Richard J. Tornetta v. Elon Musk

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
RICHARD J. TORNETTA, Individually )
and on Behalf of All Others Similarly )
Situated and Derivative on Behalf of )
Nominal Defendant TESLA, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2018-0408-JRS
)
ELON MUSK, ROBYN M. DENHOLM, )
ANTONIO J. GRACIAS, JAMES )
MURDOCH, LINDA JOHNSON RICE, )
BRAD W. BUSS, IRA EHRENPREIS, )
STEVE JURVETSON, and KIMBAL MUSK, )
)
Defendants, )
)
and )
)
TESLA, INC., a Delaware corporation, )
)
Nominal Defendant. )
OPINION
Date Submitted: June 10, 2019
Date Decided: September 20, 2019
Peter B. Andrews, Esquire, Craig J. Springer, Esquire and David Sborz, Esquire of
Andrews & Springer LLC, Wilmington, Delaware and Jeremy S. Friedman, Esquire,
Spencer Oster, Esquire and David F.E. Tejtel, Esquire of Friedman Oster &
Tejtel PLLC, New York, New York, Attorneys for Plaintiff Richard J. Tornetta.
David E. Ross, Esquire, Garrett B. Moritz, Esquire and Benjamin Z. Grossberg,
Esquire of Ross Aronstam & Moritz LLP, Wilmington, Delaware and William
Savitt, Esquire, Anitha Reddy, Esquire and Noah B. Yavitz, Esquire of Wachtell,
Lipton, Rosen & Katz, New York, New York, Attorneys for Defendants Elon Musk,
Robyn M. Denholm, Antonio J. Gracias, James Murdoch, Linda Johnson Rice,
Brad W. Buss, Ira Ehrenpreis, Steve Jurvetson, Kimbal Musk and Nominal
Defendant Tesla, Inc.
SLIGHTS, Vice Chancellor
In January 2018, Tesla, Inc.’s board of directors (the “Board”) approved an
incentive-based compensation plan for its chief executive officer, Elon Musk, called
the 2018 Performance Award (the “Award”). The Board then submitted the Award
to Tesla’s stockholders for approval. The stockholders who voted at the specially
called meeting overwhelmingly approved the Award and Tesla implemented it
thereafter. A Tesla stockholder has brought direct and derivative claims against
Musk and members of the Board alleging the Award is excessive and the product of
breaches of fiduciary duty. Defendants move to dismiss under Court of Chancery
Rule 12(b)(6).
A board of directors’ decision to fix the compensation of the company’s
executive officers is about as work-a-day as board decisions get. It is a decision
entitled to great judicial deference.1 When the board submits its decision to grant
executive incentive compensation to stockholders for approval, and secures that
approval, the decision typically is entitled to even greater deference.2 But this is not
a typical case. Plaintiff has well pled that Musk, the beneficiary of the Award, is
1
See Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000) (“[A] board’s decision on executive
compensation is entitled to great deference. It is the essence of business judgment for a
board to determine if a particular individual warrant[s] large amounts of money. . .”)
(internal quotations omitted).
2
See Michelson v. Duncan, 407 A.2d 211, 214, 222 (Del. 1979) (holding that an option
grant to directors or officers that has been ratified by the stockholders is subject to judicial
review only if the award is wasteful); Lewis v. Vogelstein, 699 A.2d 327, 336 (Del. Ch.
1997) (same).
1
also Tesla’s controlling stockholder. And the size of the Award is extraordinary; it
allows Musk the potential to earn stock options with a value upwards of
$55.8 billion.3
Defendants’ motion to dismiss presents the gating question that frequently
dictates the pleadings stage disposition of a breach of fiduciary duty claim: under
what standard of review will the court adjudicate the claim? If the court reviews the
fiduciary conduct under the deferential business judgment rule, the claim is unlikely
to proceed beyond the proverbial starting line. If, on the other hand, the court
reviews the conduct under the entire fairness standard, the claim is likely to proceed
at least through discovery, if not trial. Given the high stakes and costs of corporate
fiduciary duty litigation, defendants understandably are prone to call the “standard
of review” question at the earliest opportunity, usually at the pleadings stage.
In this case, the standard of review question presents issues of first impression
in Delaware. On the one hand, as noted, board decisions to award executive
compensation are given great deference under our law, particularly when approved
by unaffiliated stockholders. On the other hand, as pled, the Award is a transaction
3
As discussed below, the Award is also remarkable for the significant market capitalization
and operational milestones Musk must lead Tesla to achieve before the sequential tranches
of compensation within the Award are triggered.
2
with a conflicted controlling stockholder and, as such, it ought to provoke heightened
judicial suspicion.4
Defendants maintain the stockholder vote approving the Award ratified the
Board’s decision to adopt it and thereby ratcheted any heightened scrutiny of the
Award that might be justified down to business judgment review. 5 By Defendants’
lights, Plaintiff’s only legally viable claim is waste, which he has not adequately
pled. In response, Plaintiff argues stockholder ratification cannot alter the standard
of review with respect to conflicted controller transactions. The only possible
exception to this proposition Plaintiff will acknowledge is that Defendants might
have avoided entire fairness review had they implemented the dual protections
outlined in the seminal In re MFW Shareholders Litigation.6 Defendants admittedly
4
Leo E. Strine, Jr., The Delaware Way: How We Do Corporate Law and Some of the New
Challenges We (and Europe) Face, 30 DEL. J. CORP. L. 673, 678 (2005) (“Delaware is
more suspicious when the fiduciary who is interested is a controlling stockholder.”).
5
If truth be told, Defendants would say they drew the wrong judge here. In In re Tesla
Motors, Inc. S’holder Litig., 2018 WL 1560293 (Del. Ch. Mar. 28, 2018) (“Tesla”), I held
the plaintiffs there had well pled both that Musk was a controlling stockholder of Tesla and
that demand to bring derivative claims was excused with respect to a majority of Tesla’s
board. Plaintiff has repeated those same allegations here. While Defendants deny that
demand is excused, “out of respect for this Court’s recent pleadings-stage decision in
[Tesla],” they have elected not to move to dismiss under Court of Chancery Rule 23.1.
Defs.’ Opening Br. in Supp. of Their Mot. to Dismiss the Compl. (“OB”) 3. Defendants
also contest that Musk is Tesla’s controlling stockholder but, out of deference to Tesla,
they have framed their legal arguments as if he was. Tr. of Oral Arg. Re Defs.’ Mot. to
Dismiss (“OA”) at 10–11.
6
In re MFW S’holders Litig., 67 A.3d, 496, 524–25 (Del. Ch. 2013) (Strine, C.), aff’d,
Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (holding the business judgment
3
did not follow the MFW roadmap. And they reject any suggestion they were required
to do so in order to earn business judgment deference. According to Defendants,
any such requirement would extend MFW beyond its intended bounds and ignore
the Delaware law of stockholder ratification.
This court’s earnest deference to board determinations relating to executive
compensation does not jibe with our reflexive suspicion when a board transacts with
a controlling stockholder.7 Delaware courts have long recognized the risks to sound
corporate governance posed by conflicted controllers and generally review these
transactions for entire fairness.8 This doctrinal suspicion has its costs, however.
A rule holding corporate fiduciaries personally accountable for all transactions with
conflicted controllers unless the fiduciaries demonstrate the transaction is entirely
fair will necessarily suppress at least some beneficial transactions.9
rule is the “correct standard of review for mergers between a controlling stockholder and
its subsidiary, when the merger is conditioned on the approval of both an independent,
adequately empowered special committee that fulfills its duty of care, and the uncoerced,
informed vote of a majority of the minority stockholders”).
