Delaware Chancery Nixes Musk’s $55.8-Billion Tesla Pay-Out
The Delaware Court of Chancery invalidated a $55.8-billion payout by Tesla, Inc., to its founder and controlling stockholder, Elon Musk. In a 200-page post-trial decision, Chancellor McCormick stated Musk was required to prove the package was entirely fair and that he had failed to do so.
The largest compensation plan in public company history, Musk’s compensation was contingent on Tesla meeting market capitalization milestones. According to the court, however, the compensation package was not necessary to incentivize Musk. Rather, “his ownership stake gave him every incentive to push Tesla to levels of transformative growth—Musk stood to gain over $10 billion for every $50 billion in market capitalization increase.” Tesla and its directors argued the package should be evaluated under the highly deferential “business judgment rule” standard because it was contingent on meeting aggressive growth goals, was approved by the Board of Directors, and was ratified by a vote of the majority of the minority stockholders. Under the business judgment rule standard, a decision by fully informed and unconflicted fiduciaries will be upheld unless it cannot be attributed to any rational business purpose.
Here, the court applied a stricter standard of review placing the burden on defendants to prove their action was “entirely fair” procedurally and substantively. In reaching that determination, the court found Musk enjoyed such close personal and professional relationships with the directors that they were beholden to him and lacked independence when negotiating with Musk for Tesla. Of the directors on the compensation committee, the court observed: “[w]hen asked to describe the process, none viewed the process as an arm’s length negotiation. Each viewed it is as a form of collaboration with Musk.” In short, Musk dominated the process leading to Board approval. The court also found that misrepresentations about Musk’s influence on the Board and incomplete descriptions of the negotiations leading to Board approval tainted the stockholder vote.
In evaluating substantive fairness, the court discounted the assertion that the package incentivized Musk to remain at Tesla’s helm and to promote its growth. The court found Musk’s substantial ownership of Tesla stock provided sufficient incentive and found no evidence he was considering stepping down from leadership. It also found Musk sought the windfall to finance his efforts through another company to colonize Mars, an objective having “no relation to Tesla’s goals with the compensation plan.”
In a pointed summation, the court wrote: “Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit” resulting in “an unfair price.” The court found that while rescission does not automatically flow from fiduciary duty breaches, it was the appropriate remedy in this case. Musk’s response came soon after in an X post stating: “Never incorporate your company in the state of Delaware” and announcing he would seek stockholder approval to reincorporate in Texas.
While transactions involving conflicted fiduciaries generally are subject to stringent judicial review, certain mechanisms can result in a more deferential standard. The courts will, however, scrutinize those mechanisms to confirm they actually result in arms-length bargaining or informed stockholder ratification. Ballard Spahr’s Chancery and Employee Benefits and Executive Compensation teams can guide you through a process that enhances the probability of a deferential review.
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