Delaware Court of Chancery Strikes Down Elon Musk’s $55.8 Billion Equity Compensation Package from Tesla

By Ilan Katz, Ira Kotel, Kenneth Pfaehler and Victor Boyajian

A recent decision by Chancellor Kathaleen McCormick of the Delaware Court of Chancery following a five-day trial ordered the rescission of the largest executive compensation package in U.S. history. The decision in Tornetta v. Musk would be newsworthy just for that reason. But the opinion also has important ramifications for companies and their boards when handling transactions with dominant stockholders and when making executive compensation decisions.

The Chancellor notably found Tesla CEO Elon Musk to be a controlling stockholder, despite owning only 21.9% of Tesla. This finding caused the court to conclude that the option grants were a conflicted-controller transaction requiring application of the “entire fairness” standard of review, Delaware’s most stringent form of judicial review. The Chancellor held that the defendants failed to meet their burden to prove that the process employed by the Board in approving the compensation arrangements, as well as the compensatory options, were entirely fair. In particular, the Chancellor was troubled by what she perceived to be the pliancy of the compensation committee, which she found to be comprised of directors with deep financial and personal relationships with Musk, acting “almost as an advisory body” to Musk rather than as an independent negotiator. She twice quotes the Compensation Committee Chair’s testimony that “We were not on different sides of things. We were trying to make sure if we were going to go through this exercise that he was on board.”

The Chancellor faulted the Compensation Committee and the board for not considering alternatives, failing to conduct a customary benchmarking analysis, and not assessing whether the grant was necessary to meet the company’s purposes. She also found that the burden of proving entire fairness remained with the defendants despite a vote of the stockholders approving the grant, because the relevant proxy statement was deficient for failing to disclose, among other things, the relationships of a majority of the board with Musk that called into question their independence and projections showing that the company expected to meet the milestones for Musk’s compensation. Without such information she found the stockholder vote was not fully informed.

The full insight can be found here.