Last month, the Delaware Court of Chancery reaffirmed its prior decision from January 2024 (Tornetta I)[1] invalidating Elon Musk’s 2018 compensation package from Tesla—the largest executive compensation package in the history of public markets. The case is captioned: Tornetta v. Musk (Tornetta II), – A.2d –, 2024 WL4930635 (Del. Ch. Dec. 2, 2024).
Following Tornetta I, Tesla sought to reinstate Musk’s compensation package by retroactively obtaining stockholder approval for it. To that end, in June 2024, Tesla held a stockholder meeting during which the stockholders voted to ratify Musk’s compensation package. Thereafter, the defendants in the Tornetta case filed a “motion to revise,” requesting that the Court reverse its decision in Tornetta I based on the new stockholder ratification vote.
The Court rejected the defendants’ motion on several, independently sufficient grounds.
First, the Court held that the defendants’ after-the-fact attempts to implement MFW protections did not lower the standard of review from entire fairness to business judgment. In order to reduce the standard of review to business judgment, a controlling stockholder must commit—before the start of negotiations—to MFW’s procedural safeguards, i.e., (i) an informed vote by a majority of the minority stockholders and (ii) an independent special committee to negotiate and approve the transaction. Because Musk began negotiating his compensation package back in 2017, the defendants could not invoke MFW to reduce the standard of review. Musk’s compensation package thus remained subject to entire fairness review and the most the after-the-fact stockholder vote could do is shift the burden to the plaintiff to prove entire fairness.
The Court, however, held that the stockholder ratification vote did not suffice to shift the burden to the plaintiff because material deficiencies in the proxy statement Tesla circulated in advance of the vote rendered the stockholder vote not fully informed. Among other deficiencies, the Court found the proxy statement inaccurate because it overstated the vote’s legal effect and potential to cure the deficiencies with the compensation package that the Court identified in Tornetta I. For example, the Court found the proxy statement inaccurately stated that the stockholder vote could “extinguish” claims for breaches of fiduciary duty; “correct[]” the“ disclosure deficiencies” and “cure[]” any “wrongs found by the Delaware Court in” Tornetta I; “restore[] to Mr. Musk” the options awarded as part of the executive compensation package; and moot the “benefit” the plaintiff’s lawyers claimed to have delivered to Telsa. Tornetta II, 2024 WL 4930635, at *19. The Court found these inaccuracies provided an independent basis for rejecting the defendants’ motion to revise.
The Court also held that the defendants had not invoked an appropriate procedural mechanism for the Court to consider a stockholder vote that took place after the Court issued its initial Tornetta I decision, even if such a vote could be legally relevant. Specifically, the Court concluded that Court of Chancery Rule 54(b) (governing judgments on multiple claims), Rule 59(a) (governing the grounds for new trials), and Rule 60(b)(governing relief from a judgment or order)—on which the defendants relied—did not permit consideration of the stockholder vote. In refusing to consider evidence of the post-adjudication stockholder vote, the Court observed that there is “no procedural ground for flipping the outcome of an adverse post-trial decision based on evidence [the defendants] created after trial.” Tornetta II, 2024 WL 4930635 at *11.
Lastly, the Court held that stockholder ratification is an affirmative defense, which the defendants had waived by failing to timely raise it. The Court decided against using its discretion to allow the defendants to belatedly raise a ratification defense, noting “[n]o Delaware decision . . . has ever allowed a party to raise the defense of stockholder ratification after trial for the purpose of persuading the court to alter (much less flip) its judgment.” Tornetta II, 2024 WL4930635, at *15.
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Tornetta II thus confirms the importance of instituting MFW protections before starting negotiations on conflicted controller transactions and illustrates the limitations of attempting to do so after the transaction is already underway (much less being challenged in court).
[1] Tornetta v. Musk (Tornetta I), 310 A.3d 430 (Del. Ch. 2024).
