(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Alison Frankel

Dec 3 (Reuters) - After a Delaware judge last January

struck down CEO Elon Musk's $56 billion pay package, Tesla's

board of directors faced a choice.

The board could have reopened the complex process of

negotiating a compensation deal with Musk, this time with

guardrails in place to assure the plan would be deemed fair to

all of Tesla's shareholders despite Musk's sway over the

company.

That option, as the electric vehicle maker eventually told

shareholders in a proxy filing last April, had distinct

disadvantages. It would have been time-consuming and potentially

very expensive: Tesla told shareholders that it believed the

company would have faced an accounting charge of more than $25

billion if it had adopted a new compensation package that

granted Musk the stock options he had been promised in the pay

plan rescinded by Delaware Chancellor Kathaleen McCormick. A

newly negotiated plan, Tesla said in the proxy filing,

might also have adverse tax consequences for both Musk and the

company.

The board's other choice was simply to ask shareholders to

vote again on the pay package they had previously approved in

2018, but this time with beefed up disclosures, including the

full text of McCormick's opinion concluding that directors had

breached their duties when they approved the deal for Musk.

A new vote, Tesla said in the April proxy filing, would

"cure" the court's criticism and would "extinguish claims for a

breach of fiduciary duty."

This so-called "ratification" of the previous shareholder

vote had obvious advantages for the company, as Tesla told

shareholders in the proxy statement. It was quick, which meant

Musk would soon have a new pay package after working for six

years without compensation. It also gave shareholders a voice.

And it could save Tesla from shelling out billions of

dollars in fees to the plaintiffs' lawyers who had challenged

Musk's pay, the company told shareholders, because those lawyers

could no longer argue that they had saved Tesla billions of

dollars by blocking the transfer of valuable options to Musk.

Tesla acknowledged in its proxy filing that its ratification

theory was "novel" and that Delaware courts might not agree with

the company's assessment of the theory's viability and its

impact on the case.

But Tesla's board told shareholders that its one-woman

special independent committee had concluded - without even

bringing in a compensation consultant - that ratification was

the better course. The board told shareholders in the April

proxy materials that it agreed.

So, apparently, did shareholders, who voted resoundingly in

favor of reconfirming Musk's 2018 pay package at Tesla's annual

meeting in June. Tesla subsequently pointed to the second vote

in filings asking McCormick to revise her original opinion

because shareholders had once again approved Musk's pay deal,

this time in a fully informed vote. Tesla also said shareholder

lawyers were entitled to no more than $54.5 million for their

efforts.

Tesla, in essence, wagered that it would rather test its

novel ratification theory in Delaware courts than restart the

process of setting Musk's compensation.

It lost that bet on Monday, when McCormick denied Tesla's

request for modification of her original opinion in light of the

shareholder vote in June.

McCormick concluded that Tesla's theory - that a do-over

vote by shareholders can effectively undo a judge's post-trial

court ruling - has no basis in common law, Delaware procedural

rules, Delaware case law or even Delaware policy.

The judge also said that even if Tesla's board was right

about the ratifying effect of shareholders' second vote

approving Musk's pay package, that re-vote was tainted by the

proxy statement's overly confident depiction of the impact of

the vote.

Tesla said in a post on X that it plans to appeal

McCormick's new and original rulings to the Delaware Supreme

Court, as my Reuters colleagues Tom Hals and Jon Stempel

reported on Monday. So there is still a chance that Tesla's

ratification theory will ultimately prevail. There's also still

a chance that Delaware's justices will overturn McCormick's

original holding that the board breached its duty in negotiating

the 2018 compensation plan with Musk. (I received no response to

my email query to Tesla and defense counsel from Cravath, Swaine

& Moore and Quinn Emanuel Urquhart & Sullivan.)

Nonetheless, after reading McCormick's decision, I wondered

whether Tesla and its CEO would have been better off if Tesla's

board had opted for renegotiation rather than pushing for

McCormick to endorse its novel ratification theory.

Remember, Tesla's directors did not need much convincing to

reject that course based on accounting and tax considerations.

But four law professors told me on Tuesday that if Tesla had

reopened negotiations, it would probably have been able to

formulate a new Musk compensation plan that could withstand

court scrutiny.

The professors - Stephen Bainbridge of the University of

California at Los Angeles, Eric Talley of Columbia University,

Ann Lipton of Tulane University and retired professor Charles

Elson of the University of Delaware - said Tesla's board would

have needed to abide by standard corporate procedures, including

the creation of a genuinely independent committee to negotiate

with Musk.

If the board had set up those guardrails, Talley said by

email, it could have justified even a retroactive package that

rewarded Musk for working without pay since 2018.

"Keeping Elon happy (and not vengeful) at Tesla could easily

provide a rational basis for making a retrospective award,"

Talley said.

He and Bainbridge noted an additional wrinkle: If Tesla's

board had waited until the company's reincorporation in Texas to

reset Musk's compensation, the company might not have had to

worry about all of Delaware's rules for transactions involving a

controlling shareholder. It's not even clear, Bainbridge said,

that Texas courts would deem Musk, who does not own a majority

of Tesla's shares, to be a controlling shareholder.

"It would have been much cleaner to simply wait to do this

after the move to Texas," Bainbridge said. "It would have been

better to start from scratch."

Read more:

Delaware judge rejects Musk's $56 billion Tesla pay - again

What is next for Musk after judge rules against him in Tesla

pay case?

Judge voids Elon Musk's 'unfathomable' $56 billion Tesla pay

package