Tesla v. Musk: The Richest Person in the World Was Overpaid
This opinion concerns the lawsuit between Richard J. Tornetta on behalf of Tesla, Inc. (Tesla) against Elon Musk. Tornetta brings this derivative action on behalf of Tesla alleging that the company's directors breached their fiduciary duties by awarding Musk a performance-based equity compensation plan (the Plan). The Plan offers Musk the opportunity to secure 12 total tranches of options, each representing 1% of Tesla's total outstanding shares as of January 21, 2018. For a tranche to vest, Tesla's market capitalization must increase by $50 billion and Tesla must achieve either an adjusted EBITDA target or a revenue target in four consecutive fiscal quarters. With a $55.8 billion maximum value and $2.6 billion grant date fair value, the plan is the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude-250 times larger than the contemporaneous median peer compensation plan and over 33 times larger than the plan's closest comparison, which was Musk's prior compensation plan.
The question at the heart of this lawsuit is whether the board of Tesla can justify this extraordinary pay package. To answer this question, we must first determine whether Musk controls Tesla because the board approved the Plan with a conflicted-controller transaction. If so, the presumptive standard of review would be entire fairness, and the defendants would bear the burden of proving that the Plan is entirely fair.
This opinion finds that Musk controls Tesla and that the defendants failed to meet their burden of proving that the Plan is fair. The concept of fairness takes into consideration two basic issues: process and price. The process leading to the approval of Musk's compensation plan calls into question the motivations of those tasked with negotiating on Tesla's behalf. The price of the Plan is also problematic, and the defendants' efforts to prove fairness are unavailing.
This opinion enters judgment for the plaintiff, finding that the Plan is subject to review under the entire fairness standard, the defendants bore the burden of proving that the Plan is fair, and they failed to meet their burden. The plaintiff requests that the court rescise the Plan, and this opinion finds that such a remedy is available in light of the defendants' fiduciary breaches.