7
Strine, supra note 4, at 678.
8
See generally Kahn v. Lynch Commc’n Sys. Inc., 638 A.2d 1110 (Del. 1994); Kahn v.
Tremont Corp. (Tremont II), 694 A.2d 422 (Del. 1997); Weinberger v. UOP, Inc., 457 A.2d
701 (Del. 1983); Summa v. Trans World Airlines, Inc., 540 A.2d 403 (Del. 1988).
9
Mary Siegel, The Erosion of the Law of Controlling Shareholders, 24 DEL. J. CORP. L.
27, 73–75 (1999) (distinguishing between conflicted controller transactions where the
benefits outweigh the burdens from those where the controller’s self-interested pursuits
result in harm to the corporation, and positing that “monitoring all controlling-shareholder
transactions by entire fairness is overkill.”).
4
This tension was front and center in MFW, albeit in the context of a
transformational transaction, and the court resolved it by approving a process
whereby consummation of the transaction is conditioned from the beginning on the
informed and impartial approval of decision makers at both the board and
stockholder levels.10 As the court explained, preserving the integrity of the decisions
at both levels in the conflicted controller context is key to allaying the court’s
suspicions such that our preference for presumptive deference can be restored:
[T]he adoption of this rule will be of benefit to minority stockholders
because it will provide a strong incentive for controlling stockholders
to accord minority investors the transactional structure that respected
scholars believe will provide them the best protection, a structure where
stockholders get the benefits of independent, empowered negotiating
agents to bargain for the best price and say no if the agents believe the
deal is not advisable for any proper reason, plus the critical ability to
determine for themselves whether to accept any deal that their
negotiating agents recommend to them. A transactional structure with
both these protections is fundamentally different from one with only
one protection. A special committee alone ensures only that there is a
bargaining agent who can negotiate price and address the collective
action problem facing stockholders, but it does not provide
stockholders any chance to protect themselves. A majority-of-the-
minority vote provides stockholders a chance to vote on a merger
proposed by a controller-dominated board, but with no chance to have
an independent bargaining agent work on their behalf to negotiate the
merger price, and determine whether it is a favorable one that the
10
In re MFW S’holders Litig., 67 A.3d at 504 (explaining that the dual protections provide
comfort that beneficial controlling stockholder transactions will not be subject to judicial
second-guessing). While MFW was decided on a motion for summary judgment, the
Supreme Court has since held MFW also applies at the pleadings stage. See Flood v.
Synutra Int’l Inc., 195 A.3d 754 (Del. 2018) (affirming the trial court’s application of the
MFW framework on a motion to dismiss).
5
bargaining agent commends to the minority stockholders for
acceptance at a vote. These protections are therefore incomplete and
not substitutes, but are complementary and effective in tandem.11
MFW addressed a post-closing stockholder challenge to a freeze-out merger,
and neither the Court of Chancery nor the Supreme Court provided any indication
their holdings were intended to apply outside of that context. Subsequent decisions
of this court, however, have applied the MFW framework to controller transactions
involving the sale of a company to a third party12 and a stock reclassification.13
In both cases, however, as Defendants observe, the transactions at issue
“fundamentally alter[ed] the corporate contract” and, therefore, were subject by
statute to approval by both the board of directors and a majority of outstanding shares
entitled to vote.14 Indeed, this is the line Defendants would have the Court draw in
delineating MFW’s reach; the dual protections endorsed by MFW should be required
to earn business judgment deference only with respect to transformational conflicted
11
In re MFW S’holders Litig., 67 A.3d at 502–03. See also Kahn v. M&F Worldwide
Corp., 88 A.3d at 644 (observing that “[t]he simultaneous deployment of the procedural
protections employed here create a countervailing, offsetting influence of equal—if not
greater—force.”).
12
In re Martha Stewart Living Omnimedia, Inc. S’holder Litig., 2017 WL 3568089(Del. Ch. Aug. 18, 2017).
13
IRA Trust FBO Bobbie Ahmed v. Crane, 2017 WL 7053964 (Del. Ch. Dec. 11, 2017).
14
8 Del. C. §§ 242, 251.
6
controller transactions where the Delaware General Corporation Law requires the
approval of both the corporation’s managers and owners.15
There is symmetry in Defendants’ view of MFW. If a controlling stockholder
seeks to draw the corporation into a transaction that, by statute, cannot be
consummated without the approval of both the board and the stockholders, then it
makes sense to require the controller to condition consummation on the informed
approval of both independent board members and unaffiliated stockholders if he
wishes to secure our law’s most deferential standard of review at the threshold.
But does it make sense to impose those same dual protections on the controller and
the board as a predicate to application of the business judgment rule in instances
where the DGCL does not require both board and stockholder approval? Or, should
the fiduciaries in that context be able to trigger business judgment review through
traditional stockholder ratification?
To answer this question, I have returned to first principles. In instances where
the beneficiary of a transaction is a controlling stockholder, “there is an obvious fear
that even putatively independent directors may owe or feel a more-than-wholesome
allegiance to the interests of the controller, rather than to the corporation and its
15
Defs.’ Reply Br. in Supp. of its Mot. to Dismiss (“RB”) 3.
7
public stockholders.”16 Because the conflicted controller, as the “800-pound
gorilla,”17 is able to exert coercive influence over the board and unaffiliated
stockholders, “our law has required that [] transaction[s] [with conflicted controllers]
be reviewed for substantive fairness even if the transaction was negotiated by
independent directors or approved by the minority stockholders.”18 In these
circumstances, stockholder approval of the conflicted controller transaction, alone,
will not justify business judgment deference.19
The controlling stockholder’s potentially coercive influence is no less present,
and no less consequential, in instances where the board is negotiating the controlling
stockholder’s compensation than it is when the board is negotiating with the
controller to effect a “transformational” transaction. In my view, stockholder
16
Strine, supra note 4, at 678. See also Citron v. E.I. DuPont de Nemours & Co., 584 A.2d
490, 502 (Del. Ch. 1990) (explaining that controllers can coerce minority stockholders as
well, “[e]ven where no coercion is intended”).
17
In re Pure Res., Inc. S’holders Litig., 808 A.2d 421, 436 (Del. Ch. 2002) (Strine, V.C.).
18
Strine, supra note 4, at 678.
19
See Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 306 (Del. 2015) (Strine, C.J.) (noting
a valid stockholder vote cleanses transactions “with a party other than a controlling
stockholder”).
8
ratification, without more, does not counterpoise the risk of coercion in either
context.20
Having determined entire fairness is the standard by which the Award must
be reviewed, it is appropriate to consider whether, in circumstances like this, the
Board could have structured the approval process leading to the Award in a way that
provides a “feasible way for defendants to get [cases] dismissed on the pleadings.”21
As I see it, MFW provides the answer. In this regard, I share Defendants’ view that
neither the Chancery nor Supreme Court opinions in MFW can be read to endorse
an application of MFW beyond the squeeze-out merger. But that does not mean
MFW’s dual protections cannot be potent neutralizers in other applications. In this
case, had the Board conditioned the consummation of the Award upon the approval
of an independent, fully-functioning committee of the Board and a statutorily
compliant vote of a majority of the unaffiliated stockholders, the Court’s suspicions
regarding the controller’s influence would have been assuaged and deference to the
Board and stockholder decisions would have been justified. As that did not happen
20
See In re EZCORP Inc. Consulting Agmt. Deriv. Litig., 2016 WL 301245, at *12
(Del. Ch. Jan. 25, 2016) (holding that entire fairness applies whenever the controller
“extracts a non-ratable benefit.”).
