Finance
A re-vote on Elon Musk’s pay could expose Tesla to even more legal trouble
Tesla (TSLA) is likely to face some new legal entanglements after recommending that shareholders vote to reinstate CEO Elon Musk’s multi-billion dollar compensation package – regardless of what the final outcome reveals at the company’s annual meeting in June.
“I think regardless of whether the vote passes or not, it will be challenged in the Delaware courts,” he said. Marc Steinbergprofessor of law at Southern Methodist University Dedman School of Law.
Because of the billions at stake, “you’re likely to see shareholder derivative lawsuits and class action-style lawsuits,” he added. Jerry Comizioprofessor of corporate law at American University Washington College of Law.
Musk’s pay was cut in January by a Delaware judge, who ruled that Tesla directors breached their fiduciary duty when they awarded Musk the largest compensation opportunity ever granted to a director of a publicly traded company. The ruling came after a shareholder filed a lawsuit challenging the pay package.
If Musk’s incentive-based pay had not been invalidated by a Delaware court, it would now be worth about $47 billion due to a decline in the value of Tesla’s stock. At the time of the ruling it had been worth up to $56 billion.
Tesla used a provisional power of attorney application last week to ask shareholders to vote on this pay package again, arguing that it resolved the circumstances that led Delaware Chancellor Kathaleen McCormick to nullify Musk’s compensation in January.
This was done, the board claimed, by forming a special one-member committee to evaluate Musk’s pay package with the help of an independent director Kathleen Wilson-Thompson – and by following Wilson-Thompson’s recommendation for a new shareholder vote, after third parties assisted the company with “rigorous and thoughtful analyses.”
McCormick threw out Musk’s pay because of what she called “extensive ties” between Musk and the people who negotiated the pay package and a lack of public disclosure about Musk’s relationships with those who approved the deal.
The company is separately asking its shareholders to approve a move of Tesla’s incorporation from Delaware to Texas – a move Musk requested after a Delaware judge revoked his pay.
“2024 is the year Tesla should move to Texas,” Tesla Chairman Robyn Denholm said in her letter to shareholders included in the proxy statement.
The reauthorization of Musk’s pay, Tesla argued to shareholders in its new filing, is necessary to boost Musk’s future leadership of Tesla.
“Because the Delaware court has second-guessed your decision, Elon has not been paid over the past six years for his work for Tesla, which helped generate significant growth and shareholder value,” the company said in its filing.
Legal experts said these arguments may not be enough to stop shareholders from suing Tesla and its board again, arguing that the sole director who approved it was not independent enough of Musk.
Shareholders could also argue that the company’s disclosures surrounding the deal still fall short.
Comizio warns that executive compensation analysis typically involves a company-initiated peer review that helps the board determine CEO compensation within an appropriate range, and that without this review, Tesla will, at its own peril, be subject to the court’s may have ignored the shortcomings outlined in Delaware.
“They need to at least revamp the entire process of how they did this,” Comizio said.
“If you’re adjusting someone’s compensation… if you make a graph and the proposed compensation package looks like Mount Everest, that can be problematic.”
Not all legal experts agree.
Gunster’s corporate law expert Bob Lamm argues that Tesla may have a significant claim against that peer review standard. Historically, he said, superstar founders like Apple’s (AAPL) Steve Jobs and Amazon’s (AMZN) Jeff Bezos have been largely exempt from that scrutiny.
“The question is whether there are equals for Elon Musk,” Lamm said. “So looking for comparable data is going to be difficult.”
Musk’s compensation plan reached in 2018 was about 33 times larger than the largest pay package in history, said Greg Varallo, the shareholder attorney in the Delaware case. The previous record also belonged to Musk, in a compensation deal reached in 2014.
The next step in this payments drama, before the final votes are counted on June 13, is a likely review of Tesla’s proxy filing by the Securities and Exchange Commission.
That review could require Tesla to change its disclosure to shareholders about Musk’s proposed pay deal, Comizio said.
At a certain point, however, no more revelations can be made, Lamm said.
Business courts in Delaware and other states have wide discretion to address what they see as inequality between companies and shareholders, but they do not have the discretion to simply object to the level of an executive’s compensation.
“The problem the courts are having now is that they can’t say [compensation] is too much,” Lamm said. “And you can’t make everything public. At some point the court has to say, ‘Tesla, you did your job.’
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
Click here for an in-depth analysis of the latest stock market news and events affecting stock prices.
Read the latest financial and business news from Yahoo Finance
