November 4, 2025 • 37 mins
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.
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Speaker 1 (00:02):
This is Bloomberg Law with June Grossel from Bloomberg Radio.
Speaker 2 (00:08):
Delaware's Supreme Court is going to address the fallout from
a trial judge's rejection of Elon Musk's blockbuster pay package,
a corporate law overhaul in the state that took effect
in March that narrowed the definition of controlling stockholder, making
it easier to avoid scrutiny of potentially conflicted transactions. The
(00:30):
High Court will decide the constitutionality of that law, as Musk,
meta CEO Mark Zuckerberg, and other corporate leaders publicly discussed
moving their companies from Delaware to Texas and Nevada. My
guest is business law professor Eric Talley of Columbia Law School.
So Eric, Delaware Supreme Court is going to decide the
(00:53):
constitutionality of SB twenty one.
Speaker 3 (00:56):
What is SB twenty one.
Speaker 1 (00:59):
See was a legislative reform that, by historical standards, rocketed
through the Delaware General Assembly back in February and March
of this year. And substantively, what it did was it
basically intervened to push back and on some level to
overturn some of the decisions that had been made by
(01:22):
Delaware's Chancery court. It's much vaunted corporate law court that
deal with how do you sort of judge actions that
are taken by someone who is a controller of a
company and might be actions that are kind of self
serving or have a conflict of interest. So probably the
most famous of these was Elon Musk's first compensation package,
(01:46):
which was famously overturned by Delaware Chancery Court judge Kathleen
McCormick in early of twenty twenty four. There were some
other cases that also involved controllers that were, you know,
basically litigating a transaction that had a conflict of interest
that lost. And that's what this set of reforms did,
and it did into it. The first is it basically said,
(02:08):
it's much harder for stockholders to challenge various types of
conflicts involving that controller, and the traditional protections that had
been put up that would allow stockholders an easier rout
into court, those were going to get sort of heightened
a little bit and the wall was going to be
higher to surmount to get into court. And another related
(02:29):
reform was that the typical way that some of these
stockholders would bring a case against any corporate fiduciary is
to use historical rights that they have to get the
books and records of the corporation, and that's kind of
how they figure out what's going to go into their complaint.
And this is a long standing stockholder right. There was
a statute that allowed pretty easy access to those things,
(02:52):
and that statute itself got amped up to make it
harder to get access. So both of these big reforms
were a large reform that were pretty much in a
pro controller probe defendant direction, and probably as controversially, they
not only were so called prospective in nature, but they
(03:14):
also applied to any historical cases that involved some conflict
of interest a year ago, for example, in which the
case hadn't been brought in court yet, so it had
this retroactive application as well.
Speaker 2 (03:28):
Plaintiffs are challenging the law on two constitutional grounds. Explain
those challenges.
Speaker 1 (03:35):
The first is that it was an overreach by the
Delaware General Assembly to have a retroactive application of law.
The idea is, hey, listen, everyone knew what the rules
of the road were when they were acting back in
the pre SB twenty one days, and they either complied
or they didn't. But to suddenly say the rules of
(03:57):
the road have now changed, and we're going to use
the new rules to assess prior conduct seemed a little
bit off the rails, at least according to the plaintiffs
that are challenging this case. And then the second, which
in some ways is much more historical, has to do
with the fact that what the Delaware Assembly basically did
in overturning these chancery court opinions. If you read the
(04:20):
text of the statute, it basically says that under certain circumstances,
we're not even going to allow the Delaware Court of
Chancery to exercise its legal or equitable powers over certain
of these cases. And that is an interesting wording because
there's some old cases in Delaware, but says, if the
(04:40):
Delaware General Assembly tries to limit the equitable jurisdiction of
the Court of Chancery, it is a court of equity
after all. That's on constitutional under the Delaware Constitution, at
least if it's trying to do things that caused the
Court of Chancery to have fewer powers than it had
in and get this to back in seventeen ninety two,
(05:02):
back when the original Constitution was drafted. So those are
effectively the two constitutional challenges that the retroactive effect was unconstitutional,
and that the handcuffing of the Delaware chance Re Court
and the walling off of its ability to exercise equitable
powers was also unconstitutional under the Delaware Constitution.
Speaker 2 (05:23):
Did the Delaware Supreme Court fast track this case?
Speaker 1 (05:27):
Well, everything about SB twenty one has been fast tracked.
So one of the things that that's interesting about the
legislation itself is that, you know, corporate law is a
pretty technocratic enterprise, and a lot of times, in fact,
during the last quarter century, every time that the law
has been amended, it's gone through this what's known as
(05:47):
the Delaware Council, and it's part of the Date Bar Association,
and it's got a bunch of defendant side attorneys and
plaintive side attorneys and transactional attorneys and former judges and
made debate these things. This particular set of provisions bypassed
that Council, went straight into the Assembly, and within a
month pretty much had been passed by both houses of
(06:10):
the Assembly and signed in to law by the governor.
So it was already being fast tracked on the legislative basis.
The plaintiff in this case, a company called clearway. Well,
the shareholders of that company filed suit shortly thereafter, complaining
of conduct that predated all these statutes. And so the
plaintiff attorney said, hey, these things are unconstitutional, they shouldn't
(06:32):
apply to us, and we want to challenge the constitutionality
of the amendments. That is above the pay grade of
any of the judges in the Delaware Chancery Court, and
which Chancellor basically said, I'm going to just certify this
question the Delaware Supreme Court. It had made so much
news it really would have been shocking to me June
had the Delaware Supreme Court decided they were going to
(06:53):
sit on it for ten months or a year, they
pretty much had to say, Okay, we're going to take
briefing on this reform and we're going to hear argument
before year's end so that we can add some clarity
to exactly what is Delaware law going forward.
Speaker 2 (07:07):
So, was this rush to pass the law and then
you know, to litigate it. Is it because Delaware fears
losing corporations to Texas or Nevada?
Speaker 1 (07:19):
It certainly had an anxiety vibe to issue. So after,
you know, right after the original opinion on Elon Musk's
compensation package came out, he took to Twitter, which of
course is his right since he owns the company, and said,
never incorporate your company in the state of Delaware. And
he followed up with several other you know, sort of
(07:39):
Delaware hating Delaware rage type of tweets. And you know,
mister Musk is a pretty influential person, knows a lot
of people, and so all of his friends and associates
and prospective associates started saying, wow, I wonder whether he's
onto something, started asking their own corporate counsel, should we
reincorporate rate outside of Delaware? And my sense is that
(08:03):
those questions at least started to really pick up velocity
after he started to tweet rage a little bit against
the state of Delaware. It never really picked up a
huge sense of momentum in terms of actual reincorporations. It
was more like a handful of companies decided to reincorporate,
(08:24):
and some transactional lawyers reported I would assume truthfully that oh,
they were being inundated with questions about it. But when
the rubber hit the road, there wasn't an awful lot
of empirical support for a rushout of Delaware, though. That
clearly was the vibe that was animating both the governor
and the General Assembly, and in their view, they just
(08:46):
needed to do something, and something quickly to preempt what
they had at least become convinced was going to be
a mass exodus out of Delaware. Since the statute was passed,
you know, it's been constitutionally challenged. Its official status, I
guess is still being kicked around a little bit. There
really hasn't been that big of an upswelling of companies
(09:08):
that have left Delaware to incorporate in Nevada or Texas,
which are the two biggest states. You know, you can
definitely see a handful of companies that have done so,
but it's not been like a gigantic rush. It may
actually have picked up even a little bit compared to
where it was before the reform. Interestingly enough, a couple
of the companies that have reincorporated out of Delaware since
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the reform said that they were doing so because these
new reforms had so many words in them and they
were so complicated. They just wanted to sit that dance out.
They didn't want to have to bear the risk of
figuring out how this new statute was going to get
interpreted over the years. So it's been a really interesting
debate amongst people who are corporate law nerds, and I
unfortunately include myself in that club, June, and maybe you
(09:54):
as well. But it really has been kind of an
interesting thing to see how this plays out. I think
a lot of people, you know, if you ask them
two years ago, would have told you, oh, you know,
this race, this dance off between different states to attract incorporations,
it's not a real thing. Delaware won it seventy five
years ago and it's not going to let go of
(10:15):
its winning margins. I think that a lot of people,
including myself, think, well, you know what, at least the
discussion about, you know, effective competition amongst other types of
states or other jurisdictions has now become a real thing.
