In a case of first impression, the Delaware Court of Chancery has held that the entire fairness standard of review applies to compensation decisions made with respect to controlled companies, absent implementation of specified protections.
On September 20, 2019, Vice Chancellor Joseph Slights of the Delaware Court of Chancery denied a motion by Tesla, Inc. (Tesla) to dismiss a shareholder lawsuit (Tornetta v. Musk et al., case number 2018-0408) challenging the approval of a 10-year incentive-based compensation plan for Tesla’s Chief Executive Officer Elon Musk (the Award). The Award, which was approved by an independent compensation committee of Tesla’s Board of Directors and thereafter ratified by a majority of the minority of Tesla’s stockholders, provides Musk with the opportunity to earn performance-based stock options that, if fully realized, would be valued at approximately $55 billion. A minority stockholder filed both direct and derivative claims against Musk and the Tesla board, alleging that the Award is excessive and is the product of breaches of fiduciary duty. In response to the derivative suit, Tesla filed a motion to dismiss, which required Vice Chancellor Slights to address the “gating question that frequently dictates…a breach of duty claim: under which standard of review will the court adjudicate the claim?” Determining that the “entire fairness” standard—rather than the business judgment rule—should be applied absent implementation of the “dual protections” of Kahn v. M & F Worldwide Corp., 88 A.3d 635, 642 (Del. 2014) (M&FW), the court refused to dismiss the complaint, in a ruling that marks a major shift in Delaware case law.