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A Delaware judge on Friday expressed scepticism that a vote by Tesla shareholders would give her grounds to reinstate the record $56bn pay package for Elon Musk that she invalidated earlier this year.
During a day-long hearing before Kathaleen McCormick in the Delaware Court of Chancery, lawyers for Tesla and its board of directors admitted they could not cite any precedent to allow shareholders to override the court’s finding that the board had breached its legal duty by approving the package.
But they insisted that a shareholder vote in June to reapprove Musk’s original 2018 package should give her grounds to reverse course and make new law.
“This [vote] was stockholder democracy working,” said David Ross, an attorney for Tesla directors.
The hearing comes as McCormick considers a request from Tesla to give Musk back the package of roughly 300mn shares that she cancelled in January when she found Tesla’s board had been too cosy with Musk to fairly evaluate the pay award. A shareholder vote to approve the package in 2018 was tainted, she ruled, because investors were unaware of the board’s conflicts.
Musk, the billionaire chief executive, raged against the decision, and Tesla put the 2018 package to shareholders for a second vote in June. It passed, and Tesla returned to court to ask McCormick to reconsider.
McCormick on Friday described the “ratification” vote in June as a “risky legal strategy”.
“If this board wants to convene to pay bunch of money [to Musk], that is within a new fiduciary decision”, McCormick said. She wondered whether it might be cleaner for Tesla to simply craft a new pay scheme.
“Let’s honour finality. If stockholders want, they can vote up or down [on a new pay package]. But we can’t have a continuing recursive loop,” McCormick said.
Tesla lawyers insisted that they were not seeking to completely over-rule the January judgment. Rather, the lawyers said that McCormick could simply hand back the share award to Musk, respecting the latest shareholder vote while not disturbing her findings that the 2018 board had breached its duties.
Ross pointed out that shareholders were fully informed, having received a copy of the 200-page ruling detailing the defects in the 2018 pay process in their proxy materials ahead of the vote.
McCormick repeatedly interjected during Tesla lawyers’ arguments, trying to elicit what legal doctrines and cases they were relying on to press for the reversal. At one point, she noted that the proxy statement sent to shareholders offered more legally aggressive theories than the ones Tesla now shared in court. “It is very creative,” she said at one point.
Greg Varallo, the attorney for the Tesla shareholder who brought the case, told the court that Tesla’s only remaining recourse over the January ruling was a judicial appeal to the Delaware Supreme Court.
Despite McCormick’s findings about the conflicts between Musk and members of the Tesla board, the company and many shareholders believe that he has earned his outsized pay award.
The 2018 pay package included a series of operational and valuation milestones, which Tesla met, as its market cap soared to $1tn in 2021 from under $100bn in 2018. Several large and small shareholders said Musk deserved to be rewarded for that result. Musk himself has threatened to turn his focus elsewhere if he does not receive a sufficiently large stake in Tesla.
McCormick summarised Tesla’s arguments to Varallo: “The [Tesla] stockholders want what they want. They want to pay Mr Musk [an award] that the court has deemed unfair and breach of fiduciary duty. It would be good for Delaware for this to happen,” she said — a reference to the notion that shareholders should be able to have a say on major corporate governance actions.
“I thought it was about equal justice under the law. I contend that is good for Delaware,” Varallo said — a nod to his client’s ability to litigate against one of the world’s richest men despite owning fewer than 200 Tesla shares.
Musk has complained publicly about Delaware law since the decision. Shareholders in June also agreed to allow Tesla to move its incorporation to Texas as Musk had requested, and he moved the legal domicile of two other companies he controls — SpaceX and Neuralink — from Delaware to other states.
McCormick said she would take the arguments under advisement and rule later. She is also considering how much to award lawyers for the plaintiff in the case, who have requested billions of dollars in Tesla shares as their fee for winning the case.
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