You hear it on a regular basis. So it probably
is the case that Delaware is more vulnerable than it
(10:36):
was two years ago. Where people might differ is whether
the vulnerability is due to the cases like the musk
compensation case, or is it due to the fact that
the Assembly was putting together a slapdash set of statutes
that no one knows exactly they're going to work, right,
and it might be a combination of both things.
Speaker 2 (10:55):
Was there another law that had an overhaul because of
an unpopular chance re court ruling?
Speaker 1 (11:02):
There is, interestingly enough, about six months before this SB
twenty one reform, there was another reform in around August
of twenty twenty four. Now that was a case that
itself was responding to a different case, a case involving
the Molus Corporation and some side contracts that its founder,
(11:23):
Ken Molis had reached with the company that protected him
against a whole bunch of different fiduciary duty allegations. The
judge in that case basically said, you know, you might
be able to do these things, but you can't do
it in a side contract. You got to do it
in the corporate charter or the bylaws, and basically invalidated
those side contracts. And so the twenty twenty four reforms
(11:44):
were another, you know, essentially a legislative overturning of a
different case. This Molus case came about around the same
time as the Musk case came out, and you know,
at the time it was quite controversial, but it did
go through the Comptle, and it had the sort of
the ordinary schedule in being passed. It didn't sort of
(12:04):
have this kind of fire alarm exit rush that SB
twenty one had. And while people were you know, I guess,
busy clutching their pearls over this twenty twenty four reform,
which is called SB three thirteen if you're interested in
the alphabet soup, suddenly this SB twenty one thing comes
along and steals everyone's attention from it. But you are
(12:26):
correct that that twenty twenty four reform is still in
the mix, and it has some interesting interaction effects with
SB twenty one because it basically says, look, regardless of
what Delaware is doing in its corporate code, it is
now possible to enter into a side contract that might
(12:47):
allow you to get around most of the Delaware corporate code.
In fact, I've just written an academic paper with my
colleague Dorothy Lund that basically says, you know what, Delaware
may actually prevail in its first place position in this
race because it is basically empowered a bunch of corporations,
if they don't like what was happening to Delaware, just
(13:08):
to go private and just privatize their entire governance structure
coming up next.
Speaker 2 (13:13):
But is it a bad look for Delaware? You're listening
to Bloomberg. In response to a trial judge's rejection of
Elon Musk's blockbuster pay package, Delaware's legislature passed a corporate
law overhaul SB twenty one narrowed the definition of controlling stockholder,
(13:34):
making it easier to avoid scrutiny of potentially conflicted transactions. Now,
Delaware's highest court will decide the constitutionality of that law.
I've been talking to Eric Tally, an expert in business
law and a professor at Columbia Law School. Eric, is
it a bad look that the legislature changes the law
(13:56):
to make it friendlier to corporations so those core operations
don't leave the state.
Speaker 3 (14:02):
It seems like a bad look to me.
Speaker 1 (14:05):
Well, there are aspects of that are a bad look.
I do want to defend the enterprise of Delaware in
trying to keep the franchise alive.
Speaker 3 (14:13):
Right.
Speaker 1 (14:13):
The secret sauce of Delaware for a long time was, Hey, look,
we're a small state. We don't have a lot of
like operating industries in our state that are going to
capture our general assembly. So we can basically focus on,
you know, trying to formulate the best possible operating corporate
law that is possible, and in fact, Delaware benefits quite
a bit from that because it's a small state. In
(14:35):
corporation fees alone, you know, probably pave half the roads
in Delaware, so they really do benefit from the revenues
that are raised. On the other hand, in this particular instance,
the fact that it was so procedurally irregular, the fact
that it really seemed even though the you know, the
governor and the state legislators deny this, it seems pretty
(14:55):
obvious that the pressure initially was coming from Elon Musk
himself and attempting to change law by himself. And the
fact that it rocketed through the Delaware legislature incredibly fast,
with very few opportunities for critics to, you know, to
raise their concerns or to voice their concerns. One of
(15:16):
my colleagues testified in front the General Assembly and was
literally shouted down and was told to leave the lectern
So it really is kind of an interesting moment for Delaware.
I don't think the look has been particularly good with Delaware,
and that's in some ways one of the dangers is
that you can fail to compensate for things that may
be emerging problems in the state, but you can also overcompensate.
(15:39):
And you know, to add even another complicating factor. The
two big cases that were being you know, sort of
responded to with these reforms, the Molus case and the
Elon Musk case, they still had not at that point
gotten to even an appeal before the Delaware Supreme Court.
They were still active live cases in the Delaware Assemble
(16:00):
was effectively responding to a trial court opinion. If you know,
there's a chance a trial court opinion makes a mistake,
and sometimes they do. The usual root is okay, appeal
it and see what the Delar's Supreme Court does with it.
And only then would you want to step in and say, okay,
we still don't like what the Delar's Preme Court is
going to do, and so we're going to change the law.
And so there really was a bit of a rushed
(16:21):
kind of atmosphere to this entire ordeal, and I think
on some level that probably caused the urgency to escalate.
As opposed to the signal that I suspect the governor
was trying to send, which is now we're going to
move really really quickly to you know, to put this
fire out, and putting the fire out, they may have
started inadvertently three or four other fires.
Speaker 2 (16:42):
I mean, it's it's expensive to incorporate in a different state,
isn't it?
Speaker 3 (16:47):
To move states?
Speaker 1 (16:49):
It can be in a lot of these states. In
Nevada and Texas, the expense is actually lower than in Delaware,
and Delaware has you know, doesn't charge a ton. The
most you're going to pay in an annual franchise tax
is like two hundred and fifty thousand dollars, which is peanuts.
And it's smaller if you're not a big company. So
(17:10):
it really is a scale business. It's not a Delaware
does not make all its money from three or four companies.
It makes it from the millions of companies that are
incorporated there and pay annual franchise taxes. And that's been
their entire design. One thing that's kind of interesting about
this new competition from Texas and kind of a pre
(17:30):
existing but newly invigorated competition from Nevada is that it's
not really clear that they are in this game to
make money. It seems like they're more in this game
almost to rejoin where are you incorporated and where are
you doing business? The folks at Texas say, oh, yeah,
we want people to incorporate in Texas because we want
their factories to be in Texas. And that's kind of
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a quaint approach, at least by historical standards, because the
big innovation that Delaware introduced to the world is you
don't have to do any business in Delaware to be
incorporated there, and what they specialize in is incorporate law.
So some of the most recent competition I think has
been hard for Delaware to match up to because it
(18:14):
seems to be not about making money, and a lot
of these states seem to be interested in kind of
keeping the cost down of incorporating. Now, if you're going
to reincorporate and you're a public company, that's a very
costly process. You've got to put it out in front
of the stockholders, you've got to solicit their votes, you
have to have long disclosures, and there's a fair amount
of rigmarole that goes into trying to figure out how
(18:37):
am I going to reincorporate in a different state.
Speaker 2 (18:39):
So now, as far as SB twenty one, do you
think it's unlikely that the Delaware Court will find it unconstitutional.
Speaker 1 (18:49):
This is a really interesting issue. So the case from
which a lot of this comes is a case from
the nineteen fifties actually, and that case itself was a
controversial case when it first came down. It hasn't really
been tested very much, and so I think probably, you know,
if are replacing odds, I'd say the chances are probably
(19:11):
that the Delaware Supreme Court is going to find a
way to either uphold the statute or say, okay, look,
technically the statute is not constitutional, but if you put
in a small fix to it, like make it an
opt in statute or something like that, it would be constitutional.
We'll see what happens. But it's interesting that it's had
(19:31):
the kind of legs that it has, and in some
ways not surprising because really the whole sort of you know,
last seven or eight months in corporate law has kind
of forced us back into this kind of existential moment
of trying to figure out, you know, what is valuable
in corporate law and what is it.
Speaker 3 (19:47):
Do you think we'll see a decision soon on this.
Speaker 1 (19:50):
We'll see where this goes. My guess is we're probably
going to have to wait till the beginning of the
new year to see a judgment from the from the
Delaware Supreme Court, but they may move relatively quickly given
the state involved.
