Wilmington, Del. — Tesla is pursuing an unusual legal move to reinstate a $56 billion compensation package for CEO Elon Musk, contrary to a previous court decision that voided the agreement. The automaker insists that a second approval from its shareholders should supersede the earlier ruling by the Delaware Chancery Court, sparking a debate over the power of stockholder votes versus judicial authority.
In January, Chancellor Kathaleen McCormick of the Delaware Court of Chancery ruled against the compensation plan initially approved in 2018, which could have granted Musk stock worth more than $55 billion based on Tesla’s performance metrics. Tesla’s board, dissatisfied with this decision, sought a second vote from their shareholders, who overwhelmingly re-approved the package in June.
During a recent hearing, McCormick herself noted the unprecedented nature of Tesla’s request. The company’s lawyer championed the re-approval as an example of “stockholder democracy at work,” arguing that it was the shareholders’ will to retain Musk with a competitive compensation plan.
However, legal experts assert that this unusual route is unlikely to alter the court’s original decision. There is a possibility that Tesla’s effort to overturn the decision could reach as far as the U.S. Supreme Court if it progresses through appeals.
At the core of the debate is Tesla’s assertion that stockholders should have the final say in corporate decisions, claiming that this is essential to maintain trust in shareholder agreements across the broader business landscape. Delaware courts, known for their business-friendly rulings, generally uphold shareholder votes but also require that these votes are informed and executed without preconditions that could influence their fairness.
The case also brings to light potential missteps by Tesla in orchestrating the compensation package. Some legal observers point out that Musk’s agreement should have met “cleansing” conditions under case law, endorsing fair negotiation and subsequent shareholder approval without prior substantial agreements. It appears Tesla did not fully adhere to these legal benchmarks before re-submitting the deal for the June vote.
In the event the court upholds its decision to invalidate Musk’s package, Tesla may have undermined its own position by delaying the shareholder re-vote until after the initial ruling. This period of inaction could be perceived negatively, questioning the timeliness and sincerity of Tesla’s governance practices.
Ultimately, Tesla’s legal challenge could set a precedent for how corporations engage with and rely on shareholder votes to ratify executive compensation deals and other corporate transactions. Irrespective of this case’s outcome, the broader implications for corporate governance and the balance of power between judiciary and shareholder decisions are significant.
For businesses and CEOs observing from the sidelines, including prominent figures like JPMorgan CEO Jamie Dimon, the specifics of the case might not be directly applicable, reflecting effective governance practices that avoid similar judicial confrontations. The broader corporate world will be watching closely, potentially adjusting governance strategies based on how power dynamics between shareholders and the judiciary evolve.