, process, or disclosures to stockholders had been entirely fair.
In contrast, in the earlier SolarCity litigation, in which a company Musk controlled was merged into Tesla, the court avoided deciding whether Musk was a controlling stockholder, acknowledged the difficulty of valuation, but found that the process and consideration offered by Tesla to SolarCity and its minority stockholders was entirely fair. It did so by avoiding the Tornetta trap of ignoring the unique role of an entrepreneur, the idiosyncratic nature of an entrepreneur’s vision, and the support of that vision by Tesla’s stockholders. Rather, the court considered a variety of factors, including disinterested stockholder approval and the staggering increase in Tesla’s post-merger stock market valuation, as key indicators of fair price and fair process.
This contrast in approach taken by two judges on the Court of Chancery to transactions involving Elon Musk, who at no time owned more than a quarter of Tesla’s stock, illustrates the shortcomings of current Delaware jurisprudence concerning idiosyncratic valuation issues, particularly when the idiosyncratic vision is substantial, as in the Musk cases. This shortcoming is partially addressed by SB 21, as Fixing MFW succinctly describes and examines.
Fixing MFW critiques Delaware’s approach to control and controller transactions both before and after SB 21. It proposes three detailed sets of reforms. The first set addresses the MFW cleansing regime; the second set examines the safe harbor provisions of new section 144; and the third set challenges how entire fairness review addresses the impossible problem of proving the value of an entrepreneur’s idiosyncratic vision.
The first two sets are provocative, sweeping, and defy accurate summarization or the excessive quotation needed to do them justice in this type of review. Importantly, they advocate greater reliance on disinterested stockholder decision-making as long as financial aspects of a controller transaction are fairly disclosed, and structural reforms that incentivize the use of exemplary special committee processes.
The third set of reform proposals address the circumstance in which, as in Tornetta or Solar City, entire fairness is the standard of review. The most interesting aspect of these proposals is how entire fairness review should be conducted when an entrepreneur’s idiosyncratic vision must be valued.
Where no cleansing mechanism is used, the court lacks assurance that an independent decision-maker has validated the controller’s vision or its price. In such cases, the burden should be on the defendant to show that the price was appropriate relative to the average value of comparable assets or transactions. (P. 588.)
Since there can be no appropriate comparable assets or transactions, a controller who has used neither MFW cleansing mechanism would almost always be unable to prove entire fairness when idiosyncratic value is a substantial factor. As such, the proposal is a draconian penalty (or process-forcing) default rule that, in circumstances where entire fairness is the standard of review and idiosyncratic value is a substantial factor, would almost certainly ensure a controller’s careful use of the authors’ preferred solo–cleansing-mechanism – the vote of a majority of the disinterested stockholders.
It is unlikely that a majority of readers will be in total agreement with every detail of Fixing MFW’s sweeping proposals. But I suspect that the authors’ goal is not to persuade that their proposals are “just right” in the fantasy world of Goldilocks. Rather, they are presenting pragmatic solutions that are within the realm of real-world political or judicial adoption. In other words, they write as Berle-like legal intellectuals to show a feasible path to a better corporation law regime.
Fixing MFW is legal scholarship at its best. It walks a fine line between telling a story accessible to those not expert in corporate law while accurately covering every important nuance of the relevant legal material and introducing the reader to the essence of the entrepreneur and her vision. The result is a paper that could easily be used to wrap up an introductory corporation class, be a centerpiece of an advanced corporation seminar, or serve to educate legislators and State Bar corporation law committees in Delaware or elsewhere. The authors’ reform proposals serve as a clarion call for legal scholarship and reforms grounded in an understanding of the unique role of the entrepreneur and her idiosyncratic vision, and the importance of not disincentivizing entrepreneurism in our corporations, whether private or publicly-held. As debate continues to rage and important appeals remain undecided by the Delaware Supreme Court, Fixing MFW should be read, considered, and debated not only in Delaware, but wherever and whenever corporate law intellectuals and actors congregate to mull the future of American corporation law.
