What if Musk Funds the TSLA BoD Settlement by Himself?

N.B.: much of what we write here derives from superb analysis of the TSLA comp cases by Chancery Daily, the invaluable Substack of an pseudonymous ("Chance"), informed, and entertaining observer of the Delaware Chancery Court. If you have any interest in what happens there, then we urge you to at least add your name to the mailing list, and even better subscribe.

Everyone by now should know the TSLA BoD proposed to settle a derivative suit alleging it paid itself improperly for a few years. The settlement will claw back $735 million in cash, shares, and options, one of the largest such deals ever in Delaware.

Among many questions about this proposal: could CEO Elon Musk pay the whole thing? Of course, he has the dough, but would the law allow it? More importantly, why would he do that?

Earlier, we outlined the proposed settlement, and addressed its corp gov reforms, specifically the director say-on-pay (DSoP) vote. We see a gap in the voting mechanics, which likely merit objection from TSLA shareholders. Here, we address the financial terms, which also likely merit objection.

As we said before, $735 million is a lot of money

The proposed settlement covers amounts paid and granted to the BoD from 2017-2020. Chancery Daily summarizes the dense legal prose in the settlement document to identify the cash, shares, and options, and how they amount to that huge figure. The BoD also agreed to receive no compensation in 2021-2022.

The proposal affects a total of twelve people. It covers eleven non-executive directors, including BoD Chair Robyn Denholm, Oracle CEO Larry Ellison, News Corp. CEO James Murdoch, Elon Musk's brother Kimbal, and seven others. It's also covers Elon Musk in his capacity as a director.

A commenter on Chancery Daily estimated this amount represents one-third of the compensation that the BoD received during the relevant time period. The parties to the settlement still need to argue this amount is appropriate, and we await eagerly those briefs (more below).

How to split the $735 million bill?

Chance thinks hard about the proposed settlement, and observes it has no mechanism for allocating that amount among the affected directors. They find this "weird" and have never "seen a settlement structured this way before."

Neither Chance nor we can find anything that would stop all eleven non-executive directors from allocating every last cent of the settlement to ... Elon Musk. He's a defendant, after all. Maybe they think he got them into this mess in the first place.

Suppose, though, Musk offered to fund all of it? Chance likens it to "sitting at a really expensive dinner and someone just throws down their Black card and says, 'I’ve got it.'" Why would Musk act so generously? Chance sets forth two very plausible reasons.

• It really cements BoD loyalty, or rewards them for their past loyalty.
• The BoD case may generate some interesting and explosive evidence that could really hurt Musk.

You see, Musk has another case pending in Delaware Chancery Court, about his own comp, both in front of Chancellor McCormick. That one seeks to claw back $55 billion. Chance sorts through the procedural history, and figures the BoD case unearthed documents that Musk badly does not want Chancellor McCormick to admit into evidence in his own comp case. Settling the BoD comp case should take care of that. Spending $735 million to protect $55 billion is definitely ... rational.

It also undermines completely the proposed settlement. That settlement seeks to hit those eleven directors hard, both financially and corp gov-wise. Earlier we showed how the corp gov changes may fail to allow shareholders meaningful authority over BoD comp. This lack of specificity about the damages allocation would remove the financial penalty, too.

Shareholder objections to the proposed settlement

The proposed settlement is scheduled for a hearing before Chancellor McCormick on October 13. TSLA shareholders may object to the proposal at the hearing, and must file objections with the Chancery Court by around September 21.

Shareholders have at least two solid objections: the DSoP vote is unenforceable, and the damages allocation may allow the independent directors to evade the financial consequences of their actions. As a TSLA shareholder, we plan to object on both grounds. Feel free to get in touch to share your views and plans.

For now, the parties will file briefs with their detailed arguments in support of the settlement later this week, on Aug 30. We guess these will cover how a clawback of one-third of the BoD comp makes sense, how the allocation will work, why the DSoP vote provides appropriate oversight of the BoD, and many other fascinating aspects of the proposal. We'll read these and report back.