Tesla and opponents of Elon Musk's $56 billion compensation package clashed on Friday over how to resolve the ongoing legal battle surrounding the pay deal and the substantial legal fees contingent on its outcome. Tesla contends that a recent shareholder vote to reinstate Musk's compensation plan should overturn a prior court decision that nullified the package. The company has filed documents urging the Delaware judge to consider this vote and reverse her previous ruling.
The dispute began when Tesla shareholders voted on June 13th to reinstate Musk's pay package, initially approved in 2018. However, this decision is pending while the lawsuit remains unresolved. The shareholder vote occurred after Delaware Chancery Court Chancellor Kathleen McCormick voided the pay package in January, finding that the board's process was influenced by Musk's personal relationships with board members and inadequate disclosure of
information about the deal. Richard Tornetta, the shareholder who sued to invalidate Musk's pay package, argues that the recent shareholder vote should not impact the court's earlier decision. Tornetta's legal team insists that Tesla must appeal to the Delaware Supreme Court to reverse the January ruling. Additionally, they argue that before any appeal, Chancellor McCormick must determine the legal fees Tesla owes for
winning the case. Tornetta's attorneys previously demanded 29 million shares of Tesla stock, valued at over $5 billion, as their legal fee. On Friday, they suggested Tesla could alternatively pay $1.1 billion, a figure based on precedent in the Delaware Court of Chancery, though they described this amount as unfairly low. Tesla, on the other hand, urged the judge to address the implications of the shareholder vote first, which could potentially reduce the legal fees.
Tesla maintains that the pay package was re approved by shareholders and reviewed by an independent board member, addressing the judge's concerns about Musk's undue influence over the board. The company plans to file a motion to reverse the January ruling, arguing that the shareholder vote resolves the issues raised by the court. Tornetta's legal team disputes Tesla's position, asserting that the process for proposing the ratification vote was flawed.
They claim the shareholder vote was influenced by Musk's threats to shift his focus to artificial intelligence investments if he'd not gain more control over Tesla. This coercion, they argue, invalidates the vote's legitimacy. Musk's pay package, structured with performance based targets leading to stock option awards, was valued at $56 billion when the last milestone was achieved.
According to Tesla, the compensation plan requires Musk to hold the stock options for five years before exercising them. This intricate structure is now under legal scrutiny as Tesla seeks to uphold the agreement. The legal battle put significant financial stakes for Tesla.
If the courts rule in favor of Tesla, the company can maintain Musk's pay plan and a $2.5 billion accounting charge recorded in 2018. Conversely, a negative ruling could force Tesla to hold another shareholder vote on the compensation plan and potentially book a charge of at least $25 billion, threatening future earnings. Kevin Murphy, an executive compensation expert and finance professor at the University of Southern California, testified
for Tesla during the trial. He emphasized the unprecedented nature of this dispute, indicating that its resolution could set new legal precedents. The outcome hinges on complex legal interpretations and the judge's decision making process. The spotlight now returns to Delaware Judge Kathleen McCormick, who ruled that Tesla's board did not act in the best interests of shareholders when approving Musk's pay
package. Corporate law professor Anne Lipton from Tulane School of Law noted that McCormick must decide whether the new shareholder vote reinstates Musk's pay plan. This could involve considering written and oral arguments or requesting additional information and discovery. Tesla has requested an expedited schedule for submitting court documents to present further rationale for their positions. The company aims for a final judgement from McCormick before
taking further legal steps. Tesla's legal team describes the recent shareholder vote as one of the most well informed in recent history. Citing support from major investors like BlackRock and Vanguard, Tesla reported that 72% of votes cast by shareholders, excluding Musk and his brother Kimball, favored the compensation package.
The upcoming hearing before McCormick on July 8th will address unresolved matters, including the request for $6 billion in legal fees by Tornetta's lawyers, which Tesla disputes. Should McCormick validate Musk's compensation, she might also determine whether the shareholder vote retroactively reinstates the agreement.
As of 2018, Tesla claims this could save the company at least $25 billion, making the court's decision Making the court's decision even more crucial for the company's financial outlook. Kevin Murphy suggests that if McCormick acknowledges the shareholder vote, she might decide not to interfere further in the contract between consenting parties. However, Murphy doubts this outcome, predicting that an appeal will follow if McCormick rules against Tesla.
And Lipton also anticipates that the losing side will appeal to the Delaware Supreme Court, indicating that Mccormick's decision may not be the final word on the matter. The case's resolution will likely involve multiple legal maneuvers and further judicial scrutiny. The broader implications of this case extend beyond Tesla potentially influencing corporate governance and executive compensation practices.
Legal experts are closely monitoring the proceedings, given their potential to set new precedents in shareholder rights and board responsibilities. As the legal battle continues, Tesla's ability to sustain Musk's compensation package and navigate the associated financial challenges remains uncertain. The company's strategy and legal arguments will be critical in shaping the final outcome and
its impact on Tesla's future. The upcoming court hearing and subsequent legal proceedings will determine the fate of Musk's $56 billion pay package and the financial consequences for Tesla. The case underscores the complexities of executive compensation and corporate governance in today's business landscape.