Elon Musk's $56B Tesla compensation voided by judge(cnbc.com)
cnbc.com
Elon Musk's $56B Tesla compensation voided by judge
https://www.cnbc.com/amp/2024/01/30/tesla-shares-slide-after-judge-voids-elon-musks-56-billion-compensation.html
82 comments
He wanted to give himself a $56B compensation?
The shareholders voted to pay him $50B compensation if he achieved specific milestones
https://www.detroitnews.com/story/business/autos/mobility/20...
https://www.detroitnews.com/story/business/autos/mobility/20...
Which he did so I don’t really see the issue with any of it. He took his entire compensation betting on massive success of the company and it happened.
Whats wrong with that?
Whats wrong with that?
Did you read the article or the ruling?
Yes I did, and I don't see sound justification for the ruling. The judge says the compensation was biased, rather than providing justification for establishing that there was too much compensation.
The judge provided a sensational quote: "Is the richest man on Earth overpaid?" - completely ignoring any business value that he has brought to Tesla, a key element in determining whether a compensation package is responsible from a fiduciary standpoint.
Nothing in the article convinces me that the ruling is just and that the judge was acting in the fiduciary interests of Tesla shareholders.
The judge provided a sensational quote: "Is the richest man on Earth overpaid?" - completely ignoring any business value that he has brought to Tesla, a key element in determining whether a compensation package is responsible from a fiduciary standpoint.
Nothing in the article convinces me that the ruling is just and that the judge was acting in the fiduciary interests of Tesla shareholders.
> completely ignoring any business value that he has brought to Tesla
According to the ruling, Musk’s lawyers failed to argue causality during trial. The judge can’t credit Musk for what Musk himself doesn’t argue.
According to the ruling, Musk’s lawyers failed to argue causality during trial. The judge can’t credit Musk for what Musk himself doesn’t argue.
It's not that they failed to argue causality, but they did not prove it. From II.C.b.vii (The Hindsight Defense):
> Defendants finally argue from hindsight. They claim the Grant was fair because it worked: “Tesla thrived because of the 2018 Plan.” With this argument, Defendants ask the court to infer a direct causal relationship between the Grant and Tesla’s subsequent performance. But Defendants failed to prove that Musk’s less- than-full time efforts for Tesla were solely or directly responsible for Tesla’s recent growth, or that the Grant was solely or directly responsible for Musk’s efforts. This last argument is empty rhetoric, not evidence of fair price.
> Defendants finally argue from hindsight. They claim the Grant was fair because it worked: “Tesla thrived because of the 2018 Plan.” With this argument, Defendants ask the court to infer a direct causal relationship between the Grant and Tesla’s subsequent performance. But Defendants failed to prove that Musk’s less- than-full time efforts for Tesla were solely or directly responsible for Tesla’s recent growth, or that the Grant was solely or directly responsible for Musk’s efforts. This last argument is empty rhetoric, not evidence of fair price.
The judge characterized it as “made no effort” so it’s a little of both.
The argument boiled down to the idea that Elon already stood to make 100B by hitting the milestones, so it's more Milestone based incentives had no impact.
Yes and it doesn’t make sense to me. They had what would be considered moonshot goals for a car company, a compensation package attached to them, and he hit the numbers. Pay the man!
How they arrived at those numbers is nowhere near as relevant as coming to an agreement and meeting the targets.
It’s the complete opposite of all the situations where the CEO burns down the office tower and jumps out the window with a golden parachute.
How they arrived at those numbers is nowhere near as relevant as coming to an agreement and meeting the targets.
It’s the complete opposite of all the situations where the CEO burns down the office tower and jumps out the window with a golden parachute.
> coming to an agreement and meeting the targets.
That’s the crux of the whole lawsuit.
The judge found that the whole process of coming to an agreement in this case was Musk talking to a mirror.
If there were an actual fair process here and it arrived at $55B then the judge wouldn’t have found as she did.
That’s why the shareholder lawsuit was successful.
That’s the crux of the whole lawsuit.
The judge found that the whole process of coming to an agreement in this case was Musk talking to a mirror.
If there were an actual fair process here and it arrived at $55B then the judge wouldn’t have found as she did.
That’s why the shareholder lawsuit was successful.
> It’s the complete opposite of all the situations where the CEO burns down the office tower and jumps out the window with a golden parachute.
