The directors of Tesla have agreed to return a staggering $735 million to address allegations of overpayment, concluding a contentious legal battle with a pension fund. The lawsuit, filed by the Police and Fire Retirement System of the City of Detroit in 2020, contested the stock options granted to directors in June 2017, claiming that they had granted themselves excessive compensation at the expense of shareholders.
The directors, including notable figures like Larry Ellison, have been ordered to refund the equivalent of 3.1 million Tesla stock options, marking one of the highest settlements ever reached in a derivative case before the Court of Chancery.
Throughout the legal proceedings, the directors have maintained that their actions were in good faith and in the best interests of the stockholders. However, they chose to settle to avoid potential litigation risks and to put the matter to rest.
It is crucial to note that this settlement is unrelated to another ongoing legal challenge regarding Tesla CEO Elon Musk’s $56 billion compensation package. That separate litigation remains under scrutiny, but it will not be affected by this agreement.
In the initial lawsuit, the Police and Fire Retirement System of the City of Detroit accused Tesla’s directors of granting themselves excessive compensation through approximately 11 million stock options between 2017 and 2020. The derivative action was filed on behalf of Tesla’s shareholders, alleging that the board had acted inappropriately by enriching themselves through these stock options.
Despite Tesla’s well-known reputation for vigorously defending itself and its CEO, Elon Musk, in high-profile cases such as defamation and securities law violations, the company chose not to prolong this particular legal dispute. Tesla cited its unprecedented growth, soaring stock price, and strategic use of stock options to align directors’ incentives with the company’s long-term investor objectives.
As part of the settlement, the directors agreed to forego compensation for the years 2021, 2022, and 2023. Additionally, the Tesla board plans to revise its compensation determination process to ensure greater transparency and accountability moving forward.
The resolution of this lawsuit sets a significant precedent for shareholder claims of overpayment and executive compensation practices within publicly traded companies. Tesla’s decision to resolve the matter through a substantial financial settlement and corporate governance changes underscores the importance of addressing shareholder concerns promptly and comprehensively.