While Elon Musk has been in the news of late for any number of other reasons, there is one worth noting both for its sheer scale and two related court decisions.

The board of Tesla initially granted Musk performance contingent share options that had an initial value of approximately $56 billion over a 10-year plan period. The grant was worth around $100 billion in February, but as a reminder of option grant fickleness, is lower at present.

While a majority of shareholder votes approved the equity grant, one shareholder brought legal action to challenge it.

In January 2024 the Delaware Court of Chancery ordered rescission of the share option grant that had been approved by Tesla’s board and its shareholders. The options had already vested as the performance conditions had been met. Performance conditions for some tranches were arguably modest.

As the court decision eliminated the Tesla CEO’s total remuneration, the board went back to the shareholders with more detail around the equity plan and details of the Court’s decision to get approval for the equity plan based on the more fulsome disclosure. The shareholders again voted in favour of the plan. Given this favourable view of the shareholders, Tesla asked the Court to revise its decision to rescind the equity plan.

In December 2024, the Court denied that request.

A high-level summary of the Court’s reasons for the rescission of the equity plan include:

• The controlling effect of the founder/large shareholder and the significant quantum of the equity grant made it highly unusual.
• The Court found that the Tesla directors’ testimony about the compensation process being a cooperative one with Musk “came as close to admitting a controlled mindset as it gets.”
• The directors were not independent of Musk.
• The shareholder vote was not fully informed.

Australia is, like the US, blessed with entrepreneurs and has a reasonable share of founder led public ASX listed companies. While there has been nothing as comparable to the Tesla case in terms of scale, there has been, over the decades, instances of shareholder remuneration angst with some of these companies.

A checklist for Australian board directors dealing with these types of circumstances includes:

• Is the executive remuneration reasonable as required by Section 211 of the Corporations Act 2001 (the Act)? If it is not reasonable, then shareholder approval is required.
• Shareholder approval is not required if the remuneration is reasonable having regard for the circumstances in which the remuneration is being provided.
• Have the Acts’ requirements in relation to directors’ and executives’ conflicts of interest been satisfied?
• What steps have been taken to be satisfied that CEO and executive remuneration is reasonable?
  • Who has structured and proposed the quantum and incentives structure?
  • Has independent third-party advice been sought?
  • Who sought the advice – management or the board?
  • Is the remuneration supported by robust market analyses?
  • Was the remuneration process a negotiation, or a compromise?
  • Is it material to current value, contingent value or cash earnings per share?
  • Is there a risk of executive turnover and inadequate succession prospects likely to result in loss of value?
  • Has the process been overseen by independent directors?

For some interesting reading on the first and second Musk cases see this Harvard Law School Forum article (see HERE).

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