Tesla said Wednesday it can ask shareholders to reinstate CEO Elon Musk's $56 billion pay package, which a Delaware judge invalidated earlier this yr after ruling that the record-breaking compensation agreement was “deeply flawed.” ” be.
Tesla also said it would ask shareholders to approve moving the company's incorporation from Delaware to Texas. Musk proposed the move after his pay package was declared illegal. Wednesday's announcement came days after the automaker said it would reduce its workforce by 10%.
Tesla said the court decision created a “fundamental problem for the company.”
The two proposals are likely to be highly controversial. Tesla has hired a proxy lawyer, Innisfree M&A, and plans to spend an unspecified amount in the millions to secure votes for the two proposals, the filing said.
Tesla hasn't hired Innisfree since 2018, when the company first asked shareholders to vote on Musk's pay package. Companies often only advertise the cost of proxy solicitations when major proposals or proxy fights are anticipated. (Innisfree was too is suing Musk's Twitter about unpaid invoices.)
Musk's pay package was voided after a shareholder won a lawsuit against the company earlier this year. Delaware Chancery Court Chancellor Kathaleen McCormick found that Musk, not Tesla's board, controlled the company and that instead of negotiating with Musk over the terms of the contract, the board's compensation committee “worked with him almost like an advisory body.”
The Tornetta decision, named after Tesla shareholder Richard Tornetta, who filed the lawsuit, prompted Musk to say, “Never incorporate your organization within the state of Delaware.”
McCormick was also the presiding judge in the legal battle that forced Musk to buy Twitter, which he renamed. Tesla expressed doubts about their decision in its statement filed on Wednesday. “The Company and the Board believe that the decision in Tornetta ignored the substantial evidence presented at trial and that the Delaware court made errors of fact and erroneous conclusions of law,” Tesla said in the proxy filing.
The company also noted that “dozens of institutional shareholders” had told Tesla that they disagreed with the Tornetta decision.
Delaware has long been a preferred location for business – more than 60% of Fortune 500 companies are incorporated there – because the state has a robust legal framework and court system dedicated to resolving corporate matters such as executive compensation , but also more comprehensive contract negotiations.
Moving from Delaware to Texas
Tesla's new proposal alerts shareholders that the Delaware court found the company's initial disclosures from 2018 to be deficient and encourages them to read the full text of the decision.
In January, on the same day the pay package was rejected, Musk asked his X followers whether Tesla should be reincorporated in Texas. Months later, Tesla's board agreed and is now proposing the move to Texas and asking shareholders to approve the move.
Tesla linked the Delaware decision directly to its proposal, but said that both Elon Musk and his brother Kimbal Musk, who also sits on Tesla's board, had withdrawn from the deliberations.
The company said Tesla's “home and future lie in Texas” and that the board considered every U.S. state before settling on a direct comparison between Delaware and Texas, regardless of Musk's public comments.
Tesla also defends the move as commonplace, saying that 35% of S&P 500 companies are not incorporated in Delaware. The company praised Delaware's court system as world-class but said, “Doing recent things is an element of Tesla's DNA and has led it to turn into one of the vital beneficial firms on the earth.”
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