Relatedly, the Court found that the compensation plan was not approved by a majority of independent directors, which similarly prevented deferential review under the business judgment rule. The Court pointed to Musk’s long-standing friendships and business relationships with Tesla’s outside directors, who attained great personal wealth due to their ownership of shares in Tesla or other Musk-backed ventures. The Court also found that the record supported that the outside directors in fact acted with a “controlled mindset.” They approached the process leading up to the plan’s adoption “as a form of collaboration” intended to reach a result that would seem fair to Musk—as opposed to an arm’s-length negotiation between parties with adverse interests. The Court emphasized the “absence of any evidence of adversarial negotiations” concerning the size of the plan or its other material terms. Indeed, Musk testified that a change to reduce the number of Tesla shares issuable to him was the result of “me negotiating against myself.”
The compensation plan was approved by an affirmative vote of a majority of disinterested stockholders (i.e., excluding Musk and his affiliates). The defendants argued that approval by Tesla’s stockholders supported that the transaction was fair. The Court disagreed, reasoning that the stockholder vote was not fully informed because Tesla’s proxy statement omitted material information. Tesla referred to its outside directors as “independent,” and it did not disclose the directors’ long-standing, lucrative relationships with Musk that gave rise to their potential conflicts of interest in considering his compensation. The Court further reasoned that the proxy statement should have disclosed Musk’s initial conversations with Tesla regarding the compensation plan, in which Musk proposed the material terms of the plan. The Court observed a description of that conversation was included in four drafts of the proxy statement, but it was omitted from the final version. The Court rejected the defendants’ argument that accurately disclosing the transaction’s economic terms was sufficient, particularly given that the omitted information was important to the accuracy of the proxy statement’s other disclosures concerning the transaction.
Regarding the substance of the plan, the defendants argued the plan was “all upside” for Tesla and its stockholders other than Musk. Specifically, for Musk to be able to acquire all of the shares under the twelve tranches, Tesla’s market capitalization had to increase to an amazing extent—from roughly $50 billion at the time of the plan to $650 billion—which it ultimately did. The Court reasoned, however, that in virtue of his 21.9% ownership, Musk already had “every incentive to push Tesla to levels of transformative growth.” The record evidence did not support that the plan was necessary to keep Musk as CEO. The plan did not require Musk to devote any particular amount of time to Tesla, as opposed to other projects. The Court also questioned whether the plan’s milestones were ambitious, because Tesla’s roughly contemporaneous projections supported that Tesla would probably meet most of the milestones if it successfully executed on its business plan.
The Court also rejected what it called a “hindsight defense”—that the fact Tesla had grown immensely and achieved the milestones supported that the plan worked. The Court stated the 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 [compensation plan] was solely or directly responsible for Musk’s efforts.” The Court reasoned this post hoc argument could not make up for the absence of contemporaneous evidence supporting the fairness of the compensation plan.
Because Musk’s compensation plan was not entirely fair to Tesla, the Court ordered that it be rescinded. The Court rejected Musk’s arguments that rescission would leave him uncompensated, because “Musk’s preexisting equity stake provided him tens of billions of dollars for his efforts.” The Court also reasoned that the defendants had not offered a viable alternative remedy short of leaving the entire compensation plan intact, and that any uncertainty as to the appropriate remedy could be resolved against them as the parties who breached fiduciary duties. The Court accordingly entered judgment in the plaintiff’s favor and directed the parties to confer on an order addressing the issue of attorneys’ fees payable to the plaintiff’s counsel.