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After the entertaining but somewhat ineffective theatrics surrounding the fate of Elon Musk's $48 billion pay package, replete with a shareholder-led re-ratification of Musk's equity-only compensation scheme, we are back in the judicial arena. While Elon Musk feels emboldened by Tesla shareholders reposing their confidence in his leadership skills en masse, the vote remains largely ceremonial in nature, and constitutes a "novel" approach to dealing with fiduciary duty breaches under the Delaware General Corporation Law.
The Chess-Like Moves In Elon Musk's Compensation Package Saga
Tesla underwent a trial in the Delaware Court of Chancery in 2022, where one shareholder, Richard Tornetta, asserted that Elon Musk's 2018 compensation plan should be voided by the court as it was a result of sham negotiations between a beholden board and an increasingly assertive CEO. The Delaware Chancery Court Chief Judge, Kathaleen St. J. McCormick, ultimately agreed with the plaintiff and voided Elon Musk's compensation plan in early 2024, prompting Elon Musk to declare that Tesla would abandon Delaware and reincorporate in Texas.
Elon Musk then staked his commitment to Tesla as a bargaining chip to convince shareholders to re-ratify his desired compensation package within the ambit of the company's 2024 annual general meeting (AGM) of the shareholders.
After weeks of uncertainty, including opposition from proxy advisors, who called on the company's shareholders to reject the re-ratification of Musk's mammoth pay package, Elon Musk and Tesla did manage to win a comprehensive vindication, with all proposals tabled at the AGM, including Tesla's re-incorporation in Texas and the thorny issue of Musk's desired compensation scheme, receiving the approval of a convincing majority of the shareholders.
The Main Challenge For The CEO Of Tesla: Section 204 Of The Delaware General Corporation Law
Elon Musk's legal team has already assured the Delaware Court of Chancery that the CEO of Tesla will not use a change in the company's state of incorporation to try to undo the court's ruling on Elon Musk's pay package, having termed this possibility a "rank speculation" on the part of the plaintiff. By doing so, Musk's legal team conceded that the Delaware Chancery Court will retain jurisdiction over his ongoing pay dispute.
Therefore, as we noted in a dedicated post, the only way forward for Elon Musk and Tesla is to appeal the court's ruling. However, this can't be done until the court settles a $6 billion claim filed by the plaintiff's lawyers as remuneration for their services. The first hearing on this legal fee dispute is currently slated for the 08th of July.
NEWS: Tesla tells judge that shareholder vote should reverse ruling.
Attorneys for Tesla said in a filing Friday that the June 13 decision by Tesla investors to re-approve Musk’s pay “impacts significantly what remains to be decided in this litigation.” https://t.co/d6M5GllB3P
— Sawyer Merritt (@SawyerMerritt) June 21, 2024
Today, while submitting its brief on the legal fee claim filed by the plaintiff's lawyers, Tesla informed the Delaware Court of Chancery that its shareholders' recent re-ratification of Elon Musk's pay package constitutes sufficient grounds for the reversal of the underlying ruling.
In doing so, however, Tesla and Elon Musk are trying to create a new legal precedent. To wit, Tesla and Elon Musk opted for a re-ratification under the section 204 of the Delaware General Corporation Law, which provides for rectifying corporate acts that are defective due to a "failure of authorization." Critically, the code does not provide for curing breaches of fiduciary duty, which was the entire raison d'être cited by the court for nullifying Musk's 2018 pay package.
What's more, the Delaware Law does not allow in the vast majority of circumstances - including this one, according to Professor Ann Lipton - the awarding of compensation as reward for work that has already been accomplished. This further undermines the standing of Elon Musk and Tesla in this ongoing legal battle.
Of course, the court will have to find a way forward. In the meantime, in what constitutes a direct contravention of Elon Musk's express wishes, nothing has been actually settled by the Tesla AGM.
