Tesla shareholders have won a landmark legal victory against the company’s CEO Elon Musk and its board of directors, who had granted Musk an unprecedented $55 billion pay package in 2018. The Delaware Court of Chancery has ruled that the pay package was invalid and must be cancelled, saving Tesla stockholders from massive dilution.
The court found that the board had failed to act in the best interest of the company when they approved the 12-tranche package of stock options, which was the largest executive compensation plan ever. The court also found that the board had misled shareholders about the difficulty of the milestones that Musk had to achieve to receive the options, as well as the independence of the board and the compensation committee.
The court’s decision, issued on January 30, was based on a full trial on the merits, where Tesla shareholders presented evidence that the pay package was designed by Musk himself, and that it was based on Tesla’s internal projections that were shared with banks and rating agencies, but not with shareholders.
The court’s ruling, written by Chancellor Kathaleen McCormick, was scathing in its criticism of the board’s conduct. She wrote, “Put simply, neither the Compensation Committee nor the Board acted in the best interests of the Company when negotiating Musk’s compensation plan.” She also used a clever analogy to describe Musk’s role in the process, saying, “In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit. The process arrived at an unfair price.”
The case was brought by Tesla shareholder Richard Tornetta, who was represented by a team of lawyers from Bernstein Litowitz Berger & Grossmann LLP, led by partners Greg Varallo and Jeroen van Kwawegen and associates Glenn McGillivray and Meg Sanborn-Lowing. The law firms of Andrews & Springer and Friedman Oster & Tejtel acted as co-counsel.
Mr. Varallo said: “We are enormously grateful for the Court’s thorough and extraordinarily well-reasoned decision in turning back the Tesla board’s absurdly outsized pay package for Musk. The Court’s hard work will redound directly to the benefit of Tesla investors, who will see the dilution from this gargantuan pay package erased.”