Tornetta v. Musk

Tesla, Inc.’s board of directors (defendant) approved an executive compensation plan for its chief executive officer, Elon Musk (defendant). Under the plan, Musk received incentive-based compensation tied directly to Tesla’s market milestones. If all milestones were reached, Musk would receive stock options valued at $55 billion. The plan was submitted to Tesla’s shareholders for approval. Musk was the largest shareholder in Tesla, holding over 20 percent of the company’s stock and arguably making him Tesla’s controlling shareholder. Tesla called a shareholder meeting to vote on the plan. The meeting was attended by 81 percent of Tesla’s total voting shares, including 64 percent of Tesla’s disinterested voting shares, those not affiliated with Elon Musk or board member Kimbal Musk (defendant). A majority of the disinterested shares present at the meeting, along with Musk’s affiliated shares, voted to pass the plan. Tesla shareholder Richard Tornetta (plaintiff) filed suit in Delaware Chancery Court against Musk and the board, claiming that they breached their fiduciary duty to Tesla by getting the compensation plan approved. Musk and the board filed a 12(b)(6) motion to dismiss the complaint, arguing that a board’s decision on executive compensation was entitled to great deference. Additionally, Musk argued that even if a controlling shareholder was involved in the transaction, the decision deserved deference if it was supported by a shareholder vote. Tornetta argued that because Musk was a controlling shareholder, the compensation plan should be analyzed with greater scrutiny using the entire-fairness standard and that a shareholder vote did not exempt the decision from heightened scrutiny. The chancery court addressed the proper standard of review.