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.
C.A. No. 2018-0408-JRS
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
September 20, 2019
SLIGHTS, Vice Chancellor
Date Submitted: June 10, 2019
OPINION
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.
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
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
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 party12 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
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
I. BACKGROUND
I have drawn the facts from well-pled allegations in the Complaint23 and documents incorporated by reference or integral to the Complaint, including publicly filed SEC documents.24 Tesla produced documents to Plaintiff pursuant to
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“),
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
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
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
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
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
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
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
c. What is a Controlling Stockholder/CEO to Do?
Our law recognizes the costs and downstream implications of fiduciary litigation in the corporate context and has provided road maps to avoid such consequences.114 Corwin allows more searching standards of review that might otherwise apply to be reduced to business judgment review when the transaction is approved by a majority of disinterested, fully informed and uncoerced stockholders.115 MFW provides a roadmap that allows fiduciaries to engage in conflicted controller transactions worthy of pleadings stage business judgment deference.116 In the conflicted controller context, in particular, MFW’s “dual protections” are meant to “neutralize” the conflicted controller’s “presumptively coercive influence” so that judicial second-guessing is no longer required.117
Defendants see no place for MFW here.118 They rely heavily on a “statutory
Pure Resources addressed the applicable standard of review when a controlling stockholder makes a tender offer for the shares he does not own, and ultimately held entire fairness does not apply to such transactions if the tender offer is not otherwise coercive.121 After a lengthy discussion of the symmetry between the DGCL (particularly Section 251) and the Lynch line of Supreme Court precedent endorsing dual protections,122 the court concluded it was not terribly useful to look for statutory symmetry in the tender offer context that does not exist and, instead, focused on what best protects the interests of minority stockholders.123 That same practical approach to equitable problem solving makes sense here as well.124
While I reject Defendants’ statutory symmetry argument, I do agree with Defendants that nothing in MFW or its progeny would suggest the Supreme Court intended to extend the holding to other transactions involving controlling stockholders.125 That does not mean, however, that MFW’s dual protections cannot provide useful safeguards here. Just as in the squeeze-out context, preconditioning a controller’s compensation package on both the approval of a fully functioning, independent committee and an informed, uncoerced vote of the majority of the minority stockholders will dilute the looming coercive influence of the controller. With MFW’s dual protections in place, the minority stockholders can cast their votes knowing the controller has agreed at the outset to negotiate his compensation award with an independent, fully functioning committee of the board, to condition consummation of the award on that committee’s endorsement, and to allow the unaffiliated stockholders to have the final say. Under these circumstances, the minority
Had the Board ensured from the outset of “substantive economic negotiations”127 that both of Tesla’s qualified decision makers—an independent, fully functioning Compensation Committee and the minority stockholders—were able to engage in an informed review of the Award, followed by meaningful (i.e., otherwise uncoerced) approval, the Court’s reflexive suspicion of Musk’s coercive influence over the outcome would be abated.128 Business judgment deference at the pleadings stage would then be justified. Plaintiff has well pled, however, that the Board level review was not divorced from Musk’s influence.129 Entire fairness, therefore, must abide.
2. Plaintiff Has Adequately Pled the Award Was Not Entirely Fair
As Defendants have not satisfied MFW’s dual protections, I revert to Kahn v. Lynch to guide my review of Plaintiff’s breach of fiduciary duty claims.130 I have determined on the pleadings that Defendants have satisfied the “majority of the minority” condition but have not satisfied the “fully functioning, independent special committee” condition. The burden of persuasion shifts to Plaintiff, therefore, to demonstrate the Award is not entirely fair.131 At this stage, the bar set for Plaintiff is to demonstrate from well-pled facts that it is reasonably conceivable the Award is unfair to Tesla.132 As explained below, he has cleared the bar, albeit just barely.
As things stand, Plaintiff is obliged to plead and prove the Award was not the “product of both fair dealing and fair price.”133 “Often, whether the price paid in a transaction was fair is the ‘paramount concern.’”134 Because this inquiry is fact intensive, it is rare the court will dismiss a fiduciary duty claim on a Rule 12(b)(6) motion when entire fairness is the governing standard of review.135
Defendants urge me to consider that the Award is entirely performance based and aligns Musk’s incentives with those of the other stockholders. This is particularly important, say Defendants, since Musk has several other business interests, including SpaceX, that might distract him from his work at Tesla. Moreover, given the extraordinary market capitalization and performance milestones built into the Award, Defendants observe it is quite possible Musk will never see the full value of the Award.139 On the other hand, if Musk leads Tesla to achieve the milestones, then Tesla will be one of the most valuable companies in the world and all stakeholders will have reaped the benefits of Musk’s incentivized focus. These are all factors I would consider, if uncontested, on summary judgment or, if contested, at trial. Indeed, they may well carry the day in those contexts. But, on the pled facts, albeit lodged on the “very outer margins of adequacy,” it is reasonably conceivable the Award is unfair.140 Accordingly, Defendant’s motion to dismiss Counts I & II must be denied.
B. The Unjust Enrichment Claim
Plaintiff alleges the Award unjustly enriches Musk. The elements of unjust enrichment are: (1) an enrichment; (2) an impoverishment; (3) a relation between the enrichment and impoverishment; (4) the absence of justification; and (5) the absence of a remedy provided by law.141 As Plaintiff acknowledges, this claim essentially duplicates his breach of fiduciary duty claims.142 If there is no underlying breach, there is no unjust enrichment. Even so, “Delaware law does not appear to bar bringing both claims.”143 While there will be only one recovery, at this stage, I must allow that “factual circumstances [might exist] in which the proofs for a breach of fiduciary duty claim and an unjust enrichment claim are not identical“.144 Defendant’s motion to dismiss Count III is denied.
C. The Waste Claim
Plaintiff also alleges the Award is “so one-sided that no person acting in good faith pursuant to Tesla’s interests could
While Plaintiff has adequately pled the Award is unfair, “[t]he pleading burden on a plaintiff attacking a corporate transaction as wasteful is necessarily higher than that of a plaintiff challenging a transaction as ‘unfair.’”147 This is especially so with respect to the Award given that the majority of disinterested stockholders voting at the special meeting approved the Award, and our law recognizes as axiomatic, even on the pleadings, “that stockholders would be unlikely to approve a transaction that is wasteful.”148 The well-pled facts fail to support a reasonable inference that no person of “ordinary sound business judgment” would have granted the Award, a fact made even more clear in the light of the informed stockholder vote that approved it. Defendant’s motion to dismiss Count IV is granted.
III. CONCLUSION
For the foregoing reasons, the motion to dismiss is DENIED as to Counts I, II and III, and GRANTED as to Count IV.
IT IS SO ORDERED.