In what is as far as I know the largest shareholder derivative lawsuit settlement ever as measured by dollar value, the defendant board members in the Tesla Board compensation derivative suit have agreed to settle the case for a combination of payments and transfers with a total value of $735 million. The agreement settles a Delaware Chancery Court lawsuit that a public pension fund shareholder filed against the board in June 2020 alleging that the since at least 2017 the board had received “unfair and excessive” compensation. The settlement is subject to court approval. A copy of the parties’ stipulation of settlement in the case, filed with the court on July 14, 2023, can be found here.
As detailed here, in June 2020, the Police and Fire Retirement System of Detroit filed a shareholder derivative lawsuit in the Delaware Court of Chancery against then-current and past members of Tesla’s board of directors. The defendants include Elon Musk’s brother, Kimball Musk, as well as media executive James Murdoch and Oracle founder Larry Ellison, as well as Elon Musk, Tesla’s CEO. The lawsuit alleged that the board had paid themselves “outrageous” compensation in the form of directors pay, stock awards, stock options, and other benefits and bonuses. The complaint alleges that the board “granted themselves millions in excessive compensation and are poised to continue this unrelenting avarice into the indefinite future.” The complaint sought to have the board members disgorge “egregious” stock option awards, reforms to board compensation practices and a declaration that the defendants had breached their fiduciary duties to Tesla and its stockholders.
After the complaint was filed, the parties engaged in extensive discovery. Beginning in 2022, the parties also commenced mediation processes that ultimately resulted in the settlement.
The settlement provides that the director defendants will, jointly and severally, provide to Tesla the value of 3,130,406 stock options, using methods and valuations provided in the settlement stipulation. The director defendants will return the value of the options in one of three forms: cash; unrestricted common shares of Tesla stock; and unexercised Tesla options. The director defendants shall have the “sole discretion” in the ratio of returned cash, returned stock, and returned options, provided that the total value of the returned amounts equals the settlement option amount. The agreement specifies the method to be used in valuing the returned assets. Using these valuation methods, the value of the settlement is $735,266,505. As part of the settlement, the director defendants did not admit to any wrongdoing.
The settlement amount consists of $435,649,785 in returned options and $276,616,720 in returned cash or returned stock. In the event the director defendants return a different combination of returned options, returned cash, or returned stock, the adjustment should not change the settlement amount, and the director defendants are obliged to inform the court of any adjustments. The director defendants also agreed to permanently forego options for 2021 and 2022 and will not receive any compensation for Tesla board service for 2021 and 2022. The current directors also agreed to forego any compensation for Tesla board service for 2023. The current board also agreed to adopt corporate governance reforms and the board’s compensation committee agreed to certain measures to ensure oversight and independence.
The agreement says little about attorneys’ fees other than to say that the attorneys will submit a fee and expense application to the court and that the amount of any attorney fee award will be paid out of the settlement amount.
News stories about the settlement quoted plaintiffs’ counsel as saying that the settlement is one of the largest ever in a Delaware Court of Chancery derivative lawsuit. As readers know, I have been tracking derivative settlements on this site (here), and at least as far as I know, this settlement represents the largest ever shareholder derivative lawsuit settlement, far exceeding the value of the previous largest settlements. It is by any measure an extraordinary settlement.
The settlement is interesting not only because of its sheer size, but also because the defendant directors have agreed as individuals to return massive amounts of cash, stock, and options they were awarded as compensation for board service. Not only that, the compensation was awarded at a time when Tesla’s stock value rose massively. If the directors did well during that time, well, so did the Tesla shareholders, even if the directors’ compensation was out of proportion to amounts that directors were or are paid at other corporations.
I know that there will be those who will quibble with me about how this settlement should be valued for purposes of ranking the settlement on the largest all-time list. The quibble will be that much of the value is in the form of returned stock and options, and that the actual cash value will likely be substantially less than the nominal $735 million value of the settlement. While that is true, it the stock and option components obviously have real value to the settling defendants, and the return of those equity compensation awards to the corporate treasury will have a real and substantial effect. I am open to suggestions of alternative ways the settlement should be valued and ranked, but for now I think the best way to value and rank it is according to the value that the settlement requires the defendants to pay.