Tesla’s (TSLA) court battle to recover Elon Musk’s pay raises an unresolved question that could rewrite the rules of corporate law: Can shareholders overrule a judge?
The electric car maker says the answer is yes.
The company is asking the same Delaware business court judge who invalidated Musk’s $56 billion CEO compensation agreement in January to overturn that decision and replace it with the will of the company’s shareholders, who approved the payment a second time in June.
“This has never happened before,” Delaware Circuit Court Judge Kathleen McCormick said at a hearing earlier this month.
Tesla’s attorney agreed, but said the new shareholder resolution should have the final effect.
“This has been a successful shareholder democracy,” he said.
Corporate lawyers expect that this offer will not be enough to change Chancellor McCormick’s decision.
They say the question at the heart of the case could go on appeal all the way to the U.S. Supreme Court.
“Purification”
Tesla’s argument is that shareholders, not judges, should decide corporate transactions. Otherwise, the broader business world will lose confidence in its ability to rely on the agreements it reaches with shareholders.
As a general rule, Delaware courts take shareholder votes seriously, which makes them inclined to defer the outcome of those votes.
“I don’t see how Delaware law can tell the owners of a company that they can’t” set CEO pay, Rudolph Koch, a lawyer for Tesla’s board of directors, said during an August hearing before McCormick.
But what could stumble Tesla is that it may have missed some steps that could have made the shareholder lawsuit moot.
Legal experts point to a series of cases in the state’s business court known as M&FW A collection of cases that illustrate the path Tesla could have taken, but didn’t.
The decisions in those cases held that even when a corporate transaction involved a conflicted controlling shareholder — as the judge ruled in the Musk and Tesla case — it was possible for the company to “cleanse” the deal with the right kind of shareholder vote.
But here’s the potential problem: Case law suggests Musk must have met the conditions for clearance. before He engaged in substantive negotiations with Tesla over his salary deal and conditioned the deal on shareholder approval, according to New York University Law School professor Marcel Kahan.
It would be hard for Musk to prove that. No new negotiations appear to have taken place before Tesla resubmitted Musk’s payout deal to shareholders in June.
There’s still another problem: Even if Judge McCormick finds that Tesla’s second vote “cleansed” Musk’s pay deal, she may simply find that Tesla waited too long before holding the runoff vote.
Corporate law attorneys said the Delaware Chancery Court takes into account the timing and reasonableness of corporate actions, and may not tolerate Tesla waiting until after a judge has ruled against it to seek new shareholder approval.
Regardless of the outcome, Tesla could appeal the defeat to the Delaware Supreme Court. Those judges, Kahan said, could rule that Musk was not a controlling shareholder and that the shareholder consent clause doesn’t apply.
He added that many companies do not have to worry about how this case will end because most of them adhere to good governance policies that protect them from having their transactions cancelled by a judge.
“So if you are [JPMorgan CEO] Jamie Dimon, I’m reading [McCormick’s] From my perspective, I’m not at all worried that my compensation package will be at risk.”
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on X @alexiskweed.
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