Way back in 2019, we blogged that a shareholder went to court to challenge the $56 billion compensation award that was awarded to Elon Musk in 2018. The Delaware Court of Chancery determined that the case could proceed under an “entire fairness” standard because Musk was a controlling shareholder, even though it had been approved by shareholders. Nearly three years later — now that the Tesla moonshot award has paved the way for similar deals at other companies — the compensation case is going before Chancellor Kathaleen McCormick on the merits in late October.
In case you missed it, Chancellor McCormick is also presiding over the litigation that will determine whether Musk can walk away from his merger agreement with Twitter (John’s been blogging about that case on DealLawyers.com, and if you want the blow-by-blow, follow The Chancery Daily on Twitter. Yesterday, the WSJ reported that Twitter’s shareholders are poised to approve the deal – Musk hasn’t voted).
The lawsuit alleges that the compensation decision was a breach of fiduciary duty because the board failed to ensure Elon Musk’s full-time devotion to his role as CEO of Tesla. His other endeavors include chairing SpaceX, founding The Boring Company, owning Neuralink and joking that he’ll buy public companies. A recent Reuters article gives more detail:
The lawsuit in Delaware’s Court of Chancery by shareholder Richard Tornetta alleges the package was unnecessary, since Musk at the time owned 22% of Tesla, giving him plenty of incentive to make the company a success.
Tornetta seeks to cancel the plan, including stock options already granted.
Musk is using his Tesla stock as collateral for loans to buy Twitter.
Musk and Tesla’s directors argued in court filings that the pay package did what it set out to do — align Musk’s incentives with shareholders and create value.
On Twitter, Ann Lipton pointed out that some of the arguments being made in the Twitter litigation could also affect the compensation trial. This compensation case has been overshadowed by other Musk drama, but we’ll be watching for the outcome — and the impact that it could have on CEO arrangements, backing up compensation committee decisions and drafting proxy disclosures for shareholder votes.
— Liz Dunshee, CompensationStandards.com, September 13, 2022