In a January 30, 2024, post-trial ruling, Vice Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery rescinded a compensation package valued at $55.8 billion awarded by Tesla, Inc. to its CEO, notwithstanding that stockholders had previously voted to approve the package. Tornetta v. Musk, No. 2018-0408-KSJM, 2024 WL 343699 (Del. Ch. Jan. 30, 2024). In so holding, the Court found that neither the value of the compensation nor the process by which it was achieved was entirely fair to stockholders.
According to the Court’s findings, the negotiation around the CEO’s compensation package took place over a nine-month span in 2017 and 2018, after a Company board member initiated discussions with the CEO about the package. From there, the Court determined that the CEO largely controlled the negotiations, reciting testimony that the process was a “collaborative” effort, rather than an arm’s-length negotiation. Although the compensation committee was advised by outside counsel and compensation consultants, no external benchmarking was conducted by the consultants. The board ultimately approved a compensation package of twelve tranches of options, with vesting dependent upon achievement of certain market capitalization and operational (either EBITDA or revenue) targets. Each tranche represented 1% of the Company’s shares and, in the aggregate, was worth up to $55.8 billion. The maximum figure was proposed by the CEO and was not negotiated, according to the Court’s findings. The board contended that these incentives benefited the Company because they incentivized the CEO to focus on its business and not his other outside business ventures.
The Court first determined that the CEO was a controlling stockholder based on a combination of his (i) ownership of 21.9% of the Company’s equity, (ii) “maximum influence” over the Company’s business decisions and (iii) power over a board filled with “loyalists,” including his brother and others whom the Court perceived owed their careers and/or wealth to the CEO. The Court also concluded that the board was beholden to the CEO during negotiations, in part due to the CEO’s testimony that he was negotiating against himself. Accordingly, the Court applied the entire fairness standard of review.
The Court then ruled that the stockholder approval of the package did not cleanse the transaction or shift the burden of persuasion on entire fairness to plaintiffs, as the vote was not fully informed. The Court found mere disclosure of the economic terms of the package inadequate, pointing to several omissions that she deemed material, including that the CEO generally controlled the timing of negotiations and that several purportedly “independent” board members had close personal relationships with the CEO.
For the reasons summarized above, the Court concluded that the negotiation process was not entirely fair. The Court also found that the price was unfair. Rejecting defendants’ arguments that the outsize pay package was necessary to incentivize the CEO, the Court cited the CEO’s public statements that he was a “lifer” who already had incentive to create value for the Company because of his large ownership stake. The Court further observed that the package had no exclusivity requirements, thus limiting the weight of the retention incentive. Finally, the Court highlighted internal documents indicating that certain operational targets were more than 70% likely to be achieved, further reducing the import of the value-to-the-company rationale.
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Tornetta v. Musk
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