The Advisors' Blog

I’ve blogged a few times about the Tornetta v. Musk litigation – in which the plaintiff is arguing that Tesla’s directors (& Elon Musk, as an allegedly controlling stockholder) breached their fiduciary duties when they approved Musk’s 2018 “moonshot” award. This case may have disclosure & governance implications for other companies.

Last month, Charles Elson – who is the founding Director of the Weinberg Center for Corporate Governance at the University of Delaware – filed an amicus brief in support of the plaintiff, which can be found along with other trial-related documents on this docket page. Professor Elson argues that Musk’s award was unfair to stockholders & that the defendants ignored the purpose of equity-linked compensation in crafting it. Here’s an excerpt:

When the challenged award was made, Musk owned 21.9% of Tesla’s outstanding common stock.32 Thus, for every $50 billion dollars that Tesla’s market capitalization increased, Musk would personally see a $10.95 billion benefit based solely on his existing holdings. In this critical respect, Musk could not be more dissimilar from the professional managers whom modern equity compensation packages were designed to motivate. As a founder-owner-manager, Musk is more like Gates, Bezos, Zuckerberg, Brin and Page. And like them, Musk’s pre-existing holdings should have been a more-than-adequate incentive for him to do whatever it took to help Tesla grow.
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For Musk’s award to be justified, Defendants must somehow show that the marginal benefit to Musk—i.e., above and beyond the benefits he would obtain from the increase in value of his significant existing holdings — would meaningfully affect his motivations. They make no serious effort to do so.

Professor Elson also suggests the court consider the effect that Musk’s award has had beyond Tesla – the “Lake Wobegan” dynamic of executive compensation – which I blogged about last year.

Chancery Daily will be live-“tooting” on Mastadon during post-trial arguments today. Here’s their recap of the current procedural status:

The Tornetta v. Musk trial was held back on November 14th through 18th, 2022. Remember those days? To be honest, it’s all a bit of a blur, but at least for the moment, sufficient failover systems still in place mean that most days, Twitter remembers. (At the end of this email, you’ll find links to all of the live Twitter coverage from the trial, as well as to the previous Substack summary of the case.)

But why are we talking about a trial from November, and what was the outcome anyway? Well, that’s kind of the point! Here’s why you should you care, especially now. Because there hasn’t been a verdict yet. These are bench trials, baby! And they are the best. And bench trials have pre- and post-trial briefing and post-trial argument, and this one happens on Tuesday, February 21st at 1:30pm Eastern, and you and me, kid, we can dial-in and listen.

– Liz Dunshee