Tesla shareholders, including CEO Elon Musk, who were accused of receiving excessive compensation, have reached a settlement with the company amounting to $735 million. The lawsuit, filed in 2020 by the Detroit Police and Fire Retirement System, contested the validity of stock options awarded to Tesla’s board of directors from 2017 to 2020, totaling approximately 11 million options. Shareholders claimed that the directors granted themselves an unjustifiably high number of stock options for a corporate board.
As part of the settlement, the board members, including Larry Ellison, co-founder of Oracle, have agreed to return the cash value of 3.1 million Tesla stock options. This sizeable settlement represents a significant moment in the realm of corporate governance and the handling of derivative actions by the Court of Chancery.
Elon Musk’s separate $56 billion pay package, currently facing challenges in another lawsuit that went to trial recently, remains unaffected by this settlement, with a decision expected shortly.
Musk and Tesla are no strangers to legal battles, having emerged victorious in three previous trials, including a defamation case and allegations of securities law violations. Shareholders had accused Musk of pressuring Tesla to acquire SolarCity in yet another lawsuit.
In addition to returning the cash value of stock options, the board members have agreed to forego compensation for the years 2021, 2022, and 2023 as part of the settlement. They will also reevaluate their approach to compensation in the future.
Tesla had countered the lawsuit by attributing the company’s stock price increase to its exceptional growth and argued that the stock options program aimed to align the interests of directors with those of shareholders.
The settlement funds will be directed to Tesla without any intermediaries. By reaching this agreement, the board members sought to avoid further legal repercussions and demonstrate their commitment to acting in the best interests of the company’s stockholders. The settlement amount is one of the largest in derivative cases in the history of the Court of Chancery.
This resolution indicates a willingness by Tesla and Elon Musk to find common ground on matters of corporate governance, highlighting their dedication to shareholders’ well-being and readiness to take accountability for their actions.
In summary, Tesla’s top executives will pay out $735 million to address shareholder concerns regarding excessive compensation. The settlement puts an end to the 2020 lawsuit brought by a pension fund holding Tesla shares, and the funds will go directly to support the company. The board members’ decision to settle aims to avoid further legal disputes and signifies a pivotal moment in corporate governance and how derivative actions are handled by the Court of Chancery.
First reported on TechCrunch
Frequently Asked Questions
Q: What is the nature of the settlement reached by Tesla shareholders and the company?
A: The settlement between Tesla shareholders and the company amounts to $735 million. It resolves a lawsuit filed in 2020 by the Detroit Police and Fire Retirement System, which challenged the validity of stock options granted to Tesla’s board of directors between 2017 and 2020, totaling approximately 11 million options. Shareholders alleged that the directors awarded themselves an unreasonably high number of stock options for a corporate board.
Q: How significant is the settlement in the context of corporate governance and derivative actions?
A: The settlement represents a major milestone in the field of corporate governance and the handling of derivative actions by the Court of Chancery. Its size and scope make it one of the largest settlements in the history of derivative cases. This outcome sets a notable precedent and underscores the significance of addressing issues related to executive compensation and governance practices.
Q: What impact does the settlement have on CEO Elon Musk’s separate pay package challenge in another lawsuit?
A: The settlement reached in this particular case does not affect Elon Musk’s separate $56 billion pay package challenge, which is facing scrutiny in another ongoing lawsuit that recently went to trial. The outcome of that case is still pending, and a decision is expected in due course.
Q: How has Tesla and Elon Musk’s history of legal battles played a role in this settlement?
A: Tesla and Elon Musk have faced previous legal battles, emerging victorious in three separate trials, including a defamation case and allegations of securities law violations. Shareholders previously accused Musk of pressuring Tesla to acquire SolarCity in another lawsuit. These prior legal experiences likely influenced the approach taken by both Tesla and Musk in addressing the current shareholder lawsuit and finding a resolution through settlement.
Q: What concessions have the board members made as part of the settlement?
A: As part of the settlement, the board members, including Larry Ellison, co-founder of Oracle, have agreed to return the cash value of 3.1 million Tesla stock options. Additionally, they have committed to forgo compensation for the years 2021, 2022, and 2023. Furthermore, the board will reassess its approach to compensation going forward, reflecting their willingness to address shareholder concerns and improve corporate governance practices.
Q: How did Tesla defend itself against the shareholder lawsuit?
A: Tesla defended itself by attributing the increase in the company’s stock price to its remarkable growth and success. The company argued that the stock options program was implemented to align the interests of its directors with those of its shareholders. Tesla maintained that the stock options were meant to incentivize and reward board members for their contributions to the company’s growth and performance.
Q: Where will the settlement funds be directed, and what is the purpose behind this decision?
A: The settlement funds will be directed to Tesla without any intermediaries. As a derivative lawsuit, the money will be utilized to support and benefit the company directly. By directing the funds to Tesla, the settlement aims to strengthen the company’s financial position and potentially be used for future investments or initiatives.
Q: What message does the settlement send about Tesla and Elon Musk’s approach to corporate governance?
A: The settlement sends a message that Tesla and Elon Musk are willing to find common ground and compromise on matters of corporate governance. It reflects their commitment to shareholders’ well-being and a sense of responsibility for their actions as leaders of the company. This resolution demonstrates a willingness to address and resolve issues related to executive compensation and governance in the best interests of the company and its stakeholders.
Q: How will the settlement impact Tesla’s top executives and their compensation practices?
A: As part of the settlement, Tesla’s top executives will pay out $735 million to address shareholder concerns regarding excessive compensation. The agreement also leads the board to reconsider its approach to compensation, signaling a potential change in how salaries and benefits are determined in the future. This settlement could encourage a more balanced and transparent compensation system that aligns better with the interests of shareholders.
Originally published on ReadWrite.