One of the last chapters in Elon Musk’s six-year legal fight to save his $56 billion Tesla Inc. pay package unfolded Friday, as the world’s richest man made his final pitch to a judge that ruled the compensation deal was flawed and threw it out.
Delaware Chancery Court Judge Kathaleen St. J. McCormick heard arguments on whether a June 13 vote by shareholders to revive the compensation plan for Tesla’s co-founder justifies changing her ruling. Earlier this year, she found the largest executive-pay package in history was fouled by conflicts of interest and improper disclosures.
“We’re asking you to give effect to the vote,” Tesla lawyer David Ross said during the hearing. Just because the board used a flawed process for setting Musk’s pay, stakeholders “shouldn’t be foreclosed” from deciding to ratify the compensation package, he said.
However, under questioning from McCormick, Ross acknowledged an investor vote had never been used to affect a post-trial ruling under Delaware law. The judge has no legal obligation to recognize the vote, but she can consider it. If she sticks with her earlier decision, Musk, Tesla’s chief executive officer, can finally appeal the decision to the Delaware Supreme Court.
“The real question is whether shareholders can ratify” breaches of legal duties by directors after a judge has called them out after a trial, McCormick said during the hearing, signaling her skepticism of arguments made by Musk and Tesla.
Musk’s lawyers argue the proxy vote by Tesla investors addressed concerns raised by the judge, including those about company directors who approved the pay plan being beholden to the billionaire and not looking after shareholders’ interests.
Rudolf Koch, a lawyer for Tesla’s board, said if McCormick brushes aside the June proxy vote, she would be at odds with the state’s corporate-law statutes that focus on protecting shareholders. “I don’t see how Delaware law can tell owners of a company that they can’t make” their own decision on how much the CEO should be paid, Koch told the judge.
Attorneys for Richard Tornetta, a Tesla investor who challenged Musk’s pay as a waste of corporate assets, argued the shareholder vote was irrelevant to the case and that the company’s maneuvers to address problems identified by the judge were inadequate.
In legal filings, Tornetta’s lawyers argued the latest proxy vote was tainted by Musk’s threats to walk away from Tesla if his pay plan wasn’t resurrected and take with him some of the company’s Artificial Intelligence assets.
During the hearing, Greg Varallo, Tornetta’s lead attorney, said there are serious questions about the the legitimacy of the most recent shareholder vote.
“Our law doesn’t say shareholders can overrule courts,” Varallo said, adding that the defense arguments, while creative, are at odds with existing corporate statutes.
McCormick said she’d try to return her decision in the case in “a timely fashion.” The ruling also will include her decision on a request by Tornetta’s lawyers to have their legal fees for winning the case paid with $7 billion in Tesla stock.
McCormick’s courtroom in Wilmington, Delaware, was packed with lawyers, reporters and onlookers for what may be the last hearing in a case that began with Tornetta’s lawsuit in 2018. Neither Musk nor Tornetta were in attendance.
The unprecedented court case has drawn world-wide attention. More than 8,000 Tesla shareholders sent letters to McCormick sharing their opinions on her pay ruling. And Musk was so upset by the judge’s decision to block the pay packages that he moved Tesla’s state of incorporation out of Delaware to Texas.
The case is Tornetta v. Musk, 2018-0408, Delaware Chancery Court (Wilmington).
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