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Re-vote on Elon Musk’s pay could expose Tesla to even more legal trouble

Tesla (TSLA) is likely in for some fresh legal entanglements after recommending that stockholders vote to reinstate CEO Elon Musk’s multibillion-dollar compensation package — no matter what the final tally reveals at the company's June annual meeting.

"I think regardless of whether the vote is approved or not, it's going to be challenged in the Delaware courts," said Marc Steinberg, a law professor at Southern Methodist University Dedman School of Law.

Because of the billions at stake, "chances are you're going to attract shareholder derivative and class-action type lawsuits," added Jerry Comizio, a business law professor at American University's Washington College of Law.

FILE - Tesla and SpaceX's CEO Elon Musk looks on, during an in-conversation event with Britain's Prime Minister Rishi Sunak at Lancaster House in London, Thursday, Nov. 2, 2023. Former CNN reporter Don Lemon mixed it up with Musk in an interview Lemon posted on Musk's X social network Monday, March 18, 2024. (AP Photo/Kirsty Wigglesworth, Pool, File)
Tesla CEO Elon Musk. (AP Photo/Kirsty Wigglesworth) (ASSOCIATED PRESS)

Musk's pay was struck down in January by a Delaware judge who found that Tesla's directors had breached their fiduciary duty when they awarded Musk the largest compensation opportunity ever granted to a public company executive. The ruling came after a shareholder sued to challenge the pay package.

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Musk's incentive-based pay, had it not been invalidated by the Delaware court, would now be worth roughly $47 billion following a fall in the value of Tesla’s stock. At the time of the ruling, it had been worth up to $56 billion.

Tesla used a preliminary proxy filing last week to ask shareholders to re-vote on this pay package, arguing it had cured the conditions that led Delaware Chancellor Kathaleen McCormick to void Musk’s compensation in January.

It did so, the board claimed, by forming a single-member special committee to evaluate Musk's pay package using independent director Kathleen Wilson-Thompson — and by following Wilson-Thompson's recommendation for a new shareholder vote that came after third parties assisted the company with "rigorous and thoughtful analysis."

McCormick threw out Musk’s pay because of what she called "extensive ties" between Musk and the people negotiating the pay package and a lack of public disclosure about Musk’s relationships with those who approved the deal.

In this courtroom sketch Tesla CEO Elon Musk, left, testifies before Chancellor Kathaleen McCormick, seated right, in a courtroom in Wilmington, Del., on Wednesday, Nov. 16, 2022. Musk is defending himself in a shareholder lawsuit challenging a compensation package he was awarded by the company's board of directors that is potentially worth more than $55 billion. A stenographer is seated at center. (Elizabeth Williams via AP)
In this courtroom sketch Tesla CEO Elon Musk, left, testifies before Delaware Chancellor Kathaleen McCormick, seated right, in 2022. A stenographer is seated at center. (Elizabeth Williams via AP) (ASSOCIATED PRESS)

The company is separately asking its shareholders to approve a move of Tesla’s incorporation from Delaware to Texas — a move called for by Musk after the Delaware judge voided his pay.

"2024 is the year that Tesla should move home to Texas," Tesla board chair Robyn Denholm said in her letter to shareholders included in the proxy statement.

Tesla argued to shareholders in its new filing that the reauthorization of Musk's pay is needed to incentivize Musk’s future leadership of Tesla.

"Because the Delaware court second-guessed your decision, Elon has not been paid for any of his work for Tesla for the past six years that has helped to generate significant growth and stockholder value," the company said in its filing.

Legal experts said those arguments might not be enough to keep shareholders from suing Tesla and the board all over again, arguing that the sole director who approved it was not independent enough from Musk.

Robyn Denholm, Chair of the Technology Council of Australia and Chair of the Board of Directors of Tesla Inc, during an address to the National Press Club of Australia in Canberra on Wednesday September 14th, 2022. (Photo by Alex Ellinghausen/Sydney Morning Herald via Getty Images)
Tesla board chair Robyn Denholm. (Photo by Alex Ellinghausen/Sydney Morning Herald via Getty Images) (Fairfax Media via Getty Images)

Shareholders could also argue that the company's disclosures around the deal still fell short.

Comizio cautioned that a company's analysis of executive compensation typically involves a company-initiated peer review that helps the board set CEO pay within an appropriate range and that without it, Tesla, to its peril, may have ignored deficiencies outlined by the Delaware court.

"At minimum, they've got to revamp the whole process of how they did this," Comizio said.

"When you adjust somebody’s compensation … if you’re doing a graph and the proposed compensation package looks like Mount Everest, that can be problematic."

Not all legal experts agree.

Gunster's corporate law expert Bob Lamm argued that Tesla may have a decent claim against that peer review standard. Historically, he said, superstar founders such as Apple’s (AAPL) Steve Jobs and Amazon’s (AMZN) Jeff Bezos have been largely exempt from that scrutiny.

"It's questionable whether there are any peers for Elon Musk," Lamm said. "So looking for comparable data is going to be tough."

Musk's compensation plan reached in 2018 was around 33 times larger than the largest pay package in history, according to Greg Varallo, the shareholders' attorney in the Delaware case. The prior record also belonged to Musk from a compensation deal reached in 2014.

The next step in this pay drama, before final votes are tallied on June 13, is a likely review of Tesla’s proxy filing by the Securities and Exchange Commission.

That review could require Tesla to amend its disclosure to shareholders about Musk’s proposed pay deal, according to Comizio.

At some point, however, there are no more disclosures to be made, Lamm said.

Business courts in Delaware and other states have wide discretion to address what they view as inequities between companies and shareholders, but they don’t have the liberty to simply object to the amount of an executive's pay.

"The problem that the courts have now is that they can’t say the [compensation] is too much," Lamm said. "And you can’t disclose everything. At some point, the court’s got to say: 'Tesla, you've done your job.'"

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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