Fiduciary Duties, Business Judgement Rule, Entire Fairness Standard of Review and Execpay

We will review in this post a thorough analysis by Anna Restuccia, (Hardvard Law School), on the Delaware court decision on 2018 Tesla´s compensation plan for Elon Musk. (1)

Elon Musk pay scheme as it was setup in 2018 has faced a setback as Delaware Courts have ruled board members did not act well. He was offered 12 stock option tranches (for 1% of outstanding shares each) each tranche to vest under certain cumulative conditions (50 billion in market capitalization increase each, plus some sustainable adjusted Ebitda or Revenue targets). Grant date fair value was establised at 2,6 billion, and maximum package was up to 55,8 billion. Pay opportunity was some 33 times bigger than his last pay package and some 250 times its peers higher schemes.

The plaintiff argued that this decision was taken in a conflicted controller-stockholder situation; Elon Musk held 21,9% of Tesla shares, he was the founder, powerful CEO and Chair; he also had strong ties to some directors deciding on the matter and dominated the decision-making process that led to the pay package. This implied that Courts should use an entire fairness standard, so that the defendant should prove that the plan was fair. Only if the decision had been taken by a majority of the minority shareholders on an informed way could the defendant have avoided this standard, and the plaintiff argued the decision was not informed.