## Facts

- Tesla, Inc.’s board approved a 2018 executive-compensation plan for CEO Elon Musk consisting of performance-vesting stock options designed to run for 10 years.
- The plan offered up to 12 tranches of options, each tranche equal to roughly 1% of Tesla’s outstanding shares as of the grant date.
- Each tranche would vest only if Tesla achieved escalating market-capitalization milestones (in $50 billion increments) and met an operational milestone based on either adjusted EBITDA or revenue targets measured over four consecutive fiscal quarters.
- The plan’s estimated grant-date fair value was approximately $2.6 billion, and its maximum potential value was approximately $55.8 billion, making it the largest potential executive-compensation opportunity observed in public markets at the time.
- Musk was Tesla’s largest stockholder and owned about 21.9% of Tesla’s common stock when the plan was approved.
- The individuals who negotiated and approved the plan on Tesla’s behalf had long-standing personal and professional ties to Musk, including a compensation-committee chair with a long relationship with Musk, another committee member with a decades-long relationship that included shared family vacations, and a general counsel who previously served as Musk’s personal attorney.
- Tesla solicited stockholder approval by proxy statement, and a majority of disinterested shares voted in favor of the plan.
- Tesla stockholder Richard Tornetta filed a derivative action on behalf of Tesla alleging that Musk and the director defendants breached fiduciary duties by approving a conflicted transaction that was not entirely fair and by seeking stockholder approval through a proxy that omitted material information.
- After discovery and trial, the Delaware Court of Chancery issued a post-trial merits decision addressing controller status, standard of review, fairness, disclosure, and remedy.

## Issues

1. Whether Musk functioned as a controlling stockholder for purposes of the 2018 compensation-plan transaction, despite owning less than a majority of Tesla’s stock.
2. What standard of review applied to the board’s approval of Musk’s compensation plan—business judgment or entire fairness—and who bore the burden.
3. Whether stockholder approval of the plan reduced the standard of review or shifted the burden of proof, given the content of the proxy disclosures.
4. Whether the defendants proved the plan was entirely fair as to both fair dealing (process) and fair price (economic terms).
5. If the plan failed fiduciary review, what remedy was appropriate.

## Decision

- The court found that Musk was a controlling stockholder in the context of the compensation-plan transaction because his equity stake, “Superstar CEO” position, and influence over directors and management gave him extraordinary power over the process and outcome.
- The court applied entire fairness review and placed the burden on defendants because the transaction was a controller self-dealing arrangement and was not conditioned from the outset on dual procedural protections that would trigger business-judgment review.
- The court held that the stockholder vote did not cleanse the transaction or shift the burden because the proxy statement was not fully informed; it omitted material information about Musk’s role in setting key terms, the lack of meaningful independence among key decisionmakers, and information bearing on the difficulty and timing of the milestones.
- The court concluded defendants failed to prove entire fairness, finding deficiencies in both the deal process and the economic terms, including the plan’s unprecedented magnitude relative to peer compensation and Musk’s existing equity incentives.
- The court ordered rescission of the compensation plan, cancelling the options award.

## Legal Principles

- A stockholder owning less than 50% can be a controlling stockholder for a particular transaction if the stockholder exercises actual control over the board’s decisionmaking or the transaction’s approval.
- When a controlling stockholder stands on both sides of a transaction (including a controller’s compensation), the transaction is reviewed for entire fairness unless it is structured at the outset to satisfy recognized procedural protections.
- Entire fairness requires defendants to prove fair dealing and fair price; fair dealing examines how the transaction was initiated, structured, negotiated, disclosed, and approved, and fair price examines the economic terms and their effect on the corporation and its stockholders.
- Stockholder approval affects fiduciary review only if it is uncoerced and fully informed; material omissions or misleading disclosures about conflicts, the negotiation process, or key economic assumptions prevent cleansing and can keep the burden on defendants.
- Rescission is an equitable remedy that can unwind an improperly approved compensation arrangement, including by cancelling an unexercised equity award granted through a process that fails fiduciary standards and is not shown to be fair.

## Conclusion

In *Tornetta v. Musk*, the Delaware Court of Chancery held that Musk acted as a controlling stockholder for purposes of Tesla’s 2018 CEO compensation plan, applied entire fairness with the burden on defendants, found that the stockholder vote did not cleanse the transaction due to materially incomplete disclosures, determined the defendants failed to show fair dealing and fair price for the record-setting option award, and ordered rescission cancelling the options.


Tornetta v. Musk, 2024 WL 382424, 310 A.3d 430 (2024)