Speaker 2 (20:01):
Before I let you go, I want to get your
input on something totally different.
Speaker 3 (20:05):
Open Ai is laying the.
Speaker 2 (20:07):
Groundwork for an IPO that could value the company at
one trillion dollars.
Speaker 1 (20:13):
You can't see me, but I've got my little Austin
Powers pinky up against the corner of my mouth for
one trillion dollars. So so yeah, so this is this
has been a long brewing situation with open ai. You know.
When the company began, uh, it had a unique structure, right,
and I think some of the founders were quite worried about,
(20:35):
you know, the general intelligence of artificial decision makers and
whether that caused a risk and so uh they deliberately
built into the original structure of open ai what is
essentially a ceiling on how profitable it could be for
its investors. It was a company and owned by a
nonprofit foundation, and it basically said that if you're an
(20:57):
investor in the for profit company, as soon as you've
made back one hundred times your investment, you don't get
anything more, all right, And so that that seemed at
the time like one hundred times by investment, that's great,
well open ai. Open ai is shot well past that
now and and that creates a problem, particularly given that
it is sitting side by side with a bunch of
(21:20):
other generative AI companies that are investing heavily in improving
their project. The only way that you can kind of,
you know, do that and stay in competition is to
try to figure out a way to raise more money.
But when the existing investors have already hit their one
hundred times cap, there's no easy way to do it.
So open ai was in a clearly a conundrum in
(21:44):
you know, the highly competitive environment it now finds itself
and it's still the market leader, but you know, a
bunch of these other big players didn't have a hand
tied behind their back, and so there's been a longstanding,
you know, kind of internal debate and discussions that been
taking place across the board on how and whether open
ai could be transitioned to a place where it'll have,
(22:07):
you know, better ability to raise money from outside investors,
but still have some controls in place that were pretty
much envisioned by the founders that set up open ai
to begin with, and so under that existing structure, it's
not going to be easy to raise money from anyone,
including an IPO, and so they kind of felt that
(22:29):
they had to somehow transition to something different, and that's
what they've done. They are a Delaware company and they
have basically announced that they have transitioned into something known
as a public benefit corporation. And these are relatively new
structures that basically say you can be a for profit
company and have kind of a do good goal at
(22:52):
the same time. And Delaware opened up its own statutes
to allow these types of companies in about ten fifteen
years ago. There haven't been that many takers, quite frankly June,
particularly in the in the publicly traded company space, but
there are some and so open Ai basically said, well,
if we did that, then through that conversion, we could
(23:14):
get rid of this one hundred times your investment cap
that's been you know, tying our hands. We could still
make the foundation, the nonprofit, a big player in the
post conversion company. And they have basically you know what,
It's been reported that the foundation is going to have
(23:34):
a significant amount of stock in the company and is
also going to have special rights to fire board members
if they don't like what the board members are doing.
That is a non trivial amount of control. But by
the same token, the handcuffs are now off the ability
of investors to to generate a return, and so that
has absolutely sowed the seeds for a possible public offering
(23:59):
of Open AI. And you know, it's still early days,
so we don't know when that's going to occur, what
it's going to look like, but it seems pretty clear
that if they were going to do a type of
a public offering of their stock ownership, this was the
type of move that they had to make. And so
that's kind of where things are pointing right now. Because
Opening is not a publicly traded company, they have not
(24:21):
made all kinds of long disclosures about exactly what those
different levers of control are. That will happen eventually if
they file paperwork for having an initial public offering, but
it hasn't happened yet, and you'll be.
Speaker 3 (24:35):
The one we call when they do.
Speaker 2 (24:36):
Thanks so much, Eric, as always, that's Professor Eric Talley
of Columbia Law School. The federal judiciary hasn't had defurlough's
staff during a shutdown in three decades until now. For
the first two and a half weeks of the shutdown,
the Judiciary tampt into other sources of funding to keep
(24:57):
the courts fully functioning.
Speaker 3 (24:59):
And to keep keep employees paid.
Speaker 2 (25:02):
But that money has now run out and the federal
district courts are using different strategies to manage staffing and caseloads.
Joining me is Bloomberg Law reporters Suzanne Monnac So, Suzanne,
the federal courts have run out of money.
Speaker 4 (25:16):
Yes, the Judiciary ran out of funds in mid October.
This was the first time that the Judiciary had been
required to do shutdown related furloughs of their employees in
thirty years. And that's just because they didn't have the
reserves that they've had in the past. They've said underfunding
by Congress. So we have now entering multiple weeks of
a shutdown and the Judiciary employees, if this continues, are
(25:38):
going to see their first miss paycheck this coming Friday.
Speaker 2 (25:41):
Before the Judiciary was able to prevent these furloughs and
court closures during a shutdown, why weren't they able to
this time?
Speaker 4 (25:51):
The Judiciary has in the past had the reserves to
float payroll during shutdowns, and for example, it managed to
avoid having to furlough any employees during the five weeks
shut down during President Donald Trump's first term. But Judiciary
employees have blamed the furloughs that they've had to have
quite a bit sooner this year on tighter margins. They've
gotten flat funding from Congress the last few years, and
(26:13):
that's effectively a cut due to inflation. So they've just
said that this has given them less cushion. So while
of course federal workers stop getting paid October first, at
the start of the fiscal year, the judiciary had just
two weeks of additional funding to keep themselves going, but
then after that they haven't had the ability to continue
paying employees.
Speaker 2 (26:32):
So the federal district courts are handling the lack of
funds in different ways. For example, some are having the
courts close for a day tell us about some of
the measures they're taking.
Speaker 4 (26:43):
That's right, federal courts across the country. The federal districts,
i should say, do really operate quite independently. So while
we're seeing both furloughs kind of on the administrative side
of the judiciary in Washington. We're also seeing different responses,
really varying by every single district in the country. Federal courts,
as you mentioned, have been closing or limiting services on Fridays.
(27:04):
For example, the Middle District of Alabama has said that
its courthouses will be closed and its employees furloughed every
Friday while this continues. The Federal Court House in Connecticut
will be furlowing its clerk's office staff on Fridays. And
we're also just seeing a number of courts putting out
notices that they're going to be suspending things like travel
training programs, and of course many are postponing civil trials
(27:27):
that involve the Justice Department. As Low's lawyers are also
not getting paid.
Speaker 2 (27:31):
We should just mention that judges get paid because it's
required under the constitution. How are they deciding which workers
to furlough and which to keep on the job without pay.
Speaker 4 (27:41):
There seems to be some discretion and making those decisions.
There is a course shutdown guidance under the Anti Deficiency
Act which the judiciary is operating under in terms of
how to identify who is essential and who is not essential. Activities,
for example, include criminal cases, so those cases must continue
during shutdowns because they involve liberty of people, and so,
(28:02):
for example, the federal defenders are generally classifying their employees
as essential since they handle those cases. And of course,
since courts have to continue those cases, we are seeing
a lot of court staff being deemed essential and having
to continue to work, hopefully for back pay later. And
so I just think that it's one of those things
where courts do have to continue operating during a shutdown.
(28:23):
So even though they have run out of money, I
think the furloughs are still going to remain somewhat limited
since they do have to be able to continue to
process cases in some capacity. And some civil cases are
continuing as well if the judge considers them important enough
to do so.
Speaker 2 (28:35):
Yeah, I was going to say that a lot of
the cases involving Trump administration policies are continuing. For example,
we have those two cases over the funding of snap benefits.
Speaker 4 (28:48):
If a judge tells the Justice Department, I know, you
do have to continue showing up and continuing this case,
then the Justice Department has to do so. Guidance that
DJ had given was to generally request a pause in
a case in a civil case where they felt it
was appropriate to do so during the shutdown. But if
the judge says, no, I disagree, we're too far into this,
I want to continue, then those lawyers do have to
(29:08):
continue without pay. So really we're out of point where
the judge is like the only person getting paid in
a courtroom as their staff's not getting paid. Any type
of federal government lawyers are not getting paid. Federal defenders
are not getting paid in a criminal case. So really
it's just the private attorneys in civil cases that are
getting paid for their work at this point in the courtroom.
