25 April 2024

Chancery Invalidates Elon Musk's $55.8 Billion Pay Package

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Tornetta v. Musk, et al., C.A. 2018-0408-KSJM (Del. Ch. Jan. 30, 2024) Stockholders of Tesla, Inc. brought a derivative action against Elon Musk and six individual Tesla directors.
United States Corporate/Commercial Law
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Tornetta v. Musk, et al., C.A. 2018-0408-KSJM (Del. Ch. Jan. 30, 2024)
Stockholders of Tesla, Inc. brought a derivative action against Elon Musk and six individual Tesla directors, alleging that the directors breached their fiduciary duties by awarding Musk performance-based stock options in January 2018 with a potential $55.8 billion maximum value and $2.6 billion grant date fair value. Following a trial, the Court of Chancery held that the defendants failed to meet their burden to prove the fairness of the compensation plan and granted the plaintiffs' request to rescind the plan in its entirety.

At least regarding the pay package, the Court found that Musk controlled Tesla based on a combination of factors, including his 21.9% equity stake, his "Superstar CEO" status, his close ties with the directors negotiating the pay package for Tesla, and his domination over the board's approval process for his compensation. Accordingly, the burden was on the defendants to establish the fairness of Musk's compensation as to both price and process.

A fully informed vote of the minority stockholders could have shifted the burden to the plaintiff, but the Court found that the stockholder vote approving the transaction was not fully informed. The proxy statement inaccurately described key directors as independent despite several having substantial personal and financial ties to Musk, and misleadingly omitted material details about Musk's role in setting the terms of the grant and the timing of the process.

As to process, the Court found defendants failed to meet their burden due to "barely any evidence of negotiations at all." Based on evidence presented at trial, "[r]ather than negotiate against Musk with the mindset of a third party, the Compensation Committee worked alongside him, almost as an advisory body." As to price, the Court similarly found defendants failed to prove the compensation's fairness. Musk owned 21.9% of Tesla before the compensation package. That already incentivized him to grow Tesla without additional equity of the magnitude the board approved. And Musk had stated that he had no intention to leave the company. In those circumstances, the record-breaking equity grant was not within the range of reasonable approaches to achieve the board's purported goals of retention, engagement, and alignment.

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