Richard J. Tornetta v. Elon Musk
Not yet reported; C.A. No. 2018-0408-KSJM (Del. Ch. Dec. 2, 2024) (2024)
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Rule of Law:
A post-trial stockholder ratification cannot nullify a court's adjudication of a breach of fiduciary duty or reverse its judgment, particularly when the underlying transaction was conflicted and the ratification disclosures were misleading. In awarding attorney's fees for successful derivative litigation that secures rescission of executive compensation, courts must prevent windfalls by adjusting the valuation of the benefit achieved, even if a direct market-based approach would yield a higher figure.
Facts:
- On January 21, 2018, the Tesla Board of Directors approved Elon Musk's 2018 compensation award (the "Grant"), comprising 12 tranches of stock options.
- Each completed tranche provided Musk options to purchase shares equal to 1% of Tesla’s outstanding common stock, vesting upon satisfaction of market capitalization and operational milestones.
- The February 8, 2018 Proxy Statement regarding the Grant disclosed a maximum value of $55.8 billion and a grant date fair value (GDFV) of $2.6 billion.
- By April 29, 2022, 11 of the 12 tranches had vested, and by June 30, 2022, all conditions for the final tranche to vest were achieved, resulting in 303,960,630 fully vested options.
- As of January 30, 2024, all options under the Grant were fully vested and "in the money," but Musk had not exercised any of them.
- Tesla recognized approximately $2.3 billion of employee stock-based compensation expenses in connection with the Grant in its audited financial statements.
- Less than an hour after the court issued its Post-Trial Opinion in January 2024, Elon Musk criticized Delaware on social media and declared that Tesla would "move immediately to hold a shareholder vote to transfer state of incorporation to Texas."
- On April 29, 2024, Tesla filed a Proxy Statement recommending that stockholders "ratify" the exact same Grant that the Post-Trial Opinion had rescinded.
Procedural Posture:
- Tesla stockholder Richard J. Tornetta filed a derivative action on June 5, 2018, challenging Elon Musk's 2018 compensation award as a breach of fiduciary duties by Musk and the Director Defendants.
- Plaintiff overcame a motion to dismiss, which involved novel arguments and required extended oral argument and supplemental submissions.
- Extensive fact and expert discovery was conducted, including document requests, interrogatories, subpoenas, and 17 fact depositions.
- Plaintiff prevailed on a motion to compel, and pursued and defended against a motion for summary judgment.
- The case was tried over five days, involving 1,704 trial exhibits and testimony from nine fact and four expert witnesses.
- The matter was fully submitted on April 25, 2023, after opening and answering post-trial briefs, post-trial argument, and supplemental post-trial briefing.
- On January 30, 2024, the court issued a post-trial opinion (Tornetta v. Musk, 310 A.3d 430 (Del. Ch. 2024)) finding that the Grant was subject to the entire fairness standard, that defendants failed to meet their burden, and that plaintiff was entitled to rescission.
- On March 1, 2024, Plaintiff’s counsel filed a petition seeking fees and expenses.
- On June 13, 2024, Tesla stockholders voted in favor of a proposal to "ratify" the Grant at Tesla's annual meeting.
- On June 28, 2024, the Director Defendants filed a "Motion to Revise the Post-Trial Opinion" based on the stockholder vote, with Tesla filing a joinder in support, arguing the vote mooted the action.
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Issue:
1. Does a post-trial stockholder vote to ratify a conflicted-controller executive compensation package, which a court has already adjudicated as a breach of fiduciary duty and ordered rescinded, have the legal effect of reversing the court's judgment? 2. What is the appropriate method for valuing the benefit achieved from the rescission of an executive compensation package in a derivative action for the purpose of awarding attorney's fees, especially when a market-based valuation suggests an amount that would result in a "windfall" for counsel?
Opinions:
Majority - McCormick, C.
1. No, a post-trial stockholder vote cannot ratify an already adjudicated breach of fiduciary duty or reverse a court's judgment. The court denied the motion to revise based on four fatal flaws in the defendants' argument. First, the defendants had no procedural ground to introduce newly created evidence (the stockholder vote) after trial to flip the outcome of an adverse post-trial decision; court rules (54(b), 59(a), 60(b)) are for newly discovered evidence that existed at the time of trial. Second, common-law ratification is an affirmative defense that must be timely raised, and asserting it six years after the action was filed, 1.5 years after trial, and five months after the post-trial opinion was untimely. Third, common-law ratification does not allow a stockholder vote alone to ratify a conflicted-controller transaction that involves breaches of the duty of loyalty, especially without precommitment to the MFW framework's protections ("ab initio" conditioning of the transaction on dual protections). Fourth, even if a stockholder vote could have a ratifying effect, it could not here due to multiple, material misstatements in the Proxy Statement concerning the vote's binding effect, rendering the vote uninformed. 2. The appropriate method for valuing the benefit achieved from rescission, for attorney's fees, requires balancing a sound theoretical valuation with the policy against windfalls. The court adopted the Grant Date Fair Value (GDFV) of $2.3 billion as the basis for the fee calculation and applied a conservative 15% to that figure, resulting in a $345 million award. The court found Plaintiff's "reverse-dilution theory," valuing the benefit at $51 billion (based on the market's pricing of dilution reversal), to be theoretically sound. It rejected defendants' criticisms, including their event-study arguments due to confounding factors like Musk's volatile statements and threats. However, a fee award of $5.6 billion (11% of $51 billion), while technically justified by the methodology, would constitute a "windfall" that exceeds the incentive value for counsel in megafund cases. To avoid this, the court adopted the defendants' fallback argument to value the benefit at the Grant Date Fair Value of $2.3 billion, which represents the accounting charge reversed by rescission. Applying a conservative 15% (at the lower end of the Americas Mining guideline for post-trial success) to this $2.3 billion results in a $345 million fee, which is a reasonable sum to reward a total victory, supported by secondary Sugarland factors such as counsel's substantial time and effort (resulting in a 25.3x lodestar multiplier), the litigation's complexity, the significant contingency risk, and counsel's high standing and ability. Tesla may elect to pay the fee award in cash or freely tradeable shares.
Analysis:
This decision significantly reinforces the integrity of Delaware's judicial process by definitively rejecting attempts to subvert court judgments through post-hoc stockholder votes, especially in cases involving conflicted-controller transactions. It underscores the stringent requirements for effective ratification under MFW, highlighting the precommitment to procedural safeguards as non-negotiable. Furthermore, the ruling provides crucial guidance on attorney's fee awards in 'megafund' derivative cases, balancing the strong public policy of incentivizing vigilant shareholder litigation with the imperative to prevent excessive windfalls, thereby shaping future expectations for both plaintiff and defense counsel regarding the valuation of non-monetary benefits.