Speaker 2 (29:25):
So let's talk about the cash crunch how it affects
criminal cases. So federal public defenders are not being paid
right at this point.
Speaker 5 (29:34):
That's correct.
Speaker 4 (29:35):
They did receive a paycheck in October from their work
for the first two weeks of the month that there
was funding for, so they really haven't actually felt the
crunch yet in terms of the paycheck suspension, but they're
going to feel that this Friday if this shutdown is
still going.
Speaker 2 (29:48):
So federal public defenders rely on CJA panel attorneys to
take clients in cases involving multiple defendants, etc. Tell us
about what's been happening those attorneys even before the shutdown.
Speaker 4 (30:03):
Yes, here the shutdown is really exacerbated an existing underfunding
problem for criminal defense CJA or the Criminal Justice Act
Panel attorneys. These are private attorneys who take on cases
for indigen defendants where federal defenders cannot. Oftentimes that might
be a multi defendant case where the defenders are representing
one of the defendants but then would have a conflict
of interest in representing other ones. There, for example, a
(30:25):
CJA panel lawyer would get tapped.
Speaker 5 (30:27):
To step in.
Speaker 4 (30:28):
Funding for that panel actually ran out earlier this summer,
back in July, and so they actually haven't been paid
for about four months now. They had hoped to be
reimbursed for their work during that several months period on
October first, when new funding came in, but of course
that isn't what happened, and the shutdown has continued.
Speaker 5 (30:45):
So they've been now floading their own.
Speaker 4 (30:47):
Expenses, as I said, for about four months, and that's
including expert witnesses that they might want to bring on.
Forensic investigators, those types of people who might be testifying
in a case examining mobile cell phone or computer data
in the case. Those people are also fronting their own expenses. Now,
of course, federal defenders who were previously getting paid I've
now joined them and not getting paid. So we're really
(31:08):
seeing a pretty significant underfunding for criminal defense in that space.
Speaker 2 (31:13):
So some lawyers have made motions to have cases dismissed
because of this situation. I mean you wrote about one
lawyer wrote, you prosecute, you pay, you don't pay, you
don't prosecute, complaint, indictment dismissed with prejudice. There are a
lot of lawyers trying to have cases dismissed because of this.
Speaker 4 (31:36):
We're certainly seeing them across this country. I've probably seen
close to a dozen at this point, though of course
there may be more. We've seen more success with request
to postpone cases.
Speaker 5 (31:45):
Judges seem a little bit more willing.
Speaker 4 (31:47):
If the defendant who might be in prison is willing
to postpone their case, I think the judge is a
little bit more willing to do that. I have yet
to see if case fully dismissed for a constitutional violation
as a result of this underfunding. The six and and
My guarantees a right to counsel even if you cannot
for an attorney, and so that's where we're seeing some
of these arguments being brought under that by nature, the
(32:07):
fact that the government hasn't funded criminal defense, and as
long as it hasn't would create a constitutional violation.
Speaker 5 (32:13):
Waiting to see if we.
Speaker 4 (32:15):
See a judge become receptive to that argument and decide
to fully toss the case. There's a number of motions
that we're keeping an eye on in that respect, and
I think they're only going to continue and proliferate as
criminal defense lawyers are sharing templates with each other and
sharing the motions if they filed, and what they've had
success or not success with.
Speaker 2 (32:32):
And what's happening at the Supreme Court.
Speaker 4 (32:34):
So the Supreme Court has actually also run out of funding,
and their spokesperson has said that they'll need to make
some changes to its operations, including by closing the building
to the public and some capacity, but keeping it open
for official business, which means that the justices will continue
to hear and decide cases.
Speaker 2 (32:51):
So now let's talk a little bit about Lindsay Halligan.
First of all, tell us who Lindsay Halligan is.
Speaker 4 (32:56):
Lindsay Halligan was previously Trump's personal attorney, and she has
been appointed the interim US attorney for the Eastern District
of Virginia based just outside of Washington, DC, and she
is leading the criminal charges against New York Attorney General
Latitia James and former FBI Director James Comey that we've
seen last month or so. She's also come under scrutinized
(33:17):
by the public and within those cases for the way
in which she was appointed. We're seeing those defendants make
arguments in court that she was invalidly serving as interim
US attorney when those indictments against them were filed.
Speaker 2 (33:30):
Well, she was hastily installed after the prior interim US
attorney refused to bring indictments against some of those on
Trump's enemies lists.
Speaker 5 (33:41):
That's right.
Speaker 4 (33:41):
She came to the office after a little bit of turnover.
We had seen the Biden appointed US attorney for that
office resign as is typical, and a new person, Eric Seibert,
was brought in. He'd served as an interim term and
then has had his term renewed by the Federal District Court,
as is the law regarding US attorney appointments. But then
he was pushed out after the Trump administration told him
(34:02):
he'd be removed for not bringing mortgage fraud charges against
Letitia James, even though prosecutors in his office had found
that there wasn't.
Speaker 5 (34:09):
Enough evidence for that.
Speaker 4 (34:10):
That's when we saw Lindsay Halligan, Trump's former attorney, who
has never been a prosecutor before, be brought in and
she was willing to sign on to that indictment, both
against Letitia James as well as against James Comey, who's
been accused of making a false statement to Congress.
Speaker 2 (34:24):
After her appointment was attacked in court papers by both
Comy and James, US Attorney Pam Bondy has given her
a new title.
Speaker 5 (34:34):
That's correct.
Speaker 4 (34:34):
We're seeing a little bit of maneuvering here on the
part of the Trump administration to try to shore Halligan
up against some of these claims of having been improperly serving.
So we saw just last night court filing where Attorney
General Pam Bondy has signed an order on October thirty first.
Speaker 5 (34:49):
But she's backdating. It's a fact.
Speaker 4 (34:50):
She's saying it's taking effector retroactively to when Lindsay Halligan
took office in September, to add a new title for
her that she is the Special Attorney. And this is
essentially an effort to try to shore her up against
these claims that she might have been invalidly serving at
the time that the indictments against James Cove and Letitia
James were filed. She's calling it ratifying essentially her appointment
(35:12):
as US attorney and claiming that she had the authority
to issue those indictments when those.
Speaker 5 (35:17):
People were charged.
Speaker 4 (35:19):
And this is really part of a broader pattern of
maneuvering that we're seeing at US attorney's offices across the country,
particularly in states with two Democratic senators. US attorneys go
through the nomination process in the Senate, and senators do
have veto power under the blue slit process over those nominees,
and so we're seeing in states like Virginia that has
two Democratic senators, California, and New York where the Trump
(35:41):
administration doesn't want to have to come up to deal
with Congress about this, so instead they're kind of taking
creative interpretations of some of the vacancy laws to try
to get people in that they want in acting her
in her own capacities and using things like making them
the second in command at the office, thus allowing them
to have all of the powers as the first command
if that spot is vacant, those types of maneuvering, and
(36:02):
so that's just what we're seeing here, and it's something
we've seen across the country as well.
Speaker 3 (36:06):
Though it's quite inventive.
Speaker 2 (36:09):
We'd all like to be able to say this is retroactive.
My mistake doesn't count because I'm now retroactively correcting it.
But I doubt that a court is going to allow
her to say, oh, by the way, you.
Speaker 5 (36:22):
Know, well, certainly you have to see.
Speaker 4 (36:24):
The Justice Department is arguing that Halligan was wildly serving regardless,
and they've sort of portrayed this as well, just in case,
we're doing this extra thing to make our case even stronger.
But we think we have a strong case regardless. That's
essentially what their argument has been. There'll be a hearing
in this in both criminal cases in about two weeks
or in November thirteenth. So interesting to see how the
judge receives.
Speaker 2 (36:45):
US Federal judges in other jurisdictions have ruled against the
Trump administration in similar cases. Thanks so much, Suzanne. That's
Bloomberg Law reporter Suzanne Monyac And that's it for this
edition of the Bloomberg Law Show. Remember you can always
get the latest legal news on our Bloomberg Law podcasts.
(37:05):
You can find them on Apple Podcasts, Spotify, and at
www dot bloomberg dot com, slash podcast slash Law, and
remember to tune into The Bloomberg Law Show every weeknight
at ten pm Wall Street Time. I'm June Grosso and
you're listening to Bloomberg
This is Bloomberg Law with June Grossel from Bloomberg Radio.
