The Advisors' Blog

Last month, Chancellor McCormick approved the settlement in Tesla’s big director compensation case. Although the amounts in this case were dwarfed by Tornetta, the directors are returning and forgoing about $920 million in total value – that’s a big deal! This Reuters article summarizes:

The settlement requires Tesla board members including Denholm and Murdoch to return roughly $277 million in cash, $459 million in stock options and to forgo stock options for 2021-23 worth $184 million. The settlement was not covered by insurance, according to a court filing by the shareholder who brought the case.

The damages will be reduced by $176 million, which is what the judge awarded to the plaintiffs’ lawyers. According to Reuters, that’s the 4th-largest fee award in the history of Delaware derivative suits.

I’ve previously blogged about the governance aspects of the settlement, which had been proposed way back in 2023. In addition to requiring the Compensation Committee to annually review director compensation with advice from an independent consultant, it requires Tesla to submit director compensation to a shareholder vote for the next 5 years. The settlement agreement says (in part):

On an annual basis, Tesla shall submit the proposed annual compensation to be paid to Non-Employee Directors to an approval vote of the majority of Unaffiliated Tesla Stockholders present in person or represented by proxy and entitled to vote on such decision.

Mike Levin at The Activist Investor shared in his newsletter that he objected to the settlement language about the vote. He’s concerned there’s no enforcement mechanism if the shareholders vote against director pay – i.e., the vote will be treated as a mere advisory recommendation, similar to say-on-pay. Here’s an excerpt describing his objection:

As for the enforceability of the shareholder vote, the settlement provides for a shareholder vote on director comp for the next five years. It states a voting standard (majority of shares voting at the AGM) and excludes directors from voting on their own comp. Yet, it is completely silent as to the consequence of a majority of shareholders voting against the proposed director comp for a given year. We urged her to require specific consequences of such a vote, namely TSLA doesn’t pay them.

Chancellor McCormick “doesn’t see it [our] way.” She states a brief, cryptic rationale: “…the company is committing to condition director compensation on approval by the minority stockholders. That agreement and that term is as enforceable as any corporate agreement.”

Your guess is as good as mine on how this will play out. One thing I’m sure of is that this won’t be the last time we’ll be blogging about Tesla’s director pay. We’ll be watching the vote!

– Liz Dunshee