Tesla’s directors have agreed to return $735 million to the company to resolve claims from shareholders, alleging excessive compensation for themselves. The settlement, which was filed in court on Monday, marks the conclusion of a lawsuit brought forth in 2020 by the Police and Fire Retirement System of the City of Detroit, which holds Tesla stock. The retirement fund had criticized the stock options granted to Tesla directors, including CEO Elon Musk, his brother Kimbal Musk, and Oracle co-founder Larry Ellison, starting in June 2017.
Scrutiny on Elon Musk’s Compensation Package
Elon Musk, the CEO of Tesla, is also under separate scrutiny for his own $56 billion compensation package, which became the subject of a lawsuit that went to trial last year. Shareholder Richard Tornetta filed the suit against Tesla in 2019, seeking to invalidate Musk’s 2018 pay deal. Tornetta contends that the package unjustly awards Musk, whom he refers to as a “part-time CEO,” “the largest compensation grant in human history” without requiring him to focus exclusively on Tesla. We expect a ruling on Musk’s case soon.
Allegations Against Tesla Directors
The lawsuit accused Tesla’s directors of awarding themselves approximately 11 million stock options from 2017 to 2020. Shareholders argue that this number significantly exceeded the standard for corporate boards. As part of the settlement, the directors agreed to return the equivalent value of 3.1 million Tesla stock options. Tesla defended its directors, stating they acted in good faith and in the best interests of the company’s stockholders. The company highlighted the unprecedented growth it experienced. This growth caused Tesla’s stock price to surge tenfold. As a result, there was an increase in the value of the stock options awarded to directors and Elon Musk. Tesla justified the use of stock options to align the directors’ incentives with investor goals.
Tesla Changes in Compensation and Board Decisions
As part of the settlement agreement, Tesla’s directors will not receive compensation for the years 2021, 2022, and 2023. Additionally, during the next shareholder meeting, the board will need to observe closely. They should carefully assess how they determine compensation and be prepared to make necessary modifications.
One of the Largest Settlements in Court of Chancery
The settlement reached in this case is one of the largest ever for a similar lawsuit in the Court of Chancery. Tesla will directly receive the funds, benefiting the company and resolving the contentious issue of director compensation.
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