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It definitely is the court's place to rule on excessive compensation packages. Musk and the board have fiduciary responsibilities to the other shareholders. The

by jjeaff 3y ago

It definitely is the court's place to rule on excessive compensation packages. Musk and the board have fiduciary responsibilities to the other shareholders. The other shareholders can sue if they believe they are being stolen from. The court found that there had been no real process to decide if that much compensation was in the best interest of the shareholders because it seems they are all just Musk puppets.

leereeves 3y ago
Musk more than met his fiduciary responsibilities when he increased the stock value tenfold. In what world is that not in the best interest of the shareholders? And wasn't the board elected by the shareholders? It seems likely that the shareholders supported Musk so they chose a board that also supported him. What's wrong with that? (Unless Musk somehow selected the board without shareholder approval, which I agree would be wrong.)
- aw1621107 3y ago
  > Musk more than met his fiduciary responsibilities when he increased the stock value tenfold. The important part is not the absolute benefit, but the proportion of benefit to cost. Elon's pay package was 12% of total outstanding shares at some point in time; would he/the board have still met his fiduciary responsibilities if the pay package were 15% of total outstanding shares? 20%? 50%? 100%? 200%? Higher? And what about the other direction? Wouldn't shareholders have benefited even more if they had received the same increase in shareholder price but only giving Musk 11% of outstanding shares? What about 10%? 8%? 5%? 2%? 0%? More to the point, there's some limit to how many shares could be granted to Elon, as at some point the dilution is too severe even if the share price skyrocketed the same way. And on the other side, there might be a point where the offered compensation is too low, so you may not see a benefit. The issue was that there was no effort to find the best cost/benefit ratio (or even a good cost/benefit ratio) for the shareholders, and since the deal was assumed to be unfair and the burden of proof was on Elon/Tesla to prove their price was fair, that results in the package being rescinded. > And wasn't the board elected by the shareholders? Sure, but that doesn't necessarily mean the board has the shareholders' best interests in mind for every action they take. As an example, the board composition was mostly the same during the SolarCity acquisition as when negotiating the 2018 compensation plan, but the board behaved very differently during the acquisition (e.g., pushing back on Elon's asks), so they were deemed to be sufficiently independent for that transaction. > What's wrong with that? It works as long as "supporting Elon" happens to be what works in the shareholders' interest, but there's no reason the two have to be the same thing.
  - leereeves 3y ago
    > the board behaved very differently during the acquisition (e.g., pushing back on Elon's asks), so they were deemed to be sufficiently independent for that transaction. So they were not "Musk puppets". If they had been, they would not have been capable of pushing back at any time. Why was the deal assumed to be unfair? And how could anyone prove that a deal was fair?
    - aw1621107 3y ago
      > So they were not "Musk puppets". If they had been, they would not have been capable of pushing back at any time. What the board could have done counts for very little, if anything. All that matters is what they did (or in this case, did not) do. > Why was the deal assumed to be unfair? That's what Delaware law/precedent requires given the facts of the case. The judge found Musk to be effectively in control of the company for the purposes of the transaction, which made it a conflicted-controller transaction. Under Delaware law, those types of transaction are subject to the highest level of judicial scrutiny - the "entire fairness" standard - where both the process (how the deal was made) and the price (the terms of the deal) need to be proven fair. By default, the burden of proof rests on the defendants (Musk/Tesla, in this case), but Delaware law allows the burden of proof to be shifted to the plaintiffs by using a well-functioning committee of independent directors and/or through a fully-informed stockholder vote (IIRC the opinion says either one suffices, but I've seen commentary that seems to state both are needed, so I'm not sure what the exact conditions are). The judge found that the compensation committee was not well-functioning and that the directors on it were not independent. In addition, she ruled that the shareholder vote was not fully informed due to material deficiencies in the proxy Tesla sent out. As a result, Musk/Tesla failed to meet the requirements to shift the burden of proof. If they had succeeded in shifting the burden of proof, the deal would be assumed to be fair, and the plaintiff would need to show the deal was unfair. > And how could anyone prove that a deal was fair? They'd need to show the process and the price were fair. The former includes looking at the initiation, timing, structure, negotiation, and approval of the process, and while the latter does seem vague in comparison it seems to involve showing the court that the price paid falls within a range of fairness. In fact, Tesla faced the same challenge of proving entire fairness during the SolarCity acquisition and succeeded. They showed that the price they paid was fair (enough), and despite flaws in the process there were enough elements of fairness in the process to avoid dooming the deal.