Interesting observation. I wonder how we wound up at a place where all of the incentives are the exact opposite of what they should be.
Interesting observation. I wonder how we wound up at a place where all of the incentives are the exact opposite of what they should be.
It seems like you disagree with the ruling, which is different than not understanding the problem
It isn't really an article.
Did you find the ruling? Everything I saw said it was approved by a large majority, and viewed as extremely ambitious goals at the time.
Did you find the ruling? Everything I saw said it was approved by a large majority, and viewed as extremely ambitious goals at the time.
> Everything I saw said it was approved by a large majority, and viewed as extremely ambitious goals at the time.
Both of these are addressed in the ruling [0]. The shareholder approval was effectively void due to material omissions, and it seems there's some dispute on how ambitious the goals actually were.
[0]: https://courts.delaware.gov/Opinions/Download.aspx?id=359340
Both of these are addressed in the ruling [0]. The shareholder approval was effectively void due to material omissions, and it seems there's some dispute on how ambitious the goals actually were.
[0]: https://courts.delaware.gov/Opinions/Download.aspx?id=359340
Not only that, but the judge found that the Board members basically had serious conflicts of interest because of their personal relationships with Musk, meaning that they were not independent representatives of shareholder interests in any meaningful sense.
It's worth noting that companies can change the state that they are incorporated in. Elon is considering changing Tesla to Texas. After he changes, I wonder if Elon's lawyers can get this re-litigated somehow?
https://twitter.com/elonmusk/status/1752491924848820595
https://twitter.com/elonmusk/status/1752491924848820595
Legal tricks are seldom workable in real life. In this case evading a shareholder class action by moving to Texas is very unlikely to work. Ask the NRA how much good that did.
> After he changes, I wonder if Elon's lawyers can get this re-litigated somehow?
I'm rather skeptical that such a thing could happen. The events in question all occurred while Tesla was incorporated in Delaware, so I don't think there would be any reason for the laws of Texas to apply. As far as Texas is concerned all the relevant events happened to someone outside of its jurisdiction.
Granted, I'm not a lawyer, let alone one licensed to practice in either Delaware or Texas, so a few grains of salt are more than warranted.
I'm rather skeptical that such a thing could happen. The events in question all occurred while Tesla was incorporated in Delaware, so I don't think there would be any reason for the laws of Texas to apply. As far as Texas is concerned all the relevant events happened to someone outside of its jurisdiction.
Granted, I'm not a lawyer, let alone one licensed to practice in either Delaware or Texas, so a few grains of salt are more than warranted.
[dupe]
More discussion: https://news.ycombinator.com/item?id=39196390
More discussion: https://news.ycombinator.com/item?id=39196390
This is absurd. Elon deserves the package.
Does anyone truly deserve $50Bn compensation for anything?
Yes-- if he can generate much more than $50 billion in value for Tesla shareholders, and they give him $50 billion in compensation, that's a fair trade in my book.
Nobody in the history of work has ever earned 50 billion dollars. It's winnings. That's all.
That wholly depends on your definition of the term 'earned'. If you compare it to the way most people look at it - earning money through hard work against an hourly rate - it does not make any sense at all. If you define it in terms of gains - monetary or otherwise - created through the actions of a person things look different and there are many people who would have 'earned' this amount and more. In practice hardly anyone who 'earns' so much actually is awarded the amount they 'earn' but Musk took a gamble which would normally have paid off like many be-suited-and-tied types (and quite a few be-shirted-and-hoodied in more recent years) have taken such gambles before him have done. As to why Musk is singled out here where others like Gates, Bezos and Zuckerberg were left alone does raise a number of questions related to the impartiality of the legal system.
Nobody has ever “earned” any money. They trade services and goods for it.
That's beyond ridiculous. What true value has he generated? Also if the stock tanks then shouldn't investors have a right to strip some of that compensation? 50 billion to millions of investors and 50 million to one guy is hardly a fair trade. Not to mention how many times he's promised to deliver new features or products and comes up terribly short.
He was paid to be CEO and drive the company towards particular goals. The entire point of leadership is to make sure those happen, not to do them yourself.
You can claim the amount should be lower, but then your argument is with the shareholders who came up with the proposal and approved it.
You can claim the amount should be lower, but then your argument is with the shareholders who came up with the proposal and approved it.
