Chancery Finds Tesla Board Breached Fiduciary Duties
In Tornetta v. Musk (Jan. 30, 2024), the Delaware Court of Chancery, in a post-trial decision, ruled that the directors of Tesla, Inc. breached their fiduciary duties when, in 2018, they awarded Elon Musk, Tesla’s CEO and founder, a ten-year performance-based equity compensation plan with an estimated maximum value at one time of $55.8 billion. The court […]
Gail Weinstein is Senior Counsel, and Philip Richter and Steven Epstein are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Steven Steinman, Peter Simmons, and Jeffrey Ross and is part of the Delaware Law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Executive Compensation in Controlled Companies (discussed on the Forum here) by Kobi Kastiel.
In Tornetta v. Musk (Jan. 30, 2024), the Delaware Court of Chancery, in a post-trial decision, ruled that the directors of Tesla, Inc. breached their fiduciary duties when, in 2018, they awarded Elon Musk, Tesla’s CEO and founder, a ten-year performance-based equity compensation plan with an estimated maximum value at one time of $55.8 billion. The court ordered rescission of the entire plan, eliminating all of the compensation Musk had earned under the plan. The court emphasized that Musk’s preexisting 21.9% equity stake in the company in any event had “provided him tens of billions of dollars for his efforts” that had increased the value of the company.
The court found that: (i) Musk controlled Tesla, at least with respect to the compensation plan; (ii) therefore, the compensation plan was a conflicted-controller transaction invoking entire fairness review; (iii) although the plan was made subject to approval of a majority-of-the-minority stockholders, the burden to prove entire fairness remained with the defendants because the disclosure to stockholders was materially flawed, preventing a fully informed vote; and (iv) the defendants did not prove that the compensation plan was fair as to price or process. We anticipate that the decision will be appealed.
