Tesla’s directors have agreed to return a staggering $735 million to the company, settling claims that they were grossly overpaid in one of the largest shareholder settlements of its kind.
A retirement fund that owns Tesla stock filed a lawsuit in 2020 challenging stock options given to the directors starting in June 2017. The settlement is in response to that lawsuit.
Elon Musk’s $56 billion compensation package, which is subject to separate shareholder litigation, is unaffected by the settlement, which involves the equivalent value of 3.1 million Tesla stock options. A ruling in the Musk case is expected soon.
The directors, including Oracle co-founder Larry Ellison, reached the settlement to eliminate the risk of litigation for themselves and the company. Although they claimed they acted in good faith and in the best interests of Tesla shareholders, they agreed to settle to resolve the matter.
The lawsuit accused the directors of awarding themselves unfair and excessive compensation, with around 11 million stock options allegedly grossly exceeding corporate board norms between 2017 and 2020.
The Police and Fire Retirement System of the City of Detroit filed the case as a derivative lawsuit, which means that the settlement benefits the business. It marks one of the largest-ever derivative case settlements in the Court of Chancery, a major venue for shareholder litigation.
Tesla and Elon Musk have gained a reputation for vigorously defending themselves against lawsuits. The company argued that the directors’ compensation was aligned with investor goals, given Tesla’s unprecedented growth and a corresponding 10-fold increase in stock value.
As part of the settlement, the directors will not receive any compensation for 2021, 2022, and 2023, and the board will change the way compensation is determined moving forward. This landmark settlement represents a significant development in the ongoing efforts to address executive compensation issues and ensure alignment with shareholders’ interests.