That’s the whole point of the lawsuit. The shareholders allege Musk came up with the proposal, controlled the process, then lied about it to shareholders. The judge found in their favor after a trial.
So why does Musk deserve this again? Because he says so?
So why does Musk deserve this again? Because he says so?
No, that’s not what they claimed. The judge found that the board was to biased in favor of Musk. Not that he came up with anything.
The judge found that "At least as to this transaction, Musk controlled Tesla".
Meaning that Musk directed the creation of the compensation package, not that the compensation committee were merely biased. The analysis of this is on pages 103-146 of the ruling.
Meaning that Musk directed the creation of the compensation package, not that the compensation committee were merely biased. The analysis of this is on pages 103-146 of the ruling.
I want to point out that, you are arguing with a guy who defends a person who spends more time shitposting on twitter then running a company that he really deserves $50bn bonus.
You can spend your time better than this ;)
You can spend your time better than this ;)
lol what are you taking about, arguing on the internet is the highest calling! :P
at least argue with someone who might be reasoned with, like flat eathers or underground resistance of reptilian overloads
Tesla market cap is $600B. The shareholders made a lot of money. That was the deal.
The stock doesn't pay dividends. Why not pay dividends and let investors purchase more stock with the proceeds. Smells like speculation and an invitation to getting sued and prosecuted.
Yes. All by himself. So many all nighters building cars, alone. “Just one more car, so I can, alone, provide value.”
The board believed (quite reasonably) that Elon had the power to determine the trajectory of the stock over the next 5 years, and they acted on that belief by tying his compensation to particular stock goals. The board then put that compensation plan to a shareholder vote, and the shareholders approved it.
The stock hit those goals, and Elon got paid.
Then one guy with 9 shares said it's not fair, and got a judge to agree.
The stock hit those goals, and Elon got paid.
Then one guy with 9 shares said it's not fair, and got a judge to agree.
I love it, the legal system really is a great equalizer sometimes.
The judge said "no":
"A Delaware judge on Tuesday voided the $56 billion pay package of Tesla CEO Elon Musk, ruling that the company's board of directors failed to prove "that the compensation plan was fair" or show much evidence that they had even negotiated with him".
And , to be objective :
"Tesla ended Q4 2023 with a net income of $7.9 billion and the full year with $15 billion in profits" , that money is more 3 years of profit, meaning that the company , after that compensation, must wait almost 4 years, if the trend remains that one, to generate profit !
So who can say the judge was unfair ???
Other possible repercussion, Tesla lack of funds for R&D in a sector where the competitors became very aggressive.
"A Delaware judge on Tuesday voided the $56 billion pay package of Tesla CEO Elon Musk, ruling that the company's board of directors failed to prove "that the compensation plan was fair" or show much evidence that they had even negotiated with him".
And , to be objective :
"Tesla ended Q4 2023 with a net income of $7.9 billion and the full year with $15 billion in profits" , that money is more 3 years of profit, meaning that the company , after that compensation, must wait almost 4 years, if the trend remains that one, to generate profit !
So who can say the judge was unfair ???
Other possible repercussion, Tesla lack of funds for R&D in a sector where the competitors became very aggressive.
He's not spending $50B on Lambo's and Gucci bags. If he uses it to start a new company that employs thousands of people then he deserves it.
- But - he used the money to buy a company , Twitter, that was able to create profit, do lot of questionable choices killing any profit and, worst, firing thousands of employees, people with families, I want to remember. So, at the end, better if he did spend that money in Lambos and Guccis !
You don't know what you're talking about. If he didn't fire those employees there would be no Twitter and 100% of the jobs would be gone. Twitter was losing money and nearly bankrupt. It was not a profitable company when he bought it. After learning about the actual state of the company he tried to exit the deal but was sued by Twitter and legally forced to complete the deal. He has since turned it into a profitable company.
https://qz.com/elon-musk-is-suing-the-law-firm-that-helped-f...
https://qz.com/elon-musk-is-suing-the-law-firm-that-helped-f...
I don't think so and , anyway, why are you using the past ? Twitter IS losing money and IS nearly backrupt, not being able to sell , you know, ads, that in a company relying for 75% of its income on ads it's a big problem:
"X generated $4.4 billion revenue in 2022, a 11% decrease on 2021 figures. Revenue is expected to be worse in 2023 due to a loss of advertising revenue"
In fact, now is 1.5 billion verified, 2.1 estimated with a negative trend:
https://www.reuters.com/technology/us-ad-revenue-musks-x-dec... https://arstechnica.com/tech-policy/2023/12/stop-comparing-x...
