Delaware Chancery court judge Kathaleen McCormick has denied Tesla’s request to revise her decision to strike down CEO Elon Musk’s $56 billion pay package — despite shareholders voting at the company’s annual meeting this year to “re-ratify” the deal.
Her decision, laid out in a 103-page opinion piece published on Monday, explains that the attempt by Tesla’s legal team — which Musk has called “hardcore” — to change her mind contained multiple flaws, each of which were fatal on their own.
“The large and talented group of defense firms got creative with the ratification argument, but their unprecedented theories go against multiple strains of settled law,” McCormick wrote.
Tesla has been expected to appeal to the Delaware Supreme Court since McCormick’s initial opinion was issued in January. Since then, though, the company has reincorporated from Delaware to Texas. Musk is also now a sort of right-hand man to President-elect Donald Trump, raising all kinds of questions about his priorities as the United States heads into a new administration.
McCormick also awarded the plaintiff’s attorneys a $345 million fee — payable in cash or Tesla shares — that is eye-popping but still a fraction of the $5.6 billion those lawyers requested earlier this year.
Tesla awarded the compensation package to Musk in 2018, at a time when the electric automaker was in crisis. It laid out a series of stock price milestones that Tesla would have to hit in order for Musk to unlock the full value of the package — milestones the company easily cleared in the following years as Tesla ramped up its Model 3 and Model Y programs.
A former corporate defense lawyer (and thrash metal drummer) Richard Tornetta sued Tesla over the deal. His lawyers argued that shareholders were misinformed because the company and its board of directors were under such great influence from Musk that the negotiations surrounding the package were lopsided. There was a trial, and Judge McCormick explained in her January opinion that she found the core of Tornetta’s argument to be true.
Tesla put the opinion to a vote at its shareholder meeting this June, in an attempt to re-litigate the deal in the court of public opinion.
The company released a whole new proxy statement that included McCormick’s January opinion and argued that it would now fully inform the shareholders as they set out to vote a second time. They approved the re-ratification by a margin of more than two to one, and Tesla’s lawyers tried to use this to convince the judge to change tack.
But McCormick wrote Monday that Tesla’s legal team has “no procedural ground for flipping the outcome of an adverse post trial decision based on evidence they created after trial.” That was one “fatal flaw,” she said. The second is more procedural: Tesla’s legal team considered the vote a “common-law” ratification, which is an affirmative defense, and those can’t be raised after a post-trial opinion is released.
Third, McCormick challenged the common-law ratification idea on its face. While Tesla’s lawyers argued that “stockholders hold the power to adopt any corporate acts they deem in their own best interests,” McCormick said this idea is “dubious generally and unquestionably false in the context of” how Tesla’s governance was essentially captured by Musk.
Fourth, McCormick said that “even if the Stockholder Vote could have a ratifying effect on the Grant, it could not here due to multiple, material misstatements in the Proxy Statement concerning the effect of the vote.”
