Tesla, Inc. Settles $753 Million Shareholder Suit Challenging “Outrageous” Board Compensation Packages
On Monday, Tesla Inc.’s board of directors agreed to settle a shareholder derivative suit for $735 million, ending a three-year lawsuit against the company that accused the board of receiving “outrageous” compensation packages that cost the company hundreds of millions of dollars.
In June 2020, a pension fund shareholder of Tesla sued Elon Musk and the company’s board of directors to seek repayment of what it claimed were “outrageous” stock awards. The shareholder accused Musk and the company’s board of approving director pay and stock option benefits valued at $8.7 million – compensation more than 29 times higher than the average for similarly-situated company boards.
The shareholder alleged in its complaint that the directors “granted themselves millions in excessive compensation and are poised to continue this unrelenting avarice into the indefinite future.” Plaintiffs claimed that Tesla repeatedly failed to obtain approval from shareholders for board compensation, instead leveraging Musk’s substantial ownership of Tesla stock to procure excessive compensation for Musk and other directors.
The shareholder set its sights primarily on Musk himself, alleging that Musk secured unfettered control over the board by agreeing to fund liability insurance for director and officer compensation. The fund claimed that “allowing Musk to personally serve as the board’s D&O insurer brings the entire board under the yoke. Any offer to compromise an action to recover for a breach of the directors’ fiduciary duties, including this litigation, is now wholly determined by Musk’s personal whim, and not an independent insurer.”
In its complaint, the shareholder demanded disgorgement of the stock option awards and an accounting of past practices, as well as reforms to board equity compensation policies and a declaration that the named directors had breached their fiduciary duties to Tesla and its shareholders.
Under the terms of the settlement, Tesla is required to return $735 million to shareholders through a combination of stocks, options, and cash. Additionally, current board members agreed to forego compensation between 2021 and 2023 and to have their future compensation packages examined by an independent consultant. The board also agreed to submit proposed board compensation for shareholder approval, and to disclose the processes and considerations used to determine director compensation.
The settlement marks the end of one of many lawsuits brought against Musk and his company alleging outrageous compensation practices. In June 2018, shareholders challenged Elon Musk’s $56-billion compensation package. Plaintiffs in that suit alleged that Musk exploited his control of Tesla and the board of directors to secure compensation to “fund his personal ambition to colonize Mars.” The case went to trial in 2022, and a ruling is expected soon.