We have half revenue, even if you improved the efficiency of 100%, you have no improvement. Besides there are the interest he have to pay to banks lent him money.
So, "He has since turned it into a profitable company" , it's not true, it's the opposite, demonstrated black on white in the financial documents. Everything else is a delusional dream of Musk's troll army.
The people he fired was the same people help the platform to keep away the scum of the web outside, reason why the ads are declining. You know, you don't want nazis, white suprematist, antisemitic, hamas, near the new shoes model you are trying to advertise.
P.S. Anyway why this article is flagged? The source is a news article for a reputable source and the title is correct. Other demonstration that when you dare commit blasphemy against the Cult of Musk , you have to face an overdose of trolling.
"X generated $4.4 billion revenue in 2022, a 11% decrease on 2021 figures. Revenue is expected to be worse in 2023 due to a loss of advertising revenue"
In fact, now is 1.5 billion verified, 2.1 estimated with a negative trend:
https://www.reuters.com/technology/us-ad-revenue-musks-x-dec... https://arstechnica.com/tech-policy/2023/12/stop-comparing-x...
We have half revenue, even if you improved the efficiency of 100%, you have no improvement. Besides there are the interest he have to pay to banks lent him money.
So, "He has since turned it into a profitable company" , it's not true, it's the opposite, demonstrated black on white in the financial documents. Everything else is a delusional dream of Musk's troll army.
The people he fired was the same people help the platform to keep away the scum of the web outside, reason why the ads are declining. You know, you don't want nazis, white suprematist, antisemitic, hamas, near the new shoes model you are trying to advertise.
P.S. Anyway why this article is flagged? The source is a news article for a reputable source and the title is correct. Other demonstration that when you dare commit blasphemy against the Cult of Musk , you have to face an overdose of trolling.
> it's not true, it's the opposite, demonstrated black on white in the financial documents
Which financial documents? Twitter is a private company now. How did you get access to their private financial statements?
Also, revenue != profit, and those numbers are estimated, as explained in the articles that you linked to. Those sources do not have access to the financial statements.
Net income for Twitter before it went private was -$221 million. That's a $221 million loss in 2021 before Musk bought it (public information, since it was a public company). 80% of the employees were fired and the system is still running. Why should those people have stayed employed and continued to lose $200M+ per year? Do you believe a company can continue to pay staff if it has no money?
> P.S. Anyway why this article is flagged?
It's a dupe. Further discussion here: https://news.ycombinator.com/item?id=39196390
Which financial documents? Twitter is a private company now. How did you get access to their private financial statements?
Also, revenue != profit, and those numbers are estimated, as explained in the articles that you linked to. Those sources do not have access to the financial statements.
Net income for Twitter before it went private was -$221 million. That's a $221 million loss in 2021 before Musk bought it (public information, since it was a public company). 80% of the employees were fired and the system is still running. Why should those people have stayed employed and continued to lose $200M+ per year? Do you believe a company can continue to pay staff if it has no money?
> P.S. Anyway why this article is flagged?
It's a dupe. Further discussion here: https://news.ycombinator.com/item?id=39196390
> That's a $221 million loss in 2021
That was down to a one-off $800M lawsuit settlement. They technically made $580M profit in 2021.
That was down to a one-off $800M lawsuit settlement. They technically made $580M profit in 2021.
"Technically" that is a $221M loss in 2021.
In 2020 they lost $1.1 billion.
2018 and 2019 were the only profitable years in the 10 years prior to 2022 [0].
From 2018 to 2021 they nearly doubled the number of employees from 3920 to 7500 [1]. Jack Dorsey regretted it and apologized for over-hiring [2].
[0] https://www.statista.com/statistics/274563/annual-net-income...
[1] https://www.statista.com/statistics/272140/employees-of-twit...
[2] https://www.theguardian.com/technology/2022/nov/05/twitter-e...
In 2020 they lost $1.1 billion.
2018 and 2019 were the only profitable years in the 10 years prior to 2022 [0].
