Rosalind Evans
Tesla directors have agreed to repay $735 million to the corporation to settle a lawsuit accusing them of grossly overpaying themselves. The settlement, one of the largest of its kind, was declared in a Monday filing in a Delaware court.
The settlement effectively resolves a 2020 legal action from a retirement fund holding Tesla (TSLA) stock. The lawsuit contested stock options assigned to Tesla (TSLA) directors from June 2017 onward.
The settlement will not affect Elon Musk’s $56 billion compensation package, which shareholders are currently contesting in a separate lawsuit that went to trial last year. A decision on the Musk case is anticipated shortly.
According to court documents, the directorial team, which includes Oracle (ORCL) co-founder Larry Ellison, has agreed to return the equivalent value of approximately 3.1 million Tesla stock options.
Tesla did not comment on the matter. Despite asserting their actions were in good faith and the best interests of Tesla shareholders, the directors agreed to the settlement to mitigate potential litigation risks for themselves and the company, as indicated by court filings.
The directors allegedly granted themselves excessive compensation in the form of about 11 million stock options between 2017 and 2020, surpassing acceptable norms for a corporate board.
The lawsuit was initiated by the Police and Fire Retirement System of the City of Detroit in 2020. The settlement, paid to Tesla for the company’s benefit, is part of a derivative lawsuit, one of the largest ever settled in the Court of Chancery, a significant venue for shareholder litigation.
Tesla and Musk are known for vigorously defending against lawsuits. Musk has previously been successful in a defamation lawsuit, a case alleging securities law violations, and a shareholder lawsuit claiming he forced Tesla into purchasing SolarCity.
As part of the settlement over director compensation, the directors agreed to forego any remuneration for 2021, 2022, and 2023. Additionally, the board will revise its compensation determination process.
Tesla had defended the lawsuit by emphasizing the company’s exceptional growth, which resulted in a tenfold increase in the company’s stock price. This surge in stock value led to a steep rise in the stock options awarded to directors and Musk.
Tesla had previously stated that stock options were used as a tool to align the directors’ incentives with the interests of investors.
The legal resolution brings a significant chapter in Tesla’s history to a close, with the directors agreeing to forgo their compensation for the next few years and return a substantial amount to the company. It’s a development that could affect future lawsuits and corporate governance standards in the tech industry. The future of Tesla’s growth trajectory and its executive compensation strategies will remain areas to watch in light of this landmark settlement.
