The Delaware Chancery Court’s decision in January to nullify Elon Musk’s $55 billion compensation package leaves the CEO of Tesla Inc. without any compensation for six years. Despite this, Tesla is allowing its stockholders to ratify Musk’s 2018 pay package at its annual meeting on June 13. Seeking such ratification isn’t just permitted under established Delaware law—it’s a sensible path forward, as shareholders should have a say in decisions affecting their investment, including executive compensation.
Musk’s options weren’t worth $55 billion when Tesla announced his compensation plan on Jan. 23, 2018, or when 73% of Tesla’s independent shareholders approved it that March. To earn his pay, Musk had to increase Tesla’s market value from $59 billion to $650 billion within 10 years—a goal considered outrageous by some at the time. Nonetheless, after the compensation plan was adopted, the company posted record losses and struggled with production targets for the Model 3. Shareholder Richard Tornetta subsequently sued in Delaware in June 2018.
By June 2019, Tesla’s shares dropped as low as $12, during which time Musk received no guaranteed compensation. The Delaware lawsuit alleged that Tesla’s board breached its fiduciary duty by awarding Musk this incentive-based compensation plan. By the time of the 2022 trial, Musk had already reached the final milestone under the plan, amidst Tesla becoming more valuable than General Motors, Ford, Toyota, Mercedes-Benz, Volkswagen, Honda, Nissan, and Hyundai combined. Read more here.
The essence of the claim centered on Musk being a controlling shareholder of Tesla, thus subjecting his compensation to a higher standard of judicial review unless negotiated by independent directors and approved by a vote of unaffiliated shareholders. Although financial details were disclosed, the Delaware court concluded that Tesla failed to satisfy procedural requirements, as Musk influenced the committee and information regarding conflicts wasn’t fully disclosed to shareholders.
In response to the decision, Tesla formed a new special committee and is now asking its shareholders to ratify Musk’s original compensation package with full disclosure of all identified flaws. Some scholars argue that awarding Musk compensation for services already rendered breaks Delaware law by amounting to a gift and waste of corporate assets. However, considering Musk’s pivotal role in significantly increasing Tesla’s market value, his compensation may instead be deemed justifiable.
Under Delaware law, waste is defined as a transfer of corporate assets serving no corporate purpose or for which no adequate consideration is received. This requires showing that the corporation entered into a transaction and received consideration deemed inadequate by ordinary, sound business judgment. It is a high bar to meet, as limited cases have succeeded in proving waste.
Musk’s case is distinct from previous examples, such as CBS’s decision to pay its controlling shareholder Sumner Redstone after he was deemed incapacitated, likely constituting a waste. The court’s finding that Tesla failed to properly approve the 2018 compensation package does not negate Musk’s entitlement to compensation for his services over the past six years, given the value he delivered to the company and its shareholders.
The question then turns to what Musk deserves to be paid, bringing the matter into the realm of shareholder judgment rather than a gift or waste. Delaware courts generally defer to the informed decision-making of disinterested shareholders, supporting the argument that Tesla’s shareholders can indeed ratify the same compensation package previously deemed excessive by the court.
The case is Tornetta v. Musk, Del. Ch., 310 A.3d 430, Opinion 1/30/24.
Full article available at Bloomberg Law.