From 2018 to 2021 they nearly doubled the number of employees from 3920 to 7500 [1]. Jack Dorsey regretted it and apologized for over-hiring [2].
[0] https://www.statista.com/statistics/274563/annual-net-income...
[1] https://www.statista.com/statistics/272140/employees-of-twit...
[2] https://www.theguardian.com/technology/2022/nov/05/twitter-e...
I'd like to hear what makes you think so, when a judge looked at the facts, heard arguments from both sides, and decided otherwise. Do you have additional facts they did not, or are you basing this off your own study of jurisprudence? Or is it just kind of a knee jerk reaction based on reading a headline and having feelings about it, or is it some fourth possibility I haven't considered?
Because I, along other shareholders, voted for the plan, which you can find here:
https://www.sec.gov/Archives/edgar/data/1318605/000119312518...
The reasons for voiding it are absurd. He did the almost impossible and met all milestones of the plan and brought TREMENDOUS value to all the shareholders.
Had he not done it, his shares would not be worth that much.
https://www.sec.gov/Archives/edgar/data/1318605/000119312518...
The reasons for voiding it are absurd. He did the almost impossible and met all milestones of the plan and brought TREMENDOUS value to all the shareholders.
Had he not done it, his shares would not be worth that much.
The guy that sued and just made Elon Musk lose 55 Billion dollars only had:
NINE SHARES OF TESLA STOCK.
NINE SHARES OF TESLA STOCK.
Would it be any less if the person had eight or more if ten? Standing is standing. Maybe someone should have paid a troll toll before things got out of hand.
It may have felt less if they had 10,000
What argument are you trying to make? That big guys should steamroll little guys? That might makes right?
That's a grim worldview.
That's a grim worldview.
Elon had 400 million shares vs this guy's 9 shares (worth $153 in 2018). Can't you see how ridiculous this is?
So you do think might makes right. That's sad.
It’s not sad, voting by ownership stake is how nearly all companies are controlled.
This shareholder should completely have had his view steamrolled from a “what he thinks the company should do” perspective. However, he is definitely entitled to file a lawsuit if he thinks there was governance fraud.
This shareholder should completely have had his view steamrolled from a “what he thinks the company should do” perspective. However, he is definitely entitled to file a lawsuit if he thinks there was governance fraud.
And he did have his court case and for now he's won it (I'm sure it will be appealed). It seems like the legal system is working as intended in this instance.
So what are we even talking about?
So what are we even talking about?
Claiming that we think it’s sad that the 9 share holder has as much say as a million share holder is stupid.
This has nothing to do with him having a say in how the company is run.
This has nothing to do with him having a say in how the company is run.
What has "say" in this case is the law. That's why they had a court case. That's how it works.
Arguing that wealth puts you above the rule of law is what's stupid.
Arguing that wealth puts you above the rule of law is what's stupid.
And nobody said that. People are lamenting that having 9 shares gives you less say in anything
> And nobody said that.
That is precisely what's being said. Re-read the thread from the beginning.
> People are lamenting that having 9 shares gives you less say in anything
That's not what "lamenting" means.
That is precisely what's being said. Re-read the thread from the beginning.
> People are lamenting that having 9 shares gives you less say in anything
That's not what "lamenting" means.
> 3 days ago [–]. So you do think might makes right. That's sad
“Might makes right” is how literally every shareholder vote and by proxy how every share ownership company is driven. Might doesn’t make right for actual law violation, but that’s not what the comment scopes it to.
“Might makes right” is how literally every shareholder vote and by proxy how every share ownership company is driven. Might doesn’t make right for actual law violation, but that’s not what the comment scopes it to.
This Hacker News post is about a court case that Tesla and Musk lost.
You've lost track of the thread.
You've lost track of the thread.
I think it's more that a company should be controlled by the majority of its owners rather than a rando with 0.000001%
What's controlling the company here is the law. Do you think Tesla or Musk are above the rule of law?
No but the law can be imperfect.
What, you mean just like how Tesla and Musk can be imperfect? Maybe that's why they lost this court case.
Maybe it's why there was a court case in the first place.
Maybe it's why there was a court case in the first place.