21
In re MFW S’holders Litig., 67 A.3d at 504; see also In re Books-A-Million, Inc.
S’holders Litig., 2016 WL 5874974, at *8 n.2 (Oct. 10, 2016) (confirming that
“one purpose of [MFW] was to remedy a doctrinal situation in which there was no feasible
way to get cases dismissed on the pleadings”) (quotation omitted).
9
here, Defendants’ motion to dismiss the breach of fiduciary duty claims must be
denied.22
I. BACKGROUND
I have drawn the facts from well-pled allegations in the Complaint23 and
documents incorporated by reference or integral to the Complaint, including publicly
filed SEC documents.24 Tesla produced documents to Plaintiff pursuant to 8 Del. C.
§ 220 (“Section 220 Documents”). The parties have agreed that I should deem the
Section 220 Documents as incorporated by reference in the Complaint.25 For now,
the Complaint’s well-pled allegations are accepted as true.26
A. The Parties
Plaintiff, Richard J. Tornetta, is, and was at all relevant times, a Tesla
stockholder.27 He brings both direct claims on behalf of a putative class of Tesla
stockholders and derivative claims on behalf of the Company.
22
Defendants have also urged the Court to dismiss on the ground Plaintiff has failed to
state a claim that the Award is not entirely fair. For reasons explained below, I disagree.
23
Citations to the Complaint are to “Compl. ¶ __.”
24
Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (noting that
on a motion to dismiss, the Court may consider documents that are “incorporated by
reference” or “integral” to the complaint).
25
Compl. ¶ 1.
26
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 169 (Del. 2006).
27
Compl. ¶ 8.
10
Nominal Defendant, Tesla, is a public Delaware corporation headquartered in
Palo Alto, California.28 It designs, manufactures and sells electric vehicles and
energy storage systems.29
At the time the Complaint was filed, Tesla’s Board comprised nine members:
Musk, Kimbal Musk, Antonio J. Gracias, Stephen T. Jurvetson, Ira Ehrenpreis,
Brad W. Buss, Robyn M. Denholm, James Murdoch and Linda Johnson Rice.30
The members of the Board’s Compensation Committee at the time of the Award
were Ehrenpreis (Chair), Gracias, Denholm and Buss.31
Defendant, Musk, is Tesla’s largest stockholder.32 At the time the Award was
approved, Musk owned approximately 21.9% of Tesla’s common stock and served
as Tesla’s Chairman (from April 2004 until September 2018),33 CEO (since October
28
Compl. ¶ 9.
29
Id.30
Compl. ¶¶ 10–19.
31
Compl. ¶¶ 12, 14–16. For purposes of this motion to dismiss, I have assumed, as
Defendants do, that a majority of the Compensation Committee was not independent of
Musk’s influence. OA at 10–11.
32
Compl. ¶ 10.
33
Following a settlement with the SEC, Musk stepped down as Chairman in November
2018 and was replaced by Ms. Denholm. Press Release, SEC, ELON MUSK SETTLES SEC
FRAUD CHARGES; TESLA CHARGED WITH AND RESOLVES SECURITIES LAW CHARGE, 2018-
226 (Sept. 29, 2018) https://www.sec.gov/news/press-release/2018-226.
11
2008) and Chief Product Architect.34 For purposes of this motion to dismiss only, it
is not disputed Plaintiff has well pled that Musk is Tesla’s controlling stockholder.35
In addition to his roles at Tesla, Musk is the majority shareholder, Chairman,
CEO and Chief Technology Officer of Space Exploration Technologies Corporation
(“SpaceX”), a private company that develops and launches rockets to deliver
commercial satellites into space. SpaceX plans, eventually, to deliver humans to
space as well.36 It is alleged SpaceX is one of the world’s most valuable private
companies.37
B. Musk’s Historical Compensation as CEO
Musk assumed his role as Tesla’s CEO in 2008 and, at that time, was paid
$1 per year annual salary with no equity compensation.38 In December 2009, Musk
was awarded options that vested on a three-year schedule contingent on his
continued service with Tesla.39 He also received options contingent on achieving
34
Compl. ¶¶ 10, 22.
35
OA at 10–11.
36
Compl. ¶ 10.
37
Id.38
Transmittal Aff. of Garrett B. Moritz Ex. (“Ex.”) 12 (Tesla Registration Statement (S-1)
Jan. 29, 2010) at 134.
39
Id. at 131–32.
12
certain operating milestones.40 After Tesla’s initial public offering in 2010, Musk
continued to receive $1 in annual salary with no equity awards in that year or in
2011.41
In 2012, Musk had nearly reached all the operational milestones set for him
in the 2009 option grant.42 With this in mind, the Compensation Committee retained
an outside consultant to review Musk’s compensation.43 Following its review, the
Compensation Committee recommended, and the Board adopted, an entirely
performance-based option award for Musk (the “2012 Award”).44
The 2012 Award consisted of ten tranches of stock options, each tranche
representing 0.5% of Tesla’s shares outstanding on the date of the grant.45 The
vesting of each tranche was entirely contingent on Tesla achieving both a market
capitalization milestone and an operational milestone.46 If the milestones were
40
Id.41
Ex. 14 (Tesla Proxy Statement (14A) June 4, 2013) at 22; Ex. 18 (Tesla Proxy Statement
(14A) Feb. 8, 2018) at 5.
42
Ex. 13 (Tesla Annual Report (10-K) Feb. 27, 2012) at 4.
43
Ex. 18 (Tesla Proxy Statement (14A) Feb. 8, 2018) at 5.
44
Id.45
Id. at 5–6.
46
Id. at 6.
13
missed, Musk received nothing.47 The 2012 Award had a ten-year term; if a tranche
did not vest within the term, it would expire.48
Each of the ten market capitalization milestones in the 2012 Award required
an increase of $4 billion in Tesla’s market capitalization, compared to Tesla’s market
capitalization of $3.2 billion when the award was granted.49 The operational
milestones included producing and designing new vehicle models, increasing
production of an existing vehicle (Tesla’s Model S) and increasing gross margin.50
Within five years of the Board approving the 2012 Award, Tesla had achieved all of
the market capitalization milestones and was on the verge of reaching all but one of
the operational milestones.51
C. The 2018 Performance Award
As 2018 approached, the Compensation Committee realized a new
compensation package for Musk would soon be necessary. Accordingly, it retained
outside counsel and Compensia, the same executive compensation firm that assisted
47
Id.
48
Ex. 2 (Presentation to the Tesla Compensation Committee, June 23, 2017) at 22.
49
Ex. 18 (Tesla Proxy Statement (14A) Feb. 8, 2018) at 7.
50
Id.; Ex. 2, (Presentation to the Tesla Compensation Committee, June 23, 2017) at 22.
51
Ex. 18 (Tesla Proxy Statement (14A) Feb. 8, 2018) at 2.
