02/01/2024
Elon Musk’s Compensation Case – Most People Are Missing The Key Lessons
As a 20+ year business lawyer, licensed in 16 states plus D.C., it is interesting watching the headlines on Elon Musk and seeing most folks miss the key points.
This is stuff that is important to all businesses, not just those with $55.8 Billion pay packages. In fact some of the conflict issues at play in the case are very common in much smaller businesses.
** The outcome from the Delaware court is NOT that surprising! **
Telsa is a Delaware corporation. The internal affairs of Tesla are, therefore, subject to Delaware law.
There’s long standing provision in the Delaware General Corporation Law, Section 144, that tells you exactly how to approve an interested officer or director transaction.
Long story short the Delaware court concluded Tesla and Elon Musk didn’t do their paperwork right. It doesn’t look like a political hit to me – it was a failure of corporate governance the court found.
Section 144 of the Delaware General Corporation Law tells you to approve interested office or director transactions 1 of 3 ways:
1) Get a vote of disinterested directors (or committee);
2) Get a stockholder approval; or
3) Show the transaction is entirely fair.
The courts opinion, 201 pages long with 939 footnotes explains the failures: https://courts.delaware.gov/Opinions/Download.aspx?id=359340
I’ll summarize the key items, which also serve as lessons to the rest of us!
Board Vote
* The Board did not deliborate over whether Musk needed more compensation
* There’s no evidence Musk was looking to leave, therefore why was the pay so high?
* In the final agreements the board didn’t require Musk to stay
* The negotiations were on a rushed timeline
* It appeared Musk was controlling the timeline for the pay package
* Musk was constantly adjusting the terms of his proposed pay package
* There were no notes about the board negotiating for minority stockholders
Long story short the board didn’t show they were acting like an effective board and negotiating.
Stockholder Vote
* Tesla and it’s board did a lot “prework” to get stockholder votes lined up in advance of the proxy going out
* The proxy claimed directors where “independent” – but the court thought this was misleading
* The proxy didn’t have sufficient disclosure on the process
* The proxy didn’t discuss that Musk proposing terms and largely leading the negotiations
* The proxy did not disclose the existence of internal projections showed Tesla has likely to meet targets that would trigger high payments to Musk. In fact a 10Q after the proxy said Musk was likely to meet the targets.
* The proxy focused on economics, not process and details
* Around the time of the proxy Musk put pressure on dissenting stockholders
Entire Fairness
The last ditch to try to save the pay package was “entire fairness” of the pay package.
The court noted that an entire fairness analysis requires a fair process and a fair price.
With the burden of proof on Elon Musk and the directors the court was not impressed with their documentation as to fairness.
Overall I am not surprised by the outcome. Elon Musk is talking about reincorporating Tesla to Texas – but Texas law is very similar to Delaware’s. I am not sure he would get a different outcome.
If you want to dig in more I did a YouTube video to help explain what really happened in the case:
https://youtube.com/live/b_iZXXSmd14
I've read the 201 page case, with 939 footnotes, so you don't have to!What happened in Delaware?Why did the court order Elon's pay package rescinded?Why was ...