Really strange that the court gave standing to this case. I guess I’d better start suing Joe Biden in court. He is ineligible to be on my state’s ballot. As an American citizen, I am aggrieved because he has violated his oath of office by refusing to defend the US border. /s
(Before I am tarred and feathered this is purely satire. But equivalent to the legal argument being discussed here)
(Before I am tarred and feathered this is purely satire. But equivalent to the legal argument being discussed here)
Why are you commenting on a legal issue if your knowledge of the law is so minimal that you don’t even know what the word “standing” means? Of course shareholders have standing to sue on corporate governance issues, even if their case has no merit.
If you really believe that you claims are legitimate, you should sue. And if the courts find that you are right, then they will remove him from the ballot. That's how it's supposed to work.
It doesn't matter what I believe, the court should have a higher standard when determining legal standing for cases like this. Otherwise it reduces overall faith in the US court system and undermines the rule of law.
Companies must respect the rights of all owners. Those companies are entirely free to limit ownership to only those who are willing to invest the equivalent of 10000 Tesla shares if they want (Berkshire Hathaway, for example, does this). Tesla knew they couldn't be a meme stock if they did that, though.
> the court should have a higher standard when determining legal standing for cases like this.
No, the court should have the same, identical standard for all cases. Equal access to the legal system and predictability are tenets of the rules of law.
No, the court should have the same, identical standard for all cases. Equal access to the legal system and predictability are tenets of the rules of law.
Anyone saying this package is unreasonable likely doesn't know that:
- This compensation package was approved, and he would only obtain payout if and only if Tesla reach some considerable aggressive milestones. - This was in 2018 when the company was not doing well relatively. - The shareholders at the time voted 74% in favour of the package.
- This compensation package was approved, and he would only obtain payout if and only if Tesla reach some considerable aggressive milestones. - This was in 2018 when the company was not doing well relatively. - The shareholders at the time voted 74% in favour of the package.
The company was worth 50 billion at the time, and the options (worth 2.6 Billion at the time) vested if the company hit a 650 billion valuation, plus revenue milestones.
Shareholders made 550 billion from performance, and Elon made 50 billion.
https://www.cnbc.com/2018/03/21/tesla-shareholders-approve-e...
Shareholders made 550 billion from performance, and Elon made 50 billion.
https://www.cnbc.com/2018/03/21/tesla-shareholders-approve-e...
The judge addresses all of these points and still came to the conclusion that the package was unreasonable.
> - This compensation package was approved, and he would only obtain payout if and only if Tesla reach some considerable aggressive milestones.
The judge points out that the package was approved by a committee consisting of close friends of Musk's who testified during the trial that they did not view the compensation negotiation as adversarial. They were not standing in for Tesla's shareholders, they were collaborating with the CEO to set his own compensation package.
> - This was in 2018 when the company was not doing well relatively.
The judge argues that this doesn't matter: Musk already had a nearly 22% stake in the company and had every reason to pursue its success. The board didn't need to offer him 6% of the future value of the company to keep him interested.
> - The shareholders at the time voted 74% in favour of the package.
The judge found that sharedholders were misled as to the independence of the people who put the package together, which meant that this vote could not be used as evidence of fairness.
A few relevant extracts:
> Delaware law allows defendants to shift the burden of proof under the entire fairness standard where the transaction was approved by a fully informed vote of the majority of the minority stockholders. And here, Tesla conditioned the compensation plan on a majority-of-the-minority vote. But the defendants were unable to prove that the stockholder vote was fully informed because the proxy statement inaccurately described key directors as independent and misleadingly omitted details about the process.
> The concept of fairness calls for a holistic analysis that takes into consideration two basic issues: process and price. The process leading to the approval of Musk’s compensation plan was deeply flawed. Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf. He had a 15-year relationship with the compensation committee chair, Ira Ehrenpreis. The other compensation committee member placed on the working group, Antonio Gracias, had business relationships with Musk dating back over 20 years, as well as the sort of personal relationship that had him vacationing with Musk’s family on a regular basis.
> At a high level, the “6% for $600 billion” argument has a lot of appeal. But that appeal quickly fades when one remembers that Musk owned 21.9% of Tesla when the board approved his compensation plan. This ownership stake gave him every incentive to push Tesla to levels of transformative growth—Musk stood to gain over $10 billion for every $50 billion in market capitalization increase. Musk had no intention of leaving Tesla, and he made that clear at the outset of the process and throughout this litigation.
> - This compensation package was approved, and he would only obtain payout if and only if Tesla reach some considerable aggressive milestones.
