By Tom Hals
WILMINGTON, Delaware (Reuters) – Tesla appears to have convinced an army of small investors and major funds to ratify Elon Musk’s $56 billion pay package. Now comes the harder part: convincing an already skeptical Delaware judge to recognize it.
Musk said Wednesday evening that shareholders voted in favor of both the pay package and a board-sponsored move of Tesla’s legal home from Delaware to Texas. The official voting results will be announced Thursday at the company’s annual meeting.
Musk is the driving force behind Tesla and responsible for many of its advances, which has led to vocal support for the compensation package, especially among small shareholders. Still, sales and the share price have fallen recently, adding to the concerns that led to a collective ‘no’.
Before Tesla can give shares to Musk, there will likely be months of litigation over the wage ratification vote, Musk’s efforts to rally shareholders in support of his compensation, and the appeal of the original ruling four months after a Delaware judge had declared the pay package null and void.
An ultimate legal outcome in Musk’s favor is not certain and will not be soon.
Judge Kathaleen McCormick of the Court of Chancery in Delaware rescinded the pay package in January because she found Musk improperly controlled the board’s 2018 process for negotiating it. She also ruled that Tesla had failed to fully inform investors before voting for it.
“A shareholder vote would not result in an automatic reversal of Chancellor McCormick’s decision. We are in uncharted waters here,” said Samantha Crispin, corporate lawyer at Baker Botts.
The way Tesla sees it, Thursday’s shareholder vote essentially went back in time and corrected the 2018 shareholder vote by releasing massive amounts of information to investors, including McCormick’s 200-page ruling.
Tesla argued that it also corrected the problem of Musk’s dominance in the pay package negotiation process. A special committee was set up, ultimately consisting only of Kathleen Wilson-Thompson, an independent board member, who reviewed the 2018 pay deal and decided it was in the best interests of shareholders.
But Tesla also acknowledged in securities filings that favorable ratification might not resolve the pay dispute. Ratification is mainly seen as a tool for solving problems such as technical problems in business documents.
Many major shareholders and some smaller shareholders voted against the pay package, frustrated by the size of the reward, slowing business at Tesla and Musk’s growing list of distractions, including companies in rocketry, AI, social media, neuroscience and tunnel digging.
At least one shareholder has already filed a legal challenge to the vote.
The lawsuit in the Court of Chancery in Delaware by Tesla investor Donald Ball accused Musk of using “strong, coercive tactics” to get his pay package approved. It cited Musk posts on his social media platform
But Tesla and Musk will likely argue that Musk should be allowed to express his desire to leave the company.
Professor Zohar Goshen of Columbia Law School said he believed the Delaware court’s decision should reverse itself after a yes vote, but acknowledged the situation was too unusual to comment on that.
“It is difficult to estimate how the court will rule, because there is too much fuss surrounding this decision. But my personal opinion is that Tesla should succeed,” Goshen said.
(Reporting by Tom Hals in Wilmington, Delaware; additional reporting by Rachael Levy in Washington; Editing by Peter Henderson and Matthew Lewis and Miral Fahmy)
