Tesla is currently involved in a potentially transformative litigation in US Corporate Law. The central question: Can the shareholders alter the decision of a judge concerning corporate transactions? This issue has cropped up at a time when the electric car maker is lobbying for a reversal of a 2018 court decision to scrap Musk’s $56bn pay deal.
Shareholders vs. The Court: The Final Call
For Tesla’s legal team, this is quite possibly the most extraordinary argument ever to be presented. They are urging Chancellor Kathleen McCormick of Delaware Chancery Court, who initially struck down Musk’s remuneration plan, to set aside her order made in the interest of Tesla’s shareholders. In June, these shareholders also endorsed the pay package for the second time which passes a nod to Musk’s ability as the chief executive.
The August hearing raised the issue for the first time, and, as Chancellor McCormick said, it is unprecedented for Tesla to make such a request. This opinion was echoed by Tesla’s attorney but he thought that the decision of shareholders should be the final one.
“This was stockholder democracy in action,” Tesla’s lawyer proclaimed.
However, many corporate law experts are not so sure that this argument will suffice to invoke any change of mind on the part of Chancellor McCormick. This could easily go up to the Supreme Court of the United States which would make this a very famous case in the annals of corporate governance.
The Doctrine of Shareholder Democracy See also: The Aircraft Investigator However, Friedman has a point when he alleges that in America the doctrine of ‘shareholder democracy’ means that shareholders through the board of directors dictate to CEOs how to manage companies and their affairs.
Tesla has submitted that the law of corporate control and corporate transactions, particularly directors’ remuneration, should be a shareholder’s prerogative rather than the court’s discretion. This is anchored on the principle of shareholders’ democracy, whereby the choice of the shareholders is regarded as supreme. Other states’ courts could learn from Delaware courts the fact that shareholder votes are still honored effectively in the latter, primarily because the latter gives serious credence to them.
I do not understand, for instance, how Delaware law can tell a company’s owners that they have no right to decide how much the CEOs should earn,” Rudolf Koch, an attorney for Tesla’s board, said during the most recent session.
At the most recent session, for instance, the attorney for Tesla’s board, Rudolf Koch argued that under Delaware law, a company’s owners cannot be told they cannot decide on the amount of money to pay the CEO.
Legal Hurdles for Tesla
As tempting as shareholder democracy is, Tesla’s case poses some strong legal barriers. Where experts look is the so-called ‘‘M&FW’’ line of cases in Delaware which established a specific procedure of destaining transactions with conflicted dominant shareholders. Therefore, companies such as Tesla have to adhere to certain regulations for example approval by shareholders if the company is to engage in substantive negotiations on pay packages.
The complication for Tesla is that these ‘purging’ steps should have been made before Musk signed his compensation agreement. New shareholder voting at Tesla did not take place until after McCormick had delivered her decision about the compensation package, and this raised more problems about the propriety of the timeframe of the voting process.
However, Tesla may have unnecessarily delayed filing for shareholder approval after the initial ruling which may be seen as unreasonable and therefore further hampering its case.
What’s Next for Tesla?
If Tesla loses its current arguments, then the company is probably to take the matter to the Delaware Supreme Court. There, they could perhaps decide that Musk was not a controlling shareholder and thus the provision of the pay deal to require shareholders’ approval was rendered void.
This case is nevertheless a good lesson on the importance that enterprises cannot afford to ignore sound governance structures. For most corporations, compliance with these standards guarantees that their transactions including executive remuneration policies are safe from judicial interference.
Indeed, as the corporate law professor Marcel Kahan of New York University avers, “If I am Jamie Dimon, and I read [McCormick’s] opinion, then I am not in the least little bit worried that compensation package I am working on [is] going to be at a risk.
