The Advisors' Blog

You know Tornetta v. Musk, but do you know the greatest “shareholder derivative lawsuit settlement ever as measured by dollar value” (maybe) of all? Over on the D&O Diary blog, Kevin LaCroix analyzes the settlement agreement in the shareholder derivative lawsuit that the Police and Fire Retirement System of Detroit filed against Tesla’s board in June 2020 alleging excessive director compensation. Here’s an excerpt from the blog with background on the claims and details of the settlement agreement, which remains subject to Delaware Chancery Court approval:

The lawsuit alleged that the board had paid themselves “outrageous” compensation in the form of directors pay, stock awards, stock options, and other benefits and bonuses. The complaint alleges that the board “granted themselves millions in excessive compensation and are poised to continue this unrelenting avarice into the indefinite future.” The complaint sought to have the board members disgorge “egregious” stock option awards, reforms to board compensation practices and a declaration that the defendants had breached their fiduciary duties to Tesla and its stockholders.

… The settlement provides that the director defendants will, jointly and severally, provide to Tesla the value of 3,130,406 stock options, using methods and valuations provided in the settlement stipulation. The director defendants will return the value of the options in one of three forms: cash; unrestricted common shares of Tesla stock; and unexercised Tesla options. The director defendants shall have the “sole discretion” in the ratio of returned cash, returned stock, and returned options, provided that the total value of the returned amounts equals the settlement option amount. The agreement specifies the method to be used in valuing the returned assets. Using these valuation methods, the value of the settlement is $735,266,505. As part of the settlement, the director defendants did not admit to any wrongdoing.

The director defendants also agreed to permanently forego options for 2021 and 2022 and will not receive any compensation for Tesla board service for 2021 and 2022. The current directors also agreed to forego any compensation for Tesla board service for 2023. The current board also agreed to adopt corporate governance reforms and the board’s compensation committee agreed to certain measures to ensure oversight and independence.

The blog goes on to discuss the settlement’s comparative size. Kevin LaCroix has been tracking derivative settlements, and the largest-by-dollar-value data point is based on his calculations and supported by a quote from plaintiffs’ counsel in the case. It’s also notable that the defendant directors agreed to return cash, stock and options that they were granted for board service.

– Meredith Ervine