Tesla’s (TSLA) legal battle to reclaim Elon Musk’s compensation raises an unresolved question that could rewrite the rules of corporate law: Can shareholders overturn a judge’s decision?
Electric-vehicle makers say the answer is yes.
The company is asking a Delaware Business Court judge who in January invalidated Musk’s $56 billion CEO compensation contract to overturn that ruling and replace it with the will of the company’s shareholders, who approved his pay for a second time in June.
“This is unprecedented,” Judge Kathleen McCormick of the Delaware Court of Chancery said during a hearing earlier this month.
Tesla’s lawyers agreed but argued that the new shareholders’ decision should have the final say.
“This is shareholder democracy at work,” he said.
A 2022 courtroom sketch of Delaware Court of Chancery Chief Judge Katherine McCormick hearing testimony in a lawsuit filed by Tesla shareholders challenging CEO Elon Musk’s compensation plan. (Elizabeth Williams via The Associated Press) (The Associated Press)
Corporate lawyers predict that the proposal alone will not be enough to change Treasurer McCormick’s decision.
They say the core issues in the case could be appealed all the way to the U.S. Supreme Court.
“purification”
Tesla’s argument is that corporate deals should be decided by shareholders, not judges, or the business world at large would lose confidence that it could trust any agreements Tesla makes with its shareholders.
And as a general rule, Delaware courts take shareholder votes very seriously and tend to follow the results of the count.
“We don’t see why Delaware law should tell a company’s owners not to set the CEO’s compensation,” Rudolph Koch, a lawyer for Tesla’s board of directors, said at an August hearing before Treasury Secretary McCormick.
But a potential stumbling block for Tesla is that the company may have overlooked some steps that could have rendered the shareholder lawsuit moot.
Legal experts point to a series of lawsuits in state business courts, known as M&FW litigation, as an example of a path Tesla could have taken but did not.
Rulings in those cases have held that even when a corporate deal involves a controlling shareholder with a conflict of interest (as the judge ruled in Musk v. Tesla), a company can “clean up” the deal with an appropriate shareholder vote.
Tesla CEO Elon Musk. (Associated Press/Susan Walsh) (Associated Press)
But here’s a potential problem: Case law suggests Musk would have had to meet cleanup conditions before he could enter into substantive negotiations with Tesla over his compensation, and that any negotiations would have had to be contingent on shareholder approval, according to Marcel Kahan, a professor at New York University Law School.
That would be hard for Musk to prove: No new negotiations appear to have taken place until Tesla resubmitted Musk’s compensation contract to shareholders in June.
The story continues
Still, there’s another problem: Even if Judge McCormick finds that Tesla’s second vote “cleaned up” Musk’s compensation agreement, he might decide that Tesla simply waited too long before voting again.
The Delaware Chancery Court considers the timeliness and reasonableness of corporate actions and may not tolerate Tesla’s failure to seek new shareholder approval until after a judge ruled against it, corporate lawyers said.
Whatever the outcome, Tesla can appeal its loss to the Delaware Supreme Court, where a justice could determine that Musk isn’t a controlling shareholder and therefore rule that the requirement to condition compensation agreements on shareholder approval doesn’t apply, Kahan said.
He added that most companies need not worry about the outcome of this case as they adhere to proper governance policies that protect them from judges invalidating transactions.
“So if I [JPMorgan CEO] Jamie Dimon and I read it. [McCormick’s] In my opinion, I have no concerns at all that my compensation package will be at risk.”
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis at Yahoo Finance. Alexis Weed.
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