TheCorporateCounsel.net

I have a friend who keeps trying to persuade me to buy a Tesla.  He owns one, and I guess there’s some kind of bounty the company pays to Tesla owners who convince other people to pony up for their own E-Z-Go on steroids. I’ve told him he’s barking up the wrong tree. I’ve always driven a beater. My current ride is a 2012 Chevy Equinox with 140,000 miles on it. It goes through 2 quarts of oil a month and I’m still determined to keep it for at least another couple of years.

But I also confess that even if I was in the market for a new car, I just can’t see buying one from Elon Musk. The guy’s antics really rub me the wrong way.  So it pains me to have to blog about him again – but I do.  This time, Elon and his board have gotten themselves sideways with Tesla shareholders in the Delaware Chancery Court, and the issue isn’t his tweets, it’s his comp.

Last year, the Tesla board – and shareholders – signed-off on a pay deal that would provide Musk with a potentially gargantuan payout if its stock hit some very aggressive market cap & operational goals.  How gargantuan? Try more than $50 billion.  A shareholder subsequently filed a lawsuit against Musk and the Tesla board alleging that the comp award was a breach of fiduciary duty.

By way of background, the Chancery Court decided last year that Musk was a “controlling shareholder” of Tesla in an unrelated case, despite the fact that he owned only around 20% of the stock.  So, for purposes of the motion to dismiss filed in this case, the parties treated him as if he was a controller.  That complicates things considerably, because the default standard for reviewing for transactions between a company and its controlling shareholder – even comp decisions – is the demanding “entire fairness” standard and not the deferential business judgment rule.

Delaware has laid out a path to the business judgment rule for these transactions, but in his 40-page opinion denying the defendants’ motion to dismiss, Vice Chancellor Slights found that despite the approval of the comp award by Tesla’s shareholders, the process wasn’t good enough to allow this award to make the cut:

Had the Board ensured from the outset of “substantive economic negotiations” 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. 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. Entire fairness, therefore, must abide.

The Vice Chancellor held that the defendants were unable to establish that the award was entirely fair at the pleading stage, so he declined to dismiss the plaintiff’s breach of fiduciary duty & unjust enrichment claims. That probably means I’ll have to blog about Musk again at some point in the not-too-distant future. Lucky me.

SEC Settles Nissan Fraud Charges: Don’t Have the CEO Set Their Own Pay!

It’s been a big week for CEO compensation stories. Here’s something Liz blogged earlier this week on CompensationStandards.com: Wow. Broc & I have blogged a couple of times over the past year about the SEC’s Nissan investigation, which (among other reasons) is of interest because Nissan is a Japanese company, and also because of the bold efforts people took to conceal former CEO Carlos Ghosn’s pay.

Yesterday, the SEC announced that it settled Section 10(b)/Rule 10b-5 fraud charges with Nissan, Ghosn, and a former director/HR exec for omitting $140 worth of Ghosn’s compensation from Japanese securities filings – which were published in the US because the company’s securities trade as ADRs on the OTC – and which required information about executive pay. Allegedly, Ghosn went to all this effort to restructure & hide his pay because he was worried that people would criticize the amounts (pro tip: at least in the US, that’s a hint that you’re probably required to disclose the info).

Nissan is ponying up $15 million – while the individuals are getting off with civil fines of $1 million and $100k. Seems like a pretty good deal for those two, based on the allegations in the SEC’s complaint against them – e.g., Ghosn first brainstormed ways to conceal part of his pay by paying it through Nissan-related entities…when that didn’t work, he started entering into secret contracts with employees and executing backdated letters for LTIP awards, and decided that “postponing” pay (along with creative accounting) would get him around the disclosure obligations.

Initially, one problem here for the company might have been faulty internal controls. But according to the SEC’s complaint against the company, the fatal blow was that because Nissan had specifically delegated to Ghosn the authority to set individual pay arrangements – including his own! – he was acting within the scope of his employment when he intentionally misled investors, and the company was liable under the principles of respondeat superior. We can complain all we want about the burdensome listing rules here, but maybe they’re saving some companies from themselves…

Audit Reports: What Does Auditor Tenure Disclosure Look Like?

This Audit Analytics blog discusses the disclosures that accounting firms are including in their audit reports in response to the relatively new requirement to disclosure their tenure with a particular company. The blog says that although the PCAOB has provided guidance on determining & reporting tenure, “auditors have discretion regarding exactly what and how the information is disclosed, resulting in substantial variation in disclosures.”

Having reviewed the blog, I can assure you that auditors have used their discretion to ensure that all versions of tenure disclosure are extremely boring.

– John Jenkins