The judge points out that the package was approved by a committee consisting of close friends of Musk's who testified during the trial that they did not view the compensation negotiation as adversarial. They were not standing in for Tesla's shareholders, they were collaborating with the CEO to set his own compensation package.
> - This was in 2018 when the company was not doing well relatively.
The judge argues that this doesn't matter: Musk already had a nearly 22% stake in the company and had every reason to pursue its success. The board didn't need to offer him 6% of the future value of the company to keep him interested.
> - The shareholders at the time voted 74% in favour of the package.
The judge found that sharedholders were misled as to the independence of the people who put the package together, which meant that this vote could not be used as evidence of fairness.
A few relevant extracts:
> Delaware law allows defendants to shift the burden of proof under the entire fairness standard where the transaction was approved by a fully informed vote of the majority of the minority stockholders. And here, Tesla conditioned the compensation plan on a majority-of-the-minority vote. But the defendants were unable to prove that the stockholder vote was fully informed because the proxy statement inaccurately described key directors as independent and misleadingly omitted details about the process.
> The concept of fairness calls for a holistic analysis that takes into consideration two basic issues: process and price. The process leading to the approval of Musk’s compensation plan was deeply flawed. Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf. He had a 15-year relationship with the compensation committee chair, Ira Ehrenpreis. The other compensation committee member placed on the working group, Antonio Gracias, had business relationships with Musk dating back over 20 years, as well as the sort of personal relationship that had him vacationing with Musk’s family on a regular basis.
> At a high level, the “6% for $600 billion” argument has a lot of appeal. But that appeal quickly fades when one remembers that Musk owned 21.9% of Tesla when the board approved his compensation plan. This ownership stake gave him every incentive to push Tesla to levels of transformative growth—Musk stood to gain over $10 billion for every $50 billion in market capitalization increase. Musk had no intention of leaving Tesla, and he made that clear at the outset of the process and throughout this litigation.
The last part is an interesting argument because I don't understand the limiting principles. It would seem that any anyone who already has a lot of skin in the game can't be incentivized by more skin in the game.
It's not an interesting argument by itself, it's in conjunction:
1. The shareholders weren't aware of the lack of independence of those negotiating the deal with Musk, making the shareholder vote irrelevant 2. Because those negotiating the deal (and the board) weren't independent, it also follows that it cannot be assumed that the deal was fair 3. Because those negotiating the deal actively collaborated with Musk over setting the terms it opens a large possibility that the terms would be favourable to him 4. The deal was reasonably outlandish (compared to to other deals for CEOs), so it's hard to make the argument that a properly negotiated deal would have come anywhere close to the same level of compensation - this was hardened by the context that Musk already had significant incentive to perform.
It's impossible to know for certain that Musk would have performed if he hadn't been given 6%, but on the balance of probabilities it seems reasonable to expect that he would have performed if he'd only been given say 1%, or perhaps even nothing. The Judge has decided that a properly negotiated deal would have offered Musk less.
And of course Musk only ends up in this position of having the deal questioned because he put himself in a position where he exerts control over the board, the compensation committee _and_ didn't fully disclose these relationships to the shareholders.
1. The shareholders weren't aware of the lack of independence of those negotiating the deal with Musk, making the shareholder vote irrelevant 2. Because those negotiating the deal (and the board) weren't independent, it also follows that it cannot be assumed that the deal was fair 3. Because those negotiating the deal actively collaborated with Musk over setting the terms it opens a large possibility that the terms would be favourable to him 4. The deal was reasonably outlandish (compared to to other deals for CEOs), so it's hard to make the argument that a properly negotiated deal would have come anywhere close to the same level of compensation - this was hardened by the context that Musk already had significant incentive to perform.
It's impossible to know for certain that Musk would have performed if he hadn't been given 6%, but on the balance of probabilities it seems reasonable to expect that he would have performed if he'd only been given say 1%, or perhaps even nothing. The Judge has decided that a properly negotiated deal would have offered Musk less.
And of course Musk only ends up in this position of having the deal questioned because he put himself in a position where he exerts control over the board, the compensation committee _and_ didn't fully disclose these relationships to the shareholders.
I suppose the question isn't whether one would be incentivized at all by an additional grant, but whether the additional incentive would be worth the cost. Another question is whether one could get other benefits (e.g., attention/time guarantees) that may have a better return on the price.