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In April of this year, Tesla announced that it would waive its directors and officers’ liability insurance (also known as D&O) for a year. Instead, they would pay Musk personally, relying on them to pay a company or board member’s expense to bring legal defenses, settlements, or judgments against them.
At the time, Tesla said in a filing that it was taking this approach because the premiums were “disproportionately high”.
However, according to legal experts, this is an extremely unusual step that could have created a conflict of interest.
Proxy advisor Glass Lewis turned down the re-election of Tesla chairman Robyn Denholm, planning to ditch D&O liability insurance in response. After Tesla’s board announced they would replace their previous liability insurance, Glass Lewis approved them.
“Very unusual”
Tesla is facing high-profile litigation on a number of issues, including the long-term performance of batteries in its cars and the decision to acquire solar energy company SolarCity.
In return, Tesla “agreed to pay our CEO a total of $ 3 million”. This rate was based on a “market-based premium” that was prorated for 90 days and then discounted by half. (Previously, the company announced it would pay Musk at least $ 1 million for D&O coverage.)
That agreement has ended, and Tesla said it has “instead tied standard third-party liability insurance for directors and officers”. The company has not disclosed at this point which carriers are covering its board members and has not disclosed the rate it will pay for the future D&O policy.
The move had the potential to create a conflict of interest between Musk and the board of directors who are supposed to oversee it.
“It is highly unusual to replace a director and officer insurance policy with a personal guarantee from an officer for any period of time,” said Kevin Hirzel, executive director of Hirzel Law in Detroit. “If the CEO guarantees payment under the compensation agreement, this creates a potential conflict of interest and jeopardizes the independence of the Board of Directors.”
Hirzel added, “Tesla’s board of directors did the right thing to get traditional directors and officers liability insurance from a third party insurer.”
Charles Elson, a professor of corporate governance at the University of Delaware, agreed that it is good that Tesla has returned to third party reporting on directors and officers.
“I don’t think it was advisable for the company’s chief executive officer to compensate the company and directors. Because of this relationship, the directors were too closely connected to the CEO. The CEO is someone over whom the board of directors has authority and such association would make it difficult for directors to exercise good oversight on behalf of all shareholders. ”
Elson notes that paying $ 3 million for insurance worth $ 100 million is not a negligible sum. Going forward, Tesla should be able to demonstrate that they obtained other offers for that interim period, that the amount they paid the CEO was fair, and explain in greater detail why they couldn’t get third-party coverage earlier.
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