Speaker 2 (00:08):
Delaware's Supreme Court is going to address the fallout from
a trial judge's rejection of Elon Musk's blockbuster pay package,
a corporate law overhaul in the state that took effect
in March that narrowed the definition of controlling stockholder, making
it easier to avoid scrutiny of potentially conflicted transactions. The
(00:30):
High Court will decide the constitutionality of that law, as Musk,
meta CEO Mark Zuckerberg, and other corporate leaders publicly discussed
moving their companies from Delaware to Texas and Nevada. My
guest is business law professor Eric Talley of Columbia Law School.
So Eric, Delaware Supreme Court is going to decide the
(00:53):
constitutionality of SB twenty one.
Speaker 3 (00:56):
What is SB twenty one.
Speaker 1 (00:59):
See was a legislative reform that, by historical standards, rocketed
through the Delaware General Assembly back in February and March
of this year. And substantively, what it did was it
basically intervened to push back and on some level to
overturn some of the decisions that had been made by
(01:22):
Delaware's Chancery court. It's much vaunted corporate law court that
deal with how do you sort of judge actions that
are taken by someone who is a controller of a
company and might be actions that are kind of self
serving or have a conflict of interest. So probably the
most famous of these was Elon Musk's first compensation package,
(01:46):
which was famously overturned by Delaware Chancery Court judge Kathleen
McCormick in early of twenty twenty four. There were some
other cases that also involved controllers that were, you know,
basically litigating a transaction that had a conflict of interest
that lost. And that's what this set of reforms did,
and it did into it. The first is it basically said,
(02:08):
it's much harder for stockholders to challenge various types of
conflicts involving that controller, and the traditional protections that had
been put up that would allow stockholders an easier rout
into court, those were going to get sort of heightened
a little bit and the wall was going to be
higher to surmount to get into court. And another related
(02:29):
reform was that the typical way that some of these
stockholders would bring a case against any corporate fiduciary is
to use historical rights that they have to get the
books and records of the corporation, and that's kind of
how they figure out what's going to go into their complaint.
And this is a long standing stockholder right. There was
a statute that allowed pretty easy access to those things,
(02:52):
and that statute itself got amped up to make it
harder to get access. So both of these big reforms
were a large reform that were pretty much in a
pro controller probe defendant direction, and probably as controversially, they
not only were so called prospective in nature, but they
(03:14):
also applied to any historical cases that involved some conflict
of interest a year ago, for example, in which the
case hadn't been brought in court yet, so it had
this retroactive application as well.
Speaker 2 (03:28):
Plaintiffs are challenging the law on two constitutional grounds. Explain
those challenges.
Speaker 1 (03:35):
The first is that it was an overreach by the
Delaware General Assembly to have a retroactive application of law.
The idea is, hey, listen, everyone knew what the rules
of the road were when they were acting back in
the pre SB twenty one days, and they either complied
or they didn't. But to suddenly say the rules of
(03:57):
the road have now changed, and we're going to use
the new rules to assess prior conduct seemed a little
bit off the rails, at least according to the plaintiffs
that are challenging this case. And then the second, which
in some ways is much more historical, has to do
with the fact that what the Delaware Assembly basically did
in overturning these chancery court opinions. If you read the
(04:20):
text of the statute, it basically says that under certain circumstances,
we're not even going to allow the Delaware Court of
Chancery to exercise its legal or equitable powers over certain
of these cases. And that is an interesting wording because
there's some old cases in Delaware, but says, if the
(04:40):
Delaware General Assembly tries to limit the equitable jurisdiction of
the Court of Chancery, it is a court of equity
after all. That's on constitutional under the Delaware Constitution, at
least if it's trying to do things that caused the
Court of Chancery to have fewer powers than it had
in and get this to back in seventeen ninety two,
(05:02):
back when the original Constitution was drafted. So those are
effectively the two constitutional challenges that the retroactive effect was unconstitutional,
and that the handcuffing of the Delaware chance Re Court
and the walling off of its ability to exercise equitable
powers was also unconstitutional under the Delaware Constitution.
Speaker 2 (05:23):
Did the Delaware Supreme Court fast track this case?
Speaker 1 (05:27):
Well, everything about SB twenty one has been fast tracked.
So one of the things that that's interesting about the
legislation itself is that, you know, corporate law is a
pretty technocratic enterprise, and a lot of times, in fact,
during the last quarter century, every time that the law
has been amended, it's gone through this what's known as
(05:47):
the Delaware Council, and it's part of the Date Bar Association,
and it's got a bunch of defendant side attorneys and
plaintive side attorneys and transactional attorneys and former judges and
made debate these things. This particular set of provisions bypassed
that Council, went straight into the Assembly, and within a
month pretty much had been passed by both houses of
(06:10):
the Assembly and signed in to law by the governor.
So it was already being fast tracked on the legislative basis.
The plaintiff in this case, a company called clearway. Well,
the shareholders of that company filed suit shortly thereafter, complaining
of conduct that predated all these statutes. And so the
plaintiff attorney said, hey, these things are unconstitutional, they shouldn't
(06:32):
apply to us, and we want to challenge the constitutionality
of the amendments. That is above the pay grade of
any of the judges in the Delaware Chancery Court, and
which Chancellor basically said, I'm going to just certify this
question the Delaware Supreme Court. It had made so much
news it really would have been shocking to me June
had the Delaware Supreme Court decided they were going to
(06:53):
sit on it for ten months or a year, they
pretty much had to say, Okay, we're going to take
briefing on this reform and we're going to hear argument
before year's end so that we can add some clarity
to exactly what is Delaware law going forward.
Speaker 2 (07:07):
So, was this rush to pass the law and then
you know, to litigate it. Is it because Delaware fears
losing corporations to Texas or Nevada?
Speaker 1 (07:19):
It certainly had an anxiety vibe to issue. So after,
you know, right after the original opinion on Elon Musk's
compensation package came out, he took to Twitter, which of
course is his right since he owns the company, and said,
never incorporate your company in the state of Delaware. And
he followed up with several other you know, sort of
(07:39):
Delaware hating Delaware rage type of tweets. And you know,
mister Musk is a pretty influential person, knows a lot
of people, and so all of his friends and associates
and prospective associates started saying, wow, I wonder whether he's
onto something, started asking their own corporate counsel, should we
reincorporate rate outside of Delaware? And my sense is that
(08:03):
those questions at least started to really pick up velocity
after he started to tweet rage a little bit against
the state of Delaware. It never really picked up a
huge sense of momentum in terms of actual reincorporations. It
was more like a handful of companies decided to reincorporate,
(08:24):
and some transactional lawyers reported I would assume truthfully that oh,
they were being inundated with questions about it. But when
the rubber hit the road, there wasn't an awful lot
of empirical support for a rushout of Delaware, though. That
clearly was the vibe that was animating both the governor
and the General Assembly, and in their view, they just
(08:46):
needed to do something, and something quickly to preempt what
they had at least become convinced was going to be
a mass exodus out of Delaware. Since the statute was passed,
you know, it's been constitutionally challenged. Its official status, I
guess is still being kicked around a little bit. There
really hasn't been that big of an upswelling of companies
(09:08):
that have left Delaware to incorporate in Nevada or Texas,
which are the two biggest states. You know, you can
definitely see a handful of companies that have done so,
but it's not been like a gigantic rush. It may
actually have picked up even a little bit compared to
where it was before the reform. Interestingly enough, a couple
of the companies that have reincorporated out of Delaware since
(09:31):
the reform said that they were doing so because these
new reforms had so many words in them and they
were so complicated. They just wanted to sit that dance out.
They didn't want to have to bear the risk of
figuring out how this new statute was going to get
interpreted over the years. So it's been a really interesting
debate amongst people who are corporate law nerds, and I
unfortunately include myself in that club, June, and maybe you
(09:54):
as well. But it really has been kind of an
interesting thing to see how this plays out. I think
a lot of people, you know, if you ask them
two years ago, would have told you, oh, you know,
this race, this dance off between different states to attract incorporations,
it's not a real thing. Delaware won it seventy five
years ago and it's not going to let go of
(10:15):
its winning margins. I think that a lot of people,
including myself, think, well, you know what, at least the
discussion about, you know, effective competition amongst other types of
states or other jurisdictions has now become a real thing.
