The Tesla Board of Directors recently settled a 2020 shareholder derivative lawsuit filed against them by the Police and Fire Retirement System of the City of Detroit.
The settlement, at $735 million, is one of the largest to date for derivative litigation. What makes this matter noteworthy beyond the amount is how much the individual directors contributed to settle the matter.
The lawsuit was based on excessive compensation the individual directors granted themselves. The compensation packages received by the board included pay, stock awards and stock options, along with other benefits and bonuses. The complaint sought the disgorgement of egregious stock option awards and called for reforms to board compensation practices.
The settlement that was reached included the directors returning approximately $435 million in options, as well as roughly $276 million in cash and stock. The directors also agreed to forgo options and other compensation they would have earned in 2021 and 2022. This proposed settlement is still subject to court approval. The settlement will be filed on August 30, 2023, and the hearing for approval is currently scheduled to take place on October 13, 2023.
The Potential Impact
The large settlement figure has set a new bar for derivative settlements that plaintiff’s attorneys will aspire to reach and exceed, so we can expect higher demands being made in these lawsuits. Further, in light of the individuals returning the cash and stock, we can expect similar calls for disgorgement in executive compensation claims against boards of directors. While the individuals in this matter appear to have been in a position to agree with such demands to effectuate the settlement, we cannot assume this would be the situation in future litigations. As such, appropriate insurance coverage, including A-side and difference-in-conditions coverage, should be discussed and considered with our clients and prospects.
What Companies Need to Know
What Is a Derivative Action
A derivative action allows a shareholder of a corporation to bring a lawsuit on behalf of the corporation against its directors and officers for alleged wrongdoing or harm caused to the corporation.
A derivative action arises when a shareholder believes that the corporation's management or board of directors has failed to take appropriate action to address a legal claim or to rectify a situation that has potentially harmed the corporation. The shareholder, acting on behalf of the corporation, brings the lawsuit to seek remedies such as damages or changes in corporate governance.
The term "derivative" refers to the fact that the shareholder's right to bring the lawsuit is “derived” from the corporation's right to take legal action. Since the harm alleged is usually suffered by the corporation itself rather than directly by the individual shareholder, the shareholder is said to be acting derivatively on behalf of the corporation.
Derivative actions serve as a way for shareholders to hold corporate directors and officers accountable for their actions, especially when those actions are believed to be harmful or negligent.
For more information, contact:
Matthew G. Schott
Managing Director, Management,
Cyber and Professional Liability
NFP Property & Casualty Services Inc.
P: 856.287.1496 | matthew.schott@nfp.com
Jonathan Franznick
SVP, Head of Claims Advocacy
200 Park Ave | New York, NY 10173
P: 212.301.1096 | M: 908.461.1389
jonathan.franznick@nfp.com
Why NFP
NFP’s Management, Cyber and Professional Liability (MCPL) practice is a dedicated broking and advisory team that is solely focused on management liability, cyber and professional liability insurance solutions. We specialize in areas such as directors and officers liability, cyber liability, fiduciary liability, employment practices liability, professional liability, crime, kidnap, ransom, extortion, and multinational placements. We are a team with over 25 years of experience and expertise in broking and advisory, specialized claims advocacy, and data and analytics that consistently secures market-leading insurance coverage and enhanced outcomes for our clients.
NFP is a leading insurance advisor and broker with over 8,000 employees globally. Our highly specialized consultants, brokers and technical professionals are focused on delivering a high service standard and partnering with clients as they work to manage risks and achieve their goals.
NFP Corp. and its subsidiaries do not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations or policies to your specific circumstances.