Tesla directors settle lawsuit over compensation for $735 million

teslaThe company’s directors will return $735 million to the company to resolve their claim of a significant overpayment in the largest shareholder settlement of its kind, according to a filing Monday in Delaware court.

The settlement resolves a 2020 lawsuit filed by a retirement fund that owns Tesla stock and challenges stock options granted to Tesla directors beginning in June 2017.

The settlement does not affect Elon Musk’s $56 billion compensation package, which was challenged by shareholders in a separate lawsuit that went to court last year. A ruling in the Musk case is expected soon.

Directors, including Oracle co-founder Larry Ellison, agreed to return the equivalent of 3.1 million Tesla stock options in value, according to a court filing.

Tesla did not respond to a request for comment. The directors acted in good faith and in the best interests of Tesla shareholders, but agreed to the settlement to remove the risk of litigation for themselves and the company, according to a court filing.

The directors are accused of unfairly and excessively compensating themselves in the form of approximately 11 million stock options between 2017 and 2020, which are said to have significantly exceeded the standards of the company’s board of directors.

The case was filed in 2020 by the Detroit City Police and Fire Retirement System, and the settlement was paid to Tesla to benefit the company, known as a derivative action. The settlement is one of the largest ever spin-off cases in the Court of Chancery, a major venue for shareholder litigation.

Tesla and Musk are known for their legal battles. Musk won a defamation lawsuit accusing him of violating securities laws and a shareholder lawsuit accusing him of forcing Tesla to buy SolarCity.

As part of the settlement, the directors also agreed to receive no compensation for 2021, 2022 and 2023, and the board will change how compensation is determined.

Tesla has defended against the lawsuit, saying the company has experienced almost unprecedented growth that has led to a 10-fold increase in its stock price. As the value of the stock rose, so did the value of the stock options granted to directors and Musk.

Tesla argues that it uses stock options to ensure directors’ incentives are aligned with investors’ goals.