Tesla attempts legal 'Band-Aid' to reinstate Musk's huge salary contract

Tesla (TSLA.O) opens in new tab Elon Musk uses opaque corporate law provisions to punish Musk An untested move to reinstate his $56 billion pay package, legal experts said, could land the company in litigation again.

The electric car maker proposed Wednesday that Musk's 2018 pay agreement be subject to a shareholder vote, despite it being invalidated by a Delaware judge in January.

Tesla is taking advantage of a little-known provision in Delaware corporate law that allows companies to correct procedural deficiencies that could undermine board decisions.

Tesla called the approach "novel" in a securities filing and said the special board committee that approved it could not predict how it would be treated under Delaware law.

Eric Talley, a professor at Columbia Law School, said the provision was intended as a "band-aid" for technical errors in board meetings, not to overturn important court decisions.

Tesla said in its proposal that Delaware Chancellor Katherine McCormick's ruling found Tesla directors lacked independence when they recommended an "incalculable" package and failed to negotiate with Musk. Thousands of shareholders said they were furious.

After years of litigation and a week-long trial, McCormick has decided to withhold these and other important details from investors before they vote to approve the compensation package.

Tesla proposed that he fix this in two ways. To address the board conflict, the company commissioned independent director Kathleen Wilson Thompson to review its 2018 pay agreement and determine whether it was in the best interests of shareholders.

Additionally, shareholders will have the opportunity to vote again after reviewing McCormick's findings. If the proposal passes, shareholders have 120 days to object.

Tesla did not attempt to address the deficiencies pointed out by Mr. McCormick in the negotiations. The company did not propose a new pay package to Musk or hire a new compensation consultant to review the record-high salary agreement, according to the company's proposal.

If shareholders agree, the burden of proving that Musk's remuneration is unfair could shift to the plaintiffs, making it easier for Mr. Talley and others to prevail on appeal to the Delaware Supreme Court. He said it could become. At trial, Musk had to prove that his pay and process were fair.

However, other experts said the proposal would almost certainly lead to further increases in shareholder litigation.

Part of the reason is that the pay package went into effect in his 2018, rewarding Mr. Musk when Tesla hits certain milestones, which it soon did. Although Musk was given options that allowed him to buy approximately 304 million shares of Tesla stock at a steep discount Opens a new tab, he never exercised those options.

Anne Lipton, a professor of corporate law at Tulane University, said it's unclear whether Tesla could pay Musk for past performance rather than for achieving future milestones. She said it could be seen as a waste of company assets.