14
in the design of the 2012 Award, to review Musk’s compensation.52 In considering
a new package, the Compensation Committee also solicited the advice of Tesla’s
other directors (excluding Kimbal Musk).53
The Compensation Committee was faced with a difficult question: how to
keep Musk focused on Tesla given his other business interests.54 By 2017, SpaceX
was among the largest private companies in the world and Musk played an active
role in SpaceX’s management.55 The Compensation Committee viewed Musk as
instrumental to Tesla’s success and keeping him locked in on Tesla was a top
priority.56
Using the 2012 Award as a model, the Compensation Committee began
crafting a new compensation package in mid-2017.57 The Compensation Committee
proposed a 10-year grant of stock options that would vest in twelve tranches, again
contingent upon reaching market capitalization and operational milestones.58 After
52
Ex. 1 (Tesla Compensation Committee Meeting Mins., June 23, 2017) at 1–2.
53
Ex. 5 (Tesla Compensation Committee Meeting Mins., Aug. 1, 2017) at 1.
54
Ex. 1 (Tesla Compensation Committee Meeting Mins., June 23, 2017) at 1.
55
Compl. ¶ 10.
56
Ex. 1 (Tesla Compensation Committee Meeting Mins., June 23, 2017) at 1.
57
Id. at 2.
58
Id.
15
conferring with Tesla’s largest institutional investors, the company tied the
operational milestones to increases in total revenue and adjusted EBITDA.59
Over a series of meetings in 2017, the Compensation Committee and Musk
negotiated the milestones at which the options would vest, the overall size of the
grant and how share dilution would affect the Award.60 The full Board approved the
Award at its January 2018 meeting.61
Each of the Award’s market capitalization milestones requires a $50 billion
increase in Tesla’s market capitalization.62 Reaching the first market capitalization
milestone would roughly double Tesla’s market capitalization as of the date the
Award was approved, and reaching all 12 would likely make Tesla one of the most
valuable public companies in the world.63 The Award’s annual revenue milestones
range from $20 billion to $175 billion, and the adjusted EBITDA milestones range
from $1.5 billion to $14 billion.64
59
Ex. 10 (Tesla Board of Directors Meeting Mins., Dec. 12, 2017) at 2.
60
Ex. 7 (Tesla Compensation Committee Meeting Mins., Sep. 8, 2017) at 2; Ex. 8 (Tesla
Board of Directors Meeting Mins., Sep. 19, 2017) at 1–2; Ex. 9 (Tesla Board of Directors
Meeting Mins., Nov. 16, 2017) at 2; Ex. 10 (Tesla Board of Directors Meeting Mins.,
Dec. 12, 2017) at 2.
61
Compl. ¶ 34.
62
Id.
63
Ex. 4 (Tesla Compensation Committee Meeting Mins., July 7, 2017) at 23.
64
Ex. 18 (Tesla Proxy Statement (14A) Feb. 8, 2018) at 9.
16
Upon reaching the twin milestones corresponding to each tranche of the
Award, options held by Musk representing 1% of Tesla’s current total outstanding
shares will vest.65 By tying the shares Musk receives to outstanding shares at the
time of the grant, as opposed to 1% of the fully diluted shares at the time of vesting,
the cost of dilution is born by Musk.66 The Award restricts Musk’s ability to sell
vested shares for five years, tying him more closely to Tesla.67 Any options that do
not vest within ten years are forfeited, and no options will vest if, at the time the
relevant milestone is met, Musk is not serving as either CEO or both Executive
Chairman and Chief Product Officer with the CEO reporting directly to him. 68
The Award also provides that milestones will be adjusted if Tesla makes acquisitions
having a material impact on reaching any milestone, ensuring the milestones will be
met through organic growth, not acquisitions.69
If none of the tranches of options vest, Musk will earn nothing under the
Award.70 Alternatively, if every market capitalization and operational milestone is
65
Compl. ¶ 34.
66
Ex. 18 (Tesla Proxy Statement (14A) Feb. 8, 2018) at 18.
67
Id. at 10.
68
Id. at 13.
69
Id. at 11.
70
Id. at 2.
17
reached, options will vest with a maximum potential value of $55.8 billion.71 Tesla
estimated the Award’s preliminary aggregate fair value at $2.615 billion on its proxy
statement.72
D. The 2018 Stockholder Vote
The Board conditioned implementation of the Award on the approval of a
majority of the disinterested shares voting at a March 21, 2018, special meeting of
Tesla stockholders.73 On February 8, 2018, Tesla submitted its proxy statement
describing the Award and recommending that shareholders vote to approve it.74
The proxy statement described the Award in detail and expressly conditioned its
approval on receiving a majority vote of the shares not owned by Musk or Kimbal
Musk.75 It explained that a failure to vote (assuming a quorum was present at the
meeting) would not be counted as a no vote (as it would for a vote on a merger), but
instead would have no effect on the vote.76
71
Compl. ¶ 36.
72
Compl. ¶ 37.
73
Compl. ¶ 52.
74
Ex. 18 (Tesla Proxy Statement (14A) Feb. 8, 2018).
75
Compl. ¶ 52.
76
Ex. 18 (Tesla Proxy Statement (14A) Feb. 8, 2018) at 23.
18
The Award was approved by the shareholders, with 81% of voting shares and
80% of shares present and entitled to vote cast in favor.77 At the final tally, 73% of
disinterested shares at the meeting (those not affiliated with either Musk or
Kimbal Musk) voted in favor of the Award.78 This equated to approximately 47%
of the total disinterested shares outstanding.79
E. Procedural History
After Tesla disclosed stockholder approval of the Award, Plaintiff demanded
to inspect certain books and records relating to the Award pursuant to 8 Del. C.
§ 220. Upon receiving responsive documents, Plaintiff filed his Complaint in which
he asserts four claims: (1) a direct and derivative claim for breach of fiduciary duty
against Musk in his capacity as Tesla’s controlling shareholder for causing Tesla to
adopt the Award; (2) a direct and derivative claim for breach of fiduciary duty
against the Director Defendants for approving the Award; (3) a derivative claim for
unjust enrichment against Musk; and (4) a derivative claim for waste against the
Director Defendants.80
77
Ex. 19 (Tesla Current Report (8K) Mar. 21, 2018) at 2.
78
Id.
79
Compl. ¶ 55.
80
Compl. ¶¶ 106–23.
19
On August 30, 2018, Defendants filed a motion to dismiss the Complaint
under Court of Chancery Rule 12(b)(6). The Court heard argument on May 9, 2019.
II. ANALYSIS
The legal standards governing a motion to dismiss for failure to state a claim
are well settled. Under Rule 12(b)(6), a complaint must be dismissed if the plaintiff
would be unable to recover under “any reasonably conceivable set of circumstances
susceptible of proof” based on facts pled in the complaint.81 “All well-pleaded
factual allegations are accepted as true[,]” and “the Court must draw all reasonable
inferences in favor of the non-moving party. . . .”82
A. The Fiduciary Duty Claims
I resolve Defendants’ motion to dismiss the breach of fiduciary duty claims in
two parts. First, I address the proper standard of review. As explained below,
I conclude entire fairness is the applicable standard at this pleadings stage given
Plaintiff’s well-pled allegations. Next, I address whether Plaintiff has stated viable
breach of fiduciary duty claims as viewed through the lens of entire fairness, and
conclude he has.
81
Gen. Motors, 897 A.2d at 168 (internal quotations omitted).
82
Savor, Inc. v. FMR Corp., 812 A.2d, 894, 896–97 (Del. 2002) (internal citations omitted).