You hear it on a regular basis. So it probably
is the case that Delaware is more vulnerable than it
(10:36):
was two years ago. Where people might differ is whether
the vulnerability is due to the cases like the musk
compensation case, or is it due to the fact that
the Assembly was putting together a slapdash set of statutes
that no one knows exactly they're going to work, right,
and it might be a combination of both things.
Speaker 2 (10:55):
Was there another law that had an overhaul because of
an unpopular chance re court ruling?
Speaker 1 (11:02):
There is, interestingly enough, about six months before this SB
twenty one reform, there was another reform in around August
of twenty twenty four. Now that was a case that
itself was responding to a different case, a case involving
the Molus Corporation and some side contracts that its founder,
(11:23):
Ken Molis had reached with the company that protected him
against a whole bunch of different fiduciary duty allegations. The
judge in that case basically said, you know, you might
be able to do these things, but you can't do
it in a side contract. You got to do it
in the corporate charter or the bylaws, and basically invalidated
those side contracts. And so the twenty twenty four reforms
(11:44):
were another, you know, essentially a legislative overturning of a
different case. This Molus case came about around the same
time as the Musk case came out, and you know,
at the time it was quite controversial, but it did
go through the Comptle, and it had the sort of
the ordinary schedule in being passed. It didn't sort of
(12:04):
have this kind of fire alarm exit rush that SB
twenty one had. And while people were you know, I guess,
busy clutching their pearls over this twenty twenty four reform,
which is called SB three thirteen if you're interested in
the alphabet soup, suddenly this SB twenty one thing comes
along and steals everyone's attention from it. But you are
(12:26):
correct that that twenty twenty four reform is still in
the mix, and it has some interesting interaction effects with
SB twenty one because it basically says, look, regardless of
what Delaware is doing in its corporate code, it is
now possible to enter into a side contract that might
(12:47):
allow you to get around most of the Delaware corporate code.
In fact, I've just written an academic paper with my
colleague Dorothy Lund that basically says, you know what, Delaware
may actually prevail in its first place position in this
race because it is basically empowered a bunch of corporations,
if they don't like what was happening to Delaware, just
(13:08):
to go private and just privatize their entire governance structure
coming up next.
Speaker 2 (13:13):
But is it a bad look for Delaware? You're listening
to Bloomberg. In response to a trial judge's rejection of
Elon Musk's blockbuster pay package, Delaware's legislature passed a corporate
law overhaul SB twenty one narrowed the definition of controlling stockholder,
(13:34):
making it easier to avoid scrutiny of potentially conflicted transactions. Now,
Delaware's highest court will decide the constitutionality of that law.
I've been talking to Eric Tally, an expert in business
law and a professor at Columbia Law School. Eric, is
it a bad look that the legislature changes the law
(13:56):
to make it friendlier to corporations so those core operations
don't leave the state.
Speaker 3 (14:02):
It seems like a bad look to me.
Speaker 1 (14:05):
Well, there are aspects of that are a bad look.
I do want to defend the enterprise of Delaware in
trying to keep the franchise alive.
Speaker 3 (14:13):
Right.
Speaker 1 (14:13):
The secret sauce of Delaware for a long time was, Hey, look,
we're a small state. We don't have a lot of
like operating industries in our state that are going to
capture our general assembly. So we can basically focus on,
you know, trying to formulate the best possible operating corporate
law that is possible, and in fact, Delaware benefits quite
a bit from that because it's a small state. In
(14:35):
corporation fees alone, you know, probably pave half the roads
in Delaware, so they really do benefit from the revenues
that are raised. On the other hand, in this particular instance,
the fact that it was so procedurally irregular, the fact
that it really seemed even though the you know, the
governor and the state legislators deny this, it seems pretty
(14:55):
obvious that the pressure initially was coming from Elon Musk
himself and attempting to change law by himself. And the
fact that it rocketed through the Delaware legislature incredibly fast,
with very few opportunities for critics to, you know, to
raise their concerns or to voice their concerns. One of
(15:16):
my colleagues testified in front the General Assembly and was
literally shouted down and was told to leave the lectern
So it really is kind of an interesting moment for Delaware.
I don't think the look has been particularly good with Delaware,
and that's in some ways one of the dangers is
that you can fail to compensate for things that may
be emerging problems in the state, but you can also overcompensate.
(15:39):
And you know, to add even another complicating factor. The
two big cases that were being you know, sort of
responded to with these reforms, the Molus case and the
Elon Musk case, they still had not at that point
gotten to even an appeal before the Delaware Supreme Court.
They were still active live cases in the Delaware Assemble
(16:00):
was effectively responding to a trial court opinion. If you know,
there's a chance a trial court opinion makes a mistake,
and sometimes they do. The usual root is okay, appeal
it and see what the Delar's Supreme Court does with it.
And only then would you want to step in and say, okay,
we still don't like what the Delar's Preme Court is
going to do, and so we're going to change the law.
And so there really was a bit of a rushed
(16:21):
kind of atmosphere to this entire ordeal, and I think
on some level that probably caused the urgency to escalate.
As opposed to the signal that I suspect the governor
was trying to send, which is now we're going to
move really really quickly to you know, to put this
fire out, and putting the fire out, they may have
started inadvertently three or four other fires.
Speaker 2 (16:42):
I mean, it's it's expensive to incorporate in a different state,
isn't it?
Speaker 3 (16:47):
To move states?
Speaker 1 (16:49):
It can be in a lot of these states. In
Nevada and Texas, the expense is actually lower than in Delaware,
and Delaware has you know, doesn't charge a ton. The
most you're going to pay in an annual franchise tax
is like two hundred and fifty thousand dollars, which is peanuts.
And it's smaller if you're not a big company. So
(17:10):
it really is a scale business. It's not a Delaware
does not make all its money from three or four companies.
It makes it from the millions of companies that are
incorporated there and pay annual franchise taxes. And that's been
their entire design. One thing that's kind of interesting about
this new competition from Texas and kind of a pre
(17:30):
existing but newly invigorated competition from Nevada is that it's
not really clear that they are in this game to
make money. It seems like they're more in this game
almost to rejoin where are you incorporated and where are
you doing business? The folks at Texas say, oh, yeah,
we want people to incorporate in Texas because we want
their factories to be in Texas. And that's kind of
(17:54):
a quaint approach, at least by historical standards, because the
big innovation that Delaware introduced to the world is you
don't have to do any business in Delaware to be
incorporated there, and what they specialize in is incorporate law.
So some of the most recent competition I think has
been hard for Delaware to match up to because it
(18:14):
seems to be not about making money, and a lot
of these states seem to be interested in kind of
keeping the cost down of incorporating. Now, if you're going
to reincorporate and you're a public company, that's a very
costly process. You've got to put it out in front
of the stockholders, you've got to solicit their votes, you
have to have long disclosures, and there's a fair amount
of rigmarole that goes into trying to figure out how
(18:37):
am I going to reincorporate in a different state.
Speaker 2 (18:39):
So now, as far as SB twenty one, do you
think it's unlikely that the Delaware Court will find it unconstitutional.
Speaker 1 (18:49):
This is a really interesting issue. So the case from
which a lot of this comes is a case from
the nineteen fifties actually, and that case itself was a
controversial case when it first came down. It hasn't really
been tested very much, and so I think probably, you know,
if are replacing odds, I'd say the chances are probably
(19:11):
that the Delaware Supreme Court is going to find a
way to either uphold the statute or say, okay, look,
technically the statute is not constitutional, but if you put
in a small fix to it, like make it an
opt in statute or something like that, it would be constitutional.
We'll see what happens. But it's interesting that it's had
(19:31):
the kind of legs that it has, and in some
ways not surprising because really the whole sort of you know,
last seven or eight months in corporate law has kind
of forced us back into this kind of existential moment
of trying to figure out, you know, what is valuable
in corporate law and what is it.
Speaker 3 (19:47):
Do you think we'll see a decision soon on this.
Speaker 1 (19:50):
We'll see where this goes. My guess is we're probably
going to have to wait till the beginning of the
new year to see a judgment from the from the
Delaware Supreme Court, but they may move relatively quickly given
the state involved.
