In July 2023, non-employee directors of Tesla, Inc. (Tesla) agreed to return $735 million in the form of cash, shares, and options to settle a lawsuit that alleged they awarded themselves outsized compensation. This CRA Insights piece focuses on a timeline of relevant events and key terms of the settlement and their effect on a director’s strategy to satisfy its requirements.
Several insights emerge from Tesla’s board compensation derivative suit settlement:
- First, the flexibility granted to directors in the settlement allows them to opt for a different mix of cash, stock, or options than was specified in the settlement. For example, they can reduce the number of options they return and increase cash or stock.
- Second, the settlement’s specified valuation methods lead to a set of guidelines that can be used to determine which financial instruments (cash, stock, or options) directors may prefer to return to satisfy the settlement’s requirements. It is optimal for directors to return cash (stock or options) when Tesla’s stock price exceeds (falls below) $260.54. Further, with respect to returning options, it is preferable to return those that were granted earlier in the alleged excess compensation period.
- Third, the lack of a specified compensation return date and the potential for unfavorable movements in Tesla’s stock price after locking in the amount of cash, stock, and unexercised options can affect directors’ optimal compensation return strategy. The optimality of a director’s chosen mix of cash, stock, and options depends on Tesla’s stock price on the date compensation is returned. Directors can attempt to mitigate this risk by holding the mix of compensation they committed to return but may still face the risk that the settlement could not be approved by the court or that the court could materially alter the settlement.