The Advisors' Blog

Today, trial begins in the derivative suit against Elon Musk & Tesla – in which former thrasher band drummer and Tesla shareholder Richard Tornetta is alleging that 2018 mega-grant to Musk unfairly awarded him with corporate assets and harmed shareholders. Here’s the complaint. In the more detailed 142-page pretrial brief, the plaintiff argues that the grant should be invalidated because it was:

– Unfair to Tesla because it was excessively large, paid to a “part-time executive,” and based on the company’s already-baked performance trajectory,

– Approved by a conflicted committee (requiring “entire fairness” review), and

– Inadequately “cleansed” due to defective proxy statement disclosure.

The plaintiff will be fighting an uphill battle in the Delaware Court of Chancery. This “Chancery Daily” newsletter explains why (also see the defendants’ 111-page pretrial brief):

Deference under the business judgment rule says that compensation of executive officers is precisely the kind of thing that (in an ordinary situation) deserves to be handled with the lightest touch by the court. As then-Vice Chancellor Slights said in an earlier opinion in this case: “A board of directors’ decision to fix the compensation of the company’s executive officers is about as work-a-day as board decisions get. It is a decision entitled to great judicial deference,” citing See Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000) (“[A] board’s decision on executive compensation is entitled to great deference. It is the essence of business judgment for a board to determine if a particular individual warrant[s] large amounts of money. . .”).

It’s too early to predict takeaways for other companies, but it is worth noting the plaintiff’s disclosure-related arguments, which could be areas to bolster in proxy statements that describe significant compensation awards. Chancery Daily summarizes the plaintiff’s “inadequate disclosure” claims as:

– Failure to disclose committee members’ potential conflicts

– Failure to accurately disclose the grant milestones’ achievability

– Failure to accurately disclose the grant process

– Failure to disclose Musk’s competing interests

The control arguments are more unique to the facts of this case, but also worth watching. Even though Musk didn’t own a majority of Tesla stock at the time of the grant, the plaintiff is arguing that Musk exercised control over the company and the compensation committee, and that at least half of the directors who approved the grant were conflicted. If the judge agrees, then the “entire fairness” standard of review will apply.

– Liz Dunshee