A unique constitutional quirk arises in January concerning impeachments. Between the November election and the inauguration of the newly elected Congress in January, the outgoing "lame duck" Congress still holds power. This creates an interesting legal wrinkle: the lame duck representatives may vote to impeach a president or elected official, but the fate of that official could ultimately be decided by a completely different set of representatives elected on different agendas. Of course, this quirk has never played out in US history, but it’s not impossible…
THIS WEEK:
- A Delaware court has voided Elon Musk's historic compensation package
- The Taylor Swift army is fighting the deepfakes
- In-House legal departments are finding they have less money to spend yet more work to take on
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🤑 EXCESSIVE COMPENSATION
Musk’s Compensation Package Backfires
"Never incorporate your company in the state of Delaware," Elon Musk tweeted on Tuesday afternoon, shortly after a Delaware chancery court voided the executive compensation package of one of the world's richest people.
The compensation package in question was set in 2018, as the New York Times explains, and gave "Mr. Musk the right to acquire about 304 million Tesla shares at a preset price of $23.34 a share if the company achieved certain revenue, profit and share price goals." These goals were split into 12 tranches, and each was achieved by Musk (though, of course, he was the one who set the goals) and the total value of the shares was worth about $51 billion this week.
So why did Chancellor Kathaleen St. J. McCormick void this compensation? “The process leading to the approval of Musk’s compensation plan was deeply flawed,” she said, citing that Musk was effectively able to decide his own pay package as much of Tesla’s board are his close friends and family. Furthermore, Musk presented a “materially deficient” version of this plan to shareholders for a final approval.
Chancellor McCormick’s decision is widely viewed as warning shot to other executives that, yes, there is such a thing as excessive pay. $51 billion (the largest pay package in history) is an exaggerated version of this, but McCormick was struck by “the absence of any evidence of adversarial negotiations between the board and Musk concerning the size of the grant,” cites Time.
Musk and co may still appeal this ruling to the Delaware Supreme Court, but corporate lawyers and Wall Street analysts alike have already taken note of the ruling’s massive potential impact. "The fact that they lost this in Delaware court, it's a jaw dropper," Dan Ives, an analyst with Wedbush Securities, told NPR. “It's unprecedented, a ruling like this. Will this case prompt companies to abandon Delaware for other states? “People have moved out of there because they don’t like the rulings of the judges,” said law professor Carl Tobias. “But most people consider it the gold standard.”
Losing Focus
As Robyn Denholm, chair of Tesla’s board, said, the justification for the multi-billion dollar compensation package was to keep Musk focused on the automaker. “It was around motivating him to achieve things that were bold and audacious,” Denholm testified, “and him putting his time and energy into that as opposed to his other interests.”
In a post on X following the court’s decision, Musk suggested that without his generous stock options, Tesla would no longer be his priority. “I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control,” the post began. “Enough to be influential, but not so much that I can’t be overturned. Unless that is the case, I would prefer to build products outside of Tesla.”
And, in her own way, chancellor McCormick seemed to agree that Musk’s compensation was about where he placed his attention.
THE VERDICT:
In an era of extreme wealth inequality and record corporate earnings, excess compensation needs to be reigned in. While Musk's $51 billion compensation package is an exaggerated and obvious example of this, will the ruling against him stand as a precedent, or will it be written off and ignored?
🚨 PROMOTION
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🤖 ARITFICIAL INTELLIGENCE
It's Me, Hi, I'm The Deepfake, It's Me
Taylor Swift may be one of the most famous and photographed faces on Earth, so it should come as no surprise when her likeness finds its way into AI-generated images. But users on X have been taking things further by posting pornographic deepfakes of the musician, with one post clocking over 45 million views before it was deleted after 17 hours. But this very high-profile mess is bringing even more intense scrutiny to X and how it handles content moderation in the wake of Elon Musk's takeover.
"Posting Non-Consensual Nudity (NCN) images is strictly prohibited on X and we have a zero-tolerance policy towards such content," a post by the X security team stated. "Our teams are actively removing all identified images and taking appropriate actions against the accounts responsible for posting them. We're closely monitoring the situation to ensure that any further violations are immediately addressed, and the content is removed."