Speaker 2 (20:01):
Before I let you go, I want to get your
input on something totally different.
Speaker 3 (20:05):
Open Ai is laying the.
Speaker 2 (20:07):
Groundwork for an IPO that could value the company at
one trillion dollars.
Speaker 1 (20:13):
You can't see me, but I've got my little Austin
Powers pinky up against the corner of my mouth for
one trillion dollars. So so yeah, so this is this
has been a long brewing situation with open ai. You know.
When the company began, uh, it had a unique structure, right,
and I think some of the founders were quite worried about,
(20:35):
you know, the general intelligence of artificial decision makers and
whether that caused a risk and so uh they deliberately
built into the original structure of open ai what is
essentially a ceiling on how profitable it could be for
its investors. It was a company and owned by a
nonprofit foundation, and it basically said that if you're an
(20:57):
investor in the for profit company, as soon as you've
made back one hundred times your investment, you don't get
anything more, all right, And so that that seemed at
the time like one hundred times by investment, that's great,
well open ai. Open ai is shot well past that
now and and that creates a problem, particularly given that
it is sitting side by side with a bunch of
(21:20):
other generative AI companies that are investing heavily in improving
their project. The only way that you can kind of,
you know, do that and stay in competition is to
try to figure out a way to raise more money.
But when the existing investors have already hit their one
hundred times cap, there's no easy way to do it.
So open ai was in a clearly a conundrum in
(21:44):
you know, the highly competitive environment it now finds itself
and it's still the market leader, but you know, a
bunch of these other big players didn't have a hand
tied behind their back, and so there's been a longstanding,
you know, kind of internal debate and discussions that been
taking place across the board on how and whether open
ai could be transitioned to a place where it'll have,
(22:07):
you know, better ability to raise money from outside investors,
but still have some controls in place that were pretty
much envisioned by the founders that set up open ai
to begin with, and so under that existing structure, it's
not going to be easy to raise money from anyone,
including an IPO, and so they kind of felt that
(22:29):
they had to somehow transition to something different, and that's
what they've done. They are a Delaware company and they
have basically announced that they have transitioned into something known
as a public benefit corporation. And these are relatively new
structures that basically say you can be a for profit
company and have kind of a do good goal at
(22:52):
the same time. And Delaware opened up its own statutes
to allow these types of companies in about ten fifteen
years ago. There haven't been that many takers, quite frankly June,
particularly in the in the publicly traded company space, but
there are some and so open Ai basically said, well,
if we did that, then through that conversion, we could
(23:14):
get rid of this one hundred times your investment cap
that's been you know, tying our hands. We could still
make the foundation, the nonprofit, a big player in the
post conversion company. And they have basically you know what,
It's been reported that the foundation is going to have
(23:34):
a significant amount of stock in the company and is
also going to have special rights to fire board members
if they don't like what the board members are doing.
That is a non trivial amount of control. But by
the same token, the handcuffs are now off the ability
of investors to to generate a return, and so that
has absolutely sowed the seeds for a possible public offering
(23:59):
of Open AI. And you know, it's still early days,
so we don't know when that's going to occur, what
it's going to look like, but it seems pretty clear
that if they were going to do a type of
a public offering of their stock ownership, this was the
type of move that they had to make. And so
that's kind of where things are pointing right now. Because
Opening is not a publicly traded company, they have not
(24:21):
made all kinds of long disclosures about exactly what those
different levers of control are. That will happen eventually if
they file paperwork for having an initial public offering, but
it hasn't happened yet, and you'll be.
Speaker 3 (24:35):
The one we call when they do.
Speaker 2 (24:36):
Thanks so much, Eric, as always, that's Professor Eric Talley
of Columbia Law School. The federal judiciary hasn't had defurlough's
staff during a shutdown in three decades until now. For
the first two and a half weeks of the shutdown,
the Judiciary tampt into other sources of funding to keep
(24:57):
the courts fully functioning.
Speaker 3 (24:59):
And to keep keep employees paid.
Speaker 2 (25:02):
But that money has now run out and the federal
district courts are using different strategies to manage staffing and caseloads.
Joining me is Bloomberg Law reporters Suzanne Monnac So, Suzanne,
the federal courts have run out of money.
Speaker 4 (25:16):
Yes, the Judiciary ran out of funds in mid October.
This was the first time that the Judiciary had been
required to do shutdown related furloughs of their employees in
thirty years. And that's just because they didn't have the
reserves that they've had in the past. They've said underfunding
by Congress. So we have now entering multiple weeks of
a shutdown and the Judiciary employees, if this continues, are
(25:38):
going to see their first miss paycheck this coming Friday.
Speaker 2 (25:41):
Before the Judiciary was able to prevent these furloughs and
court closures during a shutdown, why weren't they able to
this time?
Speaker 4 (25:51):
The Judiciary has in the past had the reserves to
float payroll during shutdowns, and for example, it managed to
avoid having to furlough any employees during the five weeks
shut down during President Donald Trump's first term. But Judiciary
employees have blamed the furloughs that they've had to have
quite a bit sooner this year on tighter margins. They've
gotten flat funding from Congress the last few years, and
(26:13):
that's effectively a cut due to inflation. So they've just
said that this has given them less cushion. So while
of course federal workers stop getting paid October first, at
the start of the fiscal year, the judiciary had just
two weeks of additional funding to keep themselves going, but
then after that they haven't had the ability to continue
paying employees.
Speaker 2 (26:32):
So the federal district courts are handling the lack of
funds in different ways. For example, some are having the
courts close for a day tell us about some of
the measures they're taking.
Speaker 4 (26:43):
That's right, federal courts across the country. The federal districts,
i should say, do really operate quite independently. So while
we're seeing both furloughs kind of on the administrative side
of the judiciary in Washington. We're also seeing different responses,
really varying by every single district in the country. Federal courts,
as you mentioned, have been closing or limiting services on Fridays.
(27:04):
For example, the Middle District of Alabama has said that
its courthouses will be closed and its employees furloughed every
Friday while this continues. The Federal Court House in Connecticut
will be furlowing its clerk's office staff on Fridays. And
we're also just seeing a number of courts putting out
notices that they're going to be suspending things like travel
training programs, and of course many are postponing civil trials
(27:27):
that involve the Justice Department. As Low's lawyers are also
not getting paid.
Speaker 2 (27:31):
We should just mention that judges get paid because it's
required under the constitution. How are they deciding which workers
to furlough and which to keep on the job without pay.
Speaker 4 (27:41):
There seems to be some discretion and making those decisions.
There is a course shutdown guidance under the Anti Deficiency
Act which the judiciary is operating under in terms of
how to identify who is essential and who is not essential. Activities,
for example, include criminal cases, so those cases must continue
during shutdowns because they involve liberty of people, and so,
(28:02):
for example, the federal defenders are generally classifying their employees
as essential since they handle those cases. And of course,
since courts have to continue those cases, we are seeing
a lot of court staff being deemed essential and having
to continue to work, hopefully for back pay later. And
so I just think that it's one of those things
where courts do have to continue operating during a shutdown.
(28:23):
So even though they have run out of money, I
think the furloughs are still going to remain somewhat limited
since they do have to be able to continue to
process cases in some capacity. And some civil cases are
continuing as well if the judge considers them important enough
to do so.
Speaker 2 (28:35):
Yeah, I was going to say that a lot of
the cases involving Trump administration policies are continuing. For example,
we have those two cases over the funding of snap benefits.
Speaker 4 (28:48):
If a judge tells the Justice Department, I know, you
do have to continue showing up and continuing this case,
then the Justice Department has to do so. Guidance that
DJ had given was to generally request a pause in
a case in a civil case where they felt it
was appropriate to do so during the shutdown. But if
the judge says, no, I disagree, we're too far into this,
I want to continue, then those lawyers do have to
(29:08):
continue without pay. So really we're out of point where
the judge is like the only person getting paid in
a courtroom as their staff's not getting paid. Any type
of federal government lawyers are not getting paid. Federal defenders
are not getting paid in a criminal case. So really
it's just the private attorneys in civil cases that are
getting paid for their work at this point in the courtroom.
