The Advisors' Blog

We were just wondering over here what was happening in the other Tesla compensation litigation — the one where the Police and Fire Retirement System of Detroit sued Tesla’s board alleging excessive director compensation. Thankfully, the folks at The Activist Investor have been following it closely — attending hearings and submitting letters — and came out with this timely update!

You may recall that the parties announced a proposed settlement in July 2023. It was a particularly notable settlement by dollar value alone but also had some interesting governance terms. As the TAI post explains, the settlement has yet to be approved, partially because Tornetta threw a wrench in the works, but that’s starting to become a problem for the settlement terms because…stock options.

In Tornetta, the plaintiff attorneys requested TSLA shares that are currently valued at $5-6 billion. They argued for these at a hearing In July 2024. The letter indicates Chancellor McCormick expects the legal arguments over the Tornetta legal fees will affect those in Detroit. She has yet to rule on the Tornetta legal fees, although it should be sometime soon. Thus, Detroit waits for the final Tornetta opinion.

Last week the plaintiff and defendants sent a letter to Chancellor McCormick, the first substantive communication in the case since January.

The Detroit settlement includes a mix of cash, shares, and unexercised options that sum to the $750 million clawback. Options of course have an exercise period. If the option holder fails to exercise them by the end of that period, they expire worthless.

That could start to happen to some of the options that the plaintiff and defendants want to include in the settlement. A tranche of options belonging to BoD Chair Robyn Denholm expired August 18 (two days ago). The parties intended to include those options in the clawback. They planned to return those (now-expired) options once Chancellor McCormick approved the settlement, which she obviously has not done.

Instead of those expired (and presumably exercised, no one with any sense whatsoever lets TSLA options issued in 2017-2020 expire unexercised) options, the parties said they will include other unexercised-but-in-the-money Denholm options in the total clawback. The letter notes replacing the expiring options with other options having a later expiration increased the value of the settlement by $209. Presumably Denholm “paid” the extra $209, since it had to come from somewhere.

The parties want to avoid having to again swap out expiring options for unexpired ones. The next tranche of options they plan to return expires in June 2025. They worry that future exchanges will cost one or another director much more than $209. Thus, the parties urge Chancellor McCormick to approve the settlement promptly, before the next tranche of options expires. They even ask her to sever the consideration of the attorney fee request from that approval. She would decide later on the $250 million in legal fees, presumably after she rules on the $5-6 billion in legal fees in Tornetta.

TAI takes issue with the letter’s assertion that there are no open issues at issue in the settlement — pointing to TAI’s prior objection regarding “lack of allocation of the aggregate clawback among directors, and unenforceability of the shareholder vote on director pay.”

– Meredith Ervine