DealLawyers.com Blog

The 1974 classic “Chinatown” contains one of the most memorably bleak closing scenes in film history.  After witnessing the film’s villain – a proverbial “malefactor of great wealth” – get away with a murder, Jack Nicholson’s character Jake Gittes is hustled away from the crime scene by his colleagues, who simply tell him to “Forget it, Jake. It’s Chinatown.”  In that last line “Chinatown” isn’t just a place, but a metaphor for the idea that the world’s a venal place, where the wealthy and powerful are above the law.

For me, it’s hard not to think of that line when I ponder Elon Musk’s encounters with the SEC and the courts and his erratic behavior surrounding his proposed acquisition of Twitter. It sounds like I’m not the only one. Here’s what Ann Lipton recently had to say on the Business Law Prof Blog about Musk & his Twitter shenanigans:

But there’s a deeper issue here, which is that the complete failure of anyone to rein Musk in really undermines the perception that there is a general rule of law that applies to everyone.  That’s why everyone’s asking why the SEC isn’t acting, even though this isn’t really the SEC’s responsibility to address.

I mean, sure, you kind of know in a cynical way that rich people play by their own rules, but there’s a difference between believing that intellectually and viscerally experiencing it, day by day, as it plays out in Twitter.

And maybe that perception is misguided in this case – as I just said, there really isn’t a basis for any regulatory authority to get involved here, though the SEC could create headaches by demanding more disclosures in the proxy – but Musk’s brazen disregard of his contractual obligations almost certainly flows from his history of ignoring rules and experiencing no meaningful consequences.  And of course, the more he does it, the more he develops an army of admirers who become less likely to hold him to account in the next iteration of the game.

Uninformed observers may be misunderstanding the specifics, but they’re right on the general principle.  Like, I don’t think it’s entirely coincidental that Musk is publicly defying obligations under Delaware law right after a Delaware court said – in practical effect – that he is a business genius who is largely entitled to skip all the niceties of Delaware procedure.

And that’s the danger of each individual player – a Delaware court, a particular regulatory agency, a merger partner – each deciding that Musk is too irascible, too smart, too wealthy, too talented, to rein in.  It collectively communicates a very specific lesson about who has to comply with the law, and who doesn’t.  That harms everyone, but no one actor has an incentive or even the jurisdiction to address it.

Elon Musk is a sometimes dazzlingly brilliant entrepreneur who has earned an immense fortune with his vast talent. He also believes that the rules don’t apply to him, and so he doesn’t follow them.  If institutions from the Tesla board to the SEC to the federal courts won’t step up and make him, then “Forget it Jake. It’s Chinatown.”

– John Jenkins