8 February 2024

Compensation of listed company executives: a Franco-American comparison in the wake of the Tesla affair

Elon Musk, current CEO of Tesla, has seen his vertiginous remuneration of nearly $56 billion disappear following a decision of annulment handed down on January 30, 2024 by the Delaware Court of Chancery, which was seized with the question of the legitimacy of such remuneration, in other words its fairness (I). It is particularly interesting to look at this decision in terms of comparative law, in order to determine whether such remuneration is conceivable in France. (II).

I. Judge McCORMICK’s decision on Elon Musk’s excessive compensation

In a particularly comprehensive 201-page decision, setting out in full the facts leading up to the decision concerning the remuneration of Tesla’s current CEO, Elon Musk, Judge McCORMICK decided torescindthe decision.

As a reminder, Tesla’s Board of Directors had decided on the following compensation arrangements: 12 levels were set up, with Elon Musk being granted free shares representing 1% of total outstanding shares each time a level was reached. A milestone was reached every time Tesla’s market capitalization increased by $50 billion, for a total, if he managed to increase Tesla’s market capitalization by $600 billion, of 12% of total outstanding shares.

Mission accomplished for the Tesla executive, who should have been able to collect the full 12% of Tesla shares, but one shareholder complained that the compensation was unfair. Indeed, by way of comparison, this remuneration is 250 times higher than the median remuneration of other US CEOs, and 33 times higher than the previous highest remuneration – which had also been awarded to Elon Musk by Tesla. This new remuneration amounted to nearly $56 billion.

Thus, it was up to the defendants – Elon Musk and six other members of the Board of Directors, four of whom are also members of theCompensation Committee– to demonstrate that the compensation awarded was fair.

The dispute involved the application of the case law Weinberger v. UOP, Inc.. issued in 1983 by the Delaware Supreme Court. This ruling established two main principles for determining fairness: “fair dealing” and “fair price“.

The first of these principles relates in particular to the procedure that led to the granting of the remuneration; the second takes into account economic and financial factors.

As the defendants failed to demonstrate the equitable nature of the compensation awarded, the judge followed the plaintiff’s lead – albeit for different reasons – and ordered the cancellation of Elon Musk’s compensation.

The judge’s arguments for declaring this null and void are manifold. We note, for example, the fact that “Musk controlled the timing“, since he alone decided on the meetings of the “compensation committee” and the deadlines they had to meet, without any questioning on the part of the committee members.

Also highlighted was the total absence of negotiation on the proportion of remuneration, as well as the absence of any comparative analysis on the subject. Indeed, the members of the “compensation comitee” themselves have stated that the procedure was carried out in “collaboration with Musk”, and not as an arm’s-length negotiation, since the majority of the members of the board of directors, and of the “compensation comitee” have very close ties with Elon Musk, making it possible to depict real conflicts of interest.

Finally, the judge noted the absence of any mention of these conflicts of interest in the “proxy statement” (a document sent to shareholders when their opinion is sought, and which must indicate, in particular, potential conflicts of interest) when seeking shareholder approval.

While the plaintiff’s main argument for nullity was that shareholder approval had been sought, and that a material error had occurred (the absence of disclosure of conflicts of interest), the judge replied that this did not allow for automatic nullity, since theDelaware General CorporationLaw does not make the granting of remuneration conditional on shareholder approval. However, nullity is still granted to “remedy” the defendants’ “fiduciarybreaches” (the American equivalent of executive disloyalty).

This particularly interesting case raises the question of whether such remuneration is possible for the director of a listed company in France, and if so, what the limits might be.

II. Transposition of such a hypothesis to a public limited company listed in France

The question is: could such a remuneration have been granted in France?

