Tornetta v. Musk

250 A.3d 793 (2019)

Purchase the Printed Copy at bsmsphd.com

Nature of the Case

To access this section all you need to do is click here and register.

Facts

P is a Tesla stockholder. He brings both direct claims on behalf of a putative class of Tesla stockholders and derivative claims on behalf of the Company. Tesla is a public Delaware corporation headquartered in Palo Alto, California. It designs, manufactures, and sells electric vehicles and energy storage systems. Tesla's Board comprised nine members. The Board's Compensation Committee were composed of three Board members. D is Tesla's largest stockholder. D owned approximately 21.9% of Tesla's common stock and served as Tesla's Chairman (from April 2004 until September 2018), CEO (since October 2008), and Chief Product Architect. Musk assumed his role as Tesla's CEO in 2008 and, at that time, was paid $1 per year annual salary with no equity compensation. D was awarded options that vested on a three-year schedule contingent on his continued service with Tesla. D also received options contingent on achieving certain operating milestones. After Tesla's initial public offering in 2010, D continued to receive $1 in annual salary with no equity awards in that year or 2011. In 2012, the Compensation Committee retained an outside consultant to review D's compensation. The Committee recommended, and the Board adopted, an entirely performance-based option award for D (the '2012 Award'). The 2012 Award consisted of ten tranches of stock options, each tranche representing 0.5% of Tesla's shares outstanding on the date of the grant. Vesting was contingent on Tesla achieving both a market capitalization milestone and an operational milestone. If the milestones were missed, D received nothing. The 2012 Award had a ten-year term; if a tranche did not vest within the term, it would expire. Within five years of the Board approving the 2012 Award, Tesla had achieved all of the market capitalization milestones and was on the verge of reaching all but one of the operational milestones. In 2018, in considering a new package, the Committee hired the same consultants and also solicited the advice of Tesla's other directors (excluding Kimbal Musk). The Committee wanted to keep D focused on Tesla given his other business interests such as SpaceX. The Compensation Committee proposed a 10-year grant of stock options that would vest in twelve tranches, again contingent upon reaching market capitalization and operational milestones. The full Board approved the Award at its January 2018 meeting. Attainment of the award would double market capitalization and increased revenue milestones range from $20 billion to $175 billion, and the adjusted EBITDA milestones range from $1.5 billion to $14 billion. Each tranche of the Award options held by D represents 1% of Tesla's current total outstanding shares. If every market capitalization and operational milestone is reached, options will vest with a maximum potential value of $55.8 billion. Tesla estimated the Award's preliminary aggregate fair value at $2.615 billion on its proxy statement. The Award was conditioned on the approval of a majority of the disinterested shares voting at a March 21, 2018, special meeting. The Award was approved by the shareholders, with 81% of voting shares and 80% of shares present and entitled to vote cast in favor. P demanded to inspect certain books and records relating to the Award pursuant to 8 Del. C. § 220. P filed his Complaint in which he asserts four claims: (1) a direct and derivative claim for breach of fiduciary duty against D in his capacity as Tesla's controlling shareholder for causing Tesla to adopt the Award; (2) a direct and derivative claim for breach of fiduciary duty against the Director Defendants for approving the Award; (3) a derivative claim for unjust enrichment against D; and (4) a derivative claim for waste against the Director Defendants. D filed a motion to dismiss the Complaint.