20
1. The Standard of Review
As in nearly all pleadings stage challenges to the viability of a breach of
fiduciary duty claim in the corporate context, deciding the proper standard of review
in this case will be outcome determinative.83 In this regard, Defendants urge the
Court to keep its sights trained on the nature of the decision at issue here, and for
good reason. A board’s decision to grant executive compensation is usually entitled
to “great deference.”84 But Defendants acknowledge (for purposes of this
motion only) that Musk is a controlling shareholder and that he dominated the Board
and the Compensation Committee during the time the Award was negotiated and
approved.85 Thus, in the absence of stockholder ratification, Defendants
acknowledge (for purposes of this motion only) that the Court must review the
Award for entire fairness.86
Citing seminal Delaware authority, however, Defendants maintain the Court
must review the Award under the business judgment rule because Tesla’s
83
See Nixon v. Blackwell, 626 A.2d 1366, 1376 (Del. 1993) (“It is often of critical
importance whether a particular decision is one to which the business judgment rule applies
or the entire fairness rule applies.”).
84
See Eisner, 746 A.2d at 263 (“a board’s decision on executive compensation is entitled
to great deference. It is the essence of business judgment for a board to determine if a
particular individual warrants large amounts of money . . .”) (quotation omitted).
85
OA 10–11.
86
OB 4 (citing Michelson, 407 A.2d at 211; Vogelstein, 699 A.2d at 336).
21
stockholders have overwhelmingly approved all aspects of Musk’s compensation.87
Plaintiff disagrees on two grounds. First, he argues the stockholder vote was
structurally inadequate to ratify breaches of fiduciary duty because a majority of all
outstanding disinterested shares did not vote to approve the Award.88 Second, he
argues even if the vote might otherwise be adequate to ratify the Award, it cannot,
as a matter of equity, ratify an incentive compensation plan where the company’s
controlling stockholder is the beneficiary.89 I address the arguments in turn.
a. The Structure of the Vote
According to Plaintiff, the 2018 stockholder vote approving the Award did
not produce ratifying effects because “Delaware law is clear that the ‘cleansing
effect of ratification’ requires the affirmative approval of a majority of all
87
RB 7.
88
Pl.’s Answering Br. in Opp’n to Defs.’ Mot. to Dismiss (“AB”) 5.
89
Plaintiff argued for the first time in his Answering Brief that Tesla’s proxy disclosures
regarding the Award were incomplete and misleading. He made no such allegations in his
Complaint. Consequently, I will not address Plaintiff’s argument that ratification does not
apply because the Tesla stockholder vote was uninformed. “When defendants filed their
motions to dismiss [Plaintiff] had a choice to make under Court of Chancery Rule 15(aaa).
[He] could either seek leave to amend [his] complaint or stand on [his] complaint and
answer the motion to dismiss. Having chosen the latter course of action, [he] is bound to
the factual allegations contained in [his] complaint. [He] cannot supplement the complaint
through [his] brief.” MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *5 (Del. Ch.
May 5, 2010).
22
disinterested shares, not a mere majority of whatever subset of disinterested shares
actually votes.”90 Defendants make two points in response, both persuasive.
First, Plaintiff’s principal supporting authority, PNB, involved a cash-out
merger where, by statute, the stockholder vote required to approve the transaction
was an affirmative vote of the majority of all outstanding shares.91 No such statutory
requirement existed with respect to the Award.
Defendants’ second point expands on their first. Tesla submitted the Award
for stockholder approval in accordance with the statute that governs stockholder
votes on non-extraordinary stockholder action, like approval of executive
compensation plans. Section 216 of the Delaware General Corporation Law
(titled “Quorum and required vote for stock corporations”) prescribes the default
requirements a stockholder vote must meet to approve a corporate action when the
90
AB 46 (emphasis in original) (citing In re PNB Hldg. Co. S’holders Litig., 2006
WL 2403999, at *15 (Del. Ch. Aug. 18, 2006) (Strine, V.C.) (holding “[t]he cleansing
effect of ratification depends on the intuition that when most of the affected minority
affirmatively approves the transaction, their self-interested decision to approve is sufficient
proof of fairness to obviate a judicial examination of that question. I do not believe that
the same confidence flows when the transaction simply garners more votes in favor than
votes against, or abstentions from, the merger from the minority who actually vote. That
position requires an untenable assumption that those who did not return a proxy were
members of a ‘silent affirmative majority of the minority.’”).
91
In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *15.
23
DGCL does not otherwise dictate a different voting structure for a “specified
action.”92 Section 216(1) sets the default minimum for a quorum:
(1) A majority of the shares entitled to vote, present in person or
represented by proxy, shall constitute a quorum at a meeting of
stockholders.
And Section 216(2) sets the default minimum for the affirmative voting threshold:
(2) In all matters other than the election of directors, the affirmative
vote of the majority of shares present in person or represented by proxy
at the meeting and entitled to vote on the subject matter shall be the act
of the stockholders.
When a stockholder vote governed by Section 216 meets the prescribed quorum and
voting requirements, the outcome “shall be the act of the stockholders,” even though
the number of shares voted in favor of the corporate action at issue may have been
less than a majority of the outstanding shares entitled to vote.
The stockholder vote approving the Award fell under the default quorum and
voting threshold requirements of Section 216 because no other provision of the
DGCL dictates “the vote that shall be required for” the issuance of options or other
compensation to directors or officers, and Tesla’s charter and bylaws did not specify
different requirements.93 And the vote clearly satisfied the statutory requirements:
92
8 Del. C. § 216.
93
See Ex. 16 (Tesla Current Report (8-K) Feb. 1, 2017) (disclosing amended charter and
bylaws).
24
(1) a majority of Tesla’s outstanding shares entitled to vote were present at the
meeting, and (2) a majority of the shares present at the meeting and entitled to vote
did, in fact, vote to approve the Award.
Given these undisputed facts, there is no basis to say the stockholder vote
approving the Award did not produce a ratifying effect. The vote met the quorum
and voting threshold requirements of Section 216 even when considering only the
disinterested shares: (1) a majority (64%) of Tesla’s outstanding disinterested shares
entitled to vote were present at the meeting, and (2) a majority (73%) of those
disinterested shares were voted in favor of the Award.94 In the ordinary course,
therefore, the stockholder vote would justify business judgment deference.
b. Stockholder Ratification Does Not Justify Business Judgment
Deference Because the Award Benefits a Conflicted Controller
In the realm of criminal jurisprudence, it is accepted that “death (capital
punishment) is different.”95 I suppose the same could be said of conflicted controller
transactions in our corporate fiduciary jurisprudence; they are, in a word, “different.”
94
Ex. 19 (Tesla Current Report (8-K) Mar. 21, 2018) at 2; Compl. ¶ 53. See In re Investors
Bancorp, Inc. S’holder Litig., 177 A.3d 1208, 1211 (Del. 2017) (“stockholder ratification
means a majority of fully informed, uncoerced, and disinterested stockholders approved
board action. . . .”); Michelson, 407 A.2d at 221 (holding that a stockholder vote ratified
an option award to directors and officers upon determining that a majority of the shares
represented at the meeting voted in favor of the plan after receiving a proper disclosure of
the plan’s terms).
95
Rauf v. State, 145 A.3d 430, 436 (Del. 2019) (Strine, C.J. concurring).
25
Our courts are steadfast in requiring corporate fiduciaries to prove entire fairness
when a controller stands on both sides of a transaction.96 These cases range from
squeeze-out mergers,97 to asset purchases,98 to consulting agreements.99 And when
conflicted controllers are involved, our courts will not allow the controller to rely
upon stockholder approval of the transaction at the pleadings stage to “cleanse”
otherwise well-pled breaches of fiduciary duty.100
Disparate treatment of controlling shareholder transactions makes good sense.
