The landmark decision to negate Elon Musk’s nearly $56 billion compensation plan at Tesla Inc. may have been an extraordinary case concerning an iconic billionaire CEO, but it also brings crucial learnings for executive boards and compensation committees. The decision, inked on January 30, saw Delaware’s Court of Chancery rule that Tesla’s director board had violated their fiduciary duties when they approved a 10-year, $55.8 billion, equity-based compensation plan for Musk, Tesla’s CEO, in 2018. Reuters further reported, this plan was substantially larger than the medium peer compensation plan (250 times over) and was over 33 times the size of the next closest comparison (Musk’s previous compensation plan).
In the case Tornetta v. Musk, Musk was found to be the Tesla controller (at least in the context of the compensation plan) and hence had to ensure that “entire fairness” was maintained regarding his compensation plan. This fairness should benefit the corporation as well as its minority shareholders both in terms of price and process. Interestingly, even though the majority of minority stakeholders had consented to the plan, this decision was seen as uninformed given materially flawed proxy disclosures. Therefore, the obligation to provide proof of fairness continued to lie with the defendants.
Findings of the court suggest that an absence of plan sanctions from independent directors or an inadequate disclosure to shareholders increase the defendants’ burden to prove the fairness of executive compensations. This situation also exemplifies how their operations can decide the judicatory standards of review, consequently bearing a significant impact on the outcomes.
The court also found Musk to be a controller of Tesla in terms of the compensation plan. This was established considering various factors, including his 21.9% equity stakeholder status in the company. The case interconnected the numerical analysis in its 2020 decision Voigt v. Metcalf, showing that minority stakeholders who don’t hold a majority stake have increased leverage in voting.
The case offers key insights for compensation committees and corporations to ensure their executive compensation decisions withstand judicial scrutiny. It provides a template for structuring compensation plans for executive management and insights for directors on how to conduct their roles without compromising their fiduciary duties.
Please find more in-depth information and views on the case in the detailed report on Bloomberg Law.