Tornetta v. Musk, et al & Fiduciary Liability

Motivations

Elon Musk is a fascinating anomaly in today's increasingly financialized world, a reminder of the shallow idea that everyone has a personal brand they can leverage. Truthfully, the idolization of Musk by Rutgers students is alarming to me. From what I gather, Musk is merely a faceless gambler whose success seems to have little to do with material good or “saving humanity” and more to do with shamelessly exploiting government subsidies, instructing his seemingly limitless army of cronies to agitate markets, and all the while laundering his efforts through this personal brand. Perhaps I am being hyperbolic and uncharitable, but I fear for the future of the business world if we only have figures like Musk to look up to.

The Facts

In 2018, Tesla stockholder Richard Tornetta filed a lawsuit against Elon Musk and members of Tesla's board of directors concerning a proposed compensation package to be awarded to Musk. The package would reward Musk upon completion of 12 financial milestones (tranches) within the agreement's 10-year period. At a minimum, Musk stood to make $2.6 billion with the potential to earn as much as $55.8 billion^7b if he met all stipulated terms. Musk is both the majority shareholder in Tesla as well as the acting CEO, creating a significant conflict of interest that gutted negotiations and jeopardized the board's ability to minimize risk which could compromise Musk's fiduciary duty to all shareholders. Beyond this, Delaware Chancellor Kathaleen St. J. McCormick questioned why the deal even needed to take place. Surely being the majority shareholder in Tesla is more than enough to incentivize Musk's hard work. In McCormick's factual background of her post-trial opinion, members of Tesla's Board of Directors corroborate that Musk had no plans of leaving Tesla's helm at any point.

The Issue

At its heart, the plaintiff argues that Musk violated Delaware's entire fairness standard of corporate transactions as a conflicted controller⁹. Essentially, the entire fairness standard requires the defendant(s) to prove the validity of corporate transactions involving the majority stockholder if their transactions are not negotiated by an independent committee and if minority stockholders were not fully knowledgeable of the transaction. In Musk's case, a look at Tesla's borderline incestuous corporate governance could not create genuineness of assent to the transaction among minority stakeholders.

Musk was revealed to be deeply entrenched with Tesla negotiators including defendant Ira Ehrenpreis, his Compensation Committee chair, and fellow defendant Antonio Gracias, who Musk has had an over 20 years-long business and personal relationship, so much so the two have vacationed together alongside their families. Additionally, Musk's General Counsel, Todd Maron, was Musk's former divorce lawyer. McCormick wrote that Maron was brought to tears by Musk's deposition in his divorce proceedings and was often cited as author to memorandum regarding Tesla's fairness in Tornetta v. Musk.

Moreover, Tesla's Board of Directors failed to establish objective benchmarks to monitor Musk's completion of the agreements tranches beyond topline (revenue) and bottom-line (EBITDA) goals. The plaintiff argued no positional negotiation could take place as a result of these facts and that minority stockholders could not make an informed vote regarding the transaction.

The Ruling

Ultimately, the Delaware Court of Chancery rescinded the grant due to disclosure defects in the grants inception and awarded Tornetta $345 million as remedy^7c,

For the foregoing reasons, judgment is entered in Plaintiff’s favor. The parties are to confer on a form of final order implementing this decision and submit a joint letter identifying all issues, including fees^939?, that need to be addressed to bring this matter to a conclusion at the trial level.