Tesla shareholders will vote Thursday on whether to reinstate the massive pay package for CEO Elon Musk that was overturned by a Delaware judge this year. But that is not expected to close the book on a legal saga that has consumed the electric car maker and the top U.S. trade law court that dared to challenge Musk and his supervisors on the company’s board.
By asking shareholders to approve the same 2018 pay package that was struck down by the Delaware Court of Chancery in January, tesla It is based on a legal principle known as “ratification,” according to which the validity of a corporate action can be consolidated by a shareholder vote. Ratification, the company told shareholders in a proxy note earlier this year, “will restore democracy to Tesla shareholders.”
This instance, however, is the first time a company has attempted to take advantage of that principle after its board was found to have breached its fiduciary duty to approve the deal in the first place.
Even Tesla admits it doesn’t know what will happen next. “He [Tesla board] “The special committee and its advisors noted that they could not predict with certainty how a shareholder vote to ratify the 2018 CEO performance award would be treated under Delaware law under these novel circumstances,” he said in a proxy statement sent to shareholders.
The outcome of the vote is far from certain. The big proxy advisors, Institutional Shareholder Services and Glass Lewis have recommended vote against salary, even as many large shareholders have expressed their support. The result will send an important message about how investors feel about rewarding successful visionary CEOs, even those who come with baggage.
Each side has offered divergent views on what Thursday vote will mean in a more practical sense. If the referendum passes, dissident shareholders could sue again or amend their original case to attack the new pay vote. They could claim that paying Musk for past performance is itself a “waste” of corporate resources and yet another breach of fiduciary duty.
For its part, Tesla has taken steps to avoid ending up in a situation similar to that of 2018, when, according to the Delaware court ruling, the company’s board of directors was too intertwined with Musk exercise independent judgment, which ultimately resulted in the approval of pay conditions that were unfair to shareholders.
A new independent director, Kathleen Wilson-Thompson, approved the same terms as in 2018: 304 million shares, equivalent to about a tenth of Tesla shares outstanding, if multiple share price targets are met and operational performance. Wilson-Thompson hired her own legal, financial and academic advisors and devoted more than 200 hours to her deliberations, according to her attorney.
The company has argued that without a sizeable pay package, Musk could lose focus at the automaker given his other projects ranging from social media platform X to SpaceX and his new artificial intelligence company, xAI. The proxy sent to shareholders detailed that the billionaire had found the salary agreement “motivating” and had confirmed “that its ratification would motivate him to continue devoting his time and energy to Tesla.”
Thursday’s vote will leave unresolved the question of how much the lawyers who sued and won the 2018 settlement will take home. In March they asked the court to award them 29 million Tesla shares (now worth more than $5 billion ) as payment for their work. A court hearing is scheduled for July.
Tesla has strongly opposed that request. In addition to expressing his views in the shareholder proxy statement, he has added four powerful law firms to represent him in the payout case: national firms Sullivan & Cromwell and DLA Piper, as well as two titans of the US bar. Delaware, Richard Layton and Morris Nichols.
Tesla says shareholders who easily approved the pay package six years ago still support the stock grant, and Thursday’s vote may prove it correct. If the shares are returned to Musk, they might argue, then the plaintiffs’ lawyers cannot argue that they achieved any benefit for the remaining shareholders and should be denied their request for fees.
It could also lead the judge who struck down the pay package, Kathaleen McCormick, to reconsider her original decision.
Lawrence Hamermesh, a law professor at Widener University, said: “In theory, the chancellor could say that if shareholders approved it with full information, that is effective ratification and the product of appropriate shareholder action, and in In some ways my previous decision is debatable.”
Delaware’s identity crisis
Musk’s salary isn’t the only item on Thursday’s ballot: So is Delaware itselfas shareholders will be asked to approve moving Tesla’s legal domicile to Texas, where its corporate headquarters is located, from Delaware, a move the billionaire first raised after the ruling.
Musk’s fury led him to move two of his other private companies to Texas and Nevada. Others have not yet rushed to join his exodus. However, top lawyers have worried about companies with large controlling shareholders, like Tesla’s CEO, increasingly facing tough scrutiny from Delaware judges over mergers and acquisitions or other strategic actions.
Musk’s pay decision is just one of a series of recent rulings that have caused setbacks for corporate boards, a trend that has roiled the corporate legal system.
The decision that has sparked the most controversy is a March ruling that invalidated a contract that the investment bank’s founder, Ken Moelis, signed with the directors of his eponymous firm that forced the board to give him veto power over key corporate decisions. .
The Delaware legislature has swung into action to consider changes to state law in the coming weeks that would swing the pendulum back toward businesses. The amendments under consideration would give companies more freedom to enter into contracts like the Moelis agreement with a small shareholder or group of shareholders. But professors and shareholder lawyers worry that the basic idea of corporations, that boards of directors should retain the flexibility to make such decisions, is being threatened.
The judge who wrote the Moelis decision, Travis Laster, shared his own concern on LinkedIn, calling the proposed changes “major surgery.”
Rick Horvath, a California-based partner at Dechert, said: “Both public and private companies have expressed concerns about the perceived uncertainty of Delaware courts. There is a growing perception that decisions are outcome-based and that a small misstep could result in significant legal exposure. “The debate over alternative domiciles is at its highest point in a generation.”
The same judge who struck down Musk’s pay package has also inserted herself into the brewing debate over whether the Delaware court has become overly hostile toward companies and boards of directors.
In May, McCormick wrote a letter to the state bar recommending changes to Delaware corporate law, arguing that historically changes to the law resulting from court decisions did not occur hastily.
“None of the hallmarks of Delaware tradition are present this year. The proposal was not the product of a cautious and deliberative process. . . quite the opposite.”
Musk and Moelis’ decisions have shown how strict Delaware corporate law can be for companies that have large shareholders who want to exert power, something common in privately held and venture capital-backed companies. Advisers told the Financial Times that they are quietly advising companies that have majority shareholders to consider alternatives to Delaware.
Ann Lipton, a law professor at Tulane University, said: “These companies went public with these existing shareholder agreements [giving power to large shareholders] and for the first time they were legally examined, the court said they were not well. “It has scared a lot of companies.”
The Delaware court has received approximately 1,500 letters and emails in total from Tesla common shareholders asking McCormick to respect their wishes if they again vote in favor of Musk’s pay package.
A self-described “small Tesla investor,” Steve Lindenmuth of Union City, California, wrote: “I only invested in Tesla for one reason. That reason was because Elon Musk was then CEO. For years I told people I would invest in Musk if he owned shares.
“It is undeniable that he is the best CEO of our lifetime.”
Additional reporting by Tabby Kinder