It is settled in Delaware that stockholder votes will not ratify director action if there
is “a showing that the structure or circumstances of the vote were impermissibly
96
See EZCORP, 2016 WL 301245, at *12–15 (eruditely detailing why our law generally
requires conflicted controller transactions to be entirely fair); Strine, supra note 4, at 678
(“For that reason, when a controlling stockholder is on the other side of the deal from the
corporation, our law has required that the transaction be reviewed for substantive fairness
even if the transaction was negotiated by independent directors or approved by the minority
stockholders.”).
97
Lynch, 638 A.2d at 1117.
98
Kahn v. Tremont Corp. (Tremont I) 1996 WL 145452 (Del. Ch. Mar. 21, 1996)
(Allen, C.) rev’d on other grounds, Tremont II, 694 A.2d 422 (Del. 1997).
99
T. Rowe Price Recovery Fund, L.P. v. Rubin, 770 A.2d 536 (Del. Ch. 2000).
100
Corwin, 125 A.3d at 306 (“Delaware corporate law has long been reluctant to second-
guess the judgment of a disinterested stockholder majority . . . [for] transaction[s] with a
party other than a controlling stockholder. . .”) (emphasis added); Larkin v. Shah, 2016
WL 4485447, at *8 (Del. Ch. Aug. 25, 2016) (holding that “the only transactions that are
subject to entire fairness that cannot be cleansed by proper stockholder approval are those
involving a controlling stockholder.”); In re Merge Healthcare, Inc. S’holders Litig., 2017
WL 395981, at *6 (Del. Ch. Jan. 30, 2017) (same).
26
coercive.”101 “The determination of whether coercion was inequitable in a particular
circumstance is a relationship-driven inquiry.”102 And, without doubt, our law
recognizes the relationship between a controlling stockholder and minority
stockholders is fertile ground for potent coercion.103 Indeed, as our Supreme Court
has observed:
Even where no coercion is intended, shareholders voting on a parent
subsidiary merger might perceive that their disapproval could risk
retaliation of some kind by the controlling stockholder. . . . At the very
least, the potential for that perception, and its possible impact upon a
shareholder vote, could never be fully eliminated. . . . Given that
uncertainty, a court might well conclude that even minority
shareholders who have ratified a . . . merger need procedural protections
beyond . . . full disclosure of all material facts.104
In Pure Resources, then-Vice Chancellor Strine aptly described the
controlling stockholder as an “800-pound gorilla whose urgent hunger for the rest of
101
Williams v. Geier, 671 A.2d 1368, 1382 (Del. 1996).
102
In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108, at *15 (Del. Ch. Apr. 11,
2017).
103
Saba, 2017 WL 1201108, at *16. See also Pure Res., 808 A.2d at 441 (“controlling
shareholders have the ability to take retributive action in the wake of rejection by an
independent board, a special committee, or the minority shareholders. That ability is so
influential that the usual cleansing devices that obviate fairness review of interested
transactions cannot be trusted.”); Sciabacucchi v. Liberty Broadband Corp., 2017
WL 2352152, at *15 (Del. Ch. May 31, 2017) (“Thus, controller transactions are inherently
coercive, and a transaction with a controller cannot be ratified by a vote of the unaffiliated
majority; the concern is that fear of controller retribution in the face of a thwarted
transaction may overbear a determination of best corporate interest by the unaffiliated
majority.”).
104
Lynch, 638 A.2d at 1116 (citing Citron, 584 A.2d 490).
27
the bananas is likely to frighten . . . minority stockholders [who] would fear
retribution from the gorilla if they defeated the merger and he did not get his way.”105
Chancellor Allen called controlling shareholder transactions “the context in which
the greatest risk of undetectable bias may be present. . . .”106
Defendants acknowledge the threat of coercion inherent in conflicted
controller transactions but argue the concern is less pressing, and less worthy of
protection, in transactions, like the Award, that do not “alter the corporate
contract.”107 I disagree. While stockholders generally would have no reason to feel
coerced when casting a non-binding, statutory Say on Pay vote,108 or when asked to
approve a board-endorsed executive compensation plan, I discern no reason to think
minority stockholders would feel any less coerced when voting against the
controlling CEO’s compensation plan than they would when voting to oppose a
transformational transaction involving the controller. In both instances, minority
stockholders would have reason to fear controller retribution, e.g., the controller
“force[ing] a squeeze-out or cut[ting] dividends . . . .”109
105
Pure Res., 808 A.2d at 436.
106
Tremont I, 1996 WL 145452, at *7.
107
OB 24–25.
108
15 U.S.C. § 78 n-1 (2012).
109
Pure Res., 808 A.2d at 442.
28
Indeed, in the CEO compensation context, the minority knows full well the
CEO is staying with the company whether vel non his compensation plan is
approved. As our Supreme Court observed in Tremont II:
[I]n a transaction such as the one considered . . . the controlling
shareholder will continue to dominate the company regardless of the
outcome of the transaction. The risk is thus created that those who pass
upon the propriety of the transaction might perceive that disapproval
may result in retaliation by the controlling shareholder.110
These words apply with equal force to the compensation setting.
Having found no principled basis to distinguish the coercive implications of
controller compensation transactions from other (even transformational) conflicted
controller transactions, I can find no basis to conclude, on the pleadings, that the
stockholder vote approving the Award would not be subject to the coercive forces
inherent in controlling stockholder transactions.111 Since Plaintiff has well pled the
Compensation Committee and Board processes with respect to the Award were also
subject to the controller’s coercive influence, at this stage, I must conclude the
Award was not duly approved by either of Tesla’s qualified decision makers.112
110
Tremont II, 694 A.2d at 428 (internal citations omitted).
111
See Ahmed, 2017 WL 7053964, at *11 (finding “no principled basis” to differentiate
squeeze-out mergers from “other forms of controller transactions.”).
112
See Gantler v. Stephens, 965 A.2d 695 (Del. 2009); J. Travis Laster, The Effect of
Stockholder Approval on Enhanced Scrutiny, 40 WM. MITCHELL L. REV. 1443, 1458–59
(2014) (describing the corporation’s two “qualified decision makers” as the independent,
disinterested board of directors and the unaffiliated stockholders). I note that neither party
cited Friedman v. Dolan, 2015 WL 4040806 (Del. Ch. June 30, 2015), where the court
29
Entire fairness, therefore, is the appropriate standard of review at this pleadings
stage.113
c. What is a Controlling Stockholder/CEO to Do?
Our law recognizes the costs and downstream implications of fiduciary
litigation in the corporate context and has provided road maps to avoid such
consequences.114 Corwin allows more searching standards of review that might
otherwise apply to be reduced to business judgment review when the transaction is
approved by a majority of disinterested, fully informed and uncoerced
stockholders.115 MFW provides a roadmap that allows fiduciaries to engage in
determined that business judgment review was appropriate in connection with a board’s
decision to award allegedly excessive compensation to a controlling stockholder who
served as CEO. Id. at *2–3. In EZCORP, Vice Chancellor Laster discussed Dolan at length
and ultimately found the decision distinguishable and unpersuasive, in part, because the
court in Dolan emphasized the complaint there had not alleged facts that would allow a
reasonable inference of coercion. EZCORP, 2016 WL 301245, at *17–23. For this and
the other reasons stated in EZCORP, I also find Dolan (and the cases cited there)
distinguishable.
