WILMINGTON, Del. (Reuters) – A Delaware judge ruled on Friday that Tesla Inc ( TSLA.O ) boards must defend by a lawsuit CEO Elon Musk's multi-billion dollar package, which a shareholder lawsuit unjustly enriched the chief of the electrician vehicle company.
FILE PHOTO: Tesla Inc CEO Elon Musk Attends Shanghai World Artificial Intelligence Conference (WAIC), August 29, 2019. REUTERS / Aly Song / File Photo
Tesla Estimates the 2018 Compensation Package to a Value of 2.6 billion when it received shareholder approval in March 2018, although stock analysts at the time said it could be worth up to $ 70 billion if the company – which has yet to make an annual profit – grew rapidly.
The compensation price does not include any salary or cash bonus for the Silicon Valley billionaire Musk, but sets rewards based on Tesla's market value, which will rise to $ 650 billion over the next decade.
On Friday, Vice Chancellor Joseph Slights of the Delaware Court of Chancery ruled against Tesla's request to dismiss the lawsuit from shareholder Richard Tornetta at an initial stage in the trial because of the way the board approved the suit.
As a result, the board must now defend itself against allegations that it violated its trust obligation upon approval of the package, and that the package unjustly enriches Tesla's CEO. The ruling opens up further discoveries in the decision-making process.
Tornetta had requested that the salary package be repealed and the Tesla board overhauled to better protect investors.
The ruling revolved around Tesla's compensation committee, which the company admitted was not independent of Musk, in Slight's opinion. Had the package been negotiated by truly independent board members and approved by a majority of shareholders not affiliated with Musk, Slights said he would have rejected the lawsuit.
"However, Plaintiff has well promised that the review of the board level was not separated from Musk's influence," Slights wrote.
Musk's Compensation Package approved shareholder approval with approximately 73 percent of the votes cast, except for Musk and his brother Kimbal. The voting results indicated that some, but not all, large investors were willing to support a large payout with the basic led company, which has struggled to produce its electric vehicles efficiently and profitably.
At that time, the proxy advisory firm Institutional Shareholder Services voted against the compensation, noting that if achieved, Musk's price would exceed anything previously given to top US executives.
Under the allotment, which involves stock options vesting in 12 tranches, Tesla's market value must increase to $ 100 billion for the first tranche to vest and increase in another $ 50 billion increment for the remainder. The package does not require Tesla to make profitability calculations.
Musk does not own a majority of Tesla's shares, but in a separate case, Slights determined that Musk's sway over Tesla made him a controller from a legal standpoint. As a supervisor, the Board is subject to a higher standard for legal oversight of decisions it makes regarding its relationship with Musk.
The judge rejected Tornetta's claim that the package constituted a waste of the company's assets.
(History fixes spelling for Tesla in the headline)
Additional reporting by Alexandria Sage in San Francisco; Editing Will Dunham