by jjeaff 3y ago

leereeves 3y ago

Musk more than met his fiduciary responsibilities when he increased the stock value tenfold. In what world is that not in the best interest of the shareholders? And wasn't the board elected by the shareholders? It seems likely that the shareholders supported Musk so they chose a board that also supported him. What's wrong with that? (Unless Musk somehow selected the board without shareholder approval, which I agree would be wrong.)

aw1621107 3y ago
> Musk more than met his fiduciary responsibilities when he increased the stock value tenfold. The important part is not the absolute benefit, but the proportion of benefit to cost. Elon's pay package was 12% of total outstanding shares at some point in time; would he/the board have still met his fiduciary responsibilities if the pay package were 15% of total outstanding shares? 20%? 50%? 100%? 200%? Higher? And what about the other direction? Wouldn't shareholders have benefited even more if they had received the same increase in shareholder price but only giving Musk 11% of outstanding shares? What about 10%? 8%? 5%? 2%? 0%? More to the point, there's some limit to how many shares could be granted to Elon, as at some point the dilution is too severe even if the share price skyrocketed the same way. And on the other side, there might be a point where the offered compensation is too low, so you may not see a benefit. The issue was that there was no effort to find the best cost/benefit ratio (or even a good cost/benefit ratio) for the shareholders, and since the deal was assumed to be unfair and the burden of proof was on Elon/Tesla to prove their price was fair, that results in the package being rescinded. > And wasn't the board elected by the shareholders? Sure, but that doesn't necessarily mean the board has the shareholders' best interests in mind for every action they take. As an example, the board composition was mostly the same during the SolarCity acquisition as when negotiating the 2018 compensation plan, but the board behaved very differently during the acquisition (e.g., pushing back on Elon's asks), so they were deemed to be sufficiently independent for that transaction. > What's wrong with that? It works as long as "supporting Elon" happens to be what works in the shareholders' interest, but there's no reason the two have to be the same thing.
- leereeves 3y ago
  > the board behaved very differently during the acquisition (e.g., pushing back on Elon's asks), so they were deemed to be sufficiently independent for that transaction. So they were not "Musk puppets". If they had been, they would not have been capable of pushing back at any time. Why was the deal assumed to be unfair? And how could anyone prove that a deal was fair?
  - aw1621107 3y ago
    > So they were not "Musk puppets". If they had been, they would not have been capable of pushing back at any time. What the board could have done counts for very little, if anything. All that matters is what they did (or in this case, did not) do. > Why was the deal assumed to be unfair? That's what Delaware law/precedent requires given the facts of the case. The judge found Musk to be effectively in control of the company for the purposes of the transaction, which made it a conflicted-controller transaction. Under Delaware law, those types of transaction are subject to the highest level of judicial scrutiny - the "entire fairness" standard - where both the process (how the deal was made) and the price (the terms of the deal) need to be proven fair. By default, the burden of proof rests on the defendants (Musk/Tesla, in this case), but Delaware law allows the burden of proof to be shifted to the plaintiffs by using a well-functioning committee of independent directors and/or through a fully-informed stockholder vote (IIRC the opinion says either one suffices, but I've seen commentary that seems to state both are needed, so I'm not sure what the exact conditions are). The judge found that the compensation committee was not well-functioning and that the directors on it were not independent. In addition, she ruled that the shareholder vote was not fully informed due to material deficiencies in the proxy Tesla sent out. As a result, Musk/Tesla failed to meet the requirements to shift the burden of proof. If they had succeeded in shifting the burden of proof, the deal would be assumed to be fair, and the plaintiff would need to show the deal was unfair. > And how could anyone prove that a deal was fair? They'd need to show the process and the price were fair. The former includes looking at the initiation, timing, structure, negotiation, and approval of the process, and while the latter does seem vague in comparison it seems to involve showing the court that the price paid falls within a range of fairness. In fact, Tesla faced the same challenge of proving entire fairness during the SolarCity acquisition and succeeded. They showed that the price they paid was fair (enough), and despite flaws in the process there were enough elements of fairness in the process to avoid dooming the deal.