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Tornetta v. Musk

Court of Chancery of Delaware

September 20, 2019

RICHARD J. TORNETTA, Individually and on Behalf of All Others Similarly Situated and Derivative on Behalf of Nominal Defendant TESLA, INC., Plaintiff,
v.
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.

          Date Submitted: June 10, 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.

          OPINION

          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 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 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 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]

         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 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 party[12] 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 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 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 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 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 Complaint[23] 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.

         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 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 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 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 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 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]

         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 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]

         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]

         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.

         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 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 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 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: (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." 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 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 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]

         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] Entire fairness, therefore, is the appropriate standard of review at this pleadings stage.[113]

         c. What is a Controlling ...


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