The Advisors' Blog

You probably saw last week’s NYT DealBook article or Wall Street Journal article that Tesla has filed its preliminary proxy statement and it includes a proposal requesting that shareholders ratify Musk’s 2018 pay package that the Delaware Chancery Court ordered be rescinded. There’s a lot here, and it’ll be fascinating to watch the vote and how the litigation proceeds (both the appeal in Tornetta and any other legal challenges). In the meantime, here are some interesting tidbits from the Times and the Journal, plus Tulane Law Prof Ann Lipton’s post and Bloomberg’s Matt Levine’s column on the topic:

– After the January 2024 opinion in Tornetta, Tesla created a special committee to assess redomestication of the company to Texas (proposal 3 in the proxy statement). Its authority was subsequently expanded to consider whether Musk’s 2018 award should be ratified at the same time. The committee was comprised of one member who was not on the board at the time of the 2018 grant — the second member stepped down after the committee’s authority was expanded. Note that the proxy makes clear that the special committee’s focus was on whether the award in its previously agreed form should be ratified based on current facts; it did not engage a compensation consultant, substantively evaluate the award or negotiate with Musk.

– The 10 annexed documents to the proxy statement include the Chancery Court’s opinion and the special committee’s report to the board.

– Tesla touts unsolicited support it received from institutional shareholders after Tornetta and includes excerpts of a letter of support from T. Rowe Price in the special committee’s report.

– Tesla’s market capitalization has gone down since the milestones included in the performance-based options were achieved. The largest milestone reflected a market cap of $650 billion; Tesla’s market cap was around $500 billion when the preliminary proxy was filed.

– The legal impact of this ratification is unclear — and the proxy says as much:

The Company is asking its stockholders to ratify the 2018 CEO Performance Award under Delaware common and statutory law. Delaware common law ratification permits a Delaware corporation to validate a corporate act where the actors that purported to effect it lacked requisite corporate authority to do so. Common law ratification can also extinguish claims for breach of fiduciary duty by authorizing an act that otherwise would constitute a breach. When properly implemented, common law ratification “reaches back” to validate the challenged act as of its initial enactment. The Company believes that, under the Tornetta Opinion, the 2018 CEO Performance Award is such an act that may be ratified under Delaware common law. The Company also seeks ratification under any other legal theory or appropriate statutory provision, including but not limited to Section 204 of the DGCL. […]

While the Company believes that the Ratification should be upheld by a Delaware court, the Special Committee noted that even a favorable vote by our stockholders to ratify the 2018 CEO Performance Award may not fully resolve the matter. The Special Committee and its advisors noted that they could not predict with certainty how a stockholder vote to ratify the 2018 CEO Performance Award would be treated under Delaware law in these novel circumstances.

Ann’s blog has much more on this topic — particularly on the topic of corporate waste.

– Meredith Ervine