In 2017, Tesla’s market capitalization hovered around US$50 billion and it was the U.S.’s most shorted stock: the market was betting decisively against Elon Musk.
But by October 2021, and on the heels of a performance-based equity-compensation plan awarded by the Tesla board to Musk and subsequently approved by shareholders in March 2018 (the Plan), Musk propelled Tesla to stratospheric valuations exceeding US$1 trillion.
Observers can therefore be forgiven for being surprised by the Delaware Court of Chancery’s decision to rescind the Plan in Tornetta v. Musk et al, issued at the end of January.
What is the key takeaway?
Writing in Lexpert, we explain that corporate law doesn’t prohibit “supersized” compensation for “superstar” executives, but it does impose specific procedural checks and balances.
Provided it is the result of a robust process led by truly independent directors advised by external experts, and assuming meaningful disclosure to shareholders, a supersized compensation plan granted to a superstar CEO should, if challenged, find judicial approval.
