In one of the largest shareholder settlements of its kind, Tesla Inc’s directors have agreed to return $735 million to the company, resolving a 2020 lawsuit brought forth by the Police and Fire Retirement System of the City of Detroit. The lawsuit challenged the stock options granted to Tesla directors, alleging they were grossly overpaid and their compensation significantly exceeded industry norms for a corporate board.
According to a court filing cited by Reuters in a Delaware court on Monday, the settlement stems from a retirement fund’s lawsuit, which holds Tesla stock. The directors, including Oracle co-founder Larry Ellison, have committed to returning the equivalent value of 3.1 million Tesla stock options. While the settlement addresses the alleged unfair and excessive compensation between 2017 and 2020, it notably does not impact the $56 billion compensation package of Tesla’s enigmatic CEO, Elon Musk.
Despite maintaining that they acted in good faith and in the best interests of Tesla’s shareholders, the directors involved in the settlement agreed to settle to eliminate the risk of ongoing litigation, both for themselves and the company. By opting for this settlement, they hope to move forward with a fresh slate and avoid any further legal entanglements.
Corporate board’s remuneration in focus
The case, categorised as a derivative lawsuit, is significant due to its scale and targeting of the corporate board’s remuneration practices. The Court of Chancery, a prominent venue for shareholder litigation, has seen few cases of this magnitude. Tesla and Musk have established a reputation for vigorously defending themselves against lawsuits, with Musk previously prevailing in various legal battles, including defamation and shareholder lawsuits.
The specific stock options awarded to directors and Musk came under scrutiny due to the remarkable growth experienced by Tesla. The company’s stock price skyrocketed tenfold during the period in question. As the stock’s value surged, so did the value of the stock options awarded to the directors and Musk.
Tesla’s defense in the lawsuit centered on the notion that the stock options were essential for aligning the directors’ incentives with the interests of the company’s investors. As Tesla underwent unprecedented growth, it aimed to ensure the board’s objectives aligned with its success.
As part of the settlement, the accused directors have made additional concessions. They have agreed not to receive any compensation for the years 2021, 2022, and 2023. Furthermore, the board has committed to reevaluating and revising the method used to determine executive compensation moving forward.
While this settlement is a significant step towards resolving the issue, another shareholder lawsuit challenging Elon Musk’s substantial compensation package awaits a ruling. Last year, shareholders filed a separate lawsuit targeting Musk’s $56 billion compensation, accusing the CEO of potential impropriety. A verdict in that case is expected imminently.
As the settlement funds flow back into the company, investors will be keen to observe how Tesla leverages this capital for future growth and advancement. However, the ramifications of the legal battles and the ensuing settlements could lead to transformative changes in how executive compensation is structured and scrutinised across corporate America.
(With Inputs from Reuters)
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