Firstly, as in the Tesla case, it is possible to remunerate the director of a listed company through the allocation of bonus shares (C. com., L. 225-197-1). However, this article quickly sets a limit not found in the American case. Paragraph 4 of section II of the aforementioned article sets an initial limit: shares may not be allocated when the executive already holds more than 10% of the share capital, and the allocation may not result in the CEO holding more than 10% of the share capital when he or she held a stake below this threshold. However, securities held for more than seven years are not included in this 10% ceiling. As Elon Musk is already a major shareholder in Tesla, he would only have been able to partially increase his stake as part of a compensation plan if the company had been subject to French law. In this area, it’s all a question of how long the employee’s shareholding has existed prior to the granting of additional shares. In theory, such remuneration would only be possible every seven years once the shares have been effectively allocated.

It should be remembered that Elon Musk’s remuneration is not an annual payment, but the reward for a target that has been set and must be reached within ten years. In this way, several years can elapse between each share-based compensation payment – provided that it is received, since if the various milestones are not reached, no compensation is granted. Under these circumstances, the seven-year period between each free share grant is no longer an insurmountable barrier when compared with the compensation system accepted in the State of Delaware.

There are also differences between American and French law in terms of how remuneration is voted.

In the Tesla case, compensation is decided by the company’s board of directors, on the recommendation of thecompensation committee. Thus, although it was requested voluntarily, shareholder approval of the chosen remuneration was not required for its implementation.

In France, for companies whose shares are admitted to trading on a regulated market, the “say on pay” procedure must be followed when granting compensation to a corporate officer, in this case the CEO. This procedure also applies to bonus share issues (c. com., L. 22-10-59, III).

It consists, firstly, of an ex ante vote to approve the draft resolution. This approval is compulsory, as no element of remuneration can be awarded without it; whereas in the Tesla case, a shareholder vote was not legally required. Indeed, only the approval of the Board of Directors was sufficient to grant Elon Musk his remuneration, but the Board had also decided to make the award conditional on shareholder approval. Similar to the aforementioned Weinberger ruling, which sets out a number of principles that must be respected, in France a director’s remuneration policy must comply with certain principles: it must be consistent with the company’s corporate interests, contribute to its long-term survival, and be in line with its business strategy.

The French “say on pay” procedure involves a second, ex-post vote by shareholders on the compensation paid to corporate officers during the previous year.

As is the case in America with the “proxy statement“, the document communicated to shareholders in France, known as the corporate governance report, which includes the remuneration policy, must also include “measures to avoid or manage conflicts of interest”. The failure to inform shareholders of conflicts of interest within thecompensation committeeand the board of directors had been raised by the judge in the ruling against Elon Musk. The lack of independence of its members was one of the main reasons for the cancellation of Musk’s remuneration. It is therefore important to avoid any conflict of interest within a General Meeting and a Board of Directors. In this respect, article 21 of the AFEP-MEDEF 2022 code, chosen as the reference code by a large number of listed companies, stipulates that ” directors must inform the Board of any situation involving a conflict of interest, even a potential one, and must refrain from attending the debate and taking part in the vote on the corresponding resolution “. In France, as in America, limiting and preventing conflicts of interest is a key factor in ensuring that decisions are taken independently and in accordance with the company’s interests.

A recent French example can be used to illustrate compensation through the allocation of free shares. Indeed, the case of Alexandre Bompard, current CEO of Carrefour, caused quite a stir when his remuneration was announced. Although highly contested (with over 40% of shareholders voting against), his remuneration for 2022 has been estimated at 9.2 million euros. This amount also includes a portion (around 4.8 million euros) that will be paid out in shares in 2025 if he achieves the targets set by the Group, as in the Tesla case, albeit to a much lesser degree.

In conclusion, remuneration based on the allocation of free shares is possible in France, as it was in the Tesla case. However, certain conditions have to be met, and constraints have been put in place to provide a rigorous framework for share-based compensation, to a greater extent than in America.

The epilogue to this affair could be twofold. Judicial, on the one hand, as Elon Musk has announced his intention to appeal this decision. Legal, on the other hand, as Tesla’s CEO has announced plans to move the company’s headquarters to Texas, whose corporate laws are likely to be more welcoming of such compensation strategies…

Don’t be shy.
Share our article.