Lawyers for Elon Musk and Tesla Inc.’s directors are seeking to overturn a Delaware judge’s ruling that ordered the company to back out of Musk’s massive and unprecedented compensation package.
Friday’s hearing followed a January ruling in which Chief Justice Katherine St. Jude McCormick concluded that Musk engineered a landmark compensation package in 2018 in sham negotiations with non-independent directors. The package was initially pegged at its peak at around $56 billion, but the figure has fluctuated over the years and is now estimated to be worth more than $60 billion.
Following the court’s ruling, Tesla shareholders met in June and again overwhelmingly approved Musk’s 2018 compensation package.
The lawyers said the vote made clear that Tesla shareholders were fully aware of the flaws in the 2018 process that McCormick cited in his January ruling, but remained adamant that Musk was entitled to his compensation package.
“Respecting titles is a testament to the strength of our corporate system,” David Ross, a lawyer for Musk and the other defendants, told McCormick. “It’s a testament to shareholder democracy at work.”
Ross told the judge that the defendants were not disputing the judgment’s factual findings or legal conclusions, but were simply seeking to vacate the order directing Tesla to withdraw the compensation package.
But McCormick appeared skeptical of the defense’s arguments, peppering the lawyers with questions and pointing out that there is no precedent under Delaware law for a post-trial shareholder vote to approve a judgment of breach of fiduciary duties by corporate directors.
“This has never been done before,” she said.
The defense argued that, while it could not find an exact comparable case, Delaware law has long permitted shareholder approval as a remedy for errors in corporate governance and has long recognized the “sovereignty” of shareholders as the ultimate owners of a corporation.
“Frankly, I don’t understand how Delaware law can say that the owners of a company don’t have the right to make decisions,” Tesla lawyer Rudolf Koch said.
Donald Verrilli, an attorney representing an individual Tesla shareholder who owns more than 19,000 shares, suggested it was wrong for one shareholder to thwart the will of the majority of Tesla shareholders by filing the lawsuit. At the time the lawsuit was filed, the plaintiffs held just nine Tesla shares.
“The opinion of the majority of shareholders should be given weight… This lawsuit does not represent the interests of shareholders,” Verrilli said.
Thomas Grady, a lawyer for the Florida opposition group that owns or controls about 8 million Tesla shares, worth about $2 billion, argued that McCormick would have to “disenfranchise” all other Tesla shareholders to rule in the plaintiffs’ favor.
Lawyers for the plaintiffs, who are seeking unprecedented legal fees in the form of Tesla shares worth more than $5 billion, were scheduled to hear arguments on Friday afternoon.
