Court OKs Tesla Board’s Deal to Repay Nearly $1 Billion

Ending one skirmish amid the legal battles at Tesla over excessive compensation, a Delaware Chancery Court on January 8 approved a deal that Tesla’s board of directors struck 18 months ago to return roughly $919 million to the company. The agreement was in response to a complaint filed by shareholders accusing board members of awarding themselves millions in excess pay from 2017 to 2020.

The court-approved settlement requires Tesla’s directors – including chair Robyn Denholm, Oracle co-founder Larry Ellison and former 21st Century Fox CEO James Murdoch – to return roughly $277 million in cash and $459 million in stock options to the company. Additionally, they will forego stock option compensation from 2021 to 2023 worth as much as $184 million. Tesla CEO Elon Musk did not receive compensation in his role as a director.

Along with the settlement, Delaware Chancery Court Chancellor Kathaleen McCormick also approved $176.2 million in legal fees to three law firms that filed the case on behalf of the Police & Fire Retirement System of the City of Detroit. It is the fourth-largest fee in Delaware shareholder litigation history, Reuters reported.

Meanwhile, Tesla’s other legal tussle continues to play out in the same court regarding a shareholder complaint filed in 2018 challenging Musk’s $56 billion compensation as Tesla CEO. In that case, McCormick ruled – twice – that Tesla must revoke Musk’s record-breaking pay package. She called Musk’s compensation “an unfathomable sum,” maintaining it was unfairly negotiated by a board of directors controlled by Musk. Not surprisingly, Musk filed an appeal on January 8 to send the case to the Delaware Supreme Court.

One of the factors McCormick considered in her decision regarding Musk’s compensation package was the “amount of wealth directors owed to Musk or Tesla,” CNN reported. Denholm testified in that case that her “board tenure at Tesla netted her around $280 million, which she described as ‘life-changing wealth.’”

Interestingly, the same board members that shareholders accused of awarding themselves excessive compensation were also involved in negotiating Musk’s CEO package. The board members were accused of receiving hundreds of millions of dollars in compensation, dwarfing the typical payouts made to other members of S&P 500 company boards.

Looking at the bigger picture, the consequences of the latest Tesla court decision in Delaware could radiate beyond the automaker. Instead of going after corporate executives for their lucrative compensation packages, plaintiffs have gravitated in the last decade towards suing boards of directors over their pay. Plaintiffs have determined that strategy offers a more direct path to court than attempting to claw back pay from executives. Moreover, companies tend to use the “business judgment rule” in defending claims regarding executive compensation. The rule contends boards of directors were acting in good faith when they negotiated pay deals, and it gives them a strong out against compensation-related claims.

Given Musk’s public profile – and, by extension, Tesla’s notoriety – it shouldn’t come as a surprise if shareholders of other companies and their attorneys take notice of the plaintiffs’ success in this case.