The first time around, judge Kathaleen McCormick of the Delaware court of chancery got it right. The $56bn pay package awarded by Tesla to Elon Musk in 2018 was indeed a governance abomination, a stitch-up in which ordinary shareholders weren’t told about the “deeply flawed” process whereby a “superstar ceo” secured wildly over-the-top terms from pliant directors.
Her closely argued ruling in January spelt it out in persuasive detail. The company had “inaccurately described key directors as independent and misleadingly omitted details about the process”. Ira Ehrenpreis, the lead director negotiating for Tesla, had a 15-year business relationship with Musk. Another member of the working group regularly went on holiday with Musk’s family. A third was the company’s general counsel and Musk’s former divorce lawyer.
Tesla’s share price still had to perform spectacularly well – the company’s value had to rise from $50bn-ish to $650bn for Musk to get the full whack – but the size of the prize was plainly beyond what should be required to motivate the boss, who was also a 22% shareholder at the time, to get out of bed in morning. Thus voiding the share options could be justified on the basis that Tesla’s shareholders had voted without being given the full picture. McCormick got three cheers from this column.
Yet it’s hard to applaud her continued insistence on blocking the award after Tesla held a second “ratification” vote in June and shareholders again gave a thumbs up to Musk’s billions by a large majority.
McCormick’s argument this time is that Tesla’s board was not entitled to hit “reset” and “were the court to condone the practice of allowing defeated parties to create new facts for the purpose of revising judgments, lawsuits would become interminable.” What’s more, the information Tesla sent to shareholders was “materially false or misleading” because it claimed the second vote could override the early decision of the court.
That is more problematic. It is close to denying shareholders’ wishes on the grounds of a legal technicality. If Tesla made fuller disclosures the second time, and if Tesla’s owners still want to shower excessive and unnecessary rewards on Musk, at some point that’s surely up to them. It may still have been misleading to say the court would accept the result of a second vote, but that objection feels incidental to the main argument. We’ll see if this judgment will withstand an appeal.
In the meantime, take a step back from the legal quarrel and be amazed that the Tesla board, after McCormick’s first ruling, didn’t try to seek a compromise with Musk and talk him down to a less grotesquely obscene award. Instead, it took none of the governance criticisms on board and declared that it felt vindicated by the super, soaraway stock price. That was pure fanclub behaviour.
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We’ll see where the battle ends once it goes (probably) to the Delaware supreme court. But the craven stance of Tesla’s board should not be lost in the legal back-and-forth. Nonexecutive directors are not meant to be this supine.