A total of 12 Tesla directors, including CEO Elon Musk, have agreed to return more than $735 million in stock awards and cash to the company to settle claims they vastly overpaid themselves.
According to a July 17 filing in a Delaware court, the settlement resolves a 2020 lawsuit by a retirement fund which holds Tesla stock. The Police and Fire Retirement System of the City of Detroit challenged stock options granted to Tesla directors starting in June 2017, describing them as unfair and excessive.
The directors, including Musk, his brother Kimbal Musk, Oracle co-founder Larry Ellison and James Murdoch, son of media mogul Rupert Murdoch, agreed to return the equivalent value of 3.1 million Tesla stock options, according to the July 14 court filing in Delaware Chancery Court seen by Reuters and Bloomberg.
The directors were accused of awarding themselves 11 million stock options from 2017 to 2020 that allegedly grossly exceeded norms for a corporate board. While the court filing noted the directors acted in good faith and in the best interests of Tesla stockholders, they agreed to settle the case "to eliminate the uncertainty, risk, burden and expense of further litigation."
As part of the settlement, the directors also agreed to not receive any compensation for 2021, 2022 and 2023. Another consequence of the lawsuit is Tesla's board has pledged to change the way compensation is determined.
The $735 million settlement will be paid to Tesla to benefit the company, a type of case known as a derivative lawsuit. It is one of the largest settlements ever for a a derivative case in the Court of Chancery, a major venue for shareholder litigation.
In its defense against the lawsuit, Tesla argued its unprecedented growth sent the company's stock price up tenfold, and stock options awarded to the directors and to Musk rose sharply in value. The EV maker said it used the stock options to ensure the incentives of directors were aligned with the goals of investors.
On a related note, the settlement does not impact the $56 billion compensation package of Elon Musk, which is subject to a separate lawsuit that went to trial last year. A ruling is expected soon in the Musk case.