Speaker 2 (29:25):
So let's talk about the cash crunch how it affects
criminal cases. So federal public defenders are not being paid
right at this point.
Speaker 5 (29:34):
That's correct.
Speaker 4 (29:35):
They did receive a paycheck in October from their work
for the first two weeks of the month that there
was funding for, so they really haven't actually felt the
crunch yet in terms of the paycheck suspension, but they're
going to feel that this Friday if this shutdown is
still going.
Speaker 2 (29:48):
So federal public defenders rely on CJA panel attorneys to
take clients in cases involving multiple defendants, etc. Tell us
about what's been happening those attorneys even before the shutdown.
Speaker 4 (30:03):
Yes, here the shutdown is really exacerbated an existing underfunding
problem for criminal defense CJA or the Criminal Justice Act
Panel attorneys. These are private attorneys who take on cases
for indigen defendants where federal defenders cannot. Oftentimes that might
be a multi defendant case where the defenders are representing
one of the defendants but then would have a conflict
of interest in representing other ones. There, for example, a
(30:25):
CJA panel lawyer would get tapped.
Speaker 5 (30:27):
To step in.
Speaker 4 (30:28):
Funding for that panel actually ran out earlier this summer,
back in July, and so they actually haven't been paid
for about four months now. They had hoped to be
reimbursed for their work during that several months period on
October first, when new funding came in, but of course
that isn't what happened, and the shutdown has continued.
Speaker 5 (30:45):
So they've been now floading their own.
Speaker 4 (30:47):
Expenses, as I said, for about four months, and that's
including expert witnesses that they might want to bring on.
Forensic investigators, those types of people who might be testifying
in a case examining mobile cell phone or computer data
in the case. Those people are also fronting their own expenses. Now,
of course, federal defenders who were previously getting paid I've
now joined them and not getting paid. So we're really
(31:08):
seeing a pretty significant underfunding for criminal defense in that space.
Speaker 2 (31:13):
So some lawyers have made motions to have cases dismissed
because of this situation. I mean you wrote about one
lawyer wrote, you prosecute, you pay, you don't pay, you
don't prosecute, complaint, indictment dismissed with prejudice. There are a
lot of lawyers trying to have cases dismissed because of this.
Speaker 4 (31:36):
We're certainly seeing them across this country. I've probably seen
close to a dozen at this point, though of course
there may be more. We've seen more success with request
to postpone cases.
Speaker 5 (31:45):
Judges seem a little bit more willing.
Speaker 4 (31:47):
If the defendant who might be in prison is willing
to postpone their case, I think the judge is a
little bit more willing to do that. I have yet
to see if case fully dismissed for a constitutional violation
as a result of this underfunding. The six and and
My guarantees a right to counsel even if you cannot
for an attorney, and so that's where we're seeing some
of these arguments being brought under that by nature, the
(32:07):
fact that the government hasn't funded criminal defense, and as
long as it hasn't would create a constitutional violation.
Speaker 5 (32:13):
Waiting to see if we.
Speaker 4 (32:15):
See a judge become receptive to that argument and decide
to fully toss the case. There's a number of motions
that we're keeping an eye on in that respect, and
I think they're only going to continue and proliferate as
criminal defense lawyers are sharing templates with each other and
sharing the motions if they filed, and what they've had
success or not success with.
Speaker 2 (32:32):
And what's happening at the Supreme Court.
Speaker 4 (32:34):
So the Supreme Court has actually also run out of funding,
and their spokesperson has said that they'll need to make
some changes to its operations, including by closing the building
to the public and some capacity, but keeping it open
for official business, which means that the justices will continue
to hear and decide cases.
Speaker 2 (32:51):
So now let's talk a little bit about Lindsay Halligan.
First of all, tell us who Lindsay Halligan is.
Speaker 4 (32:56):
Lindsay Halligan was previously Trump's personal attorney, and she has
been appointed the interim US attorney for the Eastern District
of Virginia based just outside of Washington, DC, and she
is leading the criminal charges against New York Attorney General
Latitia James and former FBI Director James Comey that we've
seen last month or so. She's also come under scrutinized
(33:17):
by the public and within those cases for the way
in which she was appointed. We're seeing those defendants make
arguments in court that she was invalidly serving as interim
US attorney when those indictments against them were filed.
Speaker 2 (33:30):
Well, she was hastily installed after the prior interim US
attorney refused to bring indictments against some of those on
Trump's enemies lists.
Speaker 5 (33:41):
That's right.
Speaker 4 (33:41):
She came to the office after a little bit of turnover.
We had seen the Biden appointed US attorney for that
office resign as is typical, and a new person, Eric Seibert,
was brought in. He'd served as an interim term and
then has had his term renewed by the Federal District Court,
as is the law regarding US attorney appointments. But then
he was pushed out after the Trump administration told him
(34:02):
he'd be removed for not bringing mortgage fraud charges against
Letitia James, even though prosecutors in his office had found
that there wasn't.
Speaker 5 (34:09):
Enough evidence for that.
Speaker 4 (34:10):
That's when we saw Lindsay Halligan, Trump's former attorney, who
has never been a prosecutor before, be brought in and
she was willing to sign on to that indictment, both
against Letitia James as well as against James Comey, who's
been accused of making a false statement to Congress.
Speaker 2 (34:24):
After her appointment was attacked in court papers by both
Comy and James, US Attorney Pam Bondy has given her
a new title.
Speaker 5 (34:34):
That's correct.
Speaker 4 (34:34):
We're seeing a little bit of maneuvering here on the
part of the Trump administration to try to shore Halligan
up against some of these claims of having been improperly serving.
So we saw just last night court filing where Attorney
General Pam Bondy has signed an order on October thirty first.
Speaker 5 (34:49):
But she's backdating. It's a fact.
Speaker 4 (34:50):
She's saying it's taking effector retroactively to when Lindsay Halligan
took office in September, to add a new title for
her that she is the Special Attorney. And this is
essentially an effort to try to shore her up against
these claims that she might have been invalidly serving at
the time that the indictments against James Cove and Letitia
James were filed. She's calling it ratifying essentially her appointment
(35:12):
as US attorney and claiming that she had the authority
to issue those indictments when those.
Speaker 5 (35:17):
People were charged.
Speaker 4 (35:19):
And this is really part of a broader pattern of
maneuvering that we're seeing at US attorney's offices across the country,
particularly in states with two Democratic senators. US attorneys go
through the nomination process in the Senate, and senators do
have veto power under the blue slit process over those nominees,
and so we're seeing in states like Virginia that has
two Democratic senators, California, and New York where the Trump
(35:41):
administration doesn't want to have to come up to deal
with Congress about this, so instead they're kind of taking
creative interpretations of some of the vacancy laws to try
to get people in that they want in acting her
in her own capacities and using things like making them
the second in command at the office, thus allowing them
to have all of the powers as the first command
if that spot is vacant, those types of maneuvering, and
(36:02):
so that's just what we're seeing here, and it's something
we've seen across the country as well.
Speaker 3 (36:06):
Though it's quite inventive.
Speaker 2 (36:09):
We'd all like to be able to say this is retroactive.
My mistake doesn't count because I'm now retroactively correcting it.
But I doubt that a court is going to allow
her to say, oh, by the way, you.
Speaker 5 (36:22):
Know, well, certainly you have to see.
Speaker 4 (36:24):
The Justice Department is arguing that Halligan was wildly serving regardless,
and they've sort of portrayed this as well, just in case,
we're doing this extra thing to make our case even stronger.
But we think we have a strong case regardless. That's
essentially what their argument has been. There'll be a hearing
in this in both criminal cases in about two weeks
or in November thirteenth. So interesting to see how the
judge receives.
Speaker 2 (36:45):
US Federal judges in other jurisdictions have ruled against the
Trump administration in similar cases. Thanks so much, Suzanne. That's
Bloomberg Law reporter Suzanne Monyac And that's it for this
edition of the Bloomberg Law Show. Remember you can always
get the latest legal news on our Bloomberg Law podcasts.
(37:05):
You can find them on Apple Podcasts, Spotify, and at
www dot bloomberg dot com, slash podcast slash Law, and
remember to tune into The Bloomberg Law Show every weeknight
at ten pm Wall Street Time. I'm June Grosso and
you're listening to Bloomberg
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