113
I say “at this pleadings stage” because I appreciate Defendants will challenge the factual
bases for Plaintiff’s allegations that Musk is Tesla’s controlling stockholder in discovery
and may well elect to bring this issue before the court again on a motion for summary
judgment. Since my conclusion respecting standard of review rests entirely on the premise
that Musk is a conflicted controller, a determination otherwise down the road may carry
case dispositive consequences.
114
See In re MFW S’holders Litig., 67 A.3d at 504; In re Books-A-Million, Inc. S’holders
Litig., 2016 WL 5874974, at *8 n.2 (confirming that “one purpose of [MFW] was to remedy
a doctrinal situation in which there was no feasible way to get cases dismissed on the
pleadings.”) (quotation omitted).
115
Corwin, 125 A.3d at 312 (“Finally, when a transaction is not subject to the entire fairness
standard, the long-standing policy of our law has been to avoid the uncertainties and costs
30
conflicted controller transactions worthy of pleadings stage business judgment
deference.116 In the conflicted controller context, in particular, MFW’s “dual
protections” are meant to “neutralize” the conflicted controller’s “presumptively
coercive influence” so that judicial second-guessing is no longer required.117
Defendants see no place for MFW here.118 They rely heavily on a “statutory
rubric” argument, claiming MFW’s dual protections, devised in the context of a
of judicial second-guessing when the disinterested stockholders have had the free and
informed chance to decide on the economic merits of a transaction for themselves.”).
116
In re MFW S’holders Litig., 88 A.3d at 645 (allowing for business judgment review if,
from the outset, “(i) the controller conditions the procession of the transaction on the
approval of both a Special Committee and a majority of the minority stockholders; (ii) the
Special Committee is independent; (iii) the Special Committee is empowered to freely
select its own advisors and say no definitively; (iv) the Special Committee meets its duty
of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is
no coercion of the minority.”). Of course, the reason these procedural protections yield
business judgment deference is because they incentivize the transacting parties to act
efficiently and in the best interests of the corporation and all shareholders. See Zohar
Goshen, The Efficiency of Controlling Corporate Self-Dealing: Theory Meets Reality,
91 CALIF. L. REV. 393, 429 (2003) (noting “[t]herefore, shifting the burden of proof [under
Khan v. Lynch] provides the market with the incentive to seek the support of the majority
of the minority, thereby reducing the need for judicial judgment on the value of the deal.”);
Ronald J. Gilson, & Jeffrey N. Gordon, Controlling Controlling Shareholders, 152 U. PA.
L. REV. 785, 787–89 (2003) (arguing that judicial review of controller transactions can
allow shareholders to enjoy the reduced management costs controlling shareholders
provide while reducing the likelihood controlling shareholders will tunnel wealth).
117
In re Rouse Prop., Inc., 2018 WL 1226015, at *1 (Del. Ch. Mar. 9, 2018).
118
See RB 9–15. Defendants advance their argument against application of MFW to
underscore their position that stockholder ratification, alone, should be adequate to
downgrade the standard of review. While I have rejected the argument in that context, it
is appropriate to consider it again here when deciding whether MFW might provide a means
to earn pleadings stage business judgment deference to a board’s decision to award
compensation to an executive who is also a controlling stockholder.
31
squeeze-out merger, mimic the approvals required by 8 Del C. § 251 but have no
practical application to transactions where our law does not mandate approval at
both the board and stockholder levels.119 As support, Defendants cite this court’s
holding in Pure Resources for the proposition that the dual protections should apply
only when confronting the “statutory rubric” of a merger.120 I read the case
differently.
Pure Resources addressed the applicable standard of review when a
controlling stockholder makes a tender offer for the shares he does not own, and
ultimately held entire fairness does not apply to such transactions if the tender offer
is not otherwise coercive.121 After a lengthy discussion of the symmetry between
the DGCL (particularly Section 251) and the Lynch line of Supreme Court precedent
endorsing dual protections,122 the court concluded it was not terribly useful to look
for statutory symmetry in the tender offer context that does not exist and, instead,
119
RB 9. As the statute governing this vote, 8 Del. C. § 216 does not require dual approval,
the argument goes, MFW should not be applied.
120
RB 11.
121
Pure Res., 808 A.2d at 430–33.
122
Id. at 433.
32
focused on what best protects the interests of minority stockholders.123 That same
practical approach to equitable problem solving makes sense here as well.124
While I reject Defendants’ statutory symmetry argument, I do agree with
Defendants that nothing in MFW or its progeny would suggest the Supreme Court
intended to extend the holding to other transactions involving controlling
stockholders.125 That does not mean, however, that MFW’s dual protections cannot
provide useful safeguards here. Just as in the squeeze-out context, preconditioning
a controller’s compensation package on both the approval of a fully functioning,
independent committee and an informed, uncoerced vote of the majority of the
minority stockholders will dilute the looming coercive influence of the controller.
With MFW’s dual protections in place, the minority stockholders can cast their votes
123
Id. at 441 (putting aside statutory symmetry to ask the normative question “[i]s there
reason to believe that the tender offer method of acquisition is more protective of the
minority, with the result that less scrutiny is required than of negotiated mergers with
controlling stockholders?”).
124
Defendants also point to Glassman v. Unocal Expl. Corp., 777 A.2d 242 (Del. 2001) as
an example of a Delaware court utilizing the statutory rubric to formulate its equitable
review. RB 11. In Glassman, however, the court found that plaintiff’s proffered “equitable
review” of the tender offer at issue “plainly conflict[ed] with the [applicable] statute.”
Glassman, 777 A.2d at 247. No such “plain conflict” exists here. The Board’s power to
set executive compensation is codified in 8 Del. C. §§ 122(5), (15); nothing in that statute
“plainly conflicts” with the notion that additional procedural protections should apply when
the executive is also a controlling shareholder.
125
More precisely, I see nothing in either the Chancery or Supreme Court MFW decisions
to suggest either court intended to hold that the dual protections are required in all
controlling stockholder transactions in order to reduce the degree of judicial scrutiny paid
to the transaction.
33
knowing the controller has agreed at the outset to negotiate his compensation award
with an independent, fully functioning committee of the board, to condition
consummation of the award on that committee’s endorsement, and to allow the
unaffiliated stockholders to have the final say. Under these circumstances, the
minority stockholders have far less reason to fear that the controller will retaliate if
the committee or minority stockholder votes do not go his way.126
Had the Board ensured from the outset of “substantive economic
negotiations”127 that both of Tesla’s qualified decision makers—an independent,
fully functioning Compensation Committee and the minority stockholders—were
able to engage in an informed review of the Award, followed by meaningful (i.e.,
otherwise uncoerced) approval, the Court’s reflexive suspicion of Musk’s coercive
influence over the outcome would be abated.128 Business judgment deference at the
126
In re MFW S’holders Litig., 67 A.3d at 502–03.
127
Olenik v. Lodzinski, 208 A.3d 704, 715 (Del. 2019).
