On January 30, 2024, the Delaware Court of Chancery struck down Tesla CEO Elon Musk’s $55 billion performance-based stock option package, ruling that Tesla’s directors did not satisfy the stringent “entire fairness” standard in approving his compensation.
This case comes on the heels of a $735 million settlement in which Tesla directors disgorged previously-received compensation following shareholder claims of unjust enrichment and breach of fiduciary duty. The court applied the entire fairness standard because of Musk’s enormous control over the transaction, referring to him as a “Superstar CEO” who wielded maximum possible influence over the board. Tesla’s board retained the burden to demonstrate entire fairness despite submitting the compensation package to a shareholder vote because the court concluded proxy disclosure was deficient and therefore shareholders were not fully informed. Ultimately, the Tesla board was not able to prove the benefit received from Musk’s leadership was worth the $55 billion Tesla paid for it.
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