Tesla Directors Will Return $735 Million to Company to Settle Shareholder Suit
In one of the largest shareholder settlements of its kind, Tesla directors have agreed to return $735 million to the company to resolve claims of grossly overpaying themselves. According to a court filing in a Delaware court on Monday, the settlement stems from a 2020 lawsuit brought by a retirement fund holding Tesla (TSLA) stock, challenging stock options granted to Tesla directors beginning in June 2017.
The settlement, which involves the equivalent value of 3.1 million Tesla stock options, will not affect Elon Musk’s $56 billion compensation package, which is the subject of a separate lawsuit by shareholders. The outcome of the Musk case, which went to trial last year, is expected to be determined soon.
Among the directors returning compensation are Larry Ellison, the co-founder of Oracle (ORCL). The directors maintain they acted in good faith and in the best interests of Tesla shareholders, but they opted to settle to avoid the risk of further litigation for both themselves and the company.
The lawsuit accused the directors of granting themselves unfair and excessive compensation, involving approximately 11 million stock options between 2017 and 2020 that allegedly greatly surpassed norms for a corporate board.
The Police and Fire Retirement System of the City of Detroit initiated the case in 2020, and the settlement payment will benefit Tesla as a type of derivative lawsuit. The settlement is one of the largest ever for a derivative case in the Court of Chancery, a major venue for shareholder litigation.
Tesla and Musk are known for vigorously contesting lawsuits, with Musk successfully prevailing in a defamation lawsuit, a case alleging securities law violations, and a shareholder lawsuit accusing him of pressuring Tesla to acquire SolarCity.
In addition to returning compensation, the directors agreed not to receive any further compensation for 2021, 2022, and 2023, and the board will adopt a new method for determining compensation.
Tesla had argued in defense of the lawsuit that the company experienced an almost unprecedented growth, leading to a tenfold increase in its stock price. As the stock value rose, so did the value of stock options granted to the directors and Musk. Tesla asserted that it used these stock options to align the directors’ incentives with the interests of investors.