128
Although I have rejected Defendants’ statutory symmetry argument as a basis not to
apply MFW to non-transformational transactions, I do think the symmetry analysis makes
sense when determining the stockholder vote that is required to satisfy the “majority of the
minority” prong of MFW’s dual protections. Specifically, for transactions, like the Award,
where 8 Del. C. § 216 governs the stockholder vote, the vote required to satisfy MFW’s
“majority of the minority” prong need only be the majority of the minority shares voting
after a quorum has been reached, not the majority of all minority shares outstanding. In this
regard, I see no reason to require a more stringent voting standard to trigger MFW’s
adjustment of the standard of review than the statute governing the vote would require to
reflect a valid “act of the stockholders.” Id.
34
pleadings stage would then be justified. Plaintiff has well pled, however, that the
Board level review was not divorced from Musk’s influence.129 Entire fairness,
therefore, must abide.
2. Plaintiff Has Adequately Pled the Award Was Not Entirely Fair
As Defendants have not satisfied MFW’s dual protections, I revert to Kahn v.
Lynch to guide my review of Plaintiff’s breach of fiduciary duty claims.130 I have
determined on the pleadings that Defendants have satisfied the “majority of the
minority” condition but have not satisfied the “fully functioning, independent special
committee” condition. The burden of persuasion shifts to Plaintiff, therefore, to
demonstrate the Award is not entirely fair.131 At this stage, the bar set for Plaintiff
is to demonstrate from well-pled facts that it is reasonably conceivable the Award is
unfair to Tesla.132 As explained below, he has cleared the bar, albeit just barely.
As things stand, Plaintiff is obliged to plead and prove the Award was not the
“product of both fair dealing and fair price.”133 “Often, whether the price paid in a
129
Compl. ¶ 103.
130
Lynch, 638 A.2d at 1117 (holding that the fulfillment of either proper special committee
approval or proper vote of the majority of minority stockholders will cause the burden of
proving entire fairness to shift from the fiduciary defendants to the stockholder plaintiff).
131
Lynch, 638 A.2d at 1117.
132
Gen. Motors, 897 A.2d at 168.
133
Weinberger, 457 A.2d at 710.
35
transaction was fair is the ‘paramount concern.’”134 Because this inquiry is fact
intensive, it is rare the court will dismiss a fiduciary duty claim on a Rule 12(b)(6)
motion when entire fairness is the governing standard of review.135
While Plaintiff alleges both unfair process and unfair price, his focus, not
surprisingly, is on the Award’s unfair price.136 Specifically, Plaintiff alleges the
Award has a potential value that is orders of magnitude higher than what other highly
paid CEOs earn.137 According to Plaintiff, the “fair value estimate of the Plan” is
either $2.6 billion or $3.7 billion, dwarfing the compensation of “the world’s most
successful technology executives.”138 While Defendants dispute Plaintiff’s
calculation of the Award’s present value, it is reasonably conceivable the present
fair value of the Award is, as Plaintiff alleges, well in excess of that paid to Musk’s
peers.
134
Monroe Cty. Empls.’ Ret. Sys. v. Carlson, 2010 WL 2376890, at *2 (Del. Ch. June 7,
2010); Weinberger, 457 A.2d at 711.
135
See Hamilton P’rs, L.P. v. Highland Capital Mgmt., L.P., 2014 WL 1813340, at *12
(Del. Ch. May 7, 2014) (“[t]he possibility that the entire fairness standard of review may
apply tends to preclude the Court from granting a motion to dismiss under
Rule 12(b)(6). . . .”); Orman v. Cullman, 794 A.2d 5, 15 n.36 (Del. Ch. 2002) (“[t]hat
conclusion [that entire fairness applies] normally will preclude dismissal of a complaint on
a Rule 12(b)(6) motion to dismiss.”).
136
Compl. ¶¶ 37–46.
137
Compl. ¶¶ 4–5.
138
Compl. ¶¶ 43–46.
36
Defendants urge me to consider that the Award is entirely performance based
and aligns Musk’s incentives with those of the other stockholders. This is
particularly important, say Defendants, since Musk has several other business
interests, including SpaceX, that might distract him from his work at Tesla.
Moreover, given the extraordinary market capitalization and performance
milestones built into the Award, Defendants observe it is quite possible Musk will
never see the full value of the Award.139 On the other hand, if Musk leads Tesla to
achieve the milestones, then Tesla will be one of the most valuable companies in the
world and all stakeholders will have reaped the benefits of Musk’s incentivized
focus. These are all factors I would consider, if uncontested, on summary judgment
or, if contested, at trial. Indeed, they may well carry the day in those contexts.
But, on the pled facts, albeit lodged on the “very outer margins of adequacy,” it is
reasonably conceivable the Award is unfair.140 Accordingly, Defendant’s motion to
dismiss Counts I & II must be denied.
B. The Unjust Enrichment Claim
Plaintiff alleges the Award unjustly enriches Musk. The elements of unjust
enrichment are: (1) an enrichment; (2) an impoverishment; (3) a relation between
139
OB 28–45.
140
Harbor Fin. P’rs v. Huizenga, 751 A.2d 879, 892 (Del. Ch. 1999) (Strine, V.C.).
37
the enrichment and impoverishment; (4) the absence of justification; and (5) the
absence of a remedy provided by law.141 As Plaintiff acknowledges, this claim
essentially duplicates his breach of fiduciary duty claims.142 If there is no underlying
breach, there is no unjust enrichment. Even so, “Delaware law does not appear to
bar bringing both claims.”143 While there will be only one recovery, at this stage,
I must allow that “factual circumstances [might exist] in which the proofs for a
breach of fiduciary duty claim and an unjust enrichment claim are not identical”.144
Defendant’s motion to dismiss Count III is denied.
C. The Waste Claim
Plaintiff also alleges the Award is “so one-sided that no person acting in good
faith pursuant to Tesla’s interests could have approved its terms.” 145 Not
coincidentally, Plaintiff’s waste allegations, summarily pled, mirror the standard for
waste, where the plaintiff “must allege facts showing that no person of ordinary
141
Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 585 (Del. Ch. 1998).
142
AB 55.
143
Dubroff v. Wren Hldgs., LLC, 2011 WL 5137175, at *11 (Del. Ch. Oct. 28, 2011).
144
Maginn, 2010 WL 1782271, at *25 n.147.
145
Compl. ¶ 122.
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sound business judgment could view the benefits received in the transaction as a fair
exchange for the consideration paid by the corporation.”146
While Plaintiff has adequately pled the Award is unfair, “[t]he pleading
burden on a plaintiff attacking a corporate transaction as wasteful is necessarily
higher than that of a plaintiff challenging a transaction as ‘unfair.’”147 This is
especially so with respect to the Award given that the majority of disinterested
stockholders voting at the special meeting approved the Award, and our law
recognizes as axiomatic, even on the pleadings, “that stockholders would be unlikely
to approve a transaction that is wasteful.”148 The well-pled facts fail to support a
reasonable inference that no person of “ordinary sound business judgment” would
have granted the Award, a fact made even more clear in the light of the informed
stockholder vote that approved it. Defendant’s motion to dismiss Count IV is
granted.
146
Huizenga, 751 A.2d at 892.
147
Id.148
Singh v. Attenborough, 137 A.3d 151, 152 (Del. 2016). I appreciate that Singh did not
involve a controlling stockholder and that its observations regarding the implications of the
stockholder vote are less useful when a controller’s influence is in the mix. But that is not
a reason to ignore the vote altogether when considering whether Plaintiff’s waste claim is
reasonably conceivable.
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III. CONCLUSION
For the foregoing reasons, the motion to dismiss is DENIED as to Counts I,
II and III, and GRANTED as to Count IV.
IT IS SO ORDERED.
40