What's Up with the Other TSLA Comp Case?

You know, the one where the BoD will return about $750 million in comp, and agreed to some (flawed) corp gov reforms, including a binding shareholder vote on their pay? The case in which we objected and went to Wilmington to argue our objection? Detroit v. Musk, if we may?

The Musk comp case, Tornetta, gets all the attention, as we'd expect given its magnitude and tortured path. We saw a little progress last week in Detroit, since we last looked at it several months ago.

Recall the rough timeline:

• 2020: a Detroit municipal pension fund files a derivative suit in Delaware Chancery Court against the TSLA BoD for breach of fiduciary duty in how it pays itself
• July 2023: Detroit and TSLA announce a proposed settlement
• October 2023: Chancellor McCormick convenes a hearing on the fairness of the proposed settlement to TSLA shareholders, including of the $750 million clawback, corp gov reforms, and proposed $250 million in legal fees for plaintiff attorneys.

Since then, we've seen two developments in the case, related to the legal fees and to the settlement consideration.

Legal fees will need to wait

Tornetta disrupted Detroit. Chancellor McCormick announced her ruling in Tornetta on January 30. The next day she sent the Detroit parties a short letter:

Approval of the Detroit settlement will need to wait until she resolves Tornetta. Specifically, the attorneys representing the plaintiff in Detroit requested about $250 million in legal fees. Much of the October 2023 hearing addressed whether they earned them.

In Tornetta, the plaintiff attorneys requested TSLA shares that are currently valued at $5-6 billion. They argued for these at a hearing In July 2024. The letter indicates Chancellor McCormick expects the legal arguments over the Tornetta legal fees will affect those in Detroit. She has yet to rule on the Tornetta legal fees, although it should be sometime soon. Thus, Detroit waits for the final Tornetta opinion.

Options can't wait

Last week the plaintiff and defendants sent a letter to Chancellor McCormick, the first substantive communication in the case since January:

The Detroit settlement includes a mix of cash, shares, and unexercised options that sum to the $750 million clawback. Options of course have an exercise period. If the option holder fails to exercise them by the end of that period, they expire worthless.

That could start to happen to some of the options that the plaintiff and defendants want to include in the settlement. A tranche of options belonging to BoD Chair Robyn Denholm expired August 18 (two days ago). The parties intended to include those options in the clawback. They planned to return those (now-expired) options once Chancellor McCormick approved the settlement, which she obviously has not done.

Instead of those expired (and presumably exercised, no one with any sense whatsoever lets TSLA options issued in 2017-2020 expire unexercised) options, the parties said they will include other unexercised-but-in-the-money Denholm options in the total clawback. The letter notes replacing the expiring options with other options having a later expiration increased the value of the settlement by $209. Presumably Denholm "paid" the extra $209, since it had to come from somewhere.

The parties want to avoid having to again swap out expiring options for unexpired ones. The next tranche of options they plan to return expires in June 2025. They worry that future exchanges will cost one or another director much more than $209.

Thus, the parties urge Chancellor McCormick to approve the settlement promptly, before the next tranche of options expires. They even ask her to sever the consideration of the attorney fee request from that approval. She would decide later on the $250 million in legal fees, presumably after she rules on the $5-6 billion in legal fees in Tornetta.

The wheels of justice turn slowly, indeed. The attorneys in Detroit worry the legal fees in Tornetta will remain tied up until at least June 2025, when the next tranche of options expires. That's certainly plausible, as TSLA will almost certainly appeal Tornetta to the Delaware Supreme Court. That could add another year or more. This would in turn delay final approval of the Detroit settlement, and the plaintiff legal fees of as much as $250 million, one of the top couple such fee awards in Delaware history, at least two years beyond the July 2023 settlement announcement.

So, the plaintiff and defendants in Detroit want her to approve the clawback and corp gov reforms now. They assert, "[t]here are no open issues (of which the Parties are aware) with respect to whether the Settlement should be approved." That got our attention.

We then wrote our own letter:

There are open issues! Both of the grounds for our objection remain unresolved: lack of allocation of the aggregate clawback among directors, and unenforceability of the shareholder vote on director pay. The letter from the parties doesn't even acknowledge the objection.

Chancellor McCormick has not responded to either of these letters, although it has only been a few days. We'll send an update once we have one.