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Delaware Chancery Court Judge Kathleen McCormick has rejected Tesla’s request to review its decision to cancel CEO Elon Musk’s $56 billion pay package — despite shareholders voting at the company’s annual meeting this year to “re-certify” the deal.
Its decision, set out in 103 pages opinion An article published on Monday explains that the attempt by Tesla’s legal team — which Musk described as “…Hardcore“- Her change of mind contained multiple drawbacks, each of which was fatal in itself.
“The large and talented group of defense firms has innovated the certification argument, but their unprecedented theories run counter to multiple strains of settled law,” McCormick wrote.
Tesla has been expected to appeal to the Delaware Supreme Court since McCormick’s initial opinion was issued in January. Since then, though, the company has done just that Re-integrated From Delaware to Texas. Musk has now also become President-elect Donald Trump’s right-hand man, raising all kinds of questions about his priorities as the US heads into a new administration.
McCormick also awarded the plaintiff’s lawyers a $345 million fee — to be paid in cash or through Tesla stock — which is eye-catching but still a small fraction of the $5.6 billion those lawyers requested earlier this year.
Tesla awarded the compensation package to Musk in 2018, at a time when the electric car maker was experiencing a crisis. It outlined a series of stock price milestones that Tesla must achieve in order for Musk to unlock the full value of the package — milestones that the company was able to easily exceed in the following years as Tesla ramped up its Model 3 and Model Y programs.
Former corporate defense attorney (and thrash metal drummer) Richard Tornetta Tesla sued over the deal. His lawyers argued that shareholders were misled because the company and its board were so influenced by Musk that negotiations surrounding the package were unbalanced. There was a trial, and Judge McCormick made clear in her opinion in January that she found the substance of Tornetta’s argument to be true.
Tesla put the opinion to a vote at its shareholder meeting next June, in an attempt to re-litigate the deal in the court of public opinion.
The company issued a brand new proxy statement including McCormick’s opinion in January, and said it will now fully inform shareholders as they prepare to vote again. They agreed to recertify by a margin of more than two to one, and Tesla’s lawyers tried to use that to persuade the judge to change course.
But McCormick wrote Monday that Tesla’s legal team “had no procedural basis to overturn the outcome of an adverse post-trial decision based on the evidence they presented post-trial.” She said that was a “fatal flaw.” The second is more procedural: Tesla’s legal team viewed the vote as a “common law” ratification, an affirmative defense, and these matters could not be raised after a post-trial opinion was issued.
Third, McCormick challenged the idea of common law ratification on the face of it. While Tesla’s lawyers argued that “shareholders have the ability to adopt any corporate actions they deem to be in their own best interest,” McCormick said that notion is “generally questionable and unquestionably false in the context” of how Musk fundamentally controls Tesla’s governance.
Fourth, McCormick said that “even if a stockholder vote could have a ratifying effect on the grant, it cannot have an effect here because there are multiple material errors in the proxy statement regarding the effect of the vote.”
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