Delaware Chancery Court Rescinds Elon Musk’s $51 Billion Pay Package! TL;DR from Ann Lipton
I taught Business Associations for roughly the first decade of my law teaching career. Some of my early articles were on corporate law, and my very first law review publication as a law professor was on executive compensation. It appeared in the law review of Professor Lipton’s home institution, Tulane, which now seems so appropriate!
We learn from Professor Lipton’s synopsis that the Chancery Court applied the “entire fairness” test rather than the business judgment rule to the decision of Tesla’s Board to Directors to pay Elon Musk $51 billion. She suggests that the Delaware Supreme Court might narrow the circumstances in which the fairness test will apply, but even if narrowing occurs, the fairness test will likely still apply to Mr. Musk’s situation. The most Mr. Musk can realistically hope for is a remand for further proceedings, unless he decides to re-incorporate in Texas. Matthew Bultman, reporting on Bloomberg Law, suggests that litigation in a Delaware court would likely follow should Musk attempt to move Tesla to Texas. Professor Lipton supplements here original post with thoughts on Texas here.
In my writing, and still today, I would go in the opposite direction from that contemplated in Delaware with respect to total fairness. I argued that the business judgment rule should never apply to executive compensation schemes. Board members are always motivated to overcompensate executives. They are themselves corporate titans, and their compensation is determined by comparison to how other corporate titans are compensated. As a result, they always have a situational conflict of interest, and they often have a more concrete conflict of interest.
Fairness analysis should always apply. What is fair? My view is that corporate executives, like all workers, are entitled to a living wage.