Musk, Tesla board to return $735M after being sued for overpaying themselves

Tesla Board Pay "grossly Exceeds" Corporate Norms, Claims Shareholder Lawsuit

Jon Brodkin - 18th July 2023 6:17 pm UTC (Note: The given sentence is already in free English. Is there any specific content from the blog section that needs to be rewritten? Please provide more information so I can assist you better.)

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Elon Musk, Larry Ellison, and other present and former members of the Tesla board have made a decision to give back a whopping $735 million to resolve a legal claim brought forth by shareholders. The lawsuit accused the directors of Tesla of excessively enriching themselves. Along with Musk's brother Kimbal Musk, these Tesla directors have also agreed to forgo stock options and other forms of compensation for their board duties in the years 2021, 2022, and 2023.

According to the lawsuit filed in 2020, Musk has placed his relatives and close companions on the Board of the Company. As a result, he wields significant influence and authority over Tesla, while avoiding independent supervision of his managerial approach. In exchange, the Director Defendants, with Musk's approval and voting power, have consistently granted themselves unjustifiably indulgent and extravagant compensation. These compensations far surpass the standard corporate board remuneration.

The agreement submitted on Friday in the Delaware Court of Chancery states that Tesla will receive $458,649,785 in options and $276,616,720 in either cash or stock that will be returned.

The agreement, subject to the court's approval, also mandates that shareholders vote on forthcoming director compensation packages. The terms of the agreement will be applicable for a period of five years once they become effective.

The City of Detroit's Police and Fire Retirement System, which holds shares in Tesla, has taken legal action on behalf of the company. The lawsuit relates to disputed stock options that had an initial value of $437 million when the complaint was filed in June 2020. However, Tesla's stock price has increased more than four times since then.

Tesla Board Denies Wrongdoing

According to the settlement agreement, the accused individuals completely reject all accusations of misconduct, error, responsibility, or harm whatsoever.

According to Reuters, the agreement is among the biggest ever made for a lawsuit involving financial contracts in the Court of Chancery, which is a prominent place for legal action taken by shareholders. Reuters also mentioned that Tesla had defended its use of the stock choices as a means to guarantee that the objectives of investors were in line with those of the directors.

The legal case claimed that the members of Tesla's board consistently granted themselves unreasonable and excessive pay each year from 2017 to 2020. Their actions, driven by self-interest and lack of loyalty, resulted in the company losing significant amounts of money, possibly in the tens or even hundreds of millions of dollars. The board directors received extravagant compensation in various ways, including not only cash retainers but also option awards. These options have already and will continue to yield enormous profits in the future.

In addition to the Musk siblings and Ellison, the accused individuals comprise of the chair of the board, Robyn Denholm; board members Ira Ehrenpreis, James Murdoch, and Kathleen Wilson-Thompson; and past board members Brad Buss, Antonio Gracias, Stephen Jurvetson, Linda Johnson Rice, and Hiromichi Mizuno. Ellison, who co-established Oracle and served as its CTO, departed from Tesla's board in the previous year.

The legal case stated that Gracias, Jurvetson, Ehrenpreis, and Ellison are individuals who have invested in Tesla and share a personal friendship with Musk.

In light of the ongoing legal case, the Tesla board made a decision in 2021 and 2022 to refrain from providing automatic grants of yearly stock option awards until July 2023. As part of the agreement, the directors have agreed to permanently give up the stock options that would have been granted in 2021 and 2022. Furthermore, they will not receive any payment for their service on the Tesla Board during these years. Additionally, the current directors who are involved in the lawsuit will also permanently forgo any compensation for their Tesla Board service in 2023.

Musk's Pay: Lawsuit Over Excessive Control

According to the lawsuit, alterations to the remuneration of directors in 2014 and 2019 did not receive majority approval from shareholders who have no affiliation with Tesla. However, Musk utilized his own shares to ensure the implementation of these changes, despite his connection with the beneficiary Director Defendants, who happen to be his close acquaintances and relatives. The lawsuit also stated that the 2019 plan lacks any conceivable restriction on the amount of shares that can be granted to Tesla's nonemployee directors by themselves.

According to the legal action filed by the shareholders, these individuals have clearly disregarded any oversight from independent stockholders when it comes to their own pay. They have awarded themselves exorbitant amounts of money and show no signs of stopping this relentless greed anytime soon.

According to the agreement, Tesla will be obligated to "present the suggested yearly payment for Non-Employee Directors for approval by the majority of external Tesla Stockholders." The accused individuals and other Tesla directors are required to "refrain from voting as stockholders on the specified votes mentioned in this section and will not be considered as shares present or eligible to vote for the purpose of determining the majority," as stated in the settlement.

Tesla will be required to enlist the services of an "unbiased compensation advisor" to offer guidance on appropriate remuneration on an annual basis. Following this, they must furnish shareholders with details on how proposals regarding director compensation were formulated, prior to the annual voting.

According to Reuters, the recent resolution does not have any effect on Elon Musk's hefty $56 billion compensation plan. This particular compensation package is currently under dispute by shareholders in a separate legal battle that commenced last year. We can anticipate a verdict on the Musk case in the near future.