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.

For Whom are Corporate Managers trustees? Prof. Dodd, 1932.

Mr Dodd understands that in a society where individuals carry on buiness for themselves, under a system of private property and freedom of contract, they have no obligations whatsoever to consider others´ interests, (customers, etc), but only theirs, (of course respecting the agreed terms). When there is an agent, he sees nothing changing except that a fiduciary duty by the agent appears in favor of the owner. If there are many owners, a second duty appears between owners, (in their respective share if they enter into running the business or not). If we consider a incorporated legal new entity with directors, nothing changes; if we consider the corporation acting in business and not the owners, nothing really changes either, as the function of the corporation is looking for profits, through their directors, etc.

Mr. Dood, once accepted that directors and managers are fiduciaries of stockholders, that they must act in pursue of profit and the private gain of stockholders (1) agrees with Mr Berle (2)  in the sense that in modern corporations, with dispersed stockholders that do not easily get access to information nor have the means to impose sanctions on managers, there is a need to impose controls and rules to prevent managers from diverting profits to their own pockets.

He recognizes though that public opinion was (remember the articles dates from 1932) favoring some additional purpose of the corporation, a social one, apart from profits, public opinion being relevant as law is made partly out of it.