Tesla and opponents of Elon Musk's $56 billion compensation
package clashed on Friday over how to resolve the ongoing legal
battle surrounding the pay deal and the substantial legal fees
contingent on its outcome. Tesla contends that a recent
shareholder vote to reinstate Musk's compensation plan should
overturn a prior court decision that nullified the package.
The company has filed documents urging the Delaware judge to
consider this vote and reverse her previous ruling.
The dispute began when Tesla shareholders voted on June 13th
to reinstate Musk's pay package, initially approved in 2018.
However, this decision is pending while the lawsuit
remains unresolved. The shareholder vote occurred
after Delaware Chancery Court Chancellor Kathleen McCormick
voided the pay package in January, finding that the
board's process was influenced by Musk's personal relationships
with board members and inadequate disclosure of
information about the deal. Richard Tornetta, the
shareholder who sued to invalidate Musk's pay package,
argues that the recent shareholder vote should not
impact the court's earlier decision.
Tornetta's legal team insists that Tesla must appeal to the
Delaware Supreme Court to reverse the January ruling.
Additionally, they argue that before any appeal, Chancellor
McCormick must determine the legal fees Tesla owes for
winning the case. Tornetta's attorneys previously
demanded 29 million shares of Tesla stock, valued at over $5
billion, as their legal fee. On Friday, they suggested Tesla
could alternatively pay $1.1 billion, a figure based on
precedent in the Delaware Court of Chancery, though they
described this amount as unfairly low.
Tesla, on the other hand, urged the judge to address the
implications of the shareholder vote first, which could
potentially reduce the legal fees.
Tesla maintains that the pay package was re approved by
shareholders and reviewed by an independent board member,
addressing the judge's concerns about Musk's undue influence
over the board. The company plans to file a
motion to reverse the January ruling, arguing that the
shareholder vote resolves the issues raised by the court.
Tornetta's legal team disputes Tesla's position, asserting that
the process for proposing the ratification vote was flawed.
They claim the shareholder vote was influenced by Musk's threats
to shift his focus to artificial intelligence investments if he'd
not gain more control over Tesla.
This coercion, they argue, invalidates the vote's
legitimacy. Musk's pay package, structured
with performance based targets leading to stock option awards,
was valued at $56 billion when the last milestone was achieved.
According to Tesla, the compensation plan requires Musk
to hold the stock options for five years before exercising
them. This intricate structure is now
under legal scrutiny as Tesla seeks to uphold the agreement.
The legal battle put significant financial stakes for Tesla.
If the courts rule in favor of Tesla, the company can maintain
Musk's pay plan and a $2.5 billion accounting charge
recorded in 2018. Conversely, a negative ruling
could force Tesla to hold another shareholder vote on the
compensation plan and potentially book a charge of at
least $25 billion, threatening future earnings.
Kevin Murphy, an executive compensation expert and finance
professor at the University of Southern California, testified
for Tesla during the trial. He emphasized the unprecedented
nature of this dispute, indicating that its resolution
could set new legal precedents. The outcome hinges on complex
legal interpretations and the judge's decision making process.
The spotlight now returns to Delaware Judge Kathleen
McCormick, who ruled that Tesla's board did not act in the
best interests of shareholders when approving Musk's pay
package. Corporate law professor Anne
Lipton from Tulane School of Law noted that McCormick must decide
whether the new shareholder vote reinstates Musk's pay plan.
This could involve considering written and oral arguments or
requesting additional information and discovery.
Tesla has requested an expedited schedule for submitting court
documents to present further rationale for their positions.
The company aims for a final judgement from McCormick before
taking further legal steps. Tesla's legal team describes the
recent shareholder vote as one of the most well informed in
recent history. Citing support from major
investors like BlackRock and Vanguard, Tesla reported that
72% of votes cast by shareholders, excluding Musk and
his brother Kimball, favored the compensation package.
The upcoming hearing before McCormick on July 8th will
address unresolved matters, including the request for $6
billion in legal fees by Tornetta's lawyers, which Tesla
disputes. Should McCormick validate Musk's
compensation, she might also determine whether the
shareholder vote retroactively reinstates the agreement.
As of 2018, Tesla claims this could save the company at least
$25 billion, making the court's decision Making the court's
decision even more crucial for the company's financial outlook.
Kevin Murphy suggests that if McCormick acknowledges the
shareholder vote, she might decide not to interfere further
in the contract between consenting parties.
However, Murphy doubts this outcome, predicting that an
appeal will follow if McCormick rules against Tesla.
And Lipton also anticipates that the losing side will appeal to
the Delaware Supreme Court, indicating that Mccormick's
decision may not be the final word on the matter.
The case's resolution will likely involve multiple legal
maneuvers and further judicial scrutiny.
The broader implications of this case extend beyond Tesla
potentially influencing corporate governance and
executive compensation practices.
Legal experts are closely monitoring the proceedings,
given their potential to set new precedents in shareholder rights
and board responsibilities. As the legal battle continues,
Tesla's ability to sustain Musk's compensation package and
navigate the associated financial challenges remains
uncertain. The company's strategy and legal
arguments will be critical in shaping the final outcome and
its impact on Tesla's future. The upcoming court hearing and
subsequent legal proceedings will determine the fate of
Musk's $56 billion pay package and the financial consequences
for Tesla. The case underscores the
complexities of executive compensation and corporate
governance in today's business landscape.