As TechCrunch says, the issue of AI-generated deepfake porn is an existential crisis for Swift's fans: "This abuse has even seeped into schools, where underage girls have been targeted by their classmates with explicit, nonconsensual deepfakes. So, for some Taylor Swift fans, this isn’t just a matter of protecting the star. They realize that these attacks can happen to any of them, not just celebrities, and that they have to fight to set the precedent that this behavior is intolerable."
And the response was, well, swift. Within a week, the US Senate had introduced a bipartisan bill targeting such NCNs in direct response to the Swift situation, reports The Guardian. The so-called Disrupt Explicit Forged Images and Non-Consensual Edits (or Defiance) Act would "'seek a civil penalty against “individuals who produced or possessed the forgery with intent to distribute it' or anyone who received the material knowing it was not made with consent," and pairs Democrats Dick Durbin and Amy Klobuchar with Republicans Lindsey Graham and Josh Hawley behind the bill.
Over in the EU, however, X has been under investigation already for allegedly violating the Digital Services Act (DSA) following the October 7th massacre in Israel and the ensuing Israel-Hamas war. X "is reportedly being questioned regarding its crisis protocols after misinformation about the Israel-Hamas war was found being promoted across the platform," notes The Verge.
An Inevitable Mess
But was such a moment inevitable for X? Taylor Lorenz of the Washington Post says yes. "Since Musk took control of the company, he has systematically dismantled all content moderation and user safety efforts," she recently wrote. "One of the first moves he made after taking control of the company in the fall of 2022 was to eliminate moderators who track and remove misinformation and abusive content. Immediately, the app saw skyrocketing hateful language and online abuse, especially towards women, escalate. But he didn’t stop there. In the year and a half since, he’s done rounds and rounds and rounds of layoffs, to the point that there are hardly any moderation systems in place on the app."
THE VERDICT:
First the Ticketmaster fiasco and the issue of monopoly there, and now NCN deepfakes and the issue of online abuse? It's a good thing that Swift's influence can draw attention to festering problems in our society, but it should it be that we don't address these problems until it affects her or another major celebrity?
⚖️ LEGAL WORKFLOW
Counsel Meets The Cost-Cutter
A new report by the Association of Corporate Counsel has found that 42% of in-house legal departments are facing cost-cutting mandates, and 58% of legal departments are seeing rates from outside law firms rising.
“Squeezing general counsel resources while at the same time expanding their remit is unlikely to be sustainable for the long term,” Veta T. Richardson, ACC's president & CEO, said in a press release, notes Legal Dive. “Improving operational efficiency and investing in new technology will help, but it remains unclear if those efforts will be enough.”
So will AI be the stopgap? Well, maybe. One day. For now, AI tools can only help with basic, rote legal tasks. A report by Thomson Reuters, however, found that 40% of general counsels expect an increase in outside counsel spending, though that may be a result of increasing rates.
In response to these rising rates, in-house legal departments are "introducing stricter guidelines for the use of outside counsel and implementing structured annual rate review processes," says Legal Dive. "Many in-house teams are also examining whether to increase their use of regional and boutique firms, which typically charge less per hour than larger outfits."
To be strategic with which firms to use and when so as to reduce outside legal bills, Brightflag, an e-billing platform, recommends analyzing case matters for risk and complexity. “Matters that are both high risk and high complexity can continue to be instructed to Am Law 100 firms, while other matters can go to regional firms, alternative providers, or be resourced with internal staff.”
But things aren't slowing down. According to Thomson Reuters, “Worked rates, the negotiated rates clients agree to pay to law firms for particular matters, have risen at a relatively dramatic pace over the past five years. The past two years, in particular, have seen the pace of worked rate growth begin to rival figures from before the GFC of the late-2000s.”
THE VERDICT:
As economic conditions continue to change, and industries like Tech and Entertainment roll out layoffs and other budget-pinching measures, its a wise time to reevaluate your organization's legal workflow. Determine which of your matters need to be handled in-house, and which can be sent to outside counsel, whether to AmLaw 100 firms or smaller firms (and even individually contracted attorneys). Developing a prudent and streamlined strategy today will only help navigate future uncertainties will keeping costs tight.