Tesla and Delaware Law

There is pending litigation, just argued orally before the Delaware Chancery Court, wherein a stockholder is challenging the grant to Elon Musk of a compensation package arguable worth up to $55 Billion over ten years.  The huge number is based on shares of stock issuable in the future on the condition that Tesla meets certain performance goals.  The complaint was that the Board compensation committee was hopelessly enamored with Musk and that the stockholder vote approving the package was passed by a majority of shareholders present (not a majority of the total number of shares issued).

The narrow legal ground is whether this was such a cozy deal that the bottom-line result, approved in the manner that it was, nonetheless is subject to judicial revue under what is called the “entire fairness” test.  The grant of compensation under Delaware law is not subject to specific statutory procedures requiring higher standards of adoption; the company argues that the entire fairness test cannot be made subject, as to compensation of the CEO, to the same standards applied under the legislature’s specific standards that the lawmakers made express only as to different actions (eg acquisitions and the like).

What IS the scope of board power in setting comp?  IF there is no special standard for voting on that issue, as there is for acquisitions, and if there is no breach of the duty of loyalty (eg the people taking the vote are not the beneficiaries of that vote), all that seems left is a claim of corporate waste. That is a hard hill to climb in Delaware, whose regulatory scheme is premised on the freedom of directors to direct (thereby attracting as clients so many major corporations which choose to form themselves under Delaware state law).  If the stockholders object, they can vote out the directors.  If the rating agencies find the vote objectionable, they can negatively recommend re-election.

This case feels like the Chancery will decide and that it will get appealed up to the Delaware Supreme Court.


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